On the 30th of November 2017, The Australian Government announced a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). Appointed to preside over the public inquiry was High Court Justice, Kenneth Hayne. He was tasked with identifying the underlying causes of financial sector misconduct, and to uncover evidence of systemic issues within corporate practices.
The Commission was precipitated by a series of high profile exposés implicating Australia’s biggest banks in scandals covering fraud, predatory sales practices, FOREX trading impropriety, interest rate rigging and more. The Commission conducted seven rounds of public hearings over 68 days, called more than 130 witnesses, and reviewed over 10,000 public submissions. The findings made front page headlines across the country. Concluding the public inquiry, Commissioner Hayne put forward 76 recommendations directed at government institutions, regulators and industry leaders.
The Commission’s findings heralded sweeping changes within current operational frameworks in the financial advice, life insurance and superannuation sectors. Leading general counsel working across these industries in Australia candidly share their experiences in rebuilding consumer trust, as they work towards transforming regulatory practices across the country.
To understand the damning findings of the Royal Commission it is crucial to reflect back upon the historical development of banks in Australia. Jeff Morris was a financial adviser for Australia’s Commonwealth Bank and more importantly, was a key whistleblower spurring the public enquiry.
‘What I noticed was the mentality of banks; they lost their way, and they lost sight of their history,’ explains Morris.
‘The history of Australian banks is a good and honourable one, and an important contributor to national economic growth. It was in the 90s when things began to change. American sales cultures came in and banks got infected with the remuneration US banks had always paid.’
This shift away from customer-focused services towards bonus schemes led to deceptive conduct. Claims that arose included: charges for services that were not provided; continuing conflicts of interest affecting financial advisors; and an insufficient focus on risk management. In more severe cases, some financial institutions had inadvertently facilitated money laundering, turned a blind eye to terrorism financing, and promoted a culture of greed.
Refusing to stay silent, Morris filed several complaints to ASIC (The Australian Securities Investment Commission) Australia’s financial regulator, outlining acts of misconduct he had witnessed. For years ASIC did little to investigate the claims and in 2013 Morris decided go public. Several media outlets began to report upon allegations of fraud, forgery and management coverups. This ultimately resulted in a parliamentary inquiry and Royal Commission.
Since the Royal Commission was televised, Australians saw the direct impact financial misconduct had on individual’s livelihoods, prosperity, and dignity. The erosion of consumer confidence and trust in the sector was – and to some extent still is – extensive.
‘The thing that was so distinguishing about the Banking Royal Commission, was how it captured the public’s attention because of how it connected through case studies into such deep feelings and experiences within Australian consumers,’ says Grant Jones, General Counsel & Executive Lead, Regulatory Affairs at MLC Life Insurance.
‘It showed how customers felt so vulnerable to large institutions, and it gave voice to this feeling and experience.’
This sentiment was shared by David Cullen, general counsel of AMP, one of Australia’s leading wealth management companies.
‘I think it certainly is a pretty challenged environment after the Royal Commission. There is lots of activity and focus on remediating and rectifying legacy issues, making compliance improvements, and leaning into a much greater regulatory change environment than we have seen in recent years.’
The findings of the Royal Commission and the suggested reform package put forward by Commissionaire Hayne represents the largest and most comprehensive corporate and financial law reform process since the 1900s. The reform package addressed issues of weak regulation, corrupt reward structures and an overall disregard for client interests. From the 76 recommendations made, 54 were directed to Government, 12 to regulators and 10 to industry leaders.
‘Together, these reforms have and will continue to ensure that Australia’s financial systems deliver fairer outcomes for consumers and remains resilient to enormous stresses caused by events like the global financial crisis and now the coronavirus,’ said a spokesman from the Australian Treasury.
Leaning into legal
Since the Royal Commission, the role of in-house counsel has been cast into the spotlight. Professor Michael Adams, head of law at Australia’s University of New England explains the delicate position of corporate counsel.
‘The Royal Commission has really highlighted the role of lawyers within financial services, and in particular the role of various in-house counsel within these entities. I think there has been a lot of soul searching and discussions about whether more could have been done, or if they should have been more vocal in management discussions.’
‘First and foremost, if you are a practicing lawyer, solicitor or barrister – you are an officer of the court and you have duties which are predominately to the court, above and beyond that to your client, even as in-house counsel. So, in theory the delineation is very clear,’ says Professor Adams.
Blowing the whistle
During a time when it would have been easier to turn a blind eye, Jeff Morris chose to do the right thing and blow the whistle. By doing so he would embark on a ten year crusade which would culminate in a Royal Commission.
‘It’s a lot more difficult, to be your own man, chart your own course if you have to stand alone, against everyone else who wants you to do nothing,’ explains Morris.
It all started in 2008 when Morris was working as a financial advisor at Commonwealth Bank – one of Australia’s biggest. He became deeply concerned about the severe losses and emotional distress being experienced by many elderly and vulnerable clients as a result of poor financial advice.
‘What I saw and the thing that actually got to me, was when some elderly people came into my office and physically broke down in distress because they had half a million dollars vaporised from their investments. They couldn’t get a straight answer out of their financial planner or any of the managers in the organisation.
‘There were some other blokes who were having similar experiences to me; we got together and decided this was not going to happen on our watch. This is when I wrote to our corporate regulator ASIC (The Australian Securities Investment Commission). The regulators were absolutely useless.
‘That is why in June 2013, nearly five years later, I went public. I needed to expose not only what the banks were doing, but what the regulator was letting them do while they were sitting there asleep at the wheel.’
Morris’s plight to expose corrupt banking practices resulted in one of the biggest regulatory overhauls for the industry.
‘It is I guess quite fortuitous banks had a tune up and a realignment of attitude. The economic carnage at the moment would be just absolutely appalling. Getting banks back on the path of righteousness probably came in just the nick of time. The way the finance industry and banks respond to coronavirus will be extremely important.’
‘In practice in-house counsel roles are subjected to a range of pressures. The more senior of a lawyer you are, the more likely you are part of the management decision-making process. If you are a general counsel at a financial entity, you are part of the c-suite.
‘You are there to facilitate your organisation to develop new products and get around legal barriers and regulatory hurdles. That is part of your job. However, you do have an obligation to speak out against ethical violations to explain when something is misleading or unreasonable.’
Navigating commercial obligations, whilst acting as a trusted advisor may sometimes present ethical grey areas for corporate counsel.
‘The Royal Commission constituted a profound point of inflection in the industry where firms were forced to publicly look into a dark mirror and make a decision to fundamentally change,’ says Jones.
‘What the Commission particularly highlighted through its case studies, is how easily unfair decisions which have real adverse impacts on people can become normalised within a large commercial operations.’
‘This was a very confronting realisation for industry because the vast majority of people across financial services get up each morning and go to work, wanting to do help and do some good and to make a contribution to their customers and community. They are horrified at any prospect of hurting customers.’
‘So when industry people saw the impact of particular conduct through the lens of impacted customers – it was a very confronting moment – people felt deep shame and were challenged at a level of personal values. It was a real moment.’
Similarly, Elizabeth Weston, former head of investment legal and governance at Cbus Super Fund reflects on the on the Royal Commission and its importance on ethical conduct.
‘For me, it was about primacy of community expectations vs the black letter of the law. As a lawyer, obviously people can sail close to the wind, but just because you can do something does not mean you should do something. So, this was a stark reminder of the importance of community expectations and the obligations to always act in the best interests of members.’
Since the Royal Commission, there has been a renewed focus on ethical conduct within the financial sector.
‘I really think those in the sector occupy a unique position of trust, because they are looking after the financial wellbeing of Australians, which is a responsibility and a pretty heavy one. But it is also a privilege,’ explains Cullen.
One of the major criticisms coming out of the Royal Commission was the toxic culture prevalent within financial service industries. In fact, Commissionaire Hayne in his final report outlined harmful cultural practices directly linked with risky, immoral and even illegal activities from financial providers. He wrote:
‘Rewarding misconduct is wrong. Yet incentive bonus and commission schemes through the financial services industry have measured sales and profit, but not compliance with the law and proper standards.’
Therefore, cultural practices play a pivotal role in driving or discouraging misconduct.
‘Quite often, an in-house counsel’s job is going to be telling people unpleasant truths, things they do not want to hear. In a culture where everything is being covered up, in a toxic culture, in-house counsel will frequently be pressured to suppress news and not present senior executives with bad news that they know they do not want to hear,’ says Morris.
Weston agrees: ‘As in-house counsel – especially in financial services – there is always a risk that you will fall captive to business and rubber stamp initiatives. One of the key challenges is the fact that you are sometimes delivering deeply unpopular messages.’
‘As you become more senior, you become resigned to the reality of your function as not merely a trusted counsel but also as an officer of the court. I think at times nobody really wants to hear the squeaky wheel, but it is better they do so, before all the wheels fall off the wagon.’
‘I think for me it is about how to deliver that message in a way that stakeholders are able to identify an alignment of interests. How do we counter that risk and deter it in such a way that they will see where you are coming from and act accordingly?’
Looking to the future post-Royal Commission, the role of in-house counsel is fundamental in influencing healthy cultural practices within the workplace.
‘The role of in-house counsel is more important than ever; certainly in this sector they are busier than ever,’ says Cullen.
‘I am a bit wary of the view that in-house lawyers are the conscience of an organisation because really I think everyone should shoulder that conscience. But we do have a key role in setting and being part of the moral compass of an organisation.
‘I think the other key thing in the Royal Commission was about misconduct. It was asked to look into conduct that may fall below community expectations – even where not strictly contrary to law. Now, that is quite a challenging environment for lawyers to operate in because generally lawyers are most comfortable when dealing with black letter legal obligations. The concept of what is and is not contrary to community expectations will be something lawyers have to consider as part of their advice. It raises the issue of ‘where is the line drawn?’ but increasingly this is another challenge that in-house lawyers will have to grapple with.’
Fairness is another concept that does not necessarily follow the black letter of the law, yet according to Grant Jones, general counsel at MLC Life insurance, it has become a key topic for consideration post-Royal Commission.
‘There are two clear learnings that I took from the Royal Commission that influence how I perform my new role today.
‘Number one is fairness. I believe fairness will be the defining regulatory principle of our time. The second learning is that fairness needs the most protection in every 100 small decisions that are made across a company every day, relative to the fewer and bigger decisions a board will make that have the benefit of lots of perspective and debate.
‘Why is the first important? It is important because it prompts the question, how do you embed fairness in your business processes? Fairness is an idea, it does not have a fixed perimeter and is entirely subjective. With that being the case, how can it be a principle of law that you can design processes and products off the back of? This is the challenge for industry participants and regulators, but it’s a critical issue to solve.’
Governance glow up
As a result of the increased regulatory environment following the royal commission, companies across the financial sector are reassessing their internal corporate governance processes. In particular, one of the most obvious shifts for in-house counsel post-Royal Commission has been the push towards strengthening internal corporate governance framework.
‘In Australia, we have come out of a Royal Commission into Financial Services which has really emphasised the need for robust corporate governance and seen an increased focus by our regulators to take action against white-collar crime. That trend is unlikely to change,’ explains Seshani Bala, group general counsel & corporate assurance at Chartered Accountants ANZ.
‘One of the things I noticed following the Royal Commission was the broadened remit of the General Counsel. I previously led the legal function and my remit was extended to risk and governance. There is definitely a trend towards integrating those functions so you can really drive process synchronisation. Risk can be identified and managed and governance around that risk solidified.’
This shift has also been observed by Cullen: ‘Supporting boards and their increased governance needs has undoubtedly heightened post the Royal Commission. I also think the approach to interacting with regulators is of fundamental importance.’
In-house legal teams across the finance industry are tasked with improving corporate governance frameworks in order to avoid public scrutiny or corporate watchdog fines. Raising the accountability and governance standards across the financial sector is crucial.
‘I was hoping that the Royal Commission would lead to a renaissance for legal function within financial services. Perhaps it did within the retail banking sector, but I am not sure if it did so much in the industry funds sector,’ says Weston.
Focusing on the future
Overall, the Royal Commission and its findings sent shock waves through the financial sector of Australia. Revelations of systemic misconduct and corporate coverups brought to light shameful practices and toxic work cultures.
‘Sometimes it takes a disaster or a near disaster for people to recognise – really truly appreciate – cognitive diversity. As a legal professional you bring a different perspective to bear because of your discipline and because of your training as an officer of the court,’ outlines Weston.
‘I think as lawyers I have always felt that we know about worst case scenarios, we seem to be the people who envision it, we seem to be the people who consider what it would look like on the front page of the paper, rather than waiting until it is on the front page of the paper.’
Although the financial sector in Australia has gone through significant regulatory transformation, acknowledging past mistakes and implementing new frameworks aimed at improving industry practices are the first steps towards rebuilding consumer trust.