Emerging lessons from the Financial Services Royal Commission for the regulation of health practitioners

Speech by John Price, Commissioner, Australian Securities and Investments Commission at the AHPRA - National Registration and Accreditation Scheme Combined Meeting, 2019, (Melbourne, Australia) 28 February 2019

Introduction

It is a pleasure to be here today to speak about the insights ASIC has gained from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

While ASIC and AHPRA regulate different types of entities and individuals operating in different sectors of the economy, preparing this speech has caused me to reflect on some of the important attributes that we share as organisations. 

We are both:

  • striving to promote competence, integrity and the promotion of the public interest within our respective realms;
  • operating to regulate the delivery of services with an increasingly high profile; and
  • increasingly judged on our ability to protect the public before harm occurs, and to sanction and deter misconduct forcefully.
  • So today, I will be focusing on the key lessons learned for ASIC as a result of the Royal Commission, some of which may be instructive more broadly for AHPRA.

Royal Commission

Royal Commissions are the highest form of public inquiry in Australia. This alone makes them significant.

This Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been particularly successful in highlighting the human aspects of misconduct and what it has done to real people’s lives. The use of case studies, which included high pressure sales tactics being used to corral vulnerable people into purchasing services that they did not want, or need, has been particularly striking.

I think this is the key reason Royal Commissions are so newsworthy, particularly in recent times. It is because they have focused upon the poor behaviour of some of Australia’s best-known institutions - behaviour that has had a significant, detrimental impact.

That is why, the Financial Services Royal Commission final report provides insights for regulators of all types - regardless of their jurisdiction - because the primary role of a regulator is essentially around changing the behaviour of the regulated population and reducing harms suffered by real people.

So, understanding how and why people have behaved, and what has enabled them to behave in this way provides some critical lessons for all regulators.

Behaviour and the role of culture

ASIC’s focus on how and why people behave in certain ways is not new. For some time, we have been raising the issue of behaviour and its relationship to culture as an issue that organisations should be focused on.

Our regulatory interest in culture relates to improving conduct and professionalism in Australian financial services firms, and whether the culture of a firm or industry sector promotes fair outcomes for consumers and investors.

Culture matters to ASIC because poor culture can be a driver of poor conduct. A good corporate culture helps to uncover and inhibit poor conduct. When a bad culture is present, poor conduct may flourish, proliferate and even be rewarded.

On the flipside, understanding how consumers behave is also critical for regulators. Behavioural economics is being used by ASIC to get a better understanding of how people actually behave and make – and sometimes avoid – decisions or actions. It is also being used to identify product design and sales practices that lead to poor consumer outcomes.

So, an enhanced understanding of firm culture and consumer behaviour can help us to understand problems more holistically and identify where the greatest opportunities are to improve consumer and market outcomes.

Now, ASIC does not want to micro-manage firm culture. But we do see it as a strong driver of behaviour. Looking at cultural problems can give us an early warning of where things might be going wrong to help us disrupt bad behaviour before it happens and catch misconduct early. Importantly, it helps with identifying not just individual instances of misconduct but broader, more pervasive, problems.

It is not simple of course, as there are a whole raft of issues about how culture can be measured and how it can be changed.

I think this is part of the reason why, in 2015, when ASIC announced that it was focusing on culture, there was a strong reaction. Some indicated that culture could not, and should not, be regulated. It was said that the imposition of greater personal liability on senior executives for failing to address detriment arising from poor culture would be “anathema to the rule of law”, and an “unjustified piercing of the corporate veil”.

It was further claimed that ASIC’s proposed monitoring of culture and suggestions to increase personal liability (and to strengthen whistleblowing laws) was simply unnecessary for cultural change to occur in financial institutions. 

Within a short period of time we have seen a significant change in sentiment on the issue of culture with acknowledgment that more is required to prompt change.

In recent times, there has been a number of corporate scandals, that range from falsifying vehicle emissions through to sexual harassment allegations, which have focused the public’s attention on the relationship between culture and behaviour. This has been accompanied by the rise of “corporate culture” as a regulatory concept in various jurisdictions.

As part of its terms of reference, the Royal Commission was directed to inquire into the source of misconduct, including as to whether it was specifically attributable to particular culture and governance practices of particular entities or the industry more broadly.

Undoubtedly the Royal Commission has found that culture within the financial services sector is sub‑par, that this was not an isolated occurrence and it has contributed to significant consumer detriment. Culture was similarly identified in a prudential review of CBA as enabling poor outcomes for consumers, with inadequate oversight by the board and unclear accountabilities in the organisation.

So, what did Commissioner Hayne recommend in relation to the cultural problems he observed?

While noting that there are difficulties in defining and regulating culture, he saw the assessment of culture as of vital importance to the entities themselves and regulators in stemming misconduct.

He states:

“Although culture cannot be prescribed or legislated, it can be assessed…a careful and detailed assessment of the culture of an entity can be of great value. It can show how issues relating to culture are at the root of misconduct. And if those issues can be identified early, then steps can be taken to address them before the misconduct eventuates.”

This echoes the recommendations in the prudential regulator’s recent review of CBA, in calling upon all regulated institutions to undertake a thorough self-assessment and for change, which moves the dial from reactive and complacent to striving for best practice in risk identification and remediation.

While noting that the primary responsibility for misconduct in the financial services industry lies with the entities concerned, and those who manage them, Hayne envisaged an important role for regulators in moderating culture.

Hayne opined that institutions, like individuals, can be blind to their own faults and that this will often be so with those institutions that have the most problematic culture. On this basis, he suggested that regulators should diagnose issues, ‘hold a mirror’ to the entity, agree to corrective steps to be taken by the entity, and supervise the implementation of those steps.

Hayne then proceeded to make a number of recommendations, which are designed to bolster ASIC’s supervision of culture and governance. This includes an ASIC-administered senior executive accountability framework based on the existing banking executive accountability regime, but which is focused on conduct. Under this regulatory regime, executives will be required to take steps to ensure the entity’s compliance with relevant financial services laws and prevent significant detriment to consumers.

Consistent with the Royal Commission’s recommendations, ASIC has agreed to apply the core tenets of this accountability regime, that applies to the regulated community, to its own operations.

So, from my perspective, some of the issues regulators may wish to think about regarding culture include:

  • As a regulator are we using what we know about industry culture to target risks, threats and harms effectively?
  • Do we have the necessary regulatory toolkit to encourage the right culture for the individuals and entities we regulate?
  • Are we meeting expectations that we will deter and prevent harm through our supervisory activities? 

Four observations – the “why” and “how”

The examination of misconduct and its causes within the financial services sector was framed by four key observations made by Commissioner Hayne.

  • First, the connection between conduct and reward. Inmost cases poor conduct was driven by the pursuit of profits and gains by entities and individuals. In other words, it matters how people get paid and what they are paid to do; 
  • Second, the asymmetry of power and information between financial services entities and their customers. Customers had a lack of knowledge and understanding and very little ability to negotiate terms;
  • Third, the presence of intermediaries who may have appeared to be independent at first glance but were often conflicted in their ability to act in the interests of their customers;and
  • Fourth, too often, financial services entities that broke the law were not properly held to account.

I think Hayne’s fourth observation, the need to hold people to account, is a timely reminder to all regulators as to whether they are operating sufficiently at all levels of the regulatory pyramid that I am sure you are all familiar with.

Now while Hayne acknowledged that there may be cases where there is a good public reason not to seek penalties, the starting point for a regulator in considering any breach of the law must always be that the law is to be obeyed and enforced, with adequate deterrence depending upon visible denunciation and punishment.

In the case of the financial sector, Hayne considered that this had not sufficiently occurred.

Importantly, ASIC quickly noted that its regulatory stance must change. ASIC committed to accelerating enforcement activities, conducting more civil and criminal court actions against larger financial institutions and, as a starting point for all enforcement matters, asking the question “why not litigate?”

In acknowledgement of this, Hayne stated that ASIC should be given time to demonstrate that changes can be made, and once made, the changes are long lasting.

We will need to regulate with sufficient vigour to ensure that the policy intent of the regulation is achieved while still being flexible, proportionate, and according procedural fairness.

So, for ASIC, and regulators more broadly I think the Royal Commission has underscored that a regulator’s enforcement stance must be considered, strategic and communicated effectively to the regulated population.

I think some of the questions for regulators here include:

  • Are our compliance and enforcement methods backed up by more severe responses – that will be used?”
  • Do we have the range of tools and strategies to match the circumstances created by the behaviour of individuals and organisations?”
  • Is our regulatory stance resulting in the desired behaviour? For example, if there is a focus on negotiated outcomes, might misconduct become a ‘cost of doing business’?

Norms of conduct

The Royal Commission report is striking in that it generally does not delve into the detail of the statutory provisions. Instead, the analysis of the issues and responses to them are informed by underlying principles or the norms of conduct that people should abide by.

In the case of the financial sector, these norms are:

  • obey the law;
  • do not mislead or deceive;
  • act fairly;
  • provide services that are fit for purpose;
  • deliver services with reasonable care and skill; and
  • when acting for another, act in the best interests of that other.

To my mind, it is interesting how you can apply these across industries and how each of the norms have a strong ethical component.

Key questions for regulators to consider may be:

  • Is there a clear consensus on what norms of conduct are expected for your regulated population?
  • Are disciplinary arrangements for the regulated population effective?

The various rounds of the Royal Commission peeled back the layers of institutions within the financial sector to view what is inside.

It revealed a predominantly sales driven sector with many intermediaries, trustees and advisers still prioritising their own self-interest. It would seem that some have lost sight of the ultimate purpose of financial service delivery, which is about managing other people’s money (as opposed to maximising their own earnings). An undeniable example of this fact has been the unacceptable, and widespread practice of charging fees where no advice was provided.

The management of conflicts of interest was also systematically poor with compliance often being seen as unnecessary and a cost of doing business – as opposed to a foundation that informs and underpins how a business must be conducted.

On a cursory review, some similar themes have recently been expressed as part of the Royal Commission into Aged Care Quality and Safety. Witnesses have claimed that aged care has become a commodity and that is not fit for purpose for the people it is meant to look after. This has been accompanied with calls for cultural change and greater protections for whistleblowers.

I think in the case of financial services, the challenge for the industry is for it to move to being professionalised and customer-centric rather than sales driven.

The future of financial advice reforms started this process, but structural barriers remain. Importantly, we are expecting some of these structural barriers to be addressed in the financial planning and mortgage broking sectors. There will also be a significant disruption to the way insurance is sold.

Reforms are already underway to lift the professional, education and ethical standards of financial advisors. This represents an important further step towards making financial advice a profession.

These and other reforms should help transform the industry into onewhere money earned is on the basis of the value add provided to the customer.

In many cases, AHPRA regulates members of established professions, in which patients and the public place enormous trust. There is significant reliance upon the competence, care and ethics of practitioners. So, in your own regulated sectors you may want to consider:

  • Is the regulated population operating with a “can I do this?” or a “should I do this?” mindset? In other words, just because something is legal does not mean it is the right thing to do.
  • Are professional standards being applied and enforced to the extent the public would expect?
  • Are regulated professionals delivering the outcomes that patients deserve and, if not, why not? 

Conclusion and reflections

Royal Commissions are transformative and are more significant than any other inquiry process. They present important opportunities for lasting change for both the regulated population and regulators.

The Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry has exposed the “why” of how poor conduct was allowed to flourish. 

I think it is fair to say that this Royal Commission has reinforced the fact that culture is everybody’sbusiness. The regulated population as well as regulators have a role in instilling good culture and conduct.

The Royal Commission has provided invaluable insights on ASIC’s work and how we may be more effective as a regulator.

There will continue to be increased scrutiny of ASIC, with a new oversight body, an expanded remit, and a number of reviews that we will be involved with going forward. This will have flow-on effects for the way we measure our regulatory performance and our data analytics. This raises important questions about how our performance is to be measured in future.

ASIC will also be heavily scrutinised regarding its enforcement stance. The creation of a functionally separate Office of Enforcement will provide a more effective basis for our enforcement activities.

We will need to continue to reflect upon and make changes to the way we approach enforcement so that we can unequivocally answer the following questions in the affirmative:

  • Is our culture, governance and structure conducive to effective enforcement?
  • Are we responsive to the culture, conduct and context of those we regulate when deciding whether a more or less interventionist response is needed? 

It will be important for ASIC to meet new expectations – investigating new laws promptly, with rigour and taking a tougher stance. On this point, while ASIC is receiving further powers to impose penalties, many of the referrals from the Royal Commission relate to provisions that, at the time the conduct occurred, had no pecuniary or criminal penalty attached.

Proposed new powers, penalties, legislative reform and funding are all important to ASIC meeting the expectations of the community, Parliament and the Government. As such we will continue to ask and work with others to address the following questions:

  • What barriers are there, legal or otherwise, to us achieving what is expected of us?
  • Are we prioritising the right cases for our finite resources?

But most importantly the Royal Commission presents an opportunity for all to catalyse action to change the financial sector.

ASIC looks forward to working in this new environment to strive for a fair, strong and efficient financial system for all Australians.

I wish you all well as you consider what your new environment may bring.

Thank you. 

Last updated: 28/02/2019 12:00