Former High Court judge Kenneth Hayne, who led the royal commission into financial services sector misconduct, has warned of a “bad apples” multiplier effect from errant behaviour as he revisited key themes that emerged during his inquiry in 2018. 

Issues like conflicts of interest, remuneration models and culture drive corporate behaviour with consequences for consumers, he said in a speech to the International Congress of Actuaries in Sydney. 

“These are issues that participants in the market may say are for regulators to confront,” Commissioner Hayne said. 

“But if there is not appropriate regulatory response to misconduct, the entire regulated industry will come to suffer. The so-called ‘bad apples’ will multiply. 

“What, then, should the individual participant in the market do to reduce this kind of risk?” 

He says some provisions of the Corporations Act that deal with financial advice speak of a need to “manage” conflicts of interest. 

“But can conflicts of interest and duty be ‘managed’? How? Should we be surprised that often, very often, persons whose personal interests conflict with their duty to a client rationalise the conflict in a way that accords with their personal interests? Or is this too cynical view of human nature?” 

The way an adviser responds when conflicts of interest occur is a key consideration, according to Commissioner Hayne. 

Customers often rely on advisers if they are unable to make an independent assessment about a product so “what happens… if the supplier sells products to customers that are not appropriate?” he said. 

“These problems will be exaggerated still further if the supplier carries on the business of providing advice and will be exaggerated even more if the supplier of advice is remunerated by the maker of the product that the adviser recommends.” 

“If there is a conflict between the interests of the adviser and the adviser’s duty to the client, how does the adviser act to protect itself?” 

On remuneration, Commissioner Hayne says there is a link between conduct and reward. 

“It is trite to observe that misconduct is often, even usually, driven by the actor’s pursuit of some commercial gain,” he said. 

“If an individual is remunerated according to income or profit generated, or according to sales made, the individual’s pursuit of higher remuneration may swamp other relevant considerations including considerations of compliance with the law and basic standards of probity. 

“Remuneration and incentives will tell employees what an entity values. Remuneration both affects and reflects culture. Adopting some forms of remuneration and incentive programs can lead not only to poor outcomes for customers, they can lead to a breakdown in culture and misconduct.”