The Aftermath of the Royal Commission: A Regtech Powered Revolution in Australia’s Banking Sector

The collapse of Opes Prime in 2008, followed by the $253 million settlement to Opes investors by ANZ Bank for mis-selling and lack of disclosures in 2009 was the beginning of a series of banking misconduct scandals that rocked Australia and led to the call for a Royal Commission. That was established in December 2017 to investigate misconduct, superannuation, and consumer wrongdoings in the industry.

With advancement of Fintech, and particularly Regtech, regulators and financial institutions now have solutions at their disposal to improve surveillance of misconduct, while raising the barriers for mis-selling of products. A Senate Select Committee established in 2019 to evaluate the opportunity for Regtech and Fintech in Australia showed that regulatory cost reduction and strengthening compliance can be achieved by adoption and implementation of Regtech solutions.  These include Regtech solutions that can be applied to facilitate financial institutions to implement the Royal Commission’s recommendations.

What were outcomes of the Royal Commission Investigation?

The Royal Commission for the banking and finance sector received more than 10,323 submissions, of which the banking sector topped the list with 61% submissions, followed by superannuation and financial advice at 12% and 9%, respectively. After a thorough review of the sector the Royal Commission submitted a comprehensive Report with a list of recommendations on banking reforms to promote and embed accountability and robust governance. The recommendations were made with the aim of bridging the trust deficit between consumers and financial institutions, while enhancing existing policy framework to deal with banking misconduct.

The Report’s recommendations emphasise establishment of policies relating to employee remuneration, anti-money laundering/counter-terrorism financing (AML/CTF), and product suitability in the financial services industry. The Report has also provided a call for criminal or civil actions for any transgressions and misconducted. The Commission also recommended extending the Banking Executive Accountability Regime (BEAR) to all financial services entities, including superannuation and insurance. Accepting this recommendation, the Australian government extended BEAR to now include all APRA-regulated financial service institutions, while all other regulated entities will be included in due course. BEAR has become a critical pillar of a financial organisation’s risk framework, with accountability for risk-based decisions lying with individual executives right across the leadership ladder. The accountable executives face a long list of responsibilities including end-to-end product responsibilities and are individually liable for legal sanctions in case of any misconduct.

 Subsequent Investigations by regulators have resulted in large penalties to banks, including an instance where Westpac was fined $1.3billion. the highest in Australian history for breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act. Furthermore, the four major banks in Australia, namely, National Australia Bank, Commonwealth Bank of Australia, Australia and New Zealand Banking Group, and Westpac Banking Corporation saw their Net Promoter Score® (NPS) fall into negative territory, at their lowest level since 2014. , as compared to an average score of above 20 for other major financial institutions. The NPS provides the likelihood of existing customers recommending a bank to new customers. The reasons were obvious as highlighted above – customers feeling they were being taken advantage of, unnecessary account deductions and penalties, and unsuitable products sold. 

Enhancing Transparency and Regulatory Compliance with RegTech

The Royal Commission’s recommendations coupled with enaction of new laws to curtail misconduct, provides strict surveillance over any wrongdoing by financial institutions. Banks have had to make significant changes in the way they run their businesses, while sales incentives have been watered down to curb aggressive selling. The new rules require banks to hold back bonuses, which can be clawed back from the employees in instances of misconduct. Additionally, billions of dollars have been set aside to refund consumers in such instances. Banks are to follow a code of practice which imposes rigorous discipline of their employees, which could include potential jail terms and significant monetary penalties. 

While the Royal Commission has been wound down, the Australian government and policy makers have advocated for the use of Regtech to enhance transparency and reduce misconduct in the financial services industry. In the last two years, we have witnessed a host of initiatives, including setting up of Regtech Liaison Forums, Regulatory Sandbox and the Regtech Initiative Series by the Australian Securities and Investments Commission (ASIC).  ASIC encourages traditional players to collaborate with Regtech providers, helping these organisations build a culture of compliance, identify learning opportunities, and save time and money relating to regulatory matters. If banks aren’t using the latest technology in the compliance space, ASIC wants to know why.

With the use of Regtech, banks can fulfil their regulatory requirements and ensure compliance with new laws faster, easier, and more efficiently. Regtech firms can help institutions accurately detect breaches of conduct policies, such as breaches in mandated disclosures during investment advisory, in real time. Further, the technology solutions can enable regulatory bodies to supervise misconduct related to product suitability as well. The Regtech offerings can be customised using Artificial Intelligence to enable appropriate suggestion of suitable products for clients, eliminating the conflict of remuneration tied to performance while allowing for alignment of information and power between institutions and consumers. These solutions promote accountability of entities through data driven KYC and due diligence eliminating spurious information.

Recent years have also seen a considerable increase in usage of digital financial solutions, ranging from digital wallets, online ecommerce transactions, robo-investing and digital lending, further spurred on by the COVID-19 crisis and social restrictions. While there are overwhelming benefits of digital solutions and fintech, use of digital solutions can heighten vulnerability to suspicious transactions and hacking. The use of Robotic Process Automation (RPA) alongside implementation of AI and big data Regtech solutions can empower banks to automate compliance and customer due diligence. Increasing safeguarding of customer interest, while adhering to regulatory requirements.

Such advanced technological solutions are increasing transparency in the industry, while reducing instances of employee misconduct due to strict surveillance.  With the Australian Government and Regulators throwing their weight behind Regtech, the coming years are likely to usher in a new phase of the Australian banking sector. A phase which places customer’s interest as paramount, with innovative technologies facilitating robust and intuitive decision making.  

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