At the time of writing this column the first week of the substantive hearings of the Royal Commission was near complete.
The progress of the hearings has been a bit like watching paint dry, but paint can dry quicker than some of the sessions so far. The attention being given to issues is quite detailed. Of the six topic areas scheduled for the first round of hearings over nine days, the first topic involving mortgage broking and three financial institutions has taken the better part of four sitting days. There is much documentation and witnesses have been taken through many of those documents.
The hearings are live streamed, which is something that all of those in the courtroom should keep in mind although the ratings may not be as high as for Married at First Sight.
Lawyers traditionally focus on what is legal and what is not. High on the list in the Letters Patent is for the Commission to inquire into any criminal or civil misconduct. However, the remit of the Royal Commission is broader than that, with a requirement to inquire into whether conduct, practices, behaviour or business activities by financial services entities fall below community standards and expectations.
Black letter law can be hard enough to follow at times but tracking behaviour or activities falling below community standards and expectations can be harder.
Community standards and expectations can and do change over time as do common behaviours. Some analysts frame this in term of notions of pre-conventional, conventional and post-conventional behaviours.
Pre-conventional is where someone is mostly motivated by the promise of reward or punishment. If you get more money for doing something you are likely to do that, tempered by what might be a punishment for being caught doing something wrong. The moral framework is what your peers and competitors are doing, and they might not be fussy.
Conventional is a more enthusiastic adoption of legal responsibilities, with individuals and organisations complying more with the spirit of the law rather than a calculation of how far they can push things or what is the chance of getting caught. The decision makers are trying to comply with general community norms as reflected in legal requirements.
Post-conventional is where an even broader approach is taken, one where the decision makers pick up on what is expected of business by the community although not necessarily legislated in any way.
Clearly the Royal Commission is setting a bar for practices and behaviour attuned to community expectations while at the same time coming down hard on any breaches of the law that it discovers.
Culture and governance practices are clearly within the remit of the Royal Commission.
The Commission had indicated that questions being addressed include:
- Was misconduct attributable to a custom, system or practice?
- Why did misconduct go undetected?
- Were entities’ processes adequate?
- Did the entity respond in a timely and sufficient way?
To date, much of the material provided by financial services entities has related more to provision of documents and lists of breaches, both minor and major, from the past rather than much analysis of why misconduct may have happened and whether there have been any shortcomings in the response to any misconduct that had occurred.
This has been a cause of some irritation to the Royal Commissioner and his staff, who would much prefer a concise confession of systemic failings and the causes of those failings to a comprehensive list of breaches already notified to a regulator. Confessions rather than admissions seem to be preferred but with the amount of legal representation involved voluntary confessions may be few and far between.
Perhaps in response, the Royal Commission in hearings has given close attention to internal audit and other like documents prepared within financial services entities which identify any shortcomings in practices or approaches or room for improvement. It appears that there is a fine line between scope to improve and not complying with legal obligations and community expectations.
It may be some time before superannuation is being addressed in hearings of the Royal Commission. On the basis of proceedings to date, documents held by funds, including any internal audit or like review documents, will play an important part of proceedings.
