The Australian Banking Royal Commission
After a decade of headline grabbing scandals relating to rate fixing, tied insurance products, terrorism funded by money laundering and general mis-selling, the Australian financial institutions will be subject to scrutiny by a recently established Royal Commission.
Scope of the inquiry
Referring to the Royal Commission as a Banking Royal Commission is actually a misnomer. The Royal Commission is not limited to “banks” or other deposit institutions. It also includes insurance (and reinsurance) companies, those holding Australian Financial Services licences (and their authorised representatives) and registerable superannuation entities.
Its net is intended to be broadly cast. The terms of reference require Commissioner Kenneth Hayne to inquire into misconduct, conduct, practices or activity “that falls below community standards and expectations” and the use of superannuation funds which similarly “falls below community standards and expectations”.
The focus on “misconduct”, “community standards” and “the effectiveness of redress mechanisms” suggest that the inquiry will be consumer focussed. That makes sense given the scandals in terms of mis-selling financial products and personal lines insurance. But the terms of reference are not limited and the Commissioner has a licence to travel in whatever direction he sees fit.
An ambitious timetable has been set. The Commissioner is supposed to report in February 2019. That is a full year less time than was devoted to the Royal Commission into unions and only a quarter of the time spent on the Royal Commission into institutional child abuse.
An aggressive start
At the initial hearing on 12 February 2018, the Commissioner noted that the terms of reference refer to Australians being entitled to expect the highest standards of conduct and that specific matters to look into are questions of misconduct and community standards and expectations.
He explained that he had written to a number of financial institutions, regulators and other interested groups in December 2017 and had already followed up with them on the basis that their initial responses were inadequate. He was particularly concerned that some large institutions had provided examples of conduct rather than full particulars. He was also concerned that large institutions had complained that they could not respond within the further deadlines he had set.
The Commissioner emphasised that the public has been asked to make submissions by using an online form. One of the purposes of those submissions is that the Commission hopes to identify whether there is a gap between the industry participants’ view and the communities’ view of the financial services industry.
Early responses from the public submissions indicate:
- 49% relate to banking.
- Approximately 20% relate to superannuation.
- 6% relate to general insurance matters.
- 84% allege misconduct or a failure to meet community standards, including falsified documents, misleading advice, misleading lending and delays.
- 40% complain about cultural and governance issues, including conflicts, particularly relating to incentive remuneration and commissions for referral work.
- 35% relate to the effectiveness of redress and, in particular, delay.
The first round of evidential hearings will start in March 2018 and will target unsuitable lending and consumer lending practices. This will be examined in the context of a number of credit products such as home loans, car loans and credit cards. Following this investigation, another early focus of the Commission will be the financial planning and wealth management industry.
We suggest insurers need to have something of the two-headed God, Janus, about them – the ability to look in all directions at once - as the Banking Royal Commission and its aftermath unfolds.
Certain exposures are obvious, such as those of the banks, either as general circumstances which may give rise to claims or in respect of inquiry costs. We are aware that a number of notifications have already been made in this context.
Unknown exposures include other financial service providers and trustees or managers of super funds. It is also unknown at this stage the extent to which insurers themselves will need to be involved in the Royal Commission and the extent to which they will be criticised.
We anticipate a clearer picture will emerge over the coming months, as the plans of the Commissioner speedily unfold.