I love the sound of a royal commission. It contains two words that I find attractive: ‘royal’ and ‘commission’ (oops! not that type of commission!!).
But, what exactly is it? How does it differ from the type of inquiry that the Australian Securities and Investments Commission (ASIC) or Australian Prudential Regulation Authority (APRA) might conduct, and, more importantly, what might it mean for us in financial services?
What is it and why is it ‘Royal’?
It is an inquiry into a matter of public importance initiated by the Governor-General (GG), Sir Peter Cosgrove AK MC. The GG is the Queen’s representative (by ‘the Queen’ I mean Queen Elizabeth the Second of Australia, not Queen Elizabeth the Second of that other lot that recently lost the Ashes. Even though she’s the same person, she’s not. It’s a matter of hats, or, rather, crowns).
The Commissioner is appointed or ‘commissioned’ by the Crown by letters patent to preside over the commission of inquiry. The Crown is independent of the executive government.
Whilst the Queen acts on the advice of her ministers (the GG commissioned the inquiry on the advice of the federal executive), once commenced, the Royal Commissioner’s powers cannot be hampered by the executive government.
He is beyond politics.
The ‘terms of reference’ set out the ambit of the inquiry. Within that ambit, the Commissioner has considerable powers.
He can summons a person to appear, to give evidence or to produce documents under oath or affirmation. He can authorise the Federal Police to execute search warrants.
All these powers are provided for in the Royal Commissions Act 1902 (Cth).
We’ve been hearing argument for some time now about whether there should be a Banking Royal Commission. Well, we now have one, but it’s important to recognise that its ambit is much broader than just the banks.
In fact, it extends to financial services entities. More on that later.
The Commissioner is the Honourable Kenneth Hayne AC QC. He is required to submit his interim report by 30 September, 2018, with the final report due on 1 February, 2019.
In a previous life, I had the good fortune to be junior counsel to Ken Hayne QC before he became a judge of the Supreme Court of Victoria, then the Victorian Court of Appeal, and then the High Court of Australia (retiring in 2015); and a better mind you won’t find.
He is incisive, fair and balanced, and doesn’t miss a thing of importance.
So, what are the all-important ‘terms of reference’? In summary, the Commissioner must inquire into:
- whether any conduct by financial services entities (including by directors, officers or employees) might have:
- amounted to misconduct, and whether any criminal or other legal proceedings should be referred to a relevant agency; or
- been below community standards or expectation;
- whether the use by financial services entities of superannuation or retirement funds is not in the best interests of members, or is below community expectations;
- whether any misconduct or conduct that doesn’t meet community expectations is a result of:
- culture and governance practices of the entity or, more broadly, the industry;
- risk management, recruitment and remuneration practices of the entity or the industry;
- the effectiveness of consumer remediation mechanisms;
- the adequacy of:
- existing Commonwealth laws and policies relating to banking, superannuation and financial services;
- internal system of financial services entities;
- industry self-regulation, including codes of conduct;
- the effectiveness of the regulators; and
- whether any changes are required to the law, industry practice or the regulators to minimise misconduct.
In proposing to recommend any changes to the law, the Commissioner is directed to consider any implications for the economy generally, access to financial services and the cost of the financial services for consumers, and competition.
There is a website where members of the public can make submissions to the Commissioner. These submissions may include reports of misconduct.
It is not the purpose of the Commission to resolve disputes or to award compensation. However, if the Commissioner is sufficiently concerned about the misconduct, the terms of reference enable him to refer the misconduct to a relevant agency, for example, ASIC or APRA, to be followed up.
Financial Services Entities includes, among others, people required to hold an Australian Financial Services Licence (AFSL), and also authorised representatives!
So, what does this mean for me if I’m a ‘Financial Services Entity’?
The first observation is that the Commission is not confined to the banking sector. The industry, of which you are part, is under the microscope.
It is possible that you will receive communications from the Royal Commission, particularly if any misconduct is alleged against you, either previously or through submissions made to the inquiry.
In that event, you might expect the Commissioner to be enquiring into your internal processes relating to governance, risk management, recruitment, remuneration, conflicts of interest management, culture, training, review and remediation.
This may be by way of summons to produce documents and/or to attend for examination.
It follows that, if you are not 100 per cent confident of your processes, now would be a very good time to review them and to make sure that documents are accessible.
Those Licensees who have been diligent with their compliance:
- the general obligations of AFSL holders set out in s912A of the Corporations Act. See ASIC’s Regulatory Guide (“RG”) 104;
- their breach reporting obligations in s912D. See ASIC’s RG 78; and
- who have review and remediation processes in line with ASIC’s RG 256,
will be in the best shape to respond to any such requests.
If you are not sure about your remuneration structures, you should review ASIC’s regulatory guide on conflicted and other banned remuneration, RG 246.
Standards Australia has a useful standard on Reference Checking in the Financial Services Industry. It would be good to build this into your recruitment practices, if you have not already done so.
The second observation is that the terms of reference are broader than the type of review that ASIC or APRA might conduct. Our regulators have broad powers of investigation and can require the production of documents and examine people under oath.
However, the Royal Commission is a broader ranging inquiry that is also enqui ring into the conduct of the regulators and the sufficiency of the laws under which they and the industry operate.
It is also free from political interference or other agendas (which is not to suggest that investigations by ASIC or APRA are).
If you have recently been the subject of an investigation by ASIC or APRA, unfortunately this will not exempt you from being examined again, or having to comply with a summons from the Royal Commission if the Commissioner decides that is necessary.
It is a separate inquiry with a different purpose and the Royal Commissioner cannot simply ‘piggy back’ off answers given in, say, a section 19 examination or documents produced in response to an ASIC sections 30 or 33 notice.
Hopefully, however, if you are called upon, you will reap some efficiency from having previously gathered the information.
This time next year, we will have a good idea of what the Royal Commissioner is likely to recommend. Those recommendations are likely to set the compliance agenda for the next few years. Stay tuned!
Grant Holley is a partner at Holley Nethercote Commercial & Financial Services Lawyers.
