What you can expect from the Financial Services Royal Commission

Announcing a government inquiry is always big news, but when the Australian Government declared it was establishing a royal commission into Australia’s banks, it really made a splash. Referring to it simply as a banking royal commission may be underestimating its potential to also investigate the superannuation sector, and the financial services industry more generally.

The upcoming inquiry is titled the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (FSRC), but given its draft terms of reference, the superannuation industry – in particular industry super funds – seems likely to be just as big a focus as the banking sector.

Large super funds are likely to find themselves devoting considerable time and resources to dealing with the FSRC in the coming year. Financial analysts believe the cost of complying with the FSRC will be between $50 and $100 million each for the big banks, so the cost to super funds – and their members – is also likely to be substantial (for information about the types of super funds affected by the FSRC, see SuperGuide article Comparing super funds: Who’s who in the super zoo?

FSRC terms of reference: who’s in the spotlight?

The FSRC has only one year to complete its work (a year less than was given to the trade union royal commission), so it is likely to stick closely to its terms of reference, rather than straying into other areas of interest.

The general scope of the FSRC stretches across the financial services industry, with its terms of reference requiring it to investigate:

• financial service entities, such as banks and authorised deposit-taking institutions
• entities that undertake liability, such as general and life insurers and reinsurers
• holders of Australian financial services licenses and authorised representatives, such as financial advisors
• registrable superannuation entities (RSEs), such as large industry, retail and corporate super funds
• any entity connected to the RSE, which presumably includes super funds’ administrator, insurer, investment managers and other related entities.

Self-managed super funds and accountants servicing SMSFs are excluded from the royal commission’s attention.

Although mortgage brokers and other credit providers (such as pay day lenders) were not covered in the draft terms of reference, at the time of writing it seems the final terms of reference will be changed to include them. There are media reports Royal Commissioner Justice Kenneth Hayne (a former High Court judge appointed to head the FSRC) will be empowered to investigate all agencies holding an Australian credit licence, which will include lenders outside the major banks.

As this is a royal commission, Justice Hayne will have the power to compel witnesses to give evidence under oath and it will be an offence to fail to attend or produce documents to the commission, or to conceal, mutilate or destroy any documents.

What issues will the commission explore?

The areas the Government has requested the commission to investigate are outlined in the terms of reference and include:

• the nature, extent and effect of misconduct by a financial services entity (including its directors, officers or employees, or anyone acting on its behalf)
• any conduct, practices or business activities below community standards and expectations
• use by a financial services entity of super fund members’ retirement savings for any purpose not meeting community standards and expectations, or otherwise not in the best interest of members
• whether problems are attributable to the culture or governance of an entity, industry or sector
• effectiveness of mechanisms to assist consumers suffering due to misconduct
• adequacy of existing laws, internal systems and industry self-regulation
• effectiveness of regulators in identifying and addressing misconduct
• whether changes are needed to the legal framework, company practices or financial regulators to minimise future misconduct
• any incidental matters.

The draft terms of reference do not specify how far back the royal commission can investigate into reported misconduct or behaviour falling below community standards and expectations.

Impact on the banks? Less than expected

In discussing the likely impact of the FSRC on Australia’s banks, most commentators noted that when the banks wrote to Prime Minister Turnbull requesting the royal commission, they kindly provided their own draft terms of reference for the inquiry.

Overall, it seems likely that although the financial cost of the FSRC will be significant for the banking sector, the overall impact on how the financial services industry is regulated may be less than what many Australians are expecting.

The draft terms of reference make it clear “the Commission is not required to inquire into, and may not make recommendations in relation to macro-prudential policy, regulation or oversight”, so major changes to the regulation and oversight of the banking sector is unlikely. Particularly as the FSRC “may not make recommendations” into policy that can “have widespread implication for the financial system”.

Super industry: under the microscope

One area that does have the potential to see the FSRC make significant recommendations is the superannuation industry. Several commentators have claimed the government’s main aim with the royal commission now appears not to be an investigation of the banks, but instead an investigation into the superannuation industry.

The reference requiring the FSRC to inquire into “the use by a financial services entity of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members” is being interpreted as a direct shot at industry super funds and claims they are using members’ money to benefit unions.

The day after the royal commission was announced, Financial Services Minister, Kelly O’Dwyer, hit out at industry super funds claiming they had spent millions of dollars on a “political campaign” where bank employees were depicted as foxes in a henhouse. This was followed by comments by Immigration Minister, Peter Dutton, that a benefit of the royal commission would be that industry super funds would face more scrutiny, given they have “union members and whatnot on the board”.

Industry reaction to the FSRC

Given these comments from the federal government, it’s unsurprising the super industry has been less than enthusiastic about the financial services royal commission. The Association of Superannuation Funds of Australia (ASFA) noted the sector “has been much reviewed by numerous inquiries in recent years and is closely supervised by a variety of regulators. Accordingly, ASFA is disappointed the government has included superannuation in the scope of the royal commission.”

Chair of Industry Super Australia, Peter Collins, told ABC TV super “has been tossed into [the royal commission] for political reasons and also to appease the banks. In [the banks’] view to shift the blame, to deflect attention to superannuation.”

It’s worth noting if the royal commission explores relationships between industry funds and associated entities like unions, it is also likely to investigate the relationships between retail super funds and the banks operating them. Given any parties accused of illegal or ethical conduct in a royal commission have the opportunity to cross-examine witnesses to ensure they are afforded natural justice, this could make for some absorbing testimony at the commission.

What does the FSRC mean for super fund members?

Whatever the findings of the FSRC when it comes to misconduct in the superannuation industry, one thing is certain – large super funds and their senior executives are unlikely to be able to devote their full attention to super fund members over the next year or so.

Aside from the royal commission, there is also a Productivity Commission inquiry into competition and efficiency in the super industry, plus the release of new prudential standards for super funds by the Australian Prudential Regulation Authority (APRA). With all this attention directed towards the super industry, super funds and super industry associations are likely to find 2018 yet another very busy year.

For more information about the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, refer to the draft terms of reference by clicking here.