By Adrian Edwards
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Commission) will be remembered for the displays or drama and sensationalism.
Some of the headlines featured fainting executives under cross examination, executives admitting wrongdoing and confirmation of burgeoning executive salaries. The real drama was the hundreds of consumer stories relating to the misery caused by the alleged misconduct and subsequent arrogance of management when faced by these stories.
In the interim report, the Commission pointed out that the reason in most cases for the misconduct was;
“…. the answer seems to be greed – the pursuit of short-term profit at the expense of basic standards of honesty…. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales…. When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done. The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court…”
The Commission, in the final report, delivered a damming admonishment of the banks, fund managers, superannuation funds and insurance companies. I will refer to the Banks for ease of reference, but it must be understood that the comments reference the entire industry even when the word Bank is used.
The Commission made key observations summarising the dire state of the Australian Financial Services industry and typified the industry based broadly on greed, non-compliance, limited accountability and failed regulatory responses.
Several commentators believe that the Royal Commission missed its objective, in that it did not address the relevant issues as to the misconduct with reference to key issues that industry and consumers expected to be addressed.
Globally the laws that govern both national and international banking are constantly subjected to evolution. It is a fundamental that banking regulation should be able to be adapted to specific macro and micro circumstances that may arise.
The central question is whether the Royal Commission achieved its purpose in the light of the disclosures and enquiries but more importantly whether the recommendations are in keeping with global macro and micro developments.
Definition of Banking, Structure and Products
The Commission did not analyse or determine the risk that is inherent in integrated services offered by the Banks to customers and consumers.
In my view the Commission should have called for the redefining of the term ‘Bank’ and ‘Banking’ to distinguish exactly in whose interest the Bank is supposed to act. The Australian concept has so far departed from the Common Law definition that it is now a market rather than a “Bank” following the deregulation of the definition between savings and trading banks in the 1980’s.
Ellinger  describes the principles that the courts have laid down that identify and define a bank and banking business at common law. Importantly these principles have been enunciated at different times in the evolution of banking business and it is submitted may have to be tempered with a further reading of the statutory provisions and the ever-changing face of the banking environment.
The meaning of ‘banking business’ is fluid and changes from time to time as was borne out in the case of Wood v Martin . Arguably the fact that we are dealing with a globalised economy and incredible technological advances in information technology necessitates this flexibility.
Ellinger  points out to the fact that the Australian Courts proffer a view that the activity of taking deposits from the public with the view of on-lending same would be viewed as banking and contrary to the common Law do not hold the relationship to per se have a fiduciary origin or basis.
The Commission’s view of the relationship seems to suggest that the relationship between banker and customer is one of Trust. However, the case law assumes a different proposition as advanced by Ellinger, that requires there to be reliance, misleading and deceptive conduct or other grounds establishing a positive duty on the Bank for there to be a fiduciary duty.
Without the correction of the perception and definition the Australian Bank structures permit the Bank to issue create products and sell these to retail consumers, which marketing, promotion and sale may ignore knowledge of the consumer financial and other circumstances.
The question as to whether this amounts to an imbalance in the trust relationship has been left open by the Commission. The nature of the relationship requires a review of the evolution away from the Common Law to the contractual model as the basis of the relationship rather than assuming that the Law has crystallised the definition.
The Commission did not deal with the potential limitation of structures, services or departments that may cause harm to the relationship assuming that it is somehow related back to the Common Law definition. In the end the Commission failed to confirm or redefine the nature of the relationship between the Bank and its customers.
The Commission failed to address the pricing of ‘banking products’ that are strictly not within the definition of “banking” products and services to retail investors, such as the issuance of credit cards with interest rates in excess of 20% with punitive terms, fees and costs.
Clearly the risk of these type of products, affect a greater part of the Australian retail market. The ability to issue credit cards, or other products, on this basis is inherently tied into the structure of the bank.
The Banks are permitted to have departments or associations that permit and allows knowledge about the consumers to transcend departments and leads to cross selling of products and services and due to the integration of the Banks these profit centres are often remunerated upon these sales.
The ability of the Bank to extend credit and increase limits with almost routine disregard of the National Consumer Credit Protection Act 2009 (NCCP Act) safeguards was left untouched. It is submitted that the redefinition of the term “Bank” in this environment needs to be addressed as a point of departure.
That in itself will assist with the limitation of what products and services may be offered to unsuspecting consumers and in who’s interest the Bank acts.
The Mortgage Industry
Criticism was reserved for mortgage brokers and the commissions paid to them by the banks for mortgage broking and advice services. Largely the report ignores the important role that mortgage brokers play in the retail home loan environment.
It is assumed that the existing methodology that is employed by mortgage brokers lends itself to abuses. In an extraordinary oversight the report does not deal with the issues relating to the Productivity Commission or the ASIC’s recommendations as to the mortgage broking industry.
Both the Productivity Commission and ASIC viewed the mortgage brokering industry as vital and necessary for creating competitive tension between banks, the inertia is that if you remove the commission-based system that brokers will not be able to provide continued services to consumers.
The report failed to acknowledge the fact that consumers accept that the payment of commissions by the banks is a preferred method of broker remuneration rather than a fee for service model. In fact, the recommendations if wholly implemented may give rise to the collapse of the industry.
The Commission recommends that mortgage brokers will be subjected to a best interest’s duty similar to that imposed on financial planners and that a wholesale ban will apply to trail commissions from July 2020. This suggested approach ignores the industry and mortgage broker accreditation and loyalty based on the approved products regime.
The NCCP Act provides the requisite safeguards as was implemented in 2010 and provides a framework responsible lending protection.
The Department of Treasury provided a background submission to the Commission relating to the reasons why they were of the opinion that the best interest duty was not sustainable in relation to mortgage brokers and stated that;
“…268. Applying a positive duty to brokers would not, however, necessarily be best achieved by attempting to replicate the financial advice best interests duty given differences between brokers and financial advisers, and the existence of responsible lending and other obligations. If it was to be introduced, careful consideration would again need to be given to an approach that mitigates conflicts of interest risks while avoiding unnecessary compliance costs, and to what extent it can rely on industry efforts or providing ASIC with some discretion or rulemaking power…”.
However, the NCCP Act and the Future of Financial Advice recommendations were not cross referenced or distinguished by the Commission, as to the application of the actual subject matter and or legal treatment of each activity.
The basis of each activity was thus not analysed or understood and will lead to potential collapse of the mortgage industry. I deal with the potential fallout at the conclusion, suffice to say that the housing market will dictate whether this distinction has received adequate analysis.
The Corporate Governance Culture or lack of it?
The report does not address the systemic issues that appear inherent in the banking culture that has led to the misconduct.
The Commission states that;
“… First, in almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business. Providing a service to customers was relegated to second place. Sales became all important. Those who dealt with customers became sellers. And the confusion of roles extended well beyond front line service staff. Advisers became sellers and sellers became advisers…”
The concept of culture in the financial services sector has always been an issue of competing interests, this really occurred when the industry was deregulated in the 1980’s.
The view of the Commission is that the culture of the Banks is similar to the credo of the greedy stockbroker in the Hollywood film “Wall Street”. Gordon Gecko, states;
“…greed is good, greed is right, greed works…”.
It is doubtful that the directors and management of the Banks would instruct their staff in exactly the same blatant way as Gordon Gecko did, but the practices of paying bonus arrangements, tying performance to sales, hidden commission and adverse conduct suggest that the mantra existed in the hearts of the industry and negated a Corporate Governance Culture.
The Commission expressed this as follows;
“…too little attention has been given to the evident connections between compensation, incentive and remuneration practices and regulatory, compliance and conduct risks…”
The problem for the Commission is that they cannot dictate culture that is something that arises by leadership and application of best practices and standards.
The report failed to address the link between culture, compliance and corporate governance, the recommendations seem to be silent on what should be expected of the industry in this regard.
Financial literacy and Advice
While the report addresses the financial literacy of the broker, advisor and planner, it is noteworthy that financial literacy in Australia is limited to basic education relating to budgets and salary management.
Even if the educational requirement for the industry is adapted how do you bridge the information to the consumer, without them understanding the basics.
The answer is you penalise the individual by assuming they cannot gather a modicum of financial literacy to understand the impact of their decisions. The Australian Financial Literacy Board is a non-statutory body that provides independent and strategic guidance to Government and ASIC on financial capability, the general question is how many consumers, schools or tertiary education bodies know of the board? I would submit that the education of consumers lacks behind the rest of the world.
If financial literacy is not on par with other Western Economies then one must assume that the Australian population readily seeks and accept advice from financial planners and is prepared to pay for that advice. Unfortunately, this is not the case and the industry has observed that there is a disconnect between the level of financial literacy and the will of the general population to seek financial advice.
This seems to have largely escalated due to the Future of Financial Advice recommendations that were implemented in 2013.
The major Banks countered the problem by building the advice fee into the sale of managed products, insurance and other products which in turn raised the best interest question. Jointly with the Royal Commission the Future of Financial Advice Reforms have largely led to a contracted financial planning industry with little or no players left to advise or educate consumers.
The Commission missed the point as to the commissions paid by product manufacturers to financial advisers and has recommended that all commissions cease.
Superannuation Industry funds
The Productivity Commission stressed that there were potential issues in relation to Industry funds opposed to retail funds in the superannuation funds industry. The Commission was conspicuously silent about the link between industry funds, the unions and political parties. The retail funds have asserted that the industry funds claim to better results are obscured by sub fund results.
The further political link and payments from industry funds to the unions is confirmed by the Australian Electoral Commission.
According to the Electoral Commission disclosures payments in excess of 53 Million Dollars were made to the Unions by Industry Funds  from 2006 to 2016. In addition, while the industry funds controlled a great deal of the market, they spent 37 million dollars in 2016 to promote themselves in the media this was 54% more than their non-industry rivals, there is little or no value of the expenditure to existing members.
CBUS Industry Fund was highlighted by Finance Minister Kelly O’Dwyer as requiring scrutiny due to the fact that CBUS, has three CFMEU nominated board members and its mandate has been influenced by the CFMEU agenda. The Commission did not require CBUS to attend or to explain policies in regard to methods used to value unlisted assets, which carry a higher weight in industry fund portfolios than in retail funds.
The role of union members as directors of the boards of industry funds and the extent to which their board fees are paid to their unions and ultimately to assist the Labour Party, was overlooked.
This appears to be an area of concern as the retail industry fear about mispricing and political interference may affect thousand of retail superannuants in the future.
The Regulator and Disciplinary Role
The Commission has recommended that a new independent oversight authority be promulgated to check that each regulator meets its statutory obligations.
However, the Commission did not delve into what the final form of that new oversight body ought to look like other than to suggest that it has staffed by a permanent secretariat and three part-time members, that will have the obligation to report to the government on a biennial basis.
The Commission recommended that registration and disciplinary body be created for financial services providers. The Commission did not provide any recommendations on the registration and discipline model for financial service providers and left this to the government to resolve with industry.
What is glaringly missing from both the new oversight body and the registration and disciplinary model relating to financial service providers is that “Funding” is not mentioned.
ASIC moved to the industry funding model after consultation the view is that these new bodies should not be funded by industry but rather by taxpayers and treated as a serious quasi-judicial forum; the registration of an adviser is a matter of law rather than an industry body membership.
As I mentioned in the opening paragraph the failing of the banking and financial services system affected ordinary consumers that were subject to abhorrent practices and unconscionable behaviour by institutions that the consumers believed were acting in their best interest.
I fear that all the recommendations if implemented without considering the aspects raised in this paper amounts to mere layering of legislation. There needs to be an alignment of the recommendations with international standards and procedures and that cannot be achieved without the adjustment of the definition of “Banking” and related services. The reality is that the harmonisation of these concepts is required in order to ensure the effectiveness of any regulatory response and ultimately to ensure healthy competition.
The Commission did not in any way compare the Australian landscape with the International counterparts, the Commission failed to review the recommendations of the Financial Crisis Inquiry Commission  that found that in the United States (US) the layered regulations and the ‘failure to regulate’ caused the collapse not the extent of existing regulations this was echoed in the Turner report in the United Kingdom (UK).
Levin confirms this in the sense that all the systems were in place with robust structures, regulation and mechanisms but that the lack of action represents the unwillingness of the policy apparatus to adapt to a dynamic, innovating financial system in that light the GFC was the subject of a systemic regulatory failure.
The failing of the steps taken by the US and UK lead to the age-old dilemma that countries tend to regulate in a haphazard way following challenges just to abolish the legislation when the booms occur.
This was evident with the repeal of the Glass Steagall Act in the US, that brought about fractured and overtly dangerous consequences for the international prudential environment.
Australia does not operate in isolation; the standards and recommendations may not only make it non-competitive from a national perspective but also from an ever-globalising international market.
The real test is then whether the safeguards that have been recommended remain in place when our banking and financial services are not competitive in an international environment or whether severe liberalisation is needed to ensure that markets are not restrained.
 Hayne, Kenneth (28 September 2018). “Interim Report: Executive summary” (PDF). Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Commonwealth of Australia. available at<https://financialservices.royalcommission.gov.au/Pages/default.aspx> accessed on 6 February 2019.
 Hayne, Kenneth (1 February 2019). “Final Report: Case Studies” (PDF). Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. ISBN 978-1-920838-65-2. 2019 available at <https://financialservices.royalcommission.gov.au/Pages/default.aspx>, Accessed on 6 February 2019,.
 P Wallbank, “Bank advertising escapes criticism in the financial services royal commission”, Mumbrella, , 5 February 2019, Available online at <https://mumbrella.com.au/bank-advertising-escapes-criticism-in-the-financial-services-royal-commission-563672> Accessed on 6 February 2019; M Farrer, “The banks’ most dangerous foe is not the royal commission – it’s the housing market, The Guardian, Available online at < https://www.theguardian.com/commentisfree/2019/feb/06/the-banks-most-dangerous-foe-is-not-the-royal-commission-its-the-housing-market> Accessed on 6 February 2019
 V. Raja, ‘A Critical Evaluation of the UK Banking Act 2009, Now Seen as the Benchmark, Post the Financial Crisis, for Dealing with Failing Banks’, 24 May 2010, Available online at <http://ssrn.com/abstract=1595303> Accessed on 6 February 2019
 G de Brouwer, Deregulation and Open Capital Markets: The Australian Experience Before Wallis, A Journal of Policy Analysis and Reform Vol. 6, No. 1 (1999), pp. 51-68
 E.P. Ellinger, E. Lomnicka & R.J.A. Hooley Ellinger’s Modern Banking Law, 4th edition, Oxford University Press, 2006 at p 69
 Woods v Martins Bank Ltd  1 QB 55
 R. Gropp and S. Corvoisier, ‘Contestability, Technology and Banking’ October 2001, EFA 2002 Berlin Meetings Presented Paper, Available online at <http://ssrn.com/abstract=299404> Accessed on 4 February 2019
 E.P. Ellinger, E. Lomnicka & R.J.A. Hooley Ellinger’s Modern Banking Law (n6) at page 70
 Australian Independent Distributors Ltd v Winter  112 CLR 443
 James v Australia and New Zealand Banking Group Ltd (1986) 64 ALR 347 (Fed Crt, Toohey J), Shaddock & Associates Pty Ltd v Council of the City of Paramatta (1981) 55 ALJR 713
 Productivity Commission, “Competition in the Australian Financial System”, Report 89, (2018), Available at https://www.pc.gov.au/inquiries/completed/financial-system/report/financial-system.pdf, Accessed on 6 February 2019
 Australian Securities and Investment Commission, Report 516: “Review of mortgage broker remuneration”. (20017), Available at: http://asic.gov.au/regulatory-resources/find-adocument/reports/rep-516-review-of-mortgage-broker-remuneration/ Accessed on 6 February 2019
 Momentum Intelligence, “Consumer Access to Mortgages Report”, (2018), Available at https://www.momentumintelligence.com.au/files/Consumer_access_to_mortgages_report.pdf, Accessed on 7 February 2019,
 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Background Paper 24, prepared by the Australian Treasury, 13 July 2018, p. 64, Available At <https://financialservices.royalcommission.gov.au/publications/Documents/Treasury-background-paper-24.pdf> . Accessed on 7 February 2019
 M Farrer, “The banks’ most dangerous foe is not the royal commission – it’s the housing market, The Guardian (n5)
 Hayne, Kenneth (1 February 2019). “Final Report: Case Studies” (PDF). Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. ISBN 978-1-920838-65-2 (n2) page 1
 JE Sturm and B Williams, “Deregulation, Entry of Foreign Banks and Bank Efficiency in Australia”, December 2002, CESifo Working Paper Series No. 816, Available at https://ssrn.com/abstract=367160, Accessed on 6 February 2019
 Hayne, Kenneth (1 February 2019). “Final Report: Case Studies” (PDF). Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. ISBN 978-1-920838-65-2 (n2) page 15
 Worthington, A. C. (2005). Financial literacy in Australia. Accounting and Finance Association of Australia and New Zealand Conference (pp. 1-23). Australia: John Wiley & Sons Australia Ltd.
 C Brycki, “Not all industry super funds are created equal”, Business Insider, 24 October 2017, Available at <https://www.businessinsider.com.au/chris-brycki-explains-why-not-all-industry-super-funds-are-created-equal-2017-10> Accessed on 7 February 2019
 The Hon Kelly O’Dwyer, “ACTU misleading and conflicted on super reforms”, 1 November 2017, Available at http://kmo.ministers.treasury.gov.au/media-release/107-2017/ , Accessed on 7 February 2019
 B Norington, “Industry super funds ‘cashed-up activists”, The Australian, 13 July 2017, Available at < https://www.menziesrc.org/super-funds-cashed-up-activists >, Accessed on 8 February 2019.
 S Patten, “Industry super funds spend $37 million on advertising”, Australian Financial Review, 7 September 2017 Available online at < https://www.afr.com/personal-finance/superannuation-and-smsfs/industry-super-funds-spend-37-million-on-advertising-20170907-gycnfi>, Accessed on 7 February 2019
 M Howes, “Why industry superannuation funds are not so super”, Australian Financial Review, 11 April 2018, Available at < https://www.afr.com/news/economy/why-industry-funds-are-not-so-super-20180411-h0ym1a>, Accessed on 7 February 2019,
 The Construction Forestry Mining and Energy Union was the biggest recipient of super fund payments, receiving $12.4m from 2007 to 2016 from First Super, CBUS and other funds. United Voice, a union representing cleaners and other low-paid workers, was paid $10.1m by Host Plus and Australian Super over the same time. The Australian Workers Union, formerly led by Bill Shorten, was paid $1.8m by Australian Super, CBUS, AustSafe and others. The Transport Workers Union received $7.1m from a single fund, TWU Super.
 Treasury, “Restoring trust in Australia’s financial system” February 2019, Treasury Website, Available at <https://static.treasury.gov.au/uploads/sites/1/2019/02/FSRC-Government-Response-1.docx>, Accessed on 9 February 2019
 Her Majesty Treasury, ‘A new approach to financial regulation: building a stronger system’ (February 2011), Presented to Parliament by the Financial Secretary to the Treasury by Command of Her Majesty February 2011, Available online at < http://www.hm-treasury.gov.uk/d/consult_newfinancial_regulation170211.pdf>, Accessed on 9 February 2019
 H. Stein, ‘Financial Liberalisation, Institutional Transformation and Credit Allocation in Developing Countries: The World Bank and the Internationalisation of Banking’, 2010, 34 Cambridge Journal of Economy 257-273 Available online <https://academic.oup.com/cje/article-abstract/34/2/257/1696432 >,Accessed on 9 February 2019