Pain from Hayne....Again and Again

As the proceedings of the Royal Commission of Inquiry into Misconduct in the Financial Services Industry approach the final stages in Australia and an Interim Report has been released, it’s perhaps time to reflect on some key issues, and to draw some lessons from the experience.

For 18 months, the Australian Government resisted the Opposition (and the media) demands for a Royal Commission of Inquiry. The Banking and Wealth Management Head Honchos were vociferous in their “nothing to see here” oft-repeated mantra. For the most part, their Insurance counterparts, wisely as turns out, were less eager to comment.

Eventually, the Government caved in to public pressure (immediately following an email from the CEOs of the major banks) and Hayne was duly appointed with a brief calling for internally discovered and admitted failures, errors, omissions, and breaches to be reported to the Commission for consideration.

What ensued in the various public hearings, driven by Councils Assisting, was a cross-examination of the Australia financial services industry which was unrelenting, detailed, and at times, brutal.

No sector of the Australian banking, wealth management, or insurance sectors escaped the steely gaze of the redoubtable Ms. Orr, QC, or the hooded, hawkish, baleful stare of Justice Hayne, with the condemnatory finger of accusation extended to point at the Regulator in “failing to meet Community standards and expectations”.

As became glaringly obvious from the first session, a Royal Commission of Inquiry was wholly justified, and the revelations presented to the Enquiry left many observers (including this one) wondering how such an intrusive and seemingly extensive regulatory regime could produce such poor outcomes for consumers.

Maybe I’ve been around the free enterprise system and the financial services industry for too long in too many places, but to believe that the issues emerging from the Royal Commission are unique to Australia is a stretch. And to believe that overseas parent companies have no influence over the culture, strategy, and operational activities of their NZ subsidiaries and branches is naïve beyond belief.

Agreed Australia has a different regulatory and legislative framework against which conduct is measured, but this is largely a matter of degree, and, as mentioned earlier, the Australian regime was supposedly more robust, prescriptive, and intrusive than anything NZ has contemplated. 

But despite the confirmed rigour of their operating environment over the Ditch, blatant misconduct seems to be endemic, so to claim that “there’s nothing to see here” in NZ with our relatively light-handed approach appears unlikely.

The current FMA/RBNZ inquiry is in train so perhaps it would be advisable to hold off further comment until we are made aware of the findings.

But headlines from the Sydney Morning Herald such as “ANZ knew of risks that its bank tellers could mis-sell super accounts” and “CommInsure could face criminal charges” or “ASIC investigating NAB for potential criminal offences, documents reveal” would surely motivate Management of financial services organisations in NZ to seek public exoneration of their culture, conduct, and activities to avoid the collapse in consumer trust as has clearly occurred in Australia.

There have also been some high-profile casualties because of the Hayne Inquiry’s investigations submerging the careers of not only Board members, CEO’s, and senior management, but also extending to the regulatory entities which have also been under fire for ineffective responses to the widespread misconduct being revealed.

Some with 20/20 hindsight would say that the Compulsory Super regime handed to private industry was always a train-wreck in the making.

Certainly, the battle for a share of the A$2 trillion+ market among the industry funds (REST, Hostplus), the private platforms (BT, Colonial First State) and more recently, the Self-Managed Super Fund (SMSF) sector has been uncompromising, vicious, and constant. 

Left to their own devices on how to deliver superannuation solutions to the community, private financial services players applied the model which they had used successfully for decades with built-in distribution incentives, volume-based compensation, and aggressive marketing strategies masking sales behind the legislative veil of financial advice – much like NZ is about to embark on with the enactment of FSLAB.

The results are evident in Australia from the interrogation of the institutional witnesses called to account for their organisation’s conduct.

However, it's worth noting that questioning was largely based on the material provided by the institutions to the Commission, with Council’s assisting berating and brow-beating the hapless witnesses into admitting that the behavior “fell below Community standards and expectations” or “breached the duty of utmost good faith”. Add the undoubtedly dreadful testimonies of some claimants scandalously mistreated by insurers following natural disasters and you have a picture building of apparent systemic malfeasance which needs to be addressed.

Incidentally, it’s easy to find a definition of “utmost good faith” – it’s much less easy to find a definition of “community standards and expectations”. It’s tough to subscribe to standards and expectations that are not defined, articulated, or left to the subjective evaluation of the Commissioner.

That’s not to exonerate the institutions called to account for the misconduct identified, but I suspect there will be a fightback from the industry players. There will be armies of lawyers in George Street arming themselves with counter-arguments to the allegations and accusations contained in the final report, due by 1st February 2019. The Interim Report, while not mandated, provides an insight into the Commissioner’s thinking and which is likely to carry over through the remainder of the proceedings. 

I'm also not convinced that the entire industry should be tarred with the same brush - most insurance claims are paid without dispute, most financial advisers provide good quality advice to clients, and, while the Inquiry clearly points to some drastic remedial work requirements, the Australian community still needs a financially stable and secure banking sector

But it’s hard to come to any other conclusion than the institutions in the Commission's cross-hairs have brought this on themselves. Afforded elevated positions of public trust and confidence, these organisations have been exposed as abusing the privileges awarded them to provide important financial support for Australian citizens and they will be faced with radical changes to their structure, conduct, and business plans soon.

It struck me during a recent conversation that all NZ Directors could do worse than have a framed portrait of Ms Rowena Orr, QC., on full display and presiding over every Board meeting so that a proposal, resolution, or decision can be tested against the question “What would Rowena ask us about this?”  

Just a thought – albeit a very sobering thought!