Financial Services Royal Commission: Hearings announced on causes of misconduct

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By Darren James, Partner

A 5 minute read about the latest developments in the Financial Services Royal Commission.


Commissioner Hayne has announced the 7th round of hearings in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

What will the round 7 hearings focus on?

The principal focus during this round of hearings will be on two principal issues:

  1. Cause: identifying the causes of misconduct and conduct which falls below community standards and expectations
  2. Response: evaluating the responses to that conduct (both by the financial services entities themselves and by regulatory and supervisory agencies).

What sorts of issues will be considered in round 7’s hearings?

The Commission will examine the cause and response issues some of the case studies which it explored in earlier hearing rounds.

The Commission will specifically consider:

  1. how culture, governance, remuneration and risk management practices caused or contributed to the conduct in each case study.
  2. the actions and responses of the regulatory and supervisory agencies involved in each of the case studies, and how those responses may have, in turn, caused or contributed to the occurrence of such conduct.

These issues will be explored through senior executives from the financial services entities and the regulators. These senior executives will examined by Counsel Assisting the Commission.

The Commission will not only focus on cause and response issues through case studies. It will also look at a wider range of issues that inform those matters.

The Commissioner has received almost 500 written submissions from the public which concern matters relevant to this round of hearings.

Those submissions are under active consideration by the Commission and the Commissioner has advised that those submissions will inform the matters explored with the financial services and regulatory executives called during this round of hearings.

What’s likely to emerge from this round of hearings?

The Commission’s exploration of factors causing or contributing to misconduct, including regulatory response and supervision, will inevitably lead to the Commissioner making several much anticipated recommendations as to reform in his final report (due 1 February 2019).

A read of the many submissions lodged by the public with the Commission reveals a clear and present push for banking services to be separated from other financial services (including superannuation, insurance and financial advisory services).

The many submissions that advance this contention often refer to the Glass-Steagall Act reforms historically implemented in the USA. Those reforms were implemented during the Great Depression in 1932-33 at the behest of the then former head of US Treasury (Sen. Carter Glass) and the then Chair of the House Banking & Currency Committee (Rep. Henry Steagall).

The Glass-Steagall reforms were emergency measures to counter the failure of many thousands of banks during the depression. They forced a separation of regular banking services from investment banking services. The reforms were partially repealed in 1999.

In 2008, Nobel Prize Winner in Economics Science, Josteph E. Siglitz, while writing about the global credit crisis (known to Australians as the GFC), made this observation about the impact that the repeal of the Glass-Steagall Act had on the corporate culture of America’s financial institutions: “When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.”

Stiglitz’s observations were made almost 10 years ago now.

Yet the very sentiments that underpin his observations found a clear voice in the Interim Report that Commissioner Hayne issued only two months ago.

The Commissioner’s Interim Report stopped short of making recommendations about how to combat misconduct and other forms of unacceptable conduct. Similarly, he refrained from making recommendations about the desirability or need for cultural and structural structural reform. Instead, the Commissioner posed many questions about those matters.

Many of those questions will be considered at this next round of hearings. The exploration of cause and response issues in this round is the ideal context in which to do so.

When this round of hearings scheduled to occur?

The hearings will take place over the course of 2 weeks starting on Monday 19 November 2018.

Hearings during the first week will be in Sydney and hearings the second week will be in Melbourne.

This article is of a general, informational nature. It does not constitute legal or professional advice by the author or by Mills Oakley, and must not be relied on as such. 

For further information, please do not hesitate to contact us.

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