Australian Royal Commission Into The Financial And Banking Sector: Essay Overview And Implications.

Write a research essay on the recent Australian Royal Commission into the banking and finance sectors.  

Corporate governance and its influence on operations of big business

The present study is to provide an overview of the Australian royal commission into the financial and banking sector. Financial system of Australia has experienced a trend of broader implications of corporate governance in recent years. Corporate governance is the practices, rules and process that help in controlling, administering and directing any corporation (Tricker and Tricker 2015). The establishment of Royal commission was due to the whist blowing from consumer groups to enquire into the misconduct and malpractices by financial institutions of Australia. The study on Royal commission incorporates discussion about corporate culture, remuneration and conflict of interest that are apparent. It also demonstrates the role of different regulatory bodies in event of corporate failure. The cross culture awareness is compared with overseas countries with respect to professionalism, ethical issues, mechanism and controls. It has been found that after the introduction of corporate governance principles, 3^rd edition by ASX has resulted in improving the efficiency of financial service providers (Asic.gov.au 2018).

Corporate governance is a mechanism that helps stakeholders of organization in exercising control over the management and corporate insiders for protecting their interests. Such mechanisms have been seen to have great influence on operations of big business due to significant challenges posed by globalization. An organization having successful corporate governance in the form of value creation, improved public accountability, boosting of operational efficiency and minimization of risk exposure. During the global financial crisis, major Australian banks were ranked best among the world compared to US banks because of their higher standards on leveraging and proactive attitude towards prudential regulations (Bell and Hindmoor 2018). Little research has been done on measuring the effectiveness of corporate governance on performance of banks in Australia. However, after the introduction of corporate governance principles, an improvement in technical efficiency of banking industry was observed. In line with the stewardship and agency theory, the technical performance of banks is not significantly impacted by the number of independent board meetings and board members (Decker and McCracken 2018).

The purpose of Royal commission is to conduct investigation on whether the financial service providers of Australia have engaged in misconduct, legal or criminal proceedings. Such commission is entitled with the power of taking evidences and summoning witness and authorizing police to conduct search for warrants along with making recommendation to government to make alterations into the regulations governing banking sector (Ellis and Littrell 2017).

There were several reasons to call the Royal commission into the banking and finance sector of Australia comprising of many scandals, criminal cases and duping customers. Over the past years, Australian banks have been plagued with one scandal after another. An aggressive promotion strategy, sale driven culture and emphasizing on profits at all costs at the heart of banking industry and their flawed compliance structure require calling of such commission (abc.net.au 2018). In addition to this, customers were misled by financial advisers on recommendation of speculative investments strategies.

Purpose of Royal commission

The prime minister of Australia that is Malcolm Turnbull along with his liberal party resisted the Royal commission by opposing it. A considerable amount of time has been spent by them in revisiting Royal commission into the financial and banking sector. The reason he opposed introduction of such commission because of vested interest of his ministers into various banking scandals.

The objective of Royal commission to investigate into the misconduct of banking sector has uncovered an impressive blow sheet of misconduct comprising of fraud, bribery and outright lying. A fraud and bribery ring was exposed in western Sydney branches of national Australian bank along with many myriad cases relating to lending to customers inappropriately. Furthermore, the biggest bank of Australia that is Common wealth bank was faced with explosive allegations of assisting money laundering. Committee was also provided with evidences from major banks that the target and remuneration structures intends to incentivize cross selling of products that are not in the best interest of customers (Ahmed and Ndayisaba 2016).

The majority report produced by banks fall short in various aspects of law as the detail provided gave rise to many conflict of interest in structure. Common wealth bank being the largest institution of Australia wad admitted with the interest of conflict of interest that was created by commission payment. Such commission payment was made by bank to mortgage brokers of amount $ 1.5 trillion. The commission would be bigger if the loan is larger and larger training the commission due to longer paying time of loan would create conflict.

The success of any organizations is significantly influenced by its culture and remuneration structure. Organization such as banks is less prone to misconduct if they have strong ethical culture as it helps in improving controls and accountability. Sustainability drivers in such organizations are enabled by a culture of ethical behavior. The implementation of remuneration policies incentivized ethical conduct by material risk takers and senior executives with the help of executive remuneration. Organizational culture induces employee to work in consistent manner alongside determining the efficiency of compensation in influencing behavior of employees. Entitlement of employees to performance based remunerations is determined by failure to make completion of required compliance and in serious cases; this could lead to termination of employments (Beck and Paton 2018). ‘

Royal commission has exposed most of dodgy practices of banking institutions which has been due to development of the concept of control fraud. This concept made people in position of power to carry fraud activities within the organization. The conservative neo liberal agenda has amplified and generated control frauds which are responsible for regressively and significantly altering the financial service industry. It was admitted by ANZ bank that the details of personal living expenses on application of loans were not checked as employees were not bothered to conduct the verification. Organizational culture in banking sector is regarded as significantly important factor as it helps in generating outcomes that are positive observable. It is required by banking organization to align the culture with their strategy that would leads to facilitation of value creation and ensures strategy execution in a more effective way.

Reasons to call the Royal commission

Exposing of several financial scandals by banking organizations by Royal commission has resulted in such organization toward taking step to implement corporate governance practices on a broader base. The role of professional bodies is to increase the capability of workforce and management to share the latest advancements and promote best practices that would help in promoting the interest of stakeholders. Banks are revising their incentive schemes that are committed to work in the best interest of customers and not trapping them ethically. Moreover, financial institutions are required to be more forthcoming and needs to be upfront in addressing the existing lapse in the governance and culture so that they are able to meet the needs of community.

Corporate failure does not necessarily imply poor practices concerning corporate governance. ASIC regularly engages stakeholders on issues relating to corporate governance and provide guidance to organizations to comply with the obligations. The long term performance of company is enhanced by effective engagement of shareholders and their ability to hold the board to account. It is advocated by ASIC that there exist relationship between risk and reward and ethical conduct within organization is promoted by management practices relating to performance and remuneration of employees (smh.com.au 2018). Various acts were introduced under the APRA that is designed to take preventive actions instead of enforcing reactive measures. Non compliance of organization with the standards provided under the acts would lead to imposing penalties. Since culture plays a very important role in involvement of organization into the financial scandal, it is required by ASIC to bring out strict warning for leaders, board of directors and CEO.

The findings uncovered by Royal commission have led commissioner to make several recommendations that is intended to enhance practices of corporate governance. Commissioner should make recommendations on determining the criteria for selection of members of board of directors and CEO. In event of violations of regulations and obligations imposed by financial reporting standards, exemplary measures and strict penalties should be imposed. All the cases relating to financial scandals and money laundering by banks should be forwarded to the Commonwealth and should recommend investigation on the report published by companies (Oates and Dias 2016).

The impact of Royal commission is witnessed on many accounting and lending practices by banking institutions. Lending practices are expected to become more cautious and this will make it difficult for customers to find it tough to access to loans. Across the branch network, the banking staffs in assessment of credits would be more conservative. The validation of customers expenses concerning loan applications would requires the process to tighten up by organization (Hollow et al. 2016).

Opposition of Royal commission

Many countries over the last few decades have been engulfed by various financial scandals and case of money laundering. Under the veil of presenting a good amount of profits generated by large organizations and financial institutions, they have committed vast array of frauds and financial scandals. Almost all developed and developed countries have one thing in common thing which is related to fraud by financial institutions and financial scandal cases. Increased amount of financial scandals have been witnessed in countries such as United States, United Kingdom, India and Australia due to the involvement of management level employees in such scandals and political nexus (Hollow et al. 2016).

The activities of organization and financial markets are witnessing increased interference on part of governments and regulations by regulatory bodies. It has been outlined by more than half of the members of CFA that the main focus of current market regulations should not emphasize on insignificant issues rather than they should focus on incidents relating to fraud activities. The financial service market of United States is increasingly deregulated and this increased deregulation enable organization to be competitive at global level by providing efficient financial services (Steen et al. 2016).

The financial service market and financial providers of United Kingdom are increasingly regulated by several legislations issued by authority of financial conduct and prudent regulations and apex bank of England (Liu 2015). All such regulations have led to increased intervention of government into various components of financial markets. ‘

The regulatory control within the financial market of Australia should be enhanced so that a responsibility of consumer protection and market integrity across the financial system is entailed. A range of legislative provisions relating to financial sector intermediaries, financial market and several financial products should be enforced and administered by Australian securities and investment commission. Furthermore, there should be development of monitoring and licensing of compliance in the financial system so that accurate and comprehensive information on corporate activities of company should be provided. Royal commission should provide guidance and recommendations that would seek addressing the reasons that are associated with such scandals (Jones 2016). Improvement in the corporate governance practices and culture of corporate entities requires substantial efforts. Occurrence of financial scandals in country such as Australia requires organization to enhance their practices of corporate governance. Royal commission should intend to bring reforms that would introduce stronger regime for management of customers and their requirement. The financial architecture of Australia should be further strengthened that requires enhanced regulation and independence of auditors (Godwin and Schmulow 2015).

Conclusion:

The occurrence of several accounting scandals for many big financial organizations in different countries around world has called for strengthening the market by imposing legislations and rules by regulatory bodies. Financial regulatory structure of Australia should be designed that would help in ensuring effective cooperation and coordination between regulatory agencies. In addition to this, financial organizations should imbibe a practice of strengthening ethical practices and culture so that interest of stakeholders is protected.

References list:

ABC News. (2018). Banking royal commission highlights the conflict of interest at heart of mortgage broking. [online] Available at: https://www.abc.net.au/news/2018-03-23/banking-royal-commission-highlights-mortgage-broking-conflict/9581330 [Accessed 9 Aug. 2018].

Ahmed, A.D. and Ndayisaba, G.A., 2016. Effect of corporate governance on ceo pay-risk taking association: empirical evidence from australian financial institutions. The Journal of Developing Areas, 50(4), pp.309-344.

Annual general meetings and other shareholder engagement | ASIC - Australian Securities and Investments Commission . Asic.gov.au. (2018).  Retrieved 9 August 2018, from https://asic.gov.au/regulatory-resources/corporate-governance/annual-general-meetings-and-other-shareholder-engagement/

Beck, J. and Paton, G., 2018. Corporate law: The Royal Commission: Corporate culture spotlight: Where is all this heading?. Governance Directions, 70(6), p.351.

Bell, S. and Hindmoor, A., 2018. Are the major global banks now safer? Structural continuities and change in banking and finance since the 2008 crisis. Review of International Political Economy, 25(1), pp.1-27.

Decker, F. and McCracken, S., 2018. Central banking in Australia and New Zealand: historical foundations and modern legislative frameworks. Research Handbook on Central Banking, p.245.

Ellis, L. and Littrell, C., 2017. Financial Stability in a Low Interest Rate Environment: An Australian Case Study. In RBA Annual Conference Volume. Reserve Bank of Australia.

Godwin, A.J. and Schmulow, A.D., 2015. Financial Sector Regulation Bill in South Africa, Second Draft: Lessons from Australia. S. African LJ, 132, p.756.

Hollow, M., Akinbami, F. and Michie, R. eds., 2016. Complexity and Crisis in the Financial System: Critical Perspectives on the Evolution of American and British Banking. Edward Elgar Publishing.

Jones, E., 2016. Australian trade liberalisation policy: the Industries Assistance Commission and the Productivity Commission. The Economic and Labour Relations Review, 27(2), pp.181-198.

Liu, H., 2015. Constructing the GFC: Australian banking leaders during the financial ‘crisis’. Leadership, 11(4), pp.424-450.

Lui, A., 2016. Financial stability and prudential regulation: a comparative approach to the UK, US, Canada, Australia and Germany. Routledge.

Oates, G. and Dias, R., 2016. Including ethics in banking and finance programs: teaching “we shouldn’t win at any cost”. Education+ Training, 58(1), pp.94-111.

Steen, A., McGrath, D. and Wong, A., 2016. Market Failure, Regulation and Education of Financial Advisors. Australasian Accounting, Business and Finance Journal, 10(1), pp.3-17.

Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Yeates, C. (2018). The Hayne effect: Home loans will be harder to get and take longer. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/banking-and-finance/the-hayne-effect-home-loans-will-be-harder-to-get-and-take-longer-20180501-p4zco3.html [Accessed 9 Aug. 2018].