Role of Ethical Values and Human Dignity in Economic Decisions Paper

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Assessment Task 2:

Very Straightforward task

Task has been broken down into steps and structure

some sources have been provided to help you

Bust use minim 8 literary sources referenced correctly

MUST APPLY TO AUSTRALIA

ALL DATA FOR AUSTRALIA
ARTICLE MUST BE AUSTRALIAN

Word Count 1500

Critically analyse a recent article related to the The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in light of the role of ethical values and human dignity in economic decisions.

You will find such articles in daily newspapers as well as in more dedicated economic/business journals such as The Economist magazine. Factiva, an electronic database system available through the ACU Library also allows you to search for newspaper articles on specific topics.

Requirements

The article analysis is comprised of a written paper of no more than 1500 words. In preparing your business article critique you should:

  1. Provide a brief discussion of the article and point out the three most important issues contained within the article. Do not simply summarise.
  2. Point out the underlying concepts which are relevant to the article
  3. The article should be properly referenced at the end of the paper and include a copy of or a link to the article.

A suggested structure to you critique may be:

  1. Intro - (background info about ethical values and human dignity in economic decisions, overview of components to be discussed)
  2. Brief discussion of article and three most important issues
  3. Underlying concepts/theories relevant to article
  4. General critique - whether you agree/disagree and why
  5. Conclusion

Here are some readings which may be of assistance in your research for Assessment 2. Please feel welcome to use them as you see fit (with proper referencing).

Articles and Websites on Ethics and Economics




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Final Report Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry VOLUME 1 © Commonwealth of Australia 2019 © Commonwealth of Australia 2019 ISBN: ISBN: 978-1-920838-64-5 (print) 978-1-920838-64-5 (print) 978-1-920838-65-2 (online) 978-1-920838-65-2 (online) With the exception of the Coat of Arms and where otherwise stated, all material presentedofinthe this publication is provided under astated, Creative With the exception Coat of Arms and where otherwise all material presented thisInternational publication islicence provided under a Creative Commons Attributionin4.0 Commons Attribution 4.0 International licence (www.creativecommons.org/licenses). (www.creativecommons.org/licenses). For the avoidance avoidanceofofdoubt, doubt, this means licence applies to material For the this means thisthis licence onlyonly applies as set out in document. to material as this set out in this document. licence conditions are are available on the The details detailsofofthe therelevant relevant licence conditions available onCreative the Creative Commons website as is the full legal code for the CC BY 4.0 licence Commons website as is the full legal code for the CC BY 4.0 licence (www.creativecommons.org/licenses). (www.creativecommons.org/licenses). Use of the Coat of Arms Use of the Coat of Arms The terms under which the Coat of Arms can be used are detailed The terms under which Coat of Arms be used are detailed on the on the Department of the the Prime Minister andcan Cabinet website (www.dpmc.gov.au/government/commonwealth-coat-arms). Department of the Prime Minister and Cabinet website (www.dpmc.gov.au/government/commonwealth-coat-arms). 1 February 2019 His Excellency General the Honourable Sir Peter Cosgrove AK MC (Retd) Governor-General of the Commonwealth of Australia Government House CANBERRA ACT 2600 Your Excellency In accordance with the Letters Patent issued to me on 14 December 2017, I have made inquiries and now provide the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Yours sincerely [Signed] Kenneth M Hayne Commissioner v Contents Volume 1 Glossary xxiii Abbreviations xxvii Legislation xxxi Preface xxxv 1. Introduction 1 1 This report 1 1.1 Four observations 1 1.2 Primary responsibility 4 1.3 Key questions 5 1.4 Extending the Commission 6 1.5 Underlying principles and general rules 7 1.5.1 Underlying principles 1.5.2 General rules Apply and enforce the law Industry codes Hawking Intermediaries Conflicted remuneration Culture and governance 1.5.3 Making change carefully and simply 2 8 11 12 12 13 14 14 15 16 Recommendations 19 2.1 Reading the recommendations 20 vii Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 3 Recommendations by subject matter 20 3.1 Banking 20 Consumer lending: Direct lending  Recommendation 1.1 – The NCCP Act  Consumer lending: Intermediated home lending  Recommendation 1.2 – Best interests duty Recommendation 1.3 – Mortgage broker remuneration Recommendation 1.4 – Establishment of working group Recommendation 1.5 – Mortgage brokers as financial advisers Recommendation 1.6 – Misconduct by mortgage brokers Consumer lending: Intermediated lending for vehicles and other consumer goods Recommendation 1.7 – Removal of point-of-sale exemption Access to banking services Recommendation 1.8 – Amending the Banking Code Lending to small and medium enterprises Recommendation 1.9 – No extension of the NCCP Act Recommendation 1.10 – Definition of ‘small business’ Recommendation 1.11 – Farm debt mediation Recommendation 1.12 – Valuations of land Recommendation 1.13 – Charging default interest Recommendation 1.14 – Distressed agricultural loans Enforceability of industry codes  Recommendation 1.15 – Enforceable code provisions Recommendation 1.16 – 2019 Banking Code Processing and administrative errors Recommendation 1.17 – BEAR product responsibility 3.2 Financial advice Ongoing fee arrangements Recommendation 2.1 – Annual renewal and payment Lack of independence Recommendation 2.2 – Disclosure of lack of independence Quality of advice Recommendation 2.3 – Review of measures to improve the quality of advice  Conflicted remuneration Recommendation 2.4 – Grandfathered commissions Recommendation 2.5 – Life risk insurance commissions Recommendation 2.6 – General insurance and consumer credit insurance commissions  viii 20 20 20 20 20 21 21 21 21 21 22 22 22 22 22 22 23 23 23 24 24 24 24 24 25 25 25 25 25 26 26 26 26 26 27 Final Report Professional discipline of financial advisers Recommendation 2.7 – Reference checking and information sharing Recommendation 2.8 – Reporting compliance concerns Recommendation 2.9 – Misconduct by financial advisers Recommendation 2.10 – A new disciplinary system 3.3 Superannuation 27 27 27 28 28 28 Trustees’ obligations 28 Recommendation 3.1 – No other role or office 28 Recommendation 3.2 – No deducting advice fees from MySuper accounts 29 Recommendation 3.3 – Limitations on deducting advice fees from choice accounts 29 ‘Selling’ superannuation 29 Recommendation 3.4 – No hawking 29 Nominating default funds 30 Recommendation 3.5 – One default account 30 Recommendation 3.6 – No treating of employers 30 Regulation30 Recommendation 3.7 – Civil penalties for breach of covenants and like obligations 30 Recommendation 3.8 – Adjustment of APRA and ASIC’s roles 30 Recommendation 3.9 – Accountability regime  30 3.4 Insurance Manner of sale and types of products sold: Hawking Recommendation 4.1 – No hawking of insurance Recommendation 4.2 – Removing the exemptions for funeral expenses policies Specific steps in respect of particular products: Add-on insurance Recommendation 4.3 – Deferred sales model for add-on insurance Recommendation 4.4 – Cap on commissions Pre-contractual disclosure and representations Recommendation 4.5 – Duty to take reasonable care not to make a misrepresentation to an insurer Recommendation 4.6 – Avoidance of life insurance contracts  31 31 31 31 31 31 31 32 32 32 ix Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Unfair contract terms Recommendation 4.7 – Application of unfair contract terms provisions to insurance contracts Claims handling Recommendation 4.8 – Removal of claims handling exemption Status of industry codes Recommendation 4.9 – Enforceable code provisions Recommendation 4.10 – Extension of the sanctions power External dispute resolution Recommendation 4.11 – Co-operation with AFCA Recommendation 4.12 – Accountability regime  Group life policies  Recommendation 4.13 – Universal terms review Recommendation 4.14 – Additional scrutiny for related party engagements Recommendation 4.15 – Status attribution to be fair and reasonable 3.5 Culture, governance and remuneration 32 32 33 33 33 33 33 34 34 34 34 34 34 34 35 Remuneration35 Recommendation 5.1 – Supervision of remuneration – principles, standards and guidance 35 Recommendation 5.2 – Supervision of remuneration – aims 35 Recommendation 5.3 – Revised prudential standards and guidance 35 Recommendation 5.4 – Remuneration of front line staff 36 Recommendation 5.5 – The Sedgwick Review 36 Culture and governance 36 Recommendation 5.6 – Changing culture and governance 36 Recommendation 5.7 – Supervision of culture and governance 37 3.6 Regulators Twin peaks Recommendation 6.1 – Retain twin peaks ASIC’s enforcement practices Recommendation 6.2 – ASIC’s approach to enforcement Superannuation: Conduct regulation  Recommendation 6.3 – General principles for co-regulation Recommendation 6.4 – ASIC as conduct regulator Recommendation 6.5 – APRA to retain functions x 37 37 37 37 37 38 38 38 39 Final Report The BEAR: Co-regulation 39 Recommendation 6.6 – Joint administration of the BEAR 39 Recommendation 6.7 – Statutory amendments 39 Recommendation 6.8 – Extending the BEAR 39 Co-ordination and information sharing 40 Recommendation 6.9 – Statutory obligation to co-operate 40 Recommendation 6.10 – Co-operation memorandum 40 Governance40 Recommendation 6.11 – Formalising meeting procedure 40 Recommendation 6.12 – Application of the BEAR to regulators 40 Recommendation 6.13 – Regular capability reviews  41 Oversight41 Recommendation 6.14 – A new oversight authority 41 3.7 Other important steps External dispute resolution Recommendation 7.1 – Compensation scheme of last resort ASIC Enforcement Review Taskforce Government Response Recommendation 7.2 – Implementation of recommendations Simplification so that the law’s intent is met Recommendation 7.3 – Exceptions and qualifications Recommendation 7.4 – Fundamental norms 4 41 41 41 42 42 42 42 42 Recommendations: Answering the key questions 43 4.1 Simplifying the law so that its intent is met 43 4.2 Conflicts 45 4.3 Regulators and compliance 46 4.4 Culture, governance and remuneration 47 4.5 Increasing protections 49 xi Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 2. Banking 51 Introduction51 1 Direct lending under the NCCP Act  52 1.1 The existing provisions 52 1.2 Compliance with existing provisions 54 1.2.1 The NCCP Act Benchmarks ‘Not unsuitable’ Recommendation 1.1 – The NCCP Act  1.2.2 The responsible lending provisions of the Banking Code 2 Intermediated home lending 60 2.1 Home lending through mortgage brokers 61 2.1.1 Misconduct 2.1.2 Customer outcomes 2.1.3 More recent changes 70 2.3 Best interests duty 72 2.4 Do more? Recommendation 1.3 – Mortgage broker remuneration Recommendation 1.4 – Establishment of working group 2.5 Brokers as advisers Recommendation 1.5 – Mortgage brokers as financial advisers Recommendation 1.6 – Misconduct by mortgage brokers 73 73 80 80 80 82 82 2.6 Aggregators 83 2.7 Introducers 83 Intermediated auto lending and associated issues 84 3.1 Flex commissions 85 3.2 Relying on the retail dealer 86 Recommendation 1.7 – Removal of point-of-sale exemption 3.3 Capitalising add-on insurance xii 64 66 68 2.2 Trail commissions Recommendation 1.2 – Best interests duty 3 54 56 59 60 60 88 88 Final Report 4 Access to banking services Recommendation 1.8 – Amending the Banking Code 5 88 94 Lending to small and medium enterprises 94 5.1 The lending framework 94 Recommendation 1.9 – No extension of the NCCP Act 96 5.2 The 2019 Banking Code and the definition of ‘small business’97 Recommendation 1.10 – Definition of ‘small business’ 5.3 Guarantors 98 5.4 Loan renewal and enforcement 99 5.5 Agricultural enterprises Recommendation 1.11 – Farm debt mediation Recommendation 1.12 – Valuations of land Recommendation 1.13 – Charging default interest Recommendation 1.14 – Distressed agricultural loans 6 100 103 103 103 104 Enforceability of industry codes 104 6.1 Enforcing the code 104 6.2 The purpose of industry codes 105 6.3 Identifying the enforceable code provisions 108 6.4 The proposed model: Codes more broadly 111 Recommendation 1.15 – Enforceable code provisions Recommendation 1.16 – 2019 Banking Code 7 97 112 112 Processing and administrative errors 112 7.1 Identifying processing and administrative errors 112 7.2 Preventing processing and administrative errors 114 Recommendation 1.17 – BEAR product responsibility 116 Conclusion117 An addendum: Bankwest  117 xiii Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 3. Financial advice 119 Introduction119 1 History 119 1.1 How did the financial advice industry emerge? 121 1.2 Development of the regulatory framework 123 1.3 Vertical integration 124 1.4 Early scandals 127 1.4.1 Storm Financial 1.4.2 Commonwealth Financial Planning (CFPL)  2 127 129 1.5 The FoFA reforms 130 1.6 More recent developments 133 1.7 Further Observations 134 Fees for no service 136 Introduction136 2.1 How and why did these events occur? 138 2.2 What has been the response to these events? 145 2.3 Were the responses adequate? 149 2.3.1 Possible offences151 2.3.2 Communication to ASIC153 2.3.3 Section 1041G154 2.4 Avoiding future fees for no service 2.4.1 Improvements to systems and processes 2.4.2 Further changes Information about the services to be provided The duration of the arrangement Authorisation for deductions 158 158 159 160 161 162 Conclusion163 Recommendation 2.1 – Annual renewal and payment 3 Inappropriate advice 164 164 Introduction164 3.1 Conflicts of duty and interest 3.1.1 The legislative premise 3.1.2 Applying the current law about the client’s interests xiv 165 166 168 Final Report 3.2 Can conflicts be managed better? 170 3.2.1 Improved education and standards for financial advisers 170 3.2.2 Design and distribution obligations and product intervention powers 171 3.2.3 Better disclosure? 172 Recommendation 2.2 – Disclosure of lack of independence 176 3.2.4 Amending the best interests duty? 177 Recommendation 2.3 – Review of measures to improve the quality of advice 178 3.3 Reducing or eliminating the conflict 3.3.1 Conflicted remuneration The exception for grandfathered commissions Recommendation 2.4 – Grandfathered commissions The exception for life risk insurance Recommendation 2.5 – Life risk insurance commissions The exceptions for general insurance, consumer credit insurance and non-monetary benefits Recommendation 2.6 – General insurance and consumer credit insurance commissions 3.3.2 Structural separation? 4 Professional discipline 179 179 182 185 185 189 189 190 190 196 Introduction196 4.1 Existing arrangements 4.1.1 AFSL holders Recommendation 2.7 – Reference checking and information sharing Recommendation 2.8 – Reporting compliance concerns Recommendation 2.9 – Misconduct by financial advisers 4.1.2 ASIC 4.1.3 Industry associations 4.1.4 FASEA and the Code of Ethics 4.2 A new approach to discipline 4.2.1 Mandatory individual registration 4.2.2 A single, central disciplinary body 4.2.3 Mandatory and voluntary notifications Recommendation 2.10 – A new disciplinary system 200 200 205 205 205 206 208 210 212 213 215 216 217 Conclusion218 xv Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 4. Superannuation 219 Introduction219 1 Some history 220 2 Trustees’ obligations to members 224 2.1 The trustees’ covenants 224 2.2 Best interests of members and conflicts of interest 225 2.2.1 Dual-regulated entities Recommendation 3.1 – No other role or office 2.2.2 Conflicts of interest and the trustees of retail funds 2.2.3 Frameworks for managing conflicts 2.2.4 Conflicts of interest and industry funds 2.2.5 Extend best interests duty? 2.2.6 Prohibit ‘for-profit’ funds? 2.2.7 Structural separation 2.3 Dealings with members’ funds 2.3.1 Deduction of advice fees from superannuation accounts Recommendation 3.2 – No deducting advice fees from MySuper accounts 2.3.2 Ongoing advice fees Recommendation 3.3 – Limitations on deducting advice fees from choice accounts 2.3.3 Paying grandfathered commissions 2.4 Governance 239 239 241 241 243 243 243 2.4.1 Board composition 2.4.2 Mergers 243 245 2.5 Selling superannuation 247 2.5.1 No hawking Recommendation 3.4 – No hawking 2.5.2 Nominating a default fund Recommendation 3.5 – One default account Recommendation 3.6 – No treating of employers 2.6 Accessibility 2.6.1 Identification 2.6.2 Binding death benefit nominations 2.6.3 Early release of superannuation benefits for severe financial hardship xvi 228 229 229 232 235 236 237 238 247 250 250 253 253 253 253 254 254 Final Report 3 Regulatory framework 255 3.1 A different regulatory task 255 3.2 The present division 258 3.3 Who should regulate? 258 3.4 Adjusting regulatory roles 259 3.4.1 Current enforcement of the trustees’ covenants 3.4.2 Changing enforcement of covenants Recommendation 3.7 – Civil penalties for breach of covenants and like obligations Recommendation 3.8 – Adjustment of APRA and ASIC’s roles 260 261 262 263 3.5 Regulators and trustees’ conflicts of interest 263 3.6 Governance, regulation and supervision 264 Recommendation 3.9 – Accountability regime  266 Conclusion266 5. Insurance 267 Introduction267 1 History 267 2 The life insurance industry 268 3 The general insurance industry  271 3.1 Regulatory framework 272 3.2 Limitations in the regulatory framework 276 Issues and responses 277 4.1 Manner of sale and types of products sold 278 4 4.1.1 How to sell: Advice about insurance products 4.1.2 How to sell: Prohibit the unsolicited offer or sale of insurance products Recommendation 4.1 – No hawking of insurance 4.1.3 Specific steps in respect of particular products Funeral insurance Recommendation 4.2 – Removing the exemptions for funeral expenses policies Add-on insurance Recommendation 4.3 – Deferred sales model for add-on insurance 278 279 284 284 285 288 288 292 xvii Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Recommendation 4.4 – Cap on commissions Product intervention, disclosure and design 4.2 Pre-contractual non-disclosure and misrepresentations 4.2.1 The duty of disclosure 4.2.2 Section 29(3) of the Insurance Contracts Act Recommendation 4.5 – Duty to take reasonable care not to make a misrepresentation to an insurer Recommendation 4.6 – Avoidance of life insurance contracts  4.3 Unfair contract terms Recommendation 4.7 – Application of unfair contract terms provisions to insurance contracts 4.4 Claims handling Recommendation 4.8 – Removal of claims handling exemption 4.5 Status of Industry Codes Recommendation 4.9 – Enforceable code provisions Recommendation 4.10 – Extension of the sanctions power 4.6 External dispute resolution Recommendation 4.11 – Co-operation with AFCA 4.7 Accountability Recommendation 4.12 – Accountability regime  5 292 293 295 296 301 302 303 303 308 308 310 310 316 316 316 318 318 318 Group life insurance 318 5.1 The structure of group life insurance 319 5.2 MySuper 320 5.2.1 Standardising MySuper insurance Recommendation 4.13 – Universal terms review 5.3 Associated entities 5.3.1 Trustee obligations for insurance 5.3.2 Increased requirements for related insurers Recommendation 4.14 – Additional scrutiny for related party engagements 5.4 Statistically appropriate rates 322 324 324 324 327 329 329 Recommendation 4.15 – Status attribution to be fair and reasonable 331 Conclusion332 xviii Final Report 6. Culture, governance and remuneration 333 Introduction333 1 Remuneration 336 1.1 Background 336 1.1.1 1.1.2 1.1.3 1.1.4 Responses to the GFC International developments Australian developments Further observations 1.2 Executive remuneration 1.2.1 Issues of design Experimentation in the design of remuneration systems Proportion of fixed and variable remuneration Design of variable remuneration Availability of clawback 1.2.2 Issues of implementation Risk-related adjustments Supervision of implementation Disclosure of consequences Recommendation 5.1 – Supervision of remuneration – principles, standards and guidance Recommendation 5.2 – Supervision of remuneration – aims Recommendation 5.3 – Revised prudential standards and guidance 1.3 Front line remuneration Recommendation 5.4 – Remuneration of front line staff Recommendation 5.5 – The Sedgwick Review 2 336 340 342 346 347 348 350 352 353 357 359 359 363 365 366 367 367 367 375 375 Culture 375 2.1 Supervising culture 377 2.1.1 Responses to the GFC 2.1.2 Linking culture and conduct 2.1.3 The way forward 2.2 Changing culture Recommendation 5.6 – Changing culture and governance Recommendation 5.7 – Supervision of culture and governance 377 382 386 388 392 393 xix Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 3 Governance 394 3.1 The role of the board 396 3.1.1 CBA and AML/CTF 3.1.2 NAB and adviser service fees 3.1.3 What the examples show 3.2 Priorities 3.2.1 The pursuit of profit 3.2.2 The importance of non-financial risks 3.3 Accountability 3.3.1 The BEAR 3.3.2 This Commission 396 397 400 401 401 404 407 408 409 Conclusion412 7. Regulators 413 Introduction413 1 2 History 414 1.1 Twin peaks 414 1.2 The Wallis Inquiry 414 1.3 The Cooper Review 415 1.4 The Murray Inquiry 416 1.5 ASIC Capability Review 418 1.6 ASIC Enforcement Review 419 1.7 Productivity Commission Competition Report 420 ASIC’s remit 421 2.1 Size of the existing remit 421 2.2 Change the remit? 422 Recommendation 6.1 – Retain twin peaks 3 xx 423 Changing ASIC’s enforcement culture 424 3.1 Why change? 424 3.2 What change? 426 3.3 Radical change? 428 Final Report 3.4 Litigation 432 3.5 Infringement notices 436 3.6 Enforceable undertakings 440 3.7 Making the change in ASIC’s enforcement culture 442 3.7.1 Internal review 3.7.2 Altering the management structure Recommendation 6.2 – ASIC’s approach to enforcement 442 444 446 4 APRA’s remit 446 5 Co-regulation by APRA and ASIC 448 5.1 Conduct regulation and superannuation  449 5.1.1 The current division 5.1.2 Enlarging ASIC’s role  Recommendation 6.3 – General principles for co-regulation 5.1.3 Giving effect to co-regulation  Recommendation 6.4 – ASIC as conduct regulator Recommendation 6.5 – APRA to retain functions 5.2 The BEAR Recommendation 6.6 – Joint administration of the BEAR Recommendation 6.7 – Statutory amendments Recommendation 6.8 – Extending the BEAR 6 455 457 458 458 Regulatory co-ordination and information sharing 458 6.1 History 458 6.2 The need for change 459 6.3 Co-operation 460 6.4 Information sharing 461 Recommendation 6.9 – Statutory obligation to co-operate Recommendation 6.10 – Co-operation memorandum 7 449 450 453 454 455 455 464 464 Governance of the regulators 464 7.1 Independent non‑executive directors? 465 7.1.1 ASIC 7.1.2 APRA 7.2 Formalisation of procedure Recommendation 6.11 – Formalising meeting procedure 465 467 468 468 xxi Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 7.3 An accountability regime Recommendation 6.12 – Application of the BEAR to regulators 7.4 Periodic capability reviews Recommendation 6.13 – Regular capability reviews 8 470 471 471 External oversight 472 8.1 Existing mechanisms 472 8.1.1 8.1.2 8.1.3 8.1.4 9 468 Parliamentary oversight Ministerial responsibility Regulator Performance Framework Other existing forms of oversight 472 474 475 476 8.2 Additional oversight required 476 A new oversight authority 477 9.1 The additional oversight required 477 9.2 The appropriate oversight body 478 Recommendation 6.14 – A new oversight authority 480 Conclusion480 8. Other important steps 481 Introduction481 1 Pending proposals 482 1.1 A compensation scheme of last resort 482 Recommendation 7.1 – Compensation scheme of last resort 1.2 ASIC Enforcement Review Taskforce Government Response Recommendation 7.2 – Implementation of recommendations 487 488 489 2 Legal assistance and financial counselling services 490 3 Simplification so that the law’s intent is met 494 Recommendation 7.3 – Exceptions and qualifications Recommendation 7.4 – Fundamental norms xxii 496 496 Glossary Term Definition accrued default amount (ADA) An amount of superannuation accumulated in a situation where (a), the member has not given the fund’s trustee any direction about how the amount is to be invested, or (b), the amount is invested in the fund’s ‘default’ investment option. anti-hawking provisions Provisions set out in Sections 736, 992AA and 992A of the Corporations Act 2001 (Cth) that prohibit offering financial products for issue or sale during, or because of, an unsolicited meeting or telephone call with a retail client. Australian Credit Licence (ACL) A licence issued under the National Consumer Credit Protection Act 2009 (Cth) that authorises a licensee to engage in particular credit activities. Australian financial services licence (AFSL), Australian financial services licensee A licence under the Corporations Act 2001 (Cth) that authorises a person who carries on a financial services business to provide financial services. A licensee is the person who provides the services. authorised deposittaking institution (ADI) A body corporate authorised under the Banking Act 1959 (Cth) to carry on a banking business in Australia. Bank Bill Swap Rate (BBSY) An interest rate used as a benchmark when pricing financial products. Banking Executive Accountability Regime (BEAR) A piece of legislation set out in Part IIAA of the Banking Act 1959 (Cth) and enacted in February 2018, the BEAR establishes accountability obligations for authorised deposit-taking institutions (ADIs) and their senior executives and directors. It is administered by APRA. buyer of last resort (BOLR) Arrangements whereby a licensee or an authorised representative acquires the business of another representative. The purchase price is determined using a specific formula. xxiii Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Term Definition conflicted remuneration Any benefit, whether monetary or non-monetary, given to a financial services licensee, or their representatives, who provides financial product advice to retail clients that, because of the nature of the benefit or the circumstances in which it is given could reasonably be expected to influence the choice of financial product recommended by the licensee or representative or could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative: see Section 963A of the Corporations Act 2001 (Cth). enforceable undertaking (EU) An undertaking enforceable in a court. Issued under the Australian Securities and Investments Commission Act 2001 (Cth) and the National Consumer Credit Protection Act 2009. external dispute resolution (EDR) An independent service for resolving disputes between consumers and providers of financial products and services, as an alternative to the court system. financial product Under the Corporations Act 2001 (Cth), a facility through which, or through the acquisition of which, a person makes a financial investment, manages financial risk and/or makes non-cash payments. financial services entity Defined by the Letters Patent as (among other things) ‘an ADI (authorised deposit-taking institution) within the meaning of the Banking Act 1959’, ‘a person or entity required by section 911A of the Corporations Act 2001 to hold an Australian financial services licence, or who is exempt from the requirement to hold such a licence by virtue of being an authorised representative’, and ‘a person or entity that acts or holds itself out as acting as an intermediary between borrowers and lenders’. xxiv Final Report Term Definition Financial Services Guide (FSG) A guide that contains information about the entity providing financial advice, and explains the services offered, the fees charged and how the person or company providing the service will deal with complaints. financial services licensee An individual or business that has been granted an Australian financial services licence (AFSL) by ASIC. Future of Financial Advice (FoFA) A 2012 package of legislation intended to improve the trust and confidence of Australian retail investors in the financial services sector and ensure the availability, accessibility and affordability of high quality financial advice. grandfathering arrangements, grandfathered commission Grandfathering arrangements allow for commissions to continue to be paid to intermediaries who sold financial products prior to the Future of Financial Advice (FoFA) reforms that would otherwise be classified as conflicted remuneration. This source of revenue is known as a grandfathered commission. group life insurance Life insurance where a group of people (for example, members of a superannuation fund) are covered by the one contract. Household Expenditure Measure (HEM) A measure of what families spend on different types of household items, calculated quarterly by the Melbourne Institute of Applied Economic and Social Research. mortgage aggregator An intermediary between mortgage brokers and lenders. Mortgage aggregators have contractual arrangements with lenders that allow brokers operating under the aggregator to arrange loans from those lenders. mortgage broker An intermediary between borrowers and lenders of home loans. xxv Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Term Definition MySuper products Low-cost, simple superannuation products for members who make no active choice about their superannuation. registrable superannuation entity (RSE) A category of superannuation entity, regulated by APRA, that includes regulated superannuation funds, approved deposit funds and pooled superannuation trusts, but does not include self-managed superannuation funds (SMSFs). successor fund transfer (SFT) Where a member’s benefits are transferred to a successor fund. This is one of the few situations where benefits can be transferred without the member’s consent and is subject to strict regulation. third party guarantor A person or business other than the borrower who guarantees to pay back a loan if the borrower does not. Tier 1 Capital Capital against which losses can be written off while an authorised deposit-taking institution (ADI) continues to operate and can absorb losses should the ADI ultimately fail. trail commission A regularly recurring commission to an intermediary, such as a broker, based on a proportion of the current or average loan balance and payable periodically after the loan is made/drawn. Distinct from a commission that is paid up front. vertical integration A description of the relationship between entities where financial advice, platforms and funds management are controlled by a single entity. xxvi Abbreviations ABA Australian Bankers’ Association (now Australian Banking Association) ABARES Australian Bureau of Agricultural and Resource Economics and Sciences ACBF Aboriginal Community Benefit Fund ACCC Australian Competition and Consumer Commission ACL Australian Credit Licence ADA accrued default amount ADI authorised deposit-taking institution AFA Association of Financial Advisers AFCA Australian Financial Complaints Authority AFSL Australian financial services licence APRA Australian Prudential Regulation Authority ASBFEO Australian Small Business and Family Enterprise Ombudsman ASIC Australian Securities and Investments Commission AUSTRAC Australian Transaction Reports and Analysis Centre BEAR Banking Executive Accountability Regime BOLR buyer of last resort DRE dual-regulated entity EDR external dispute resolution xxvii Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry EU enforceable undertaking FASEA Financial Adviser Standards and Ethics Authority FoFA Future of Financial Advice (legislation reforms) FOS Financial Ombudsman Service FPA Financial Planning Association of Australia FSC Financial Services Council FSG Financial Services Guide HEM Household Expenditure Measure IDR internal dispute resolution KPI Key Performance Indicator LVR loan-to-value ratio PDS product disclosure statement RE responsible entity RSE registrable superannuation entity SFT successor fund transfer SME small and medium enterprises SMSF self-managed superannuation fund xxviii Final Report Key references Cooper Review, Final Report Super System Review: Final Report (30 June 2010) Murray Inquiry, Final Report Financial System Inquiry Final Report (November 2014) Ramsay Review, Final Report Final Report: Review of the Financial System External Dispute Resolution and Complaints Framework (April 2017) Ramsay Review, Supplementary Final Report Supplementary Final Report: Review of the Financial System External Dispute Resolution and Complaints Framework (September 2017) Sedgwick Review, Report Retail Banking Remuneration Review: Report (19 April 2017) Wallis Inquiry, Final Report Financial System Inquiry Final Report (March 1997) xxix Legislation ASIC Regulations 2001 (Cth) Australian Crime Commission Act 2002 (Cth) (the ACC Act) Australian Prudential Regulation Authority Act 1998 (Cth) (the APRA Act) Australian Prudential Regulation Authority Amendment Act 2003 (Cth) Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) Australian Small Business and Family Enterprise Ombudsman Act 2015 (Cth) Banking Act 1959 (Cth) (the Banking Act) Competition and Consumer Act 2010 (Cth) Consumer Insurance (Disclosure and Representations) Act 2012 (UK) Corporate Law Reform Act 1992 (Cth) Corporations Act 1989 (Cth) Corporations Act 2001 (Cth) (the Corporations Act) Corporations Amendment (Financial Advice Measures) Act 2016 (Cth) Corporations Amendment (Financial Advice) Regulation 2015 (Cth) Corporations Amendment (Revising Future of Financial Advice) Regulation 2014 (Cth) Corporations Regulations 2001 (Cth) Fair Work Act 2009 (Cth) xxxi Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Farm Business Debt Mediation Act 2017 (Qld) Farm Debt Mediation Act 1994 (NSW) Farm Debt Mediation Act 2011 (Vic) Financial Services and Markets Act 2000 (UK) Financial Services Reform Act 2001 (Cth) Income Tax Assessment Act 1997 (Cth) Insurance Act 1973 (Cth) (the Insurance Act) Insurance Contracts Act 1984 (Cth) (the Insurance Contracts Act) Insurance Contracts Amendment Act 2013 (Cth) Insurance Contracts Regulations 2017 (Cth) Legislation Act 2003 (Cth) Life Insurance Act 1995 (Cth) (the Life Insurance Act) National Consumer Credit Protection Act 2009 (Cth) (the NCCP Act) National Consumer Credit Protection Regulations 2010 (Cth) (the NCCP Regulations) Occupational Superannuation Standards Act 1987 (Cth) (the OSSA Act) Privacy Act 1988 (Cth) Public Governance, Performance and Accountability Act 2013 (Cth) xxxii Final Report Retirement Savings Accounts Act 1997 (Cth) Royal Commissions Act 1902 (Cth) Superannuation Guarantee (Administration) Act 1992 (Cth) Superannuation Guarantee (Administration) Regulations 2018 (Cth) Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2005 (Cth) Superannuation Legislation Amendment (Further MySuper and Transparency Measures) Act 2012 (Cth). Superannuation Legislation Amendment (MySuper Core Provisions) Act 2012 (Cth) Superannuation Legislation (Trustee Obligations and Prudential Standards) Act 2012 (Cth) Superannuation Safety Amendment Act 2004 (Cth) Superannuation Legislation (Trustee Obligations and Prudential Standards) Act 2012 (Cth) Superannuation Safety Amendment Act 2004 (Cth) xxxiii Preface This is the Final Report of the results of my inquiry, and the recommendations arising out of my inquiry, into the matters described in the Letters Patent dated 14 December 2017. It is to be read with the Interim Report I submitted to His Excellency the Governor General on 28 September 2018. In Chapter 1 of my Interim Report, I refer to the establishment of the Commission and set out the Commission’s Terms of Reference. For ease of reference I have included the Letters Patent in Volume 3 of this Report. I describe in Chapter 1 of the Interim Report, and need not repeat in this Report, the first steps taken in appointing staff, counsel and solicitors; the initial inquiries I made of financial services entities, industry associations, consumer advocacy groups and regulatory authorities about the matters that were to be the subject of inquiry; and the steps taken to gather submissions and information from the public. As is recorded elsewhere in this Report, members of the public submitted more than 10,000 complaints about financial services entities by using the Commission’s web form. In addition, there were many thousands of telephone calls and emails to the Office of the Royal Commission, some asking for help in making a complaint, some asking about the work of the Commission and some offering comments on the work that was being, or had been, done. As also explained in Chapter 1 of the Interim Report, it was evident at the outset of the Commission’s work that not every case could be investigated or examined in the course of public hearings. To investigate, let alone hear evidence about, every case would have taken many years. Choices had to be made. The cases that were chosen were selected as reasonably illustrative of the kinds of conduct about which members of the public had complained. Inevitably, those not chosen are disappointed. xxxv Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Much of the work of the Commission has been done outside the hearing room. Choosing case studies required solicitors and counsel assisting to examine in detail many more cases of alleged relevant conduct than those taken as case studies in hearings. Many hours were spent, hundreds of complaints and thousands of documents were examined, before choosing what cases would be the subject of public hearings. Other work done outside the hearing room included the preparation of background and research papers. Some of those papers were published in Volume 3 of the Interim Report; the balance of them appear in Volume 3 of this Report. The Interim Report sets out the findings I made in respect of case studies considered during the first four rounds of the Commission’s public hearings. I conducted three other rounds of public hearings: • between  6 August 2018 and 17 August 2018 – concerning superannuation; • between  10 September 2018 and 21 September 2018 – concerning insurance; and • between  19 November 2018 and 30 November 2018 – taking evidence from some CEOs, board chairs and the heads of ASIC and APRA concerning policy and other questions that I had raised in my Interim Report. This Report sets out, in Volume 2, the findings I make in respect of case studies considered during the rounds of hearings concerning superannuation and insurance. Behind the whole of the Commission’s work, and this Final Report, lies the work of very many people: as advisers or consultants, as members of the staff of the Office of the Royal Commission, as Solicitors Assisting the Commission, and as Counsel Assisting the Commission. Their names are set out in Volume 3. I am deeply grateful to every one of them for all that they have done so willingly, diligently and skilfully. xxxvi 1. Introduction 1 This report The central task of the Commission has been to inquire into, and report on, whether any conduct of financial services entities might have amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations. The conduct identified and described in the Commission’s Interim Report and the further conduct identified and described in this Report includes conduct by many entities that has taken place over many years causing substantial loss to many customers but yielding substantial profit to the entities concerned. Very often, the conduct has broken the law. And if it has not broken the law, the conduct has fallen short of the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them. This Final Report seeks to take what has been learned in respect of each part of the financial services industry that has been examined and identify: • issues; • causes; and • responses and recommendations. 1.1 Four observations Those analyses, taken together, will reveal the importance of four observations about what has been shown by the Commission’s work: the connection between conduct and reward; the asymmetry of power and information between financial services entities and their customers; the effect of conflicts between duty and interest; and holding entities to account. Each of those observations should be explained. First, in almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, 1 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry whether in the form of remuneration for the individual or profit for the individual’s business. Providing a service to customers was relegated to second place. Sales became all important. Those who dealt with customers became sellers. And the confusion of roles extended well beyond front line service staff. Advisers became sellers and sellers became advisers. The conduct identified and condemned in this Final Report and in the Interim Report can and should be examined by reference to how the person doing the relevant acts, or failing to do what should have been done, was rewarded for the conduct. Rewarding misconduct is wrong. Yet incentive, bonus and commission schemes throughout the financial services industry have measured sales and profit, but not compliance with the law and proper standards. Incentives have been offered, and rewards have been paid, regardless of whether the sale was made, or profit derived, in accordance with law. Rewards have been paid regardless of whether the person rewarded should have done what they did. Second, entities and individuals acted in the ways they did because they could. Entities set the terms on which they would deal, consumers often had little detailed knowledge or understanding of the transaction and consumers had next to no power to negotiate the terms. At most, a consumer could choose from an array of products offered by an entity, or by that entity and others, and the consumer was often not able to make a well‑informed choice between them. There was a marked imbalance of power and knowledge between those providing the product or service and those acquiring it. Third, consumers often dealt with a financial services entity through an intermediary. The client might assume that the person standing between the client and the entity that would provide a financial service or product acted for the client and in the client’s interests. But, in many cases, the intermediary is paid by, and may act in the interests of, the provider of the service or product. Or, if the intermediary does not act for the provider, the intermediary may act only in the interests of the intermediary. The interests of client, intermediary and provider of a product or service are not only different, they are opposed. An intermediary who seeks to ‘stand in 2 Final Report more than one canoe’ cannot.1 Duty (to client) and (self) interest pull in opposite directions. Chapter 7 of the Corporations Act 2001 (Cth) (the Corporations Act), and the National Consumer Credit Protection Act 2009 (Cth) (the NCCP Act) (but not the Superannuation Industry (Supervision) Act 1993 (Cth) – the SIS Act), speak of ‘managing’ conflicts of interest.2 But experience shows that conflicts between duty and interest can seldom be managed; self‑interest will almost always trump duty. The evidence given to the Commission showed how those who were acting for a client too often resolved conflicts between duty to the client, and the interests of the entity, adviser or intermediary, in favour of the interests of the entity, adviser or intermediary and against the interests of the client. Those persons and entities obliged to pursue the best interests of clients or members too often sought to strike some compromise between the interests of clients or members and their own interests or the interests of a related third party (such as the person’s employer, or the entity’s owner). A ‘good enough’ outcome was pursued instead of the best interests of the relevant clients or members. (Notions of best interests and conflicts between duty and interest are further examined below in connection with mortgage brokers, financial advice and superannuation.) Fourth, too often, financial services entities that broke the law were not properly held to account. Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished. Misconduct, especially misconduct that yields profit, is not deterred by requiring those who are found to have done wrong to do no more than pay compensation. And wrongdoing is not denounced by issuing a media release. The Australian community expects, and is entitled to expect, that if an entity breaks the law and causes damage to customers, it will compensate those affected customers. But the community also expects that financial services entities that break the law will be held to account. The community 1 Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex parte Ame (2005) 222 CLR 439, 448. 2 The SIS Act requires trustees to give priority to the duties to and interests of the beneficiaries over the duties to, or the interests of, others. See s 52(2)(d). 3 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recognises, and the community expects its regulators to recognise, that these are two different steps: having a wrongdoer compensate those harmed is one thing; holding wrongdoers to account is another. Some may see what has emerged from the work of the Commission only through the lens of public accountability for what has happened. And public accountability is critically important. But it cannot be the only focus. It is necessary to look to the future as well as to the past. The responses and recommendations made in this Report will attract varied responses. Those who oppose change will appeal to real or supposed difficulty in altering present arrangements. Reference will be made to change bringing ‘unintended consequences’. That argument is easily made because it has no content; the ‘consequences’ feared are not identified. But choices must now be made. The arrangements of the past have allowed conduct of the kinds and extent described here and in the Interim Report of the Commission. The damage done by that conduct to individuals and to the overall health and reputation of the financial services industry has been large. Saying sorry and promising not to do it again has not prevented recurrence. The time has come to decide what is to be done in response to what has happened. The financial services industry is too important to the economy of the nation to allow what has happened in the past to continue or to happen again. 1.2 Primary responsibility There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management. Nothing that is said in this Report should be understood as diminishing that responsibility. Everything that is said in this Report is to be understood in the light of that one undeniable fact: it is those who engaged in misconduct who are responsible for what they did and for the consequences that followed. Because it is the entities, their boards and senior executives who bear primary responsibility for what has happened, close attention must be given to their culture, their governance and their remuneration practices. 4 Final Report 1.3 Key questions In its written submission in response to the Interim Report, Treasury identified the key questions emerging from the Interim Report as:3 • To what extent can the law be simplified so that its intent is met, rather than merely its terms being complied with, and how can this be done? • Should the approach to addressing conflicts of interest change from managing conflicts to removing them, either by banning all or some forms of conflicted remuneration and sales or profit‑based remuneration and/or changing industry structures? • What can be done to improve compliance with the law (and industry codes), and the effectiveness of the regulators, to deter misconduct and ensure that grave misconduct meets with proportionate consequences? Treasury submitted that a fourth key question should be added:4 • What more can be done to achieve effective leadership, good governance and appropriate culture within financial services firms so that firms ‘obey the law, do not mislead or deceive, are fair, provide fit for purpose service with care and skill, and act in the best interests of their clients’? Treasury submitted that answers to these four questions ‘would form the pillars of any comprehensive policy response to what the Commission has publicly exposed’.5 I agree. These are the pillars of the policy responses to be made. And, as is explained in the body of the Report, some particular changes to the law are necessary to improve protections for consumers against misconduct, to provide adequate redress and to address asymmetries of power and information between entities and consumers. 3 Treasury, Interim Report Submission, 1 [2]. 4 Treasury, Interim Report Submission, 1 [3]. See also, FSRC, Interim Report, vol 1, 290. 5 Treasury, Interim Report Submission, 1 [4]. 5 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 1.4 Extending the Commission Why deal with these issues now? Why make my Final Report now? Why not extend the work of the Commission? Many suggested that I seek an extension of the time by which my Final Report was due to allow for further public hearings. I did not seek any extension of time for this Final Report for the reasons I gave in the Introduction to the Interim Report. As I said there:6 The Letters Patent require me to inquire into, and report on, whether any conduct by financial services entities, including banks and their associated entities, might have amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fall below community standards and expectations. I must execute those tasks conscious of the fact that the banking system is a central artery in the body of the economy. Defects and obstructions in the artery can have very large effects. Likewise, prolonged injections of doubt and uncertainty can affect performance. I concluded then, and remain of the view, that these reasons oblige me to execute my tasks promptly and do so in ways that would achieve two related purposes: to identify properly the underlying causes of conduct of the kinds referred to in the Terms of Reference; and to prompt proper consideration of how best to avoid recurrence of similar conduct. One reason often given for proposing to extend the work of the Commission was to give more persons who had been affected by relevant misconduct the chance to give evidence of those events. Throughout the work of the Commission I have paid close regard, and given great significance, to the Commission conducting a public inquiry so that there might be public exposure of misconduct and the vindication those affected by misconduct derive from its being exposed. All of the many public submissions made to the Commission were read and considered, and many were considered repeatedly. 6 6 FSRC, Interim Report, vol 1, 1. Final Report Not every complaint that was made could be publicly examined. There were too many to do that. Hence, choices had to be made and, inevitably, the choices that were made will have disappointed those not chosen. But the cases that were the subject of case studies were chosen as being reasonably illustrative of kinds of conduct and general issues that could be seen as emerging from the very active public engagement with the Commission’s work and from the Commission’s own investigations. The case studies provided a sufficiently broad and firm platform for drawing the conclusions that are expressed in this Report. Multiplying examples would not have altered the breadth or depth of that platform to any useful extent. And, as I point out more than once in this Report, every financial services entity, whether examined in a case study or not, must look at its own conduct and the way in which it governs itself. The decision not to seek an extension was taken recognising that the Commission could provide no remedy to those who complained that they had been affected by misconduct. The most that could be done was to provide them with a public platform to voice their complaint. I recognise the importance of a Royal Commission in giving public voice to the issues and concerns that prompted its establishment. But the decision not to seek extension was also taken recognising the central importance that the health of the financial system has for the nation’s economy and thus for every member of this society. For me, these wider considerations were determinative. It is time to grapple with the key questions identified. And it is necessary, therefore, to state plainly the principles and general rules that underpin the answers that are to be given. 1.5 Underlying principles and general rules In my Interim Report I asked many questions. As I said at that time, I sought to provoke informed and useful debate about the issues that have emerged in the course of the Commission’s inquiries. Many of those questions were explored in the course of the final round of the Commission’s public hearings and in the many submissions made to the Commission. Submissions were received from financial services entities; the Australian Prudential Regulation Authority (APRA); the 7 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Australian Securities and Investments Commission (ASIC); Treasury; those who have been affected by the conduct that has been the subject of the Commission’s inquiries; other interested parties given leave to appear at some of the Commission’s hearings (including the Finance Sector Union and consumer bodies such as CHOICE and the Consumer Action Law Centre); industry associations (including the Australian Banking Association (ABA) bodies representing financial advisers, mortgage brokers and others); academics; and members of the public more generally. The focus of this Report must be on issues, causes and responses. I will deal separately with the various sectors of the financial services industry. More particularly I will deal separately with: • banking; • financial advice; • superannuation; and • insurance. Some more general issues extend across all sectors of the financial services industry. They are issues about • culture, governance and remuneration; and • regulators. The responses to the issues that are identified in each of those separate areas are informed by some underlying principles. It is useful, therefore, to begin by stating those principles. 1.5.1 Underlying principles At their most basic, the underlying principles reflect the six norms of conduct I identified in the Interim Report: • obey the law; • do not mislead or deceive; • act fairly; 8 Final Report • provide services that are fit for purpose; • deliver services with reasonable care and skill; and • when acting for another, act in the best interests of that other. These norms of conduct are fundamental precepts. Each is well‑established, widely accepted, and easily understood. Of course, when these norms are stated in the terms I have, it will be said that borderline cases can be identified. And applying the norms to some of those borderline cases may not be easy. But real or imagined cases testing the boundaries of a rule do not show that the rule has no content. Debate about whether the wire runs one side or the other of one or more fence posts must not obscure the size of the field the fence encloses. The six norms of conduct I have identified are all reflected in existing law. But the reflection is piecemeal. The general obligations of Australian financial services licence (AFSL) holders, stated in section 912A of the Corporations Act, and the general obligations of Australian Credit Licence (ACL) holders, stated in section 47 of the NCCP Act, stand out. First, both provisions impose an overarching obligation to ‘do all things necessary to ensure’ that the financial services or credit activities authorised by the licence are provided ‘efficiently, honestly and fairly’.7 Understood properly, this requirement would embrace all six norms. Second, both provisions oblige licence holders to comply with, in the case of AFSL holders, the financial services laws and, in the case of ACL holders, the credit legislation.8 That is, licence holders must obey the law. Third, both provisions oblige licence holders to maintain their own competence to provide the licenced services and to ensure that their representatives are both adequately trained and competent to provide 7 Corporations Act s 912A(1)(a); NCCP Act s 47(1)(a). 8 Corporations Act s 912A(1)(c); NCCP Act s 47(1)(d). 9 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry those services.9 That is, they are required to have the capacity to deliver services with reasonable care and skill. As the law now stands, breach of these general obligations carries no penalty. They are licence conditions enforceable only indirectly, by threatening withdrawal of the licence. That said, the requirement that an AFSL holder acts honestly is expressed further in section 1041G of the Corporations Act, which makes it an offence to engage in dishonest conduct in relation to a financial product or financial service. But the offence relates only to conduct in relation to a financial product or financial service, and Divisions 3 and 4 of Part 7.1 of the Corporations Act are given over to defining what is, and is not, a financial product, and when a person provides a financial service. The more particular norms I state about not misleading or deceiving and acting fairly are reflected in the provisions of the Australian Securities and Investment Commission Act 2001 (Cth) (the ASIC Act) about misleading or deceptive conduct,10 false or misleading representations,11 unconscionable conduct12 and unfair contract terms.13 And the requirement to provide services that are fit for purpose and deliver services with reasonable care and skill are also reflected in the ASIC Act.14 But some of those provisions apply generally and some apply only to dealings with consumers. And the unconscionable conduct and consumer protection provisions use definitions of ‘financial product’ and ‘financial service’ that differ from those provided by Chapter 7 of the Corporations Act.15 The sixth norm – when acting for another, act in the best interests of that other – is reflected in the financial advice sector by the best interests duty imposed by section 961B of the Corporations Act, together with the 9 Corporations Act s 912A(1)(e) and (f); NCCP Act s 47(1)(e) and (f). 10 ASIC Act s 12DA. 11 ASIC Act s 12DB. 12 ASIC Act ss 12CA–12CC. 13 ASIC Act ss 12BF–12BM. 14 ASIC Act ss 12EA–12ED. 15 ASIC Act ss 12BAA,12BAB. 10 Final Report associated obligation provided by section 961J to give priority to the client’s interests over other interests. The norms are dealt with differently in respect of superannuation and insurance. In superannuation, they find their most prominent reflection in the SIS Act, in the best interests covenant and associated covenants by registrable superannuation entity (RSE) licensees and directors of trustees.16 And those covenants also provide direct reflection of the norm that a person or entity acting for another, must act in the best interests of that other. In insurance, all of the norms may be seen as embodied in the duty of utmost good faith imposed on each party to an insurance contract by section 13 of the Insurance Contracts Act 1984 (Cth) (the Insurance Contracts Act). As I say, the six norms of conduct I have set out are reflected in existing law, but the reflection is piecemeal. 1.5.2 General rules The six norms of conduct I have identified support, and in some cases entail, some general rules: • the law must be applied and its application enforced; • industry codes should be approved under statute and breach of key promises made to customers in the codes should be a breach of the statute; • no financial product should be ‘hawked’ to retail clients; • intermediaries should act only on behalf of, and in the interests of, the party who pays the intermediary; • exceptions to the ban on conflicted remuneration should be eliminated; 16 SIS Act ss 52, 52A. 11 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry • culture and governance practices (including remuneration arrangements) both in the industry generally and in individual entities, must focus on non-financial risk, as well as financial risk. Why these general rules? Apply and enforce the law The first general rule, that the law must be applied and its application enforced, requires no development or explanation. It is a defining feature of a society governed by the rule of law. The conduct identified and criticised in the Commission’s Interim Report and in this Report has been of a nature and extent that shows that the law has not been obeyed, and has not been enforced effectively. It also points to deficiencies of culture, governance and risk management within entities. Too often, entities have paid too little attention to issues of regulatory, compliance and conduct risks. And the risks of regulatory or other non‑compliance and of misconduct are the risks of departure from the first general rule of ‘obey the law’. What consequences follow, and whether this amounts to effective enforcement of the law, bears directly upon the nature and extent of the regulatory, compliance and conduct risks that entities must manage. Industry codes Industry codes are expressed as promises made by industry participants. If industry codes are to be more than public relations puffs, the promises made must be made seriously. If they are made seriously (and those bound by the codes say that they are), the promises that are set out in the code, and are intended to govern the particular relations between the provider and the acquirer of a financial product or financial service, must be kept. This must entail that the promises can be enforced by those to whom the promises are made: the customer who acquires the product or service, and the guarantors of loans to individuals and small businesses. 12 Final Report Hawking ‘Hawking’ company securities, by making unsolicited approaches to potential buyers, has long been unlawful.17 The practice has long been unlawful because it too readily allows the fraudulent or unscrupulous to prey upon the unsuspecting.18 There is no real check on what is said to the target and often the target is not able to check the truth of what is said. The asymmetry of power and information between the provider of the product and service and the acquirer is very large. Even if the ‘hawker’ is not fraudulent or unscrupulous (and, too often, cases examined in evidence showed that the hawker was at least unscrupulous) the acquirer is nevertheless ‘unsuspecting’. The potential acquirer who has not sought out the product or service comes to the encounter unprepared to look critically at whatever is said. The potential acquirer often does not know what questions to ask. Hawking financial products and managed investment products is now generally prohibited.19 But there are some exceptions. Other than the provisions relating to offers not made to retail clients and offers made under an eligible employee share scheme,20 however, there is no immediately apparent basis for thinking that the exceptions are areas where the fraudulent or unscrupulous may not yet prey upon the unsuspecting. And the evidence given to the Commission points firmly against maintaining exceptions to the general prohibition, at least in respect of superannuation and insurance products, other than the two exceptions mentioned: offers not made to retail clients and offers made under an eligible employee share scheme. For the avoidance of doubt, it should also be made plain that a solicited meeting, or telephone call, to discuss one type of financial product must not 17 The 1926 Report of the UK Company Law Amendment Committee chaired by Mr Wilfrid Greene KC (Cmnd 2657) recommended that the offering from house to house of shares, stock, bonds, debentures or debenture stock or similar securities either for subscription or sale should be made an offence. Hawking company securities has long been an offence under Australian company law. See now Corporations Act s 736. 18 United Kingdom, Report of the UK Company Law Amendment Committee (Cmnd 2657), 48 [92]. 19 Corporations Act ss 992A and 992AA. 20 Corporations Act ss 992A(3A) and (3B). 13 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry be used for the unsolicited offering of some other type of product. (In that regard, common forms of banking products, like transaction accounts and credit card accounts should be treated as together forming the one kind of product. But each superannuation product and each insurance product is, and should be treated as, a distinct product type.) Intermediaries In the Interim Report, I pointed out how difficult it may be to decide for whom intermediaries act and to whom a particular intermediary may owe duties and responsibilities.21 As I indicated then, the difficulties may be acute in the case of mortgage brokers. But the difficulties are not confined to home lending. Point-of-sale negotiation of credit arrangements (by car dealers, white goods retailers and the like) presents similar difficulties. The point is much more important than a dry point of legal analysis. For whom the intermediary acts determines what duties the intermediary owes and to whom they owe them. The general rule that should apply throughout the financial services industry is that an intermediary who is paid to act as intermediary: • acts for the person who pays the intermediary; • owes the person who pays a duty to act only in the interests of that person; and • ordinarily owes the person who pays a duty to act in the best interests of that person. The particular working out of these principles, especially with respect to mortgage brokers and the home lending market, is dealt with in the chapter about banking. Conflicted remuneration The definition of ‘conflicted remuneration’ in the Corporations Act shows why the practice should be prohibited. 21 14 FSRC, Interim Report, vol 1, 56–9. Final Report Section 963A of the Corporations Act defines ‘conflicted remuneration’ as any benefit (whether monetary or non‑monetary) given to a financial services licensee or a representative of the licensee, who provides financial product advice to persons as retail clients, that, because of the nature of the benefit or the circumstances in which it is given, could have either or both of two effects: • it could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or • it could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative. That is, as I said in the Interim Report, ‘the very hinge about which the conflicted remuneration provisions turn is that the payment is one that “could reasonably be expected to influence the choice of financial product recommended to retail clients”’.22 For grandfathered commissions, the time when the initial advice was given and the initial conflict arose has passed. The influence of the commission has already done its work once. But the problem remains. The influence continues. Advisers have an incentive to keep their clients in products with grandfathered commissions rather than advise them to move to better products. There can be, and is, no justification for maintaining the grandfathering provisions. Culture and governance After the Global Financial Crisis (GFC), financial services entities and regulators, in Australia and elsewhere, gave close attention to financial risk. Until recently, however, too little attention has been given in Australia to regulatory, compliance and conduct risks. Too little attention has been given to the evident connections between compensation, incentive and remuneration practices and regulatory, compliance and conduct risks. The very large reputational consequences that are now seen in the Australian financial services industry, especially in the banking industry, stand as the clearest demonstration of the pressing urgency for dealing with these 22 FSRC, Interim Report, vol 1, 92. 15 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry issues. As the Group of Thirty (G30) said in November 2018, ‘getting culture and conduct right is not a supervisory requirement. It is necessary for banks’ and banking’s economic and social sustainability’.23 1.5.3 Making change carefully and simply Treasury,24 and many of the entities that made submissions,25 urged the need for caution before recommending change. This is undeniably right. As I said in the Interim Report, adding a new layer of regulation will not assist. It will add to what is already a complex regulatory regime. No doubt the financial services industry is itself complicated. That may be said to explain why the regulatory regime is as complicated as it is. But closer attention will show that much of the complication comes from piling exception upon exception, from carving out special rules for special interests. And, in almost every case, these special rules qualify the application of a more general principle to entities or transactions that are not different in any material way from those to which the general rule is applied. History shows, as Treasury submitted, that legislative simplification can be a long and difficult task. Programs to simplify the law relating to income taxation and to reform corporate law have extended over many years – well beyond the life of a single Parliament. And I do not doubt that simplifying the law that relates to the financial services industry would be a large task. But there are two parts of that task that can inform, and I consider should inform, what is done in response to this Report. First, it is time to start reducing the number and the area of operation of special rules, exceptions and carve outs. Reducing their number and their area of operation is itself a large step towards simplificiation. Not only that, 23 G30, Banking Conduct and Culture: A Permanent Mindset Change, November 2018, Foreword, v. 24 Treasury, Interim Report Submission, 1 [4]–[5]. 25 See, eg, AMP, Interim Report Submission, 7 [34]; ANZ, Interim Report Submission, 2 [11]; CBA, Interim Report Submission, 41 [223]; Westpac, Interim Report Submission, 2 [6]; NAB, Interim Report Submission, 17 [50]; Mortgage Choice, Interim Report Submission, 3 [3]. 16 Final Report it leaves less room for ‘gaming’ the system by forcing events or transactions into exceptional boxes not intended to contain them.26 Second, it is time to draw explicit connections in the legislation between the particular rules that are made and the fundamental norms to which those rules give effect. Drawing that connection will have three consequences. It will explain to the regulated community (and the regulator) why the rule is there and, at the same time, reinforce the importance of the relevant fundamental norm of conduct. Not only that, drawing this explicit connection will put beyond doubt the purpose that the relevant rule is intended to achieve. And, the further consequence will be to highlight the fact that exceptions and carve outs like grandfathered commissions constitute a departure from applying the relevant fundamental norm. Emphasising the fact of departure may assist in reducing both the number and the extent of these qualifications. In their submissions, some entities used the undoubted need for care in recommending change as a basis for saying that there should be no change. The ‘Caution’ sign was read as if it said ‘Do Not Enter’. An assertion was necessarily implicit in the submissions that sought to maintain some aspect of the present regime unchanged: that doing nothing about those matters would carry less cost than making any change to the rules under consideration. But rarely, if ever, was the submission developed beyond the point of bare assertion. Rarely, if ever, was there explicit examination of, or comparison between, the costs of doing nothing and the costs and consequences of changing the rules. The rules that govern grandfathered commissions provide a useful example. Two grounds have often been given for maintaining the present rules about grandfathered commissions without modification: orderly transition and constitutional infirmity. If the provisions were made to allow orderly transition within the industry, that time has now passed. How much longer is the transition to take? For all the suggestions that it will ‘wither on the vine’, the charging and receipt of 26 For example, the preservation of grandfathered commissions during a successor fund transfer by potentially treating the succeeding RSE licensee as a ‘platform operator’: see the NULIS Nominees (Australia) Ltd case study discussed in vol 2 of this Report. 17 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry grandfathered commissions remained alive and well until some of the larger participants in the industry (especially the banks) sensed the wind of change may be blowing and found it best to bend now by phasing it out rather than have the wind grow to such intensity that it snap off this branch of their activities. Whenever change is mooted, someone will suggest that changing the permitted forms of remuneration would lead to constitutional difficulties because it would amount to an acquisition of property otherwise than on just terms. As I said in the Interim Report, two points must be made.27 First, where would be the acquisition? Who would acquire anything? What proprietary benefit or interest would accrue to any person?28 Second, if the point is good, it was good at the time when most forms of conflicted remuneration were prohibited. Yet no-one sought then to challenge the validity of the relevant provisions and the Future of Financial Advice (FoFA) ban on conflicted remuneration has now operated for more than five years without challenge. It is time to ignore the ghostly apparition of constitutional challenge conjured forth by those who, for their own financial advantage, oppose change that will free advice about, or recommendation of, financial products from the influence of the adviser’s personal financial advantage. A third point is sometimes made in attempting to justify preserving grandfathered commissions. It is said that prohibiting this form of remuneration once and for all will carry with it unintended consequences and the advice industry will be disrupted. Generalised fears of this kind should not be heeded. ‘Disruption’ and similar terms can be used, and in some submissions to the Commission were used, as little more than pejorative synonyms for ‘change’. As the Treasury submissions show, however, it is always necessary to identify the nature and the extent of the consequences that will or may follow from the change under consideration before speaking of the change as ‘disruptive’. Without identifying those consequences, ‘disruption’ has no useful content. 27 FSRC, Interim Report, vol 1, 95. 28 Cf JT International SA v The Commonwealth (2012) 250 CLR 1. 18 Final Report If an exception to the rules prohibiting grandfathered commissions is to be preserved, the exception must be closely and cogently justified. Saying only that there may be ‘disruption’ or ‘unintended consequences’ is nothing but a naked appeal to fear of the future. And it seeks to graft some exception onto the body of law intended to give effect to a coherent set of policy objectives without any attempt to identify the competing policy objectives. Creating exceptions that depart from underlying principles has consequences. Those consequences are amply demonstrated by the grandfathering arrangements made in respect of FoFA. ‘Temporary’ or ‘transitional’ carve outs departing from principle too often become (and in this case did become) entrenched. Carve outs and exceptions are too often exploited (and in this case have been exploited) for purposes having nothing to do with the stated purpose of their creation. Creating carve outs and exceptions impedes, and may even prevent (and in this case did prevent) achieving fully the intended policy objectives that inform the body of the law. Instead, the law is (and here it was) made more complex; it is (and here it was) made harder not only for regulators to administer but also for the regulated community, and the public more generally, to understand. 2 Recommendations In the succeeding chapters of this Report, I make a number of recommendations. It is desirable to set them out here and to do that: • first, by reference to subject matter, recording the recommendations in the order in which they are considered in the body of the Report; and • second, restating the recommendations but reordering them by reference to the key questions identified above, and then by reference to the more particular changes that must be made to protect consumers against misconduct, to provide adequate redress and to address asymmetries of power and information. 19 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry 2.1 Reading the recommendations All of the recommendations set out below are to be read and understood in the light of what is said in the body of the Report. In particular, each recommendation is to be read in light of the reasons given for making it and what is said about other steps regulators, entities and the industry more generally can, and should, take in response to the conduct and events referred to in the Interim Report and this Report. 3 Recommendations by subject matter 3.1 Banking Consumer lending: Direct lending Recommendation 1.1 – The NCCP Act The NCCP Act should not be amended to alter the obligation to assess unsuitability. Consumer lending: Intermediated home lending Recommendation 1.2 – Best interests duty The law should be amended to provide that, when acting in connection with home lending, mortgage brokers must act in the best interests of the intending borrower. The obligation should be a civil penalty provision. Recommendation 1.3 – Mortgage broker remuneration The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending. Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers. 20 Final Report Recommendation 1.4 – Establishment of working group A Treasury-led working group should be established to monitor and, if necessary, adjust the remuneration model referred to in Recommendation 1.3, and any fee that lenders should be required to charge to achieve a level playing field, in response to market changes. Recommendation 1.5 – Mortgage brokers as financial advisers After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients. Recommendation 1.6 – Misconduct by mortgage brokers ACL holders should: • be bound by information-sharing and reporting obligations in respect of mortgage brokers similar to those referred to in Recommendations 2.7 and 2.8 for financial advisers; and • take the same steps in response to detecting misconduct of a mortgage broker as those referred to in Recommendation 2.9 for financial advisers. Consumer lending: Intermediated lending for vehicles and other consumer goods Recommendation 1.7 – Removal of point-of-sale exemption The exemption of retail dealers from the operation of the NCCP Act should be abolished. 21 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Access to banking services Recommendation 1.8 – Amending the Banking Code The ABA should amend the Banking Code to provide that: • banks will work with customers: – who live in remote areas; or – who are not adept in using English, to identify a suitable way for those customers to access and undertake their banking; • if a customer is having difficulty proving his or her identity, and tells the bank that he or she identifies as an Aboriginal or Torres Strait Islander person, the bank will follow AUSTRAC’s guidance about the identification and verification of persons of Aboriginal or Torres Strait Islander heritage; • without prior express agreement with the customer, banks will not allow informal overdrafts on basic accounts; and • banks will not charge dishonour fees on basic accounts. Lending to small and medium enterprises Recommendation 1.9 – No extension of the NCCP Act The NCCP Act should not be amended to extend its operation to lending to small businesses. Recommendation 1.10 – Definition of ‘small business’ The ABA should amend the definition of ‘small business’ in the Banking Code so that the Code applies to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million. Recommendation 1.11 – Farm debt mediation A national scheme of farm debt mediation should be enacted. 22 Final Report Recommendation 1.12 – Valuations of land APRA should amend Prudential Standard APS 220 to: • r equire that internal appraisals of the value of land taken or to be taken as security should be independent of loan origination, loan processing and loan decision processes; and •  rovide for valuation of agricultural land in a manner that will p recognise, to the extent possible: – the likelihood of external events affecting its realisable value; and – the time that may be taken to realise the land at a reasonable price affecting its realisable value. Recommendation 1.13 – Charging default interest The ABA should amend the Banking Code to provide that, while a declaration remains in force, banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster. Recommendation 1.14 – Distressed agricultural loans When dealing with distressed agricultural loans, banks should: •  nsure that those loans are managed by experienced e agricultural bankers; •  ffer farm debt mediation as soon as a loan is classified o as distressed; •  anage every distressed loan on the footing that working out will be m the best outcome for bank and borrower, and enforcement the worst; • r ecognise that appointment of receivers or any other form of external administrator is a remedy of last resort; and •  ease charging default interest when there is no realistic prospect c of recovering the amount charged. 23 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Enforceability of industry codes Recommendation 1.15 – Enforceable code provisions The law should be amended to provide: • that ASIC’s power to approve codes of conduct extends to codes relating to all APRA-regulated institutions and ACL holders; • that industry codes of conduct approved by ASIC may include ‘enforceable code provisions’, which are provisions in respect of which a contravention will constitute a breach of the law; • that ASIC may take into consideration whether particular provisions of an industry code of conduct have been designated as ‘enforceable code provisions’ in determining whether to approve a code; • for remedies, modelled on those now set out in Part VI of the Competition and Consumer Act, for breach of an ‘enforceable code provision’; and • for the establishment and imposition of mandatory financial services industry codes. Recommendation 1.16 – 2019 Banking Code In respect of the Banking Code that ASIC approved in 2018, the ABA and ASIC should take all necessary steps to have the provisions that govern the terms of the contract made or to be made between the bank and the customer or guarantor designated as ‘enforceable code provisions’. Processing and administrative errors Recommendation 1.17 – BEAR product responsibility After appropriate consultation, APRA should determine for the purposes of section 37BA(2)(b) of the Banking Act, a responsibility, within each ADI subject to the BEAR, for all steps in the design, delivery and maintenance of all products offered to customers by the ADI and any necessary remediation of customers in respect of any of those products. 24 Final Report 3.2 Financial advice Ongoing fee arrangements Recommendation 2.1 – Annual renewal and payment The law should be amended to provide that ongoing fee arrangements (whenever made): • must be renewed annually by the client; •  ust record in writing each year the services that the client will be m entitled to receive and the total of the fees that are to be charged; and •  ay neither permit nor require payment of fees from any account m held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement. Lack of independence Recommendation 2.2 – Disclosure of lack of independence The law should be amended to require that a financial adviser who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words or expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’) must, before providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased. 25 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Quality of advice Recommendation 2.3 – Review of measures to improve the quality of advice In three years’ time, there should be a review by Government in consultation with ASIC of the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice. The review should preferably be completed by 30 June 2022, but no later than 31 December 2022. Among other things, that review should consider whether it is necessary to retain the ‘safe harbour’ provision in section 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed. Conflicted remuneration Recommendation 2.4 – Grandfathered commissions Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable. Recommendation 2.5 – Life risk insurance commissions When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero. 26 Final Report Recommendation 2.6 – General insurance and consumer credit insurance commissions The review referred to in Recommendation 2.3 should also consider whether each remaining exemption to the ban on conflicted remuneration remains justified, including: • the exemptions for general insurance products and consumer credit insurance products; and • the exemptions for non-monetary benefits set out in section 963C of the Corporations Act. Professional discipline of financial advisers Recommendation 2.7 – Reference checking and information sharing All AFSL holders should be required, as a condition of their licence, to give effect to reference checking and information-sharing protocols for financial advisers, to the same effect as now provided by the ABA in its ‘Financial Advice – Recruitment and Termination Reference Checking and Information Sharing Protocol’. Recommendation 2.8 – Reporting compliance concerns All AFSL holders should be required, as a condition of their licence, to report ‘serious compliance concerns’ about individual financial advisers to ASIC on a quarterly basis. 27 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Recommendation 2.9 – Misconduct by financial advisers All AFSL holders should be required, as a condition of their licence, to take the following steps when they detect that a financial adviser has engaged in misconduct in respect of financial advice given to a retail client (whether by giving inappropriate advice or otherwise): •  ake whatever inquiries are reasonably necessary to determine m the nature and full extent of the adviser’s misconduct; and •  here there is sufficient information to suggest that an adviser w has engaged in misconduct, tell affected clients and remediate those clients promptly. Recommendation 2.10 – A new disciplinary system The law should be amended to establish a new disciplinary system for financial advisers that: • r equires all financial advisers who provide personal financial advice to retail clients to be registered; • provides for a single, central, disciplinary body; • r equires AFSL holders to report ‘serious compliance concerns’ to the disciplinary body; and •  llows clients and other stakeholders to report information about a the conduct of financial advisers to the disciplinary body. 3.3 Superannuation Trustees’ obligations Recommendation 3.1 – No other role or office The trustee of an RSE should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund. 28 Final Report Recommendation 3.2 – No deducting advice fees from MySuper accounts Deduction of any advice fee (other than for intra‑fund advice) from a MySuper account should be prohibited. Recommendation 3.3 – Limitations on deducting advice fees from choice accounts Deduction of any advice fee (other than for intra‑fund advice) from superannuation accounts other than MySuper accounts should be prohibited unless the requirements about annual renewal, prior written identification of service and provision of the client’s express written authority set out in Recommendation 2.1 in connection with ongoing fee arrangements are met. ‘Selling’ superannuation Recommendation 3.4 – No hawking Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme. The law should be amended to make clear that contact with a person during which one kind of product is offered is unsolicited unless the person attended the meeting, made or received the telephone call, or initiated the contact for the express purpose of inquiring about, discussing or entering into negotiations in relation to the offer of that kind of product. 29 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Nominating default funds Recommendation 3.5 – One default account A person should have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account. Recommendation 3.6 – No treating of employers Section 68A of the SIS Act should be amended to prohibit trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts specified in section 68A(1)(a), (b) or (c) where the act may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund or having one or more employees of the recipient apply or agree to become members of the fund. The provision should be a civil penalty provision enforceable by ASIC. Regulation Recommendation 3.7 – Civil penalties for breach of covenants and like obligations Breach of the trustee’s covenants set out in section 52 or obligations set out in section 29VN, or the director’s covenants set out in section 52A or obligations set out in section 29VO of the SIS Act should be enforceable by action for civil penalty. Recommendation 3.8 – Adjustment of APRA and ASIC’s roles The roles of APRA and ASIC with respect to superannuation should be adjusted, as referred to in Recommendation 6.3. Recommendation 3.9 – Accountability regime Over time, provisions modelled on the BEAR should be extended to all RSE licensees, as referred to in Recommendation 6.8. 30 Final Report 3.4 Insurance Manner of sale and types of products sold: Hawking Recommendation 4.1 – No hawking of insurance Consistently with Recommendation 3.4, which prohibits the hawking of superannuation products, hawking of insurance products should be prohibited. Recommendation 4.2 – Removing the exemptions for funeral expenses policies The law should be amended to: • r emove the exclusion of funeral expenses policies from the definition of ‘financial product’; and •  ut beyond doubt that the consumer protection provisions p of the ASIC Act apply to funeral expenses policies. Specific steps in respect of particular products: Add-on insurance Recommendation 4.3 – Deferred sales model for add-on insurance A Treasury-led working group should develop an industry-wide deferred sales model for the sale of any add-on insurance products (except policies of comprehensive motor insurance). The model should be implemented as soon as is reasonably practicable. Recommendation 4.4 – Cap on commissions ASIC should impose a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products. 31 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry Pre-contractual disclosure and representations Recommendation 4.5 – Duty to take reasonable care not to make a misrepresentation to an insurer Part IV of the Insurance Contracts Act should be amended, for consumer insurance contracts, to replace the duty of disclosure with a duty to take reasonable care not to make a misrepresentation to an insurer (and to make any necessary consequential amendments to the remedial provisions contained in Division 3). Recommendation 4.6 – Avoidance of life insurance contracts Section 29(3) of the Insurance Contracts Act should be amended so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms. Unfair contract terms Recommendation 4.7 – Application of unfair contract terms provisions to insurance contracts The unfair contract terms provisions now set out in the ASIC Act should apply to insurance contracts regulated by the Insurance Contracts Act. The provisions should be amended to provide a definition of the ‘main subject matter’ of an insurance contract as the terms of the contract that describe what is being insured. The duty of utmost good faith contained in section 13 of the Insurance Contracts Act should operate independently of the unfair contract terms provisions. 32 Final Report Claims handling Recommendation 4.8 – Removal of claims handling exemption The handling and settlement of insurance claims, or potential insurance claims, should no longer be excluded from the definition of ‘financial service’. Status of industry codes Recommendation 4.9 – Enforceable code provisions As referred to in Recommendation 1.15, the law should be amended to provide for enforceable provisions of industry codes and for the establishment and imposition of mandatory industry codes. In respect of the Life Insurance Code of Practice, the Insurance in Superannuation Voluntary Code and the General Insurance Code of Practice, the Financial Services Council, the Insurance Council of Australia and ASIC should take all necessary steps, by 30 June 2021, to have the provisions of those codes that govern the terms of the contract made or to be made between the insurer and the policyholder designated as ‘enforceable code provisions’. Recommendation 4.10 – Extension of the sanctions power The Financial Services Council and the Insurance Council of Australia should amend section 13.10 of the Life Insurance Code of Practice and section 13.11 of the General Insurance Code of Practice to empower (as the case requires) the Life Code Compliance Committee or the Code Governance Committee to impose sanctions on a subscriber that has breached the applicable Code. 33 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry External dispute resolution Recommendation 4.11 – Co-operation with AFCA Section 912A of the Corporations Act should be amended to require that AFSL holders take reasonable steps to co-operate with AFCA in its resolution of particular disputes, including, in particular, by making available to AFCA all relevant documents and records relating to issues in dispute. Recommendation 4.12 – Accountability regime Over time, provisions modelled on the BEAR should be extended to all APRA-regul...
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Running head: ARTICLE ANALYSIS

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Article Analysis: The Role of Ethical Values and human Dignity in Economic Decisions
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ARTICLE ANALYSIS

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Article Analysis: The Role of Ethical Values and human Dignity in Economic Decisions
Economists, bankers, professionals, and all market participants are subject to a particular
code of ethics that they have an obligation to adhere to without compromise. The importance of
ethics in the making of economic decisions should not be underestimated. Every market play has
to play their role adequately to ensure that the small subsection of economic system that they can
influence runs smoothly. Lack of ethics and observance to human dignity may hinder the
effectiveness of services offered by businesses to the people in a given economy. The economy
of Australia, like most other modern economies, faces the challenge of unethical behaviors and
inobservance of human dignity in the making of economic decisions under various capacities
(Foster, 2018). More specifically, the article A Commission of Inquiry reaches a damning verdict
on Austria’s Bank by The Economist relates to The Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services industry with respect to the essence of human
dignity and ethical values in the making of effective economic decisions; three main issues
featured in the article include hidden fees by banks, charging of fees for false services, and
docked charges from the dead.
Banks in conjunctions with their professionals and regulators have to operate within the
prescribed code of conduct. The development of a healthy banking system has been a big worry
in Australia over time. Banking system affects the economy of the country both directly and
indirectly. The royal commission, for some time, has been investigating abuses by the financial
institutions of the country (The Economist, 2019). The troubling practices, such as hiding of fees
by banks, are unethical and should not be tolerated by the banking industry. Decisions that are
made in the banks affect the economic development. Some banks have been referred to as TooBig-To-Fail because of their big influence in the economy. The Australian economy cannot stand

ARTICLE ANALYSIS

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the fall of huge banks because they can influence the development and growth of the economy
directly. Therefore, economic decisions should be c...

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