This inquiry arose in the midst of multiple inquiries into the banking,
insurance and financial services sector. The inquiry accepted submissions until
March 2017, and the first hearings were held in mid-2017. The evidence from
this and other inquiries gave weight to the argument that a royal commission
into the sector was urgently needed to investigate systemic issues and illuminate
potential breaches of the law, misconduct and behaviour falling below community
standards and expectations. The Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry (Financial Services
Royal Commission) was established in December 2017.
This chapter outlines the circumstances that led to the announcement of
the Financial Services Royal Commission, including industry and government positions.
It then discusses some of the major themes arising from the Royal Commission's
interim report. The chapter concludes with a reflection on the evidence
provided to the committee, the committee's view on the work of the Royal
Commission and the committee's recommendations.
Lack of industry and government support for a royal commission
The Financial Services Royal Commission commenced during the course of
the committee's inquiry, and its preliminary findings correlate with many of
the findings of the committee. As outlined in Chapter 2 and referenced
throughout this report, the Financial Services Royal Commission's interim
report identified systemic and cultural issues with the banking, superannuation
and financial services sector and inadequacies in the regulatory system.
The issues outlined in this chapter, and those detailed in the Financial
Services Royal Commission's interim report, conflict with the position formerly
held by the banking industry and the Commonwealth Government.
Prior to the announcement of the Financial Services Royal Commission,
representatives from the major banks held the view that a royal commission into
the banking industry was unnecessary and the banks were adequately addressing
community concerns. The major banks made this case on numerous occasions during
the House of Representatives (HoR) Standing Committee on Economics' review of
Australia's four major banks. For example, on 8 March 2017, Westpac's
Chief Executive Officer (CEO) Mr Brian Hartzer opined that a 'royal commission
would be extremely expensive for everybody involved and would not have the
benefit of immediate action' and that 'the best way to restore confidence is to
address the very real issues that are raised and take action on them to fix
Mr Hartzer added that the industry is:
...operating in a highly regulated environment with
tremendously active regulators, as we have seen, and we as an industry have
demonstrated and will continue to demonstrate that we are taking these matters
very seriously and we are taking action...We have never said there is nothing
wrong, and I have nothing to hide.
Mr Hartzer further argued that a royal commission would take unnecessary
time and resources, and stated that the banks are 'an open book...we have
demonstrated through our actions that the legitimate issues that have been
raised by the community are being taken seriously and are being addressed'.
The Australia and New Zealand Banking Group (ANZ) shared a similar
sentiment. When asked whether it could see utility in a royal commission, its
CEO Mr Shayne Elliott said that it is 'hard to know exactly what the
benefit would be' and that:
...the conduct and the operation of the industry today is
better than it was in the past and we're making real progress to restore the
community's confidence and trust in our system. We have a very, very important
role to play in the economy. I think that should be our primary focus. Yes, we
should fix all these things. I personally believe that a royal commission would
In March 2017, the National Australia Bank (NAB) told the HoR Standing
Committee on Economics that it did 'not believe a royal commission is necessary
because the industry is well governed, well regulated, and is actually
addressing the issues that need to be addressed'.
Mr Ian Narev, the former CEO of the Commonwealth Bank of Australia (CBA),
I think the message that the convening of a royal commission
would send about policymakers over the last decade, regulators over the last
decade and bank management and governments over the last decade would not be
positive for the industry, for strength and for the perception of our industry as
The Australian Bankers' Association
The argument that the banking industry is addressing community concerns
and is adequately addressing issues through self-regulation was also made by
the Australian Bankers' Association (ABA). It submitted that the 'banking
industry has heard the concerns of Australians and is committed to taking
action so customers receive a better experience'.
Further, the ABA explained that 'trust and confidence in the banking and
financial services industry' is achieved through institutional leadership,
self-regulation to strengthen accountability, transparency and ethical
behaviour, and '[s]trong legal and regulatory obligations which protect
The ABA highlighted that Australia's banks 'recognise they haven't
always lived up to the community's standards and need to do better' and for
this reason, initiatives like the Banking Reform Program strengthen 'cultural
and ethical standards and improve the delivery of products and services'.
The Banking Reform Program, established in April 2016, was an initiative
developed by the banking sector in partnership with key stakeholders and
regulators, and sought to address community concern about governance, conduct
and culture of the banking sector.
On 8 March 2017, the HoR Standing Committee on Economics questioned the
motivation and timing of the Banking Reform Program with the ABA. The ABA
denied that the Banking Reform Program was developed to avoid a royal
commission; however, it acknowledged that 'Labor's calls for a royal commission
have galvanised the industry' and that the 'threat of a royal commission
is...keeping the industry on its toes'.
The ABA added that it did not think a royal commission to be a good idea, and
that it 'is both unnecessary and actually carries some risks'.
The Commonwealth Government
The Commonwealth Government also claimed a banking Royal Commission was
unnecessary. The Minister for Finance, Senator the Hon. Mathias Cormann, had
long maintained that a royal commission was unnecessary, and argued that 'it
would recklessly and irresponsibly undermine confidence in our banking system,
without actually achieving anything beneficial for bank customers with
Once the Commonwealth Government announced it would proceed with a Financial
Services Royal Commission, the Minister for Finance declared it was regrettable
that a royal commission had to happen.
Ms Julia Banks MP, member of the HoR Standing Committee on Economics,
declared that a 'longwinded royal commission' would only benefit 'banking
lawyers' and argued the parliamentary review of the four major banks would
'find agile, flexible, immediate answers for consumers'.
On 7 March 2017, Ms Banks asserted that a royal commission would destabilise
the banking sector and that 'there will be no practical deliverable outcomes
for bank consumers, and, basically, the only beneficiaries will be, quite
frankly, the banking lawyers'.
Establishment of the Financial Services Royal Commission
Sustained public calls from consumer advocates and victims of misconduct,
multiple parliamentary, government and industry-initiated inquiries and
political pressure for the Commonwealth Government to announce a royal
commission built over the final months of 2017. Finally, on 30 November
2017, the leaders of Australia's major banks wrote a letter to the Treasurer,
the Hon. Scott Morrison MP, stating that they had changed their position and
supported a royal commission to end uncertainty and lack of confidence in the sector:
Our banks have consistently argued the view that further
inquiries into the sector, including a Royal Commission, are unwarranted. They
are costly and unnecessary distractions at a time when the finance sector faces
significant challenges and disruption from technology and growing global
However, it is now in the national interest for the political
uncertainty to end. It is hurting confidence in our financial services system,
including in offshore markets, and has diminished trust and respect for our
sector and people...
We now ask you and your government to act to ensure a
properly constituted inquiry into the financial services sector is established
to put an end to the uncertainty and restore trust, respect and confidence.
The same day, the Turnbull Government announced the establishment of the
Financial Services Royal Commission.
The Royal Commission was officially established on 14 December 2017.
Despite the Commonwealth Government's longstanding objection to a royal
commission and claims it was unnecessary, the Royal Commission's findings to
date have been profound and have revealed significant issues in the conduct and
culture of financial services in Australia.
The Financial Services Royal Commission's
On 28 September 2018, the Royal Commission released an interim report
outlining policy related issues from its first four rounds of hearings. The
interim report made no recommendations, but rather raised questions about how
particular issues identified to date could be resolved.
The interim report criticised the financial sector, declaring that
misconduct was too often driven by greed and 'the pursuit of short term profit
at the expense of basic standards of honesty'.
The interim report highlighted the inadequacies of regulators, and explained
cases of misconduct 'either went unpunished or the consequences did not meet
the seriousness of what had been done'.
A snapshot of revelations made since the commencement of the Financial
Services Royal Commission is briefly outlined below:
It was revealed that a CBA financial planning business had been
charging deceased clients fees for financial planning advice, with at least
five employees admitting they had knowingly done so.
Issues were revealed relating to the lending practices of the
banks, in particular for farmers
and people with gambling addiction.
ASIC announced it would pursue the major banks and AMP as part of
its 'fee-for-no-service' investigation. ASIC advised the Financial Services
Royal Commission that so far $260 million had been refunded to customers who
were wrongly charged fees, with the expectation that total refunds would equate
to over $1 billion. ASIC confirmed the likelihood of legal proceedings
over the matter.
The effectiveness of the Australian Prudential Regulation
Authority (APRA) and ASIC was questioned, including considerable delays by the
banks to report significant breaches
and the lack of regulatory oversight dedicated to superannuation trustees. One
example involved ANZ bank tellers selling superannuation products, which
accrued $3.6 billion in funds under ANZ's management. ASIC forced the ANZ to
stop this conduct, and issued a fine of only $1.25 million.
Personal accounts—calls for an
extension to the Royal Commission
The Financial Services Royal Commission generated significant interest
in the community, and subsequently received 10,140 submissions as at 28
Despite the large number of submissions received, the Financial Services Royal
Commission has only heard from a limited number of witnesses selected to
provide personal accounts of their experiences with the banks. One of the
primary concerns about the Financial Services Royal Commission's work is that
it has not heard sufficient evidence from victims in regional areas.
For this reason, there have been calls for the Financial Services Royal
Commission to be extended in order to hear from victims of financial sector
The position of the banks after the
release of the interim report
By October 2018, after the release of the Financial Services Royal
Commission's interim report, the major banks had changed their position on the
Royal Commission completely. On 11 October 2018, the HoR Standing Committee on
Economics re-commenced its review of Australia's four major banks. This was the
first time a parliamentary committee had heard from representatives from the
major banks since the release of the Royal Commission's interim report.
The CBA explained that the Royal Commission had illuminated 'failures of
judgement, failures of process, failures of leadership, and in some instances,
greed'. It acknowledged that it was too slow to address these issues, and its
'capability has been inadequate in critical areas, particularly operations risk
The CBA had consequently appointed six new executives, and those across the
...faced consequences for our failures. Some have been
terminated and there has been a $100 million impact on remuneration. Accountability
has not been clear enough inside the Commonwealth Bank. To address this, we
have extended the government's new Banking Executive Accountability Regime
across more than 90 executives.
Westpac's address to the committee referenced issues concerning remuneration,
complaints handling, the fee-for-service model and culture in the banking
sector. Its CEO, Mr Hartzer, who 12 months ago held the view that a royal
commission 'would not have the benefit of immediate action',
admitted that 'we weren't quick enough to identify and fix the problems, and we
accept the consequences of this delay'.
ANZ's CEO, Mr Elliot, who had once stated that the conduct of the
banking sector was 'better than it was in the past',
acknowledged on 12 October 2018 that the:
...interim report lays out conduct of a standard below what the
community expects and, at times, what the law requires. These observations have
rightly dismayed and disappointed Australians. We have acknowledged to the
commission that ANZ has engaged in misconduct and conduct falling below
community standards and expectations.
On 19 October 2018, NAB's Group CEO and Managing Director Mr Andrew Thorburn
admitted that industry has moved its primary focus away from customers and
towards profits, has failed to plan long-term, has rewarded wrong behaviours
and lost 'local connections we previously had with customers'.
Mr Thorburn disclosed that 700 employees have had a reduction in their variable
pay, and over 300 have had their employment terminated, or have left as part of
NAB's investigation into employee conduct.
The large number of recent inquiries into the banking, insurance and
financial services sector demonstrates the systemic problems inherent in the
current system. This committee has been of the view since the beginning of the
inquiry that the only solution to solving the fundamental flaws in the banking,
insurance and financial services sector is a royal commission with the ability
and the resources to examine the system as a whole and to make broad structural
The issues raised in this inquiry regarding the current consumer
protection system include: lack of funding for financial counselling and legal
services; lack of documentation for consumers to prove misconduct; and lack of
enforcement on the part of regulators and external dispute resolution services.
Evidence raised allegations of misconduct in specific areas of the banking,
insurance and financial services industry, including:
loans and credit contracts;
property valuations and foreclosure;
the conduct of financial entities engaging with Aboriginal and
Torres Strait Islander groups;
credit card limits;
gambling limits and credit;
consumer leases and payday loans;
debt management firms; and
the conduct of receivers, administrators and liquidators.
The committee's findings in this report align with many of the issues
that have been identified by the Financial Services Royal Commission to date.
This outcome comes as no surprise to the committee; victims of banking
misconduct have long advocated for a royal commission into the financial
services sector, and the committee commenced this inquiry to add further weight
to their arguments. However, despite their calls for action, banking
representatives and the Commonwealth Government have continually objected to
Prior to its establishment, the CEOs of the four major banks all
conveyed messages that a royal commission would have no benefit, and the banks
had nothing to hide. They argued that a royal commission would be a distraction
and that the industry was well regulated. The Australian Bankers' Association
maintained that a royal commission was unnecessary and claimed that trust and
confidence are achieved through institutional leadership and self-regulation,
along with adherence to laws and regulatory obligations that protect consumers.
Australia's major banks only admitted that a royal commission was necessary
because 'political uncertainty' was 'hurting confidence' in the sector.
The Commonwealth Government, by delaying the decision to establish a
royal commission and insisting until the last moment that such a commission of
inquiry was unnecessary, has hindered efforts to address longstanding issues of
misconduct in the financial services sector. At the commencement of this
inquiry, the Commonwealth Government declared that it opposed the inquiry
'because the government has taken and continues to take strong action to
improve consumer outcomes in the financial services sector'.
It also argued against a royal commission, claiming this would only benefit
banking lawyers without producing any deliverable outcomes for consumers. The
Minister for Finance contended that a royal commission was both reckless and
irresponsible, and would not achieve anything for bank customers.
It was not the weight of substantial evidence that misconduct had
occurred, nor the findings of multiple inquiries, nor calls from consumer
advocates that led to the Commonwealth Government's decision to establish a
major commission of inquiry into the financial services sector. Only internal
political pressure from within the Government's own ranks and a letter from
Australia's major banks calling for an end to uncertainty led, finally, to the
Commonwealth Government announcing the establishment of the Royal Commission.
The long-held position by the banking sector and the Commonwealth
Government that a royal commission was unnecessary has since been discredited
by the work of the Financial Services Royal Commission and the consistency of
its findings with the evidence provided to this committee. These investigations
have revealed a culture of greed, misconduct and inadequate regulatory
oversight. Subsequently, the major banks and the Commonwealth Government have
had to backpedal, and now acknowledge that systemic problems exist. The Royal
Commission's work has brought to light actions by some of the largest, most
respected financial service providers in the country that may amount to
misconduct, deliberate withholding of information from ASIC and even what may
be, in some instances, breaches of the law. The regulatory and legal
repercussions of the Financial Services Royal Commission are yet to manifest
While delayed in its onset, the Financial Services Royal Commission
appears to have taken a comprehensive and forensic approach, and taken into
account a broad cross-section of consumers of various financial products and
services. However, some of the areas addressed in this inquiry have not yet
been examined by the Royal Commission. It seems unlikely, given the extent of
misconduct and behaviour below community standards that has been indicated in
public evidence so far, that the Royal Commission will be able to adequately
cover issues in the financial sector beyond more than a few brief snapshots in
the time that it has been allocated and the small number of witnesses that it
has called in public hearings. The committee notes that the
Royal Commission has only heard from 27 victims even though it received over
10,000 submissions and has not held any hearings in South Australia, Western
Australia and Tasmania. Given the extent of misconduct identified in the
Royal Commission's work to date, the committee considers that the Royal
Commission should be granted an extension of time beyond February 2019 to
examine particular aspects of misconduct in greater detail.
The committee recommends that the Commonwealth Government give the Royal
Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry an extension of time to report.
To date, the Royal Commission has stated that it will not be examining
receivership, consumer leases, payday loans or in-store credit arrangements
because these do not fall within the terms of reference of the Royal
Commission, as they do not fit the definition of a financial services licensee
A number of financial counselling and legal services bodies highlighted in
evidence to this inquiry that payday loans and consumer leases are a major
issue for consumers from lower socio-economic backgrounds, who can least afford
high interest rates and penalties. Because of the gap in the Royal Commission's
terms of reference, the Senate has referred an inquiry to this committee to
investigate these issues more closely. The committee will inquire into credit
and financial services targeted at Australians at risk of financial hardship,
in particular payday lenders and consumer lease providers, unlicensed financial
service providers such as 'buy now, pay later' providers, debt management
firms, debt negotiators, credit repair agencies and personal budgeting
services. The committee is required to report by 22 February 2019.
Evidence provided to this inquiry also outlined concerns about administration,
receivership and the practices of liquidators. The Parliamentary Joint
Committee on Corporations and Financial Services tabled a report into the
impairment of customer loans in May 2016. The Parliamentary Joint Committee
recommended that if the banks and the Australian Banking Association did not address
issues surrounding valuation reports, including providing borrowers with copies
of these reports, the Government should introduce appropriate legislation and
regulations. The Parliamentary Joint Committee also recommended that receivers
be 'required to take every reasonable step' to ensure that 'assets are sold at
or as close to listed market value as possible' in accordance with the
appropriate prudential standard, and that ASIC administer a strong penalty
regime to govern breaches of section 420A of the Corporations Act 2001,
which requires a controller to take all reasonable care to sell property for no
less than its market value or, where this is not available, the best price that
is reasonably available.
This committee reiterates its support for these recommendations. The
committee notes that the Australian Banking Association has expressly addressed
the issue of valuations in its 2019 Banking Code of Practice. However, the
Commonwealth Government is yet to respond to the Parliamentary Joint
Committee's recommendations. The committee considers, given that two and a half
years have passed since the report was tabled, and the Financial Services Royal
Commission's terms of reference have excluded issues related to receivership,
administration and the conduct of liquidators, there is no reason for the
Government to have delayed responding to the report's recommendations.
The committee recommends that the Commonwealth Government provide a
response to the Parliamentary Joint Committee on Corporations and Financial
Services' inquiry into the impairment of customer loans.
Evidence provided to this inquiry emphasised the importance of
adequately resourcing financial counselling and legal services. These services
often deal directly with consumers experiencing failures in the consumer
protection system and may assist consumers from lower socio-economic
backgrounds, Aboriginal and Torres Strait Islanders and consumers who have
limited literacy and resources to prepare applications for external dispute
resolution. In other words, these services may assist consumers who are in
severe financial distress and need to access dispute resolution the most.
Further, these services often contribute to law reform and policy development
and assist ASIC with identifying systemic problems. As a result, it is
essential that community legal and financial counselling services be adequately
funded, particularly while the work of the Royal Commission is still ongoing.
The committee recommends that the Commonwealth Government consider increased
funding for community legal and financial counselling services dealing with
victims of financial misconduct.
The work of the Financial Services Royal Commission is an important step
in the right direction. The committee anticipates that the Royal Commission
will make recommendations relevant to many of the areas of concern raised in
this inquiry, and the committee will continue to observe the Royal Commission's
work in those areas. It is for this reason that the committee has determined
not to make specific policy recommendations, but iterates that there is a need
for serious reform to the entire financial services system. Consumers must be
properly protected from the endemic greed that has corrupted the financial
Previously, the common response from financial entities to proven
instances of misconduct found by regulators was either that it was the fault of
a few 'bad apples', or that misconduct may have occurred in the past but due to
to recent reforms and changes by the financial entities, protections for
consumers are now greatly improved. These reforms and changes may have
occurred, but they do not change the fact that misconduct and unethical
behaviour by individuals and organisations has left a trail of ongoing
destruction, featuring ruined businesses, impacts on health and relationships,
financial problems and even bankruptcy on the part of affected consumers.
Finally, the committee recognises the considerable toll that negative
experiences with the banking, insurance and financial services sector have had
on consumers' physical, emotional and mental health, in addition to the
financial losses that many submitters and witnesses outlined in their evidence.
Many financial entities have systematically engaged in practices that amount to
misconduct, fall below community expectations of ethical conduct and even
contravene the law, in some instances.
Despite the Commonwealth Government's longstanding objection to a royal
commission and claims that it was unnecessary, the Royal Commission's findings
to date have been profound and have revealed significant issues in the conduct
and culture of financial services in Australia. Ordinary Australians should
never have had to bear the burden of this misconduct for so long; a royal
commission was long overdue.
Senator Chris Ketter
Navigation: Previous Page | Contents | Next Page