By Daniel Archibald | CFA
You know things are pretty bad when the Government feels it necessary to investigate an issue by way of a Royal commission. Since Federation, there have been about 140 of these national enquiries, with most of these occurring prior to WW2. The first commission was set up to investigate the arrangement of troops brought home from the Boer War and the second commission was set up to figure out where the Federal Government should be based. Other commissions primarily focused on industry, tariffs and taxation and included investigations into such things as butter, tobacco, sugar and 'moving pictures'.
Since then, Royal commissions have been used more sparingly and perhaps, only in the more serious types of cases. In the 50's we had a Royal commission on espionage. In the 70's, parliament took a look at Aboriginal land rights and the environmental protection of the Great Barrier Reef. In the 80's they investigated drug trafficking and the Lindsay Chamberlain conviction. Most of these post-war enquiries focussed on social issues such as welfare, rights and abuses.
The last 30 years has seen only 15 Royal commissions initiated. Interestingly, most of these have dealt with issues of perceived corruption, negligence or misconduct by corporates, industries or political entities and have included cases such as the Centenary House scandal, HIH collapse, building and construction industry, oil-for-food programme, home insulation program and trade union corruption. And in 2019, the latest enquiry to conclude issued its final report into the Royal Commission into Misconduct in Banking, Superannuation and the Financial Services Industry.
This national investigation was spurred by history of high profile cases involving the banks and other financial intermediaries, including many instances of financial mis-advice (e.g. Storm Financial scandal, Opes Prime collapse, subprime mortgage security mis-selling, benchmark rate rigging... There's plenty more). This commission took aim at a number of more recent and dubious practices in the finance industry including:
- Fees for no service
- Aggressive/unsolicited sales practices in the insurance industry
- Poor ethical cultures in large financial corporates
The final report listed 76 recommendations, which were quickly supported by all sides of politics. Some of these were targeted at the banks and included suggestions on possible criminal investigations. And some recommendations were targeted at eliminating certain practices such as the removal of all conflicted remuneration. There were also a number of recommendations aimed directly at the regulators (ASIC, APRA), who the report highlighted were somewhat complacent in roles of protecting consumers and the industry against misconduct and poor practice.
As a result of the report's findings there have already been a trail of small and large adjustments to the way in which financial services are provided in Australia. Firstly, it wasn't too long before some of the big players in the industry determined to improve their practices/image by replacing CEOs and other complicit executives. Most banks are now on the way to selling or dissolving their wealth management businesses and the financial planning industry is set to lose 1000s of advisers. The regulators have taken the report's feedback and have detailed plans to improve their respective and coordinated roles.
Prior to the commission, financial advisers had already been given the roadmap for the future of the industry towards professionalism with the adoption of a legislated code of ethics and tertiary education requirements. This brings the industry more in line with other professions such as accounting and legal services.
Operators at all levels - individual adviser, institutional, regulator - have been forced to reflect and make changes. The need for this global range of introspection is evident in the nature of human frailty, fraud and lessons from the past. But don't be mistaken, misconduct is still likely to occur, as it does in any industry. But hopefully, protections can be put in place to eradicate as much unethical behaviour as humanly possible and regain the lost trust of a nation.