Andy Schmulow talks to Regulation Asia about a project he is leading to investigate the introduction of a TCF regime in Australian financial services.
Australian researchers are exploring the introduction of a ‘Treating Customers Fairly’ (TCF) regime for the country, similar to those in the UK and South Africa.
The TCF, first implemented in the UK in 2006 in response to multiple financial scandals, is a principles-based and outcomes-focused regime that would require financial firms to demonstrate how they will ensure that they treat customers fairly in the context in which they operate.
Under such a regime, the regulator would set out standards of conduct that are to be met, rather than requiring firms to adhere to strict methods of compliance that would arise in a rules-based approach.
The TCF regime focuses on culture and governance within regulated firms, requiring them to proactively design and manage their operations, internal governance, and controls to ensure that customers are treated fairly, and report to the regulator on how they are ensuring customers are treated fairly.
As such, TCF better reflects High Court Judge and Royal Commissioner Kenneth Hayne’s admonition that firms should ask “what should we do?” not “what can we do?”
ALRC recommendations
In January 2024, the Australian Law Reform Commission (ALRC) tabled a final report in Parliament setting out the findings from a comprehensive review of Australia’s legislative framework for corporations and financial services regulation.
The report was the culmination of an inquiry that was referred to the ALRC in September 2020 following the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, headed by Kenneth Hayne KC AC.
The ALRC found the current legislative framework for corporations and financial services regulation is overly complex and made 58 recommendations to streamline financial services legislation.
Among the recommendations, the ALRC said implementing a legislative framework similar to the TCF would enable Australia to streamline financial services regulation by “more effectively separating high-level principles and obligations from prescriptive detail”.
Moreover, the TCF regime, which rests on six pillars, reflects the six norms of behaviour that Commissioner Hayne laid down as the grundnorms for conduct in the financial industry.
Discovery Project grant
The Australian Research Council (ARC) recently awarded a AUD 561,000 Discovery Project grant to a group of academics – described by the ALRC reviewers as a “dream team” – to investigate the TCF regime law put forward by the ALRC.
The “dream team” includes:
- Associate Professor Andrew Schmulow, University of Wollongong
- Dr Nicola Howell, Queensland University of Technology
- Professor Jeannie Paterson, Melbourne Law School
- Professor Elise Bant, University of Western Australia
- Professor Therese Wilson, Griffith University
- Professor Jason Harris, Sydney University
The project aims to investigate the TCF regime law by utilising, for the first time, an internationally comparative critique of existing regimes in the UK, South Africa and New Zealand.
The project will generate a blueprint for adopting the TCF regime in Australia, in line with the ALRC’s suggested government policy direction.
In awarding the grant, the ARC said the outcomes of the project include “significantly enhanced consumer protection and effective law enforcement” and that the benefits would include “a much simplified, more effective law, governing every consumer, and every financial product in Australia”.
“The manner in which this project could enhance enforcement efficacy is particularly pertinent, in light of the 2024 Senate Inquiry (Bragg Inquiry) into ASIC’s enforcement,” says the project leader, Associate Professor Andy Schmulow. “It would be fair to say that the Bragg Inquiry concluded that ASIC is a failed regulator.”
Customer-centric philosophy
Schmulow said the new project will build on a submission he co-authored for the ALRC review, which advocated for a TCF regime in Australian financial services, modelled on the UK and South Africa.
The submission argued that Australia’s current prescriptive, rules-based legislation, while containing elements of fairness, lacks an overarching customer-centric philosophy and explicit outcome focus.
Moreover, it is contained in a “legislative morass” that Schmulow describes as akin to “the Hindenburg crashing into the Titanic: 5,000 pages of legislation, backed by 43,000 pages of regulations, presented in a manner that is contradictory, confusing, ambiguous, duplicated (albeit imperfectly) across half a dozen or more Acts, without any thought given to hierarchy, presentation or location.”
“It’s impossible to find the relevant sections, when you do, they’re contradicted by others of a very similar nature, informed by definitions that conflict with other definitions, and some of the regulations and carve-outs are not published anywhere at all,” Schmulow says. “Those have been described as ‘secret law’ – a technique last used by the Nazis.”
In the submission, the authors presented a consumer survey revealing Australians’ dissatisfaction with financial service providers and a desire for fairer treatment.
They also highlighted the UK’s new Consumer Duty as a successful example of principles-based regulation, emphasising its focus on consumer outcomes, clear articulation of expectations, and mechanisms for demonstrating compliance. The submission detailed how the UK Duty addresses product governance, pricing, consumer understanding, and support, contrasting it with Australia’s existing framework.
The submission recommended that the ALRC taskforce explicitly consider implementing a TCF regime in Australia, including a high-level TCF obligation, compliance reporting requirements, and consumer education initiatives.
“Six years ago, Commissioner Hayne said that our financial services legislation needed root and branch reforms” says Schmulow. “In the succeeding six years since the Royal Commission, Commissioner Hayne, Graeme Samuel and others have decried the lack of progress in inculcating decent standards of conduct in our financial industry.”
“Change is needed to reflect Commissioner Hayne’s findings, and the TCF framework is best suited to the task. The need for that change is now.”