Royal Commission, Amp and Misconduct in The Banking

The article from The Australian, “Banking Royal Commission: Kenneth Hayne unveils super hearing line-up” outlines numerous issues pertaining to the ongoing Banking Royal Commission in regards to Australian regulators, AMP and Australian corporate law. AMP Limited is a provider of life insurance, superannuation, pensions and other financial services in Australia and New Zealand, and have been undergoing misconduct in relation to fees for no service to clients. This brings question towards Australian regulators’ role and competency, the legal matters of AMP’s conduct and the link between corporate law and the Royal Commission, which will all be discussed thoroughly in this essay.

Role and Competency of Australian Regulators

The Council of Financial Regulators (CFR) comprises of four coordinating bodies whose role promotes stability of the Australian financial system and contributes to financial regulation of the country. Australian corporate bodies such as AMP are closely regulated and supervised by agencies specifically such as the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).

ASICASIC is an independent Commonwealth Government body who regulates corporations, markets, financial services and consumer credit of Australia. Administering the Australian Securities and Investments Commission Act (ASIC Act) and working closely with the Corporations Act, the regulatory body has the vision to produce a fair, honest, competent and efficient financial structure for the nation. Due to the roles and laws ASIC administers, ASIC has particular powers they can exercise to fulfill their duties, such as registering auditors and liquidators, investigating any suspected breaches of the law, make rules aimed at ensuring the integrity of financial markets, and seek civil penalties from the courts.

APRAAPRA is an independent statutory authority who protects the interests of depositors, policyholders and superannuation fund members by working closely with Australian Treasury, the Reserve Bank of Australia (RBA), and the Australian Securities and Investments Commission (ASIC). APRA administers legislation which allows the body to oversee general insurers, life insurers, friendly societies, superannuation funds and authorized deposit-taking institutions.

Royal Commission View and Criticism

In order for the financial system of Australia to remain stable, strong and trusted, the regulators must utilize their capabilities, skills and power correctly. However, weaknesses of the competency and processes of ASIC particularly have surfaced through the media. There are concerns of the actions by ASIC in regards to penalties in the legislation administered, with views that they may not be effective and do not successfully reflect community perceptions on the seriousness of white collar crime.

Inconsistencies are found in the framework of penalties for corporate offences, as it was found that some penalties have not been reviewed and altered since 1993. Commonwealth offences in comparison to State offences demonstrate lack of consistency, where offences with equal impact and illegality are treated distinguishably different; the State offences were found to have higher penalties majority of the time. It is viewed that it is not the funding of ASIC that is lacking, it is the culture, and many blame ASIC for the number of corporate misconduct that is not being resolved in Australia and for the repeated failures of protecting the interests of consumers. For instance, ASIC was aware of NRMA Insurance deliberately deceiving their clients in 2006, and chose to refrain and not take action.

Even after policyholders complained to Financial Ombudsman (FOS) about the misconduct, who reported to ASIC to address the issue, no real action has been taken and no conclusions have been drawn yet. This is similar to numerous other current cases regarding misconduct of banks and insurance companies such as NAB, ANZ, Westpac and AMP, where their competency is questioned.

AMP’s Conduct and Director Liabilities

Who is AMP? AMP is a wealth management company which offers solutions and services across numerous fields such as financial advice, investment management, banking, superannuation, self-managed superannuation funds (SMSFs), life insurance, retirement income and investing. The corporate body was established in 1849, having started as the Australian Mutual Provident Society, managing life insurance. In 1998, AMP demutualized and listed on the Australian Stock Exchange (ASX), where intentions of the company altered. The wealth creation of customers shifted to the greed of directors, the only focus being on creating money and increasing shareholder wealth. This greed took over AMP in recent years, resulting in illegal misconduct against clients which can be seen in the recent years in the media.

In the article from The Australian, “Banking Royal Commission: Kenneth Hayne unveils super hearing line-up”, it can be seen that the AMP culture has changed from previous years. In recent years, AMP has been found charging clients for financial advice which they had not been receiving; this misconduct is known as fees for no service. This conduct was found to be occurring from 1 July 2008 to 30 June 2015 , and over this time AMP mislead and gave ASIC false statements in this regard, suggesting that this was not a deliberate action, even though it was later found that the intention was there. These actions fall below community standards and expectations in relation to the financial advice conduct of these sectors, and several laws have been breached.

Key Legal Matters

The misconduct AMP is undertaking creates legal issues, due to numerous breaches occurring over several years. Financial services licensees such as AMP, must take reasonable steps to ensure compliance with particular sections of the Corporations Act and ASIC Act, however AMP may be in breach of this. There are general obligations that financial services licensees must conform by and AMP is in breach of section 912A(1)(a), (c), (ca), and 912D(1)(b) of the Corporations Act. Financial services were not provided efficiently, honestly and fairly; financial services law was not complied with by representatives; and additionally, breaches were classified as significant and ASIC was not always notified of these.

AMP admitted that ASIC was misled seven times through false and misleading statements in regards to fees charged with no service, which is a clear breach of section 1308 (2) and section 1308(3) of the Corporations Act, and section 64 of the ASIC Act, due to the dishonest information being provided. A provider such as AMP must also act in the best interest of the client in regards to advice, however this is not being done as services have not been provided, or clients were offered inferior financial products.

The ASIC Act addresses accepting payments without the intention or the ability to supply as ordered, which is what AMP dishonestly was doing. This is a contravene of section 12DI (b) of the ASIC Act, as AMP did not have the intention to supply the financial services they were charging, yet the money was still being received and kept. All of these breaches may lead to criminal sanctions, civil sanctions, disqualifications or commercial consequences, with potential liability present.

The Corporations Act specifies four main duties for directors of a company; to act with a degree of due care and diligence, to act in good faith, to not improperly use position and to not improperly use information. It is clear that the directors have taken advantage of clients and their positions, and have not acted in good faith, as they have been intentionally dishonest and are not acting upon the best interests for AMP. This is a breach of their duties as a director and consequences will be implemented.

Relevance of Royal Commission to Corporation Law

Royal Commission and Potential Recommendations While conclusions have not been drawn in regards to consequences for these actions, there are potential suggestions that have arisen through the Royal Commissions statements, counsel assisting commentary and past similar cases. Counsel assisting Rowena Orr, said it was open to Commissioner Kenneth Hayne to find that AMP’s behavior may have breached some criminal provisions of the Corporations Act. Provisions of s 184 and s 1308(2) for instance, have penalties of 200 penalty units or imprisonment for 5 years, and 100 penalty units or imprisonment for 2 years, respectively.

If the Commissioner adopts the suggestions of the counsel assisting, AMP may be facing criminal prosecution due to the misleading theft they have been conducting. Civil prosecutions are highly likely to be incurred due to breaches of civil provisions, in addition with further potential banning order on directors due to breaches. Already numerous directors have stepped down, and one financial adviser of AMP has been banned for five years, demonstrating consequential actions are being taken by ASIC.

Regulators Changing their Approach to White-Collar Crime

ASIC and APRA are both changing and undergoing reforms in order to be more successful in seizing these types of misconduct from large corporate bodies, as it is clearly a growing problem over the financial sector. In the past particularly, ASIC culture has been viewed as weak and inconsistent, so strengthening this regulatory body is vital. ASIC conducted numerous surveillance programs which lead to several public reports, such as ASIC Report 499 which focuses on fees without service in relation to large institutions such as AMP, ANZ and NAB, which in turn has led to review and law reforms.

ASIC have been restricted in relation to their power for several years, but recent reforms by the Government will significantly widen the scope of ASIC’s enforcement capabilities. ASIC considers bannings to be an effective regulatory tool to implement against the financial advice industry, as civil penalties alone in the past have generally not been strong enough to seize this behavior. By strengthening ASIC’s power to ban management and directors of the financial service business, there will be successful enforcement action, which may assist in stopping this misconduct.

The Government has announced this reform. Having the ability to ban these offenders may avert offenders from moving around in the industry HNAB-AG has suggested. However, ASIC has not had the power to ban a senior manager or controller of a business such as financial advice, which does not prevent recurrence of the offending conduct originating from these particular employees. For instance, with this power, on the 28th of June 2018, two employees of NAB were able to be permanently banned for loan fraud, preventing them from in engaging in further credit activities and financial services.

In the past, as a part of the Wealth Management Project ASIC was undertaking since 2014, ASIC has banned 47 advisers and one director from the financial services industry, which demonstrates the effect they are taking. By strengthening their powers, it may prevent this misconduct from occurring as commonly in the future. Furthermore, section 912A of the Corporations Act is recommended of being made into a civil penalty provision by the Taskforce, which would result in increased penalties being implemented against the misconduct under this section.

Other reforms announced such as, ASIC being given a temporary product intervention power and giving ASIC the power to make directions to licensees to take action of their business, are all reforms which will strengthen ASIC’s regulation as a result, which will in turn protect consumers from misconduct from organizations such as AMP.

Conclusion

AMP has conducted serious misconduct with charging fees for no service and there will be many consequences due to the numerous breaches of both the ASIC Act and Corporations Act. However, AMP is not alone; there are many other large corporate bodies who have conducted similar misconduct, raising question to the competency and success of the Australian regulators, ASIC specifically. Reforms of the law and practice in place must be a strong focus, to seize these large corporations from taking advantage of their positions and clients, in order to better the community and decrease white collar crime as a result.