There are growing calls for a financial sector-wide code that “consolidates” conduct regulation and self-regulation in the industry.
The Financial Sector Union (FSU) has proposed the development of a financial services code to “simplify the system of regulation”, which Commissioner Kenneth Hayne referred to as “labyrinthine and overly detailed” with a “blizzard of provisions” in his interim report.
In its response to the Hayne royal commission’s interim report, the FSU said that the problem is not that there is a lack of conduct regulation for financial services entities; rather, it’s that current regulation is “piecemeal and too complex”, as it has evolved “on the back of countless enquiries, recommendations for change and political compromise”.
Rather than adding further layers of regulation, the FSU suggested that the financial services code “consolidate” and “improve on” current regulation and self-regulation measures, such as the Australian Banking Association’s Code of Banking Practice; it acknowledged, however, that overhauling the currently “flawed” regulatory framework is no easy feat.
The union proposed that the code provide a “combination of rule-based prescriptive obligations underpinned by clear principles”. Basic concepts such as “obey the law”, “do not mislead or deceive”, “be fair”, “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” are important in setting a framework for appropriate regulation, according to the FSU.
Proposed features of the financial services code
The financial services code should include community service obligations, the FSU has suggested, including obligations around branch closures. The union noted the important role banks play in supporting communities, particularly rural and remote communities.
The code should also include the capacity for enforceable rule-making by the Australian Securities and Investments Commission, the union argued.
“ASIC’s use of these powers to date has generally focused on permitting conduct that may otherwise have been unlawful. There have been some instances where the power has been used to extend the reach of the law,” the FSU’s submission to the royal commission stated.
Conferring such rule-making power on ASIC could mean that self-regulations such as the Code of Banking Practice can be substituted by the financial services code, the union suggested.
“The [Code of Banking Practice] should have legal force on its terms, rather than through the circuitous route of incorporation into contracts or subject to the limits of the FOS. Moreover, a regulator is better placed than banks to consult with relevant stakeholders and promulgate such regulation,” the FSU’s submission stated.
Further, by delegating such powers to ASIC, the financial services code could also address gaps in the existing law and changes to systems and practices over time, the union said.
“The provision of financial services is fast changing and complex. There will always be gaps and loopholes, and entities that seek to exploit the gaps and loopholes. Enforceable rules can address this issue,” its submission stated.
However, the FSU noted that assigning such powers needs to be done carefully and that ASIC should be “required to exercise such powers with caution and discretion”.
“Safeguards, including as to oversight, disallowance and sunsets can be incorporated into the power,” the union added.
The union additionally proposed that the code “enhance” all relevant regulators’ enforcement powers, including greater capacity to issue sanctions for individuals or entities found to have breached their obligations.
It further suggested that the code include the establishment of a “culture oversight division” by a regulatory body, given the important role regulators play in “promoting and monitoring good culture”.
A three-tiered standards framework for finance sector staff should also be established under the code, according to the FSU, to boost professionalism. It proposed that this standards framework could extend the reach of the Banking Executive Accountability Regime (BEAR), which currently serves as an accountability framework, imposing higher standards of behaviour on banks and their senior executives and directors.
Tier 1 of the standards framework, as it has been proposed, would cover all finance sector workers who have some capacity to affect customer outcomes, while Tier 2 would cover workers that can substantially impact customer outcomes.
Tier 3, on the other hand, would apply to senior managers and executives “with significant power or influence over decisions and culture within banks”. BEAR would be incorporated into this tier.
In addition, the FSU recommended that the financial services code prohibit or substantially limit variable or conflicted pays that could incentivise staff to place their own interests above the customer’s.
“The regulation in FOFA, and as a result of the Sedgwick review, is far too limited. The code should prohibit variable pay for all workers in the sector,” the union’s submission stated, noting the importance of ensuring that this feature of the financial services code not be used as a mechanism to reduce employee pay.
Another suggested feature of the financial services code includes making it easier for consumers to seek remedies when negatively impacted by misconduct.
“A feature of the current law is the difficulty consumers have in obtaining relief against bad decisions of banks. The current system is a somewhat confused combination of semi-formal processes, such as the FOS/AFCA which have limited utility in precedent setting, and litigation generally reliant on very general obligations in the ASIC Act,” the FSU’s submission stated.
“The code should increase the capacity of consumers to seek recourse for damage occasioned to them as a result of conduct of financial institutions in breach of their obligations.”
Lastly, the union suggested that the code extend the operation of criminal law in the financial services industry.
“Potential criminal sanction against those that make significant decisions on behalf of banks and set bank culture is likely to act as a more significant incentive than where breaches are simply addressed by remediation and a negotiated enforceable undertaking,” the FSU said in its submission.
“Specific criminal provision for serious and wilful breaches of obligations by senior executives and entities that breach obligations should be introduced.”
The federal government had already in October introduced legislation into Parliament that would see harsher financial penalties and prison terms administered for corporate and financial sector misconduct.
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