Lessons from the Commission.

Source: The Godfather, Part 3, Francis Ford Coppola.

Source: The Godfather, Part 3, Francis Ford Coppola.

The Commission.

Big chunky documents are a favorite of mine – so it was no stretch to sit down and read the final report of the Royal Commission into Misconduct in the BankingSuperannuation and Financial Services Industry.

After ploughing through most of the 496 pages of Volume 1, I stopped to reflect on the key problems that seem to be at the heart of the matter.

These are ably summarised in the Commission’s 4 key observations.


4 Observations.

1.      The connection between conduct and reward

The Commission found that providing a service to customers was relegated to second place and concluded that the cause of this was stapled to how the person doing the conduct was rewarded for doing that conduct, regardless of whether that conduct was lawful.

Intended or not, some of the organisations that fell under the Commission’s gaze seem to have an ingrained culture of rewarding individuals for breaking the law.

2.      The asymmetry of power and information between financial services entities and their customers.

The Commission found there to be a marked imbalance of power and knowledge between the product/services entity and the consumer, stacked of course to the detriment of the consumer.

We all know what that feels like!

3.      The effect of conflicts between duty and interest.

I enjoyed Kenneth Hayne’s canoe analogy. Paraphrasing, he imagines the remuneration-conflicted intermediary standing in two canoes - (a) the client canoe in which the consumer is owed a duty; and (b) the product issuer canoe that rewards and looks after the interests of the intermediary. To complete the Haynes vision, he sees one leg in the ‘duty’ canoe and the other in the ‘interest’ canoe, with the two canoes pulling in opposite directions.

Nice analogy.

4.      Holding entities to account.

Clearly, real accountability has not happened enough and in any event is often swept under the carpet once the transgressor has paid compensation and issued a media release.

But, this is all well below what the community reasonably expects to happen, and that of course is part of the political motivation for the Commission, but also a reasonable and accurate observation.

One key recommendation is for ASIC to adopt a ‘why not litigate?’ approach instead of discussing and negotiating.

The 4 observations together.

These 4 key observations show a glimpse of unacceptable behaviour in many of Australia’s largest and seemingly most respectable organisations.

An even bigger problem is that their cultures seem to operate to reward people for breaking laws, and that attracts a certain kind of person to the organisation which to me is at the heart of the problem.

The old saying that ‘the fish rots from the head’ also appears to have some weight judging by the case study material and some of the Commission interviews we witnessed last year.

In support of that, the banking executive accountability regime that is to start in July is aimed at this. Essentially, it requires at least 60% of CEO bonuses and 40% of other senior executive bonuses to be deferred for a 4 year minimum, and policies to be put in place to cut bonuses if warranted by circumstances.

But it’s not just the fish head that rots. That’s just where it starts.

good and bad.JPG

2 Advisor types.

Based on 30 years of experience in financial markets, I have noticed that where product linked commissions are involved and where they are not paid directly by the client, there are two distinct types of individuals.

The first type is dedicated to serving clients without conflict and without doing harm. If it’s not right for the client, forget about it!

The second type thinks it’s OK to feather his or her own nest, regardless of whether it’s to the disadvantage of a client. In fact, and as demonstrated by the Commission’s findings, the second type is often rewarded for doing so.

Clearly, it’s the first group of people that you want to be dealing with.

Regrettably, the second group is perpetuated through ineffective or misguided regulation and culture, as well as licensing exemptions and loopholes.


Is the party over for type 2?

Kenneth Hayne wants entities and individuals operating in the industry to obey the law and act in a conflict-free, well educated and honest manner. 

Specifically, he has outlined 6 commandments, namely:

1.          Obey the law.

2.          Do not mislead or deceive.

3.          Act fairly.

4.          Provide services that are fit for purpose.

5.          Deliver services with reasonable care and skill.

6.          When acting for another, act in the best interest of that other.

What’s wrong with that? Surely these are basic principles.

But the suggestion that these 6 values should be compulsorily applied to all holders of financial services licenses in Australia appears to be causing a bit of a stir.

Here’s part of ASIC’s new direction which was released on 19 February 2019:

“Across the range of its jurisdiction, as a result of the recommendations and current reforms, there will be over 60 additional penalty provisions that ASIC will be able to action. These penalty provisions will be of greater deterrence value with the recent passage of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018. That Bill increases maximum prison penalties for the most serious offences to 15 years. It significantly increases civil penalties for companies, now to be capped at $525 million, with maximum civil penalties for individuals increasing to $1.05 million. Significantly, the Bill also introduces, for the first time, a civil penalty (capped at $525 million) for breach of the primary obligation banks and other financial services and credit licensees owe to all of their customers, that is ‘to do all things necessary to ensure the financial services covered by the licence are provided efficiently, honestly and fairly’.

jon snow.JPG

What else is coming?

The Commission has focused on a mix of policy, prohibitions, regulation and tougher enforcement levers in an effort to change cultures that operate as breeding grounds for bad actors.

Blunt instrument enforcement as per the above will create scare factor, but in reality it will take more time, licensee/taxpayer dollars and sustained political will (which is less than certain) to adopt and/or enforce the Commissions’ recommendations.

In the meantime, ASIC will establish a separate Office of Enforcement and says that it is currently establishing a taskforce to put its proposed Office of Enforcement in place. Completion is expected in 2019.

I think the Commission has done well in a little over a year to get people thinking about the issues here, and ASIC appears ready to rise to the occasion. But these are only good first steps that will require follow through and political will, if they are to make an impact.

The reality is that if we want to create a well trained, balanced, affordable and conflict-free financial services industry, we will need to be flexible and patient.

But, it’s critical that the measures taken do not over-regulate the good actors into non-existence.

A regulatory winter may or may not come, but if it does and if it’s handled correctly, it may enable a longer summer.

Bring it.

Regards, Mike.

Read Volume 1 of the final report here.

Read ASIC’s response here.

NextLevelCorporate is one of a very small number of independent corporate finance industry pioneers with decades of experience delivering conflict-free M&A, Growth Capital and Strategic Corporate Finance Advisory solutions. With a focus on solutions that capture competitive advantage, our sole objective is to help our clients to successfully buy, sell, finance or invest in companies and assets of any size, in and out of Australia.