Last week, Australia’s largest bank, CBA, made headlines when it became the first major bank in the country to be charged with criminal offences after the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the RC).
The publicly listed company has been accused of “hawking” for selling insurance products via its insurance arm CommInsure through making unsolicited phone calls to prospective customers.
It faces a total of 87 charges, including contravening section 992A(1) of the Corporations Act 2001 (Cth) which prescribes a maximum penalty of 6 months imprisonment and hefty fines for ‘offer[ing] financial products for issue or sale in the course of, or because of, an unsolicited meeting with another person.’
The charges come less than a year after the Commissioner Kenneth Hayne filed his final report, proposing radical reforms to the financial services industry, after finding substantial evidence of widespread crime and malpractice.
The proceedings against the CBA will be important in determining whether there will be an actual deterrent to financial services executives who formulate policies which contravene the criminal law, and direct their enforcement.
Indeed, many are of the view that fining multi-billion dollar companies will do little to deter future crime and misconduct, and only penalising the individuals responsible will lead to real change.
Criminal prosecutions rather than cautions and fines
Criminal prosecutions are blunt instrument in seeking justice, but one that Justice Hayne found was necessary in an industry fraught with misconduct.
It is expected this culture of coercion will whip the sector into shape and deter poor lending practices that appeared to be rife before the RC took place.
In the words of Justice Hayne, “why not litigate?”
Regulator clamp down
Regulator ASIC – who themselves came under fire during the RC proceedings – are on high alert sniffing out instances of non-compliance.
ASIC utilises a number of commonwealth laws to regulate corporations, managed investment schemes, financial services industry participants and people undertaking credit activities.
These include the Corporations Act 2001 (Corporations Act), the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the National Consumer Credit Protection Act 2009 (National Credit Act).
ASIC currently has a substantial number of ongoing investigations relating to RC-exposed matters, which it hopes to have finalised this year. In a recent enforcement update, the regulator revealed that 17 criminal and 29 civil financial services-related matters were underway, awaiting a final result.
Plus, they have been given increased powers and funding in their quest to clean up the sector. Earlier this year they received $400 million from the Federal Budget, enabling them to take stronger actions against banks.
The enhanced threat of litigation wasn’t enough to satisfy Justice Hayne, who recommended a more rigorous set of penalties for non-compliant organisations.
The penalties regime includes the introduction of civil penalties; substantially increased fines (up to $525 million); a maximum prison sentence of fifteen years (originally five); an extension of civil penalties to forms of misconduct not previously included; as well as disgorgement in civil penalty proceedings.
These changes represent the largest and most comprehensive corporate and financial services law reforms since the Corporate Law Economic Reform Program (CLERP), more than three decades ago.
More trip-ups and longer compliance checklists
In addition to stricter penalties, the industry must also watch out for more hoops and hurdles in its bid to satisfy the regulator.
Mortgage broking, for example, is now regulated in a similar fashion to the financial planning industry, with the recent arrival of a best interest duty.
Under the BID, providers need to document background information about the client; what the scope of the advice is; what the clients’ needs and requirements are; alternative strategies and whether these are appropriate.
Breaches of the BID in section 50 and 52A of the SIS Act are now punishable by criminal law and carry strict consequences.
In 2017, ASIC alleged that a provider had failed to take reasonable steps to comply with the BID, by repeatedly providing inappropriate advice to retail consumers which saw them committing to costly, expensive and unsuitable financial products.
As a result of the contraventions, the firm was ordered to pay $1.1million in fines and costs.
Accompanying the BID is a statement of advice obligation in which brokers (and financial planners) must run through and document a checklist of facts regarding their client and appropriately marry them up with products, in a way which can be comprehended and validated by the regulator.
Enhanced protections for whistleblowers
While constraints are being imposed on financial services providers, they are being lifted from whistleblowers.
The Corporations Act protects a whistleblower against certain legal actions relating to the disclosure, including exemption from criminal prosecution, civil litigation or administrative action (with some exceptions).
Corporations need to be mindful of these enhanced whistleblowers protections – which are designed to incentivise people to expose internal wrongdoings.
In large corporations it can be challenging to maintain integrity within all pockets of the business and whistleblowers often diagnose areas of weakness before executive leaders are able to. These enhanced protections could mean that more instances of misconducted are alerted to the regulator.
In addition to pumping more funds into the regulator, the government has declared its intention to fast-track the implementation of RC recommendations in its recently announced “implementation roadmap”.
This is in part due to a series of recent political attacks in which government has been accused of being too soft on the financial services industry.
Under the roadmap, more than twenty commitments will have been implemented or have legislation before the parliament by the end of 2019; by mid-2020, this will more than fifty; and by the end of 2020, the remaining RC recommendations will be introduced.
As for CBA, their matter will be dealt with by the Commonwealth Director of Public Prosections and has been listed for the first mention on 19 November 2019 at the Downing Centre Local Court in Sydney.