• Financial services providers, industry participants and consumers.


  • The Royal Commission Interim Report has identified extensive misconduct in the Banking and Financial Services Industry.
  • In response to the identified misconduct and conduct falling short of community standards and expectations, Commissioner Hayne has expressed a preference for simplification of the existing legal framework rather than additional regulation.
  • The law must be enforced to ensure financial services entities uphold basic standards of fairness and honesty.


  • If you have any questions in relation to the Interim Report or the Royal Commission generally, please contact us.

On 28 September 2018, Commissioner Kenneth Hayne handed down the interim findings in relation to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Interim Report).

The Interim Report covers policy related issues arising from the first four rounds of hearings; consumer lending, financial advice, loans to small and medium enterprises and issues affecting Australians who live in remote and regional communities.

The Report sets out the Commissioner's assessment of its inquiry into the conduct of financial services entities that may amount to misconduct or conduct falling short of community standards and expectations. It addresses the questions of why the misconduct has occurred and what can be done to prevent the conduct happening again. The Report identifies issues that require further consideration with a view to provoking informed debate ahead of the release of the Final Report in February 2019.

Key Observations

Round 1 – Consumer Lending

Commissioner Hayne criticised the conduct of entities involved in consumer lending, finding that financial services entities preferred the pursuit of profit over the interests of the consumer. The role and duties of intermediaries were examined and remuneration structures within the consumer lending industry which incentivise conduct that is adverse to the interests of the consumer, were criticised.

Examination of responsible lending raised issues about the application and interpretation of obligations imposed by the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act), in particular the requirement to verify a customer's financial situation.

Round 2 – Financial Advice

The Commissioner highlighted two reoccurring themes that have contributed to the misconduct in the financial advice industry: dishonesty and greed. Culture and incentives were examined in considering questions about how industry participants are paid (including how bonuses and other incentives are calculated).

The issue of 'fees for no service' was closely examined, where clients of financial advisers or licensees were charged fees for services not provided to them. The Commission described this issue as "rightly recognised to have been a large and endemic problem in the industry".

Further, consideration was given to conflicts of interest and duty (including management of conflicts), the consequences related to vertical integration, inappropriate advice (for example where advisers propose action that benefits the adviser or licensee) and improper conduct and discipline (the effectiveness of the regulators' response to improper conduct).

Round 3 – Small and Medium Enterprises

Commissioner Hayne described small businesses to resemble consumers on the basis that small businesses lack the bargaining power and resources of larger entities and may have limited access to legal and financial advice.

A number of issues relating to SME lending were considered, including examination of the legal framework governing SME lending (including whether the NCCP Act should apply to loans made to SMEs), the obligations of the Code of Banking Practice (conditionally approved by ASIC on 31 June 2018), the role and responsibilities of third party guarantors and external dispute resolution approaches by the Financial Services Ombudsman and the Australian Financial Complaints Authority.

The Commissioner recognised that there does not appear to be substantial support for changing the legal framework in respect of SME lending (in so far as bringing SMEs within the application of the NCCP Act) and that although the existing regulatory framework is complex, adding a new layer of law or regulation will only increase the complexity and cost of compliance.

Round 4 – Regional and Remote Communities

The Commissioner described the unique circumstances facing agricultural borrowers and questioned how borrowers and lenders in the agricultural sector deal with the consequence of uncontrollable and unforeseeable external events. The Commissioner considered issues relating to agricultural lending (including revaluation of security) and questioned whether the 2019 Banking Code of Practice provides adequate protection for agricultural businesses.

The Report also considered issues relating to access to financial services and support for regional and remote communities (including basic accounts, informal overdrafts, dishonour fees and identification issues), the conduct of funeral insurance providers and the value of funeral insurance.


After considering the outcomes of the abovementioned hearings, Commissioner Hayne examined the relevant regulations and conduct of the regulators (ASIC and APRA). It found that when misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done.

Commissioner Hayne criticised the regulators' response to the improper conduct identified and found ASIC and APRA rarely took full advantage of their powers and were too close to the sector that they were meant to be policing.

In Commissioner Hayne's view, ASIC's approach to enforcement to date has not been effective to achieve deterrence. While ASIC's powers are limited, ASIC has greater enforcement powers than it has used.

Why has the misconduct occurred?

Unsurprisingly, Commissioner Hayne found across the banking and financial services sector, both misconduct and conduct that falls below community standards and expectations, has occurred. Entities have failed to comply with the law and have neglected responsibility for the consumer. Hayne found the failings of the system, illustrated through the use of case study examples discussed above, point firmly towards the simple conclusion: "Too often, the answer seems to be greed – the pursuit of short-term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?".

Contrary to community expectations, across the industry, profits have been prioritised before the interests of the consumer. This conduct has been driven by and reflected in remuneration practices and policies and is conduct that ignores basic standards of honesty. All the conduct identified and criticised was conduct that provided a financial benefit to the individuals and entities concerned.

What can be done to prevent the conduct happening again?

Commissioner Hayne has expressed a preference for simplification of the existing legal framework rather than additional regulation. The law already requires financial services entities to do all things necessary to ensure that the services they are licensed to provide are provided efficiently, honestly and fairly.

While entities appear to have treated the law as applying only when and if they choose to obey it, passing new law will add an extra layer of legal complexity to an already complex regulatory regime. In Commissioner Hayne's view, "breaches of existing laws are not prevented by passing new law". "Good culture and proper governance cannot be implemented by changing the law. Culture and governance are affected by rules, systems and practices but in the end they depend upon people applying the right standards and doing their jobs properly".

Commissioner Hayne identified the following simple principles that must be applied and adhered to by all industry participants: obey the law, do not mislead or deceive, act fairly, provide services that are fit for purpose, deliver services with reasonable care and skill, and when acting for another, act in the best interests of the other. The question that remains is to what extent does the existing law and regulatory framework need to be administered or enforced differently to ensure these basic principles of fairness and honesty are adhered to?

Next Steps

Public submissions in response to the Interim Report are now open and must be submitted by 26 October 2018. A further round of public hearings will commence in November 2018, at which time the Commissioner will consider policy related issues raised in the Interim Report. These issues along with commentary on the fifth and sixth rounds of hearings (covering superannuation and insurance) and the Commissioner's recommendations will be reported in the Final Report, due to be released by no later than 1 February 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.