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Feature Articles

Cite as: September 2012 86 (09) LIJ, p.54.

The debate over the Future of Financial Advice reforms has some surprising similarities to the debate that accompanied the introduction of secret commissions laws over a century ago.

By Stuart Walton

In the spring of 1907 David William Jones, a driver for the freight company Pickfords in London, delivered some parcels to a warehouse. The warehouseman was Adam Stiven, who asked Jones for a favour. He had a few small packages that he needed delivered locally, but the job was too small for Pickfords. Could he give Jones a few coppers to deliver them in his spare time? Jones agreed, and in his lunch hour set off to deliver the packages using the Pickfords horse and van.

We don’t know exactly what happened next, but it seems the vanboy Jones worked with threatened to report him. Jones gave the vanboy a few pence to “keep his mouth shut”. Unfortunately for Jones and Stiven, it appears a few pence wasn’t enough, because they soon came to the attention of the newly formed Bribery and Secret Commissions Prevention League.

Fighting corruption in the UK

The Bribery and Secret Commissions Prevention League was an organisation of judges, nobility and captains of industry dedicated to stamping out corruption in Britain’s commercial life. The UK had just passed the Prevention of Corruption Act in 1906 and the League took upon itself the task of gathering evidence to support charges under the Act. (Although there are differences between secret commissions laws in various jurisdictions, the UK’s Prevention of Corruption Act formed the basis of all the original secret commissions laws, including those introduced in Australia.) Under the Prevention of Corruption Act, an agent was prohibited from corruptly receiving any consideration without the knowledge of their principal. Corruptly giving secret consideration was prohibited too. “Agent” was drafted broadly to cover a wide range of relationships, not just fiduciaries – cases were brought involving “agents” as diverse as hotel porters, cooks, police and the secretary of a gun enthusiasts’ club.1

Jones and Stiven found themselves being prosecuted for commercial corruption. In his defence Stiven said he “could not see how he had injured Pickfords, who never got business of this nature”.2 The pair were found guilty. Stiven was fined 10 pounds plus costs, and Jones was fined one pound (which Stiven paid). Jones lost his job. He had worked for Pickfords for 27 years.

Jones and Stiven were victims of a moral panic over secret commissions which began in 1876 with an article in The Times reporting on a commercial corruption scandal.3 In the weeks that followed, The Times was deluged with letters telling of other instances of commercial corruption. Calls were made for secret commissions to be made criminal. In summing up the correspondence, the editors of The Times thundered:

“First came solicitors accused of betraying the trust of their employers and leaguing with third parties to divide fees to which they had no sort of just claim; then followed bankers, auctioneers, architects, insurance agents and accountants. There does not seem, in short, to be any end to the ramifications of this canker, which has grown to such a height as to threaten the extinction of honest plain dealing altogether . . .”4

As with any moral panic, in retrospect we can see that the outrage was something of an overreaction. The original “scandal” reported by The Times involved a stage manager accused of taking bribes from aspiring performers (one correspondent frothed “. . . painted courtesans and impostors take their places in our theatres and concert-rooms”5). This was not the South Sea Bubble. Also, the public outrage seems to have been principally confined to that portion of the public with sufficient wealth to employ servants and commercial representatives – the owners of large estates and members of the new middle class.

However, over the following few decades the issue continued to simmer. A number of judges, including the Lord Chief Justice, Lord Russell of Killowen, led a crusade against secret commissions through judgments, speeches and newspaper articles. A report on secret commissions was prepared by the London Chamber of Commerce. Equivalents of the UK’s Bribery and Secret Commissions Prevention League were formed throughout the world, including in Australia.

Fighting corruption in Australia

The UK’s Prevention of Corruption Act was passed in 1906, but it was Victoria that passed commercial corruption laws first. While the UK’s bill was slowly grinding through parliamentary committees and debates, the Royal Commission on the butter industry in Victoria in 1904-05 was uncovering extensive corruption in Australia’s dairy industry, including practices involving something known as “renovated butter”. Understandably, Victoria moved quickly to pass the Secret Commissions Prohibition Act in 1905 within a few months of the Royal Commission’s final report, and other jurisdictions in Australia followed soon after.

The moral panic subsides

Soon, however, public opinion began to move on. Over the next few decades newspapers in Australia occasionally carried stories warning of corruption in business, but these were generally part of what the NSW League (the only Australian organisation) called their “educational and forceful propaganda”6 efforts, such as this:

“Bribery in Australia: That bribery exists in Australia was stated at Melbourne by Mr G. Patterson, of Sydney. He was explaining to members of the Melbourne Rotary Club that a movement was afoot in New South Wales, sponsored by the Sydney Rotary Club, to put down bribery and secret commissions. ‘It is no good trying to dodge the issue,’ said Mr Patterson. ‘We have found that the forms of bribery that exist in Australia would make your hair stand on end.’”7

There was actually little evidence of widespread public concern about commercial corruption in Australia. In the year following its formation, the NSW League had only investigated “about 14 cases” of alleged corruption,8 and by October 1935 there had still been no prosecutions. In January 1937 even the secretary to the NSW League commented that:

“. . . the name of the league seemed to have an irresistible appeal in hair-raising tales of bribery and corruption. The difficulty with them lay in the fact that most of the stories were hearsay.”9

Similarly, supporters of the secret commissions laws in the UK claimed that:

“Prosecutions under the Act have been numerous and have generally resulted in conviction and drastic sentences or heavy penalties.”10

But even in the UK there were only a handful of prosecutions (most commonly in connection with wartime supply contracts).11 In 1929 members of the UK League bemoaned that there had only been 109 prosecutions involving commercial corruption in over two decades,12 and blamed the “fiat” provision of the Act for the lack of private prosecutions.13 (No prosecution could be made without the consent of the Attorney-General.) In fact, the fiat provision was largely operating as intended – to ensure the laws were not used for trivial or malicious prosecutions. The reality was secret commissions were not the dire issue that the moral panic had led people to believe.

The UK League also appeared to have little success in maintaining the level of public outrage that arose when the issue first surfaced through The Times. In 1929 Lord Crewe remarked:

“It had always been the anxiety and regret of thoughtful people that public opinion had not dealt as hardly with this vice or crime as it deserved.”14

“Thoughtful people” being, of course, people like Lord Crewe.15 In the case of lesser men who came to the attention of the League it’s hard not to suspect that they, like Stiven, were confused by their prosecution.

By the 1950s the public outrage against secret commissions appears to have completely dissipated. In the 1951 survey English Life and Leisure, the survey’s authors contacted the UK League and were told that:

“. . . there is no corruption in British commercial life, and that there is the same high standard of commercial honesty as before the war. Our informant added that civil servants, and the professional classes in general, are still quite incorruptible.”16

This is despite the survey’s authors concluding that, in their private lives, the English were increasingly venal, dishonest and opportunistic – particularly “the youth”.17

Secret commissions laws are still in place in Australia, but these days secret commissions are hardly the burning issue they were in the past. Instead, for the financial services industry in Australia, we have the Future of Financial Advice (FOFA) reforms.

Secret commissions and FOFA

There is a range of modern legislation that requires the disclosure of commissions relating to financial services, such as requirements to disclose commissions in Financial Services Guides and Statements of Advice under the Corporations Act 2001 (Cth). Other regulatory schemes, such as the national credit laws, also prescribe certain disclosures relating to commissions.

The Commonwealth government’s new FOFA reforms, however, go significantly further than these other modern disclosure requirements. The FOFA laws generally ban commissions and other benefits that could reasonably be expected to influence advice given to retail clients about financial investment products.18 These restrictions do not only apply to benefits received by financial advisers. The FOFA laws extend certain restrictions on commissions to product issuers, and also to other intermediaries in the product distribution chain, such as platform operators.19

At first glance, it would seem that the principles underlying the secret commissions laws have more in common with those of the other modern disclosure requirements than those of the FOFA reforms. The reasoning behind the other modern disclosure requirements is, primarily, that such disclosure allows investors to “consider the impact”20 commissions may have on the financial services they acquire. Supporters of the secret commissions laws similarly believed that disclosing commissions was sufficient to address the harm:

“The real evil is not the payment of money but the secrecy attaching to it.”21

But supporters of the secret commissions laws had a very different understanding of the purposes of such disclosure.

One purpose was that disclosure gave the principal the option of prohibiting the commission. The general recommendation was that, by and large, a principal should not permit their agent to receive commissions:

“. . . there remains a moral question. Ought a master to consent to the receipt by his servant of a donation from the dealer? It is in my opinion generally unwise to do so, and it is especially unwise when the gift is proportioned to the amount of the dealings. The evil of such payments is that they tend to place the servant in a difficulty – to create an obligation or an inclination to act in the interests of a stranger when he ought to act with a single eye to his master’s benefit.”22

However, the main reason behind requiring the disclosure of commissions was that it allowed the principal to claim the commission for themselves. In the second reading speech for the UK’s Prevention of Corruption Bill, an example of a disclosed commission was given to illustrate the evil the Bill was intended to prohibit – a firm of horticulturalists had disclosed commissions (5 per cent of an order’s value) they paid to gardeners, but when a gardener’s employer demanded the commission be paid directly to them instead of their gardener, the horticulturalists had refused.23

For supporters of the secret commissions laws, disclosure was less about enabling consumers to make informed choices, and more about ensuring the principal could maintain control over the relationship with their agent, thereby eliminating potential conflicts of interest – principles consistent with those evident in the debate over the FOFA reforms.24

Mountains or molehills?

Almost from the outset of the passing of the Prevention of Corruption Act there was concern in the UK that the law was becoming a dead letter. Even its supporters acknowledged:

“The Act has done a great deal of good, but not as much as enthusiasts expected.”25

The debate around the secret commissions laws reveals a genuine concern for the future of Britain’s economic prosperity, as well as the future of Britain’s moral character – there was a starry-eyed belief that such underhandedness “just wasn’t British”.26 The secret commissions laws were drafted by those who felt that concern most keenly, and who led the crusade against bribery and commercial corruption. Perhaps unsurprisingly, the laws they drafted were harsh and very broad.

But when supporters of the secret commissions laws were unable to actually find mountains of significant commercial corruption, they turned their attention to trivial practices that they saw as embodying the same element of moral corruption. In the UK, much of the debate ended up being over whether it was permissible to give an agent a gift box at Christmas.27 The only issue the NSW League actually brought to public attention was corruption by schoolmasters in uniform supply contracts – undisclosed commissions often paid by suppliers in the form of donations of sports equipment for school teams.28

Getting the balance right

Many investors lost huge amounts in the collapse of Storm Financial, Westpoint and Trio Capital (and other recent collapses) and it is clear that conflicted remuneration structures played a large part in the distribution of often inappropriately risky products and investment strategies through some financial advisers. However, while some form of legislative response would appear to be appropriate, at least some of the proposed regulation of the minutiae of industry practice foreshadowed in the FOFA reforms appears to reveal a regulatory approach that has the potential to be quite onerous, and seemingly beyond the level of regulation necessary to appropriately address the risks. A good example is FOFA’s proposed $300 gift threshold.29 The compliance costs associated with monitoring whether “infrequent or irregular” benefits breach the threshold will be substantial – and are those costs really justified given the risks such benefits could present?

The creation of any regulatory scheme involves appropriately balancing the costs of regulation against the potential harm that regulation is designed to avoid. The lesson of the secret commissions laws is that this balance can be difficult to achieve when laws are drafted in response to scandal and outrage. Although the overall framework of the FOFA reforms is likely to be a positive step towards the better regulation of the financial advice industry, it is yet to be seen whether the fine detail of the FOFA reforms will manage to strike an appropriate balance.

STUART WALTON is a Special Counsel with HWL Ebsworth Lawyers. The views expressed in this article are the author’s and should not be attributed to HWL Ebsworth Lawyers.

1. Albert Crew, The Law Relating to Secret Commissions and Bribes (Christmas Boxes, gratuities, tips etc.) the Prevention of Corruption Act, 1906, 1913, London, Isaac Pitman and Sons, pp90-97.

2. The Times, 8 August 1907, p2.

3. The Times, 12 December 1876, p10.

4. The Times, 13 January 1877, p12.

5. The Times, 3 November 1877, p6.

6. Bribery: The Official Organ of The Bribery and Secret Commission Prevention League (Inc) No. 1 Oct 1935, p3.

7. Advocate, 9 Feb 1932, p2.

8. Barrier Miner, 28 November 1934, p4.

9. Cairns Post, 26 Jan 1937, p10.

10. Crew, note 1 above, p100.

11. The Times, 4 June 1919, p9 and The Times 26 November 1946, p8.

12. The Times, 19 December 1929, p5.

13. Note 12 above, p5.

14. Note 12 above, p5.

15. Before his retirement, Lord Crewe had been responsible for managing large portions of the world as the UK’s Secretary of State for the Colonies.

16. Rowntree, B and Lavers, G. English Life and Leisure: A Social Study Longmans, Green and Co London, 1951, p200.

17. Rowntree and Lavers, note 16 above, pp226-227. The survey’s authors put this down to falling church attendance.

18. Division 4, Subdivision C of the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012.

19. Division 5 of the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012.

20. Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 Explanatory Memorandum at 5.597.

21. Shipway v Broadwood 1899 1 Q.B. at 373, quoted in Crew, note 1 above, p109.

22. Crew, note 1 above, p105.

23. Hansard, House of Lords, 10 March 1903.

24. See, for example, the debate described in the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into financial products and services in Australia, November 2009 at 6.85-6.101.

25. Secretary to the Secret Commissions and Bribery Prevention League, quoted in The Times, 24 May 1910, p3.

26. In the words of Lord Lambourne responding to a toast to the UK League, “The motto of the League ought to be ‘Honesty and charity in all our dealings.’ There could be nothing finer than that, and nothing more characteristic of Englishmen”, quoted in The Times, 24 May 1910, p3.

27. See, for example, The Times, 1 December 1909, p4 and The Times, 14 January 1909, p10.

28. Note 6 above, p3.

29. Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 Explanatory Memorandum at 2.36.


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