After Hayne: reflections on the banking royal commission

It has been several months since Commissioner Kenneth Hayne handed down his final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Experts, industry, regulators and government, however, continue to reflect on the lessons learned and how best to respond to the recommendations. MLS News asked Melbourne Law School experts for their take on the findings.

Simplification and enforcement

Professor Jeannie Paterson and Professor Elise Bant argue that recommendations to simplify and enforce the law are two key aspects of Commissioner Hayne’s final report.

Commissioner Hayne identified six simple principles in the law regulating financial institutions:

  • obey the law
  • do not mislead or deceive
  • act fairly
  • provide services that are fit for purpose
  • deliver services with reasonable care and skill
  • when acting for another, act in their best interests.

From these principles follow some more general lessons in reforming and enforcing the law, which are worthy of further consideration.


Commissioner Hayne recommended what is effectively a principle to simplify the existing labyrinth of legislation:

“As far as possible, legislation governing financial services entities should identify expressly what fundamental norms of behaviour are being pursued when detailed rules are made about a particular subject matter.”

Under our current law, the six simple principles above are expressed in different terms in multiple pieces of legislation that run to thousands of pages and even more regulations at both state and federal levels.

This reality suggests that our current system is failing to communicate the law to the businesses and citizens who are bank customers. It also provides an endless supply of ‘stall and evade’ opportunities for wrongdoers who can clog up the courts with technical and strategic debates over how to interpret the vast body of legislation. Even the best-intentioned plaintiff or prosecutor can end up pleading every possible permutation of the law to try and cover all bases. The inevitable result, as Justice Edelman has noted, is to “delay the proceedings and increase legal expenses.” (Kadam v MiiResorts Group 1 Pty Ltd (No 2) [2016] FCA 1343, [35]).

Take the core prohibition of “misleading or deceptive” conduct. Our research has identified the same prohibition in slightly different forms, with different requirements, defences, remedies and penalties, in more than 30 pieces of state and federal legislation. The result has been described by another Federal Court judge as a “legislative porridge” (Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028, [948] (Rares J)).

In fields of regulation that affect ordinary people there is much to be said for ensuring any new regime is accessible. However, there is room to question whether Commissioner Hayne’s recommendation that more specific prohibitions be expressly ‘linked’ in the legislation with the relevant, generalised norm, is desirable. It may be better to de-clutter the legislation and put that kind of explanatory material into soft law guidelines (alongside the dozens of more specific examples of the operation of the core principles in different industry contexts that currently bedevil our statutory landscape).

In considering any new legislation, it is also crucial to think about how it will fit with other regulation in the area. Is the overall effect coherent and cohesive? For example, given that the consumer protection provisions in the Australian Securities and Investments Commission Act 2001 (Cth) and the Australian Consumer Law sit side by side, there is a strong argument for promoting a mirror approach to all provisions, whereas currently there are some significant differences.


A second recommendation from the Royal Commission relevant to the six key principles relates to enforcement of the law.

Commissioner Hayne recommended that the Australian Securities and Investments Commission (ASIC) should take as its starting point “the question of whether a court should determine the consequences of a contravention”. In addition, “infringement notices should principally be used in respect of administrative failings by entities” and should “rarely be appropriate for provisions that require an evaluative judgment”.

During the Royal Commission, ASIC came under heavy fire for taking the lighter option of securing enforceable undertakings from businesses in breach of the law, rather than pursuing litigation.

Of course, regulators have finite resources and choices must be made about which alleged contraventions of the law to litigate and which to pursue through other means. Moreover, on one view, ASIC was acting in accordance with the so-called ‘enforcement pyramid’. This model 8 mlsNEWS JUNE 2019 advocates a ‘tiered’ approach to enforcement. It promotes taking administrative or low-level action for most contraventions and saving litigation and criminal prosecutions for the most egregious cases.

The question here, however, is whether this strategy met public expectations. There is a public expectation that regulators will respond strongly to wrongdoing that offends basic moral standards, such as those identified in Commissioner Hayne’s principles. In other words, it is possible that ASIC’s interpretation of the enforcement pyramid didn’t necessarily correspond with community expectations about how regulators will respond to breaches of the law in punishing wrongdoing and deterring future contraventions.

It may be that this calls for a different approach in applying ideas of the enforcement pyramid. Commissioner Hayne’s recommendations suggest that litigation should be a primary option in cases of serious contraventions. However, what qualifies as ‘serious’ misconduct for this purpose? Generally, society considers that deliberate or reckless wrongdoing is worthy of heavier sanctions than innocent, provided no harm is caused. In other words, regulators’ responses should be proportionate to moral fault and impact of wrongdoing. But it is also arguable that impact here does not only mean the harm caused by the misconduct but also the profits obtained from, for example, protracted or ingrained forms of contravening behaviour.

We note, in addition, Commissioner Hayne’s point that litigation may be necessary to clarify the law and, to the extent that this is achieved, litigation can be counted as a success even where the regulator’s claim is, ultimately, dismissed. While this outcome may be less publicly popular than massive ‘wins’, it may be important to draw attention to this role in reporting litigation outcomes. It is also possible that principles relating to the model litigant requirements for government agencies should be addressed to consider these broader kinds of considerations.

Key legal and regulatory issues

Associate Professor Andrew Godwin identifies three interrelated areas in the Royal Commission’s final report that are of critical importance: enforcement, culture and the regulatory framework.


The need for the law to be complied with and enforced was a key theme to emerge from the final report. This was underpinned by a strong rule-oflaw message: first, it is the legislature – not the regulators – that sets the law and the consequences of breach; secondly, there should be public enforcement of the law; thirdly, it is primarily for the courts to determine the consequences of a contravention of the law; and, fourthly, it is up to the legislature to set enforceable norms of conduct.

Consistent with this message, the final report recommended that industry codes of conduct include ‘enforceable code provisions’. It also recommended that the Australian Banking Association (ABA) and ASIC take all necessary steps to designate ‘enforceable code provisions’ in the ABA Code of Banking Practice.

The effect of adopting enforceable code provisions is that contravention of the relevant provisions would constitute a breach of law – not just a breach of the contract between the institution and the customer – and would attract various statutory remedies modelled on those in the Competition and Consumer Act 2010 (Cth).

As to which provisions should be identified as enforceable for this purpose, the final report suggested that they would include the obligation to engage with customers in a fair and ethical manner, the obligation to exercise the care and skill of a diligent and prudent banker when extending credit, and also the provisions concerning guarantees.


Two aspects of culture were embodied within the recommendations of the final report: organisational culture within the regulated entities and enforcement culture within the regulators.

Culture, of course, is a very broad concept that embraces a range of elements, including the fair treatment of customers. The final report provided one definition of culture, namely, “the shared values and norms that shape behaviours and mindsets”, and observed that culture could drive or discourage misconduct.

As the final report noted, most of the focus to date has been on risk culture and its relationship to financial soundness and stability from a prudential perspective rather than organisational culture and its relationship to conduct.

Accordingly, the final report made a number of recommendations in relation to culture. With regards to financial services entities, the recommendations included the need to assess and identify problems with culture and governance.

In relation to the prudential regulator, the Australian Prudential Regulation Authority (APRA), the recommendations included the need to build a supervisory program focused on building a culture that mitigates the risk of misconduct. In relation to the market conduct regulator, ASIC, the recommendations included strengthening ASIC’s enforcement culture, particularly the deterrence effect of public enforcement.

Both ASIC and APRA received a funding boost in the 2019 Federal Budget to enable them to strengthen their roles in this regard.

Regulatory framework

The basic premise of the regulatory framework in Australia, which is known as the ‘twin peaks’ model, is that there should be functional separation between the market conduct regulator (i.e. ASIC) and the prudential regulator (i.e. APRA). Together, ASIC and APRA constitute the twin peak regulators in Australia. Another critical regulator in Australia is the Australian Competition and Consumer Commission (ACCC), which has sometimes been referred to as the third peak.

The final report recommended that the twin peaks model be retained. However, it also recommended that cooperation between ASIC and APRA be strengthened through the imposition of a statutory obligation to cooperate, including in the area of enforcement, and a requirement for ASIC and APRA to enter into a regulatory memorandum of understanding for this purpose.

The limited scope of the Commission

The Royal Commission’s remit was not as wide-ranging as it could have been. There are areas it did not examine which are nevertheless important for the government to consider.

In particular, the Commission did not examine the underlying causes of misconduct, particularly the problem of incentives and the embedded “sales culture” within the banking sector. Nor did it consider the future challenges the sector will be facing.

Addressing both of those issues would require fundamental structural reforms.

Ahead of the election neither the Coalition nor Labor offered any detail about how they would approach such reforms, nor how they would address the looming financial challenges that households face or steps they would take to ‘future-proof’ the financial system in the face of technological transformation.

The sorts of reforms our multidisciplinary research teams at the University of Melbourne are examining and that need to be explored by the newly elected government include:

  • measures to achieve a more consumer-centric (and less sales-centric) approach to the provision of financial services;
  • a national “Fincare” system that gives all Australians free access to basic financial health checks, advice and guidance;
  • a financial wellbeing agency to monitor, coordinate and guide action on financial wellbeing; and,
  • the integration of financial literacy education in high school curricula across Australia.

Professor Jeannie Paterson teaches and researches in the areas of contracts, consumer protection and consumer credit law, as well as examining the role of technological change in these contexts. Professor Elise Bant teaches and researches in the fields of unjust enrichment and restitution law, property, contract and consumer law, civil remedies, equity and trusts. Professors Paterson and Bant are currently working on an Australian Research Council grant, which examines the regulation of misleading conduct at common law, in equity and under statute, along with the effective design of regulatory systems for protecting consumers.

Associate Professor Andrew Godwin is the Director of Melbourne Law School’s banking and finance law program. He teaches finance and insolvency law, transactional law, financial regulation and the regulation of the legal profession. He is currently working with researchers from the Faculty of Business and Economics and the School of Computing and Information Systems on a white paper concerning the future of financial services.

Banner image credit: Pexels

This article originally appeared in MLS News, Issue 21, June 2019