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A “perfect storm” sets off a compliance rush in Australia’s finance industry

Michael Griffiths

15 May 2018

A “perfect storm” sets off a compliance rush in Australia’s finance industry

Financial institutions in Australia are working overtime to sharpen compliance programmes as the country plans to crack down on white-collar crime and scrutiny on the banking sector intensifies.

Lawyers say that increased attention on the country’s banking sector has financial institutions devoting more resources to compliance than ever before. Australia’s banks are currently the subject of a Royal Commission into misconduct within the financial sector and are preparing for a wave of new legislation tackling white-collar crime, all of which, lawyers say, has focused minds within banks’ compliance departments.

“There’s a perfect storm, or cluster of events and scrutiny from a variety of regulators and enforcers,” said Wendy Wysong at Clifford Chance in Hong Kong. Another lawyer, who spoke to GIR on the condition of anonymity, said: “I’ve never experienced such a state of panic, concern and a focus of attention on compliance.”

Australia’s Financial Services Royal Commission has put a spotlight squarely on the country’s financial sector. The probe, initiated by Prime Minister Malcom Turnbull in November 2017 to examine misconduct in Australia’s banking, superannuation and financial services industries, has dominated national media since public hearings began on 13 March 2018.

Public hearings so far have focused on personal financial advice given by banks and financial planners over the last decade. For example, the Commonwealth Bank of Australia has reportedly admitted to charging fees to dead clients and financial institution AMP reportedly said it lied to the Australian Securities and Investments Commission (ASIC) over whether it gave misleading financial advice to customers.

Lawyers say that even banks that haven’t yet been the subject of public hearings are under pressure to respond to questions from the Royal Commission. One lawyer, Rani John at DLA Piper in Sydney, told GIR that “there’s been a massive escalation in the volume of work, especially if you’re a company that has to provide responses to the Royal Commission”.

Many financial institutions have also quickly beefed up compliance departments and internal legal teams purely to deal with requests from the Royal Commission, according to lawyers who did not want to be named to protect their clients.

The Royal Commission follows two years of media and government attention on the conduct of banks that has run parallel to government efforts to transform ASIC into a more muscular enforcer. In 2016, the Australian government created the ASIC Enforcement Review Taskforce to examine whether the agency has enough enforcement power to effectively punish misconduct.

The taskforce concluded in October 2017 that ASIC should be able to impose harsher penalties and be given tougher investigative powers. On 16 April 2018, the government agreed to adopt all of the taskforce’s recommendations pending the Royal Commission’s findings. The commission is due to publish an interim report before 30 September and its final report by 1 February 2019.

Georgie Farrant at Baker McKenzie in Sydney told GIR that “the level of focus on compliance and enforcement in the financial services sector is higher than we’ve ever seen it,” as a result of the government’s posturing over the past two years about cracking down on financial sector misconduct, as well as the Royal Commission. 

But the Royal Commission is just one issue for Australian companies. Several lawyers reported fielding many questions from corporate clients about Australia’s potential new whistleblower protection regime.

The Australian parliament will soon debate a bill that, if passed in current draft form, will streamline various whistleblower protections embedded in numerous Australian laws into one piece of legislation. Among the possible requirements under the new law are that all companies, of a certain size, must implement whistleblower policies. 

Australian companies could also have to consider a new law that introduces deferred prosecution agreements (DPAs) and the offence of failure to prevent bribery. The bill, which sits before Australia’s upper house in draft form, also simplifies Australia’s definition of foreign bribery to mean attempting to illegitimately influence a foreign official or a foreign candidate for public office, removing the requirement that the bribed official was influenced by the corrupt payment.  

Put together, lawyers say these proposed laws are causing considerable stress at Australian companies. “It’s not that everything has suddenly changed, it’s that it’s all coming at once,” John told GIR.

Several recent scandals within the banking sector have added to public attention on the financial sector. Australia’s largest lending bank, the Commonwealth Bank of Australia, found itself engulfed by media attention in July 2017, after Australia’s money laundering and terrorism financial authority Austrac alleged that the bank failed to promptly report over 53,000 suspicious cash deposits.

The bank blamed the late reporting on a software glitch in its cash machines and later denied some of Austrac’s allegations. So far, the bank has set aside AU$1.57 billion (US$1.19 billion) to resolve Austrac’s investigation and to improve its internal compliance procedures, as recommended by the Australian Prudential Regulation Authority (APRA). Both APRA and ASIC launched investigations into the bank in August 2017, based on Austrac’s allegations.

Before the Commonwealth Bank matter broke, ASIC’s flagship investigation centred on whether the country’s big four banks manipulated Australia’s benchmark rate, the bank bill swap rate (BBSW). So far, three of the four banks have settled with ASIC before trial. NAB and ANZ paid AU$50 million each in 2017 to resolve the allegations and the Commonwealth Bank agreed to a AU$25 million fine on 9 May. Westpac, the fourth of the big four, will fight ASIC’s allegations in court.

Wysong said that the recent compliance boom isn’t a reaction to the scandals, rather it is a sign that Australia is getting serious about investigations into white-collar and corporate crime. “I don’t think there’s more bad behaviour than has been here before, but there’s been a spotlight shone on problems that need to be fixed and addressed,” she said.