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A test of compliance in Australian financial services

Daryl Sisson
Daryl Sisson
Managing Director, Pacific, Refinitiv

Bolstering compliance in Australian financial services is an urgent priority after a Royal Commission found financial institutions to be lax at detecting, reporting and stopping misconduct. How will the recommendations impact the compliance function in the short and long term?

  1. A Royal Commission into banking misconduct exposed a multitude of shortcomings in Australian financial services, leading to 76 recommendations across the sector.
  2. A pro-compliance culture is needed to rebuild trust in the industry, although finding enough skilled compliance personnel to meet this aim is likely to be a challenge.
  3. The 2019 Refinitiv Australian Regulatory Summit Industry Report explores more of the regulatory and risk management issues facing compliance in Australian financial services.

Much has been written about the fall-out from Australia’s Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which exposed a multitude of shortcomings exerted by all actors within the financial system.

The majority of the report is an uncomfortable read for those in industry.

Lenders, investment managers, brokers and even regulators — few escaped Commissioner Kenneth Hayne’s criticism. Providers of Australian financial services, the report claims, put their interests ahead of those of their customers.

The commissioner highlighted four key observations in the report’s preface: conduct was driven by profit; unsuitable products were sold to customers; conflict of interest was widespread; and those who broke the law escaped punishment.

Where were the regulators?

During the inquiry’s hearings and in the Interim Report, Commissioner Hayne cited numerous scandals: billing the deceased for financial advice; charging fees for no service; deliberately misleading regulators; and lending to impoverished borrowers, among many others.

When the findings were released in early February 2019, there were 24 prosecutions ongoing, both civil and criminal.

By then, the Australian financial services industry had already experienced an unprecedented number of high-profile resignations. Commissioner Hayne was unequivocal about who was ultimately responsible: “Boards and senior management”.

Yet through it all, where were the regulators?

Too close to the organizations they supervise, the report said. It found the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) to be “ineffective” at overseeing the market and protecting consumers.

All too easily were cases settled out of court, Commissioner Hayne observed, with neither ASIC nor APRA wanting to prosecute.

What are the biggest challenges facing the financial industry in 2019?

Changing how products are sold

The report made 76 recommendations that have yet to come into law.

These generally fall into six categories: bolster regulation; compensate victims; overhaul remuneration; end unlawful fees; reform banking culture; and increase protection for vulnerable customers.

Most of these reforms will transform how products and services are sold. The heavy-handed selling of insurance, for example, will be banned, with customers — and not sales agents — mandated to drive purchasing decisions.

The recommendations could also disrupt operating models. For instance, the inquiry urges borrowers to pay for the services of brokers, and not lenders, as is currently the case.

This threatens the livelihood of brokers: Not only will consumers likely balk at the idea of paying brokers, such fees will probably be significantly less than those paid by lenders.

For the regulators, the commission recommends a new oversight authority, independent of the government, that will supervise both ASIC and APRA.

The inquiry urges ASIC to overhaul its approach to enforcement, with a focus on court action rather than on infringement notices, among others.

It remains unclear which recommendations will be passed into law. Commentators expect the processes to start at the end of this year. Firms therefore have time to consider the implications of each recommendation, and prepare accordingly.

Compliance in Australian financial services

The report found monitoring within firms to be lax at detecting, reporting and stopping misconduct. However, the reasons behind their shortcomings were not due to incompetence or deliberate wrongdoing.

Prior to the Royal Commission, compliance faced an increasingly complex regulatory system. Commonly, departments were under-resourced, under-funded, deprived of independence, and undermined in favor of profitability. For many firms, compliance was a mere box-ticking exercise.

Daryl Sisson quote

In response, the commission clearly outlined its expectations for compliance. Teams must undertake a principle-based mandate to “call out” corporate wrongdoing. The message from Commissioner Hayne to firms and senior management is clear: “Ignore compliance advice at your peril”.

To achieve this, firms must significantly invest in compliance and ensure it is properly resourced. They must also allow the function to operate independently from the business, and be given a voice on all risk-related matters.

Furthermore, firms could shift compliance from being purely an operational function to a strategic resource with representation at the board level, which will help to steer the long-term goals of the business.

Regulators also stand to gain. Already, ASIC has received an additional A$404 million in funding to help improve its supervisory role, and to implement its “litigation-first” strategy.

Future challenges and opportunities

Meeting the recommendations of the report will test compliance. It will require new capabilities in terms of people, processes and technology.

In the short-term, challenges will remain. With the selling of products still mainly performed out of the office and in the homes of customers, for example, firms must rely on salespeople to exert ethical practices and not mis-sell these.

Another issue is talent. With compliance teams set to expand, firms and regulators will be challenged to find skilled personnel. Already, the talent pool for compliance in Australia is stretched, with law firms having bolstered their teams to meet surging demand during the Royal Commission.

Swathes of Australian compliance professionals are also being drawn to overseas opportunities, as foreign banks and regulators seek to capitalize on the skill sets this workforce offers.

The Royal Commission will bring compliance to the forefront of firms, and prompt the industry to adopt a pro-compliance culture. While the immediate challenges facing compliance are great, so too are the short- and long-term opportunities. An exciting time for compliance professionals awaits.

To further explore the pressing challenges facing Australia’s compliance industry, download our 2019 Australian Regulatory Summit  Industry Report