Banking Royal Commission: ASIC, APRA Told To Push The Envelope With Prosecutions

Speculation is building that AMP, CBA and NAB will face criminal charges after Commissioner Kenneth Hayne asked the corporate regulator to revisit a brief that sought to prosecute under a rarely used and difficult to prove section of the law.

Commissioner Hayne said the Australian Securities and Investments Commission should continue to investigate fees-for-no-service misconduct as a breach of section 1041G of the Corporations Act, which carries a penalty of up to 10 years' prison for individuals or fines of up to $9.45 million for a company.

In his final report, Commissioner Hayne said after being made aware of ASIC's initial investigations into breaches of 1041G he told ASIC it should not only continue with the strategy but target at least two other companies with the same approach.

The fees-for-no-service scandal has cost the big four banks and AMP more than $2 billion and has brought an abrupt end to the careers of high-flying executives including AMP chairman Catherine Brenner, AMP chief Craig Meller and NAB chief customer officer Andrew Hagger.

Section 1041G deals with dishonest conduct in relation to a financial product or service. To prove a breach the prosecution must show that the offender knew what they were doing was dishonest and an ordinary person would think the conduct is dishonest.

Under a proposal being considered the first limb in which the offender knew what they were doing was wrong would be removed, reducing the burden of proof.

Commissioner Hayne's guidance to ASIC on pursing the banks and AMP over fees-for-no-service using 1041G is in addition to his 24 referrals of misconduct to the regulators, included in the final report.

'Brand new world for regulators'

Legal experts have observed that many of the 24 referrals are no less unique than his 1041G recommendation, with at least 10 referrals involving breaches of the Superannuation Industry Supervision Act of 1993.

Commissioner Hayne refers NAB, CBA, AMP, IOOF and Suncorp to APRA for covenant breaches of Section 52 of the SIS Act which refers to obligations of superannuation trustees.

Among these covenants are the responsibility to act in the best interests of the beneficiaries, to exercise the care and skill of a prudent superannuation trustee and to prioritise the interests of the beneficiaries over the duties and interests of others.

Commissioner Hayne says NAB breached its duties when superannuation trustee NULIS approved the maintenance of ongoing grandfathered commissions and when it relayed the transition of retirement savers into low-fee MySuper accounts.

Commonwealth Bank subsidiary Colonial First State Investments chose to deduct grandfathered commissions and lobbied the government over its right to do so, which ran counter to the best interests of its members according to Commissioner Hayne.

AMP's trustee business outsourced its responsibilities to other parts of the business, leading to sub-par returns for fund members, IOOF decided against moving super fund holders to lower fee accounts and Suncorp funnelled a tax surplus owed to members to a related party.

Allens partner and superannuation law expert Michelle Levy said many of the potential breaches related to untested portions of the law, which placed the regulator tasked with pursuing them on uncertain ground.

"Breaches of the SIS Act have not been tested publicly and it is something of a brand new world for the regulators," Ms Levy said.

Commissioner Hayne has referred the above companies for breaches of Section 52 (b), (c), (d) and (h). Section 52 (d) and Section 52 (h) have never been tested in court before.

Lack of sanctions available

APRA's reluctance to pursue trustees in the courts has already been noted by Commissioner Hayne, who observed they never went to court. Among the reasons for APRA's reluctance is the lack of sanctions available.

"There are no penalties for breach of trustee covenants. And therein lies the problem," Ms Levy said.

It is a similar situation for the four referrals Commissioner Hayne makes against insurance providers Comminsure, TAL and Youi. Commissioner Hayne refers all three companies to ASIC for breaching obligations to act in good faith under section 13 of the Insurance Contracts Act. Youi is referred twice.

ASIC is unable to obtain penalties from these companies for the range of misconduct committed at these companies because it is only able to take licensing action such as imposing additional conditions on its licence.

It is unable to enforce penalties despite the Enforcement Review Taskforce recommending civil penalties be made available to ASIC in these circumstances.

Commissioner Hayne's referral of IOOF to ASIC over breaches of the ASIC Act for making false or misleading statements in contravention of 12DA of the ASIC Act allows the regulator to likewise impose conditions, or suspend or cancel a licence. It may also be used as a basis for imposing a civil liability.

The final report's referrals of IOOF and ANZ for breaches of 964A of the Corporations Act, which states that investment platform operations must not accept shelf space fees, is one of the few breaches with prescriptive penalties with the act allowing for a maximum penalty of $200,000 for an individual or $1 million for a company.


By James Frost & Liz Main

Financial Review

6 February 2019

#RoyalCommission #ASIC #APRA

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