Dr Hillary Ray, Partner at Cowell Clarke, discusses how every corporation can learn from the findings of the Banking Royal Commission, particularly in the areas of Culture and Governance. The Final Report proposes that where possible, conflicts of interest and conflicts between duty and interest should be eliminated rather than “managed” – but how does one eliminate conflicts of interest? she asks.
Hillary will present on the topic, The Royal Commission into the Financial Sector: the Wide Ranging Impact and What it Means for Companies Across Australia, at the 12th Annual In-House Counsel Summit, on Wednesday, 6 March.
The Royal Commission into Misconduct in The Banking, Superannuation and Financial Services Industry revealed deficiencies in the culture, governance and risk management of many financial services businesses. The systemic issues that were exposed serve as a lesson for all corporations to focus on compliance and governance processes, not just those in the financial services industry.
Boards will need to step up their scrutiny of compliance processes, as well as modify existing executive remuneration structures in light of current community and political expectations. It is more important than ever to get governance right. With ASIC and APRA under heightened pressure to investigate, enforce and hold wrongdoers to account, all businesses should be prepared to have their governance systems, policies and procedures scrutinised. Organisations should proactively identify and address inadequacies in their systems. A concept as simple as not taking proper board minutes resulted in embarrassing publicity for IOOF when they infamously tendered scribbled board meeting notes in response to information requests from the Royal Commission. This demonstrates how a well-designed process can be undermined by poor implementation. The converse is also true, a well-implemented but poorly-designed processes is also unlikely to achieve results that meet best practice. In fact, one of the biggest surprises of The Royal Commission was the number of businesses that were not compliant.
The Final Report proposes that compliant culture encourages good customer outcomes. A culture in which employees ask, ‘what should I do?’ instead of ‘what can I do?’, and feel comfortable speaking up when they see that something is not right, should be the norm and encouraged by senior management.
Senior management should, as often as reasonably possible, take proper steps to:
1. assess its corporate culture and governance;
2. identify any problems with that culture and governance;
3. take responsibility and deal with those problems; and
4. determine whether the changes it has made have been effective.
Without strong governance processes, companies risk their reputation and shareholder wealth. Think back to Volkswagen’s emissions scandal which revealed systemic internal ‘cover-ups’ and resulted in an estimated $10 billion loss in brand value and destroyed a valuable brand.
In a state of continued financial success, CBA fell behind in its management of non-financial risks or as APRA puts it ‘dulled the senses of the institution’. Non-financial risks include operational, compliance and conduct risks, all of which are essential to good governance. APRA’s Report of the Prudential Inquiry into the governance, culture and accountability at CBA (dated 1 May 2018), highlighted the importance of understanding these risks and having robust frameworks in place for managing them.
The Final Report encourages every entity to ask the questions provoked by the APRA Inquiry into CBA:
– Is there adequate oversight and challenge by the board of emerging non‑financial risks?
– Is it clear who is accountable for risks and how they are to be held accountable?
– Are issues, incidents and risks identified quickly, referred up the management chain, and then managed and resolved urgently?
– Is enough attention being given to compliance?
– Do compensation, incentive or remuneration practices recognise and penalise poor conduct?
An important lesson from the Final Report is that the primary responsibility for misconduct lies with those who manage and control the entities – the board and senior management.The board and senior management are responsible for, and have the greatest degree of control over, the way that risks are managed. The Royal Commission saw time and time again, remuneration arrangements designed in a way that that saw the board and senior management rewarded with large bonuses despite their poor management of risks. As such, we can expect to see executive remuneration directly linked to compliance outcomes.
Conflicts of interest
Another area of focus by ASIC, APRA and the Royal Commission is conflicts of interest
ASIC’s Report 562 into vertically integrated institutions and conflicts of interest notes that while the law permits this conflict to exist, it must be adequately managed. The Final Report recognised that simply disclosing conflicts of interest, is insufficient as a means of managing them. The disclosure regime presumes that what is given to a consumer in writing will be read and understood. Often, that presupposition is wrong. How often do you read the terms and conditions and simply ‘tick the box’? The Final Report proposes that where possible, conflicts of interest and conflicts between duty and interest should be eliminated rather than ‘managed’. But how does one eliminate conflicts of interest? The Royal Commission doesn’t provide the answers to eliminate, it does provide ways to deal with inherent conflicts – namely, removing commissions and developing better disclosure. The challenge for boards in the current environment will be to increase the transparency of their remuneration and invectives while rewarding their executives in a complaint manner that meets shareholder approval.
The Royal Commission is really an impetus for change in how boards are accountable for their licensing obligations and in creating best practice governance structures. It has put pressure on companies to abide by society’s minimum expectations in relation to good corporate governance. The basic principles of good governance are fundamental to the sustainability of all businesses, no matter the size or industry. It’s simple – good governance is good business and you will reduce your regulatory risk.
Partner Hillary Ray is a partner in Cowell Clarke’s Financial Services practice group. She has more than 15 years experience in financial services regulation and has held senior roles in the areas of legal, corporate governance and compliance. Hillary has practised in-house, at ASIC and in private practice, providing regulatory and litigation advice to clients including wealth managers, financial planners and accountants, and specialised financial services intermediaries. Hillary also has a keen interest in fintech and the application of law to technology, such as in the area of non-cash payment products. Hillary has advised numerous fintechs at innovation hub Stone and Chalk in Sydney, as well as speaking on panels about fintech and regulation. Hillary assists clients to navigate the raft of regulation and address the gaps that exist to produce commercial outcomes. She works with clients to represent them in enforcement actions and conducts ASIC-style forensic compliance audits. She also advises on ASIC, APRA and AUSTRAC notices, Australian Financial Service and Australian Credit licence applications, relief applications to ASIC, as well as financial products including managed investment schemes. Conact Hillary at [email protected] or connect via LinkedIn or Twitter
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