Royal Commission Condemns Greed and Inaction Behind Industry Misconduct

The Banking Royal Commission has blamed greed by financial services providers and inaction by regulators for the range of issues it has uncovered during the first four rounds of hearings.

The Commission released its interim report today, which covers the hearings related to financial advice but not life insurance, and in an executive summary accompanying the report stated the key questions were: why did the misconduct happen, and what can be done to avoid it happening again?

“Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty”

In answering the first question, the summary explained, “Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty”, adding that it was necessary to go behind the events documented during the hearings to see how this behaviour developed.

The summary noted that banks, and financial services providers recognised they sold services and products but “…selling became their focus of attention. Too often it became the sole focus of attention”.

“Products and services multiplied. Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales,” the summary stated.

It also criticised the regulators – ASIC and APRA – claiming they took little or no effectual action against banks and financial services provider, and what action was taken “…did not meet the seriousness of what had been done”.

“The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court,” the report asserted, criticising the approach taken by the regulators in the past.

The summary noted that past misconduct has resulted in little more than in an apology from the financial services entity, a lengthy remediation program and negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking (EU) that recognised ASIC had ‘concerns’ about conduct of the company involved.

“The conduct regulator, ASIC, rarely went to court …The prudential regulator, APRA, never went to court”

It also claimed that penalties applied under infringement notices “…were immaterial for the large banks” and community benefit payments made under an EU were “…far less than the penalty that ASIC could properly have asked a court to impose”.

In addressing the issue of what could be done to prevent the further misconduct the report rejected the imposition of more legislation to create better consumer outcomes stating, “The law already requires entities to ‘do all things necessary to ensure’ that the services they are licensed to provide are provided ‘efficiently, honestly and fairly’”.

The summary noted that “…the conduct now condemned was contrary to law. Passing some new law to say, again, ‘Do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime”.

It concluded by questioning whether existing laws should be enforced differently to have financial services entities apply ‘basic standards of fairness and honesty’, to obey the law and to action in the best interests of consumers, adding, “The basic ideas are very simple. Should the law be simplified to reflect those ideas better?”

Click here to access the Banking Royal Commission’s Interim Report, Volume 1.

Update – 4:21pm

Federal Treasurer, Josh Frydenberg

The Federal Treasurer, Josh Frydenberg has welcomed the release of the interim report, commenting that the report and the hearings to date “… make clear that some financial institutions have fallen far short of treating Australians honestly and fairly”.

In a media conference given after the release of the report, Frydenberg said, “Banks and financial institutions have put profits before people. Greed has been the motive as short-term profits have been pursued at the expense of basic standards of honesty”.

“This interim report is a frank and scathing assessment of the culture, conduct and compliance of our financial system,” he said.

ASIC Chair, James Shipton said the regulator welcomed the report and noted its “…serious and important observations of ASIC’s role as a regulator”.

“ASIC will carefully consider these observations, as well as the broader findings in the report, and will respond fully in its submission by 26 October 2018,” Shipton said.

  • Scotson

    After all the forensic questioning by the various SCs assisting the Commissioner a main criticism in the 4th paragraph of the Executive Summary of the Interim Report is that “How else (“..the answer seems to be greed”) is charging continuing advice fees to the dead to be explained?”

    A normal Financial Adviser would explain that use of an IDPS Platform needs continued monitoring because the Estate Executor/Trustee needs continuing advice as:
    Funds Managers have nervous breakdowns and lose the plot,
    Asset Allocations need changing,
    Funds Need changing (e.g. At the start of 2018 all exposure to Emerging Countries Funds needed to be dropped, or there may be a case to reduce exposure to Growth Funds and swap to value Funds, or certain Fixed interest Funds need to be dropped as interest rates change). This applies and is justifiable irrespective whether an “active” management stance is employed or not.
    The advent of a Financial crisis may be seen to be coming by an astute adviser and the recommendation may be to go to cash lest in the space of as little as 2 months a market may have fallen substantially. Beneficiaries sometimes need cash and not a long term investment portfolio.
    A grant of Probate and the winding up of an Estate may be fast or VERY, VERY SLOW and keeping an IDPS Platform Investment in place may be quite justified and often is.
    If the portfolio is a collection of Blended Funds, even then continuing surveillance is justified. Who remembers the crash of Cap Stable Funds in the 1990s, which many of us saw approaching and advised clients to go to CASH!.

    I put it to you Commissioner that you have been misled by a political agenda aimed at finding instances of “poor advice” rather than critically examining carefully why Financial Advisers are successful in managing clients’ affairs for the best interest of clients, even Estate Executors and Trustees!

  • Jeremy Wright

    Simplification of the Laws to allow everyone to understand what is fair, with an expectation of honesty, backed up by accountability for everyone, is a step in the right direction.

    Bad people work in Good Businesses and if they know that the Employer is responsible for their actions, with little recourse to punish them for their misdeeds, then bad things will continue to occur.

    Accountability needs to flow through to everyone, including public servants, who can become part of the problem by turning a blind eye and allowing bad things to continue, which can be more devastating than the initial misconduct.

    The more complex the law, the less people understand, which in itself, is a cause for misconduct, as the repercussion, is a distant thing, based on a hazy requirement that no-one can easily explain, which leads to a convulsion of events, that blow up at a later date, at which point, there is an explosion of finger pointing and the need for complex people who cannot explain in plain English, what the problem was, to fix the problem that they or their fellows introduced as a prior solution.

    The end result?

    We have another Royal Commission, years later to remedy the complex regulations and laws that were put in place to remedy the previous events and change the laws to fix it and the Merry go round continues.

    As long as we have a system that encourages the current maze that is our legal frame work, nothing will change.

    The definition of confusion, is to ask a Lawyer to explain something in plain English.

  • John Galt

    Over $1b in losses posted by the Australian Life Insurance Industry on Income Protection in the 3 years to 31/12/2016. The Commission’s puerile position that FSP’s and Regulators are “greedy” highlights the extent to which the commission does not understand financial services, has conveniently avoided the real issues within the industry; and has clearly been tasked with an agenda.