banking royal commission pillars

On 24 August, Counsel Assisting released closing submissions in relation to the fifth round of the Royal Commission hearings on superannuation. Counsel Assisting made a number of conclusions as to the findings available to Commissioner Hayne regarding misconduct, or conduct that falls below community standards and expectations — lack of customer focus, a strong sales mentality, flawed advice, deficient risk management processes, conflicts of interest, poor culture and leadership turning a blind eye to the issues.

As has been well noted in the media, the findings relate to systemic issues of bad behaviour across the superannuation sector, primarily the alleged misconduct by a number of corporate trustees of retail superannuation funds.

In its report, Counsel Assisting concluded NAB, CBA, AMP, IOOF, Suncorp and ANZ had contravened superannuation and corporations law. Submissions suggested industry and union-backed funds, including Australian Super and Energy Super, were clear of misconduct, but the behaviour of Hostplus was alleged to have fallen below community standards when it sought to keep low-balance accounts in the fund to boost revenue from insurance premiums.

Webinar: Areas of focus for super trustee governance

27 Nov, 12–1pm (AEDT). Are trustees on top of their governance requirements, frameworks and processes? Join this webinar to ensure you keep abreast of the latest regulatory focus areas. More information here.

In the case of NAB superannuation trustee NULIS, hearings suggested its conduct fell below community standards and expectations, with the bank since admitting to breaches of the Corporations Act 2001 (Cth) in relation to charging customers fees for advice and other services it did not provide, failing to report serious financial service licence breaches to ASIC, and engaging in deceptive conduct with respect to disclosure to and communication with members. Counsel Assisting said that the behaviour “may be attributable, at least in part, to the culture and governance practices within the NAB Group.”

Likewise, Counsel Assisting suggested that NAB’s behaviour was “ethically unsound” and its handling of the fee-for-no-service issues displayed a “disrespect for the role of the regulator and a disregard for the gravity of the events in question.”

Counsel Assisting also said, “Assessed as a whole, it is submitted that this behaviour indicates a disregard on the part of the NAB Group for members of the relevant superannuation funds, for regulators and for the law.”

For CBA, the Royal Commission heard that the a trustee within the CBA group had allegedly breached the law by not moving or notifying its customers to lower-fee (MySuper) products by a deadline of 1 January, 2014. It was also alleged that the Australian Prudential Regulation Authority (APRA) failed to penalise the bank for this misconduct. Counsel Assisting also suggested that AMP trustees may have breached various sections of the Superannuation Industry Supervision (SIS) Act 1993 (Cth) — that requires trustees to act in the best interests of members.

The role of the regulators was also examined, with ASIC and APRA coming under criticism for their approach to regulation and interactions with regulated entities. In particular, there was a suggestion that neither has been an effective conduct regulator, and that there has been confusion as to their respective roles. Counsel Assisting commented that “on the evidence, it is not clear why so little action has been taken” against corporate superannuation trustees, and that the approach of neither APRA nor ASIC has been sufficient to achieve specific or general deterrence.

Counsel Assisting implicitly suggested a new regulator may be needed to clean up the sector and “the evidence suggests that APRA is reluctant to commence court proceedings and take public enforcement action.”

The Royal Commission heard that while APRA can take civil action against breaches of the sole purpose test (ensuring a super fund is maintained for the purpose of providing benefits to its members upon their retirement or for beneficiaries if a member dies), it has never done so. Counsel Assisting questioned APRA deputy chair Helen Rowell about its “behind closed doors” approach to misconduct, asking why it had not taken any action against likely breaches of the sole purpose test in relation to the fee-for-no-service scandal. Particular examples included a lack of action or enforcement over misconduct by the big four banks, including CBA’s Colonial First State, as well as IOOF and AMP, with only warnings given.

“It might be thought that APRA’s objective of ensuring financial system stability is not readily reconciled with being an effective conduct regulator.” Counsel Assisting Michael Hodge QC

Throughout the hearings, it was also identified that APRA had only disqualified one trustee (the director of fallen super trustee Trio Capital) in relation to superannuation over the decade since the process around disqualification was tightened in 2008. Prior to that, between 2003–2007, APRA had the power to administratively disqualify trustees if they weren’t fit and proper. The regulator made 133 disqualifications during that time.

There have since been calls for a capability review of APRA. Counsel Assisting said, “It might be thought that APRA’s objective of ensuring financial system stability is not readily reconciled with being an effective conduct regulator.”

On 3 September, the Royal Commission released written submissions from parties involved in the case studies. Thirteen submissions were received and there was strong rebuttal of many of Counsel Assisting’s conclusions with respect to breaches of trustee duties in particular.

AICD view

The AICD believes the evidence presented of misconduct in the superannuation industry is concerning. While Commissioner Hayne is yet to reach any findings, it appears major shifts need to occur in approaches to governance. The AICD is reflecting on the evidence given and learnings that must be applied. Trustees should be doing the same, and governance structures and related policies and processes will need to be reviewed carefully.

The conduct that grounds many of Counsel Assisting’s conclusions involves potential breaches of a range of laws, including the SIS Act and, in particular, corporate trustees’ duties to exercise the degree of care, skill and diligence a prudent superannuation trustee should, and to perform their duties and exercise their powers in the best interests of members. The two key areas of concern identified by Counsel Assisting relating to culture and governance practices were:

  • The relationship between trustees, their corporate groups and financial advisors, which creates difficulties in prioritising interests of fund members
  • The management of conflicts of interest within retail groups.

It is a matter for Commissioner Hayne to consider the evidence and submissions (including from those who may receive adverse findings) and formulate his final recommendations. The relevant matters would then need to be litigated in court by the relevant authorities before liability is established, and the law in the area is relatively untested and complex. In particular, the AICD understands that several of the sections of the SIS Act at issue have not yet been considered by a court, and others only rarely. The closing submissions reflect Counsel Assisting’s views on the application of the laws, but conclusions will not necessarily be clear-cut.

That said, there is enough on the table to demonstrate that cultural and governance practices need to improve. Counsel Assisting expressed a view that there are several governance practices that may offer explanations for misconduct seen across a range of entities, including in relation to management of conflicts of interests, and called out the development and hardening of cultures that are not compliant and lack insight.

Policy questions

Counsel Assisting called for submissions on a range of policy issues. Some go to systemic or structural issues, while others have a stronger governance focus (such as whether the best interests duty should be expanded). Governance-focused questions the AICD will be closely considering are:

  • Appointment of directors — Is it appropriate for shareholders of Registrable Superannuation Entity (RSE) licensees to retain a broad discretion to appoint and remove directors? Or should there be an obligation imposed on shareholders to exercise such powers in the best interests of the members?
  • Conflicts — Would it be preferable to extend the obligation to act in the best interests of members of a super fund so that (a) contravention of the obligation attracts a civil penalty and (b) the obligation (and civil penalty for breach) extends to shareholders of trustees and any related bodies corporate of the trustee in respect of any conduct that will affect the interests of members of the fund? Are there any unforeseen consequences of such a legislative intervention that would make it undesirable to strengthen the SIS Act in this way?
  • Deterrence — What can be done to encourage the regulators to act promptly on misconduct or potential misconduct? Is the present allocation of regulatory roles appropriate to achieve specific and general deterrence from misconduct? Given that what we are fundamentally concerned with is conduct that, in subtle but ongoing ways, negatively affects the retirement outcomes of consumers, are either of the regulators best placed to carry the responsibility to protect consumers should the balance between them be restructured or significantly altered?

In August, the AICD sought member feedback on policy issues raised in the Interim Report and will formulate a response. This will be available to members in due course.

Royal Commission hearings on the insurance sector took place 10–21 September. They will be followed by hearings on policy issues commencing 19 November. Commissioner Kenneth Hayne will lodge his Interim Report on 31 September, focusing on the Royal Commission’s first four rounds of public hearings. Company Director will include coverage in our November issue. The final report is due on 1 February 2019.