Financial services industry Royal Commission not out of the question
25 July 2016
Will there be a Royal Commission into banks?
Given that the Coalition has secured a majority in the House of Representatives, the prospect of a Royal Commission into the financial services industry appears less likely.
However, given the strong ALP, Green and independent support, a private member’s bill may seek a Royal Commission in any case.
Coupled with increased funding to ASIC and growing calls from industry (including a show of support from AustralianSuper, the first institutional shareholder of all of the big four banks to back the approach), it is clear that the scrutiny of the financial services industry will only intensify.
What do Royal Commissions involve?
In the Australian system of government, Royal Commissions are the highest form of inquiry on matters of public importance. They are issued by the Governor-General and are usually chaired by one or more notable figures, often a retired or serving judge.
Reasons for using them include:
- perceived independence;
- the government needs to explore a very complex matter in a manner which is beyond the scope of its administrative resources;
- the government lacks the expertise or coercive powers to handle an issue or investigation;
- the need to investigate allegations of impropriety where the government, or an individual working in government, is involved; and
- to justify a change in direction from the policy of a previous government, or a policy proposed while in opposition.
Broadly speaking, these types of Commissions have been investigatory or advisory - i.e. to look into events in the past or to formulate government policy. They have also moved towards being a law enforcement-style process.
It is common for the findings of a Royal Commission to contain policy recommendations which may subsequently be enacted into law.
What would a financial services industry Royal Commission target?
The Letters Patent instigating a Royal Commission contain its terms of reference. If a Royal Commission into the financial services industry eventuates, its terms of reference will reflect the imperative of those driving it. The Greens are advocating for wide terms encompassing the financial sector more generally; whereas the ALP has maintained focus on the banks.
Given the size and complexity of the financial services industry and the fact that it has been subject to so much internal and external scrutiny of late, it would be essential for the terms of reference of any Royal Commission to be appropriately targeted to avoid duplicating the work of past and existing initiatives.
- the Financial System Inquiry, finalised in 2014
- ASIC’s investigations of the big four banks (and proceedings commenced against NAB, Westpac and ANZ) in relation to bank bill swap rate manipulation
- the Scrutiny of Financial Advice Inquiry, commenced in 2014 and ongoing;
- enforceable undertakings provided to ASIC by Commonwealth Financial Planning Ltd, Macquarie Equities Limited, NAB, HSBC, UBS Wealth Management, amongst many other smaller institutions and individuals;
- additional licence conditions imposed upon Commonwealth Financial Planning Limited, Financial Wisdom Limited, Macquarie Equities Limited and other financial services licensees;
- internal review and remediation programs undertaken by all of the major financial institutions;
- ASIC’s life insurance industry review, initiated in April 2016;
- ASIC’s investigation into culture, conduct and conflicts of interest in vertically-integrated businesses in the funds-management industry, finalised in March 2016;
- the Australian Bankers’ Association industry review of commissions and whistle blower protections, chaired by the former Commonwealth auditor-general; and
- ASIC’s review of mortgage broker remuneration.
Amongst all of this activity, it is difficult to imagine what further outcomes a Royal Commission could achieve without extremely specific terms of reference. The lack of clear objectives (other than general trivia like “cleaning up the banking industry”) is of key concern given the immense financial, time, political and human resources absorbed by a Royal Commission.
Possible areas of focus could include the life insurance industry, superannuation, financial advice and culture (including remuneration, incentives and whistle blowers). This will impact the number and nature of the institutions involved: whether the inquiry is limited to the Big Four banks or extends to smaller banks, super funds, insurance companies, financial advisers or other industry players.
What could it mean for organisations and their people?
The powers of a Royal Commission are extensive in terms of compelling members of the public to provide evidence, either in the form of production or as a witness, which is relevant to the terms of reference.
Institutions the subject of the inquiry may be required to produce millions of pages of documents, and their officers and employees compelled to provide statements or appear in person before the Royal Commission.
Hearings can be conducted in public or in private.
A claim of legal professional privilege may only be maintained over documents required by a Royal Commission if:
- a court has found the document (or relevant part of the document) to be subject to legal professional privilege; or
- the member of the Royal Commission who required production of the document is satisfied as to the privilege claimed (which may require the person asserting the privilege claim to provide evidence to support their claim).
A Royal Commission is empowered to issue search warrants to be carried out by a member of the Commission, the Federal Police or the police force of the state in question. A person who fails to attend a Royal Commission after being summonsed as a witness can be arrested.
Severe penalties, including fines and imprisonment, can be imposed on persons who:
- provide false or misleading evidence to a Royal Commission;
- fail to provide a document or other thing that they were required to produce by a summons (unless they can prove that it was not relevant to the Royal Commission);
- refuse to be sworn to provide evidence or answer any question put to them by a Royal Commission; or
- deliberately conceal or destroy evidence required by a Royal Commission.
What you can do now
If a Commission is issued shortly:
- What processes and teams do you have in place for document collation, management and production?
- What information or processes of your institution might require special protection?
- What arrangements do you have in relation to witness preparation, management and support?
Since 2013, HDY has had a role in each of the most significant Royal Commissions and Special Commissions in NSW, mobilising dozens of people to review tens of thousands of documents within very tight timeframes.
HDY’s Regulatory Risk + Strategy team has extensive expertise advising financial institutions in relation to their compliance with regulatory obligations and in responding to regulatory enforcement action. We would be pleased to meet with your team to discuss any particular concerns.