Lessons from Australia’s Royal Commission

Dishonest conduct. Money for nothing. Deceiving customers. Systemic failures. Those were just some of the phases hand-picked by Commissioner Kenneth Hayne in his long-awaited Royal Commission report into Misconduct in the Banking, Superannuation and Financial Services Industry, released earlier this month.

The 496-page report was a damning indictment of Australia’s financial services sector, accused of endemic misconduct, unfair practices and suspect bonuses, among other offences. While the Royal Commission focused on financial services, Australian regulatory experts believe the fallout will hit every sector, especially complex customer-facing industries.

Zero tolerance

Hayne’s report has already prompted new laws to tackle rogue banks and insurers, with further changes expected to Australia’s Corporations Act. Both major political parties in Australia have promised to vote through corporate reforms and tougher enforcement for individuals. The developments are likely to herald a new era for ethics and conduct in Australia, with risk managers directly in the firing line.

Dr Deen Sanders, a Sydney-based partner at Deloitte focused on regulation, believes the Royal Commission will change the way Australian corporates are run. He says ethical standards and conduct requirements will change. “Everything will be different, and people will have to think of new ways of doing things,” Sanders says.

So what can Australian risk managers take from the Hayne Report? Sanders says top executives, including corporate risk managers, should expect a higher degree of individual accountability in the future. There are currently calls to extend Australia’s Banking Executive Accountability Regime to other industries. Sanders adds: “There has been a call to professionalism, including in the risk management industry. How can individuals understand their duties as professionals?”

The Hayne report recommended a more enforceable code of conduct across the financial services industry, something Sanders believes will have a major impact on the risk profession.

“This opens up a big conversation with risk managers. They have measured risk from a control and measurements perspective, but when you talk about behaviour and codes of conduct, that is more esoteric. It will be hard to tie down, and a challenge for risk management. The old model of compliance-based risk oversight will need to be overhauled.”

Change your approach now

Sanders says risk managers may need to change their approach: “In the past, most companies have come from the view of ‘what is the law?’ Their compliance rules have been based on their interpretation of the law, which is a hard line. When you look at ethics and conduct, it is a fuzzier line, and more subjective. Risk managers will have to look at the best outcome for clients, rather than the legal outcome. That will be a big challenge,” he adds.

Sanders believes the risk management function will become more important within the financial services sector. “The Royal Commission challenges risk managers to be part of a leading conversation,” Sanders says. “How do they help their employer lead a conversation about what good behaviour looks like? Hayne’s view was that things should not go wrong in the first place. A risk manager’s role becomes very important in this context.”

In the face of greater individual accountability, tougher regulation, and greater oversight, does the Royal Commission present any opportunities to risk managers? Sanders says the call to professionalism could prompt the risk management industry to become a more formalised profession, set standards and qualifications.

He says: “Commissioner Hayne was clear, he wants to see standards, codes, and professional behaviour across the [financial services] sector. That will naturally extend to those who support the sector. The sooner the risk management community can be become a genuine profession, with appropriate standards, obligations, it is a great opportunity, it improves the career path and also provides more authority and autonomy to the industry.”

Overall, Sanders says risk managers will have to tackle a broader number of risks in the new environment, as Australian corporates enter a new era of accountability. “How does a risk manager take a broader view of their role? Hayne called out conduct and culture. In the future, risk managers will have to give more consideration to the broader elements of risk, and how that affects a business. I believe it’s a very exciting time for the Australian risk management community.”