Important changes to the Australian Royal Commission into the Financial Services Sector

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By Darren James, Partner

When Governor-General Peter Cosgrove AK MC issued Letters Patent on 14 December 2017, the terms of reference for the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry were finalised.

The final terms incorporated two significant changes to the Commission’s powers. These, together with some other recent developments in relation to the Commission, are detailed below.

Power added to refer entities and individuals to law enforcement and regulatory agencies for investigation and prosecution

The Commission’s power to inquire into misconduct was expanded.

Misconduct is broadly defined in the Commission’s terms of reference. It includes, but is not limited to, conduct that: constitutes an offence at law; is misleading, deceptive or both; is a breach of trust, breach of duty or unconscionable conduct; or breaches a professional standard or a recognized and widely adopted benchmark for conduct.

I am confident that this broad and flexible definition will catch many by surprise.

 

It is critical is that in the final re-write of the Commission’s terms, the Commission was charged with the requirement to also consider whether, in respect of any misconduct that it consider might exist, the persons or entities involved should be referred to relevant Commonwealth, State or Territory enforcement or regulatory agencies, for those agencies to then consider whether to bring criminal or civil legal proceedings.

The inclusion of this requirement means that if there is a finding that there might have been misconduct, the Commission can decide that the entities and persons involved should be referred to enforcement and regulatory agencies for investigation and civil or criminal prosecution.

Financial service entities of all kinds who fall within the Commission’s terms, as well as those who are directors, officers, employees of them, should take particular note of this significant inclusion.

 

Entities who are served with a summons or subpoena to produce documents by the Commission cannot refuse to produce on the grounds that to do so might incriminate them or others. The privilege against self-incrimination is not available to entities – and cannot be taken by an entity on behalf of an individual who might be able to claim it.

Persons who receive a summons to produce documents or to give evidence to the Commission may also be required to produce documents and answer questions that tend to incriminate them to civil or criminal penalty.

Persons who receive such summonses can only refuse to produce documents or to give evidence on the grounds that to do so may incriminate them, in extremely limited circumstances. They can only do so if the documents or evidence is in respect of an offence or a civil penalty for which they have already been charged and prosecuted or subjected to a civil penalty proceeding for – which prosecution or penalty proceeding has not yet been finally dealt with by a court or otherwise disposed of.

Many individuals will not be able to invoke privilege against self-incrimination in the Commission. Nor will they be able to refuse to answer questions or to produce documents that might incriminate others.

 

There is a popular misconception that persons who give evidence that may tend to incriminate them in a Royal Commission are nevertheless given significant protection by some limitations imposed by the Royal Commission Act 1902 (Cth).

While the Act does limit the use to which the evidence given by a person can be put in subsequent criminal or civil proceedings, the protection that limitation affords is not that broad.

The protection only applies to evidence that the person themselves gave in the Commission, and it operates only to stop the evidence that they themselves gave from being used in court against them as admissions by them.

It does not operate to stop fresh questions being asked of the person which are are based upon, and directed towards adducing answers, that are the same or similar to those that they gave in the Commission.

It also does not operate to stop other evidence given to the Commission – such as by colleagues, associates or others involved in the conduct – from being used against them.

In some cases, the evidence adduced at the Commission, may well be sufficient in and of itself to lead to prosecutions, penalty proceedings or other legal actions being brought.

 

Power to investigate misconduct by borrower-lender intermediaries

The Commission’s powers were also expanded to require it to inquire into a person or entity that “acts or holds itself out as acting as an intermediary between borrowers and lenders”. This inclusion was not expected and caught many by surprise.

The expression “intermediary between borrowers and lenders” is not defined in the Commission’s terms. Nor is the term “lenders” defined. It may well embrace more than just approved deposit-taking institutions or financial services licence holders. It remains to be seen how the Commission will interpret both of these expressions in the course of its inquiries.

Misconduct within the mortgage and loan brokerage sector is now also in the Commission’s sights.

 

Many businesses within this sector are now taking steps to ensure that they are prepared for what the Commission will bring for them.

Legal teams are being assembled, potentially likely documents gathered, and risks, issues and strategies considered. Media teams are also being briefed, and professional indemnity and D&O insurance policies examined to identify potential coverage for the legal costs that are likely to be incurred in connection with the Commission and risks that might arise from the Commission’s inquiry.

Commission’s final terms of reference

The Commission’s final terms are available here on its newly-established website, www.financialservices.royalcommission.gov.au.

Other developments

Other Commission related developments to occur over recent days include:

  1. The Commission has announced the appointment of a team of four Melbourne-based barristers as Counsel Assisting the Commission. They will be led by prominent silks, Rowena Orr QC and Michael Borsky SC. No doubt, this team will be supplemented as the work of the Commission increases.
  2. ACTU President Ged Kearney announced earlier this week that the ACTU intends to seek to be heard at the Commission and to make submissions on behalf of victims of misconduct by financial services entities. The ACTU has since set up an online portal for members of the public to submit their grievances for inclusion in the ACTU’s submission at www.australianunions.org.au/banksarenotsuper. Recent reports indicate that over 500 members of the public have already availed themselves of the opportunity to outline their grievances to the ACTU for this purpose.
  3. A date has yet been fixed for the commencement of hearings in the Commission. Given that the Commission must issue its final report by February of next year, it is expected that hearings will commence in early February of this year.
For further information, please do not hesitate to contact us.

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