The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released by the Government on 04 February 2019. The following is a summary of key recommendations most relevant to boards:
Culture and governance: Boards and APRA to step up
- APRA to focus on encouraging supervised entities to build culture to mitigate conduct risk, manage conduct risk and improve governance.
- Boards must assess culture and governance, identify cultural and governance problems and deal with them, and assess the effectiveness of changes.
- No change to director's statutory duty but 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."
Out with financial metrics – in with risk
- APRA to extend its focus beyond the management of financial risk to address misconduct, compliance and other non-financial risks.
- Remuneration systems to focus on non-financial risks and misconduct – not only financial metrics. APRA to set limits on the use of financial metrics. The tension with shareholder expectations and the operation of the "two strikes rule" in this context is for "others to undertake".
- APRA-regulated institutions to claw-back vested remuneration.
- Greater board scrutiny of remuneration outcomes and more meaningful information to be provided to boards.
Extension of BEAR and enforcement
- BEAR to be extended to apply to all APRA regulated financial institutions (including insurers and superannuation funds). The Government intends to extend the regime to AFSL and ACL holders, market operators and clearing and settling facilities as well.
- BEAR to be jointly administered by ASIC and APRA with ASIC overseeing consumer protection and market conduct and APRA overseeing prudential aspects.
- BEAR to be amended so that ADIs and accountable persons must deal with ASIC in an open, constructive and co-operative way.
Superannuation trustee directors singled out
- 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).
- Trustees and directors who fail their best interests duties to be subject to civil penalties.
Changes to ASIC, APRA and ACCC
- Endorsement of new "why not litigate" approach to ASIC enforcement. Role of enforceable undertakings, infringement notices and non-enforcement contact to be limited. ASIC to have the power to approve industry codes and certain provisions to be "enforceable".
- Jurisdiction of the Federal Court to be expanded to cover corporate criminal misconduct.
Looking forward – recommendations to be implemented
Parliament has made progress on a few of the final report's recommendations but it is now very unlikely that any more legislation will be passed before the Federal election (which must be held by 18 May). However, many recommendations do not require legislation and progress can continue to be made on those recommendations even before Parliament resumes after the election.
There are numerous ways in which some recommendations could be implemented (e.g. legislation, regulations, ASIC instrument or licence variations). How quickly these recommendations are implemented will depend in part on:
- how complex the recommended change is and whether draft legislation has already been released and been subject to consultation;
- how it is implemented (e.g. regulations are usually quicker than legislation);
- the time provided for consultation;
- if the final report recommended a particular commencement date; and
- the Government's policy and numbers in Parliament.
An in-depth analysis of the final report and the consequences for industry and other useful materials can be found online on the Royal Commission Hub.