15 February 2019
Fair Point, Mr Hayne
In case you hadn’t heard, the Final Report of the Financial Services Royal Commission was delivered by Mr Ken Hayne on Friday 1 February, and published on Monday 4 February.
It’s good that it has finally arrived: it feels like the industry has collectively been holding its breath for six months, wondering what is going to happen.
A lot has been written since the report was delivered about the detail, the recommendations and possible consequences read our detailed summary for more information.
In this article, we concentrate on the role of the law, and of legal advisers, as we now look forward.
Mr Hayne said there are six fundamental precepts that the financial services industry should follow:
- obey the law;
- do not mislead or deceive;
- act fairly;
- provide services that are fit for purpose;
- deliver services with reasonable care and skill; and
- when acting for another, act in the best interests of that other.
As lawyers, we are generally asked to advise clients on the first two of those issues. But whether a client is acting ‘fairly’ in the way it operates its business is often not our call to make. A client might even say to us:
‘We just need you to tell us whether what we are doing complies with the law: leave it to us to decide what is fair.’
Mr Hayne made it clear he thinks that approach hasn’t worked for the financial services industry. He thinks the industry needs to go beyond just looking at whether certain conduct complies with the letter of the law, and consider whether that conduct is fair and consistent with what clients expect. But, more to the point, he thinks the existing law needs to be considered, and interpreted, against these general principles. Where there is black letter law, whether it be in insurance, or superannuation, or financial advice, it needs to be considered against the background of these general principles: act fairly, provide services that are fit for purpose, and act in the best interests of your clients.
There is no doubt that regulators such as ASIC and APRA have taken note of Mr Hayne’s comments. You can expect to see them take an interpretation of the law that incorporates these general principles, and for any new law to be framed against this principles-based approach.
And so we think, as lawyers working in the industry, we too have to take a more active role in deciding whether conduct is fair, or in the best interests of clients, because that is how the law is likely to be applied in this post-Royal Commission era. Whether it is an insurer looking at claimstaking, or a financial advice business trying to structure its remuneration arrangements, or a superannuation trustee trying to decide whether particular conduct is in its members’ best interests, we want to work with our clients to help them take a wider view.
To be clear, we are not planning to lecture our clients on ethics, or to be their ‘moral compass’. But we would not be serving our clients’ interests by focusing just on ‘black letter law’. We think that, by taking a broader view of the application of the law to our clients’ businesses, we can best help them navigate the challenging world ahead.
The six fundamental precepts which Mr Hayne identified as basic norms of conduct, are each well-established, widely accepted, and easily understood. As Mr Hayne said, how a financial services organisation approaches each of these issues, and how committed it is to living these values, says much about its culture.
There will be some who take the view that the financial services industry has dodged a bullet. A better perspective would be to see the industry as having an opportunity to learn from the mistakes of the past and take the opportunity to change the industry for a better future. This applies to all segments of the financial services sector:
- for insurers, there is an opportunity to build general principles of fairness into the way they work with clients when writing business and processing and managing claims. It doesn’t serve the long-term interests of the insurer to delay, deny or avoid when it would not be fair to the customer to do so.
- financial advisers can take the opportunity to rebuild personal ‘trusted adviser’ relationships with their clients. The additional compliance obligations recommended by Mr Hayne are not going to make the practice of providing financial advice any easier, but the only way that advisers will win back the trust of their clients and the community is to operate on a personal ‘one-to-one’ basis.
- superannuation trustees should take heed of the warnings from Mr Hayne about acting in the best interests of fund members when discharging their duties, whether they are operating in the retail or not-for-profit sector. The retail superannuation sector may have come under more scrutiny in the Royal Commission than the industry fund sector, but there are challenges in both the Final Report and in the Productivity Commission report for all trustees to demonstrate they are providing valuable services to members.
Mr Hayne recommends that all financial services entities review their culture and governance to identify any problems, to make whatever changes are necessary to align their culture and governance with their clients’ interests, and to periodically assess the effectiveness of those changes. We will be continuing the conversation about how to do this – to achieve better outcomes for financial services businesses and their customers, build better relationships with regulators, and evolve and adapt to changing community expectations and technological advances.
May we live in interesting times!
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