The Australian Government is in receipt of four landmark reports: the Heydon Royal Commission, Productivity Commission (superannuation and financial sector competition), and the Hayne Royal Commission.
Each of them points to deep systemic and cyclical problems in the provision of financial products and financial services. A common thread is poor culture leading to poor conduct, diffusion of poor culture (taint), the distinction between compliance based law and morality (what can be done is not what should be done),and re-establishment of trust.
Publicly reported disappointment with Hayne focusses on his Recommendations. These are mostly tactical. They should be seen as a pathway to further widespread reform of the law.
The required reform is not explicit in a recommendation, but buried in pp 494-496 of Volume 1. This is the need to simplify the law and implement its intent. Jeremy Cooper in his Stronger Super Review noted: ‘directors should not have to collate their duties from multiple sources’.
Hayne notes: ‘because the law is now spread over so many different Acts and is as complex as it is … the very size of the task shows why it must be tackled’.
He also notes that ‘lobbying …has been a significant contributor to the current state of the law’. Heydon points to this problem in his 2016 report. Hayne and Heydon both point to the need to eliminate lobbyist induced politically inspired carve-outs from the law.
These carve-outs include Workers Entitlement Funds, Mortgage Brokers,some insurers, and franchisors.
Hayne concludes: ‘the overall task is … much wider. It will require examination of how the existing laws fit together and identification of the various policies given effect by the law’s various provisions. Only once this detailed work is done can decisions be made about how those policies can be given better and simpler legislative effect’.Importantly: ‘the recommendations I have made cannot wait for that larger task to begin, let alone end’.
Much of that reform framework has been done: it appears in Dr David Millhouse’ PhD thesis: Systemic and Cyclical Failure in Australian Financial Services and Financial Products Sectors: Have Weaknesses in Law contributed to these Failures? The answer is unequivocably yes.
The Productivity Commission propose a new ‘duty of care and a 21st century disclosure regime “based on trust”’. Hayne wants an ‘integrated solution’ linking law and morality, noting that ‘Regulatory gaming occurs when gaps open, an inevitable consequence of piece meal change’.
This is Hayne’s real message. What we presently have due to time and political constraints is more piece meal tactical change, pleasing few.
Much is made in the media and in political circles of the adjective “fiduciary” and the aphorism “best interest”.
Australian statutes presently have seven interpretations of ‘best interest’ in different contexts. The proposed addition of mortgage broker best interest duty make it eight, plus varying interpretations in the general law.
Fiduciary law has largely been subsumed by statute to the role of ‘legal polyfilla’. For instance, in many respects financial advice consumers are worse off now than before the FoFA reforms. This is largely the result of lobbying.
Australia, as part of the Hayne inspired reform challenge needs to revisit the role of fiduciary law. In the Anglosphere, Canada has implemented reform in its regulation of financial services and products on fiduciary principles. German civil law (now incorporated into EU statutes) provides deep and relevant insight.
If Australian directors and financial intermediaries were subject to similar provisions applying in Canada and Germany, they would be less able to hide behind box-ticking compliance processes. They would apply the spirit, principle and intent of the law for the benefit of their consumers.
Australia is at a cross-roads. It is at a seminal point in the reform period which commenced in 1981. Australia presently is an international outlier in its financial regulation, its desire to become a world financial centre compromised.
Fiduciary qualities are implicit in community expectations of trust and loyalty on whom they rely: these qualities need to be the basis of post-Hayne reform. Otherwise, egregious conduct will continue.