Financial Services Royal Commission Report: In-depth analysis

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The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released by the Government on 4 February 2019.  This in-depth analysis considers the recommendations, and identifies the consequences for industry and what you should do next.

The final report is far reaching and shines a light on fundamental issues which go to the heart of the way in which the financial services industry operates.  It will bring about change in modes of business and service delivery, conflict management, culture, conduct, corporate responsibility and remuneration.  The regulators will be regulated and more litigation is likely.

Much of this won't come as a surprise to financial services providers.  Getting on the front foot and having an understanding of the finer details of the Commissioner's conclusions and the implications will be advantageous, because the recommendations made in the final report will largely be adopted and brought into law and market practice.

There are a number of actions which you can take now in response to the final report.  Our analysis is designed to help you navigate industry-wide issues as well as specific topics.  We hope it will provide some comfort around the way forward, for you and your business.

Click on the topics below of most interest and relevance to you.


Financial advice – the revolution accelerates

Relevance & consequences for industry

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The revolution in financial advice, which started with the FoFA reforms and continued under the Professional Standards reforms, will be accelerated.

There was no recommendation aimed directly at limiting vertical integration but the Commission's focus on conflicts of interest may require changes to policies in this area.  Changes will be felt first in adviser practices and then by advice licensees/dealer groups and also by product manufacturers and distributors.

The recommendations will accelerate the forces of change already reshaping the industry that collectively amount to a revolution.

Implications for adviser practices

  • The combination of removing grandfathered commissions, the potential reduction (to zero) of life insurance commission limits, restrictions on advice fees that can be paid out of superannuation accounts and enhanced annual opt-in requirements for all ongoing fees, could reduce the value of advisers' practices, removing much of the goodwill that exists in the back book and accelerating the move towards the front book fee for service model.
  • These factors, coupled with new professional standards and training obligations are likely to accelerate the departure of advisers from the profession, particularly where buyer of last resort or "BOLR" arrangements are in place.
  • Advisers who have already transitioned to a fee for service model and more efficient advice delivery methods will be less impacted and will enjoy a competitive advantage. There will be opportunities for innovation in the delivery of advice through fintech and other more efficient advice delivery models.

Implications for product manufacturers and distribution

  • These changes will continue to drive up the cost of personal advice and could further reduce the number of consumers willing to pay high up-front costs for advice.  For product manufacturers, in-flows through personal advice channels may weaken over time, which should drive further innovation in distribution models.

Implications for advice licensees/dealer groups

  • The increased compliance burden and its cost is likely to drive further consolidation.
  • All AFSL holders will be required to investigate misconduct of a financial adviser and inform and remediate clients where misconduct is identified.   This requirement and the possible removal of the "safe harbour" provision will require licensees to enhance their monitoring measures for representatives.  A much sharper focus on investigation, compensation and breach reporting will be expected.

What you should do next

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  • Product manufacturers should consider the implications for their distribution models and ensure they are not over-exposed to personal advice channels.  They should also review all grandfathered commission arrangements and consider whether they should be terminated (where possible) or whether commissions can and should be redirected to customers.
  • Dealer groups and advisers who receive payments from superannuation accounts and/or grandfathered commissions should consider the impact on their business of the removal of these revenue sources.  They should also consider how the cost of advice can be reduced through efficiencies and how they can deliver greater value to their clients on a fee for service model.
  • All participants should review and, where appropriate, enhance policies on conflicts of interest and develop protocols for disclosures where there is a lack of independence, impartiality or bias.


Culture and governance

Relevance & consequences for industry

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The final report has brought to the forefront the importance of, and the links between, remuneration, culture and governance, and reiterated that the primary responsibility for culture and conduct lies with the board and senior management.  The Commissioner pinned responsibility for past misconduct on boards and senior managers, not "bad apples". It is the role of the board to seek further or better information where required and to review and challenge management's actions as required.

The Commissioner reaffirmed that when considering the best interests of the corporation, directors must consider more than the financial returns available to shareholders and that considering the interests of customers supports the best interest of the corporation. "The best interests of a company cannot be reduced to a binary choice."

Directors of superannuation trustees

The role of directors of superannuation trustees was specifically called out.  While the Commissioner accepted that shareholders appointing directors is a fundamental feature of company law, the final report suggests that the appointment of directors of superannuation trustees should be by reference to the best interests of members only, rather than as a representative of the shareholder(s). 

What will happen now?

Specifically, as a result of the final report:

  • the BEAR:

    • will be amended to require that an additional responsibility be added to accountable persons of ADIs – the additional responsibility will relate to end-to-end management of products;
    • will be extended to apply to all APRA regulated financial institutions (including insurers and superannuation trustees). In addition, the Government intends to extend the regime to AFSL and ACL holders, market operators and clearing and settling facilities so that the accountability regime has a similar scope to the UK Senior Managers Regime;
    • will be jointly administered by ASIC and APRA with ASIC overseeing consumer protection and market conduct and APRA overseeing prudential aspects; and
    • will be amended so that ADIs and accountable persons must deal with ASIC in an open, constructive and co-operative way. This may affect a fundamental legal right, insofar as it impacts broad principles of self-incrimination or even privilege;
  • non-financial risks (such as misconduct and compliance risk) will need to be managed, and considered for remuneration purposes, alongside financial risks.  For APRA regulated entities, the prudential standards will require remuneration systems to be designed to encourage management of non-financial risk;
  • culture will be assessed, but not prescribed, by regulators – initially, APRA will assess the culture of APRA regulated entities;
  • increased attention will be given to minute taking at board meetings to record when directors have requested additional information and engaged in debates; and
  • the quality of information provided to boards will be further considered and refined – APRA has been encouraged to include guidance on the quality of information to be provided to boards.

What you should do next

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  • Increase oversight of remuneration - the quality of risk, non-financial performance and remuneration information being provided to the board should be improved.
  • Get ready to expand annual reviews to include culture and governance: management of conduct and compliance risk, identify and deal with problems proactively, and consider whether previous changes have been effective.
  • Ensure that board minutes properly reflect deliberations and identify matters on which there are disagreement and how those are resolved.
  • Review the information provided to boards to determine whether the right information is provided to enable the board to challenge management, including on issues related to standards of conduct.
  • Prepare for the broad implementation of the BEAR – this will include identifying your "accountable persons", reviewing their roles, and preparing an accountability map and accountability statements.
  • Consider how the additional responsibility will be implemented for ADIs.
  • Directors of superannuation trustees should also review their delegation and outsourcing arrangements, and the supervision of and reporting by delegates and service providers, especially where related parties are involved.


Remuneration and BEAR

Relevance & consequences for industry

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The interim report drew attention to the root cause of the issues in the financial services industry being greed and the observation that "all the conduct identified and criticised in this report [concerns] conduct that provided a financial benefit to the individuals and entities ...".  The final report recommends changes to the way individuals in the industry are remunerated and rewarded. 

APRA focus on remuneration is not fit for purpose and lags behind international standards

The Commissioner recommends that APRA's prudential standards and guidance on remuneration should move beyond a focus on prudential risks to more directly address the management of non-financial risks and misconduct.  In particular, APRA's prudential standards and guidance should be guided by international standards and adopt the guidance prepared by the G20's Financial Stability Board (FSB).  The FSB's principles require adjustments to remuneration for all forms of risk and not just financial metrics.

APRA should refocus its efforts on: (a) developing its prudential standards and guidance on remuneration to identify and manage reputational, compliance, conduct and other risks; and (b) requiring boards to assess the effectiveness of remuneration systems by gathering more information about how remuneration systems actually work in practice. These recommendations are consistent with recent APRA initiatives and commentary and do not come as a surprise.

The financial services industry can expect APRA to set limits on the use of financial metrics in long-term variable remuneration.  The Commission has not sought to prescribe specific requirements.

Clawback of variable remuneration

All financial services entities should implement clawback of vested remuneration (backed by APRA standards).  This is a significant step further than the remuneration frameworks utilised by many financial institutions, which operate mechanisms to enable the downward adjustment of in-year short-term variable remuneration, and unvested deferred short-term and long-term variable remuneration.

Unlike the prudential inquiry into the CBA, the final report does not address the practical and legal difficulties associated with clawing back vested remuneration, including:

  • how a company will claw back vested securities;
  • the interaction with limitations in the Fair Work Act 2009 which limit an employer's ability to make deductions to employees remuneration, and require payments from employees; or
  • the practical reality that the implementation and enforcement of a clawback mechanism can only be achieved through the pursuit of costly litigation.

Absent serious law reform, or the implementation of a statutory regime for the clawing back of remuneration (which the Commissioner does not recommend), significantly increased litigation can be expected where clawback mechanisms are built into existing contractual based remuneration arrangements.

Closed door remuneration adjustments

The Commissioner does not propose public disclosure of remuneration adjustments.  While this avoids imposing further disclosure obligation on companies, it seems at odds with other recommendations designed to increase transparency.

What you should do next

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There are two key areas of focus:

BEAR for all!

  • In light of the Government's proposal to apply an equivalent regime to the BEAR to all entities that hold an AFSL or ACL, consider how you will implement the mandatory forfeiture of variable remuneration, and the extension of variable remuneration deferral periods.
  • Develop an accountability framework that nominates accountable persons and specifies their accountabilities, and develop the principles by which remuneration will be adjusted.
  • Develop consequence management frameworks which clearly articulate the relationship between conduct and other non-financial risks and remuneration outcomes.

Increase governance of the remuneration framework/outcomes

  • Boards should develop non-financial metrics which will support sound risk-management and which are also aligned to shareholders' expectations.
  • Boards should set clearer expectations through comprehensive guidance on how reductions to variable remuneration will be determined and the factors which will result in an adjustment.
  • Boards should develop a database/library of consequence management options to assist with the implementation of consistent and fair decision making, and set clear expectations for both positive and negative risk outcomes.
  • Boards should expect more comprehensive risk information to allow for sufficient review of issues that could impact remuneration outcomes – comprehensive assessment/report from risk and audit and explanation for adjustments.
  • Increase communication of outcomes (with due regard for confidentiality concerns…) to reinforce the link between accountability and consequence.
  • Start considering how remuneration systems (contractual, policy and otherwise) will allow for the clawback of vested remuneration.


Small business lending - big changes to product design and delivery obligations

Relevance & consequences for industry

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As expected, the Commissioner has recommended that the NCCPA should not be amended to extend its operation to small business lending. This responds to concerns that extending the responsible lending obligations would likely reduce access to and increase the cost of credit for small businesses.

However, the Government's proposed design and distribution obligations (DDO) and product intervention powers will be extended to all products regulated under the ASIC Act. We expect some kind of consumer and small business test will be adopted, which should be aligned to one of the existing definitions in use.  This means lenders to small business will be required to make a "target market determination", which must be reviewed, publicised, enforced and monitored. A "target market determination" describes the people that comprise the target market for a product, sets out any conditions and restrictions on the distribution of the product, sets out arrangements for periodic review of the determination and specifies a number of reporting obligations for distributors.

The final report recommends that the definition of "small business" in the Banking Code of Practice be amended, so that the Code applies to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million. The effect is that the rights and protections available under the new Banking Code of Practice will be available to more small businesses. It is unclear whether the ABA will act on this recommendation.  We understand the Small Business and Family Enterprise Ombudsman has also requested the ABA consider further changes to the Code.

A national farm debt mediation system is the headline recommendation in a package for agricultural loans.  In addition, banks should not be able to charge default interest on agricultural loans while a natural disaster declaration is in place, and other changes should be made to the way in which distressed agricultural loans are appraised and managed.

What you should do next

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  • Lenders should start reviewing their products with regard to the DDOs, considering the appropriate target markets, whether changes are required to cover a range of target markets, what distribution channels continue to be appropriate and what restrictions may be required.
  • Subject to the ABA's response on the recommendation to amend the definition of small business, signatories to the Banking Code of Practice should consider revising their policies and procedures to ensure that they can accurately identify small businesses that satisfy the new definition.


A brave new world - credit distribution and intermediaries

Relevance & consequences for industry

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Lenders may look for new distribution channels as traditional distribution models for home loans, auto finance and co-branded credit cards come under threat.  

The removal of the point of sale exemption will have a significant impact on the distribution of auto finance, credit card products and consumer leases. We expect that lenders and distributors may look to other distribution models using the mere referrer exemption or a credit representative model. In the retail space, providers of non-NCCPA regulated credit (such as buy now pay later products) may also become more prevalent (both online and instore) if issuers chose not to offer co-branded credit cards instore.

We expect that lenders will also look at new distribution channels for home loans following the banning of commissions paid to mortgage brokers and the introduction of a best interests duty. The new digital banks and those that have invested heavily in their digital platforms may have an advantage if there is a decline in the number of loans originated by brokers. Comparison sites may also see an opportunity to expand.

With the new product design and distribution obligations extending to credit (NCCPA and non-NCCPA), both issuers and distributors will also need to consider whether modifications will be required to products, whether all distribution channels remain appropriate and the kinds of restrictions that will need to be imposed on distributors (and how these will be monitored and managed).

What you should do next

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  • Lenders should review their current distribution channels and consider investing in new models or divesting of existing channels.
  • Lenders involved in point-of-sale, or in other areas which may be viewed as analogous to broking, should engage in the legislative process to ensure there are no unintended outcomes.
  • Lenders should start reviewing their products with regard to the design and distribution obligations, considering the appropriate target markets, whether changes are required to cover a range of target markets, what distribution channels continue to be appropriate and what restrictions may be required.


Responsible lending – steady as she goes?

Relevance & consequences for industry

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The unsuitability assessment under the NCCPA will not be changed at this stage (including to change the obligation to a suitable rather than not unsuitable threshold).  Banks are already making changes to the collection and verification of expense information and the extent of reliance on benchmarks.  However, legislative changes may be made depending on the outcome of ASIC's current litigation in relation to mortgages.

Given the commentary in the final report on the verification of borrower expenses, we expect to see a move towards increased use of digital technology to capture customer income and expense data and reduced reliance on the Household Expenditure Benchmark, particularly when the Open Banking reforms commence operation. ASIC is also expected to release a revised Regulatory Guide relating to responsible lending conduct obligations, which we expect will drive further changes in how lenders verify a borrower's financial situation.

Finally, the decision to apply design and distribution obligations to credit, with target market determinations and distribution restrictions will also interact with responsible lending obligations, and how they will develop going forward.

What you should do next

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  • Lenders should review their current systems and processes for responsible lending obligations and consider whether any enhancements would assist with verifying a borrower's financial situation.  The measures discussed in the report should be considered.
  • Once ASIC releases the revised ASIC Regulatory Guide 209, lenders will need to engage with it and enhance their systems and processes to align with ASIC's expectations.
  • Lenders should consider the impact of design and distribution obligations, and how they interact with responsible lending.


Key points for superannuation trustees

Relevance & consequences for industry

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Certain trustee conflicts would be removed, while others could continue

Trustees of registrable superannuation entities will not be able to assume any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund.  For example, a trustee could not also be the responsible entity of a managed investment scheme. That does not mean that a trustee cannot act for more than one registrable superannuation entity. The trustee must be a "specialist" superannuation trustee.  This echoes the RSE licence condition prohibiting a trustee from conducting other business which APRA recently removed.  Further, it will not effectively prevent a person from being a director of both a superannuation trustee and a responsible entity.

The trustee's role in ensuring that the requirements are met is not specified in the final report.

Fee for no service arrangements involving superannuation to be significantly curtailed

The deduction of any advice fee (other than for intra-fund advice) from a MySuper account will be prohibited.  The deduction of any advice fee (other than for intra-fund advice) from superannuation accounts other than MySuper accounts will be prohibited unless certain requirements are met.

One account for life

A person will have only one default account but it is not clear how this will occur.

This recommendation addresses concerns about the proliferation of unnecessary accounts not being in the interests of members. While this recommendation replicates one of the recommendations recently made by the Productivity Commission, the final report did not endorse the rest of the Productivity Commission's package, such as the "best in show" shortlist of up to 10 funds proposal or other related recommendations.

More thought should be given to how an account should be stapled to a person.   The approach finally adopted potentially will have significant impacts on the superannuation industry.

Greater accountability for trustees

Breach of the trustees' and directors' covenants under sections 52 and 52A of the SIS Act and obligations in relation to MySuper under sections 29VN and 29VO of the SIS Act will be enforceable by action for civil penalty (recommendation 3.7).

This recommendation addresses concerns that there are currently no civil or criminal penalties for relevant breaches. The recommendation would mean a breach could be subject to civil penalties enforceable by APRA or ASIC.  There are risks in extending the consequences for such broad obligations the scope of which are still subject to significant debate within the superannuation industry.  Further, it is not clear how civil penalties would apply to superannuation trustees which have no or limited personal assets.

An unsurprising recommendation was that, over time, provisions modelled on the BEAR should be extended to all RSE licensees.  This recommendation reflects the view that at least the larger superannuation funds are now large enterprises dealing with very large sums of money, with no reason in principle why their directors and senior executives should not be subject to similar obligations to those of boards and banking executives.

What you should do next

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  • Dual regulated entities should start considering options for splitting their superannuation arrangements from other arrangements.
  • While the BEAR for superannuation may be different, trustees should understand the requirements of the current regime and understand what lessons can be learnt from the banks' implementation of the BEAR.  See the Culture and Remuneration and the BEAR sections for further actions.
  • Trustees should consider their current agreements with advice licensees and determine what would need to change to implement the recommendations and how the changes could be made.
  • RSE licensees will need to reassess their group life insurance arrangements with related parties and other life insurers to ensure that the arrangements and policies entered into are in the best interests of members and otherwise satisfy legal and regulatory requirements.

RSE liensees will need to assess the rules which govern whether premium rates are fair and reasonable.  This would normally require consideration of whether the status attributed is statistically appropriate.


Insurance – more compliance costs, less sales avenues, higher premiums?

Relevance & consequences for industry

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Changing the duty of disclosure – insurers should have to ask the questions

The Commissioner criticises the scope of the duty of disclosure under the Insurance Contracts Act 1984 (ICA), particularly the requirement that consumers disclose "all matters that a reasonable person in the circumstances could be expected to know to be a matter so relevant".  His view is that consumers often have little understanding of what is and isn't relevant to an insurer, leading to unintentional non-compliance.

For consumers, the duty of disclosure will be replaced with a duty to take reasonable care not to make a misrepresentation, shifting the burden from the consumer to the insurer by requiring the insurer to elicit the required information.  This approach may increase the burden insurers presently face in seeking to reduce liability for a claim as a result of non-disclosure.  Demonstrating that a consumer failed to take reasonable care is arguably more difficult.

Hawking of insurance products "unscrupulous" – further clarity recommended

There will be a stronger, blanket prohibition on the hawking of insurance products (except to wholesale clients or under eligible employee share schemes).  Hawking of such products "too readily allows the fraudulent or the unscrupulous to prey upon the unsuspecting".

It will be interesting to see whether the introduction of a definition for the term "unsolicited" provides greater certainty regarding the application of the anti-hawking provisions.  Any definition of "unsolicited" will need careful drafting to take into account the wide range of sales models for insurance products.

Handling of insurance claims should be a "financial service", provided "efficiently, honestly and fairly"

Claims handling is currently exempt from the definition of a "financial service", giving ASIC limited ability to intervene.  The removal of the exemption will mean insurers would need to provide claims handling services "efficiently, honestly and fairly".

These changes are particularly important when coupled with the increased enforceability of breaches and wider sanctions.  Insurers could be subject to penalties/regulatory actions for unreasonable delay in responding to a claim, drawn out assessments or repair works and incorrect decisions on indemnity, particularly for vulnerable insureds following natural disasters.  There may be lessons to be learned from the Japanese insurance industries' approach.

Other restrictions on the sale of insurance products

Other recommendations aim to increase consumer protection in the content and sale of certain insurance products:

  • Unfair contract terms regime will apply to insurance policies. This is not new – see our previous article on this proposal here.
  • Funeral expense insurance will be included within the definition of "financial product".
  • Add on insurance (other than comprehensive motor insurance) will be offered under a deferred sales model.
  • Caps on commissions will be introduced for add-on insurance connected with motor vehicle sales.

Self-regulation through industry codes not enough – a breach of a code should be a breach of the law

Some industry codes will become mandatory and all industry codes approved by ASIC will include 'enforceable code provisions', breach of which will constitute a breach of law.

Consumers will be able to elect to enforce breaches through existing dispute resolution mechanisms or through the courts (think AFCA and consumer complaints), and the Code Governance Committee will be permitted to impose sanctions on insurers in breach of the Code.

Additional consequences specific to life insurance

As the value of a life insurance policy turns heavily on key definitions, terms and exclusions, the Commissioner recommends that Treasury, in consultation with industry, determine the practicability, and likely pricing effects, of legislating universal key definitions, terms and exclusions for default MySuper group life policies.

One of the general themes in the final report is the question of how conflicts of interest can be avoided.  In line with this, the Commissioner recommends that RSE licensees that engage a related party to provide group life insurance, or who enter into an arrangement with a life insurer where the insurer is given a priority in the provision of life insurance, will be required to provide to APRA independent certification that the arrangements and policies entered into are in the best interests of members and otherwise satisfy legal and regulatory requirements.

ASIC should consider further reducing the cap on commissions for life risk insurance products in its review of conflicted remuneration.  The cap should be zero unless there is a clear justification.  ASIC is called on to consider whether the remaining exemption to the ban on conflicted remuneration for general insurance and consumer credit insurance products remains justified.

Further, the final report raises concerns over higher premiums being charged to default members unless trustees receive specific information from the member to the contrary.  RSE licensees will be required to be satisfied that the rules by which a particular status is attributed to a member in connection with insurance are fair and reasonable.

What you should do next

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  • All insurers should carefully reconsider the questions asked of consumers in any pre-contract proposal form.  This may result in an increase to the number and specificity of questions, as well as premium implications.
  • Insurers will need to reassess telephone sales models.  Appropriate policies and training programs will be required to assist employees assess the scope of a customer's request, including the scope of solicited products.
  • Insurers and other claims handling providers will need to re-evaluate their claims handling processes to ensure compliance as a "financial service".
  • Claims handling providers may need to obtain an AFSL or become authorised representatives, and may also become subject to the various codes and regulations.
  • Insurers should assess the terms of their insurance policies for compliance with the unfair contract terms.
  • Sales and distribution models should be re-assessed, especially given the recommendation regarding deferred sales models and the removal of the anti-hawking exemption.
  • Insurers should engage with the Financial Services Council, the Insurance Council of Australia and ASIC to identify provisions of industry codes that govern the terms of the contract between the insurer and the policyholder, as they will be designated as "enforceable code provisions".

Additional actions specific to life insurance

  • Life insurers will need to review their policy and cancellation procedures to ensure that they only avoid a contract of life insurance where they would not have entered into a contract on any terms.  Insurers will need to consider what process needs to be in place to be able to demonstrate this.
  • Life insurers should engage with Treasury on the formulation of universal key terms.
  • Life insurers to consider the effect of removing commissions for life insurance products on their pricing.

We will be preparing a more in-depth alert on the recommendations for insurance.


A new dawn for regulation and enforcement

Relevance & consequences for industry

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The final report had a great deal to say about the regulators of the financial services industry – ASIC, APRA and the ACCC – with 14 recommendations expressly directed at them. 

But it is important to realise that those recommendations will have profound implications for the regulated, who should ensure that they are ready for what is to come.   

Failures of enforcement

The Commissioner has given the regulators, particularly ASIC, a clear message: improve or be replaced.  It is abundantly evident that the Commissioner gave serious consideration to the establishment of a specialist civil enforcement agency, drastically curtailing ASIC's remit.  Though not among the recommendations in the final report, the Commissioner clearly signals that it may be necessary in the future.

A number of circumstances were also identified where misconduct had been observed in APRA-regulated institutions. The Commissioner questioned APRA's apparent lack of enforcement action against those institutions, though the final report did identify a tension between:

  • APRA's core mandate as a prudential regulator; and
  • increasing community expectations that it should also be a conduct regulator and undertake enforcement actions for the purposes of consumer protection.

Twin Peaks retained, but other changes to come

Despite speculation to the contrary before the final report was released, the Commissioner has recommended the retention of the "Twin Peaks" model, with ASIC as the primary conduct and disclosure regulator, while APRA is charged with prudential responsibility.

The final report notes potential advantages in removing parts of ASIC's remit, such as financial services consumer protection, and transferring them to the ACCC.  The Commissioner has concluded, however, that such a change would "disrupt the processes of responding to what has happened in the Australian financial services industry".  He concludes that the costs of associated disruption would outweigh the possible benefit.

The final report has attempted to address existing issues in relation to the supervision of the superannuation system and of the BEAR.

In relation to superannuation, the Commissioner recommended that the roles of APRA and ASIC be adjusted so that:

  • APRA retains its current functions of ensuring that the financial promises made by superannuation entities that APRA supervises are met within a stable, efficient and competitive financial system; and
  • ASIC's remit is broadened so that it has the power to enforce all the provisions in the Superannuation Industry (Supervision) Act (currently limited to matters of disclosure).

In relation to the BEAR, which is currently solely regulated by APRA, the Commissioner recommended that ASIC and APRA be joint administrators. ASIC is to be charged with overseeing those parts of the BEAR that concern consumer protection and market conduct matters while APRA will oversee the prudential aspects. Over time the BEAR should be extended to all APRA-regulated financial services institutions, and APRA and ASIC should jointly administer those provisions.

These recommendations clearly allocate responsibilities for enforcement between the regulators in order to address apparent failures in enforcement against the types of misconduct that was revealed in the Commission. The recommended broadening of ASIC's remit in relation to the superannuation system and the BEAR will likely see increased enforcement action given ASIC's new "why not litigate" enforcement approach.

Watching the watchdogs

Following the Commission, there will also be further regulation of the regulators, including "capability reviews" and a new independently-chaired oversight body.

What you should do next

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Court filings to follow

Expect ASIC to fully embrace its new "why not litigate?" approach.  There will be more civil actions, and more referrals to prosecutors. 

The final report flags more than 20 civil, and 3 criminal, referrals to the regulators.  Even before the final report, ASIC had launched a number of new cases against big-name players.

We predict that ASIC will become less willing to consider negotiated outcomes that are limited to enforceable undertakings, infringement notices or voluntary donations.

Comply with your Codes

The final report recommended a greater role for enforceable Codes of Conduct.  Consider whether you need to review your current practices and processes for compliance with the Codes that apply to you.

Expanded pecuniary penalties

Proposed legislation amends the Corporations Act and the ASIC Act to introduce a stronger penalty framework for misconduct. Several provisions will have associated civil penalties for the first time (s 912A, misleading or deceptive conduct) and civil penalties are also increasing.

Expect to be watched

Given the considerable pressure on regulators to be more proactive and effective, expect to be watched.  We are already aware of many organisations facing new and substantial investigations from regulators.

The Government has proposed a new proactive power for ASIC to issue a "product intervention order" if satisfied that a product is likely to result in "significant detriment" to retail clients or consumers.


Remediation and class actions

Relevance & consequences for industry

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Changes to ACFA's role including the Compensation Scheme of Last Resort

The recently established external dispute resolution body, the Australian Financial Complaints Authority (AFCA), will now:

  • have a role in the public reporting of firm remediation activities; and
  • administer a newly established industry-funded compensation scheme of last resort (CSLR) for future claims.

The CSLR will pay out compensation owed to consumers and small businesses that receive a court or tribunal decision in their favour or a determination from AFCA, but are unable to get the compensation owed by the financial firm (for example, because the firm has become insolvent).

The CSLR will:

  • have a scope wider than financial advice failure, but its limits are presently unclear;
  • be funded, as a licence condition, by financial firms engaged in the types of financial services covered;
  • require that consumers and small businesses have a decision from AFCA, a court or tribunal that remains unpaid after "reasonable steps" have been taken to obtain payment (with those "reasonable steps" to be defined by the CSLR).

Increased responsibility for remediation on senior executives and AFSL holders

The BEAR will be extended to all APRA-regulated entities. All covered entities will be required to nominate one senior executive to be accountable for the design, delivery and maintenance of all products offered, and "any necessary remediation of customers in respect of any of those products."

Where an AFSL holder identifies misconduct by one of its financial advisors in respect of financial advice given to a retail client, it will be required to make whatever inquiries reasonably necessary to determine the nature and full extent of an adviser's misconduct and to "inform and remediate affected clients promptly."

ASIC and remediation

  • ASIC's focus will likely shift away from a remediation-first policy and ASIC will take "as its starting point", the question of whether a court should determine the consequences of a contravention;
  • ASIC will be granted a directions power, which extends to ordering remediation.

What you should do next

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To take immediate steps to:

  • review all identified prior misconduct for the last 10 years and determine whether that misconduct has been fully remediated, or whether further remediation is required;
  • put in place appropriate structural and governance changes required to address the BEAR changes, including identifying an appropriate senior executive to be accountable for customer remediation;
  • design and establish the appropriate channels to connect with AFCA in respect of the public reporting of remediation activities;
  • establish institutional structures that are equipped to respond promptly to, and give full effect to, an ASIC direction ordering that remediation activities to be undertaken;
  • prepare for a post-Commission world in which ASIC will be less likely to be satisfied simply with remediation, but will likely pursue more court enforceable remedies; and
  • provision for the costs associated with the CSLR.
  • Organisations should put in place appropriate reporting and quality assurance mechanisms for remediation. Maintaining appropriate records will assist institutions should they be required to provide information in respect of future scrutiny that may come from regulators or subsequent inquiries.


So where to from here?

The vast majority of law reform recommendations are likely to be implemented, given they are supported by the major political parties.  Although some recommendations will take more time to implement, the Government's plan is to implement reforms "efficiently and effectively".  Some measures will be able to be implemented quickly through legislation that is already well advanced or through regulations or via policy or funding changes.

Keep up-to-date

Our Royal Commission Hub will keep you informed and up-to-date as the implementation of the final report progresses. Here you can access related content, useful resources, and keep in touch with our dedicated Financial Services Regulation Team.

We are happy to assist you in considering the final report and how it impacts your business further.  Please contact your usual KWM contact or Jim Boynton [email protected] if you would like to discuss the report further.

Authored by: Jim Boynton, Damien Richard, Jo Dodd, Andrew Gray, Daniel Delimihalis, Travis Toemoe, Mandy Tsang, Tim Bednall, Miriam Kleiner, Nathan Hodge, Phil Logan, Alex Morris, Amanda Engels, Alison Hammond, Jo Ruitenberg, Katherine Forrest, Kate Jackson-Maynes, Mizu Ardra, Stephen Jaggers, Jedd Watmore-Tanner, Moira Saville, Samantha Kinsey, Phillip South and Ben Goodyear.

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