The government announced on 30 November that it will establish a royal commission into the financial services sector. In a joint statement, the Prime Minister and the Treasurer said the inquiry will consider 'the conduct of banks, insurers, financial services providers and superannuation funds (not including self-managed superannuation funds). It will also consider how well equipped regulators are to identify and address misconduct. It will not inquire into other matters such as financial stability or the resilience of our banks'. Mr Turnbull added that 'This will be a sensible, efficient and focussed inquiry into misconduct and practices falling below community standards and expectations'. The draft terms of reference were also released on 30 November. They state that an interim report is to be submitted no later than September 2018 and the final report must be submitted within 12 months.
Reportedly, $75 million has been set aside for the purposes of the Commission.
Key points: Draft terms of reference
Timing: The draft terms of reference state that an interim report is to be submitted no later than September 2018 and the final report must be submitted within 12 months.
The commission will inquire into:
The discovery of misconduct:
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.
The use by a financial services entity 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.
Consumer complaint handling and restitution: The effectiveness of mechanisms for redress for consumers of financial services who suffer detriment as a result of misconduct by a financial service entity.
Efficacy of existing laws: The adequacy of existing laws, and the internal systems of financial services entities.
Efficacy of regulators: The effectiveness and ability of regulators of a financial services entity to identify and address misconduct by those entities.
Efficacy of the legal framework: Whether any further changes are necessary to: the legal framework; practices within financial services entities; and the financial regulators.
In addition, the terms of reference state that the commission's inquiry will 'not defer, delay or limit, in any way, any proposed and announced policy, legislation or regulation of the Government'.
Limits on the scope of the inquiry: The draft terms of reference also specify limits on the scope of the inquiry. These include:
The Commission is 'not required to inquire into and may not make recommendations in relation to macro prudential policy, regulation or oversight'. Macro-prudential policy and regulation is defined in the draft terms of reference as meaning 'policy and regulation including as to the structure, role and purpose of financial regulators, that is concerned with containing systemic risk which can have widespread implications for the financial system as a whole, beyond simply the banking system'.
The Commission is also not required to inquire into 'a particular matter to the extent that to do so might prejudice compromise or duplicate another inquiry or investigation or a criminal or civil proceeding'.
The draft terms of reference also state that the commission may choose not to inquire into certain matters otherwise within the scope of this inquiry but any such decision will be the commission's alone.
Further detail: scope of the inquiry and the meaning of 'financial service entities'
The draft terms of reference define 'financial service entities' to be:
Banks: ADIs (authorised deposit-taking institution) within the meaning of the Banking Act 1959
Insurers: An entity that carries on the business of undertaking liability, by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event, including: a general insurer within the meaning of the Insurance Act 1973; and an entity undertaking life insurance business within the meaning of the Life Insurance Act 1995.
Financial advisers (AFS licensees): 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 a licence by virtue of being an authorised representative.
[Sources: Joint Media release Treasurer Scott Morrison, and Prime Minister Malcolm Turnbull 30/11/2017; Draft Terms of Reference 30/11/2017; [registration required] The AFR 01/12/2017]
Prime Ministers' comments: New Daily quotes the Prime Minister as stating that the decision to institute the inquiry was 'a regrettable but necessary action' and added: 'The banks … do not believe an inquiry is necessary, but they have raised – and you may have seen their letter to us – serious concerns that the ongoing uncertainty is undermining the financial system. Now the speculation about an inquiry cannot go on. It's moving into dangerous territory, with some of the proposals being put forward have the potential seriously to damage some of our most important institutions. We have got to stop the banks and our financial services sector being used as a political football'.
Treasurer's comments: The ABC quotes Treasurer Scott Morrison as commenting that 'Australia's banks are unquestionably strong, nothing that we have announced today changes this or gives any reason to question this, on the part of the Government…This is an important message for markets and the international financial community, it does not question the robust nature of our prudential system.'
[Sources: The ABC 30/11/2017; Joint letter from the Major Banks: Major Banks unite to call for certainty and stability 30/11/2017; The New Daily 30/11/2017; Transcript: Treasurer and Prime Minister Joint Press Conference, Parliament House: 30/11/2017; transcript Interview with Gareth Parker 6PR 30/11/2017]
Letter from the major banks requesting an inquiry
The announcement of the inquiry came shortly after Australia's big four banks — ANZ, CBA, NAB and Westpac — wrote to the Treasurer asking for an inquiry to be instituted to 'deliver certainty to Australia's financial services sector, our customers and the community'. The letter was signed by the chairpersons and the CEOs of each of the banks. The key points of the letter are below.
Necessary to end uncertainty: 'We now ask you and your government to act to ensure a properly constituted inquiry into the financial services sector is established to put an end to the uncertainty and restore trust, respect and confidence'.
Suggested characteristics: In addition, the letter states that in the view of the banks, a 'properly constituted inquiry must have several significant characteristics:
Led by a respected ex judicial officer.
Terms of reference should be 'thoughtfully drafted and free of political influence.'
The 'scope should be sufficient to cover the community's core concerns which include banking, Insurance, superannuation and non-ADI finance providers'.
Inquiry should to 'the most practical extent' replace other ongoing inquiries.
Report in a timely manner.
'It is vital that the terms of any inquiry consider the many reviews and inquiries that have been conducted into the banking sector in recent years; the significant government and industry-led reforms that have been and will shortly be implemented; the 44 recommendations made in the Financial System Inquiry in 2014; and the broad and positive contribution that banks make to the Australian economy and to millions of customers and shareholders'.
[Source: CBA media release: Major Banks Unite to call for certainty and Stability 30/11/2017]
Banks have issued statements welcoming the inquiry
Commonwealth Bank of Australia: In a short statement the Commonwealth Bank of Australia (CBA) acknowledged the announcement and stated that it would cooperate fully: 'Commonwealth Bank acknowledges the announcement by the Prime Minister and Treasurer that the Federal Government will establish a Royal Commission into the Australian financial services sector, and notes the draft Terms of Reference that have been released. The Commonwealth Bank will cooperate fully with the Royal Commission'.
[Source: CBA announcement 30/11/2017]
Westpac: Westpac released a statement quoting CEO Brian Hartzer as saying that Westpac 'along with the other major banks, accepts the Royal Commission'. The statement adds that 'While Westpac has consistently argued and continues to believe that a Royal Commission is not necessary, in the current circumstances it is now more important that the financial sector can continue to operate effectively and with certainty. As a result, we have concluded that it is in the sector's and Australia's interests that a properly constituted Royal Commission is established to finally end the political distractions… we will fully cooperate with the Royal Commission that has been announced today'.
[Source: Westpac statement 30/11/2017]
At the time of writing, ANZ and NAB had not issued statements on the announcement of the inquiry.
ABA response to the inquiry: The Australian Banking Association (ABA) said 'Australia's banks have welcomed the Prime Minister's decision to take action and provide certainty to the Banking industry to the benefit of the national economy and all Australians'. The statement reiterates that though a costly and lengthy commission is 'unwarranted', given the actions already being taken, the step was necessary to end uncertainty and that 'all banks will fully co-operate with the Royal Commission and do not fear scrutiny or accountability'.
The statement continues that in calling for the inquiry to be instituted 'The Major Banks acted in the national interest to minimise more serious risk to the banking sector and welcome the fact that the government has stepped in to bring certainty to this issue. Labor’s support for a Royal Commission is also acknowledged, as is that from other parties.' The statement also urges the parties to agree the terms of reference quickly: 'Bipartisan agreement on a properly constituted Inquiry, free from political interference, is the best way forward if we are to avoid further damage or harm to Australia’s financial services sector'.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) response to the inquiry: ASBFEO welcomed the Prime Minister's announcement of a Royal Commission into the banking sector. Ombudsman Kate Carnell said she hoped the inquiry would examine past cases where small businesses had been unfairly treated. Though progress had been made on changing banks' behaviour, she said, 'What’s been missing is the capacity to review past disputes and award compensation'. Ms Carnell added the Small Business Loans inquiry earlier this year had identified numerous cases where small businesses had suffered from questionable conduct. 'The asymmetry in power between the banks and small businesses, together with the conduct of banks particularly since the global financial crisis in 2008, has left many small businesses in a devastating financial position'.
[Source: ASBFEO media release 30/11/2017]
Superannuation funds: Both the AIST and AFSA have expressed disappointment at the inclusion of superannuation funds in the inquiry.
[Source: ASFA media release 30/11/2017; AIST media release 30/11/2017]
Narrower terms of reference than there may have been? The AFR writes that the terms of reference appear less wide than those that would have been proposed by Senator Barry O'Sullivan. Reportedly, Mr O'Sullivan indicated that his Bill would have incorporated the intentions of the Greens private members Bill (Banking and Financial Services Commission of Inquiry Bill 2017) and Bob Katter's Banking Commission of Inquiry Bill 2016.
[Sources: [registration required] The AFR 19/11/2017; 30/11/2017; 30/11/2017]