On Friday, 28 September 2018, the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Commission), was released by Commissioner Hayne (the Commissioner). The interim report documents the findings of the Commission so far and considers some of the measures needed to address the failings in the financial system found by the Commission.
The interim report provides a summary of the first four Rounds of hearings conducted by the Commission. The Commission's interim report:
The Commission's interim report indicates that the interim report is to be used to guide and set the tone for Commission's final round of hearings. As a result, the interim report has made concluded findings in respect of the specific examples of misconduct that were considered during its initial hearings, but makes no recommendations for reform.
The work of the Commission was focused on four key areas of inquiry, namely: Consumer Lending, Financial Advice, Small and Medium Enterprises, and Remote and Regional Communities.
Consumer Lending: In this area of the inquiry, misconduct was exposed by the Commission in relation to the provision of home loans, car loans, credit cards and "add-on" insurance products. The type of misconduct included,
The Commissioner specifically noted that the importance of profit over the interests of the consumer was clearly reflected in the remuneration policies for staff and third party intermediaries such as mortgage brokers, financial advisors and authorised representatives of financial services licensees. Such policies being seen to reward volume and the amount of sales at the expense of the interests of consumers.
Another important point in this area of the Commission's investigation was the role that intermediaries played in relation to the consumer and the providers of financial services and the confusion that often arises as to whose interests these intermediaries serve, and who it is that owes any legal obligations to the consumer.
A number of areas came from this area of investigation and were flagged for further consideration by the Commission, some of these are:
Financial Advice: In this area the hearings focused on the key issues of:
The Commission found to main causes of misconduct in the financial advice industry, was "dishonesty and greed". Importantly, the Commission found ". . . that as long as advisors and licensees stand to benefit from clients acting on the advice that is given, their interests will inherently conflict with those of the consumer". As a result the Commission identified the following as possible areas for reform: culture and incentives; conflicts of interest and confusion of roles; and regulator effectiveness.
Small and Medium Enterprises: This area dealt with issues arising as a result of the dealings between banks and small and medium enterprises (SMEs).
Here a range of misconduct regarding lending to SMEs was identified, it included:
In this respect the Commission considered whether there should be a changes to the National Consumer Credit Protection Act 2009 (Cth) so that it could apply to loans made by banks to SMEs. The Commission also recommended: further clarification of the obligations under the Code of Banking Practice, widening the circumstances where a guarantee ought not be able to be enforced, and extending the power of the Australian Financial Complaints Authority to enable it to award compensation for losses or harm caused rather than putting a borrower back in the position they would have been in if the loan had not been made.
Remote and Regional Communities: Key areas of concern here were agricultural lending and the interactions between Aboriginal and Torres Strait Islander people and financial services entities.
With respect to agricultural lending the main problem identified was how to regulate lending where the borrowers are subject to a range of matters beyond their control such as drought and the weather. The main form of misconduct found in this area of inquiry was how securities were valued and revalued, the way in which farmers are able to access banking services and appropriate support, the change to conditions of lending and the appointments of external administrators. The Commission found further consideration and potential policy reform was needed for the way in which borrowers and lenders in the agricultural sector deal with the results of uncontrollable and unforeseen external events. Also further consideration was needed for
The Commission also examined banking services in remote communities and in this area found that the banks failed to recognise unique indigenous customers' circumstances. A failure resulting in banks' being unwilling to provide "basic accounts", charging overdrafts fees and dishonour fees, and failing to recognise the difficulty indigenous people face in providing appropriate identification when communicating with a bank. A specific example investigated by the Commission was the provision of funeral insurance to indigenous people where it was found that inappropriate sales practices including misrepresentations and pressure selling tactics were used, and that products were sold that were of little or no benefit to the purchaser. Highlighted for further consideration were:
As part of its process the Commission looked at how effective the relevant financial industry regulations and regulators were and to what extent they were conducive to misconduct being as widespread as it was found to be. In this respect the Commissioner was critical of Australian Securities Industries Commission (ASIC) noting that ASIC mostly sought to negotiate with organisations who had committed misconduct, focusing on remediation rather than denunciation. The Commissioner proposed the following issues as being worthy of further consideration and possible reform:
The Commission's final report is due to be submitted to the Governor-General by 1 February 2019. However, the Treasurer has expressed that if a time extension is required it will be supported by the Government. The Commission is also accepting written submissions on policy related issues on Round 6 which deals with Insurance. The next round of hearings (Round 7) will focus on policy questions arising from the first six rounds. That Round is scheduled for Sydney (on 19 to 23 November 2018) and Melbourne (on 26 to 30 November 2018). For more details click.
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