UK: 5 Years On From The Royal Commission

It has been 5 years since Commissioner Hayne, in February 2019, released the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (FSRC). It was a watershed moment for the financial services sector, with the rippling effects still being felt 5 years on. It is safe to say that the pre-FSRC financial services environment has been replaced by a new post-FSRC order.

The FSRC triggered an avalanche of market-shaping reforms on how financial services were to be regulated in Australia, with some of those reforms (such as the Financial Accountability Regime (FAR)) still yet to commence. It also triggered an unprecedented volume of enforcement activity from the regulators, particularly ASIC.

But as has become the hallmark of the financial services sector, the headwinds and tailwinds continue to shift, driven by the global economic outlook, technology, market consolidation and sustainability issues.

In this article, we examine:

• where the industry stood 5 years ago, in the immediate aftermath of the FSRC Final Report;
• where the industry is now; and
• where we see the industry moving over the next 5 years.

You can also read further insights in our Global FSR Outlook 2024.

The immediate aftermath: 5 years ago

As many will recall, ASIC responded to the FSRC Final Report with a 'why not litigate' stance, bringing with it a substantial increase in ASIC litigation on case studies canvassed in the FSRC. ASIC's approach to litigation, in many ways, appeared to embrace Commissioner Hayne's comment that 'misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished'.

Concurrently, the Government implemented 2 tranches of reforms which have reshaped key aspects of the regulatory framework for governance and product design. These reforms included, among others:

• changes to the ASIC breach reporting regime;
• the introduction of unfair contract terms for insurance;
• a deferred sales model for add-on insurance;
• a more stringent anti-hawking regime;
• a prohibition against superannuation trustees having fiduciary duties to other persons; and
• new roles for ASIC to regulate the superannuation sector from a conduct perspective and insurance claims handling.

The combination of heightened enforcement activity and major regulatory reform caused many financial services institutions, particularly diversified corporate groups, to reconsider their strategies in financial services; namely, the notion of 'one stop shops' for banking, insurance, investments, superannuation, and financial advice. This resulted in one of the busiest periods for M&A activity in financial services, brought about by an unwinding of the vertically and horizontally integrated financial services models, developed over several decades. We also saw financial services institutions undertake a high volume of strategic acquisitions, to further consolidate market share in core business areas. The industry now has fewer superannuation funds, insurers, platforms and advice providers; however, the remaining providers have significantly greater scale.

Present day

5 years on, we are now seeing a phase of 'recalibration' in financial services regulation and the sector more broadly.

While the theme in 2019 was regulatory uplift, the Government, ASIC and APRA have now been turning their minds to the next phase of change, with some focus on reducing unnecessary red tape. This has resulted in initiatives such as:

• ASIC issuing targeted relief for the breach reporting regime (listen to our podcast episode here);
• the Government's Delivering Better Financial Outcomes reforms to remove red tape and improve access to quality financial advice (see our Treasury submission here); and
• the Government commencing a review of the regulatory framework for managed investment schemes, including with respect to the monetary thresholds for the definition of a wholesale client (see our Treasury submission here).

The industry continues to settle after several years of implementation of regulatory reform, with the focus now shifting to reducing risk through operational simplification and capitalising on growth opportunities.

That said, the roadmap for regulatory reform is not yet complete, and we expect further changes in the medium term due to the commencement of further reforms including FAR, APRA Prudential Standard CPS 230 Operational Risk Management, the implementation of the Quality of Advice reforms, and ASIC and APRA's continuing focus on business continuity, cyber security and operational resilience. The Government and APRA are also continuing their focus on sustainable retirement solutions for Australians, as the superannuation chest continues to grow with limited take-up of longevity products.

Following a period of heightened reform and enforcement, it will be important to ensure that regulatory settings are striking the right balance between regulation, flexibility, and sustainability.

The 5-year horizon

Without a doubt, the next 5 years will be another transformative period in the financial services industry, which we anticipate will include the following:

• Continuing market consolidation: We expect to see a continuation of the industry-wide and regulatory focus on market consolidation, particularly as a means to increase scale, lower fees, and improve sustainability. This trend is playing out across industry sectors including in superannuation, insurance and investments, and we also expect to see greater consolidation among professional third-party service providers including professional custodians and trustees;
• International disruption: We anticipate a noticeable spike in interest from potential foreign entrants, with Australia being viewed as a key growth market for international operators, particularly in insurance and retirement solutions. We expect this interest to increase over the short to medium term;
• New distribution channels for quality advice: With the implementation of the Government's Delivering Better Financial Outcomes reforms following the Quality of Advice Review, we expect to see the introduction of new distribution and advice channels to improve access to quality financial advice, particularly in a superannuation and retirement context. We expect these reforms to have a major effect on financial product distribution, with the reintroduction of scaled advice in a more viable format and the introduction of 'simple' personal advice;
• An intensified approach to ASIC/APRA enforcement action: ASIC has committed to running more test cases to 'push the envelope' of the regulatory perimeter. We anticipate more test cases from both ASIC and APRA, including with respect to topical matters such as ESG and operational resilience. We also anticipate ASIC returning to the use of infringement notices and enforceable undertakings (which had fallen out of favour in the immediate aftermath of the FSRC) to achieve expedited enforcement outcomes, particularly for smaller licensees;
• Ongoing focus on cyber resilience: Cyber risk, security and resilience continue to be central focus areas for regulators and industry. This focus sharpened over the course of 2023. Following a series of high-profile cyber attacks in Australia and evolving cyber threats, ASIC and APRA have clearly signalled their expectations that regulated entities focus on identifying weaknesses and gaps in their cyber security frameworks, with a greater emphasis on board oversight and governance on cyber security. We expect this to continue as a key focus area for industry (including boards) as ASIC and APRA continue regulatory scrutiny and pursue enforcement on inadequate cyber frameworks;
• AI disruption: AI has been a dominant discussion topic for the last year. Over the next 5 years, we expect much of that discussion will turn towards implementation and governance of AI, with significant implications for service delivery, product and advice governance, data protection, the customer experience and technology-assisted product offerings (for more information, see our Global FSR Outlook 2024 chapter on AI and the role of senior managers); and
• Focus on individual executive accountability: With the commencement of FAR for insurers and superannuation trustees in March 2025, the international experience is that we will see ASIC and APRA pay close attention to the specific actions of individual senior executives. While FAR does not impose civil penalties for accountable persons, we anticipate that regulators will apply greater scrutiny to individual accountability during enforcement investigations. This will be consistent with a global trend towards regulators holding individual executives accountable for decisions within their business (for more information, see our Global FSR Outlook 2024 chapter on The evolution of individual accountability regimes).

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.