The Importance Of Governance In Banking And Financial Sector: Impact Of Royal Commission In Australia
Purpose of Corporate Governance
In this assignment, the importance of governance is discussed to maintain the efficacy in the corporate process. This assignment is an essay written on the corporate governance of the banking and financial sector. It is divided into four parts. Each part highlights the impact of the Royal Commission in Australia on the banking/financial sector. It identifies the main purpose of the Royal Commission and the reasons and resistance to the Royal Commission in Australia. This essay will help in understanding the mindset of the workforce of financial institutions. The essay will also provide information on breached professional and ethical standards by financial institutions identified by the Royal Commission. Overall, the assignment helps in the understanding the importance of governance (Royal Commission) in the banking/financial sector in order to understand the current corporate culture of banking/financial industry.
Purpose of Corporate Governance
Corporate Governance is very important to run the business successfully. It is also required because of increase in non-compliance of the standards by the businesses for accountability and financial reporting. The absence of good corporate governance can lead to collapsing of big businesses. Corporate governance is equally important in the banking and financial sector worldwide. In Australia, the Royal Commission is responsible for the effective and efficient working of the banks and the financial enterprises. The sound corporate governance helps in boosting the efficiency of the banks and it increases the involvement of the shareholders and the profit for the banks (Ciro, 2016). In Australia, it is mandatory for all the industries listed in ASX to have certain attributes. The new ASX principles have helped in boosting the banking industry and the banks have performed commendably better. They have maximized their total revenues compared to the previous years.
Purpose of Royal Commission
The Royal Commission is a public enquiry that is governed by Parliament Act. The purpose of the Royal Commission is to investigate Australian Banks and Financial Service Entities if they are engaged in any kind of misconduct or not. The purpose is to provide good governance so that the banks boost their revenues with the use of the effective policies and procedures set for them. It also makes sure that the banks and other financial entities are not engaged in any criminal or illegal offences (Ciro, 2016). The Royal Commission can be called on any matter related to the Bank/Financial sector and/or any matter that is concerned with the peace and order or any public purpose. Its purpose is to prevent the misconduct from recurrences in the future. The main purpose of Royal Commission into Misconduct was to find out what was going wrong in the banking sector as there were many complaints as the major and large banks of Australia were unable to maintain the standards and not treating the citizens honestly. Australia was considered one of strongest provider of banking and financial services to its citizens but lately the people were reporting misconduct in the banks and misbehaviour of the employees towards the customers. Therefore the major purpose of Royal Commission in Misconduct was to make a report on the inquiry set to check the misconduct in governing culture.
Purpose of Royal Commission
Reasons for calling Royal Commission
The Royal Commission by the Australian Government was called for the banking and finances sector in 2017. It was called with effect to the Royal Commission Act 1902 to inquire and make a report on the misconduct of the banking and financial industry (Ciro, 2016). Since the Royal Commission was called, there has been a great increase in the revenue generation for the banking sector. The attempt that was commenced by the Royal Commission for protecting the interest of the consumers and also trying hard on increasing the liability and lucidity along with building confidence in banks so that they can achieve success and add to the economy of the country. The basic reason for calling the Royal Commission was to take an initiative that was aimed at providing better services and helping customers and other stakeholders with full information and resources available.
Resistance to Royal Commission
The Royal Commission was called by the Governor-General of the Commonwealth of Australia, the Honourable Sir Peter Cosgrove AK MC (Retd). In this report, the AMP, Westpac and the Commonwealth Bank were found guilty and into misconduct as the report by the Royal Commission had revealed. There were some politicians who regularly and repeatedly rejected the Royal Commission idea. There was resistance by many people and they said that the inquiry will not serve the purpose and it will only search for the things that have already happened and it will keep revolving around them. The accountability was the only reason for the Royal Commission being called as the Commonwealth Bank Chairman apologized many times against the breach of trust. Therefore to look into the reason behind these breaches again and again the inquiry was finally called. Due to the series of scandals that happened in the banks, the commission was finally called.
Key findings of Royal Commission
The key findings of the Royal Commission to date have been related to the misconduct in the various banks. There were traces of fake documents, suspected bribery, lending money without verifying the customers living expense, and many more. AMP has admitted that the financial planners and the Commonwealth Bank have been charging fees to the dead clients. The TAL has also breached its duties for its customers when assessing the claims (Leong, 2016). The chief executive of AMP with immediate effect claimed that he is standing down from the inquiry. By market value, the big four banks are the largest companies of Australia who are holding power. The banks determined long ago that it will be highly gainful to sell customers the financial products and the financial adviser and enjoy a profitable feedback sphere. With many other factors, it was also one of the major factors that had affected the customers of these banks. The behaviour of the bank employees with the poor advice affected greatly the bank customers.
Reasons for calling Royal Commission
Apparent Conflicts of Interest
The conflict of interest that was apparent was by one of Australia’s largest institution, Commonwealth Bank. The bank admitted that there has been a conflict of interest which was created by the “Commission Payments” that are generally made by the banks to finance the dealers. The mortgage brokers with the help of the Commonwealth Bank have maximized their incomes which have been the biggest conflict of interest by the bank. The absence of a complaint by the customers led to make more offences by the bank employees. In the interim report, the Royal Commission into misconduct into the banking sector wrote that the reward through the incentive programs for achieving the home loans sales target was the main reason behind all the misconducts that was happening in the banks (Leong, 2016). Also, it was acknowledged that the only attributable to misconduct was this reward program, though further investigations on this matter ruled out that it was not only single reason behind the misconduct, there were many reasons that contributed for unethical behaviour of the bank employees.
Corporate Culture and Remuneration Impact on bank/finance employees
The remuneration is the monetarily reward that the employees get on specific achievements. The impact that the remuneration has on the employees is that they work harder to achieve the targets. Corporate culture impacts the behaviour of the employees who work within the financial and banking sectors of Australia to a greater extent. Also, some of the employees who are unable to achieve the target go for illegal means to achieve the target to get the reward by the organisation (Gall, 2017). In order to prevent the illegal methods that the employees apply for achieving the remuneration in the workplace, the effective corporate governance is very important. The corporate culture can be defined as the behaviour of the employees and believes in the management that helps in attracting large customers. The way the employees and the management handle to interact with the outside business customers can be described as the culture of that business (Ciro, 2016). “Reforming Culture and Behaviour in the Financial Services Industry” has become very important nowadays in order to overcome all the problems that this sector has faced in the last few years. It will have to change its overall culture that may include the policymakers, researchers, and so on. The researchers, as well as the executives of large financial institutions, have discussed the possibility of enhancing the financial stability in Australia in within a year or so (Bulmer, 2015). With few amendments in the culture, the banking and the financial service industry can enhance the development and the growth. The remuneration also includes the incentives from the CEO compensation schemes in Australian banking sector.
Resistance to Royal Commission
Examples of Corrupt Culture of Government Organisations
The corruption and the bribery in the corporate world have ruined the Australian corporate world over many years (Azeez, 2015). Australians have been exposed to it in their everyday steps. Nothing has changed in this context in the last 10 years. The exposure of the ASX listed large Australian companies involvement has been evidenced in many cases of bribery and the corruption. It has significantly risen over the time. The government organisations like the 4 big banks which are listed in the ASX list and are among the 5 largest organizations in the area in Australia have been found corrupted. The culture within the organizations had been the major factor that led to the increase in the corruption (Mellor, 2015). The Commonwealth Bank of Australia (CBA) was among the examples of the corrupt culture which led to the misconduct while it failed to apply the fee waivers to eligible customers of AgriAdvantage Plus scheme. CBA reported the reason behind failure and financial impact on the customers was due to the product complexity and the manual and burdensome processes that were involved. The prevailing culture of an organisation should be according to other cultures in the organisation. The corrupt behaviour of the employees should not be rewarded and it should be taken care that only the employees who have been working hard and with ethical means to achieve their target should be rewarded (Singh, 2016). Such organisations that reward their employees who have achieved the target by false and corrupt means promote corruption in their corporate culture.
Conversely, in an organisation, if the employees are motivated to work and the remuneration is provided on the basis of their efforts and ethics, the organisation will definitely be successful. Such organisations rewards and they encourage the employee’s compliance with procedures and the policies and therefore the dishonesty will be less likely to occur in such organisations. The ethical culture is best influenced by the senior management and also by the line managers of the organizations.
Impact of Royal Commission
The issues identified by the Royal Commission directly impact the responsibilities of professionals in relation to the stakeholders’ interest (Sheedy and Griffin, 2014). The business leaders are responsible to replicate on what went wrong and the reason behind the bribery and corruption in these big financial and banking organisations. The community and other stakeholders trust, during the last few years, have been low and this situation was further eroded by the revelations that were made by the Royal Commission. Since then, disbelieve among the stakeholders have been building higher and higher and has brewed up following the Financial Crisis that occurred globally. The bankers reveal that it has become difficult to regain trust. Neither customers nor the stakeholders believe them. It is true that the behaviour which is not ideal leads to distrust (Hunt and Terry, 2018).
Key findings of Royal Commission
Links between Rewards and Punishment
The organisations pay rewards to the employees who achieve more than the targets set by them. Rewards can be monetary or others. In the context of the organisation, punishment is one of the ways of treating the unethical behaviour of the employee for achieving the rewards (Crane and Matten, 2016). If the organisational culture practices this practice the organisations will never fail and there will be no corruption. Also, these practices will make the culture of the organisation healthy and good to work in. The role of ASIC and APRA can regulate and impose the penalties at the Board and CEO levels if the corporate governance is a failure. This has been the recent case where the ASIC was involved in penalizing the higher level management of JHIL which is a holding company of James Hardie Group. It manufactured as well as sold asbestos products until 1987 where the corporate governance was found guilty at the leadership (Gitman, et. al., 2015).
Commissioner Recommendations based on the findings
The Australian government should be responsible and it should conduct regular prevalence study to establish the extent and make the institutions safe of corruption and bribery. The people who were found guilty of the inquiry of the Royal Commission said that they got very less time for unearthing the wrongdoing and they argue that they should have been informed so that they could examine the bonuses and profits of the executives (Fairbrother, et. al., 2018). They further argued that if the Royal Commissioner allowed more time the government would act on it with immediate effect, therefore they did not ask for more time. During the initial phase of the Royal Commission, there has been awful behaviour by the majority of the Australian banks and other financial planners. It is mandatory to have control and motivate healthy competition within these sectors so that the employees do not use illegal or unethical methods to achieve the targets for remuneration. The legal framework and financial regulators should be ethically controlled. Recommendations were also made regarding the inadequacy of the internal system of the banks. They were recommended to control internal environment of the banks.
Impacts and Reforms are likely as a result of the Royal Commission
Impacts – The major impact that the Royal Commission may have is on the insurance industry as it may face impending consequences from the findings of the banking sector by the Royal Commission. This may include strong and stricter directive, augmented premiums, and a major focus on underwriting obedience. Particularly, there may arise the likelihood of actions like the penalties that are given to the civilians and criminal prosecutions. There can be a direct focus on civil fines and punishments under professional compensation, and many more (Duckenfield, 2016). Reforms – The major reform that had taken place was a letter which was written to the Treasurer on the 30 November 2017, and which was signed by the presidents and CEOs of Commonwealth Bank, NAB, ANZ as well as Westpac. These banks argued that the political uncertainty should end but on the same date, the Australian Prime Minister announced the entry of the Royal Commission into the banking sector and evaluating the cause for the unrest.
Apparent Conflicts of Interest
Define Ethics and Levels of Professionalism varying between countries
The ethical behaviour is a very important perspective for the banking and the financial sector. Given that these sectors are the global sectors, it becomes important for the management to look into the ethics and manage the governance on the business ethics so that there are not only declarative ethics but there are also actual ethics followed by the people (Ellis and Littrell, 2017). There is a big difference in approximating actual behaviour to the declared behaviour in context to the ethical behaviour. The management should fully consider the means by which the employee has achieved their targets and therefore should only pay rewards to the employees who have achieved the target with effective and efficient and ethical means.
There is a necessity for further improvement that should be introduced in the gadgets for educating the corporate world and encouraging them in putting into practice the management practices which is reliable with principled behaviour (Kelsey, 2015). Australia should try to re-establish the banking sector so that the broadening of the task happens for achieving ambitious results by calculating and providing respect to the principled standards. The importance of an organisation’s culture is to prevent the corruption in the workplace and make the employees behave properly with the customers. Therefore, it is true that organisations with a strong culture make pressure on the employees or employees may feel pressure for maintaining and be compliant with that culture. The issues that have recently exposed in the Royal Commission were unique but most awaited as the banking industry had for some time following the illegal and unethical practices for earning profits. These issues that have been exposed were the issues that have made the banking sector pitfall. The breaches had become systematic in the banking sector for Australia. There have been serious problems of misalignment between consumers of the banks and the banks that have been found guilty of misconduct due to the vertical integration of the banking arrangements (Sikka, 2014). This has been preventing the illegal models of the behaviour and has made it worse with the systematic and regular breaches of the laws which were reviewed after the inquiry.
Conclusion
To conclude, the effective Corporate Governance is very important for the organisation to run successfully and for its growth and the development. There is a big danger that negative sentiments force spilling out into much worse financial system in later years. The recent issues that had happened due to the breach cases and bribery cases in the banking sector, it became imperative for the Royal Commission to interfere with the workings of banking and the financial sector. The floodlights provided by the Royal Commission on the major 4 big banks of Australia have rattled the nation. This misconduct appeared to have spread widely and is not just restrained to one sector or one place. The ASIC has only used existing laws for interference and they are not strong enough to dig out what these sectors have been doing for a long time. In the end, it is important that the organisations are ruled by effective corporate governance with effective ethical and legal policies so that there are no chances of misconduct.
References
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