How the Banking Royal Commission will change the Australian regulatory landscape
The final report brings Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry to a close, with a series of 76 recommendations. In an election year, this promises to reshape the regulatory compliance and enforcement landscape for the entire industry.
The Commissioner has made several recommendations designed to address identified cultural failings pervading both the industry and its regulators. These include failings by the industry to eliminate conflicts of personal interest and duty, and failings by regulators, particularly the Australian Securities and Investments Commission (ASIC), properly to take account of the public interest in its pursuit of enforcement outcomes. Included among these are recommendations which are likely to change the financial services regulatory landscape in three key areas:
1. Structural improvements to the banking and financial services regulatory regime, including simplifying the law by reducing the number of exceptions and carve-outs, introducing overarching "norms of behaviour" to better ensure that the intention of particular and detailed rules is met, implementing the recommendations of the Department of Treasury's 2017 ASIC Enforcement Review Taskforce regarding self-reporting, and better cooperation and information sharing between the conduct regulator ASIC and the Australian Prudential Regulation Authority (APRA).
2. Firm culture, governance, remuneration and individual accountability, including recommendations regarding the administration and scope of the Banking Executive Accountability Regime (BEAR), and recommendations directed chiefly at banks and financial services entities themselves, to improve their culture, governance and remuneration practices. These include ensuring they remain under close internal review and that any problems are promptly identified and dealt with.
3. ASIC's approach to regulatory enforcement, including laying down the challenge to ASIC to consider as a starting point in any enforcement action the question "Why not litigate?".
Taken together, these recommendations may prompt a fundamental shift towards a regulatory model which more closely resembles the UK financial services regulatory regime, including introducing overarching principles, obligations on the regulated population (principally through the expansion and co-regulation by APRA and ASIC of the BEAR) to be more forthcoming and transparent with ASIC, and empowering ASIC to take a harder-line approach to regulatory investigations and enforcement.
Regulatory change is already well underway, with Parliament in February having passed legislation to dramatically increase civil and criminal penalties for breaches of financial services laws, together with a significantly expanded whistleblower protection regime which will cause both foreign and domestic companies to reassess their internal whistleblower complaints handling policies and processes or face heavy penalties, potentially with extraterritorial reach. Further, both major political parties have expressed unequivocally an intention to implement all but one of the Commissioner's recommendations as a matter of priority.
However, with an election in May 2019 and the Government having resisted the Labor Opposition's calls for additional sitting days to implement the Commissioner's recommendations prior to the election, the finer details of a great many of the recommendations and the shape of their implementation will remain up for debate and not likely be known until after the election.
What is clear is that the impact of the Commissioner's recommendations is already being felt. Banks and financial services firms need to be taking steps now to prepare for inevitable reform and a new era of more intensive regulatory scrutiny—including more investigations, enhanced cooperation and information sharing between regulators, much heavier penalties for non-compliance and a "Why not litigate?" approach to enforcement by ASIC.