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)
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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’.
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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.
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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
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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)
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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)
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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.
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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,
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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).
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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].
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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
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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).
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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.
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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.
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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.
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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.
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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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