Financial Services Disputes Alert 28 Sep 2018 Interim report delivered by the Hayne Royal Commission

Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry

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What you need to know

  • The 3 volume report outlines issues identified by the Commission in relation to consumer lending, financial advice, loans to small and medium enterprise and experiences with regional and remote communities.

  • The interim report does not foreshadow wholesale legislative changes to financial services law but does raise a number of issues about potential specific reforms and simplification, and how the current legislation is enforced. In particular, it suggests ASIC has been too reluctant to use court action.

  • Round 7 of the Commission's public hearings will take place in November. The final report is due by 1 February 2019.

  • Volume 2 of the interim report contains findings based on the case studies in the first four rounds of hearings about whether conduct might have amounted to misconduct or conduct falling short of community standards and expectations.

What you need to do

  • Stay up to date with the work of the Hayne Royal Commission, as its recommendations are likely to significantly impact financial services regulation in Australia. Ashurst will be analysing the interim report and providing more detailed updates in the coming week.

The interim report

This afternoon, the Hayne Royal Commission's interim report was released.

The interim report comprises 3 volumes and contains preliminary observations in relation to consumer lending, financial advice, loans to small and medium enterprises and experiences with regional remote communities. It does not deal with the recent rounds of hearings focussed on superannuation and insurance.

The interim report raises a number of questions about possible reform. These include whether financial services law should be simplified, and whether certain exceptions to the law should be eliminated or reduced. The interim report also asks how entities should manage conduct and compliance risks and how the regulators should respond to those risks. Finally, the interim report asks whether financial regulatory architecture should change and what is the proper place for industry codes of conduct in the financial sector.

At over 1000 pages we are still digesting its contents, but some initial observations can be made.

Perhaps the most interesting chapter is Chapter 8, headed "Regulation and the Regulators". The following themes are worth noting:

  • The Commissioner considers the conduct identified in the report generally contravened existing norms of conduct, with the most serious breaching existing laws. The Report strongly suggests that further legislation will not as a general matter assist matters – as the Commissioner puts it "breaches of the existing law are not prevented by passing some new law that says 'Do not do that'".
  • The complexity in the law is identified as potentially contributing to matters. Mr Hayne says "the existing law has rightly been described, at least in some respects, as labyrinthine and overly detailed".
  • ASIC starting point should not be, how can a matter be resolved by agreement. Rather, where there is a contravention, there should be more use of the courts (although bringing proceedings does not preclude negotiation about how they should be resolved).
  • The report identifies a significant number of issues for consideration leading up to the final report. We will be issuing further publications dealing with these.

Consumer lending

In relation to consumer lending, the interim report identifies four kinds of issues that came out of the first round of hearings. First, the confusion of the roles and responsibilities of intermediaries. Secondly, the formation of "customer needs" by reference to what an entity wants to sell. Thirdly, treating lending as not unsuitable if the customer was unlikely to default, without inquiring into the customer's circumstances, requirements and objectives. Fourthly, selling products without the right systems in place to deliver those products and not remedying a default as soon as reasonably practicable.

Financial advice

In relation to financial advice, the interim report identifies two major themes, namely charging for services that were not provided and giving advice that served the interests of the adviser rather than the client.

Loans to small and medium enterprises

In relation to small and medium enterprise (SME) lending, the interim report identifies as high level issues whether the legal framework governing small and medium enterprises should change, and in particular whether SMEs should come within the reach of the NCCP Act.

More specifically, the interim report focuses on the content of the Code of Banking Practice, the situation of third party guarantors and dispute resolution approaches by the Financial Ombudsman Service and the Australian Financial Complaints Authority.

Experiences with regional and remote communities

The issues identified in relation to agricultural lending were revaluation of securities, difficulties in obtaining access to banking services and support, changes to lending conditions and enforcement by appointment of external administrators.

For remote communities, the interim report focuses on access to services, account fees and the application of standard identification requirements, as well as regulation of the sale of funeral insurance.

The Hayne Royal Commission

The Hayne Royal Commission was established by letters patent dated 14 December 2017.

Former High Court Justice, the Honourable Kenneth Hayne AC QC, is required to inquire into whether financial services entities have engaged in misconduct or fallen below community standards.

The scope of the letters patent is wide, including not only the adequacy of existing laws and policies but also the effectiveness of regulators.

Public hearings and submissions

The Commission has held six rounds of public hearings so far, covering consumer lending, financial advice, loans to small and medium enterprises, remote and regional communities, superannuation and insurance. The interim report focuses on the first four topics.

The public hearings have involved case studies whereby witnesses including consumers, financial executives and regulators have given evidence and produced documents where conduct was identified as warranting investigation.

A further round of public hearings will take place in November in Sydney and Melbourne in relation to policy questions arising from the first six rounds.

In addition to the public hearings, the Commission has published 29 background papers and received over 9,000 public submissions. Public submission in relation to insurance industry remain open until 25 October 2018.

Likely impact

Publicity surrounding the work of the Hayne Royal Commission appears to have already led to a more aggressive regulatory stance by the Australian Securities & Investments Commission and triggered a series of class actions in the financial sector.

Since the Royal Commission was announced, the government has been cautious about not anticipating the Commissioner's report. Nevertheless, the interim report will no doubt provide some insight into the future shape of financial regulation and disputes in Australia.

Over the coming week the Ashurst Financial Services Regulatory team will provide more detailed analysis of the interim report.

Authors: Andrew Carter, Partner; and Andrew Westcott, Senior Expertise Lawyer.

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Hayne Royal Commission Interim Report - Key themes 

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.

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