Australia: What you need to know about the Royal Commission into the financial services sector

Services: Banking & Finance
Industry Focus: Financial Services

What you need to know

  • The first initial public hearing of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission or Commission) will be held on 12 February 2018.
  • Under the Terms of Reference, the Royal Commission has extensive powers to investigate, interview, and obtain sensitive documents in relation to its objective. Failure to adhere to the Royal Commission's requests may result in civil or criminal penalties.
  • Organisations and individuals involved in the financial services sector should take advice on their position and formulate a strategy for responding to any summons served on them by the Royal Commission.

On 14 December 2017, the Governor General established the Royal Commission by finalising its Terms of Reference and appointing former High Court Justice Kenneth Hayne as Commissioner. The pre-disclosure reports from larger organisations in the banking, superannuation and financial services sector were submitted on 29 January 2018. The Royal Commission will convene its first initial public hearing on 12 February 2018.

Those who are impacted by the Royal Commission will be starting to grapple with the Commission's broad powers, the scope of its Terms of Reference, the unique procedures and the protections available to those who are called to give evidence.

Powers of the Royal Commission

Under the Royal Commissions Act 1902 (Cth) (Act), the Royal Commission has broad powers to:

  • summon witnesses and take evidence
  • require production of documents, irrespective of whether or not the document may be subject to legal professional privilege (LPP) or constitute evidence that may tend to incriminate a person or entity
  • apply for search warrants if there are reasonable grounds to believe that certain evidence might be concealed, lost, mutilated or destroyed.

Failure to comply with the Royal Commission

Failure to comply with an order from the Royal Commission, without a reasonable excuse for non-compliance, could result in serious penalties or imprisonment.

Legal professional privilege

Under the Act, it is not a reasonable excuse for a person to fail to produce a document because the document might be subject to LPP. The only exception to this rule is if an Australian court has already determined the specific document is privileged.

If an Australian court has not yet determined whether a document is subject to LPP, a claim for privilege may be made to the Commission at the time of its production. If, after inspecting the document, the Commission accepts the claim for LPP, the document will be returned. If the Commission rejects the claim for LPP, the Commission may use the document for the purposes of the inquiry.

Self-incrimination

Under the Act, it is not a reasonable excuse for an individual to refuse or fail to produce a document if the particular document might tend to incriminate the person, or make the person liable to a penalty.

The person will only be excused from answering a question or producing a document that might tend to incriminate them in relation to an offence or make them liable to a penalty if:

  1. the person has been charged with that offence and the charge has not been finally dealt with by a court or otherwise disposed of, or
  2. proceedings in respect of the penalty have commenced and those proceedings have not been finally dealt with by a court or otherwise disposed of.

Use of evidence in subsequent proceedings

The Commission may communicate or furnish certain information or evidence obtained during its inquiry to a relevant authority if the information or evidence relates to or may relate to a contravention of the law of the Commonwealth or any State or Territory. It should be noted that any statements or documents produced to the Commission by a witness are not admissible in evidence against that witness in any subsequent civil or criminal proceedings. However, statements or documents produced by others in the course of the Commission's inquiry may be admissible in subsequent criminal or civil proceedings against another person.

Scope of the inquiry

The Terms of Reference give the Royal Commission broad powers to investigate any conduct by financial services entities (including directors, officers and employees) that might have amounted to misconduct, and investigate whether the conduct of financial services entities fell below community standards and expectations.

Who are 'financial services entities'?

The Terms of Reference define 'financial services entities' to include:

  • authorised deposit-taking institutions (ADIs)
  • insurers
  • financial brokers
  • persons or entities that are a registrable superannuation entity (RSE), a licensee of a RSE, or have any connection to such a RSE licensee
  • persons or entities that act or hold themselves out as acting as an intermediary between borrowers and lenders.

Whilst it may be a relatively simple exercise to identify entities that are ADIs or insurers, the task is not so clear cut when it comes to persons or entities that act or hold themselves out as acting as an intermediary between borrowers and lenders. The breadth of this category potentially captures many who might not otherwise expect to be the focus of the Royal Commission's inquiry. In the coming weeks and months we expect that further clarity will emerge about how wide this net will be cast by the Royal Commission.

What is 'misconduct'?

The Terms of Reference define 'misconduct' to include legal offences, misleading or deceptive conduct, a breach of trust, or a breach of a professional standard or a recognised and widely adopted benchmark for conduct. Interestingly, the Commission has the authority to have regard to comparable international experience, practices and reforms.

This wide definition of 'misconduct' will require those who are summoned to produce documents and appear before the Commission to look beyond the pure legal meaning of 'misconduct'. They will need to carefully consider whether any conduct engaged in should be assessed and measured against an applicable professional standard or benchmark.

What are 'community standards and expectations'?

The Royal Commission must also determine what are 'community standards and expectations' for financial services entities. There is no legal definition or answer to this question. Only time will tell how the Commission will interpret this phrase. However, in responding to the Commission's questions, organisations will need to put in place a strategy for dealing with any unacceptable cultural, systemic or governance practices that may have fallen below these standards and expectations.

Will the Commission inquire into every possible incidence of poor behaviour or misconduct?

The Commission will give priority to matters that in its opinion have greater potential for harm if not addressed expeditiously. Therefore, although a particular matter may technically fall within the scope of its Terms of Reference, the Commission has the discretion not to inquire into a particular matter.

Furthermore, the Commission is not required to inquire into a particular matter to the extent it is satisfied that the matter has been, is being, or will be, sufficiently and appropriately dealt with by another inquiry or investigation or a criminal or civil proceeding. Given there have been extensive parliamentary inquiries, investigations, and court proceedings involving some segments of the financial services sector, we do not expect the Commission will be overly interested in trudging over old ground other than for the purposes of making recommendations to improve the effectiveness of our regulators or for the purposes of law reform.

Preparation is paramount

As outlined above, the Royal Commission has extensive powers to summon whomever and whatever it desires as long as the requested information is relevant to the objectives of the inquiry as set out in the Terms of Reference. As non-compliance with a summons from the Royal Commission can result in both civil and criminal penalties, it is paramount that organisations and individuals who are served with a summons from the Royal Commission deal with any summons promptly and cooperate with the process.

Any organisation or person who is concerned about whether they might be caught by the broad definition of 'financial services entity' should seek legal advice and implement a strategy to deal with any summons that might be served on them by the Royal Commission.

The strategy should address how to deal with:

  • documents or evidence over which a claim for LPP might be made
  • the production of financially sensitive or 'confidential' documents
  • any documents or evidence that may tend to incriminate a person or entity
  • the practice and procedure of the Royal Commission and representation at any hearing.

If you are a director, officer or employee of an entity that has been summoned (or may be summoned) you should consider obtaining separate legal representation about your position, rights and obligations.

We will provide further updates as more information about the Royal Commission becomes available.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

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