Background
The Royal Commission has now completed six rounds of public hearings since 13 March 2018.
The Report addresses the issues raised in the first four rounds of hearing, primarily consumer lending practices, financial advice, small and medium enterprises, and issues affecting remote and regional communities.
The Report
The Report comprises 3 volumes and an executive summary, in which Commissioner Kenneth Hayne AC QC considers that the two key questions are:
Why did the conduct happen?; and
What can be done to prevent the conduct happening again?
Commissioner Hayne concludes that too often the answer to question 1 appears to be ‘greed - the pursuit of short term profit at the expense of basic standards of honesty’. In answer to question 2, the report considers whether the existing law should be administered or enforced differently, or whether the law should in fact be simplified.
The Report explores the issues and case studies examined by the Commission to date and raises questions which will require further consideration in the next round of public hearings.
Key issues that have emerged so far
Consumer lending practices
The issues that emerged from investigation of consumer lending practices relate to:
intermediaries (mortgage brokers, mortgage aggregators, financial advisers, etc.), and confusion of roles;
communication with customers; and
responsible lending.
The Report reveals that entities are given conflicting messages about whether intermediaries represent entities, themselves, or the customer. This results in confusion about intermediaries’ obligations toward customer entities and customer expectations of intermediaries, which further results in issues arising in communication between intermediaries and customers. Responsible lending issues relate to the interpretation and application of the National Consumer Credit Protection Act 2009 (“NCCP Act”). For example, one issue arises from the varying interpretations of the NCCP Act requirement to verify a customer’s financial situation.
Financial advice
The Commission focused on four topics, being:
fees for no service,
inappropriate financial advice
improper conduct by financial advisers; and
disciplinary matters and how they are dealt with.
The key issues which emerged from the hearings in connection with financial advice relate to:
culture and incentives;
conflicts of interest and duty, and confusion of roles; and
regulator effectiveness.
The Report reiterates that an underlying issue in the financial advice industry is the way in which industry participants are paid, and how bonuses and other incentives are calculated, which raises questions about how this can be improved. The conflict of interest and duty issues include Future of Financial Advice’s treatment of conflicts of interest as conflicts that can be ‘managed’. These issues draw attention to the consequences that frequently stem from the vertical integration structure of particular entities. The Report also highlights the issues relating to regulator effectiveness, and the necessity of addressing what responses regulators should have to certain conduct, and whether their responses to date have been satisfactory.
Loans to small and medium enterprises
The Report notes that the third round of public hearings raised key questions relating to whether there should be changes made to the legal framework governing small and medium enterprise lending, and whether lending to small and medium enterprises should be captured by the NCCP Act. The other issues which have arisen under this topic are:
the content of Code of Banking Practice obligations;
third party guarantors; and
dispute resolution approaches by the Financial Ombudsman Service (“FOS”) and the Australian Financial Complaints Authority (“AFCA”).
The meaning of certain obligations in the Code of Banking Practice have been disagreed upon, which was evident in the submissions in this third round. The disagreement in the meanings of obligations are significant because these obligations provide practical protection to small businesses seeking funding from subscribing banks. Investigation into third party guarantors also highlights the disconnect between how the law and lenders may treat third party guarantors, given the reality that many guarantors of small businesses are family members assisting a loved one in their business plans. Dispute resolution approaches by FOS and AFCA further demonstrated that customers who were wholly or partly successful in their claims did not necessarily believe they had obtained a satisfactory outcome, which raises questions of whether these dispute resolution bodies should be improved.
Agricultural lending and remote communities
The topic of agricultural lending which marked the beginning of the fourth round of public hearings, raised four key issues:
revaluation of securities;
difficulties in obtaining access to banking services and appropriate support;
changes to conditions of lending; and
enforcement by appointment of external administrators.
These issues raise questions on how borrowers and lenders in the agricultural sector ought to deal with the consequences of uncontrollable external events, and if the 2019 Banking Code of Practice provides adequate protection for agricultural businesses, or whether changes should be made.
The key issues highlighted by the Report for remote communities, in particular Indigenous Australians, when dealing with financial services entities are:
access to services;
account fees; and
application of standard identification requirements.
The Report notes that the underlying theme in this area is the complicating of basic transactions by a bank’s inadequate recognition of an Indigenous customer’s circumstances. The selling of funeral insurance revealed ‘predatory behaviour’ by insurers and salespeople, which raises questions about the regulation of funeral insurance. The report explains that the absence of culturally appropriate communication aggravates the existing difficulties in these areas. Whether financial services entities have in place appropriate policies and procedures to assist Aboriginal and Torres Strait Islander people will be a focus of the Final Report.
Regulation and the regulators
The Report addresses the roles and effectiveness of responses to misconduct from the Australian Prudential Regulation Authority (“APRA”) and the Australian Securities and Investments Commission (“ASIC”). The Report emphasises that the criticisms of regulator responses to conduct must not be understood as diminishing in any way the culpability of the entities that engaged in misconduct.
The Report explains that there would be no advantage to an additional layer of new law or regulation unless there is a clearly identified advantage to be gained by doing so. The scope of ASIC and APRA’s remit is considered, particularly whether they are simply expected to regulate too much of the industry. The Report also questions whether the regulatory regime itself is too complex, and if a ‘radical simplification’ of the regime is required.
Going forward
Submissions on the Report are being accepted by the Commission until 26 October 2018. There will be a further round of public hearings to consider the questions that have arisen from the first six rounds of hearings which will be dealt with in the Commission’s Final Report. The hearings for round seven will be held in two parts from 19 – 23 November 2018 in Sydney, and from 26 – 30 November 2018 in Melbourne. The Commission’s Final Report is expected in early 2019. If you have any questions please contact Hillary Ray or a member of our Financial Services team.