The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry held its initial public hearing on 12 February 2018. A transcript was recently published on the Commission's website. The Commission identified inappropriate or unsuitable lending in the context of home loans, car loans and credit cards as initial areas of focus.
The Royal Commission's initial public hearing was held on 12 February 2018 and a transcript of the hearing was recently published on the Commission's website. Among other things, the Commissioner, the Honourable Kenneth Hayne AC QC, stated that the commission would not attempt to repeat the last 73 inquiries and reviews into the financial services industry and would not have time to 'publically examine every case of alleged misconduct'. Rather, he said that the commission will focus on identifying why the conduct occurred, what was done in response and what should have been done.
The initial areas of initial areas of focus for the commission were identified at the hearing as inappropriate or unsuitable lending in the context of home loans, car loans and credit cards. The first round of hearings will commence in approximately one month’s time.
Public hearings: Rounds of public hearings will be conducted periodically throughout the year. Public hearings are expected to commence in 'approximately one month'. No decision has been made as to the locations of hearings. The date on which the hearings will commence will be published on the Commission’s website.
Interim report: The Commission's interim report will be submitted no later than 30 September.
Final report: The final report will be submitted 1 February 2019.
Focus of initial public hearings
Counsel assisting Rowena Orr QC explained that the focus of the initial hearings would be on determining whether consumers enjoying the 'right of all Australians to be treated honestly and fairly' in their dealings with banking and financial services providers 'when it comes to lending'. More particularly she identified the following as key areas of focus.
Inappropriate or unsuitable lending in the context of home loans, car loans and credit cards': 'one of the themes that has emerged from the public submissions through the Commission website is inappropriate or unsuitable lending. The focus for the first round of hearings will be on consumer lending practices. It is likely that this topic will be examined in the context of a number of credit products such as home loans, car loans and credit cards'.
Financial planning and wealth management: 'Another area of early focus for the Commission will be the financial planning and wealth management industry. Australians engage financial advisors to improve their financial position, to achieve their aspirations, and to plan for their future. Clients repose trust and confidence in their financial advisors. It is important that their trust and confidence is well placed'.
'Themes' of public submissions received to date
Public submissions received: 49% relate to banking 18% relate to superannuation; 6% relate to the general insurance market and 6% relate to the life insurance and total permanent disability insurance market.
84% of submissions relate to misconduct or conduct of financial services entities that falls below community standards and expectations: 'In relation to misconduct or conduct that falls below community standards and expectations, we have seen a number of submissions about topics such as financial services entities acting on falsified documents, the provisions of inappropriate financial advice, inappropriate lending and delay in processing insurance claims'.
40% of submissions relate to culture and governance practices of financial services entities: 'In relation to culture and governance practices, we have seen a number of submissions that raise the issue of conflicts of interest in connection with the practices of representatives of financial services entities. These submissions refer to matters such as incentive-based remuneration, which is regarded as encouraging such representatives to secure an outcome that is not necessarily appropriate for the consumer, such as a loan for an amount in excess of the amount sought. They also refer to Commissions payable to a financial advisor by a financial institution for referring its products to the consumer'.
35% relate to the effectiveness of redress for consumers: 'In relation to the effectiveness of redress, we have seen a large number of submissions that express frustration and concern about the time taken and effort required to navigate the internal and external dispute resolution frameworks that apply to financial services entities'.
Commissioner's remarks: Among the comments made by the Commissioner in opening the inquiry were the following.
The 'right to be treated honestly and fairly' in dealings with banking, superannuation and financial service providers' and the importance of 'community expectations' of misconduct: The Commissioner noted that the recitals to the Letters Patent record that all Australians have the right to be treated 'honestly and fairly in their dealings with banking, superannuation and financial service providers'. He added that the terms of reference refer to both 'misconduct' as that term is defined and to 'conduct, practices, behaviour or business activities that fall below community standards and expectations'. The Commissioner stated that 'One element, perhaps a very important element, of community standards and expectations may be derived from what was said in the Murray Report into the Financial System', namely that 'fundamental to fair treatment is the concept that financial products and services should perform in the way that consumers expect or are led to believe. Fairness, understood in this way, may lie at, or at least close to, the heart of community standards and expectations about dealings with consumers'.
Gap between industry participant's view of relevant conduct and public view: The Commissioner commented that 'one of the consequences of our adopting the sequence of action of first asking industry participants to identify misconduct and conduct falling short of community standards and expectation and then asking the public to make submissions is that it may help us to identify whether there is a gap between what industry participants now say is relevant conduct and what members of the public see as being relevant'.
Insufficient time to 'publically examine every case': The commissioner stated: 'I understand fully that those affected by what they considered to be misconduct want their complaints recognised and considered and want those responsible held to account. I also recognise the central importance of public disclosure and examination of the issues that the Commission is required to consider. All of the public submissions made and to be made to the Commission are very important to the work of the Commission, but I have to say that the Commission will not have time to publically examine every case of alleged misconduct. We will have to proceed by reference to case studies and examples with a view to identifying the kinds of misconduct that have occurred, why it occurred, what should have been and what was the response to discovering the misconduct, and what follows from those conclusions'.
Focus on identifying the causes of misconduct, the quality of the response to it and whether recommendations should now be made: The Commissioner said 'In many cases – perhaps very many cases – the fact that there has been misconduct or conduct falling short of community standards and expectations has been established previously or is now acknowledged or admitted. In those cases, the Commission must focus upon why the conduct occurred; what was the response by the relevant entity and regulators; what should have been the response; what if any recommendations should now be made. More is to be gained by looking at why this happened and at what was and what should have been the response then, reproving what other processes have shown happened or reproving what is now admitted to have occurred'.
Submissions from industry participants
Industry submissions: In total, responses were received from 48 different entities including banks, insurers, superannuation funds, 'key regulators' (ASIC, APRA and ACCC), consumer advocates (eg the Consumer Action Law Centre and Choice) and the key external dispute resolution bodies, the Financial Ombudsman Service and the Credit and Investments Ombudsman.
Submissions received from industry — the request for additional time to provide information to the commission may be 'a matter to which further attention may have to be given': The Commissioner commented that the initial submissions received from industry demonstrated that some 'large industry participants' had provided a list of examples of misconduct or conduct identified as falling short of community expectations/standards 'rather than, as my original request had asked, by specifying the nature, extent and effect of the conduct they had identified'. The Commissioner commented that a subsequent request for more specific information about misconduct identified by entities over the last five years, and further information about examples already provided, had been met in some cases with requests for additional time. The Commissioner commented that this ' is itself a matter to which further attention may have to be given'.
Confidentiality: The Commissioner noted that there has been 'recent public discussion about the effects on the work of the commission of contractual provisions about confidentiality. It is said that many arrangements made to settle disputes with participants in the financial services industry have had confidentiality provisions and that as a result the consumer who made the settlement and signed the agreement may be reluctant to approach the Commission. It’s also said that employment agreements, settlement agreements, or severance agreements may contain non-disparagement terms'. The Commissioner commented that:
A confidentiality or non-disparagement clause in an agreement will not act as a reasonable excuse against production in answer to a notice to produce or a summons.
In many cases where a dispute had been settled on confidential terms, 'the most immediate fact for the Commission will be that the dispute was settled, not the particular terms on which it was settled, and the fact of the settlement of the dispute will not be within any confidentiality provision'.
He added that 'under section 6M of the Royal Commissions Act, if a witness gives evidence or produces a document under a notice or summons, no injury can be done to that person. Suing the person would almost certainly fall within that prohibition'.
The Commissioner commented were an institution to see 'any form of legal redress against a member of the public or a whistleblower seeking to volunteer information to the Commission in anticipation of the possible exercise of the Commission’s coercive powers would be taking a step which would very likely provoke two immediate consequences. First, the Commission would be very likely indeed to exercise its compulsory powers to secure the information in question. Second, the very fact that an institution sought to inhibit or prevent the disclosure of the information would excite the closest attention not only to the lawfulness of that conduct by the institution, but also to what were the institution’s motives for seeking to prevent the Commission having that information'.
To date, 32 notices to produce documents have been issued. Counsel assisting Rowena Orr QC noted that 'It is likely that notices to produce will be issued on a regular basis, as the solicitors and counsel assisting the Commission continue to identify documents that we believe will assist the work of the Commission'.
Series of research papers will be issues; the Commission will consult on 'matters of potential reform': The Commissioner stated that all of the issues which the Commission would consider would be examined in the context of the nature and size of the Australian Financial Services industry, the numerous past inquiries and the regulatory framework. The Commissioner noted that a background paper has already been published on the scope and nature of the financial services industry and that further research papers will be published identifying the many inquiries that have taken place over the past 10 years (and some of which are ongoing) and on the relevant legislative and regulatory frameworks.
Counsel assisting Rowena Orr QC added that the content of the research papers 'may find reflection in the final report' and added that to the extent that the papers concern matters of potential reform, 'comment will be called for at the time the paper is released. No comment will be sought in respect of purely factual papers'.
[Sources: Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry: Transcript: 12 February 2018 – initial public hearing; Some Features of the Australian Banking Industry: Background Paper 1; [registration required] The AFR 12/02/2018; 12/02/2018; 13/02/2018; 13/02/2018; [registration required] The Australian 13/02/2018; 13/02/2018]The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) commented that the first day of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, is the time for small businesses that have suffered from questionable conduct by the banks to have their say. 'While we are pleased that banks have made changes to small business loan contracts, there is still more work to be done,' said Ombudsman Kate Carnell. 'The Commission needs to probe past dispute cases where small businesses were often forced to close and people lost their jobs, and provide them with an opportunity to tell their stories.'