Financial Misconduct and Regulatory Failure

The interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry - glossed by the media immediately after release as a tale of egregious greed - offers a damning view of regulatory failure rather than merely corporate/personal self interest.

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:

• Issues 

• Causes 

• Responses

8.1 Issues 

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. 

8.1.1 Access

Do all Australians have adequate and appropriate access to banking services? 

8.1.2 Intermediaries

• 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

• Consumers

• 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:

• SMEs? 

• 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?

8.2 Causes

• 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?

8.3 Responses

• 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?

Soulless

No soul to be damned, no body to be kicked? 'Incapacitating Criminal Corporations' by William Robert Thomas in Vanderbilt Law Review (Forthcoming) comments

 If there is any consensus in the fractious debates over corporate punishment, it is this: a corporation cannot be imprisoned, incarcerated, jailed, or otherwise locked up. Whatever fiction the criminal law entertains about corporate personhood, having an actual “body to kick” — and, by extension, a body to throw into prison — is not one of them. The ambition of this project is not to reject this obvious point, but rather to challenge the less-obvious claim it has come to represent: incapacitation, despite long being a textbook justification for punishing individuals, does not bear on the criminal law of corporations. 

In this Article, I argue that incapacitation both can and should serve as a justification for punishing criminal corporations. Descriptively, I interrogate how rote appeals to the impossibility of corporate imprisonment obscure more pressing, challenging questions about whether and to what extent the criminal law can vindicate an account of incapacitation that extends to corporate persons. Excavating a richer conceptual framework for incapacitation from our practices of individual punishment, I demonstrate that sanctions we already impose in or just outside the criminal law can be better understood as efforts to incapacitate, rather than to deter or rehabilitate, a criminal corporation. Indeed, reevaluating our understanding of penal incapacitation provides reason to think that we have similar and perhaps stronger reasons for incapacitating corporate persons than we do individuals. 

Prescriptively, I leverage this comparative framework to argue that incapacitation should be recognized as a core justification for corporate punishment. Although rehabilitation has gained traction in past decades as a basis for punishing corporations, incapacitation stands as a more realistic, more administrable, alternative. This is because a principle of rehabilitation has led to a practice of imposing on corporations intricately designed, but dubiously effective, compliance and internal governance reforms. Incapacitation, by contrast, lends itself to clear, discrete prohibitions for which the criminal law is better situated to justify, impose, and monitor.

Trade, Training and Trade Practices

Having recently read Globalists: The End of Empire and the Birth of Neoliberalism (Harvard University Press, 2018) by Quinn Slobodian I was interested to see 'What Do Trade Agreements Really Do?' by Dani Rodrik in (2018) 32(2) Journal of Economic Perspectives 73-90.

Rodrik comments 

Economists have a tendency to associate "free trade agreements" all too closely with "free trade." They may be unaware of some of the new (and often problematic) beyond-the-border features of current trade agreements. As trade agreements have evolved and gone beyond import tariffs and quotas into regulatory rules and harmonization—intellectual property, health and safety rules, labor standards, investment measures, investor-state dispute settlement procedures, and others—they have become harder to fit into received economic theory. It is possible that rather than neutralizing the protectionists, trade agreements may empower a different set of rent-seeking interests and politically well-connected firms—international banks, pharmaceutical companies, and multinational firms. Trade agreements could still result in freer, mutually beneficial trade, through exchange of market access. They could result in the global upgrading of regulations and standards, for labor, say, or the environment. But they could also produce purely redistributive outcomes under the guise of "freer trade." As trade agreements become less about tariffs and nontariff barriers at the border and more about domestic rules and regulations, economists might do well to worry more about the latter possibility.

Last week the ACCC announced that the Federal Court found training college Cornerstone Investments Aust Pty Ltd, trading as Empower Institute (Empower), had in unconscionable and misleading or deceptive conduct, and made false or misleading representations when enrolling consumers into VET FEE-HELP Diploma courses that cost up to $15,000 per course.

Empower marketed and sold these courses to consumers in remote communities and low socio-economic areas (including Indigenous communities) using face-to-face marketing, including door-to-door sales.

Empower enrolled over 6,000 new students  in its courses March 2014 and October 2015.

Many of these students were vulnerable consumers and were signed up using incentives such as free laptops and cash, unaware they were incurring a significant debt. 

“Empower misled vulnerable and disadvantaged consumers into enrolling in courses they would likely be unable to complete. Many consumers it enrolled had poor literacy and numeracy skills. Some who enrolled in online courses could not even use a computer and did not have access to the internet,” ACCC Chair Rod Sims said. 

“Empower also failed to provide clear and accurate information about the price of the courses and the nature of the VET FEE-HELP loan.” ... 

 “Empower was paid more than $64 million by the Government under the VET FEE-HELP scheme for enrolling students using these appalling tactics, while the students were left with large debts."

 The ACCC is seeking remedies from Empower, including redress for affected consumers and pecuniary penalties.

The ACCC notes that it has taken action against a number of private colleges and can seek remedies from the court in those cases, but cannot itself, cancel the debts of affected consumers.

Fake Doctors

One aspect of my doctoral dissertation explored the certification of medical, legal and other practitioners ... and the associated impetus for some people to claim status to which they were not entitled by asserting unsubstantiated skills, forging documentation or otherwise engaging in identity crime. Instances of such crime include Zepinic, Milosevic and Sharobeem, noted elsewhere in this blog and in a forthcoming Health Law Bulletin article.

The Australian Health Practitioner Regulation Agency (AHPRA), with support by the Medical Board of Australia, recently noted it has successfully prosecuted fake doctor Raffaele Di Paolo - one of the more grisly providers of 'fertility' services for further offences under the National Health Practitioner Regulation Law. His  company, Artemedica Pty Ltd, was also prosecuted, with additional fines totaling $28,000.

AHPRA states that it started investigating Di Paolo after receiving a notification from the Health Services Commissioner in Victoria. This led to separate investigations in Victoria and Queensland. AHPRA filed charges against Di Paolo and Artemedica  in the Magistrates’ Court of Victoria and against Di Paolo in the Magistrates’ Court of Queensland at Southport.

In the Victorian proceedings AHPRA alleged that Di Paolo had:

•  knowingly or recklessly used words that could indicate he was a medical practitioner and/or a specialist health practitioner 
• claimed to be a specialist health practitioner by using the term ‘gynaecologist’ or the term ‘obstetrician’ in relation to himself, and 
• failed to state that he was not a medical practitioner, or that he was in fact a homeopath.

The prosecution by AHPRA took place alongside a criminal prosecution for indictable offences brought by the Victorian Director of Public Prosecutions (DPP) including

• procuring sexual penetration by fraud, 
• obtaining financial advantage by deception and 
• indecent assault. 

 In relation to the DPP charges, Di Paolo was the court sentenced to nine years and six months in prison, with a non parole period of six years and six months. He was also placed on the sex offender register for life.

He pleaded guilty to five of the AHPRA charges, incurring a $5,000 fine and AHPRA’s costs. On 13 August 2018 at the Magistrates Court in Melbourne, Artemedica pleaded guilty to three charges of knowingly or recklessly holding out another person as a registered health practitioner by using the initials “MD” in relation to Di Paolo on invoices sent by the Company. (Di Paolo was the sole director and shareholder of Artemedica; the court noted  it had no assets. Artemedica was fined $8,000, and ordered to pay AHPRA’s costs.

In Queensland last month Di Paolo did not contest the charges in Southport Magistrates’ Court. He had been charged with offences relating to using a specialist title and using words to indicate he was a registered medical practitioner at a medical conference in Queensland in September 2014 at which he was a guest speaker. He was convicted, fined $20,000 and ordered to pay AHPRA’s costs of $8,577.

Last month the Medical Board of Australia announced that Marek Jantos has been sentenced in the Adelaide Magistrates Court after being convicted of holding himself out as a registered psychologist and unlawfully using a specialist medical title. Conviction follow charges laid by AHPRA. 

 A company operated by Mr Jantos, Behavioural Medicine Institute of Australia, was also convicted of misleading and deceptive advertising. Mr Jantos and his company were fined a total of $16,000. Mr Jantos pleaded guilty to two charges which included unlawfully claiming to be a specialist in the field of ‘pain medicine’ and unlawfully claiming to be a registered psychologist. The Behavioural Medicine Institute of Australia pleaded guilty to a charge of false, misleading or deceptive advertising of a regulated health service. 

 

In 2007, Mr Jantos’ registration as a psychologist was cancelled by the then Psychology Board of South Australia. At the time the Board maintained the decision was necessary ‘in order to protect the public from similar behaviour.’ The behaviour considered by the Board included invasive physical therapy in the context of psychological treatment. AHPRA alleged that between 21 May 2014 and 30 June 2014, Mr Jantos displayed signage at his business premises stating he was a Member of the Australian Psychological Society (MAPS). Mr Jantos has not been a registered psychologist since 25 June 2007 and resigned his membership of MAPS on 6 May 2008. 

 

This and other examples of signage at his premises could have falsely led patients to believe he was a registered psychologist. In addition, AHPRA alleged that between 17 April 2014 and 30 June 2014 Mr Jantos used terminology that would lead patients to believe he was a medical specialist. An advertising placard displayed at the premises advertising pain medicine, indicated that Mr Jantos was qualified as a specialist medical practitioner in the field of pain medicine when he was not. Mr Jantos’ own website and other websites also misled the public by stating ‘his clinical specialty is Behavioural Medicine.’ AHPRA

Open Science and Intellectual Property

'Order without Intellectual Property Law: Open Science in Influenza' by Amy Kapczynski in (2018) 102(6) Cornell Law Review comments

Today, intellectual property (IP) scholars accept that IP as an approach to information production has serious limits. But what lies beyond IP? A new literature on “intellectual production without IP” (or “IP without IP”) has emerged to explore this question, but its examples and explanations have yet to convince skeptics. This Article reorients this new literature via a study of a hard case: a global influenza virus-sharing network that has for decades produced critically important information goods, at significant expense, and in a loose-knit group—all without recourse to IP. I analyze the Network as an example of “open science,” a mode of information production that differs strikingly from conventional IP, and yet that successfully produces important scientific goods in response to social need. The theory and example developed here refute the most powerful criticisms of the emerging “IP without IP” literature, and provide a stronger foundation for this important new field. Even where capital costs are high, creation without IP can be reasonably effective in social terms, if it can link sources of funding to reputational and evaluative feedback loops like those that characterize open science. It can also be sustained over time, even by loose-knit groups and where the stakes are high, because organizations and other forms of law can help to stabilize cooperation. I also show that contract law is well suited to modes of information production that rely upon a “supply side” rather than “demand side” model. In its most important instances, “order without IP” is not order without governance, nor order without law. Recognizing this can help to stabilize cooperation. I also show that contract law is well suited to modes of information production that rely upon a “supply side” rather than “demand side” model. In its most important instances, “order without IP” is not order without governance, no