Financial services firms may be asked to provide evidence to the royal commission, but there are a few important steps that can be taken to help avoid mistakes or misunderstandings.
The signed terms of reference were released on 18 December, and confirmed a broad and unfocused mandate which could see any financial services company called upon to provide evidence.
Superannuation and insurance companies, including general insurers, were a surprise late inclusion, perhaps putting the industry super funds and insurers on notice, but the commission potentially covers every AFSL holder.
The commission has already contacted several banks and super funds asking they self-report misconduct and failures to meet community expectations by the end of January 2018, but all financial services companies need to be prepared to respond.
We’ll look at some steps financial services firms must take to protect themselves from mistakes and misunderstandings.
First, let’s consider the general focus: priority will centre on matters with greatest potential for harm, which may impact the greatest number of people; the commissioner will be compelled to examine larger corporate collapses, the role financial services institutions played in these collapses and how they may have let investors down.
Likely focus areas include: misconduct or complaints that fall below community standards or expectations; insurance claims handling; banking and the rural sector; superannuation (including industry funds and any links with the trade unions); and whether superannuation funds are acting in member’s best interests.
What you need to know about evidence gathering
There will be significant time pressures on financial services firms asked to produce evidence for the commission – and we must reiterate that any AFSL holder may be called upon, given the broad spectrum.
Typically, firms required to provide evidence will receive a “notice to produce” evidence from the commissioner.
These notices to produce often work on extremely tight timeframes. If previous royal commissions are anything to go by, the notices will require materials in just one week.
There are high penalties for failing to produce evidence, and limited recourse for time extensions.
Financial services firms must also note there is limited scope for confidentiality with evidence, as royal commissions are open and public by nature.
The potential to be in the public spotlight means financial services firms need to consider potential for media scrutiny, which could damage company and individual reputation, and negatively impact company share price.
Legal professional privilege may offer some protection, but firms need to consider how they will frame privilege claims, and prepare early – claims are unlikely to succeed if assembled on the run.
This last point cannot be emphasised enough: firms cannot hide behind legal professional privilege while sorting everything out – privilege claims and material evidence must be produced together.
When you consider the typical one-week time frame to respond, only well-prepared companies will successfully manage the process – even if time extensions are available, they are unlikely to be generous.
Key steps all AFSL holders must consider for the commission
Things will move very quickly. The royal commission has a huge scope and a tight, 12-month timeline – even allowing for the potential for the commission to be extended, notices to produce evidence should start landing among AFSL holders during February.
Financial services firms can avoid making key mistakes by considering the following steps:
Time is of the essence. Leaving everything to the last minute is a classic mistake – you don’t want to be scrambling to produce documents and making sense of your demands on the run.
Have a plan of action
Will you await a summons, or prepare information and go on the front foot? It’s important to remember firms won’t be penalised for volunteering information.
If there are concerns, consider independent advice. Even if there has been a problem, the focus can quickly shift from conduct to remedial action for those firms that have identified and remedied a problem.
Royal commissions may feel like a witch hunt, but they are often constructive and co-operative for those who get on the front foot and volunteer information.
It’s not too late to act: firms that are open, honest and willing to right a wrong can come out the other side in better shape – in fact, the worst thing is to hide and cover up.
Ensure policies and procedures up-to-date
If elements of your business need review or updating, now is the time to act – particularly on areas of focus, such as remuneration (for example, incentives and soft dollar commissions).
Some tips on policies and procedures:
- Look at your complaints register – are there common themes of complaint?
- Review your processes – are you responding quickly to complaints? You need to show you can deal with problems and complaints quickly
- Record-keeping and response times need to be fair and reasonable
Understand potential conflicts of interest
Look for conflicts of interest throughout the organisation. Areas that may demand further scrutiny include parts of the business where a head of department has a high achieving team, which may not be meeting best practice, or community standards or expectations.
As outlined above, it’s best to be on the front foot with these things, to address issues and show efforts implemented to remedy the problem.
Superannuation funds analysing conflicts will need to consider their arrangements with suppliers such as insurers and fund managers – for example, the commissioner will be looking for tension between superannuation and insurance arrangements and fund manager fee arrangements.
Preparing for the costs
No-one has budgeted for this, and some financial services firms will be caught on the hop. For many in the industry it will mean a busy start to 2018.
You may not be summoned, but are better off doing something to address the risks and rest easier as the regulators may come knocking. Naturally, this will incur some costs – will there be potential to recoup these costs?
Firms need to look at their insurance policies – you may notify your insurers. You need to ensure your policy will respond if you call it up.
Financial services firms may also consider business interruption insurance.
Some costs may be claimed via government, including some legal costs, as has occurred with previous royal commissions, but details around the potential for claiming costs resulting from this royal commissions are yet to be released.
Mark Petrucco is a partner at commercial law firm Hall and Wilcox. He was assisted by special counsel Jacob Uljans.
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