JOSH FRYDENBERG:
Our financial system is the largest sector in the Australian economy, directly employing more than 400,000 people and impacting on nearly every aspect of our lives. What is clear is that the culture, the conduct and the compliance of the sector is well below the standard the Australian people expect and deserve.
It is against this background that at the end of last year, the Government announced a Royal Commission into the Misconduct in the Banking, Superannuation and Financial Services Industry, with former High Court Judge, the Honourable Kenneth Hayne AC QC as Royal Commissioner.
As the letters patent make clear, the Royal Commission is to report on both misconduct and conduct which falls short of community standards and expectations and to identify the causes of that conduct.
The Commissioner's role and that of the Commission is to exercise executive, not judicial, power. The Commissioner does not determine disputes, award damages or other relief or decide whether there has been misconduct. They are roles for a court.
The Government would like to thank the Commissioner and his team for their outstanding work to date and we look forward to receiving their final report next year.
The Interim report delivered today to the Governor General shines a very bright light on the poor behaviour of our financial sector. Banks and other financial institutions have put profits before people. I'll repeat that – banks and other financial institutions have put profits before people.
Greed has been the motive, as short-term profits have been pursued at the expense of basic standards of honesty. Too often simply selling products and services have become the sole focus of attention. The culture and the conduct of the banks was, in the words of the Commissioner, "driven by and reflected in their remuneration practices and policies. This was coupled with deficiencies in governance and risk management."
As a result, almost every piece of conduct identified and criticised in this report can be connected directly to some monetary benefit from engaging in the conduct. In the end; rules, systems, processes and practices are necessary but having the right culture and performance depends, in the Commissioner's words, "upon people applying the right standards and doing their job properly."
This Interim report also makes clear that, while behaviour was poor, misconduct when revealed quote, "either went unpunished or the consequences did not meet the seriousness of what has been done."
The Commissioner makes a series of significant observation with respect to the effectiveness and the ability of regulators to detect, monitor and enforce compliance with the law. ASIC, the Commissioner points out, rarely went to court to seek public denunciation of and punishment for misconduct.
Indeed, in his words, "little happened beyond an apology from the entity, drawn-out remediation and an infringement notice or an enforceable undertaking that acknowledged no more than ASIC had reasonable concerns about the entity's conduct." Significantly, the Commissioner observed infringement notices, imposed penalties that were immaterial to the large banks.
Again, in his words, "too often, entities have been treated in ways that would allow them to think that they, not ASIC, not the Parliament, not the courts, will decide when and how the law will be obeyed or the consequence of the breach remedied."
I want to repeat that. "Too often, entities have been treated in ways that would allow them to think that they, not ASIC, not the Parliament, not the courts, will decide when and how the law will be obeyed or the consequence of the breach remedied." This is clearly unacceptable and cannot continue.
Finally, the Commissioner asked the question, "what can be done to prevent the conduct happening again?" In doing so, he makes the telling observation that much more often than not, the conduct now condemned was contrary to the law. This does raise the question, whether new laws are required, or whether existing laws simply need to be better enforced.
He also asked the question, "should the existing law be simplified, rather than adding an extra layer of legal complexity to an already complex regulatory regime." This Interim report is a frank and scathing assessment of the culture, conduct and compliance of our financial system. Australians expect and deserve better.
The Government thanks the Commissioner to his interim report. We look forward to receiving his final report and we will take the action necessary to restore the public's confidence and trust in our financial system which is a vitally important part of the Australian economy. Are there any questions?
JOURNALIST:
Treasurer, you mentioned right at the beginning that the financial sector is the largest sector in the whole economy and I'm wondering if, on the basis of the hearing and other enquiries that that is actually appropriate for an economy? Whether you want the financial system to be the largest system in the economy and the banks as you've described to be almost non-amenable to tough regulations by government regulators?
JOSH FRYDENBERG:
It is vitally important to have a healthy, robust, strong financial system and I do believe Australia has a very strong financial system and in fact of the reasons why we came through the global financial crisis, in addition to John Howard and Peter Costello leaving a lot of money in the bank to be able to spent through the cycle, was that we had a sound financial system that didn't have some of the challenges we saw for example the United States with the Fannie Mae and Freddie Mac loans.
That being said, Australians expect their superannuation services, their insurance services, their banking services, their financial advice to be delivered in a way that puts their interest first, that the consumer comes first, second and third. In fact, these financial entities have an obligation under their licence to act honestly, fairly and efficiently.
JOURNALIST:
Do you think there was a mismatch between the resources of the regulator and the entities that they were regulating?
JOSH FRYDENBERG:
That's not clear from this report. In fact, what is clear from the report is that too often the regulator would seek a negotiated outcome as opposed to taking the next step, which would be to litigate and to make these entities face court.
JOURNALIST:
They don't have a great- the regulators don't have a great track record in this country [inaudible], that behaviour perhaps be part explained by the fact that the- by getting an undertaking, they were altering their behaviour. Do you think? Is there historically a case that emerges here that we have under-resourced the regulators?
JOSH FRYDENBERG:
That is not clear from the report, in fact the report talks about the need for the regulator to take these forms of action and that too often they were seeking merely just to negotiate.
JOURNALIST:
Why do you think that might've been?
JOSH FRYDENBERG:
I think it was a strategy that they had, which saw the regulator working too closely with the sector that they were regulating. We have increased the resources by more than $70 million to ASIC and as you know we have put in place Daniel Crennan QC to be an effective enforcer of compliance.
But what this report does go to with ASIC is a culture among the regulators which did not produce the best possible outcomes for consumers. I do point out that we have a new head of ASIC in James Shipton and he has already undertaken a review, led by Daniel Crennan, to work out what is the best strategy around enforcement and compliance.
JOURNALIST:
With that $70 million, sorry, $26 million I think is earmarked for litigation or for enforcement, that's not a lot, maybe two, three big litigations- so are you going to look at those [inaudible] for ASIC and the Commonwealth?
JOSH FRYDENBERG:
Look, we continue to work closely with ASIC and if ASIC puts the case that they do need more resources then obviously that will get a favourable hearing from the Government. The point of the Commissioner's findings goes to the culture of negotiation as opposed to litigation or taking stronger, stronger action.
That often the penalties that were handed out to the banks were, in his words, "immaterial to their balance sheets." So there is a much deeper systemic question here, which is within our regulators, how do they approach compliance? Now, another important point from the Commissioner's report is he said whatever the criticisms are of the regulator, we should remember actually who perpetrated the wrong conduct. And that was the financial institutions themselves.
So they are ultimately, and the individuals involved, they're ultimately the ones who must be held accountable and responsible for their actions. The regulators need to enforce the laws that they have at their disposal, impose the penalties that are available to them, and in doing so we are more likely to see a culture of compliance than what we have seen to date.
JOURNALIST:
The Government has previously called ASIC the tough cop on the beat. You think that choice of phrasing is now wrong?
JOSH FRYDENBERG:
No, ASIC is actually the lead agency in enforcing compliance with the law. The point that I have made repeatedly, publicly, and head of his Interim report and that is also reflected in this report, is that ASIC needs to be stronger in their approach, that they do need to pursue litigation and impose the penalties that are available to them, rather than some of these negotiated settlements, which have seen the perpetrators of these offences or misconduct get off too lightly.
JOURNALIST:
[Inaudible] historically that cop you described, the tough cop on the beat shows that they weren't the tough cop at that time
JOSH FRYDENBERG:
I think what it shows is that they needed to be tougher.
JOURNALIST:
What are the learnings of the Government [inaudible] were there any criticisms in this that could be that could be sheeted home to the Government?
JOSH FRYDENBERG:
The two key take outs for me have been, let's also make clear this is 1,000 page report.
JOURNALIST:
Sure.
JOSH FRYDENBERG:
It's a 1,000 page report, its well nearly 1,000 pages, its three volumes, and I want to commend the Commissioner and his team on the thoroughness of this report. But what is clear for me is two take outs – one is the greed that has permeated the culture, conduct and compliance of the sector and secondly, that misconduct has gone to a large degree, unpunished. Effectively unpunished.
JOURNALIST:
Due respect Treasurer, greed is a constant in human nature. I mean, why- the issue is why it was allowed to flourish.
JOSH FRYDENBERG:
The question that needs to be asked is how did this culture of greed and selling, as the dominant focus, how was that allowed to permeate the sector to produce adverse outcomes for consumers without being stamped out earlier and without the penalties that exist to be properly enforced?
JOURNALIST:
Do you think there should be a criminal actions over the institutions that Commissioner Hayne found broke the law?
JOSH FRYDENBERG:
Well, the first thing to say is that it isn't for me or indeed anyone to prejudge the outcomes of the Commissioner's final report. This report does not include specific recommendations, nor does it include a specific referral as far as we can see in the 1,000 pages to the appropriate agencies.
But obviously any such findings or decisions by the Commissioner, if they are to be included, will be included in his final report.
JOURNALIST:
[Inaudible] restructuring ASIC so the prosecution and litigation get a higher priority and it's not, you know, they're not sort of subject to second guessing by a Commissioner who is maybe worried about or a Chairman who is worried about the overall legacy itself?
JOSH FRYDENBERG:
Well Ben, as I referred to earlier, Daniel Crennan QC has been appointed Deputy, effectively in charge of that compliance and enforcement role and he will make real difference, I think, in ASIC going forward.
JOURNALIST:
Are you surprised by the findings? Are you surprised?
JOSH FRYDENBERG:
Look, I'm not surprised, given what we have heard through the public hearings to date. Can I just say the behaviour that we have seen to date has been unacceptable. Fees charged to dead people, fees for no service, 300,000 plus breaches for providing insurance advice that was unsolicited and against the rules; many other examples of conduct which is unacceptable.
But now that it has been revealed, now that we have the interim report and next year, the final report, its incumbent upon those in the financial services sector and those regulators who are charged with enforcing the law – lift their game because the public deserve it and the public expect it.
JOURNALIST:
And why release this report on a Friday it's a public holiday here in Victoria, we have the two football finals this weekend, it is such an important report. Why are you releasing it today? Isn't there a better day to release it?
JOSH FRYDENBERG:
If you- if we had sat on the report, because it was handed to the Governor General today, if we had sat on this report you would have asked what we were hiding? So from a Government's perspective, as the Prime Minister indicated earlier this week, we received this report, or the Governor General received it this morning, and we have made it public and now it is there for everyone to see.
This issue is of vital community interest. There is a great deal of interest in this report. We are making it available so that people can look at it closely and the other key point here is that the Commissioner has made clear, he welcomes public submissions going forward.
He has already received over 8,000 submissions and judging by his report, it looks like the Commissioner has read all of them and he has gone to great, a great deal of effort to ensure that people are properly heard and the right case studies are pursued and it is fair to say that those in the financial services sector are being held to account. There has been some pretty gruelling public hearings. I'll take the last two.
JOURNALIST:
Treasurer, are there any [inaudible] any explanation of to the people of Australia, why the Government resisted it so hard?
JOSH FRYDENBERG:
Well we're the- we are the ones who actually got the Royal Commission up and running, we are the ones who added aspects of superannuation and insurance to the terms of reference and we are the ones who are implementing important reforms.
We are the ones who are putting in place a banking executive accountability regime, from July, we are the ones who have added the extra financing to ASIC, we are the ones who have put Daniel Crennan QC, to be an enforcer of the law, we are the ones who put in place the financial complaints authorities.
So we are taking action, we have called this Royal Commission as, I think, all my colleagues have made very clear, this is important work that is being undertaken, the Commissioner has done an outstanding job and we await his final report. Last question?
JOURNALIST:
Have you had discussions with the Commissioner about expanding the terms of reference or extending the deadline for the final report?
JOSH FRYDENBERG:
James, I haven't, but what the Prime Minister and I have made clear is that should the Royal Commissioner ask for an extension of time, then that it will be granted.