A Banking Royal Commission By Show Trial

Written by:
1 June 2018
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The hearings of the banking royal commission have, at different times, resembled a cross between the Soviet show trials of the 1930s and the American TV show L.A. Law of the 1980s.

All those Turnbull government ministers who opposed a royal commission into the banks – on the grounds that policy should be made after careful and sober consideration and not as a result of headline-grabbing interrogations – have been absolutely vindicated.

By the end of the royal commission, maybe some of the bloodlust against the banks from some segments of the public will have been satiated. And dozens of barristers and solicitors will be substantially more wealthy.

But as yet the commission has uncovered nothing that would not have been found out by the Australian Prudential Regulation Authority or the Australian Securities and Investments Commission – if either had been doing their job properly.

What the royal commission’s processes will have done though is diminish notions such as procedural fairness, and the idea that you’re innocent until proven guilty that should be apply to any Australian, whether they’re charged with murder or merely a witness giving evidence as a bank credit officer at a royal commission.

Whatever recommendations emerge from this exercise run the risk of being seen as merely the outcome of the very real emotions and passions of people whose businesses have gone broke.

The Australian Law Reform Commission pointed out in a report in 2009 that royal commissions are basically “fishing expeditions” with the coercive powers of courts requiring people to produce documents and give evidence. However, because royal commissions don’t have judicial powers they’re not bound by the rules that apply to courts, such as the requirement to apply natural justice.

Royal commissions have a role to play, but because they are so powerful, they’re also dangerous. Royal commissions should be rare – but unfortunately they’re not.

In the last five years there’s been no less than five federal royal commissions. Witnesses at royal commissions are not supposed to be on trial, but sometimes they’re questioned as if they are. Then, in addition to the problems of process, there’s the issue of the assumptions upon which the commission is based.

An investigation shouldn’t prejudge the outcome. But the official title of the commission is the “Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry”. It looks like the royal commission found what it was looking for before it even started. It should be clear what the royal commission is actually investigating – but it isn’t.

Changing standards

One of the matters the commission is investigating is “whether any conduct, practices, behaviour or business activities by financial services entities fall below community standards and expectations”.

Who decides what are “community standards”? Does that require the commissioner do a telephone survey of 100 Australians and ask them their opinion? A “community standard” should not be a question of a commissioner expressing their personal perspective and saying “I’ll know it when I see it”.

More seriously, it is a breach of the rule of law to hold an individual or a business to a standard when they don’t know how that standard is to be measured.

“Community standards” also change over time. Not too long ago it would have been assumed that if you take out a loan to fund your small business it’s your responsibility to pay back that loan. Now it appears a new community standard is emerging whereby if you can’t pay back a loan, it’s not your responsibility – it’s the bank’s fault for giving you the loan in the first place.

Finally, there’s the question of whether lawyers are the best people to tell the government about how to ensure the stability of the country’s financial system.

Notwithstanding its title, the scope of the royal commission goes far beyond investigating misconduct in the financial services industry.

Its terms of reference require the commissioner to consider the implications of his recommendations on the provision of banking services, on “the economy generally”, and on “financial system stability”. That’s no small task.

Maybe there are lawyers who do indeed know how to avoid the consequences of the next global financial crisis. If any of them do, they should give up their day job and instead become hedge fund managers.

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