The much anticipated Royal Commission was no surprise to the Australian banking industry. What was surprising was the extension of its terms of reference to local and foreign deposit-taking institutions, life and general insurers, superannuation funds, as well as asset managers, financial planning businesses and all other holders of Australian financial services licences. Let there be no mistake – this is a Royal Commission into the Australian financial services industry.
Focus on misconduct
The thematic focus of the Commission is on misconduct – it’s an inquiry into conduct, practices, behaviour and business activity that falls short of community standards and expectations. The objective is to identify the changes that are required to rebuild the community’s trust and confidence in the financial services industry and those who manage it.
Entity and individual responsibility
The Royal Commission will inquire into the particular misconduct of a particular entity and its directors, officers, employees and any one acting on its behalf. The purpose of the inquiry is to determine whether misconduct by the entity (and its personnel) is attributable to its culture, governance, risk management, recruitment or remuneration practices or whether those concerns are industry wide or sector specific.
Culture and conduct
The draft terms of reference reflect the more recent interest of the Australian prudential and conduct regulators into the link between culture, governance and misconduct. One of the legacies of the outgoing Chair of our conduct regulator, Greg Medcraft, has been the focus on the importance of good culture and setting the right tone from the top as well as doing the right thing, which holds the financial services industry to a higher standard than just legal compliance.
Not that long ago, the Australian Government and regulators were at a loss as to how to “legislate for good governance” but then, in the 2017-18 Federal Budget, the Government announced that it will introduce the Banking Executive Accountability Regime (BEAR), which it borrowed on short notice from the UK.
The BEAR reforms are designed to make individual directors and senior executives directly accountable and personally liable for the conduct of their people at all levels within their organisation. This is a major shift in the intrusion of regulation into the inner workings of business and is designed to change behaviour through personal liability for regulatory compliance, as opposed to entity based liability for such compliance.
While there is a reasonable steps defence for regulatory misconduct, it will require the engagement of personnel at all levels to enliven the defence and the documentation of those steps in ways that are unprecedented. The draft BEAR legislation is now before the Australian Parliament and the Government has announced that while the Royal Commission will take the BEAR reforms into account, it will not delay their commencement, which is now likely to be 1 January 2019.
Importing regulatory developments
The BEAR reforms, together with increasing the powers and budgets of the regulators were seen by many as attempts by the Australian Government to dissipate the political pressure for a Royal Commission. Well, that did not go the Government’s way but the banks were not surprised and have been preparing for the arrival of the Royal Commission for some time and at considerable expense. There is good reason for their early preparation. The reason is because Australia has, since the global financial crisis, been a net importer of regulatory reforms from other developed markets, including the UK, Europe and Hong Kong, all of which have similar accountability regimes to the BEAR reforms.
As many in the banking industry will know, the BEAR reforms are largely based on the UK Senior Managers Certification and Conduct Regime (SM&CR). Importantly, the UK regime extends beyond banking to all other financial services organisations and, it is this recent extension of the UK regime, that has prompted calls from our regulators for the extension of the Australian BEAR reforms to the rest of the Australian financial services industry.
This is clearly evident in the address by Wayne Byres, the Chairman of the Australian Prudential Regulation Authority (APRA), to the House of Representatives Standing Committee on Economics in September 2017, where Mr Byres said:
“[BEAR] regime can have a wider application to add to community trust and confidence that all prudentially-regulated institutions are well-governed and prudentially managed…”
APRA’s sentiments were recently echoed by the outgoing Chair of the Australian Securities and Investments Commission, Greg Medcraft, who has called for Australia to follow the UK’s lead by extending its corporate accountability regime to cover, not only ADIs and banks, but also insurance companies and “even beyond that, to financial services entities”.
Given that the draft terms of reference of the Royal Commission allows it to “have regard to comparable international experience, practices and reforms”, there is every reason to believe that the Commission will recommend the extension of the BEAR reforms to the rest of the Australian financial services industry. So, like the banks, the time has come for the rest of the industry to prepare for its version of the BEAR reforms. What will the Financial services Executives Accountability Regime (FEAR) look like?
Lessons learnt from our global platform
Norton Rose Fulbright has conducted a global analysis of director and senior management responsibility in banks which compares such reforms to regulate the conduct of executives across multiple jurisdictions.
This comparative analysis allows us to identify common themes that the Royal Commission will, no doubt, be interested in understanding and which is likely to find its way into its findings and recommendations.
As Australia has become a net importer of regulatory developments across the globe, there is much to learn from the experiences of other jurisdictions where similar inquiries, regulatory reviews, investigations and law reforms have taken place. Our global platform is tracking these regulatory developments and undertaking comparative studies to bring the learnings from our overseas offices to Australia for the benefit of our Australian financial services clients.
 Greg Medcraft, Chair of the Australian Securities and Investments Commission, in his address to the Parliamentary Joint Committee on Corporations and Financial Services in October 2017