Australian Royal Commission Into Banking And Finance Sectors: Corporate Governance And Ethics Evaluation
The Purpose of Corporate Governance
The Australian Royal Commission (ARC) in the banking sector was established in December after periodic pressure from the public. Concerns for a public hearing were initiated in March with the strategic aim of periodic irregular intervals throughout 2018. Corporate governance refers to a set of rules and procedures upon which most of the corporations including the large scale institutions are directed and controlled. Corporate governance entails the structural power flow among the shareholders of the company or organization. Ethics, on the other hand, refers to the moral principles that guide the behaviors and activities of an individual. The fundamental query rises regarding the integration of corporate governance and ethics. Usually, the two terms are used synonymously by different people across the world. However, the corporate governance and ethics differ from each other as already expressed in the definitions above. An organization is therefore likely to exercise corporate governance but not in an ethical manner. It’s significant to exercise ethical corporate governance within an organization, institution or company for competitiveness in the market environment. This essay has been set to discuss various components regarding the corporate governance and ethics ideology while displaying various aspects brought forth about the ARC in the banking sector.
The fundamental aim of setting up corporate governance is to ensure that the management system of various organizations deliver services effectively and in a prudent manner while exercising high-level entrepreneurial skills to achieve the long-term objectives of the company or institution (ICAEW, 2018). Usually, corporate governance is a framework that is built around the mission, values, and vision of the organization with a fundamental aim of directing the staff of the organization. Corporate governance plays a vital role in controlling the internal and external actions of the managers, staff and other stakeholders outside the firm. Corporate governance also ensures that the senior employees of the firm do not take advantage of the firm resources by outlining roles, compensation programs and duties of the directors (Vitez, 2017).
Furthermore, corporate governance outlines the role of the shareholders especially in voting for the corporate values of the firm. Corporate governance emphasizes the values, goals, and objectives of the firm upon which each stakeholder is directed. Therefore, the ideology of corporate governance prevents the stakeholders from diverting their course line. The corporate governance framework entails features such as the contract schedules, individuals responsible for approving contracts, the rate of returns and other significant obligations. The checks and balances system that is entailed within the corporate governance framework is significant in controlling the internal departments of the organization. The system ensures that no one initiates business decisions that are outside the mission and values of the organization.
Corporate Governance Success Evaluation in Australia
Corporate governance in Australia is a fundamental issue that needs to be addressed. Despite the facts that different people have advocated for good corporate governance, the current state of Australia is an implication of corporate governance failure. The fall in big companies in the country displays poor management skills and public accountability issues. Corporate governance deal not only with the multiplication of assets in the organization but also risk management. Several discussions and queries have been raised regarding the National Australian Bank (NAB) scandal. Such an occurrence is an indication of poor governance and risk management from the board of directors. Following the 2004 financial report of the NAB as the largest financial services provider, a loss amounting to AUD360 has been created due to unauthorized trading in foreign currency within the country. The entire ideology was classified as an operational risk which is a clear indication of gaps within the corporate governance sector. Several monitory bodies including the Certified Practicing Accountant referred to the incidence as a financial disaster. Most of the issues in the NAB have been brought about by the Home-Side loan crisis from which different illegal foreign exchange traders have periodically exploited the gaps within the risk management policy in the country. The Australian banks have emerged in a series of alleged misconduct. Some of the incidences include failure to comply with the lending standards, selling uncommented products, irrational financial advice to the clients, failure to adhere to the anti-money-laundering policy, attempt to manipulate financial benchmarks and failure to acknowledge the requirements of the customers. Despite the aim of bringing out a solution through the establishment of the Royal Commission, the ideology has expressed different challenges to the banks. For example, exposure of the misconduct operations to the world is a sobering exercise to the management department upon which the organizational culture relies. The Royal commission relies heavily on the evidence of misconduct which is often hidden by the management of the banks. In such a case, those individuals who call for action from the Royal Commission is most likely to be disappointed. The high profitability in banks is not an issue today as the level of trust by the customers of the banks is still high making it more difficult to deal with the exposed issues.
As already mentioned, the Royal Commission in Australia was called upon following the risen issues of misconduct among the Australian Banks. The major work of the commission was to investigate the alleged concerns of misconduct among the banks. As the most profitable institutions across the world, Australian banks had been alleged with client exploitation and corporate feud including several scandals. Among the operations to be examined included the misleading and deceptive character in the banking industry. Such behaviors had been termed to be below the expectations and standards of the community. The community was also responsible for evaluating superannuation incidences within the industry.
Reasons for the Calling of the Royal Commission in the Banking and Finance Sector in Australia
Furthermore, the banks had been accused of presenting profits ahead of the clients. The commission had all the mandate and authority to present witness documents that are relevant not only in decision making but legislative amendments. Conclusively, initiation of the royal commission purposed at restoring the public trust in the banking and financial industry.
There has been great opposition to the calling of the royal commission in Australia. The first individual under the blame is the prime minister of the country. Turnbull being the prime minister of the country for a longer duration of time had all the opportunities of implementing the commission. However, he opposed the entire system until the time when he realized that he had no otherwise rather than executing the system. He recently claimed to have been wrong to oppose the calling of the commission in investigating banks even though pretty evidence of wrongdoing was available.
Additionally, Barnaby Joys as the deputy prime minister of the country strongly opposed the commission until recent weeks when he accepted that the ideology was politically wrong. Kelly O’Dwyer (the financial services minister) also opposed the commission but unlike the colleagues has not accepted his mistakes. For her, the implementation of the commission was reckless and ill-conceived. Treasurer Scott Morrison in 2016 also dismissed the calling of the commission by regarding it as a populist whinge. John Howard as the former prime minister of the country opposed the entire commission by terming it rank socialism.
Different issues have been brought forth by the royal commission in Australia. Firstly, the commission reveals that 90% of the financial advisers fail to comply with the requirements of the customers. Additionally, the pieces of advice are inaccurate accompanied by forged documents. Also, the commission brings out the ideology that many customers pay the ongoing fees but fail to receive advice reviews in the end. The commission also reveals a great increase in the number of advisers in the country since the global financial crisis. As per the commission, the number has risen by 41% from 18000 to 25, 386. However, the increase is not the fundamental issue of concern. The crisis developing in the increase is that only 35% of the advisers have accomplished their bachelor level. Peter Kell (ASIC deputy chair) says that the corporate regulator believed that the financial services in the country are unprofessional for failing to comply with professional standards. The failure to provide the ongoing financial advice has resulted to a cost amounting to $383 as compensation to the clients who ha underwent losses due to the false and failed pieces of advice. Typical examples of banks which have breached the ban of paying kickbacks to financial advisers include the National Australian Bank, Westpac, and AMP despite having recently admitted the criminal offense. NAB submitted two conflicting documents to the commission this year even though each of them constituted a breach of the Corporations Act. AMP, on the other hand, engaged in the late submission of the documents thus leaving very little time for proper securitization by the commission.
Opposition to the Royal Commission
The actions of the Royal Commission together with the announcements from the ASIC have come along with apparent conflicts of interest among vertically integrated financial advice and product providers (Murchie, 2018). Most mortgages are inscribed by brokers who act as intermediaries between the clients and the lenders. One of the fundamental conflict as admitted by the Commonwealth Bank which is the largest institution in Australia circumnavigate around the interests created by the commission payments made by the bank on the brokers (Ziffer, 2018). Another conflict arose between the brokers and the customers whereby the longer the payment schedule, the larger the loan interest which consequently results into larger commissions that present fundamental problems. Therefore, the mortgage brokers perform their business in the interest of prolonging the payment period through the allocation of huge loans to earn larger commissions. In this case, conflicts easily arise between the brokers and the customers. In such a case the customers do not get their best out of the loans. Even though most banks suffer from slow repayment from the customers, no bank is willing to be on the forefront of engaging one on one with the clients because of avoiding the risk of costing the business.
Corporate culture and remuneration play a fundamental role in replenishing the behaviors of various financial workers with a fundamental aim of improving the quality of services in the financial and banking sector. Corporate culture introduces variable compensation schemes within organizations whereby the managers are motivated for the success while acknowledging the fact that they are liable of any losses incurred unlike in the contractual compensation schemes that introduces a compromise within the risk-taking section among the finance and banking executives. Institutions that focus heavily on the competitors is likely to initiate a higher risk-taking among its accounting staff. Otherwise, organizations that have a higher level of creative culture are likely to promote a lower credit risk-taking behavior among the working staff. Banks and other financial institutions that offer bonus compensation to the CEOs are most likely to enhance more risk-taking among the working staff. Most workers tend to follow the values and beliefs triggered by the corporate culture enshrined within a respective institution.
A typical example of a government bank that has been rendered corrupt in Australia is the Central Bank of Australia. Some of the corrupt corporate culture operations involve but not limited to forged documents, cash-stuffed envelopes used to corruptly secure loans and faked pay slips (Soos, 2018). The criminal operation among the management staff of the bank has taken place for several years since the early 1980s. Research indicates that the bank has been in the position of cleaning up all the illegal operations committed by the executives. Other corrupt activities include deregulation, privatization, de-supervision, and self-regulation. Such a corporate culture has greatly promoted the criminal operations within the bank.
The only way corporate culture can be improved in such an organization is through the publication of operations so that the corrupt individuals can be exposed. Additionally, the bank should introduce restrictions on borrowing as the ideology has led household debts resulting in higher house prices in the country. Additionally, removing restrictions provides a chance for the management staff to take advantage of the large mortgage loans to auction funds.
As earlier mentioned, Corporate culture has a great implication on the overall performance of the employees in the financial institution and banks. An organization with a good Corporate Culture motivates the staff to give out their best rather than taking advantage of the contract compensation programs. An organization with good corporate culture is likely to build a reputational advantage to the public thus improving its trust to the clients. Finally, financial institutions that exercise good corporate culture focus meagerly on operational outcomes rather than the accounting needs thus avoiding cases of a bankruptcy declaration.
The royal commission in Australia has played a fundamental role in enhancing accountability among different accounting and finance officials. The basic role of the royal commission was to investigate various unprofessional operations in the banking sector. The operation has been successful as various huge financial institutions including the Central Bank of Australia have accepted the blame of unprofessionalism. In so doing, several customers are receiving compensations as a result of the frauds performed intentionally by the banking executives. Currently, the fine and investigations have triggered accountability among the banking professionals. In so doing, effectiveness is enhanced in finance and banking institutions thus resulting in a better reputation and trust by the public. Additionally, the interests of the clients are met through accountability enhancement that has been brought by the efforts of the royal commission. Effective and efficient actions in the financing sector in the country lead to the meeting of operational needs of the banks and other financial institutions thus meeting the needs and interest of the investors and other external stakeholders.
Primarily, ASIC was established to enforce and regulate financial institutions laws and policies aimed at protecting the creditors, consumers, and investors of the banks. The organization was to enhance transparency and integrity among the management department of the respective financial institutions. The organization also helps in investigating criminal operations in banks and other financial institutions through the analysis of the books of the account while posing questions regarding the identified gaps. After evidence has been shown regarding criminal operations in the bank, the organization is responsible for making prosecutions. Following the role of the ASIC, I would propose various penalties against the lawbreakers within the management department of the financial institutions. Firstly, executives found guilty of fraud should compensate the customers at individual levels in multiple terms. In this case, the funds should come directly from the personal incomes of the lawbreakers rather the bank as an entity.
Additionally, a ten-year jail term is recommended for individuals who are found guilty of engaging in corruption activities such as forged documents. On the other hand, APRA was made majorly to protect the interest of the depositors and other policyholders within the financial institutions. In this case, proper investigation and individual compensation policy would help avoid losses among the depositors as their claims are handled regardless of whether or not the bank has been declared bankrupt.
Based on the findings of the Royal Commission, it’s clear that different banks and financial institutions have engaged intensively in unprofessional operations. The fact behind this ideology is that there exist individual executives behind such criminal operations. Therefore, I would recommend the commissioner to take action against individual executives of the banks, investigate their bank accounts, investments and charge them accordingly to compensate all the clients who have either directly or indirectly suffered from the loss.
The reforms suggested by the Roya Commission are in dead fundamental for efficiency in the financial institutions. The reforms are likely to introduce a positive change in the behavior of the executives of the banks and financial institutions. As brought into account, issues such as deregulation, and self-regulation have initiated portholes for financial unprofessionalism among the management staff of the banking institutions. Therefore, reforms, as suggested by the Royal Commission, are likely to enhance accountability among the executives. Is so doing, the interests of the customers in the country will be met leading to more trust and reputation of the Australian banking institutions.
Australia and United States of America have got laws and regulations that guide the banking, finance and accounting sectors. Australia has got several bodies that deal with regulatory authorities. Such bodies include APRA, ASIC, and RBA (Paterson and Mallesons, 2018). APRA deals with prudential regulation and supervision of authorized deposit-taking institutions. It also deals with life and general insurance companies as well as retirement saving industries. ASIC is responsible for market conduct as well as investor protection. RBA deals with monitory policy, supervising on the financial system stability and the payments system.
On the other hand, U.S.A has several bank regulatory agencies which include Federal Reserve, FDIC, OCC, CFPB, and FSOC (G L I, 2018). Federal Reserve is the principal finance organization of U.S, and it supervises BHCs federal-chartered banks. FDIC has mandate over the insurance of banks and overseen check deposits. OCC is responsible for regulating and supervising national banks and state savings associations including the agencies of the foreign banks. CFPB deals with client fortification regulations that apply to both banks and other financial institutions.
Most banks in Australia have been alleged of engaging in customer exploitation and corporate field including several scandals. Some of the operations include deceptive and misleading behavior within the management departments of the banking sector. Australian banks have been at pace in operating below the standards and the expectations of the community. Some of the shocking operations include the presentation of profits above the standards of the clients. The Commonwealth Bank, for instance, has been illegally charging fees on dead customers (Murphy, 2018).
Furthermore, some of the banks like the central bank of Australia have accepted the fact that they fail to meet the interest of the clients due to the use of intermediaries rather than providing direct services. A similar ideology applies in other parts of the world. For instance, the U.S banking system has been on top in manipulating interest rates and fraudulent operations. Also, dishonesty has been viewed among the top executive managers in most U.S banks. A similar ideology has been identified in Russia whereby more than more than fifty banks have been alleged to have engaged in the 20.8 billion dollars’ scandal. Typical examples of such banks include Privatbank, Bank of China, Hellenic Bank, Commerzbank and Cyprus popular bank (Haldevang, 2017). The banks above are international across different countries in the world pausing an implication that bad behaviors in the banks occur across the globe.
Australia has been on the forefront in dealing with banking issues. More importantly is the setting up of the royal banking commission to deal with criminal operation by investigating banking executives. Additionally, Australia has developed institutions such as ASIC and APRA that deal with regulations of financial policies to ensure that the interest of the creditors, customer, investors, and shareholders are met. Likewise, different have countries taken actions in curbing banking unprofessionalism. For instance, the U.N through the World Bank group has played a fundamental role in curbing bad behaviors in the banking institutions.
References
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