After months of speculation, the Australian Government has announced that it will establish a Royal Commission into the alleged misconduct of Australia's banks, superannuation (pension providers) and financial services industry (including general and life insurers and reinsurers, and many insurance agents and brokers) ("the Commission"). With a budget of AUD75 million, the Commission will commence in February 2018. It is currently anticipated that the Commission will be required to issue its final report with findings and recommendations by February 2019.
A Royal Commission into the financial services industry was first proposed by the Australian Labor Party (the opposition party) in the last electoral term. The current Government's policy had been that a Royal Commission would be expensive and was unnecessary in light of various regulatory and legislative measures recently introduced.
The sudden change in approach appears to have been driven by two factors: first, increasing support for the Royal Commission by various members of the National Party (the minority party in the Liberal/National coalition government); and second, a direct request from the CEOs and Chairmen of the largest four banks in Australia (CBA, Westpac, NAB and ANZ) for the government to act to ensure a properly constituted inquiry into the financial services sector is established to put an end to the uncertainty and restore trust, respect and confidence in the sector.
The Royal Commissioner
The Commission will be led by Former High Court Judge Kenneth Hayne who sat in the High Court of Australia (Australia's highest appellate court) from 1997 to 2015 and was appointed to that Court by a previous Liberal/National coalition government.
Powers of the Commission
The Commission will be established under the Royal Commissions Act 1902 (Cth) and will have coercive powers to gather evidence within its terms of reference. It will have extremely broad powers, including the power to compel witnesses to give testimony, seize documents and records, waive legal professional privilege and hold private hearings to protect whistleblowers.
Spotlight on "financial services entities"
The Commission will review the conduct of a very large number of companies in the Australian financial services industry including:
- Authorised deposit-taking institutions within the meaning of the Banking Act 1959;
- Entities carrying on the business of undertaking liability by way of insurance (including reinsurance) in respect of any loss or damage, and specifically including:
- General insurers within the meaning of the Insurance Act 1973; and
- Life insurers within the meaning of the Life Insurance Act 1995;
- Australian financial services licensees and authorised representatives; and
- Registerable superannuation entity licensees.
Draft Terms of Reference
A copy of the draft terms of reference for the Commission is attached. The key matters for inquiry by the Commission will be:
- the nature, extent and effect of misconduct by a financial services entity;
- any conduct, practices, behaviour or business activity by a financial services entity that falls below community standards and expectations; and
- the use by a financial services entity of superannuation members' retirement savings for any purpose that does not meet community standards and expectations.
In the context of the Commission, misconduct will include conduct that:
- constitutes an offence against a Commonwealth, State or Territory law in relation to the provision of a financial service, as existed at the time of the alleged misconduct;
- is misleading and/or deceptive;
- indicates a breach of trust or duty or unconscionable conduct; or
- breaches a professional standard or a recognised and widely adopted (conduct) benchmark.
In considering each of these matters, various issues will be considered including: culture and governance practices of financial services entities and the industry, mechanisms for redress, and the adequacy of existing laws, internal systems and industry codes of conduct.
The Commission will be specifically required to consider whether any further changes are required to the legal framework, practices within financial services entities, or the financial regulators. In considering these issues, the Commission must have regard to the implications of changes to any laws and the comparable position in other jurisdictions.
The Commission will not have the power to order compensation to be paid in specific cases but it could make a recommendation for the introduction of a compensation scheme.
Other reforms to roll on
The announcement of the Royal Commission follows a number of other measures already announced by the Government including the controversial Banking Executive Accountability Regime ("BEAR") reforms, changes to product issuer accountability and new product intervention powers for the Australian Securities and Investments Commission ("ASIC"). The Government has confirmed that it still intends to introduce these measures.