Australian Banking Royal Commission final report - Legalwise Seminars

Buddle Findlay Partners David Perry, Paul Farrugia, Scott Abel, and Scott Barker summarise the key points from the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, released last week, and briefly explain the current situation in New Zealand’s related sectors. 

The long awaited final report of the Royal Commission into misconduct in the banking, superannuation, insurance and financial services industries in Australia has now been released.

In the report, retired High Court Justice Hayne identifies substantial shortcomings in the conduct of financial services entities and individuals and makes a wide range of significant recommendations for change in relation to conduct, culture, remuneration, governance and regulatory matters.

Among the report’s key recommendations:

• • Home Lending: The law should be amended to require mortgage brokers to act in the borrower’s best interests, and with the broker’s fee paid by the borrower, not the bank. Trailing and other commissions would be gradually prohibited. Mortgage brokers would be subject to the same laws as financial advisers in relation to retail product advice
  • Banking Services: The Banking Code should be amended to: (i) provide that dishonour fees are not charged on basic accounts, (ii) not allow, without prior express agreement, informal overdrafts on basic accounts, and (iii) require banks to identify ways to improve access for customers in remote areas to banking or with poor English language skills
  • Farm Debt: A national farm debt mediation scheme should be enacted. Banks should be prevented from charging default interest on farm loans in areas declared to be affected by drought or other natural disaster. Banks should ensure that distressed farm debt is managed by experienced agricultural bankers, that mediation is offered as soon as the debt is distressed and that default interest is not charged when there is no realistic prospect of it being recovered. Distressed farm debt should be managed on the basis that a work-out will be the best outcome, and enforcement the worst. Appointment of receivers or other external administrators should be a remedy of last resort
  • Financial Advice: The existing cap on commissions for life risk-insurance products should be ultimately reduced to zero, and grandfathered provisions for conflicted remuneration should be repealed as soon as reasonably practicable. Remaining exemptions for conflicted remuneration in relation to general insurance and consumer credit insurance should be reviewed, to determine whether they can be justified. Banking licence holders should be required to give effect to reference checking and information sharing protocols for financial advisers, and to report ‘serious compliance concerns’ about individual advisers to ASIC on a quarterly basis. A new disciplinary system for financial advisers should be created, under which advisers providing personal financial advice to retail clients would need to be registered and subject to a single disciplinary body
  • Superannuation: The unsolicited offer or sale (hawking) of superannuation products to retail clients should be prohibited. Persons should have only one default account, with machinery to be developed to “staple” a person to a single default account. Deductions of advice fees from MySuper or other superannuation accounts should, with limited exceptions, be prohibited
  • Insurance: Hawking of insurance products should be prohibited. Funeral expense insurance would be brought within the oversight of ASIC, as a financial product. Commission payable to car sellers for add-on insurance would be capped. For consumer insurance contracts, the duty of disclosure should be replaced with a duty to take reasonable care not to make a misrepresentation to an insurer. Life insurance could only be avoided for non-disclosure or misrepresentation if the insurer can show it would not have entered into a contract on any terms. Claims handling and settlement should be defined as a financial service
  • Governance: APRA should focus on, as part of its aims, standards and guidance in relation to the supervision of remuneration, the sound management by institutions of misconduct, compliance and other non-financial risks, as well as financial risk. All financial service entities should review at least annually the design and implementation of the remuneration systems for their front line staff. They should also take proper steps, as often as reasonably possible, to assess their culture and governance, and identify and deal with any problems.

While the Reserve Bank in New Zealand and the Financial Markets Authority are nearly fully through their review in relation to conduct and culture in the banking and life insurance sectors, the Government has indicated that it will now fast track customer protection measures across those sectors which will involve a careful sense check against recommendations from the Australian report.  The extent to which the Australian report ultimately influences the future development of regulatory and policy parameters for the financial services sector here in New Zealand remains to be seen.

A copy of the full report is available on the Royal Commission website.

Partner David Perry specialises in banking and financial services, and restructuring and insolvency law. He represents banks and financial institutions in the areas of general transactional banking, syndications, structured finance and structured property finance. His advisory practice includes acting for financial institutions and other credit providers on personal property and consumer credit law. David advises domestic and foreign banks, insolvency professionals, corporate trustees, Crown entities and other organisations on restructures, workouts and on the full range of insolvency assignments. He is a regular presenter at conferences domestically and internationally and is at the vanguard of insolvency law reform in New Zealand. He is a contributing author to New Zealand’s leading insolvency law reference text Heath and Whale on Insolvency. Contact David at david.perry@buddlefindlay.com

Partner Paul Farrugia specialises in banking and finance and has a broad range of experience in domestic and cross-border financings with an emphasis on leveraged and acquisition finance, syndicated lending, debt restructuring and workouts, and development and construction finance. Prior to joining Buddle Findlay, Paul worked in the banking and leveraged finance teams at Allen & Overy in London. Paul is the head of Buddle Findlay’s financial services team. He provides general banking and finance advice for both lenders and borrowers as well as corporate and commercial advice for a number of major local and off-shore companies. Paul also acts for banks providing funding to entities within the agriculture sector (dairy, sheep and beef, kiwifruit and viticulture) and frequently acts on the funding of intensification and conversion projects in the dairying, drystock, kiwifruit, viticulture and other capital-intensive sectors across New Zealand as well as advising lenders on the provision of alternative funding options to agriculture sector borrowers. Contact Paul at paul.farrugia@buddlefindlay.com

Partner Scott Abel specialises in insolvency and debt restructuring, corporate and secured finance, and specialist personal property security and credit recovery advice.  He advises and has acted for domestic and foreign banks, financial institutions, insolvency professionals and other organisations on receiverships, liquidations, administrations and workouts. He is particularly recognised by the market for his leading expertise in Personal Property Securities (PPS) law, often advising banks, insolvency practitioners and other firms and barristers on complex PPS matters. He regularly writes and presents papers on a range of insolvency and credit enforcement topics, and is a contributing editor to Heath & Whale on Insolvency, New Zealand’s leading insolvency law text. In 2015, he became the first New Zealander to pass the INSOL Global Insolvency Practice Course and be recognised as a Fellow of INSOL International. Contact Scott at scott.abel@buddlefindlay.com or connect via LinkedIn 

Partner Scott Barker specialises in litigation, insolvency and credit recovery law. His practice includes banking, insurance and commercial litigation as well as fraud (civil) asset recovery and advising both private and public sector clients. He acts on a range of litigation assignments including contractual disputes, negligence, fair trading claims, insurance, property trust and shareholder disputes and judicial reviews, as well as insolvency and credit recovery assignments. He has appeared in the District and High Courts, Court of Appeal, Supreme Court and Privy Council and has also been involved in mediations, expert determinations and arbitrations. Contact Scott at scott.barker@buddlefindlay.com or connect via LinkedIn 

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