Opinion Executive Rituals and Enforcement Reality: Insights from the Banking Royal Commission

Officers below board level are increasingly coming into the crosshairs of the the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, but it remains to be seen what punishments will be handed down if crimes are deemed to have taken place. 

free-clinton-0028.jpg

Dr Clinton Free, Deputy Director at the Centre for Law, Markets and Regulation at UNSW.

OPINION: In Ancient Greece, pharmakoi were individuals offered up as sacrificial victims when a calamity threatened the community. The pharmakoi were publicly whipped and ceremonially punished as purification or in atonement.

The leaders of Australia’s Big 4 banks have been seen increasingly in a pharmakoi role in recent years.  In the face of a stream of public shaming in the form of media exposés, Senate inquiries, and regulator reports, CEOs from the Big 4 banks have frequently been called to account. Stern faced apologies have become a common ritual. 

Another feature has been the presentation of rogue perpetrators – Don Nguyen at CBA, Melinda Scott at ANZ, David St Pierre at Westpac and Graham Cowper at NAB – who have been removed amid promises by the banks to do better.

The recent revelations of inappropriate advice, bribery, fraud and deception at the Royal Commission have played a familiar track. This is unsurprising given the important symbolic and political forces at play in this Commission, amplified by its case study approach. However, while much is familiar there are important new trajectories which provide a pointer as to where the Commission may be heading.

Unlike past inquiries, we have seen a much wider array of characters at the stand. Rather than apologetic CEOs, the uncomfortable shifting in the seats and hand-wringing has been done predominantly by Executive General Managers. In the first round of hearings dealing with credit products from 13-22 March, the Commission heard from 13 senior banking executives, 10 from the Big 4 (with two from the CBA wholly owned subsidiary Aussie Home Loans and one independent mortgage broker).

In the second round on financial advice to date (16-27 April), the Commission has seen a further 11 senior banking executives, 7 from the Big 4 (with three from AMP Limited and the owner of Dover Financial Services, who collapsed on the stand and was excused). This has had the benefit of hearing evidence from those closer to relevant behaviours. It also raises important questions about the individual liability of bank executives, rather than the dismissal of ‘rogue’ staff, symbolic apologies by CEOs and bank penalties.

Two avenues to individual liability are civil penalty sanctions and criminal prosecutions.

Civil penalty sanctions target directors and ‘officers’. Officers of a corporation can include employees who are involved in decision-making which can affect significantly the corporation’s financial standing. Executive General Managers just below board level may fit this description.

Officers such as those from AMP and the Big 4 have duties requiring them to exercise care and diligence.  As proceedings brought by the corporate regulator against officers of the Australian Wheat Board (ASIC v Flugge [2016] VSC 779) and Avestra Asset Management (ASIC v Avestra [2017] FCA 497) have illustrated, officers below board level who fail to make appropriate enquiries or to prevent conduct after gaining knowledge about the suspect conduct of others, may find themselves in the cross-hairs. If, as seems likely at AMP, their corporation has breached the law, officers may be found to have breached their duty of care and diligence.

Bank.jpg

Officers must also act in the best interests of the company. If officers of a company intentionally cause the company to breach the law, which seems plausible at AMP, it is virtually impossible that conduct could be in the interests of the corporation (ASIC v Adler (2002) 168 FLR 253; ASIC v Flugge). Officers ‘knowingly concerned’ in such conduct may also be liable, including if they know and fail to act.

If the intention of the officers is shown to be reckless or intentionally dishonest, they themselves may be criminally prosecuted, or have accessorial liability for criminal breach of the law by staff or by their company. This may range from misleading the regulator to fraud or conspiracy to defraud charges in relation to customers’ money. 

Currently, civil penalty sanctions involve disqualification for up to 20 years from corporate officer appointments and/or civil penalties (civil fine) of up to $200,000. Criminal penalties for the types of conduct seen at the Commission range from 12 months in jail for misleading ASIC, to unlimited penalties for some species of conspiracy to defraud. The harsher sanctions and penalties recently announced by the government will not apply retrospectively to executives appearing at the Commission. The same is true of the sanctions in the new Banking Executive Accountability Regime (BEAR).

While civil penalty sanctions are pursed by ASIC, criminal prosecutions are not. They are referred to the Commonwealth Director of Public Prosecutions. The DPP is thinly stretched with terrorism and drug-related offices and has focused its economic crime attention on fraud and insider dealing. Its prosecutions of bank executives for dishonest breach of duty are vanishingly rare.

Much has already been said about changing executive conduct through overhauling remuneration and separation of bank divisions. In parallel, a chorus of politicians has thrown its weight behind individual penalties for bankers, most notably Scott Morrison’s recent call for ‘jail time’. Public, political and legal dissatisfaction with the banks have different dynamics, but they also overlap. 

These currents have already started to run together: institutional investors are being advised to vote against sitting AMP directors at the imminent AGM. The tide of adverse opinion may gather sufficient momentum to result in legislative reform and a different approach to enforcement.

Will the Commission recommend a dedicated prosecution office for economic crime? More resources for ASIC’s new dedicated enforcement Commissioner? Fine tuning to allow easier enforcement against ‘officers’ who fail to act when they know of contravening dishonest or misguided conduct of less senior staff?

We will find out soon enough: it is to be hoped that the Commissioner’s recommendations carry more sting than the CEO pharmakoi rituals conducted in Canberra over recent years.

Clinton Free is Deputy Director at the Centre for Law, Market and Regulation at UNSW. He holds Commerce and Law degrees from UNSW and a doctorate from Oxford University where he was a Rhodes Scholar.