The government’s new royal commission will consider whether remuneration practices are responsible for any misconduct found in a bank, insurer, superannuation or financial services entity.
Following the announcement on Thursday (30 November) that the government would launch a royal commission into the banks, a draft terms of reference document was released outlining the parameters of the commission.
According to the document, the commission must inquire into several areas, including:
• The nature, extent and effect of misconduct by a financial services entity (including by its directors, officers or employees, or by anyone acting on its behalf).
• Any conduct, practices, behaviour or business activity by a financial services entity that falls below community standards and expectations.
• Whether any findings of misconduct are attributable to the particular culture and governance practices of a financial services entity or broader cultural or governance practices in the industry or relevant subsector, and are the result from other practices, including risk management, recruitment and remuneration practices.
• The effectiveness of mechanisms for redress for consumers of financial services who suffer detriment as a result of misconduct by a financial service entity.
• The adequacy of existing laws and policies relating to the provision of financial services.
The issue of remuneration has been in the spotlight recently, with the government response to ASIC’s review into broker remuneration expected in the coming weeks.
Notably, this review focused on whether the remuneration system in place leads to “good consumer outcomes”. It could also suggest that the royal commission would focus on a similar bent.
Other areas will look at the internal systems of financial services entities, forms of industry self-regulation, the effectiveness and ability of regulators of a financial services entity to identify and address misconduct, and whether there should be any change to legislation to minimise the likelihood of misconduct.
The commission will also look at the use of superannuation members’ retirement savings for “any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members”.
The document outlined, however, that it would not look into matters of any other inquiry, investigation or criminal/civil proceeding where it may “prejudice, compromise or duplicate” the work, nor would it make any recommendations in relation to macro-prudential policy, regulation or oversight.
According to government, an interim report will be submitted “no later than September 2018” and a final report by 1 February 2019.
‘All Australians have the right to be treated honestly and fairly’
The draft terms of reference reads: “All Australians have the right to be treated honestly and fairly in their dealings with banking, superannuation and financial services providers. The highest standards of conduct are critical to the good governance and corporate culture of those providers.
“These standards should continue to be complemented by strong regulatory and supervisory frameworks that ensure that all Australian consumers and businesses have confidence and trust in the financial system.
“The government will appoint a distinguished serving or former judicial officer to lead a Royal Commission into the Banking, Superannuation and Financial Services Industries.
“The commission’s inquiry will not defer, delay or limit, in any way, any proposed and announced policy, legislation or regulation of the government.”
Banks acknowledge the commission
The news of the royal commission came just hours after the chairs and chief executive officers of the big four banks wrote to Treasury calling for a “properly constituted inquiry into the financial services sector… to put an end to the uncertainty and restore trust, respect and confidence”.
The Nationals, Greens and crossbenchers were expected to introduce a bill to the Lower House calling for a commission of inquiry into the banks, which the Prime Minister lambasted as “political football”.
While noting that the banks had “consistently argued the view that further inquiries into the sector, including a royal commission, [were] unwarranted” (due to their belief that they are “costly and unnecessary distractions at a time when the finance sector faces significant challenges and disruption from technology and growing global macroeconomic uncertainty”), the ongoing speculation about a banking inquiry has meant that it is “now in the national interest for the political uncertainty to end”.
The letter reads: “In light of the latest wave of speculation about a parliamentary commission of inquiry into the banking and finance sector, we believe it is now imperative for the Australian Government to act decisively to deliver certainty to Australia’s financial services sector, our customers and the community.
“[I]t is now in the national interest for the political uncertainty to end. It is hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people. It also risks undermining the critical perception that our banks are unquestionably strong.”
The bank heads have acknowledged that the banks “have not always got it right, and have made mistakes”, but is taking action to “fix issues”.
Since Thursday’s announcement, the Commonwealth Bank has said that it would “cooperate fully with the royal commission”, while NAB said that it would “work hard to ensure [its] contribution helps to further strengthen Australia’s financial services sector”.
Heritage Bank CEO Peter Lock welcomed the call for a royal commission into the banking sector, but argued that the customer-owned banking sector, which includes Heritage, should “not be dragged into an inquiry based on the alleged wrongdoings of the big banks”.
“A royal commission will show once and for all whether there is any substance to the allegations that have been put forward and will help restore confidence in our banking system, which is one of the best in the world,” Mr Lock said.
“The issues of poor behaviour that have prompted calls for a royal commission have all come from the shareholder-owned banking sector, which is driven by a different ethos to the customer-owned sector,” the CEO said.
“Pulling customer-owned institutions like Heritage into this kind of inquiry punishes us for the alleged excesses of the shareholder-owned banks.
“We’re more than happy to have our integrity and prudential standards examined, but our sector is different and there should be some acknowledgment of that.”
Likewise, the CEO of the Business Council of Co-operatives and Mutuals (BCCM), Melina Morrison, said: “While this royal commission is an important step to restoring the trust of all Australians, the government must continue to implement reforms supporting and promoting competition in the banking sector, including the legislative modernisation that will allow credit unions, building societies and mutual banks to meet the growing demand by Australians for an alternative to the shareholder-owned model.”