Banking royal commission interim report highlights greed and unethical behaviour

The highly anticipated interim report from the banking royal commission was released on Friday. This report covers policy related issues arising from the first four rounds of hearings. Additional topics, including superannuation and insurance, will be covered in the final report due by 1 February 2019.

The findings of the interim report raise issues of major concern — particularly greed — the pursuit of short term profit at the expense of ethical behaviour.

The report findings support the results of our 2018 Ethics Index, which found that the banking, finance and insurance sector is perceived as the least ethical sector.

The sector needs to rebuild trust and take ownership of their past conduct.

The CEO and board of directors are key to influencing and improving good corporate culture. They need to put the voice of the customer first.

This sector has faced reputational and financial damage as a result of misconduct and non-compliance. It is also facing greater regulatory scrutiny. How will boards and executives work together to establish and maintain the governance and risk management structures needed in this new world?

Now is the time for a wide-ranging conversation on the clarity of the role of the board versus the executive and how organisations are held to account for unethical behaviour.

The report also raises crucial questions about whether the law should be administered or enforced differently.

Regulation and the regulators

The interim report recommends that ‘no new layer of law or regulation should be added unless there is clearly identified advantage to be gained by doing that.’ Commissioner Hayne suggests that simple ideas must inform the conduct of financial services entities with questions such as, is the law governing financial services entities and their conduct too complicated? Specifically, does it impede effective conduct risk management and impede effective regulatory enforcement?

It also asks questions about the regulators, ASIC and APRA such as:

  • Should there be annual reviews of the regulators’ performance against their mandates?
  • Is ASIC’s remit too large?
  • Are APRA’s regulatory and enforcement practice satisfactory?

Causes of misconduct

Commissioner Hayne comments that ‘all of the conduct identified and criticised... provided a financial benefit to the individuals and entities concerned.. The governance and risk management practices of the entities did not prevent the conduct. The culture and conduct of the banks was driven by, and was reflected in their remuneration practices and policies.’ It includes:

  • conduct – the conduct at the heart of the Commission’s work is inextricably connected with remuneration practices, with deficiencies in governance and risk management and with the culture of the entities concerned.
  • remuneration – the central tenet of the remuneration polices was to reward what the organisation treats as important – sales and profit. The central premise for so much of the debate about staff and intermediaries that they will not do their job properly without incentive payments. This must be challenged says Commissioner Hayne.
  • Banking Executive Accountability Regime (BEAR) – is it relevant to the intersect between remuneration and culture - should the BEAR be altered or extended?

Submission

Governance Institute is working with members on a submission in response to the governance policy issues that have emerged from the Interim Report.

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