By Darren James, Partner
In a small but packed temporary hearing room in Melbourne on Monday 12 February, the first hearing of the Royal Commission into misconduct in the Financial Services Industry occurred.
On this occasion, Commissioner Kenneth Hayne QC AC, and Senior Counsel assisting the Commission, Rowena Orr QC, each provided short addresses.
Five important issues emerged from these addresses. These issues are detailed below.
1. “Community standards and expectations”
The terms of reference requires the Commission to consider whether any conduct, practices, behavior or business activities by financial services entities “fall below community standards and expectations”.
The terms of reference provided no guidance, however, as to what the expression “community standards and expectations” might embrace.
There was, as such, some hope that the Commissioner would provide some early guidance on that issue – and he did.
Here’s what Commissioner Hayne said:
“One element, perhaps a very important element, of community standards and expectations may be derived from what is said in the Murray Report into the Financial System about the characteristics of an effective financial system. That report said that the ultimate purpose of the financial system is “to facilitate sustainable growth in the economy by meeting the financial needs of its users.”
The Murray Inquiry said that it believed that the financial system will achieve this goal if it operates in a manner that is efficient, resilient and fair. It concluded that fundamental to fair treatment is the concept that financial products and services should perform in the way that consumers expect or are led to believe. Fairness, understood in this way, may lie at, or at least close to, the heart of community standards and expectations about dealings with consumers.”
The Commission’s guidance on this important issue is welcomed.
Some may consider that embracing what appears to be a product-centric concept of “fairness”, is a lost opportunity to hold financial service providers to a broader and higher level of account.
But read and understood fairly and in context, the Commissioner’s guidance was just that. It did not purport to cover the field and the possibility of a more flexible and broader touchstone being contended for or adopted. There will, as such, be opportunity for those who are given leave to appear at the Commission, to later contend for something different.
2. Commission to examine issues through sample cases
Many members of the community understandably saw the Commission as providing them with an opportunity to publicly ventilate their individual grievances and to shine a sanitising and restorative light into places ostensibly hidden from public view.
Consistently, Counsel Assisting the Commission noted in her opening address that the Commission has received over 385 submissions from the public through the Commission’s online submission portal already, and that “the number of submissions received per week has increased each week”.
The Commissioner’s opening address recognised that the public have expectations about the Commission’s work. The Commissioner explained how the Commission intends to proceed as follows:
“I understand fully that those affected by what they considered to be misconduct want their complaints recognised and considered and want those responsible held to account. I also recognise the central importance of public disclosure and examination of the issues that the Commission is required to consider. All of the public submissions made and to be made to the Commission are very important to the work of the Commission, but I have to say that the Commission will not have time to publicly examine every case of alleged misconduct. We will have to proceed by reference to case studies and examples with a view to identifying the kinds of misconduct that have occurred, why it occurred, what should have been and what was the response to discovering the misconduct, and what follows from those conclusions.
In many cases – perhaps very many cases – the fact that there has been misconduct or conduct falling short of community standards and expectations has been established previously or is now acknowledged or admitted. In those cases, the Commission must focus upon why the conduct occurred; what was the response by the relevant entity and regulators; what should have been the response; what if any recommendations should now be made. More is to be gained by looking at why this happened and at what was and what should have been the response than reproving what other processes have shown happened or reproving what is now admitted to have occurred.”
The fact that the Commission will examine issues by reference to case studies and examples is not surprising.
The Commission has limited time and a broad remit, and sample case studies allow it, like other bodies charged with looking into issues with wide remit, to do its work efficiently and effectively.
The cases that the Commission will examine will no doubt be carefully selected to ensure that they provide the highest and best opportunity for the Commission to do what its terms of reference require.
The Commission’s starting point for the identification of such cases, will be the responses it receives from financial services entities to the requests for information it administers and the submissions it receives from the public.
There is sense also in the Commission choosing sample cases where financial services entities have admitted what occurred. Cases of that kind enable the Commission to avoid spending valuable resources and hearing days receiving potentially contested evidence about what happened, and instead allow the Commission focus on examining the most critical issues – namely, why it happened, how it was responded to, and how it ought to have been responded to.
The nature of the Commission’s inquiry means, however, that it may select some sample cases that might well not have been the subject of admissions. The time available to the Commission in which to conduct its inquiry does not exclude this possibility – but it probably means that any such cases will need to be of significant and broad import and, quite likely, relatively new and novel.
3. Initial subject areas of inquiry identified
Counsel Assisting the Commission identified the first major area that the Commission will inquire into – consumer lending practices.
This issue will be examined in the context of common consumer credit products “such as home loans, car loans and credit cards”.
Counsel Assisting said:
“The Commission will hear evidence of events involving certain financial services entities in the context of home lending that suggest that consumers have not always enjoyed the right to be treated honestly and fairly when it comes to home loans. … Each of these events give rise to important questions for consideration by the Commission, not least of which are how and why were such events permitted to occur, and what steps, if any, were taken at the time or have since been taken in response to those events, including steps to ensure that they do not recur.”
Counsel Assisting also noted that another area of early focus will be the financial planning and wealth management industry. The precise areas of focus within this industry are yet to be identified. Those will be identified “at a later point”, Counsel Assisting said.
4. Commission is yet to decide what issues it intends to exclude
The Commission’s terms of reference give the Commissioner the discretion not to inquire into a matter to the extent that he is “satisfied that the matter has been, is being, or will be, sufficiently and appropriately dealt with by another inquiry or investigation or a criminal or civil proceeding”.
Counsel Assisting the Commission noted in her address that one of the early tasks that has been undertaken by the Commission’s staff, has been to identify reports from recent inquiries and reviews that are relevant to the Commission’s work. So far, some 73 inquiries and reviews have been identified, some of which are continuing.
The review of these inquiries will likely be shared with the public by the Commission in a Background Paper. That paper is then expected to inform the decisions that the Commission makes on what the will not deal with.
5. Confidentiality & non-disparagement obligations
In the days leading up to the Commission’s first hearing, there was considerable media attention devoted to the waiver of confidentiality or non-disparagement restrictions applicable to whistleblowers and persons affected by misconduct.
Some of this attention was critical of the Commission – perhaps on the assumption that its inquiries could be hamstrung by the existence, and potential enforcement, of obligations of these kinds.
Commissioner Hayne used his address on Monday to say this about these issues:
“This Royal Commission, like every Federal Royal Commission, has extensive compulsory powers. A confidentiality or non-disparagement clause in an agreement will not act as a reasonable excuse against production in answer to a notice to produce or a summons. It would not be a reasonable excuse not to answer a question in a hearing. It seems to me to follow that answering a notice or summons would not amount to a breach of any confidentiality or non-disparagement clause.
Further – and this is very important – under section 6M of the Royal Commissions Act, if a witness gives evidence or produces a document under a notice or summons, no injury can be done to that person. Suing the person would almost certainly fall within that prohibition. In many cases where a dispute had been settled on confidential terms, the most immediate fact for the Commission will be that the dispute was settled, not the particular terms on which it was settled, and the fact of the settlement of the dispute will not be within any confidentiality provision.”
Commissioner Hayne’s discussion did not stop there, however.
He went on to issue an important and heedworthy warning to all who might consider taking steps to enforce confidentiality and non-disparagement obligations within the context of the Commission:
“…. any institution which sought any form of legal redress against a member of the public or a whistleblower seeking to volunteer information to the Commission in anticipation of the possible exercise of the Commission’s coercive powers would be taking a step which would very likely provoke two immediate consequences. First, the Commission would be very likely indeed to exercise its compulsory powers to secure the information in question. Second, the very fact that an institution sought to inhibit or prevent the disclosure of the information would excite the closest attention not only to the lawfulness of that conduct by the institution, but also to what were the institution’s motives for seeking to prevent the Commission having that information.”
Confidentiality and non-disparagement obligations arise in many ways, and they often protect and inhibit, not just institutions, but a range of individuals as well.
Those who are bound by, or might wish to enforce, such obligations need to carefully consider their positions – including in the light of Commissioner Hayne’s warning on Monday.
A full transcript of Monday’s Commission hearing – which includes the addresses by the Commissioner and Counsel Assisting the Commission – is available for downloading on the Commission’s website (here).
This article is of a general, informational nature. It does not does not constitute legal or professional advice by the author or by Mills Oakley, and must not be relied on as such.
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