This article was written by Tim Bednall.
In the last two weeks of November, the Financial Services Royal Commission held its seventh and final round of public hearings. While initially billed as addressing “policy questions arising from the first six rounds of hearings”, by the time the final round commenced it was clear that its focus would narrow to potential causes of misconduct (including culture, governance and remuneration) and to the adequacy of the regulatory regime. For some, this was a pity: an opportunity wasted for the Commission to obtain valuable insights from the Chairs and CEOs of our largest financial institutions on important policy matters and reforms, instead of further interrogation on issues of misconduct in retail banking that had already been fully ventilated.
The CEOs of the four major banks, AMP, Macquarie and Bendigo each appeared, as did the chairs of NAB and CBA and the heads of ASIC and APRA. Much of the questioning and evidence focussed on general questions concerning the relationship between remuneration and wrongdoing and the ways in which a healthy culture can be fostered in large organisations. In light of the Commission’s focus, APRA’s Prudential Inquiry into CBA, its subsequent request that other banks and insurance companies conduct a similar self-assessment, the Sedgwick Retail Banking Remuneration Review and the implementation of the Banking Executive Accountability Regime (BEAR) were each the subject of frequent attention.
While there was much musing as to the utility and dangers of variable remuneration models (with the Commissioner expressing a degree of scepticism), it is less clear what specific reforms may be recommended by the Commission. One possible recommendation is that the BEAR be extended beyond banking to other financial services industries. Unlike past rounds, counsel assisting did not make submissions at the close of Round 7 that any findings were open on the evidence, nor was an opportunity afforded to the entities that appeared to make further submissions. In light of this, it is unlikely that the Commission intends to make any specific adverse findings about those who appeared or about the matters addressed.
The most strenuous questioning was reserved for the Chair of ASIC, Mr Shipton, who took up the role on 1 February 2018 with the Commission already underway. The aggressive and sceptical questioning of Mr Shipton was perhaps unsurprising given the strident criticism of ASIC in the Commission’s Interim Report for its perceived reticence in taking Court action and over-reliance upon negotiated regulatory outcomes. In both its response to the Interim Report and in Mr Shipton’s evidence, ASIC was quick to indicate various changes and reviews of its enforcement approach. The Chair of APRA indicated that officers will be “very ready to ratchet up the mongrel” and adopt a more aggressive supervisory approach. If ASIC and APRA are to take this more aggressive stance, we are concerned that it is done in a disciplined fashion and that proper consideration is given to deciding which matters to litigate, and how they are litigated. The early signs that have emerged are not good: the last thing that our corporations and their stakeholders need now is a series of misconceived actions resulting in litigation failures by our regulators. Further, the Commonwealth’s Model Litigant Rules serve an important purpose and those rules were not written for “mongrels”.
In advance of the seventh round of hearings the Commission published a trove of submissions which had been made to the Commission in January of this year. Those submissions were made in response to letters sent by the Commissioner (immediately following his appointment) requesting that entities “bring out their dead” and identify all instances of misconduct or conduct falling below community standards which had occurred over the past ten years. That trove of voluntary submissions provided much of the fodder for the first six rounds of hearings (as did past and current ASIC investigations). One notable feature of this Commission has been its reliance not only upon extensive use of its compulsory statutory powers, but also upon voluntary requests for the provision of information, statements and other assistance. ASIC and APRA themselves both rely not only on their statutory powers, but on extensive engagement and co-operation with their regulated companies. One challenge for both industry and government is how healthy regulatory engagement can be maintained, in a world of aggressive enforcement where the regulators’ default stance is an adversarial one.