Business Costs and the robot tax

Do penalties shape corporate behaviour? Optus has been hit with yet another penalty, which a dour legal analyst might construe as a cost of doing business.

The ACCC reports that the Federal Court has ordered Optus pay a $10 million penalty for misleading customers over digital purchases. The telco's customers unknowingly purchased games, ringtones and other digital content through Optus' third-party billing service.  Optus admitted that the company misled consumers and breached the ASIC Act when it billed customers for third party-produced content which they mistakenly bought or subscribed to through its “direct carrier billing” (DCB) service.

The ACCC notes that

 The $10 million penalty is one of the highest imposed by the Court after ACCC action on a consumer matter, and equals the penalty paid by Telstra last year after it admitted to similar conduct. 

Optus admitted that it did not properly inform customers that the DCB service was a default setting on their accounts, and that they would be billed directly by Optus for any content bought through the service, even unintentionally. 

Optus, which earned commissions on items sold through the DCB service, also admitted that it knew from at least April 2014 that many customers were being billed for DCB content they had mistakenly or unknowingly signed up for. The DCB service allowed a purchase or subscription to be confirmed and charged to a customer’s bill after just one or two clicks on a web browser.

Importantly

Despite receiving over 600,000 enquiries about the service, Optus failed to put in place appropriate identity verification safeguards, and referred customers who sought to query DCB service charges to third parties. 

Many customers then encountered significant difficulties in cancelling the purchases and obtain refunds from the third parties. “In many cases, Optus customers had no idea they were buying anything, and certainly did not need or want the content for which they were being charged,” 

The ACCC goes on to note that

ACCC chair Rod Sims said. “Optus failed to take appropriate action, choosing instead to continue to charge customers and collect commissions on these sales, even after numerous complaints. 

“We are pleased that the Court agreed that this conduct is simply unacceptable, and deserves a significant penalty,” Mr Sims said. 

About 240,000 Optus customers have so far been refunded. The ACCC understands Optus has paid about $8 million in refunds and third party providers another $13 million.   

Optus has committed to contacting potentially impacted customers who complained about the services and have not already received a refund, as well as those customers who Optus identifies as having been incorrectly charged. 

Optus will also review any future complaints in light of this action and deal with those customers in good faith. Given the volume of enquiries to Optus about the service there are likely to be many affected customers that have not yet received a refund.

Optus earned about $65.8 million in commissions for products sold through the DCB service, which launched in 2012. Its customers were charged about $195 million for the content. The ACCC commenced proceedings against Optus in October 2018. Optus admitted that it made false or misleading representations in contravention of the ASIC Act, and agreed to apply jointly with the ACCC for orders from the Federal Court.

Do the maths.

 'Should Robots Be Taxed?' - a study of the automation tax or robot tax by Joao Guerreiro, Sergio Rebelo and Pedro Teles comments 

The American writer Kurt Vonnegut began his career in the public relations division of General Electric. One day, he saw a new milling machine operated by a punch-card computer outperform the company’s best machinists. This experience inspired him to write a novel called “Player’s Piano.” It describes a world in which school children take a test at an early age that determines their fate. Those who pass, become engineers and design robots used in production. Those who fail, have no jobs and live from government transfers. Are we converging to this dystopian world? How should public policy respond to the impact of automation on the demand for labor? 

These questions have been debated ever since 19th-century textile workers in the U.K. smashed the machines that eliminated their jobs. As the pace of automation quickens and affects a wide range of economic activities, Bill Gates re-ignited this debate by proposing that robots should be taxed. 

In this paper, we use a simple model of automation to compare the equilibrium that emerges under the current U.S. tax system (which we call the status quo), the first-best solution to a planner’s problem without information constraints, and the second-best solutions associated with different configurations of the tax system. 

Our model has two types of workers which we call routine and non-routine. Routine workers perform tasks that can be automated by using intermediate inputs that we refer to as robots. We find that robot taxes are optimal only when there is partial automation. These taxes help increase the wages of routine workers, giving the government an additional instrument to reduce income inequality. Once there is full automation, it is not optimal to tax robots. Routine workers do not work, so taxing robots distorts production decisions without reducing income inequality. 

 Under the current U.S. tax system, modeled using the after-tax income function estimated by Heathcote, Storesletten and Violante (2017), full automation never occurs. As the cost of automation falls, the wages of non-routine workers rise while the wages of routine workers fall to make them competitive with robot use. The result is a large rise in income inequality and a substantial decline in the welfare of routine workers. 

The level of social welfare obtained in the status quo is much worse than that achieved in the first-best solution to an utilitarian social planner problem without information constraints. But this first-best solution cannot be implemented when the government does not observe the worker type. The reason is that the two types of agents receive the same consumption but non-routine workers supply more labor than routine workers. As a result, non-routine workers have an incentive to act as routine workers and receive their bundle of consumption and hours worked. 

To circumvent this problem, we solve for the optimal tax system imposing, as in Mirrlees (1971), the constraint that the government does not observe the worker type or the workers’ labor input. The government can observe total income and consumption of the two types of workers, as well as the use of robots by firms. We assume that taxes on robots are linear for the reasons emphasized in Guesnerie (1995): non-linear taxes on intermediate inputs are difficult to implement in practice because they create arbitrage opportunities. This assumption, which is standard in a Ramsey (1927) setting, restricts the outcomes that can be achieved when robot taxation is optimal. 

A Mirrleesian optimal tax system can improve welfare relative to the status quo. In fact, it can yield a level of welfare that is close to that of the first-best solution. Unfortunately, Mirrleesian tax systems are known to be complex and potentially difficult to implement in practice. 

For this reason, we study the optimal policy when the tax schedule is constrained to take a simple, exogenous form. Specifically, we consider the income tax schedule  proposed by Heathcote, Storesletten and Violante (2017) and linear robot taxes. We compute the parameters of the income tax function and the robot tax rate that maximize social welfare. We find that income inequality can be reduced by raising marginal tax rates and taxing robots. Tax rates on robot use can be as high as 30 percent and full automation never occurs, so routine workers keep their jobs. But this solution yields poor outcomes in terms of efficiency and distribution. 

We consider a modification of the Heathcote, Storesletten and Violante (2017) tax schedule that allows for lump-sum rebates that ensure that all workers receive a minimum income. We find that this modification improves both efficiency and distribution relative to a tax system without rebates. 

In the three best systems in terms of welfare, the first-best, Mirrleesian optimal taxes and simple income taxes with lump-sum rebates there is full automation once the costs of automation are sufficiently low. These solutions resemble the world of “Player’s Piano.” Only non-routine workers have jobs. Routine workers live off government transfers and, despite losing their jobs, are better off than in the status quo. 

One might expect that optimal robot taxation would follow from well-known principles of optimal taxation in the public finance literature. We know from the intermediategoods theorem of Diamond and Mirrlees (1971) that it is not optimal to distort production decisions by taxing intermediate goods. Since robots are in essence an intermediate good, taxing them should not be optimal. 

The intermediate-good theorem relies on the assumption that “net trades” of different goods can be taxed at different rates. In our context, this assumption implies that the government can use different tax schedules for routine and non-routine workers. We study two environments where there are limits to the government’s ability to tax different workers at different rates, Mirrlees (1971)-type information constraints and a simple exogenous tax system common to both types of workers. We find that it is optimal to tax robots in both environments when there is partial automation. 

We know from the work of Atkinson and Stiglitz (1976) that when the income tax system is non-linear it is not optimal to distort production decisions by taxing intermediate goods. But, as stressed by Naito (1999) and Jacobs (2015), Atkinson and Stiglitz (1976)’s result depends critically on the assumption that workers with different productivities are perfect substitutes in production. This assumption does not hold in our model. Taxing robots can be optimal because it loosens the incentive compatibility constraint of non-routine workers. 

We extend our model to allow agents to switch their occupations by paying a cost. In the first-best solution, agents who have a low cost of becoming non-routine workers do so. Those with a high cost become routine workers. Once the costs of automation are sufficiently low, there is full automation; agents for whom it is too costly to become non-routine lose their jobs and live from government transfers. In the Mirrlees solution to the model with occupational choice it is optimal to use robot taxes to loosen the incentive compatibility constraint of non-routine workers. The planner can use the income tax schedule to redistribute income or to induce more agents to become non-routine workers. When the cost of becoming non-routine are high (low), the planner resorts more (less) to using the income tax schedule to redistribute income. 

The paper is organized as follows. In Section 2 we describe our model of automation. Section 3 describes the status-quo equilibrium, i.e. the equilibrium under the current U.S. income tax system and no robot taxes. Section 4 describes the first-best solution to the problem of an utilitarian planner. In Section 5, we analyze a Mirrleesian secondbest solution to the planner’s problem. In Section 6, we study numerically the optimal tax system that emerges when income taxes are constrained to take the functional form proposed by Heathcote, Storesletten and Violante (2017) both with and without lump-sum rebates. In Section 7, we compare the different policies we consider both in terms of social welfare and of the utility of different agents. Section 8 discusses the model with endogenous occupation choice. Section 9 relates our results to classical results on production efficiency in the public finance literature. Section 10 concludes. To streamline the main text, we relegate the more technical proofs to the appendix.

ALRC Class Actions Report

The ALRC final report on class actions and litigation funding - Integrity, Fairness and Efficiency — An Inquiry into Class Action Proceedings and Third-Party Litigation Funders - addresses the following terms of reference:

 consideration of whether and to what extent class action proceedings and third party litigation funders should be subject to Commonwealth regulation, and in particular whether there is adequate regulation of the following matters:

• conflicts of interest between lawyer and litigation funder; 

• conflicts of interest between litigation funder and plaintiffs; 

• prudential requirements, including minimum levels of capital; 

• distribution of proceeds of litigation including the desirability of statutory caps on the proportion of settlements or damages awards that may be retained by lawyers and litigation funders; 

• character requirements and fitness to be a litigation funder; 

• the relationship between a litigation funder and a legal practice; 

• the costs charged by solicitors in funded litigation, including but not limited to class action proceedings; and 

• any other matters related to these Terms of Reference

The ALRC's 2018 discussion paper was noted here.

The Commission's recommendations are

Case Management—Chapter 4 

Recommendation 1—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended so that all representative proceedings are initiated as open class. 

Recommendation 2—Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended to provide criteria for when it is appropriate to order class closure during the course of a representative proceeding and the circumstances in which a class may be reopened. 

Recommendation 3—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to provide the Court with an express statutory power to make common fund orders on the application of the plaintiff or the Court’s own motion. 

Recommendation 4—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to give the Court an express statutory power to resolve competing representative proceedings. 

Recommendation 5—In order to implement Recommendation 4, Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended to provide a further case management procedure for competing class actions. 

Recommendation 6—The Supreme Courts of states and territories with representative action procedures, should consider becoming parties to the Protocol for Communication and Cooperation Between Supreme Court of New South Wales and Federal Court of Australia in Class Action Proceedings. 

Recommendation 7—Part 9.6A of the Corporations Act 2001 (Cth) and s 12GJ of the Australian Securities and Investments Commission Act 2001 (Cth) should be amended to confer exclusive jurisdiction on the Federal Court of Australia with respect to civil matters, commenced as representative proceedings, arising under that legislation. 

Settlement Approval—Chapter 5 

Recommendation 8—Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should include a clause that the Court may appoint a referee to assess the reasonableness of legal costs charged in a representative proceeding prior to settlement approval. 

Recommendation 9—Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should include a clause that the Court may tender settlement administration, and include processes that the Court may adopt when tendering settlement administration. 

Recommendation 10—Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended to require settlement administrators to provide a report to the class on completion of the distribution of the settlement sum. The report should be published on a national representative proceedings data base to be maintained by the Court. 

Regulation of Litigation Funders—Chapter 6 

Recommendation 11—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to prohibit a solicitor acting for the representative plaintiff, whose action is funded in accordance with a Court approved third-party litigation funding agreement, from seeking to recover any unpaid legal fees from the representative plaintiff or group members. 

Recommendation 12—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to include a statutory presumption that third-party litigation funders who fund representative proceedings will provide security for costs in any such proceedings in a form that is enforceable in Australia. 

Recommendation 13—Section 37N and s 43 of the Federal Court of Australia Act 1976 (Cth) should be amended to expressly empower the Court to award costs against thirdparty litigation funders and insurers who fail to comply with the overarching purposes of the Act prescribed by s 37M. 

Recommendation 14—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to provide that: - third-party litigation funding agreements with respect to representative proceedings are enforceable only with the approval of the Court; - the Court has an express statutory power to reject, vary, or amend the terms of such third-party litigation funding agreements; - third-party litigation funding agreements with respect to representative proceedings must provide expressly for a complete indemnity in favour of the representative plaintiff against an adverse costs order; and - Australian law governs any such third-party litigation funding agreement the funder submits irrevocably to the jurisdiction of the Court. 

Recommendation 15—The Australian Securities Investments Commission Regulatory Guide 248 should be amended to require that third-party litigation funders that fund representative proceedings report annually to the regulator on their compliance with the requirement to implement adequate practices and procedures to manage conflicts of interest. 

Recommendation 16—Regulation 5C.11.01 of the Corporations Regulations 2001 (Cth) should be amended to include ‘law firm financing’ and ‘portfolio funding’ within the definition of a ‘litigation funding scheme’. 

Solicitors’ Fees and Conflicts of Interest—Chapter 7 

Recommendation 17—Confined to solicitors acting for the representative plaintiff in representative proceedings, statutes regulating the legal profession should permit solicitors to enter into ‘percentage-based fee agreements’. The following limitations should apply: - an action that is funded through a percentage-based fee agreement cannot also be directly funded by a litigation funder or another funding entity which is also charging on a contingent basis; - a percentage-based fee cannot be recovered in addition to professional fees for legal services charges on a time-cost basis; and - solicitors who enter into a percentage-based fee agreement must advance the costs of disbursements, and account for such costs within the percentagebased fee. 

Recommendation 18—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to include a statutory presumption that solicitors who fund representative proceedings on the basis of percentage-based fee agreements will provide security for costs in any such proceedings in a form that is enforceable in Australia. 

Recommendation 19—Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to provide that: - percentage-based fee agreements in representative proceedings are permitted only with leave of the Court; and - the Court has an express statutory power to reject, vary, or amend the terms of such percentage-based fee agreements. 

Recommendation 20—The Law Council of Australia should oversee the development of specialist accreditation for solicitors in class action law and practice. Accreditation should require ongoing education in relation to identifying and managing actual or perceived conflicts of interests and duties in class action proceedings. 

Recommendation 21—The Australian Solicitors’ Conduct Rules should be amended to prohibit solicitors and law firms from having financial and other interests in a thirdparty litigation funder that is funding the same matter in which the solicitor or law firm is acting. 

Recommendation 22—Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended so that the first notices provided to potential class members by legal representatives are required to clearly describe the obligation of legal representatives to avoid and manage conflicts of interest, and to outline the detail of any conflicts in that particular case. 

Regulatory Redress—Chapter 8 

Recommendation 23—The Australian Government should review the enforcement tools available to regulators of products and services used by consumers and small businesses (including financial and credit products and services), to provide for a consistent framework of regulatory redress. 

Review of Substantive Law?—Chapter 9 

Recommendation 24—The Australian Government should commission a review of the legal and economic impact of the operation, enforcement, and effects of continuous disclosure obligations and those relating to misleading and deceptive conduct contained in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth)

The ALRC comments

In formulating the recommendations of this Report, the ALRC has been guided by three overarching principles:

• Principle One: It is essential to the rule of the law that citizens should be able to vindicate just claims through a process characterised by fairness and efficiency to all parties, that gives primacy to the interests of the litigants, without undue expense or delay. 

• Principle Two: There should be appropriate protections in place for litigants who wish to avail themselves of the class action system and the variety of funding models that facilitate the vindication of just claims. 

• Principle Three: The integrity of the civil justice system is essential to the operation of the rule of law.

The recommendations of this Report are aligned with one or more of these principles. That is, the recommendations aim to: promote fairness and efficiency; protect litigants; and assure the integrity of the civil justice system. The relationship between the key principles and the recommendations of this Report are considered in Chapter 1. 

Clarifying the powers of the Federal Court 

The ALRC makes recommendations to assist the Federal Court case manage class action proceedings effectively, efficiently and fairly. This includes recommendations relating to: the constitution of class actions; competing class actions; and settlement approval by the Court. 

Constitution of class actions 

In Chapter 4, the ALRC recommends amendments to the Federal Court of Australia Act 1976 (Cth) (the FCA Act) to provide that class actions must be initiated as open class— this improves access to justice by enabling all victims of a civil wrong to participate in the class action and not just those who take active steps to join it. This amendment to the FCA Act would be supported by amendments to the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) (Practice Note) to: 

• set out the circumstances in which it may be necessary to close the class to facilitate early settlement, and 

• the criteria for the limited circumstances in which a class action that has been closed may be reopened.

In order to support an open class regime, the ALRC recommends the FCA Act be amended to provide an express statutory power for the Court to order a common fund.

Competing class actions 

In Chapter 4, the ALRC recommends amendments to the FCA Act to address the rising incidence of competing class actions. Those amendments seek to ensure that, wherever possible, there is a single class action in order to litigate a claim. Multiple class actions increase uncertainty, costs and delays, and therefore there is a sound public policy basis to permit only one class action with respect to a dispute to proceed, subject to the overriding discretion of the Court. Statutory amendments to reduce the risk of forum shopping are also recommended. 

Settlement approval 

In Chapter 5, the ALRC makes recommendations to assist the Federal Court in its settlement approval decision-making—including in its determination of fairness and of reasonable costs. 

The ALRC also examines the use of confidentiality orders in class action settlements, and how these orders affect group members and policy-makers reliant on an evidence-base. It is recommended in Chapter 5 that settlement administrators be required to provide a report to group members and the Federal Court outlining the distribution of settlement funds. The requirement to report would increase the accountability of administrators, support the principle of ‘open justice’, and enable the Federal Court to design and maintain a database that captures the outcomes of Part IVA proceedings that resolve in its jurisdiction. 

Regulation of third-party litigation funders 

In Chapter 6, the ALRC acknowledges the critical role that third-party litigation funders have in providing access to justice for group members, while also recognising the inherent risks associated with litigation funders. This includes the risk that third-party litigation funders may fail to meet their obligations under funding agreements, use the Federal Court of Australia for improper purposes, or exercise influence over the conduct of proceedings to the detriment of group members. 

A suite of recommendations to improve the regulation of litigation funders and to support the unique role of the Federal Court in protecting the interests of all group members is recommended in lieu of a licensing regime for litigation funders. The recommendations: provide for greater Court oversight of the litigation funding agreement, require that the funder indemnifies the lead plaintiff against an adverse costs order, and create a presumption in favour of security for costs. 

Legal costs 

As shown by the data presented in Chapter 3, class action proceedings are often run with the support of third-party litigation funders. Litigation funders cover and then recoup legal costs and receive a commission from an award of damages. Most matters receive third-party funding, meaning that the types of matters that proceed are skewed towards ones with the highest financial returns and that group members usually pay two sets of fees: legal costs and third-party litigation funding commissions. 

In Chapter 7, the ALRC recommends the limited introduction of percentage-based fees (commonly called ‘contingency fees’)—a method of billing for legal services through a percentage of the amount recovered by the litigation rather than through time-based or cost scale billing. The recommended percentage-based billing model aims to provide a greater return to group members, further enable medium-sized class action matters to proceed, and, as class actions are strictly supervised by the Court, provide protection for representative plaintiffs and group members against paying a single yet disproportionate or unreasonable fee. 

Conflicts of interest 

Actual or perceived conflicts of interest that arise in class action proceedings—with particular emphasis on the tripartite arrangement of funder, solicitor and representative plaintiff/group members—are dealt with in Chapters 6 and 7. The ALRC recommends strengthening existing ways to mitigate and protect against conflicts of interest in class action proceedings. Particularly, in Chapter 6, the ALRC recommends that the existing ASIC Regulatory Guide 248 be amended to require third-party litigation funders to report to ASIC to show compliance with the requirements to meet certain obligations to avoid or mitigate conflicts of interest. 

In Chapter 7, the ALRC recommends the development of a voluntary accreditation program for solicitors who act in class action proceedings. It also recommends prohibiting arrangements whereby a solicitor may have an interest in the third-party funder with whom the solicitor is working, and recommends clear and concise communication with group members regarding conflicts of interest. 

Areas for further inquiry 

The ALRC identifies two areas for further inquiry. First, in Chapter 8, the ALRC suggests principles that may guide and support the design of regulatory collective redress powers—aimed at enhancing access to justice, through reduced costs and greater efficiencies. A review by Government of the statutory enforcement regimes for regulators is recommended so to facilitate effective, efficient and consistent statutory redress schemes. 

Secondly, in Chapter 9, the ALRC recognises that the class action regime may benefit from a broader review of the substantive law which supports shareholder class actions, and recommends such a review.

Gayed Inquiry

The second report by Gail B Furness SC regarding Dr Emil Shawky Gayed has now been released.

(Furness' separate report to the Medical Council is noted here; the NSWCAT judgment in Health Care Complaints Commission v Gayed [2018] NSWCATOD 165, is noted here.)

The Review of documentary material in relation to the appointment of Dr Gayed, management of complaints about Dr Gayed and compliance with conditions imposed on Dr Gayed by local health districts comments -

On 21 June 2018, the Secretary of NSW Health, Ms Elizabeth Koff, appointed me to conduct an independent inquiry to review documentary material provided by each local health district in relation to the appointment of Dr Gayed, management of complaints about Dr Gayed, and compliance with conditions imposed on Dr Gayed by relevant regulatory bodies, including the Medical Council of New South Wales (Medical Council), at Kempsey District Hospital, Cooma Hospital, Manning Hospital and Mona Vale Hospital. My terms of reference required me to review documentary material; however, with respect to Manning Hospital, I interviewed a number of people who held key positions at the relevant time. ...

 On 29 June 2018, I was appointed by the Medical Council to undertake an independent review of processes undertaken pursuant to Part 8 of the Health Practitioner Regulation National Law (NSW) with respect to Dr Emil Gayed from the date of his registration as a medical practitioner in New South Wales until 7 March 2018. 

The resulting report was titled Review of processes undertaken by the Medical Council of New South Wales pursuant to Part 8 of the Health Practitioner Regulation National Law (NSW) with respect to Dr Emil Gayed and dated 31 October 2018. The report has been published on the Medical Council website. ... 

The report from each of these inquiries should be read together. The reader cannot understand the actions of each local health district without appreciating the information held and actions taken by the Medical Board and the Medical Council.

The report goes on

Registration 

8. On 17 May 1994, Dr Gayed was registered as obstetrician and gynaecologist to practice in positions approved by Medical Board.  

Grafton 

9. In 1994, Dr Gayed commenced work at Grafton Hospital, Clarence District Health Service, and completed his last procedure in June 1995. 

10. Based on the documents available to the inquiry, the Clarence District Health Service appropriately appointed Dr Gayed, including delineating his clinical privileges. No relevant conditions were imposed by the district health service on his appointment, his clinical privileges were not varied or withdrawn and his clinical privileges were consistent with his registration. There were no complaints made to the district health service. 

Cooma Hospital 

11. Dr Gayed was appointed to Cooma Hospital in February 1996. Between April 1997 and July 1998, staff at Cooma Hospital, primarily nurses, completed incident reports recording 15 events concerning Dr Gayed’s clinical treatment and his conduct in the operating theatre. 

12. Five of the incidents involved needlestick injuries. 

13. By the fourth incident, concern was being expressed about Dr Gayed’s eyesight. In relation to the seventh incident, on 11 November 1997, a nurse wrote a memo to the Health Service Manager stating that staff were expressing concern for patients under their care. She referred to Dr Gayed’s complication rate and his haste and possible poor eyesight. 

14. A review of Dr Gayed’s eyesight was suggested; however, no review was undertaken.  

15. On 29 July 1998, Dr Gayed was temporarily suspended from Cooma Health Service on the basis of concerns raised by Visiting Medical Officers and other staff about aspects of his clinical practice, as set out in the 15 incidents. 

16. Following legal advice, Dr Gayed’s suspension was withdrawn. 

17. On 8 October 1998, Mr Gleeson, as Chief Executive Officer (CEO) of the Southern Area Health Service, complained to the Health Care Complaints Commission (HCCC) about Dr Gayed’s conduct. 

18. Mr Gleeson advised that, as a result of growing general concern, the Southern Area Health Service suspended Dr Gayed’s appointment and that: 

At the same time, several general practitioner Visiting Medical Officers at Cooma who provide anaesthetics to Dr Gayed when he operated there, each took a personal decision to withdraw their anaesthetic services for a time

19. Dr Gayed resigned from Cooma Hospital in February 1999. 

20. In my view, it was appropriate for the area health service to make the complaint it did to the Health Care Complaints Commission in October 1998. As Dr Jenkins states, it takes an accumulation of incidents over a period of time to come to such a conclusion. However, both Dr Jenkins and I consider that Cooma Hospital or the Southern Area Health Service should have restricted Dr Gayed’s clinical privileges pending the outcome of the investigation. 

21. Based on the documents available to the inquiry, the Monaro District Health Service (which at that time was responsible for Cooma Hospital) appropriately appointed Dr Gayed, including delineating his clinical privileges, which were consistent with his registration. No relevant conditions were imposed by the district health service. 

22. There was no requirement under the Health Services Act, as in force in 1998, for the Southern Area Health Service to report the complaint against Dr Gayed or his underlying conduct to the Medical Board. Professional Standards Committee 

23. Between October 1998 and 2001, the HCCC investigated the complaints forwarded by the Southern Area Health Service as well as complaints directly made to the HCCC. On 15 March 2001, the HCCC made 10 complaints, concerning nine patients, to a Professional Standards Committee about Dr Gayed’s clinical work as an obstetrician and gynaecologist between July 1996 and July 1998 at Cooma Hospital. It also made one complaint that Dr Gayed suffered from an impairment—namely, high myopia. 

24. The Professional Standards Committee found that, over the period of 15 months in 1997 and 1998, a number of incidents and complications had occurred involving Dr Gayed’s gynaecological practice leading to a gradual loss of confidence in Dr Gayed by his general practitioner (GP) colleagues and his nursing colleagues. 

25. The Professional Standards Committee found that Dr Gayed suffered from an impairment—high myopia—which detrimentally affected or was likely to detrimentally affect his physical capacity to practise medicine. 

26. In relation to the other 10 complaints, it found Dr Gayed guilty of unsatisfactory professional conduct in half of those complaints and not guilty in the remaining five complaints. 

27. Overall, the Professional Standards Committee found Dr Gayed guilty of unsatisfactory professional conduct. It:

• reprimanded Dr Gayed; 

• ordered that his registration be subject to the condition that he not undertake microsurgery; 

• ordered that he be assessed by an ophthalmologist approved by the Medical Board at intervals determined by the ophthalmologist and reports forwarded to the Medical Board with the first assessment to take place before the end of December 2001; 

• recommended to the Medical Board that a performance assessment in accordance with Part 5 of the Act be undertaken in respect of his practice at Manning Base Hospital at a time deemed appropriate by the Board; 

• ordered that a full copy of the decision be provided to: o the Medical Board; o the HCCC; o Dr Gayed and his adviser; o the peer reviewers; o the Chief Executive Officer, Southern Area Health Service; and 

• ordered that a de-identified copy of the decision be forwarded to Royal Australian and New Zealand College of Obstetricians and Gynaecologists for the purposes of educational training.

28. Dr Gayed provided services at Kempsey District Hospital from October 1999 until June 2002. 

29. Following the Professional Standards Committee decision in October 2001, the Medical Board notified the Mid North Coast Area Health Service of the condition imposed that Dr Gayed not undertake microsurgery. 

30. However, the Medical Board did not notify Mid North Coast Area Health Service of the Professional Standards Committee’s finding of unsatisfactory professional conduct, the reprimand or orders or recommendations made. 

31. Based on the documents available to the inquiry, the Mid North Coast Area Health Service appropriately appointed Dr Gayed, including delineating his clinical privileges. No relevant conditions were imposed by the area health service. 

32. However, his privileges were not varied to reflect the condition imposed by the Professional Standards Committee in October 2001. They should have been. 33. There were no complaints made to the area health service. 

Mona Vale Hospital 

34. Dr Gayed was first appointed as a Visiting Medical Officer to Mona Vale Hospital in May 2002 with clinical privileges consistent with the usual practice of obstetrics and gynaecology. 

35. Dr Gayed held a temporary appointment at Mona Vale Hospital between 10 May and 10 June 2002 and a five-year appointment commencing 1 July 2002. 

36. Northern Sydney Health suspended Dr Gayed between 11 August 2003 and 30 September 2003. Dr Gayed resigned from his appointment on 7 March 2007 after being informed on 6 March 2007 by the Director of Medical Services that his appointment was suspended. 

37. I have reviewed the policies applying in Northern Sydney Health at the time of Dr Gayed’s appointment and the available documentation relating to his appointment. I am satisfied that, prior to appointing Dr Gayed, Mona Vale Hospital did not check Dr Gayed’s registration status with the Medical Board. There is no evidence that the hospital sought from Dr Gayed information as to his conditions of registration or his consent to contact the Medical Board and/or the HCCC. The inquiry has been informed that, prior to Dr Gayed’s temporary appointment at Mona Vale Hospital, the Director of Medical Services obtained a positive verbal reference from Dr Jim Wills, Director of Medical Services at Manning Hospital. 

38. I conclude that Dr Gayed was selective in the information he provided to Northern Sydney Health when he sought appointment. Specifically, he made no mention of the HCCC investigation or the Professional Standards Committee and its outcome in his curriculum vitae or any of the supporting material he provided. 

39. As a result, the clinical privileges granted to Dr Gayed by Northern Sydney Health did not reflect the conditions imposed on his registration in that there was no restriction on microsurgery. The inquiry has been informed that Mona Vale Hospital had no microsurgical capability at that time. Accepting that this was the case and that the condition not to do microsurgery was therefore of minor significance, I consider it nevertheless concerning that his eyesight issues were not known to the hospital or area health service at the time of his appointment. 

40. Northern Sydney Health first became aware of the conditions on Dr Gayed’s registration, the Professional Standards Committee and the conditions imposed and recommendations made by the Professional Standards Committee after concerns arose in relation to his management of patients in June 2003. 

41. Complaints about Dr Gayed’s management of patients at Mona Vale Hospital were made to the hospital executive each year following his appointment in 2002. Incidents were notified by staff. 

42. In June 2003, a number of cases involving Dr Gayed as consultant came to the attention of the Director of Medical Services, Dr Annette Pantle. Dr Pantle proposed reviewing the cases; however, pending that review, further clinical incidents occurred in relation to patients under the care of Dr Gayed. 

43. On 12 August 2003, Dr Gayed was suspended pending investigation of his clinical performance. 

44. Northern Sydney Health convened a Credentials Committee. Around this time, Mona Vale Hospital sought and obtained confirmation from the Medical Board as to Dr Gayed’s conditions of medical registration. However, there was no reference to the Professional Standards Committee, its orders, the reprimand or the recommendation it made that a performance assessment be undertaken. I am nevertheless satisfied that, by this time, Mona Vale Hospital was aware that Dr Gayed had been the subject of a Professional Standards Committee. 

45. On 22 September 2003, the Credentials Committee met and noted a number of matters, including the following: (a) the cluster of cases was not comparable with any other doctors at Mona Vale Hospital; (b) there was a pattern of performing operative procedures on the same patients, at intervals, which could possibly be interpreted as overservicing; (c) the conditions placed on his registration by the Medical Board and Dr Gayed’s adherence to them; and (d) in respect of four of the patients, on balance, the clinical judgment demonstrated was within an acceptable range. The Credentials Committee noted potential suboptimal outcomes for the other three patients. 

46. Notwithstanding concerns expressed by the Credentials Committee, it recommended: (a) the reinstatement of full clinical privileges; (b) that Dr Gayed’s appointment be reviewed in the event of any replication of similar concerns; and (c) notification to the Medical Board. 

47. On 31 May 2004, nursing staff submitted an incident reporting form for a ‘Major Clinical Incident’ relating to a patient of Dr Gayed. 

48. On 7 October 2004, that case was presented at a multidisciplinary peer review meeting. Dr Gayed was not present. The review concluded that a number of clinicians had correctly observed and documented features which were not consistent with the diagnosis being treated by Dr Gayed and, as such, it remained unclear why the surgery had been undertaken. It was recommended that a further case review meeting involving all the clinicians involved take place. The inquiry has not been provided with any documentation indicating that a further review of the case, as recommended by the multidisciplinary review, took place. 

49. Dr Jenkins considers that there are a number of factors about that case which raise concerns about Dr Gayed’s clinical performance. Dr Jenkins and I consider that this case should have prompted a review of Dr Gayed’s clinical privileges in accordance with the outcome of the Medical Appointments and Credentials Advisory Committee meeting in September 2003. 

50. In December 2005, concerns were again raised about a number of cases in which Dr Gayed was the treating doctor. 

51. Northern Sydney Health did not reconsider Dr Gayed’s appointment or clinical privileges. Dr Jenkins and I consider that two of those cases seen in the context of the other cases, warranted a referral to the area health service Credentials Committee for review and consideration of whether Dr Gayed’s clinical privileges should be restricted. If the outcome of a review by the Credentials Committee had been adverse to Dr Gayed, it would have been incumbent on the area health service to report the cases to the Medical Board as involving suspected unsatisfactory professional conduct. 

52. Northern Sydney Health did not formally notify the cases to the Medical Board, although the CEO contacted the Medical Board to seek information about Dr Gayed’s performance assessment. The Medical Board provided an extract of the report which indicated that the assessors considered his performance to be satisfactory. 

53. The Director of Medical Services discussed Dr Gayed’s performance with the Director of Clinical Services at Manning Hospital. The assessment provided was in positive terms. 

54. On 25 September 2006, staff registered another incident on the Incident Information Management System (IIMS) concerning Dr Gayed’s surgical management of a patient The Director of Medical Services decided to investigate the incident as a Level 2 ‘Complaint or concern about a clinician’ as outlined in the NSW Health Guideline GL2006_002. This required: (1) notification to the Director of Clinical Governance; (2) consideration as to whether variations to clinical privileges are required; and (3) an investigation. These steps were carried out. The Director of Medical Services engaged an independent obstetrician gynaecologist to conduct a review of the case. 

55. On 4 December 2006, another incident was notified in IIMS. That case was also referred to external reviewer. 

56. Both reviewers were critical of Dr Gayed’s treatment of the patients concerned. 

57. One of the reviewers was also asked to provide an opinion with regard to de- identified data relating to surgery conducted between 1 September 2004 and 31 August 2006 by obstetrics and gynaecology specialists at Mona Vale Hospital. He advised that, of the four doctors concerned, Dr ‘B’, whose identity was not known to him, had a higher rate of general complication and difficult complications without an obviously different practice from the other doctors. I am satisfied that it is likely that Dr B was Dr Gayed. 

58. In March 2007, two further cases of concern came to light. By this time, there were widespread concerns regarding the practice of Dr Gayed at Mona Vale Hospital and various investigations and reviews were underway. 

59. On the evening of 6 March 2007, the Director of Medical Services met with Dr Gayed at Dr Gayed’s request. Dr Gayed felt the current and past reviews were personally motivated rather than being motivated by safety concerns. He presented his resignation. 

60. On 16 March 2007 the Chief Executive of Northern Sydney Central Coast Area Health Service also notified the Medical Board of the cases of concern, of the decision to suspend Dr Gayed pending the outcome of investigations, and of Dr Gayed’s subsequent decision to resign. This was the second occasion during Dr Gayed’s appointment on which the Chief Executive had brought to the attention of the Medical Board the area health service’s serious concerns about Dr Gayed’s clinical practice. 

61. During the period of his appointment, it is apparent that Northern Sydney Health, then Northern Sydney Central Coast Area Health Service, had effective and quite robust systems in place for notifying and managing complaints, particularly following the introduction of IIMS and related policies in 2005. They included notifying matters to the Medical Board and seeking information from the Medical Board. 

Manning Hospital 

62. Dr Gayed commenced working as a Visiting Medical Officer Obstetrician/Gynaecologist at Manning Hospital in August 1999. He sought reappointment in 2003, 2006 and 2011. 

63. In each application Dr Gayed signed a release for enquiries to be made to, among others, previous places of employment, the HCCC and registration authorities. 

64. There are no documents indicating that the area health service checked with Cooma Hospital, the Medical Board and/or the HCCC before reappointing Dr Gayed in 2003, 2006 and 2011. I conclude that those checks were not made. These are serious omissions. The policies requiring this information to be acquired as part of consideration of reappointing Visiting Medical Officers are significant elements of a system designed to identify concerns about practitioners who work across various private and public health facilities.  

65. On each occasion the relevant area health service was informed by the Medical Board that conditions had been imposed on Dr Gayed’s registration, there were delays in reflecting those conditions in his clinical privileges. The most significant was in 2001, when some 16 months elapsed after the area health service was told that Dr Gayed’s registration was conditional on him not performing microsurgery. 

66. In most years from 1999 to 2016 there was a complaint or concern raised about Dr Gayed’s clinical treatment of a patient. They were expressed by nursing staff, anaesthetists and other medical practitioners as well as, more recently, patients themselves. 

67. Those concerns continued notwithstanding: (a) the findings of a Professional Standards Committee in 2001 and the conditions imposed on Dr Gayed’s practice; (b) the assessments by the Medical Board and Medical Council at various times over a decade and the imposition of further conditions on his registration; and (c) the effective termination of his contract at three hospitals: Cooma in 1999, Delmar in 2007 and Mona Vale in 2007. 

68. Of most concern is that a repeated theme in the complaints and concerns was the unnecessary removal of organs, unnecessary or wrong procedures, perforations of organs and reluctance to transfer to tertiary facilities. 

69. In June 2018, a public inquiry line was established at Manning Hospital. Almost 200 women who had a concern about their treatment by Dr Gayed contacted the hospital. Their treatment spanned the time of Dr Gayed’s appointment. 

70. Dr Nigel Roberts, the Director of Obstetrics and Gynaecology at Manning Hospital, met with most of those women; reviewed their medical records, to the extent they were available; and wrote a report about their treatment and his opinion as to its adequacy. 

71. Dr Gayed remained at Manning Hospital until early 2016, when he was suspended and then resigned. 

72. By that time, at Manning Hospital alone, there had been 50 women whose treatment, according to advice by Dr Jenkins, which I accept, warrants a complaint to the HCCC and many more who had complained directly to the HCCC. 

73. Most of these 50 women I have referred to the HCCC—that is, 30 in number—were treated between 2011 and 2015. 

74. The health system failed each of these women. 

What went wrong at Manning Hospital 

75. First, Dr Gayed was a Visiting Medical Officer in obstetrics and gynaecology. He saw patients in his private rooms where he carried out assessments, examined patients and made diagnoses. He booked women in for surgery at Manning Hospital. They often returned to his private rooms and some were encouraged not to attend Manning Hospital after complications arose. His medical records were not available to the hospital, nor were any test results. It follows that the extent to which oversight could have occurred, if there was a view it should have, was limited. 

76. I am concerned about a situation in which a public hospital provides facilities for a Visiting Medical Officer obstetrician gynaecologist to practise without the hospital having the capacity to ensure that those female patients are being cared for at the standard expected in a public hospital. 

77. In my view, the public health system should have sufficient information about patients receiving procedures in its hospitals and using its ancillary staff to be satisfied that the procedures are being performed to an appropriate standard. 

78. Secondly, mechanisms for oversight were not used. There was a requirement for regular performance reviews of Visiting Medical Officers. This did not occur with Dr Gayed. 

79. There were no clinical supervision plans of him as required by policy. 

80. Aggregate reviews of incidents recorded on IIMS were not completed or not documented. 

81. The doctors did not record concerns on IIMS at all and the nurses did so selectively. 

82. There was no evidence available to me that, before the arrival of Dr Roberts, there was any review of the IIMS undertaken to enable any pattern to be detected; or reviews followed up. 

83. Thirdly, senior staff were not available to provide supervision and monitoring. There was no Director of Obstetrics and Gynaecology until April 2015. It is no coincidence that IIMS and other complaints escalated from mid-2015. An anaesthetist, Dr Bourke told me that there were discussions among colleagues and no reporting because ‘there was no-one to report to’. 

84. The Director of Clinical Services was a Career Medical Officer Emergency Department doctor who responded to IIMS reports concerning Dr Gayed. I have documented the occasions on which Dr Wills was unduly favourable to Dr Gayed, did not follow policy and minimised the seriousness of concerns raised. 

85. Fourthly, the hospital was reliant on Dr Gayed providing most of the obstetrician and gynaecologist services. 

86. Local health districts need to identify these circumstances, particularly in regional, rural and remote areas, and ensure there is external oversight of the performance of medical practitioners providing such services. 

87. Fifthly, the indicators in place, Morbidity and Mortality meetings and various ‘trigger’ events were not sufficiently sensitive or effectively monitored to detect Dr Gayed’s poor performance. 

88. Sixthly, there was an attitude which prevailed that what occurred outside Manning Hospital with Dr Gayed was irrelevant to the experience of Manning Hospital. Hence:

(a) Following the report of the Professional Standards Committee in 2001, the Mid North Coast Area Health Service did not carry out a review of Dr Gayed’s clinical privileges or a risk assessment as to Dr Gayed’s continued appointment at the Hospital. 

(b) The area health service / local health district did not make any enquiries of previous places of employment, the Medical Board / Medical Council or the HCCC when Dr Gayed reapplied for appointment as a Visiting Medical Officer in 2003, 2006, 2007 and 2011. 

(c) The local health district did not carry out a review of Dr Gayed’s clinical privileges after it was notified by the Director of Clinical Governance at Northern Sydney and Central Coast Area Health Service of its effective suspension of Dr Gayed. 

(d) After that notification, the local health district did not have Dr Gayed’s performance reviewed by one or more clinicians who were of the same speciality and did not have an appointment with or work as a staff specialist at Manning Hospital. Such a review would have avoided any conflict or bias towards a Visiting Medical Officer who carried a large burden of the roster of the hospital and was a colleague of many at Manning Hospital. 

89. With the appropriate leadership, within both the hospital and the local health district, this attitude should not have prevailed. 

90. Finally, staff relied too heavily on the Medical Board providing oversight and imposing conditions on or correction of Dr Gayed’s performance. They believed that, because Dr Gayed’s performance did not change after intervention by the Medical Board, his performance was satisfactory. 

91. Staff became desensitised to his poor performance. 

92. Dr Wills told me that he relied on the Medical Board / Medical Council to determine whether Dr Gayed was fit for practice and did not consider that to be his role. He said he made statements and gave evidence based on his experience of Dr Gayed alone. 

93. Dr Wills was entitled to rely upon the Medical Board / Medical Council to carry out its regulatory functions. The Medical Board / Medical Council was the only body with overall knowledge of performance concerns of Dr Gayed from his public and private appointments and private practice. It assessed his performance from time to time and had the benefit of the views of those assessors. 

94. However, the responsibility of the Medical Board / Medical Council did not relieve the hospital from properly reviewing Dr Gayed’s performance by a clinician with the same expertise, on a regular basis. That was not done. 

95. Hunter New England Local Health District told me that there are now a number of mechanisms in place which should identify a practitioner with similar problems. I am told that some of these processes were in place during the time Dr Gayed was working at Manning Hospital. 

96. I have not considered current practices and procedures at Manning Hospital in respect of the above matters.

Furness' recommendations are

I recommend that governance processes of Hunter New England Local Health District be reviewed to ensure that IIMS reports are monitored at a local health district level to enable issues of patient safety relative to a particular clinician to be identified and to ensure that relevant staff have undertaken the reviews and investigations which the IIMS records as to be or having been undertaken. 

I recommend that public hospitals which have arrangements with Visiting Medical Officers to undertake procedures on their private patients, using public facilities, should establish mechanisms to ensure access to sufficient information about those patients to be satisfied that the procedures are being performed to an appropriate standard. 

99. The hospital was reliant on Dr Gayed providing most of the obstetrician and gynaecologist services. Local health districts need to identify these circumstances, particularly in regional, rural and remote areas, and ensure there is external oversight of the performance of medical practitioners providing such services.

Hayne Outcomes

In Casablanca Captain Renault blows his whistle and shuts down Rick's Cafe, announcing that he's "Shocked! Shocked" to discover that there's gambling on the premises. He then politely accepts his winnings. There's something of the same "shocked" in the Treasurer's response to the final report of the Hayne Royal Commission on misbehaviour in the financial services sector.

The Treasurer's formal response  states - oh so convincingly - that

My message to the financial sector is that misconduct must end and the interests of consumers must now come first. From today the sector must change, and change forever. 

The response goes on

 Commissioner Hayne’s recommendations and the Government’s response advance the interests of consumers in four key ways. First, they strengthen and expand the protections for consumers, small business and rural and remote communities. Second, they raise accountability and governance standards. Third, they enhance the effectiveness of regulators. Fourth, they provide for remediation for those harmed by misconduct. For the first time the Government will establish a compensation scheme of last resort to ensure that consumers can have their case heard and be confident that where compensation is owed it will be paid. This will be a scheme paid for by industry reflecting their obligation to right their wrongs.... 

The Government is confident that the actions announced today will put in place the legislative framework necessary, providing the regulators with the powers and the resources to hold those who abuse our trust to account. In doing so the community’s trust in our financial sector can and will be restored.

That restoration might of course not be immediately forthcoming.

The response offers the usual excuse -

On coming into office in 2013, the Government inherited a financial system in need of reform. While the system had withstood the challenges of the global financial crisis, high profile financial collapses had highlighted gaps in how the regulatory framework protected consumers and investors and there was a clear need to further improve its resilience. As part of the Government’s comprehensive economic reform agenda, in 2013 we established the Financial System Inquiry (FSI), a root and branch examination of Australia’s financial system. Since the release of the Government response to the FSI in 2015, the Government has diligently been implementing its recommendations.

Hayne questions the diligence.

The response states

Those reforms, and other measures announced subsequently, have made significant progress in ensuring the financial system is resilient, treats consumers fairly and is overseen by effective regulators. The Government has also promoted innovation and competition, the benefits of which are already evident. This response, coupled with the reforms already made or in the process of being implemented, represent the most significant changes to the financial system in a generation. The Government will build on its existing reforms 

The Royal Commission has endorsed many of the themes and individual reforms the Government is currently pursuing. However, the Royal Commission has also found that there is further work to be done. The Government agrees. 

The Royal Commission has shone a spotlight on the extent of wrongdoing and misconduct across the financial system. It has identified entities putting profits ahead of people and rewarding misconduct, a lack of accountability for those who broke the law, and regulators who need to be more effective in denouncing and punishing misconduct. 

This response will address the issues identified by the Royal Commission and substantially build on the Government’s existing agenda by:

• strengthening protections for consumers, small businesses and rural and regional communities; 

• enhancing accountability; 

• ensuring strong and effective financial system regulators; and 

• further improving consumer and small business access to redress.

In undertaking these reforms, the Government will ensure that the financial system continues to provide consumers and small businesses with access to credit and other affordable financial services that they need, and that the financial system remains competitive, efficient and resilient.

Further

Strengthening protections for consumers, small businesses and rural and regional communities 

All Australians have the right to be treated fairly and honestly in their dealings with financial services entities. It is fundamental to ensure consumers have trust in the financial system. We have already reformed remuneration practices in the life insurance advice sector and introduced new educational and ethical requirements for financial advisers. We have protected consumers from being granted excessive credit limits and building up unsustainable debt across credit cards, and simplified how interest is calculated. Legislation is before the Parliament to ensure financial products are appropriately targeted and to give the Australian Securities and Investments Commission (ASIC) the power to intervene to prevent consumer harm.

Importantly, ASIC - along with other regulators - must have a willingness to actively influence corporate behaviour by using its powers. That is as important as the proposed legislation

Legislation is also before the Parliament which contains a comprehensive package of reforms designed to protect Australians’ superannuation savings from undue erosion by fees and insurance premiums, and to improve outcomes for members of superannuation funds. 

We will further strengthen these protections, including by:

• requiring mortgage brokers to act in the best interests of borrowers; • removing conflicts of interest between brokers and consumers by banning trail commissions and other inappropriate forms of lender-paid commissions on new loans from 1 July 2020 with a further review in three years on the implications of removing upfront commissions and moving to a borrower pays remuneration structure;  

• ending the grandfathering of the conflicted remuneration provisions effective from 1 January 2021 and, in addition to the Royal Commission’s recommendation, requiring that any grandfathered conflicted remuneration at this date be rebated to clients; 

• ensuring superannuation fund members only have one default account (for new members entering the system); 

• protecting vulnerable consumers through clarifying and strengthening the unsolicited selling (anti hawking) provisions, including for superannuation and insurance products; 

• prohibiting the deduction of any advice fees (other than intra fund advice) from MySuper accounts; 

• supporting the expansion of the definition of small business in the Banking Code; 

• establishing a comprehensive national scheme for farm debt mediation; 

• supporting the elimination of default interest on loans in areas impacted by natural disasters; • supporting the appointment of receivers or any other form of external administrator only as a remedy of last resort; and 

• supporting more inclusive practices for Aboriginal and Torres Strait Islander persons.

The Royal Commission has also put industry on notice that it must step up and improve how it deals with distressed agricultural loans. 

Enhancing accountability 

It is the responsibility, first and foremost, of entities, their boards and senior executives to comply with the law, meet community standards and expectations, and treat their customers fairly. Nevertheless the regulatory framework must make it clear that where entities and individuals within them fail to meet their obligations they will be held to account. 

We have established the Banking Executive Accountability Regime (BEAR) which ensures banks and their executives are held accountable when they fail to comply with their obligations. 

Legislation is before the Parliament to significantly increase penalties, both civil and criminal, so that they are an effective deterrent to, and remedy for, corporate and financial misconduct. We have also introduced legislation for a single whistleblower protection regime to cover the corporate, financial and credit sectors. We will make entities and individuals more accountable, including by: • extending the BEAR to all Australian Prudential Regulation Authority (APRA) regulated entities such as insurers and registrable superannuation entities; • in addition to the Royal Commission’s recommendations, introducing a new conduct focused accountability regime, regulated by ASIC and extending its coverage to non prudentially regulated entities; • increasing the requirements for entities to investigate the full extent of financial adviser or mortgage broker misconduct and inform and remediate customers that are affected; and • establishing a new holistic approach for disciplining financial advisers for misconduct through a central body. 

The Royal Commission has also made a number of recommendations to APRA to bolster its focus and supervision of culture and governance and the Government supports APRA acting on these recommendations.

On the regulator front

Ensuring strong and effective financial system regulators 

For Australians to have trust in the financial system, the regulatory framework must be enforced by effective regulators. The Government has taken significant action to increase the capabilities, powers and funding of the financial regulators, and to refresh their leadership. We have also introduced or consulted on a number of pieces of legislation, including in respect of many of the recommendations of the 2017 ASIC Enforcement Review, to ensure our financial regulators have the powers they need to take strong action to protect consumers from corporate and financial sector misconduct. Additional funding of $170 million has also been provided to ASIC, APRA, the Commonwealth Director of Public Prosecutions and the Federal Court to ensure our regulators are appropriately resourced to hold those who engage in misconduct to account. 

We will ensure our regulators are strong and effective, including by: • clarifying ASIC and APRA’s regulatory roles and powers in superannuation, with ASIC becoming the primary conduct regulator; • ensuring regulators have access to appropriate powers by creating civil penalties for specific breaches of the law for superannuation trustees and directors; • creating an independently chaired regulator oversight body, and applying accountability principles consistent with the BEAR to the regulators themselves; • conducting regular capability reviews of both financial regulators, with a capability review of APRA commencing in 2019; and • expanding the jurisdiction of the Federal Court to cover corporate criminal misconduct to expedite the consideration of cases brought by regulators.

In an elegant evasion the response states

While these reforms are critical, much of the needed change must come from the regulators themselves. 

The Government welcomes the actions the regulators are taking to begin changing their practices, including a tougher approach to enforcement and more intensive supervision approaches. While the Government has also provided significant funding to the regulators, the findings and recommendations from the Royal Commission, along with more than 20 referrals, will require the regulators to take on new responsibilities and, in many cases, simply do more. 

The Government will work with the regulators to ensure that they remain appropriately resourced and will consider what additional funding is required in the 2019 20 Budget context.

Given the 'reddress' concerns highlighted by Hayne  ...

Further improving consumer and small business access to redress 

Consumers have a right to be protected from misconduct or conduct that falls below community standards and expectations. They also have a right to redress when there are breaches of the law. 

The Government has implemented important reforms to ensure this redress occurs. We have established the Australian Financial Complaints Authority (AFCA) — a one stop shop for external dispute resolution to enable more consumers and small businesses to access fast and free dispute resolution including for banking, insurance, superannuation and financial advice. AFCA operates with higher compensation limits than its predecessors — for consumers ($500,000), for small businesses ($1 million) and primary producers ($2 million). 

ASIC has also been provided with additional powers to allow it to set standards in relation to financial entities’ internal dispute resolution practices and to collect data from entities on these activities. 

We will further improve consumer and small business access to redress by going beyond the Royal Commission’s recommendations by: • paying around $30 million in compensation owed to almost 300 consumers and small businesses for the unpaid determinations of the Financial Ombudsman Service and the Credit and Investments Ombudsman; • establishing for the first time an industry funded and forward looking compensation scheme of last resort to be administered by AFCA as recommended by the Royal Commission; • expanding the remit of AFCA for a period of 12 months to accept applications for disputes dating back to 1 January 2008 (the period covered by the Royal Commission) for disputes that fall within AFCA’s thresholds. This will ensure that consumers and small businesses that have suffered from misconduct but have not yet been heard will be able to take their cases to AFCA and have them considered; and • strengthening oversight and transparency of financial entities’ remediation activities by enhancing AFCA’s role in the establishment and public reporting of firm remediation activities. 

In recognition of the need for greater stability and coordination of funding for financial counselling across Australia, the Government will also commence an immediate review of the coordination and funding of financial counselling services.

And re implementation

Implementing the reforms to achieve lasting change 

The Government will ensure these reforms are implemented efficiently and effectively. To achieve these goals, the Treasury Royal Commission Taskforce, which made several submissions to the Royal Commission, will continue as a Financial Services Reform Implementation Taskforce. To ensure ongoing coordinated delivery of reforms, a Financial Services Reform Implementation Committee will also be established consisting of the Treasury, ASIC, APRA, the Office of the Parliamentary Counsel and other agencies as required. 

Starting in three years, the Government will establish an independent inquiry to review and assess whether industry practices have changed following the Royal Commission and have led to better consumer outcomes. 

The Government will also require a similar assessment of the regulators in three years by the new regulator oversight body that the Government has agreed to establish Treas

Cold War Vetting

'Covert and Overt Operations: Interwar Political Policing in the United States and the United Kingdom' by Jennifer Luff in (2017) 122(3) The American Historical Review 727–757 comments

This article reveals a startling episode unknown to contemporaries and historians: Britain’s secret interwar bar on Communists in government service. Between 1927 and 1946, thousands of unwitting industrial workers suspected of Communist sympathies were investigated, and many were fired or blacklisted from government employment. Contrary to popular and historical accounts, the interwar British security regime was considerably more stringent than the American one. Moreover, these security regimes were enacted by legislatures, not imposed by executive fiat, and thus reflect the peculiarities of their respective political cultures. Comparing interwar American and British surveillance and policing of Communists shows that each state developed distinctive practices that varied along a covert/overt axis: both surveillance and policing could be surreptitious or conspicuous. Publicity alerted American civil libertarians, who left a record of noisy protest for historians, while secrecy concealed state repression from British citizens and the historical record. This article calls for more comparative research on modern political policing, which can enable historians to integrate the “secret state” into larger historical narratives and provide the empirical grist to revise theoretical accounts of state surveillance and social control by scholars such as Michel Foucault and Giorgio Agamben.

Hayne Royal Commission recommendations

The recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (noted in the preceding post) are, in summary -

Banking

Consumer lending: Direct lending 

Consumer lending: Intermediated home lending 

Recommendation 1.1 – The NCCP Act 

The NCCP Act should not be amended to alter the obligation to assess unsuitability. 

Recommendation 1.2 – Best interests duty 

The law should be amended to provide that, when acting in connection with home lending, mortgage brokers must act in the best interests of the intending borrower. The obligation should be a civil penalty provision. 

Recommendation 1.3 – Mortgage broker remuneration 

The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending. Changes in brokers’ remuneration should be made over a period of two or three years, by first prohibiting lenders from paying trail commission to mortgage brokers in respect of new loans, then prohibiting lenders from paying other commissions to mortgage brokers.   

Consumer lending: Intermediated lending for vehicles and other consumer goods 

Recommendation 1.4 – Establishment of working group 

A Treasury-led working group should be established to monitor and, if necessary, adjust the remuneration model referred to in Recommendation 1.3, and any fee that lenders should be required to charge to achieve a level playing field, in response to market changes. 

Recommendation 1.5 – Mortgage brokers as financial advisers 

After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients. 

Recommendation 1.6 – Misconduct by mortgage brokers 

ACL holders should: • be bound by information-sharing and reporting obligations in respect of mortgage brokers similar to those referred to in Recommendations 2.7 and 2.8 for financial advisers; and • take the same steps in response to detecting misconduct of a mortgage broker as those referred to in Recommendation 2.9 for financial advisers. 

Recommendation 1.7 – Removal of point-of-sale exemption 

The exemption of retail dealers from the operation of the NCCP Act should be abolished. 

Access to banking services 

Recommendation 1.8 – Amending the Banking Code 

The ABA should amend the Banking Code to provide that: • banks will work with customers: • – who live in remote areas; or • – who are not adept in using English, to identify a suitable way for those customers to access and undertake their banking; • if a customer is having difficulty proving his or her identity, and tells the bank that he or she identifies as an Aboriginal or Torres Strait Islander person, the bank will follow AUSTRAC’s guidance about the identification and verification of persons of Aboriginal or Torres Strait Islander heritage; • without prior express agreement with the customer, banks will not allow informal overdrafts on basic accounts; and • banks will not charge dishonour fees on basic accounts. Lending to small and medium enterprises 

Recommendation 1.9 – No extension of the NCCP Act 

The NCCP Act should not be amended to extend its operation to lending to small businesses. 

Recommendation 1.10 – Definition of ‘small business’ 

The ABA should amend the definition of ‘small business’ in the Banking Code so that the Code applies to any business or group employing fewer than 100 full-time equivalent employees, where the loan applied for is less than $5 million. 

Recommendation 1.11 – Farm debt mediation 

A national scheme of farm debt mediation should be enacted. 

Recommendation 1.12 – Valuations of land 

APRA should amend Prudential Standard APS 220 to: • require that internal appraisals of the value of land taken or to be taken as security should be independent of loan origination, loan processing and loan decision processes; and • provide for valuation of agricultural land in a manner that will recognise, to the extent possible: • – the likelihood of external events affecting its realisable value; and • – the time that may be taken to realise the land at a reasonable price affecting its realisable value. 

Recommendation 1.13 – Charging default interest 

The ABA should amend the Banking Code to provide that, while a declaration remains in force, banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster. 

Recommendation 1.14 – Distressed agricultural loans 

When dealing with distressed agricultural loans, banks should: • ensure that those loans are managed by experienced agricultural bankers; • offer farm debt mediation as soon as a loan is classified as distressed; • manage every distressed loan on the footing that working out will be the best outcome for bank and borrower, and enforcement the worst; • recognise that appointment of receivers or any other form of external administrator is a remedy of last resort; and • cease charging default interest when there is no realistic prospect of recovering the amount charged. 

Enforceability of industry codes 

Recommendation 1.15 – Enforceable code provisions 

The law should be amended to provide: • that ASIC’s power to approve codes of conduct extends to codes relating to all APRA-regulated institutions and ACL holders; • that industry codes of conduct approved by ASIC may include ‘enforceable code provisions’, which are provisions in respect of which a contravention will constitute a breach of the law; • that ASIC may take into consideration whether particular provisions of an industry code of conduct have been designated as ‘enforceable code provisions’ in determining whether to approve a code; • for remedies, modelled on those now set out in Part VI of the Competition and Consumer Act, for breach of an ‘enforceable code provision’; and • for the establishment and imposition of mandatory financial services industry codes. 

Recommendation 1.16 – 2019 Banking Code 

In respect of the Banking Code that ASIC approved in 2018, the ABA and ASIC should take all necessary steps to have the provisions that govern the terms of the contract made or to be made between the bank and the customer or guarantor designated as ‘enforceable code provisions’. 

Processing and administrative errors 

Recommendation 1.17 – BEAR product responsibility 

After appropriate consultation, APRA should determine for the purposes of section 37BA(2)(b) of the Banking Act, a responsibility, within each ADI subject to the BEAR, for all steps in the design, delivery and maintenance of all products offered to customers by the ADI and any necessary remediation of customers in respect of any of those products. 

 Financial advice 

Ongoing fee arrangements 

Lack of independence 

Recommendation 2.1 – Annual renewal and payment The law should be amended to provide that ongoing fee arrangements (whenever made): • must be renewed annually by the client; • must record in writing each year the services that the client will be entitled to receive and the total of the fees that are to be charged; and • may neither permit nor require payment of fees from any account held for or on behalf of the client except on the client’s express written authority to the entity that conducts that account given at, or immediately after, the latest renewal of the ongoing fee arrangement. 

Recommendation 2.2 – Disclosure of lack of independence 

The law should be amended to require that a financial adviser who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words or expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’) must, before providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased. 

Quality of advice 

Recommendation 2.3 – Review of measures to improve the quality of advice 

In three years’ time, there should be a review by Government in consultation with ASIC of the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice. The review should preferably be completed by 30 June 2022, but no later than 31 December 2022. Among other things, that review should consider whether it is necessary to retain the ‘safe harbour’ provision in section 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed. 

Conflicted remuneration 

Recommendation 2.4 – Grandfathered commissions 

Grandfathering provisions for conflicted remuneration should be repealed as soon as is reasonably practicable. 

Recommendation 2.5 – Life risk insurance commissions 

When ASIC conducts its review of conflicted remuneration relating to life risk insurance products and the operation of the ASIC Corporations (Life Insurance Commissions) Instrument 2017/510, ASIC should consider further reducing the cap on commissions in respect of life risk insurance products. Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero. Professional discipline of financial advisers 

Recommendation 2.6 – General insurance and consumer credit insurance commissions 

The review referred to in Recommendation 2.3 should also consider whether each remaining exemption to the ban on conflicted remuneration remains justified, including: • the exemptions for general insurance products and consumer credit insurance products; and • the exemptions for non-monetary benefits set out in section 963C of the Corporations Act. 

Recommendation 2.7 – Reference checking and information sharing 

All AFSL holders should be required, as a condition of their licence, to give effect to reference checking and information-sharing protocols for financial advisers, to the same effect as now provided by the ABA in its ‘Financial Advice – Recruitment and Termination Reference Checking and Information Sharing Protocol’. 

Recommendation 2.8 – Reporting compliance concerns 

All AFSL holders should be required, as a condition of their licence, to report ‘serious compliance concerns’ about individual financial advisers to ASIC on a quarterly basis. 

Recommendation 2.9 – Misconduct by financial advisers 

All AFSL holders should be required, as a condition of their licence, to take the following steps when they detect that a financial adviser has engaged in misconduct in respect of financial advice given to a retail client (whether by giving inappropriate advice or otherwise): • make whatever inquiries are reasonably necessary to determine the nature and full extent of the adviser’s misconduct; and • where there is sufficient information to suggest that an adviser has engaged in misconduct, tell affected clients and remediate those clients promptly. 

Recommendation 2.10 – A new disciplinary system 

The law should be amended to establish a new disciplinary system for financial advisers that: • requires all financial advisers who provide personal financial advice to retail clients to be registered; • provides for a single, central, disciplinary body; • requires AFSL holders to report ‘serious compliance concerns’ to the disciplinary body; and • allows clients and other stakeholders to report information about the conduct of financial advisers to the disciplinary body. 

Superannuation

3.3 Superannuation Trustees’ obligations 

Recommendation 3.1 – No other role or office 

The trustee of an RSE should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund. 

‘Selling’ superannuation 

Recommendation 3.2 – No deducting advice fees from MySuper accounts 

Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited. 

Recommendation 3.3 – Limitations on deducting advice fees from choice accounts 

Deduction of any advice fee (other than for intra-fund advice) from superannuation accounts other than MySuper accounts should be prohibited unless the requirements about annual renewal, prior written identification of service and provision of the client’s express written authority set out in Recommendation 2.1 in connection with ongoing fee arrangements are met. 

Recommendation 3.4 – No hawking 

Hawking of superannuation products should be prohibited. That is, the unsolicited offer or sale of superannuation should be prohibited except to those who are not retail clients and except for offers made under an eligible employee share scheme. The law should be amended to make clear that contact with a person during which one kind of product is offered is unsolicited unless the person attended the meeting, made or received the telephone call, or initiated the contact for the express purpose of inquiring about, discussing or entering into negotiations in relation to the offer of that kind of product. Nominating default funds 

Recommendation 3.5 – One default account 

A person should have only one default account. To that end, machinery should be developed for ‘stapling’ a person to a single default account. 

Recommendation 3.6 – No treating of employers 

Section 68A of the SIS Act should be amended to prohibit trustees of a regulated superannuation fund, and associates of a trustee, doing any of the acts specified in section 68A(1)(a), (b) or (c) where the act may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund or having one or more employees of the recipient apply or agree to become members of the fund. The provision should be a civil penalty provision enforceable by ASIC. 

Regulation 

Recommendation 3.7 – Civil penalties for breach of covenants and like obligations 

Breach of the trustee’s covenants set out in section 52 or obligations set out in section 29VN, or the director’s covenants set out in section 52A or obligations set out in section 29VO of the SIS Act should be enforceable by action for civil penalty. 

Recommendation 3.8 – Adjustment of APRA and ASIC’s roles 

The roles of APRA and ASIC with respect to superannuation should be adjusted, as referred to in Recommendation 6.3. 

Recommendation 3.9 – Accountability regime 

Over time, provisions modelled on the BEAR should be extended to all RSE licensees, as referred to in Recommendation 6.8.

 Insurance 

Manner of sale and types of products sold: Hawking 

Specific steps in respect of particular products: Add-on insurance 

Recommendation 4.1 – No hawking of insurance 

Consistently with Recommendation 3.4, which prohibits the hawking of superannuation products, hawking of insurance products should be prohibited. 

Recommendation 4.2 – Removing the exemptions for funeral expenses policies 

The law should be amended to: • remove the exclusion of funeral expenses policies from the definition of ‘financial product’; and • put beyond doubt that the consumer protection provisions of the ASIC Act apply to funeral expenses policies. 

Recommendation 4.3 – Deferred sales model for add-on insurance 

A Treasury-led working group should develop an industry-wide deferred sales model for the sale of any add-on insurance products (except policies of comprehensive motor insurance). The model should be implemented as soon as is reasonably practicable. 

Recommendation 4.4 – Cap on commissions 

ASIC should impose a cap on the amount of commission that may be paid to vehicle dealers in relation to the sale of add-on insurance products. 

Pre-contractual disclosure and representations 

Recommendation 4.5 – Duty to take reasonable care not to make a misrepresentation to an insurer 

Part IV of the Insurance Contracts Act should be amended, for consumer insurance contracts, to replace the duty of disclosure with a duty to take reasonable care not to make a misrepresentation to an insurer (and to make any necessary consequential amendments to the remedial provisions contained in Division 3).   

Recommendation 4.6 – Avoidance of life insurance contracts 

Section 29(3) of the Insurance Contracts Act should be amended so that an insurer may only avoid a contract of life insurance on the basis of non-disclosure or misrepresentation if it can show that it would not have entered into a contract on any terms. Unfair contract terms 

Recommendation 4.7 – Application of unfair contract terms provisions to insurance contracts 

The unfair contract terms provisions now set out in the ASIC Act should apply to insurance contracts regulated by the Insurance Contracts Act. The provisions should be amended to provide a definition of the ‘main subject matter’ of an insurance contract as the terms of the contract that describe what is being insured. The duty of utmost good faith contained in section 13 of the Insurance Contracts Act should operate independently of the unfair contract terms provisions. Claims handling Status of industry codes 

Recommendation 4.8 – Removal of claims handling exemption 

The handling and settlement of insurance claims, or potential insurance claims, should no longer be excluded from the definition of ‘financial service’. 

Recommendation 4.9 – Enforceable code provisions 

As referred to in Recommendation 1.15, the law should be amended to provide for enforceable provisions of industry codes and for the establishment and imposition of mandatory industry codes. In respect of the Life Insurance Code of Practice, the Insurance in Superannuation Voluntary Code and the General Insurance Code of Practice, the Financial Services Council, the Insurance Council of Australia and ASIC should take all necessary steps, by 30 June 2021, to have the provisions of those codes that govern the terms of the contract made or to be made between the insurer and the policyholder designated as ‘enforceable code provisions’. 

Recommendation 4.10 – Extension of the sanctions power 

The Financial Services Council and the Insurance Council of Australia should amend section 13.10 of the Life Insurance Code of Practice and section 13.11 of the General Insurance Code of Practice to empower (as the case requires) the Life Code Compliance Committee or the Code Governance Committee to impose sanctions on a subscriber that has breached the applicable Code. 

External dispute resolution 

Recommendation 4.11 – Co-operation with AFCA 

Section 912A of the Corporations Act should be amended to require that AFSL holders take reasonable steps to co-operate with AFCA in its resolution of particular disputes, including, in particular, by making available to AFCA all relevant documents and records relating to issues in dispute. 

Recommendation 4.12 – Accountability regime 

Over time, provisions modelled on the BEAR should be extended to all APRA-regulated insurers, as referred to in Recommendation 6.8. 

Group life policies 

Recommendation 4.13 – Universal terms review 

Treasury, in consultation with industry, should determine the practicability, and likely pricing effects, of legislating universal key definitions, terms and exclusions for default MySuper group life policies. 

Recommendation 4.14 – Additional scrutiny for related party engagements 

APRA should amend Prudential Standard SPS 250 to require RSE licensees that engage a related party to provide group life insurance, or who enter into a contract, arrangement or understanding with a life insurer by which the insurer is given a priority or privilege in connection with the provision of life insurance, to obtain and provide to APRA within a fixed time, independent certification that the arrangements and policies entered into are in the best interests of members and otherwise satisfy legal and regulatory requirements. 

Recommendation 4.15 – Status attribution to be fair and reasonable 

APRA should amend Prudential Standard SPS 250 to require RSE licensees to be satisfied that the rules by which a particular status is attributed to a member in connection with insurance are fair and reasonable. 

 Culture, governance and remuneration 

Remuneration 

Recommendation 5.1 – Supervision of remuneration – principles, standards and guidance   

In conducting prudential supervision of remuneration systems, and revising its prudential standards and guidance about remuneration, APRA should give effect to the principles, standards and guidance set out in the Financial Stability Board’s publications concerning sound compensation principles and practices. Recommendations 5.2 and 5.3 explain and amplify aspects of this Recommendation. 

Recommendation 5.2 – Supervision of remuneration – aims 

In conducting prudential supervision of the design and implementation of remuneration systems, and revising its prudential standards and guidance about remuneration, APRA should have, as one of its aims, the sound management by APRA-regulated institutions of not only financial risk but also misconduct, compliance and other non-financial risks. 

Recommendation 5.3 – Revised prudential standards and guidance 

In revising its prudential standards and guidance about the design and implementation of remuneration systems, APRA should: • require APRA-regulated institutions to design their remuneration systems to encourage sound management of non-financial risks, and to reduce the risk of misconduct; • require the board of an APRA-regulated institution (whether through its remuneration committee or otherwise) to make regular assessments of the effectiveness of the remuneration system in encouraging sound management of non-financial risks, and reducing the risk of misconduct; • set limits on the use of financial metrics in connection with long-term variable remuneration; • require APRA-regulated institutions to provide for the entity, in appropriate circumstances, to claw back remuneration that has vested; and • encourage APRA-regulated institutions to improve the quality of information being provided to boards and their committees about risk management performance and remuneration decisions. 

Recommendation 5.4 – Remuneration of front line staff 

All financial services entities should review at least once each year the design and implementation of their remuneration systems for front line staff to ensure that the design and implementation of those systems focus on not only what staff do, but also how they do it. 

Recommendation 5.5 – The Sedgwick Review 

Banks should implement fully the recommendations of the Sedgwick Review. 

Culture and governance 

Recommendation 5.6 – Changing culture and governance 

All financial services entities should, as often as reasonably possible, take proper steps to: • assess the entity’s culture and its governance; • identify any problems with that culture and governance; • deal with those problems; and • determine whether the changes it has made have been effective. 

Recommendation 5.7 – Supervision of culture and governance 

In conducting its prudential supervision of APRA-regulated institutions and in revising its prudential standards and guidance, APRA should: • build a supervisory program focused on building culture that will mitigate the risk of misconduct; • use a risk-based approach to its reviews; • assess the cultural drivers of misconduct in entities; and • encourage entities to give proper attention to sound management of conduct risk and improving entity governance. 

 Regulators Twin peaks 

ASIC’s enforcement practices 

Recommendation 6.1 – Retain twin peaks 

The ‘twin peaks’ model of financial regulation should be retained. 

Recommendation 6.2 – ASIC’s approach to enforcement 

ASIC should adopt an approach to enforcement that: • takes, as its starting point, the question of whether a court should determine the consequences of a contravention; • recognises that infringement notices should principally be used in respect of administrative failings by entities, will rarely be appropriate for provisions that require an evaluative judgment and, beyond purely administrative failings, will rarely be an appropriate enforcement tool where the infringing party is a large corporation; • recognises the relevance and importance of general and specific deterrence in deciding whether to accept an enforceable undertaking, and the utility in obtaining admissions in enforceable undertakings; and • separates, as much as possible, enforcement staff from non- enforcement related contact with regulated entities. 

Superannuation: Conduct regulation 

Recommendation 6.3 – General principles for co-regulation 

The roles of APRA and ASIC in relation to superannuation should be adjusted to accord with the general principles that: • APRA, as the prudential regulator for superannuation, is responsible for establishing and enforcing Prudential Standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities APRA supervises are met within a stable, efficient and competitive financial system; and • as the conduct and disclosure regulator, ASIC’s role in superannuation primarily concerns the relationship between RSE licensees and individual consumers. Effect should be given to these principles by taking the steps described in Recommendations 6.4 and 6.5. 

Recommendation 6.4 – ASIC as conduct regulator 

Without limiting any powers APRA currently has under the SIS Act, ASIC should be given the power to enforce all provisions in the SIS Act that are, or will become, civil penalty provisions or otherwise give rise to a cause of action against an RSE licensee or director for conduct that may harm a consumer. There should be co-regulation by APRA and ASIC of these provisions. 

The BEAR: Co-regulation 

Recommendation 6.5 – APRA to retain functions 

APRA should retain its current functions, including responsibility for the licensing and supervision of RSE licensees and the powers and functions that come with it, including any power to issue directions that APRA presently has or is to be given. 

Recommendation 6.6 – Joint administration of the BEAR 

ASIC and APRA should jointly administer the BEAR. ASIC should be charged with overseeing those parts of Divisions 1, 2 and 3 of Part IIAA of the Banking Act that concern consumer protection and market conduct matters. APRA should be charged with overseeing the prudential aspects of Part IIAA. 

Recommendation 6.7 – Statutory amendments 

The obligations in sections 37C and 37CA of the Banking Act should be amended to make clear that an ADI and accountable person must deal with APRA and ASIC (as the case may be) in an open, constructive and co-operative way. Practical amendments should be made to provisions such as section 37K and section 37G(1) so as to facilitate joint administration. 

Recommendation 6.8 – Extending the BEAR 

Over time, provisions modelled on the BEAR should be extended to all APRA-regulated financial services institutions. APRA and ASIC should jointly administer those new provisions. 

Co-ordination and information sharing 

Recommendation 6.9 – Statutory obligation to co-operate 

The law should be amended to oblige each of APRA and ASIC to: • co-operate with the other; • share information to the maximum extent practicable; and • notify the other whenever it forms the belief that a breach in respect of which the other has enforcement responsibility may have occurred. 

Recommendation 6.10 – Co-operation memorandum  

ASIC and APRA should prepare and maintain a joint memorandum setting out how they intend to comply with their statutory obligation to co-operate. The memorandum should be reviewed biennially and each of ASIC and APRA should report each year on the operation of and steps taken under it in its annual report. 

Governance 

Recommendation 6.11 – Formalising meeting procedure 

The ASIC Act should be amended to include provisions substantially similar to those set out in sections 27–32 of the APRA Act – dealing with the times and places of Commissioner meetings, the quorum required, who is to preside, how voting is to occur and the passing of resolutions without meetings. 

Recommendation 6.12 – Application of the BEAR to regulators 

In a manner agreed with the external oversight body (the establishment of which is the subject of Recommendation 6.14 below) each of APRA and ASIC should internally formulate and apply to its own management accountability principles of the kind established by the BEAR. 

Recommendation 6.13 – Regular capability reviews 

APRA and ASIC should each be subject to at least quadrennial capability reviews. A capability review should be undertaken for APRA as soon as is reasonably practicable. 

Oversight 

Recommendation 6.14 – A new oversight authority 

A new oversight authority for APRA and ASIC, independent of Government, should be established by legislation to assess the effectiveness of each regulator in discharging its functions and meeting its statutory objects. The authority should be comprised of three part-time members and staffed by a permanent secretariat. It should be required to report to the Minister in respect of each regulator at least biennially. 

 Other important steps

External dispute resolution 

Recommendation 7.1 – Compensation scheme of last resort 

The three principal recommendations to establish a compensation scheme of last resort made by the panel appointed by government to review external dispute and complaints arrangements made in its supplementary final report should be carried into effect. 

ASIC Enforcement Review Taskforce Government Response 

Recommendation 7.2 – Implementation of recommendations 

The recommendations of the ASIC Enforcement Review Taskforce made in December 2017 that relate to self-reporting of contraventions by financial services and credit licensees should be carried into effect. Simplification so that the law’s intent is met 

Recommendation 7.3 – Exceptions and qualifications 

As far as possible, exceptions and qualifications to generally applicable norms of conduct in legislation governing financial services entities should be eliminated. 

Recommendation 7.4 – Fundamental norms 

As far as possible, legislation governing financial services entities should identify expressly what fundamental norms of behaviour are being pursued when particular and detailed rules are made about a particular subject matter.