5 February 2019

The Financial Services Royal Commission – we digest Hayne’s Final Report

On 1 February 2019, following a whirlwind 12-month inquiry, Commissioner Hayne delivered his greatly anticipated Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. It was released to the public on 4 February 2019.

The Commission’s Final Report is a weighty tome and contains a broad range of recommendations concerning the future of the banking, superannuation and financial services sectors. While some commentators have expressed disappointment that the Commission did not go further and make more radical recommendations for structural reforms in the industry, the recommendations that have been made are significant and – critically – have the in-principle support of both the Federal Government and the Opposition.

We set out below our summary of the key findings and recommendations in relation to the six topics addressed by the Commission during its public hearing rounds. In addition, we summarise the Commission’s recommendations concerning the industry regulators, ASIC and APRA, and address some of the key instances of potential misconduct as found by the Commission.

Background

Following the delivery of Letters Patent establishing the Commission in December 2017, seven rounds of public hearings took place across 14 weeks between March and November 2018, covering consumer lending (mortgages, car finance, credit cards), financial advice, loans to small and medium enterprises, experiences with financial services entities in regional and remote communities, superannuation, insurance and causes of misconduct.

In his Interim Report delivered in September 2018, Commissioner Hayne flagged two recurrent themes arising from the first four hearing rounds: dishonesty and greed. He further identified a range of issues arising from those hearings which were to be the subject of recommendations in the Final Report.

Commissioner Hayne’s 1133-page Final Report contains 76 recommendations, in addition to a number of referrals of potential misconduct to regulatory authorities for further investigation and action.

Findings of misconduct by financial services entities

  • 24 referrals of entities for potential criminal prosecution
  • Numerous findings of admitted or possible misconduct
  • Class actions and civil penalty proceedings expected to follow

As expected, Commissioner Hayne’s report has identified a wide range of potential misconduct, and conduct that does not meet community standards or expectations, right across the financial services industry.

However, it was the large banks and AMP that were the subject of most case studies featuring in the Commission hearings, and which have come in for the most stinging criticism from the Commission.

Each of the major banks (other than Westpac) has been referred to regulatory authorities to consider whether criminal prosecution is warranted. Twenty-four entities are potentially exposed to criminal liability as a result of the Commission’s referrals.

Charging ‘fees for no service’ was singled out by Commissioner Hayne in his Interim Report as particularly dishonest conduct, and it is therefore unsurprising that the banks and other financial institutions implicated in this conduct have been the subject of referrals for potential criminal prosecution.

The Commissioner separately indicated that he had in November 2018 communicated to ASIC certain information he considered to relate to contraventions of the Corporations Act, including engaging in dishonest conduct in relation to a financial product or service.

Given Commissioner Hayne’s trenchant criticism of ASIC’s reluctance to take court action against large financial institutions, and ASIC’s expressed acceptance that its enforcement culture and priorities must change, there will inevitably be a significant number of civil penalty actions taken by ASIC following on from the Commission’s referrals for further investigation. It can also be safely assumed that class action proceedings will be commenced in response to conduct issues by financial services entities as identified in the Final Report.

Consumer lending

  • The most significant changes recommended by the Commission with respect to consumer lending relate to mortgage brokers:
    • mortgage brokers must act in the best interests of a borrower
    • the borrower, not the lender, should pay the mortgage broker’s fee
    • changes in brokers’ remuneration should prohibit lenders from paying trail and other commissions to mortgage brokers for new loans
  • The exemption of auto and other retail dealers from the operation of the National Consumer Credit Protection Act (NCCP Act) should be abolished
  • The NCCP Act should not be amended to alter the obligation for direct lenders to assess unsuitability

The responsible lending provisions require lenders to make reasonable enquiries about the consumer’s requirements and objectives in relation to the credit contract and about the consumer’s financial situation.

Commissioner Hayne noted that steps are already being taken by banks to improve their compliance with the responsible lending provisions of the NCCP Act. For this reason, and others, the Commission recommended that the NCCP Act should not be amended to alter the obligation to assess unsuitability.

The most significant proposed changes relate to mortgage brokers.

The Commission recommended that mortgage brokers must act in the best interests of an intending borrower in the selection and arranging of home loans. The best interests obligation must be enforceable by civil penalty.

The Commission recommended that the borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.

The commission noted that trail commissions are money for nothing. Changes in brokers’ remuneration should prohibit lenders from paying:

  • trail commissions to mortgage brokers for new loans for an initial period; and
  • afterwards, any other commissions to mortgage brokers.

If brokers are to charge a fee for their services, banks may also to be required to do so when directly originating a loan to maintain competition.

After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.

Retail dealers, like car dealers, are entitled to, and do, act as agents for lenders without holding a credit licence. The Commission recommended that the exemption of retail dealers from the operation of the NCCP Act should be abolished.

ASIC may approve codes of conduct relating to all APRA-regulated institutions and Australian Credit Licence holders. These may include ‘enforceable code provisions’.

The prevalence of processing and administrative errors by banks is sought to be addressed by holding banks accountable for the design, delivery and maintenance of their products.

The complex array of available banking products leads to diminished individual responsibility for the supervision of these products, and errors that arise often go unnoticed. The Commission believes this is within the bank’s control. The Commission has recommended that there should be an individual within the bank responsible for supervising the products sold or issued to customers, and that this responsibility should be subject to the provisions of the Banking Executive Accountability Regime (BEAR).

Financial advice

  • The Commission has recommended a new system of registration for financial advisers, to be overseen by a newly established regulatory body
  • Exemptions and carve-outs from the existing conflicted remuneration provisions to be repealed
  • Grandfathering provisions for conflicted remuneration to be repealed ‘as soon as is reasonably practicable’ – the Government has committed to doing this by 2021
  • Ongoing fee arrangements to be expressly renewed by the client each year
  • No enforced separation of product and advice. However, as per the Productivity Commission recommendation, the ACCC should undertake five-yearly market studies on the effect of vertical and horizontal integration in the financial system

The hearings into the wealth management industry provided some of the most harrowing examples of misconduct in the financial services systems. Commissioner Hayne was scathing of the culture of the industry, from board level down, during the hearings and in his Interim Report. However, he appeared to suggest in the Interim Report that structural change to the advice industry might not be necessary, and there was sufficient force to prevent such misconduct in the existing law, if ASIC and APRA would just enforce it.

So it is not entirely surprising that Commissioner Hayne has not advocated for significant structural change, such as complete separation of product and advice, in his Final Report. However, it is unexpected that his recommended course of action is a review of the efficacy of financial advice law: his commentary certainly did not suggest that he would find merit in (yet another) review. In the near term, he has recommended tightening certain existing laws relating to the giving of financial advice and requiring better oversight of the enforcement of those laws by ASIC and APRA.

In his Interim Report, Commissioner Hayne identified the primary issues that emerged at the hearings in relation to financial advice were:

  • culture and incentives;
  • conflicts of interest and duty, and confusion of roles; and
  • regulator effectiveness.

In the Final Report, he once again emphasised that sales-focused incentives had driven culture, and ‘advisers had become sellers and sellers had become advisers’. However, he was reluctant to enforce separation of product and advice on the basis that it would be ‘both costly and disruptive. I cannot say that the benefits of requiring separation would outweigh the costs’. He recommended the ACCC be tasked with reviewing vertical integration in the financial system.

In terms of conflicts of interest and duty, Commissioner Hayne looked closely at the effectiveness of the best interests duty in section 961B, together with the ‘safe harbour’ defence in section 961B(2). He did not recommend immediate repeal of the ‘safe harbour’ or any variation to the best interests provisions, but instead recommended their review (along with the other provisions of the Future of Financial Advice designed to improve the quality of financial advice) by no later than 31 December 2022. By that time, we should have seen more cases brought by ASIC based on breach of the statutory best interests duty, which will test the efficacy of the relevant sections.

It is of little surprise that Commissioner Hayne recommended repeal of grandfathering, and a review of the exceptions to the conflicted remuneration provisions for financial products such as general and consumer credit insurance. While not unexpected, his recommendation that life insurance commissions be effectively phased out unless there is ‘clear justification’ to keep them will not help mitigate the country’s perceived underinsurance problem.

For licensees and advisers, there is more compliance. Advisers will also be required to ‘re-paper’ clients every year rather than every two years. They will also be required to disclose a ‘lack of independence’ to clients, based on the way that term is defined in the prohibition in section 923A of the Corporations Act. This has the capacity to be quite problematic for advisers, given the broad interpretation that ASIC has applied to that prohibition. At first glance, this recommendation goes much further than the ‘restricted/independent advice’ distinction in the UK Retail Distribution Review. If adopted, it has the potential to strike a blow against ‘vertical integration’ (which, elsewhere in the Report, Mr Hayne has left intact and subject only to scrutiny from the ACCC down the track).

Commissioner Hayne also recommended establishment of a new disciplinary system for financial advisers that requires all financial advisers who provide personal financial advice to retail clients to be registered, and provides for a single, central, disciplinary body. AFSL holders will be required to report ‘serious compliance concerns’ to the disciplinary body. Commissioner Hayne appears to be adopting the model used in professions such as medicine and the law, whereby practitioners are required to maintain registration with a professional body which regulates their conduct.

Lending to SMEs

  • The Commission has recommended there be no extension of the NCCP Act to cover small business
  • Definition of ‘small business’ in the Banking Code to be simplified; no change to the existing law relating to guarantees required
  • A national scheme of farm debt mediation should be enacted
  • Industry codes of conduct approved by ASIC may include ‘enforceable code provisions’ with remedies modelled on Part VI of the Competition and Consumer Act (CCA)

Commissioner Hayne has recommended against extending the responsible lending provisions of the NCCP Act to small business on the basis that there are adequate existing provisions applying to small business lending contained in the ASIC Act. These include the prohibition on misleading or deceptive conduct in relation to financial services and on unconscionable conduct in connection with the supply of financial services. There are further additional protections at general law. Commissioner Hayne noted that evidence and submissions to the Commission did not reveal any great appetite to change the lending framework as it would likely increase the cost and availability of credit.

Commissioner Hayne has recommended changing the definition of ‘small business’ in the 2019 Banking Code and replacing it with the simpler definition advanced by the Khoury Review such that the Banking Code applies:

  • to any business or group employing fewer than 100 full-time equivalent employees; and
  • where the loan applied for is less than $5 million.

The Commission did not consider it necessary to alter or add to the existing law in relation to guarantees, whether given in support of lending to SMEs or more generally. General law principles, in conjunction with additional protections provided in the 2019 Banking Code, are considered adequate.

The Commission has recommended that a single national legislated scheme of farm debt mediation be put in place to solve existing inconsistent state-based schemes. Lenders should offer mediation as soon as a loan is classified as distressed.

The amended definition of ‘small business’ will capture many agricultural enterprises. Some additional norms of conduct should also apply to agricultural small businesses, including APRA amending Prudential Standard APS 220 to:

  • require valuations of land to be independent of loan origination; and
  • provide for valuations of agricultural land in a manner that will recognise the likelihood of external events affecting its realisable value and the time taken to realise agricultural land at a reasonable price.

Commissioner Hayne also recommended that the 2019 Banking Code be amended so that banks will not charge default interest on loans secured by agricultural land in an area declared to be affected by drought or other natural disaster.

Commissioner Hayne has recommend that the law (most likely via the Corporations Act) should be amended to provide that industry codes of conduct approved by ASIC may include enforceable code provisions, breach of which will constitute a breach of law. Remedies will flow from such breaches and will be modelled on those set out in Part VI of the CCA. Industry and ASIC should work together to identify which code provisions will become enforceable.

Remote/regional lending issues

  • The Commission has made a series of formal and informal recommendations aimed at redressing the unique issues faced by Aboriginal and Torres Strait Islander communities and Australians in remote and regional communities
  • Most of the recommendations are common sense, practical and represent initiatives already being under by the banking and financial services sectors
  • Dishonour fees and informal overdrafts on ‘basic’ bank accounts are recommended to be abolished

To promote better access to banking services for those who live in remote and regional communities, the Commission has recommended amendments to the Banking Code so that when banks are dealing with those who live in remote areas, or those who face challenges with English language skills, the banks make suitable arrangements with the customer to allow them to undertake their banking effectively.

Members of the community are also disadvantaged by certain features on ‘basic’ low (or no) cost bank accounts, such as informal overdrafts and direct debit dishonour fees. The Commission has recommended that for basic bank accounts:

  • informal overdrafts be removed unless it has been requested and agreed to by the customer; and
  • dishonour fees be removed

The removal of these features, while in favour of the customer, take away a significant revenue stream from banks who earn fees (and interest) from these standard features.

To improve access for members of Aboriginal and Torres Strait Islander communities, the Commission recommended that banks adopt the AUSTRAC Guidelines, which provide for alternative methods of verification of identify when ‘conventional’ methods of verification are not suitable for these customers. The Commission has also urged consultation with community members to determine whether the existing superannuation laws regarding binding death benefit nominations are suitable when considering the traditional Aboriginal and Torres Strait Islander notions of ‘dependency’ and ‘family’.

Superannuation

  • Commissioner Hayne has recommended that a superannuation trustee should be prohibited from assuming any obligations other than in the course of its performance of the duties of a trustee of a superannuation fund
  • Deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited
  • The SIS Act should be amended to prohibit trustees (and their associates) ‘treating’ employers where it may reasonably be understood by the recipient to have a substantial purpose of having them nominate the fund as a default fund
  • Twin peaks regulatory model to continue, but ASIC’s role be extended to enable enforcement of all provisions in the SIS Act

The Commission has recommended that the trustee of a registrable superannuation entity (RSE) should be prohibited from assuming any obligations other than those arising from or in the course of its performance of the duties of a trustee of a superannuation fund. Commissioner Hayne accepted that the regulatory framework contemplated the existence of conflicts of interest. Nevertheless, he did not accept that the purported management of conflict satisfies the obligations in the section. Rather in some instances only the avoidance of the conflict would suffice. Specifically Commissioner Hayne noted that the circumstance where a trustee was both trustee of a superannuation fund and responsible entity of a managed investment scheme should not be permitted. Further, any outsourcing requires ongoing care and diligence on the part of a trustee, and active overview by the regulator. The trustee must satisfy itself that the trust is being run in the best interests of the members, and regulators should be astute to observe whether the best interests duty is being met.

There is work here for trustees to review the benchmarking of their related party investment or administration arrangements. Trustees could be informed by recommendation 4.14, which makes recommendations in relation to the review of related party insurance arrangements. Some restructuring by trustees may be required.

The Commission has recommended that deduction of any advice fee (other than for intra-fund advice) from a MySuper account should be prohibited, and deduction of advice fees from superannuation accounts other than MySuper accounts should be prohibited unless the requirements for annual renewal, prior written identification of service and provision of the client’s express written authority are met.

Commissioner Hayne considered that using superannuation money to pay for broad financial advice is not consistent with the sole purpose test, but recommended a simplifying legislative amendment to MySuper provisions to make this clear. Given his comments in relation to the sole purpose test, trustees may need to consider whether any advice fee deductions even from choice accounts ought to be permitted in future, given Commissioner Hayne’s comments in relation to the sole purpose test.

The Commission has recommended that section 68A of the SIS Act be amended to prohibit trustees (and their associates) doing certain specified acts where the act may reasonably be understood by the recipient to have a substantial purpose of having the recipient nominate the fund as a default fund or having one or more employees of the recipient apply or agree to become members of the fund. The specified acts relate to supplying (or offering to supply) goods or services to a person or giving or allowing (or offering) a discount, allowance, rebate or credit in relation to the supply of goods or services to a person. The provision should be a civil penalty provision enforceable by ASIC.

Should this change be implemented, trustees will need to review their marketing arrangements, and perhaps their entertainment programs. Part of Commissioner Hayne’s issue here was the scope of his inquiry, since it did not extend to consideration of whether employers ought to be put in the position of determining a default fund for their employees, in the absence of the default fund being nominated by an industrial award or agreement or other instrument. Nevertheless he was robust in his recommendation that ‘treating employers’ should not be permitted.

Commissioner Hayne has recommended adjustments to the co-regulation model for superannuation. According to the Commission, APRA ought to remain as the prudential regulator for superannuation, responsible for establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by superannuation entities APRA supervises are met within a stable, efficient and competitive financial system. Commissioner Hayne has recommended, however, that ASIC’s role be extended to enable enforcement of all provisions in the SIS Act that are, or will become, civil penalty provisions or otherwise give rise to a cause of action against an RSE licensee or director for conduct that may harm a consumer. There should be co-regulation by APRA and ASIC of these provisions.

Commissioner Hayne’s recommendation is founded on his view of the merits of the regulation of superannuation by regulators with responsibility for broader financial services, given the intersection of superannuation with other parts of the financial services industry, and the importance, size and complexity of the superannuation industry. There should be no doubt over the scope of any regulatory agency’s purview, and the powers and remedies available to the agencies ought to be better aligned in that there ought to be no regulatory gaps.

Insurance

  • The Commission has recommended a prohibition on unsavoury sales tactics and implementation of a deferred sales model
  • Amendments to simplify the law and bring the regulation of insurance contracts into line with other financial products; including the application of unfair contract terms and inclusion of claims handling and settlement within the obligation to provide financial services efficiently, honestly and fairly
  • Changing an insured’s duty of disclosure to a ‘duty to take reasonable care not to make a misrepresentation to an insurer’
  • Expansion of enforcement powers for regulatory bodies with added scrutiny on group life insurance arrangements

Commissioner Hayne made 15 recommendations for the insurance sector, focusing on greater consumer protections, wider powers for regulators and streamlining the legislative framework across the insurance and financial services industry.

The recommendations included legislative prohibition on unsolicited offers of insurance products to retail clients, in order to prevent consumers purchasing inadequate insurance products due to aggressive sales tactics and insufficient information.

The Commission also endorsed a Treasury-led shift to a deferred sales model for add-on insurance (excluding comprehensive motor insurance), allowing consumers to make an informed decision on purchasing financial products. In order to reduce incentivised insurance sales, Commissioner Hayne recommended a cap on commissions to dealers.

To further simplify the regulation of insurance contracts and broaden consumer protections, Commissioner Hayne recommended bringing insurance contracts into line with other financial products by removing the carve-out of handling and settlement of insurance claims from the definition of ‘financial service under the Corporations Regulations 2001.’ The result of this will be an obligation on insurers to carry out claims handling and settlement efficiently, honestly and fairly.

As widely expected, Commissioner Hayne recommended that the unfair contract terms provisions in the ASIC Act be extended to insurance contracts.

The Commission also challenged ASIC not to be a ‘passive recipient’ and recommended that ASIC have greater regulatory powers including power to approve enforceable provisions of industry codes. In effect, the recommendations would lead to greater scrutiny by ASIC of the conduct of insurers from the pre-contractual to claims settlement stages.

The Commission recommended changes to an insured’s pre-contractual duty of disclosure in section 21 of the Insurance Contracts Act 1984 (Cth) (ICA). Commissioner Hayne proposed that an insured’s duty of disclosure in consumer contracts be amended to simply require an insured to take reasonable care not to make a misrepresentation to an insurer. The purpose of this recommendation was to address what Commissioner Hayne considered to be a knowledge imbalance between insurers and insureds regarding the categories of information insurers consider to be relevant to their decision to insure a risk.

While the practical effect of the change is not remarkably different from the current application of ss 21A(3), 21B(4) of the ICA, the amendments further shift the burden to insurers to ensure they have obtained sufficient information prior to writing a risk. The recommendation will limit the availability of the remedial provisions in Division 3 of Part IV of the ICA and will likely result in a more intense focus on underwriting in the pre-contractual stages.

In relation to life insurance, the Commission pressed for a higher degree of regulatory scrutiny (particularly group life insurers) where related parties are engaged to provide life insurance. Commissioner Hayne recommended that these conflicted parties be required to provide independent certification that the policies are in the best interests of members and satisfy all legal and regulatory requirements to APRA.

Regulatory issues, ASIC and APRA

  • Commissioner Hayne has recommended the simplification of legislation governing financial services entities to expressly identify what fundamental norms of behaviour are being pursued and remove exceptions and qualifications
  • Additional clarification of ASIC and APRA’s respective roles and accountability with oversight from a new independent super-regulatory body and regular capability reviews
  • A shift in ASIC’s approach to enforcement with a preference for court determinations of contraventions
  • The creation of a new disciplinary system for financial advisors and an express obligation for AFSL holders to take reasonable steps to cooperate with the Australian Financial Complaints Authority
  • If ASIC fails to create an effective enforcement culture, consideration should be given to making ASIC a purely investigatory body, with a new specialist litigation agency established to undertake civil penalty enforcement action

Commissioner Hayne has recommended an overarching process of simplification of financial services laws, so that the intent of those laws is met. His recommendations stress the benefit of clearly stating the fundamental norms of behaviour that are being pursued and eliminating exceptions and limitations. This approach leads to reduced uncertainty and reduced scope for literal compliance, which may not meet the underlying principles and purposes.

The size and complexity of this task was directly acknowledged by Commissioner Hayne; however, in his view, it proves why it is necessary given the law is currently spread over so many different Acts.

Commissioner Hayne has recommended that the ‘twin peaks’ model, in which APRA is responsible for prudential regulation and ASIC responsible for conduct regulation, be retained. However, the Commissioner has made several blunt observations regarding the capability and track record of each of these agencies in carrying out their regulatory functions.

The Commission concluded that APRA has an under-developed enforcement culture and observed that the recent proceedings brought by APRA against persons and entities associated with IOOF was a rare example of APRA carrying out its enforcement function. He concluded that one of the key underlying reasons for this deficiency is that APRA is more concerned with the stability of the financial system (or key actors within it) rather than consumer outcomes.

In relation to ASIC, for which enforcement is a more fundamental aspect of its work, Commissioner Hayne was similarly critical – particularly in relation to ASIC’s preference for achieving outcomes by negotiation or persuasion, which Commissioner Hayne concluded is incapable of achieving compliance with financial services laws. The critical question Commissioner Hayne has urged ASIC to ask when faced with a contravention of the law is ‘why not litigate?’ and he has concluded that ASIC has a fundamental obligation to ensure that a breach of the law is not profitable. While ultimately falling short of recommending that ASIC be stripped of its enforcement function in favour of a new specialist litigation agency, ASIC has been put on notice that such a proposal should be considered if its performance is unsatisfactory.

To address the deficiencies in regulatory and enforcement outcomes at ASIC and APRA, Commissioner Hayne has recommended that the agencies work more closely and share more information. He has also recommended that they engage in co-regulation of superannuation and jointly administer the BEAR. Recommendations have also been made for the creation of an independently-chaired oversight body for both agencies, for accountability principles consistent with the BEAR to be applied to the regulators themselves and for regular capability reviews to be conducted. At ASIC, Commissioner Hayne has endorsed the implementation of recommendations of the 2017 ASIC Enforcement Review Taskforce relating to self-reporting of breaches and has further recommended changes to ASIC’s approach to enforcement, which give preference to court action and ignore any existing relationships with the relevant entity to displace regulatory capture.

At the consumer level, Commissioner Hayne has recommended the creation of an express statutory obligation on AFSL-holders to take reasonable steps to cooperate with the Australian Financial Complaints Authority in its resolution of disputes, including a requirement to disclose all relevant documents and records. The creation of a single, central, disciplinary body for financial advisors has also been recommended with an express obligation on AFSL holders to report ‘serious compliance concerns’ to that body. This is intended to free up ASIC resources to carry out Commissioner Hayne’s aggressive court-oriented enforcement mandate.

Where to from here?

The Government was quick to issue a press release stating that it has agreed to ‘take action’ on all 76 recommendations contained in the Royal Commission’s Final Report, and has in its formal response broadly agreed to or expressed support for almost all of the recommendations. The Opposition has also indicated it accepted ‘in principle’ all of the recommendations in the Final Report, although, at the time of publication, the Opposition had not issued a formal release stating its official position.

What is clear is that whichever party (or parties) forms the next Government, they will need to concern themselves not only with fixing issues identified by the Commission as necessary to achieve better consumer outcomes, but also with maintaining the flow of credit and continuing to promote competition in the financial system. There were already signs, in response to the Commission’s proceedings and Commissioner Hayne’s interim report, that the Banks were pulling back from lending to certain sectors and to certain types of borrower, or were making lending criteria more stringent. Most of the banks have also passed on out-of-cycle rate increases to borrowers (which, while primarily a response to a rise in the cost of capital, also reflects a reduction in the banks’ risk appetite and a hedge against increasing compliance costs). All of this is occurring against a backdrop of falling house prices in most States and Territories, a slowing global economy and trading tensions between the major economic blocs (from which Australia is not immune).

But there is a federal election to be contested and won, so it is possible that the Government and the Opposition will seek to outdo each other on who is toughest on corporate wrongdoing and the causes of corporate wrongdoing. In a big picture sense, the parties’ responses to Commissioner Hayne’s report is likely to be a major election issue. What form any future reforms takes remains to be seen in the months following the federal election. Each piece of proposed new legislation will be subject to the usual process of consultation and lobbying, so guarded responses to ‘agree with’, ‘take action’ on, or ‘accept in principle’ all of the report’s recommendations need to be seen in that context. However, what is different this time is that market participants will perhaps be less keen to push for, and legislators will be less willing to concede, the types of carve-outs and exceptions that featured in the Future of Financial Advice reforms. This is a consequence of the case studies heard at the Royal Commission.

Hall & Wilcox will bring you further updates and alerts as we further develop our thinking on the impact of the Royal Commission’s report.

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