The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The Commission’s Terms of Reference specified that it must inquire into the following matters;

1. the nature, extent and effect of misconduct by a financial services entity (including by its directors, officers or employees, or by anyone acting on its behalf);
2. any conduct, practices, behaviour or business activity by a financial services entity that falls below community standards and expectations;

Significantly, misconduct includes conduct that:

1. 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; or
2. is misleading and/or deceptive; or
3. indicates a breach of trust or duty or unconscionable conduct; or
4. breaches a professional standard or a recognised and widely adopted (conduct) benchmark.

To date over 10,000 submissions have been revived from the public with the majority (62%) related to banking, superannuation (12%) and financial advice (9%).

There have been six rounds of public hearings focused on consumer lending, financial advice, superannuation, life and general insurance, agribusiness lending, sales practices and interactions between financial product providers and Indigenous and Torres Strait Islanders.

The Commission’s Interim Report revealed conduct by financial institutions that has drawn widespread public condemnation.

The interim report asked two key questions; why did it happen, and, what can be done to prevent the conduct happening again? Unfortunately, the Commission surmised that the answer to the first is ‘greed – the pursuit of short-term profit at the expense of basic standards of honesty’ and institutions’ focus on selling.

Significantly. the interim report suggests there are enough laws to cover misconduct, but their effectiveness requires enforcement. Regulatory bodies and financial institutions will be reassessing their culture, operations and staff conduct to ensure they meet much sharper scrutiny in the post-Commission period.

The Commission has documented significant operational and governance failures including:

• Mishandling of customer disputes,
• Overcharging of fees and sometimes for non-existent service
• Poor Board performance
• Remuneration that encouraged behaviour that was detrimental to customer outcomes

The Commission’s revelations have impacted the entire financial services sector. Senior executives of Australia’s major banks, several insurance companies and superannuation managers have been interviewed by the Commission and many have been called to appear as witnesses. Several high-profile CEOs and board members have been impacted by the revelations of the Commission. Key regulatory authorities have also been subjected to the Commission’s scrutiny.

Revelations have prompted the establishment of customer remediation schemes, the escalation and closure of unresolved issues and refunding of fees collected from customers for no service. The financial impacts on institutions have been significant and investment bank Morgan Stanley says customer refunds and remediation costs, as well as associated penalties and fines, will cost the big four $4.83 billion for the three years from 2018- 2020.

Separately, the Commission also posed numerous policy questions about the value of accidental death cover, the value of add-on insurance, potential conflicts of interest in group life and life insurers’ access to medical information. These matters will be considered by our practice Committees to see if the profession can provide any insights to support policymakers make sensible reforms that will meet community expectations whilst maintaining the viability of products and services that provide genuine public benefits.

Clearly everyone working in the financial services must examine their own conduct and performance. The interim report contained references to actuaries in well over 300 evidence exhibits. These mainly referred to Actuarial reports and therefore were not negative references however they do point to the integral role that the profession plays in so many aspects of the financial services industry.

A key task for industry bodies and professional associations is to consider how they can best guide and support their members to recognise and manage the pitfalls that were revealed by the Royal Commission. The financial services sector has already started to shift more focus to the customer and community expectations. Regulators will also increase their scrutiny of corporate behaviour. The final report of the Hayne Royal Commission is likely to accelerate the significant changes that are starting to impact the sector.

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