Australian Royal Commission – final report released
Following the recent release of the final report of the Australian Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry, New Zealand policy-makers, regulators and businesses inside and outside the financial services industry will be determining what, if any, changes regarding conduct and culture are required in response to its findings and recommendations.
Since 14 December 2017, the central task of the Commission has been to inquire into, and report on, whether any conduct of Australian financial services entities, including banks, financial advisers, and insurers, might have amounted to misconduct. It also considered whether any conduct, practices, behaviour, or business activities by those entities fell below community standards and expectations.
Following seven rounds of public hearings last year, and the release of an interim report in September 2018, the final report concludes that conduct by financial services entities has either broken the law, or fallen short of community expectations, "very often". In some cases, the Commissioner has invited the Australian Securities and Investments Commission (ASIC) to consider whether criminal or other legal proceedings should be instituted in respect of certain conduct, for instance, in relation to financial services entities charging "fees-for-no-service" (ie failing to deliver ongoing services to clients but charging fees nonetheless).
The Commissioner made four key observations in the final report:
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- that instances of misconduct, or conduct falling below community expectations, was often driven by the relevant entity's pursuit of profit, or by individuals' pursuit of gain for themselves or the business. The Commissioner was critical of vertical integration in the financial services sector, finding that it creates a bias towards promotion of one's own products, even where those products may not be ideal for the consumer;
- there was a marked imbalance of power and knowledge between those providing the product or service and those acquiring it;
- consumers often dealt with a financial services entity through an intermediary, frequently one paid by a financial services entity, and that this arrangement did not incentivise intermediaries to act in the best interests of the consumer; and
- financial services entities that broke the law were often not properly held to account by regulators.
The final report made 76 specific, wide-ranging recommendations regarding the amendment of legislation relating to both financial services entities and Australian regulators. These recommendations can be broadly grouped into five key themes:
- simplifying the law;
- removing conflicts of interest;
- improving the effectiveness of regulators in deterring misconduct and ensuring that there are just and appropriate consequences for misconduct;
- strengthening regulators' standards and guidelines applying to culture, governance, and remuneration within financial services entities; and
- changing or adding to the law and industry codes of conduct in ways that will increase protections to consumers.
The Australian Government has said it will "take action" on all recommendations but to date has stopped short of committing to fully implement all 76 recommendations.
Should the recommendations of the final report be implemented in New Zealand, substantial changes to New Zealand's regulatory landscape would result. For example, the final report includes recommendations that:
- mortgage brokers should be legally required to act in the best interest of the intending borrower; that the borrower, not the lender, should pay the mortgage broker; and that mortgage brokers should be subject to the law regarding the provision of financial advice;
- banks should be prohibited from allowing informal overdrafts on basic customer accounts (without prior express agreement) and from charging dishonour fees on basic accounts;
- industry codes should contain provisions that are enforceable by customers through court proceedings;
- where a financial adviser is not independent, impartial, or unbiased, they should be required to give the client a written statement explaining simply and concisely why they are not;
- the ban on conflicted remuneration should be strengthened by repealing grandfathering provisions and considering whether the remaining exemptions are justified, and the cap on commissions in respect of life insurance products should be ultimately reduced to zero (unless there is clear justification for not doing so);
- the unsolicited sale ("hawking") of superannuation and insurance products should generally be prohibited;
- the duty of insured parties to make disclosure in relation to consumer insurance contracts should be replaced by a duty to take reasonable care not to make a misrepresentation to an insurer, and that insurers should only be able to avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms; and
- ASIC should take, as its starting point, the question of whether a court should determine the consequences of a contravention, and that its approach to enforcement should recognise that an infringement notice will rarely be an appropriate enforcement tool where the infringing party is a large corporation.
The New Zealand dimension
The New Zealand Government has publicly committed to considering the recommendations of the Royal Commission since the release of the final report. However, it has also noted that action is already underway to ensure consumer interests are protected in New Zealand's banking and insurance sectors.
For instance, the Financial Markets Authority (FMA)/Reserve Bank of New Zealand's (RBNZ) recent reports on conduct and culture in the banking and insurance industries have highlighted similar issues to those contained in the Royal Commission's final report, although they conclude that issues are not as widespread in New Zealand as in Australia.
Banks and life insurers are expected to develop a plan to address the FMA/RBNZ's feedback, and report on progress for implementing the regulators' recommendations, by the end of March and June 2019 respectively. For life insurers, this will involve, for example, a "gap analysis" against the relevant recommendations of the Australian Royal Commission's final report. Banks are expected to proactively review the final report to help identify potential conduct and culture issues in New Zealand.
The Government has also agreed to fast-track customer protection measures in the financial sector, in light of the release of the FMA/RBNZ's report into conduct and culture in the life insurance industry last week (read more here). The Minister of Commerce and Consumer Affairs has said that the current goal is to have legislation before Parliament by mid-2020 that provides for:
- clearer duties on banks and insurers to consider a customer's interests and outcomes, and to treat customers fairly;
- an appropriately resourced regulator to monitor conduct, with strong penalties for breaching duties; and
- a strong response to internal sales incentives and soft commissions.
These reforms are in addition to those already underway, including the new financial advice regime, review of the Credit Contracts and Consumer Finance Act and the insurance contract law review, all of which we addressed in a previous update.