The Royal Commission
Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Royal Commission) has now completed three rounds of public hearings. With details of systemic misconduct emerging, the Government, regulators and the financial services industry are already being forced to respond.
In the public hearings so far, serious cases of misconduct and failure to meet community standards have been identified in respect of various banks and the financial advice industry. The issues identified include poor handling of conflict of interests, the inherent conflicted remuneration structure for the financial advisers, and that financial services may not have been provided efficiently, honestly and fairly as required under the Corporations Act 2001 (Cth) (Corporations Act).
In the context of consumer credit products (including add-on insurance), evidence emerged of misselling, falsified documentation, conflicts of interest and questionable lending practices. The banks involved have been heavily criticised for failing to have adequate policies in place, failing to investigate and failing to report misconduct to the Australian Securities and Investments Commission (ASIC).
The financial advice industry has also come under close scrutiny. The evidence led demonstrated numerous instances where fees were charged for no service, financial advisers gave inappropriate advice and several instances where institutions intentionally tried to mislead the regulator. Following the hearings on this topic, there have been multiple resignations at senior levels of AMP, one of Australia's largest financial institutions, and various plaintiff law firms have confirmed that they have secured funding for shareholder class actions. In the face of criticism that it has been soft on enforcement, ASIC announced after the third round of hearings that it has commenced civil penalty proceedings against Westpac Banking Corporation in relation to alleged poor financial advice provided by one of its former financial planners.
There is a lot more to come but already it appears highly likely that the Royal Commission will recommend civil and criminal prosecutions against various institutions, greater personal accountability for individuals and a complete overhaul of the breach reporting framework.
The Government has moved quickly to be seen to respond and has indicated its support for the recommendations of the ASIC Enforcement Review Task Force (issued prior to the Royal Commission). It will strengthen penalties for corporate and financial sector misconduct, enhance ASIC's powers to ban individuals in the financial sector, strengthen ASIC's licensing powers and expand ASIC's search and warrant powers. These changes will be formally implemented along with changes recommended by the Royal Commission.
Criminal Cartel Charges brought against Investment Banks
On 1 June 2018, the Australian Competition and Consumer Commission (ACCC) announced that ANZ, Deutsche Bank and Citigroup, would be prosecuted for criminal cartel offences. Six senior executives (including the former Country Head of Deutsche Bank and Citigroup) are alleged to have been knowingly concerned in some or all of the alleged conduct.
The charges involve an arrangement or understanding allegedly made between the joint lead managers in relation to the trading of ANZ shares following an ANZ institutional share placement in August 2015. Citigroup issued a statement that the allegations involve an area of financial markets activity that has not been considered by any Australian court or addressed in any regulatory guidance notes previously published by the ACCC or ASIC.
It has been reported that JPMorgan, the third investment bank that underwrote the capital raising, may have been granted immunity from prosecution after self-reporting a related issue to regulators that led to the initiation of the investigation.
If found guilty, the individuals could face a jail term of up to 10 years or a fine of up to AUD 420,000. ANZ, Deutsche Bank and Citigroup face fines of AUD10 million or three times the profit gained or up to 10 per cent of their turnover, which for ANZ equates to more than AUD 2 billion.
The matter will first be before the Court on 3 July 2018. All of the banks have publicly denied the allegations and stated that they will defend the companies and their employees.