The Commission comments
The Commission’s work, so far, has shown conduct by financial services entities that has brought public attention and condemnation. Some conduct was already known to regulators and the public generally; some was not.
Why did it happen? What can be done to avoid it happening again?
These are now the key questions.
In this Interim Report these questions – ‘why’ and ‘what now’ – are asked with particular reference to banks, loan intermediaries and financial advice, with a view to provoking informed debate about both questions.
Why did it happen?
Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained? But it is necessary then to go behind the particular events and ask how and why they came about.
Banks, and all financial services entities recognised that they sold services and products. 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.
When misconduct was revealed, it either went unpunished or the consequences 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. Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct. Infringement notices imposed penalties that were immaterial for the large banks. Enforceable undertakings might require a ‘community benefit payment’, but the amount was far less than the penalty that ASIC could properly have asked a court to impose.
What can be done to prevent the conduct happening again?
As the Commission’s work has gone on, entities and regulators have increasingly sought to anticipate what will come out, or respond to what has been revealed, with a range of announcements. These include announcements about new programs for refunds to and remediation for consumers affected by the entity’s conduct, about the abandonment of products or practices, about the sale of whole divisions of the business, about new and more intense regulatory focus on particular activities, and even about the institution of enforcement proceedings of a kind seldom previously brought. There have been changes in industry structure and industry remuneration.
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’. Much more often than not, 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.
What would that gain?
Should the existing law be administered or enforced differently? Is different enforcement what is needed to have entities apply basic standards of fairness and honesty: by obeying the law; not misleading or deceiving; acting fairly; providing services that are fit for purpose; delivering services with reasonable care and skill; and, when acting for another, acting in the best interests of that other? The basic ideas are very simple. Should the law be simplified to reflect those ideas better?
This Interim Report seeks to identify, and gather together in Chapter 10, the questions that have come out of the Commission’s work so far. There will be a further round of public hearings to consider these and other questions that must be dealt with in the Commission’s Final Report.The interim report concludes -
The many questions that have been set out above can then be distilled and organised in three categories:
The issues can be divided into four groups. First, there are issues about access to banking services. Second, there is a group of issues about the roles and responsibilities of intermediaries – those who stand between the purchaser of a financial service and the provider of that service. Third there is a group of issues about responsible lending. And fourth, there is a group of issues about regulation and the regulators. The issues intersect and overlap in different ways. Putting the issues in groups should not be allowed to diminish the importance of identifying and responding to those intersections and overlaps.
Do all Australians have adequate and appropriate access to banking services?
- For whom do the different kinds of intermediary act? – mortgage brokers – mortgage aggregators – introducers – financial advisers – authorised representatives of Licensees – point of sale sellers of loans
- For whom should each kind of intermediary act?
- If intermediaries act for the consumer of a financial service – What duty do they now owe the consumer? – What duty should they owe?
- Who is responsible for each kind of intermediary’s defaults?
- Who should be responsible?
- How should intermediaries be remunerated?
- Are external dispute resolution mechanisms satisfactory?
- Should there be a mechanism for compensation of last resort?
8.1.3 Responsible lending
- Should the test to be applied by the lender remain ‘not unsuitable’?
- How should the lender assess suitability?
- Should there be some different rule for some home loans?
- Should the NCCP Act apply to any business lending? In particular, should any of its provisions apply to:
- agricultural businesses?
- some guarantors of some business loans?
- To what business lending should the Banking Code of Practice apply?
- Is the definition of ‘small business’ satisfactory?
- Should lenders adopt different practices or procedures with respect to agricultural lending?
- Are there classes of persons from whom lenders
- should not take guarantees; or
- should not take guarantees unless the person is given particular information or meets certain conditions?
- How should lenders manage exit from a loan – at the end of the loan’s term; – if the borrower is in default?
8.1.4 Regulation and the regulators
- Have entities responded sufficiently to the conduct identified and criticised in this report?
- Has ASIC’s response to misconduct been appropriate?
- If not, why not?
- How can recurrence of inappropriate responses be prevented?
- Has APRA’s response to misconduct been appropriate?
- If not, why not?
- How can recurrence of inappropriate responses be prevented?
- What were the causes of the conduct identified and criticised in this report?
- Conflict of interest and duty?
- Remuneration structures?
- Culture and governance?
- Regulatory response?
- What responses should be made to the conduct identified and criticised in this report?
- Are changes in law necessary?
- Should the financial services law be simplified?
- Should carve outs and exceptions be reduced or eliminated?
In particular, should
- grandfathered commissions
- point of sale exceptions to the NCCP Act
- funeral insurance exceptions
be reduced or eliminated?
- How should entities manage conduct and compliance risks?
- How should – APRA – ASIC respond to conduct and compliance risk?
- Should the regulatory architecture change?
- Are some tasks better detached from ASIC?
- Are some tasks better detached from APRA?
- What authority should take up any detached task?
- Should either or both of ASIC and APRA be subject to external review?
- What is the proper place for industry codes of conduct?
- Should industry codes of practice like the 2019 Banking Code of Practice be given legislative recognition and application?
- Should an intermediary be permitted to
- recommend to a consumer
- provide personal financial advice to a consumer about
- sell to a consumer
any financial product manufactured by an entity (or a related party of the entity) of which the intermediary is an employee or authorised representative?
- Is structural change in the industry necessary?