MISCONDUCT IN THE BANKING SUPERANNUATION AND

FINANCIAL SERVICES INDUSTRY

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 Table of Contents

1. Issue of ‘Financial Advice’ in the point of view of remuneration, governance and culture ....... 3

2. Assessment and identification of effects of this issue on stakeholder ........................................ 4

3. Investigated report about financial institution as per the Recommendation and Principles of ASX
......................................................................................................................................................... 7

4. Assessing inclusion and diversity investigated by boards .......................................................... 9

5. Analysis ethical ground as per Normative Theories of Ethics and approaches of sustainability
....................................................................................................................................................... 10

References ..................................................................................................................................... 12

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The aim of this report to provide an overview of the ways and methods that Royal Commission
report has been addressed in financial service industry as well as Banking superannuation.
Regarding remuneration, culture and governance, this report has highlighted several aspects which
are showing an effective pathway to meet expectations and community standards for their
stakeholders.

1. Issue of ‘Financial Advice’ in the point of view of remuneration, governance and culture

In the context of financial advice, the main issue has been noticed in the form of ‘fees for no
service’ strategy while providing no financial advice to the client, the fees are claimed. Some early
scandals are noticed at the time of Global Financial Crisis (GFC) occurrence. Culture and conflicts
have been noticed and there was a trend had been noticed for giving no advice to people and no
compensation trends have been identified. For this reason, both Corporations Act 2001 (Cth) and
National Consumer Credit Protection Act 2009 (Cth) have been violated by different organisations
(legislation.gov.au, 2019). If any misconduct of miss advice has been given, advisors did not
provide any compensation to the clients. This is completely unethical and unlawful activity.
However, as per the ASIC framework, this is to be provided by the financial industry to their
clients (royalcommission.gov.au, 2019). In this context one of the most significant case can be
mentioned which is ASIC v Cassimatis (2016) which is also a renowned example of financial
misconduct. In terms of remuneration, culture as well as corporate governance, the financial
advisors have failed to address the aspect. Their Storm Financial Service has provided with
generalised minimal tailoring to the clients. As for this reason, several clients have fallen in
negatively equity position. On the other hand, another case of financial misconduct has been
noticed in case of Commonwealth Financial Planning (CFPL) which is an CBA subsidiary
(asic.gov.au, 2019). Their legal advice lied in investing in high risked product which was
apparently profit generating. On the contrary, as per the ASIC framework and financial governance
objective, this is not appropriate for such clients. Apart from this, the main cultural issue has been
found in this case is without prior permission they have forged signature of client on documents.

Culture: the best practice for maintaining good culture is to maintain the six norms which are
lawful obedience, avoid deceiving or misleading, fair act, fit for purpose service, reasonable
service with skill and care and acting as per best interest of others. Effective supervision of the

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organisational culture is required in the companies which is necessary for APRA-regulated
institutions as well as every financial services entity (royalcommission.gov.au, 2019).

Governance: Maintaining quality of organisational governance is necessary which should be

further assessed by external bodies. ASIC and APRA can have assessed financial service entities
for understanding whether they are maintaining prescribed measures. However, this issue has been
noticed in the both cases of CFPL and Storm financial. Maintaining right culture in the industry is
also a considerable duty of governance. The boards are to be known with emerging non-financial
associated risks properly for seeking better or further information. Along with this, the information
is required to challenge the management system robustly in order to manage risk (Sheedy and
Griffin, 2018).

Remuneration: On the other hand, there is another governance issue for which the issue has been
addressed. The main issue is ‘fees for no service’ practice which also includes fees for wrong
advice which has been predominantly noticed in case of Storm Financial. An effective customary
remuneration committee needs to be established by the board to firmly tie up question of culture
and governance with this remuneration issue (royalcommission.gov.au, 2019). In this context, the
issue has arrived that the poor financial conducts are not penalised or recognised by the
remuneration practice. Along with this, at the time of poor customer or risk outcome, the
remuneration practice does not apply properly. Therefore, this is showing negligence in
governance and culture in banking and financial sector as senior managers failed to feel the sting.

For this reason, the remuneration, governance and culture are more associated with each other. It
can be stated that, improvement in one area or resolving the issues in one particular area can
improve other practices. The undermine progress can be improved with the help of this inaction
properly.

2. Assessment and identification of effects of this issue on stakeholder

The stakeholders are the associated members of an organisations who owns stake or has link with
the organisation. Carroll and Buchholtz (2014) stated that by the practices, policies, decision and
actions of the organisation, the stakeholders are affected. The exchange of information or a two-
way interaction has been conducted between organisation with their stakeholders who are divided
in two categories such as internal and external. Due to the observed 20 prosecutions in several

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major banks, several issues have been found. As the firms have four types of responsibilities
towards their stakeholders such as Philanthropic, Ethical, Legal and Economic, in these aspects,
the stakeholder’s have been affected due to these financial misconduct. The banks were prosecuted
with civil, criminal as well as some both. Apart from this, about 24 banks have been referred for
further action. Therefore, the bankers have come under legal actions for breaching ASIC
commissions. Apart from bankers, there are several other internal stakeholders who have
significant link with organisational changes (Carroll and Buchholtz, 2014). However, the control
over qualified stakeholders and appointing representative bodies to control and directs the
association with co-regulators.

In this way, the internal stakeholders are incorporating ethical practices in governance, culture as
well as remuneration. On the other hand, the clients who are another significant as well as external
stakeholders associated with the loss and profit of the company. However, in this case, the financial
sectors have mostly conducted wrong advisory practices. Unlike Storm Financial services, Vrisakis
v Australian Securities and Investments Commission (1993), the foreseeable risk and harm is
completely ignored and several legal advices have been provided. For this reason, a huge number
of clients or external stakeholders have been affected by financial equity loss and others
(royalcommission.gov.au, 2019). There is a lack of diligence and degree of care have been noticed
among the internal stakeholder. Therefore, all the internal stakeholders are more or less responsible
for this misconduct. Apart from this, Shafron v Australian Securities and Investments Commission
(2012), in this case also the statutory responsibility has been violated by the non-executive
directors.

The higher authority of any financial organisations needs to develop strong internal policies and
procedures are required to be incorporated as per the guidelines of ASIC and APRA. Apart from
this, Corporations Act 2001 (Cth) and National Consumer Credit Protection Act 2009 (Cth) need
to be amended in order to maintain a strong internal governance and culture (legislation.gov.au,
2019). Therefore, with the help of Royal Commission’s report against superannuation, insurance,
banking and financial services industry, the internal stakeholders are also liable for doing financial
misconduct. The authority is also failed for providing an independent voice for the stakeholders in
order to improve unsatisfactory service, risks, harms, reporting misconduct, and operations
(Carroll and Buchholtz, 2014). In this way, the operations can be effectively handled and the new

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model for appointing corporate governance can be employed. In Anglophone corporate
constitutions current unethical conflicts which are inherited needs to be removed. Along with this,
constructive management is required for resolving conflict in operations and advising.

In case of this external stakeholders or clients of this financial sectors are affected by these
misconduct. A major issue of equity loss has been noticed within the organisations. As per the
Stakeholder Model, three values ca be added to the multifiduciary nature. These values need to be
appreciated by firms such as Descriptive value, Instrumental Value and Normative Value. Along
with this, as the firms have four types of responsibilities towards their stakeholders such as
Philanthropic, Ethical, Legal and Economic, in these aspects, the stakeholder’s have been affected
due to these financial misconduct (Carroll and Buchholtz, 2014).

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 Figure 1: Stakeholder View

(Source: As influenced by Carroll and Buchholtz, 2014)

3. Investigated report about financial institution as per the Recommendation and Principles
of ASX

These recommendations have been provided as per the subject matter of the beaching of the
policies and other financial misconduct. In order to mitigate the misconduct in the operations and
practices of various financial sectors, these recommendations have been provided by ASX in
different matters.

Principles:

However, as per the ASX principles, about core 8 principles need to be amended. As per the first
principle, laying concrete foundation for oversight and management, the board of directors needs
to be careful for their respective responsibilities and roles (Turnbull, 2019). On the other hand, the
boards must have skills and commitment, composition and appropriate size which is considered as
structure of board in order to discharge their duties of care (Gitman et al. 2015). In case of Storm
financial, their advisory board and board of directors are not composed and constructed with proper
duties which has created the issue. Acting with ethics and responsibility is another principle which
is not also seen in the practice of Cassimatis couple or CFPL. Safeguarding integrity and corporate
reporting is necessary or conducting a formal rigorous process. As per the National Consumer
Credit Protection Act 2009 (NCCP), making balanced and timely disclosure can help to
understand a reasonable person to know a material effect for changing value or price in any equity.
The authority or financial advisory firms needs to take responsibility for this
(royalcommission.gov.au, 2019). The equity and security holders have full rights to know about
their investments. Therefore, respect the rights of security holders are necessary aspect in order to
maintain appropriate information and to exercise right practice (ey.com, 2019). Managing skill
and knowledge is also effective and this is the main criteria to developing a financial firm.
Recognising and managing risk is significant which is a main principle of ASX that is effective
for providing sound risk management framework that people can conduct periodic review of their
securities (Macdonald and Ramsay, 2016). In this context, the remuneration principle is also

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amended. Responsible and fair remuneration system is required to fulfil the ability and services of
stakeholders.

Recommendation:

There are about 29 recommendations have been provided in order to mitigate financial
misconducts in the organisations. As per the 1.1 recommendation, maintaining leadership and
strategic entity within management and board of director is necessary and for this reason, any
changes could be amended. These are necessary to control over the board’s activity. Proper
monitoring of effective governance practice is necessary to be amended. Along with this,
approving proper remuneration framework of entity is also necessary for maintaining effective
standard. In this way, the 1.2 and 1.3 recommendations are provided knowledge about recruiting
appropriate person who is put forward for security holder. Besides this, the terms of appointment,
remuneration, commitment and expectation, any entitlement of termination have been recorded.
On the other hand, as per recommendation 1.4, 1.5, 1.6 establishment of working group for
adjusting necessary remuneration model is amended (theguardian.com, 2019). Even in case of
mortgage brokers also, they are also subjected to act under lawful amendments. As well as any
kind of misconduct by mortgage brokers must be reported as per 2.7 and 2.8. with the help of these
aspects, the prevailing misconduct in financial sectors can be omitted (royalcommission.gov.au,
2019).

For providing recommendation about consumer lending the 1.7 and to access banking service 1.8
has been amended. In case of Small and medium enterprises (SMEs), 1.9 to 1.14 have been
amended which requires to maintain banking code effectively. Other recommendations have been
provided for enforcing industry code, errors in process and administration, and others. Apart from
this, in case of financial advices, recommendations have been provided on ongoing free
arrangements, lack of independence, quality of advice, remuneration conflict and others. These
strong policies and amendments of legal bodies like Royal Commission can enhance the outcome
and prevent more financial misconducts by any financial groups and individuals. In addition to
this, financial advisors and professional disciplines, superannuation, obligations of trusties,
‘Selling’ superannuation, default fund nomination and others (asx.com.au, 2019). Some
regulations such as Civil penalties, APRA and ASIC’s roles adjustments, regime accountability
and others are also recommended (apra.gov.au, 2019). In this way, in case of insurance, Pre-

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contractual disclosure and representations as well as Unfair contract terms and many other
recommendations have bene provided (royalcommission.gov.au, 2019). It can be assumed that
with the help of these recommendations and principles, the financial practices of advising and
security management in different financial firms can be controlled with effective culture,
governance and remuneration (CG&R). thus, the overall recommendation is provided to maintain
effective culture, remuneration and governance in the financial sectors and to maintain effectively
by the Corporate Governance Principles and Recommendations (CGPR)

4. Assessing inclusion and diversity investigated by boards

The sustainability and culture as well as diversity and inclusion has been acknowledged by the
report effectively. As per the Competition and Consumer Act 2010, the diversity has to be
acknowledged in case of code obligations. In this case, the industry must have the provision to
govern terms of contracts as per the knowledge of guarantor or customer as well as financial
service provider (Mor Barak et al. 2016). However, industry must seek approval from ASIC in
order to develop a new terms and condition. This is to be done in order to acknowledge the
requirement of stakeholders which is known as diversity. As per the report, the banks are ignoring
their deteriorating culture which are based on basic norms and principles. Therefore, with the help
of Royal Commission’s report against superannuation, insurance, banking and financial services
industry, the internal stakeholders are also liable for doing financial misconduct
(royalcommission.gov.au, 2019). The authority is also failed for providing an independent voice
for the stakeholders in order to improve unsatisfactory service, risks, harms, reporting
misconduct, and operations. In this way, the operations can be effectively handled and the new
model for appointing corporate governance can be employed.

Promoting effective diversity and inclusion in the workplace reflect that the banks are promoting
effective culture. If all the employees are empowered and fully engaged with a strong and ethical
leadership, an inclusive but diversified environment can be achieved (Benschop et al. 2015
). Better decision making process can be fostered and the cases like Storm Financial cannot be
conducted. Apart from this the CG&R strategy also incorporated the Psychological safety for their
stakeholders. Due to the low diversity level among the decision making stakeholders in case of
financial advising, the risk of advisory issue can be noticed. Along with this, in case of Storm
financial services, due to lack of employee engagement within the advisory board, a generalised

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advising to the clients have been noticed (Holck et al. 2016). in order to avoid such issues in future,
the banking and other financial sectors might incorporate such diversity and inclusive practice. It
also inhibits necessary cultural changes that is required to an organisation. It ha seen noticed that,
same people intend to seek and provide similar opinion on a situation but, inclusion of diversity
can create huge amount of ideas and suggestions. The depth of financial crisis can be resolved by
a strategic group thinking. Other than the ASX 200 companies, other financial institutions have
lack of diversity in their leadership level (royalcommission.gov.au, 2019). Apart from this, this
lack of diversity has led to the organisations in their constructive forming of board of directors.
Only two banks in Australia, Macquarie and Westpac have reached their female directorship
inclusion goal at 30%. Additionally, other organisations have not met the goal along with this, the
diversity of ethnicity have not been amended (Kyriakidou et al. 2016). Therefore, the cultural gap
has been noticed which is assessed by Australian Institute of Company Directors.

5. Analysis ethical ground as per Normative Theories of Ethics and approaches of

sustainability

The ethics and approach of sustainability can be analysed as per different Normative theories of
Ethics. As per the theory of Utilitarianism, cost beneficial analysis has been conducted for
determining right and wrong. According to Mill (2016), with the help of this theory, determination
of right and wrong governance aspect can be maintained. Taking righteous decision is necessary
in case of financial practice. This is completely unethical and unlawful activity. However, as per
the Utilitarianism, this is to be provided by the financial industry to their clients. Their legal advice
lied in investing in high risked product which was apparently profit generating. On the contrary,
as per the ASIC framework and financial governance objective, this is not appropriate for such
clients. This theory is also highlighting multiple intrinsic good factors in the organisations. This
theory is against Egoism or discrimination (Piacquadio, 2017). In this context, the issue has arrived
that the poor financial conducts are not penalised or recognised by the remuneration practice.
Along with this, at the time of poor customer or risk outcome, the remuneration practice does not
apply properly. Apart from bankers, there are several other internal stakeholders who have
significant link with organisational changes (royalcommission.gov.au, 2019). However, the
control over qualified stakeholders and appointing representative bodies to control and directs the
association with co-regulators. In this way, the internal stakeholders are incorporating ethical

10
practices in governance, culture as well as remuneration (Jonsson and Voorneveld, 2018). On the
other hand, the clients who are another significant as well as external stakeholders associated with
the loss and profit of the company. However, industry must seek approval from ASIC in order to
develop a new terms and condition. This is to be done in order to acknowledge the requirement of
stakeholders which is known as diversity. As per the report, the banks are ignoring their
deteriorating culture which are based on basic norms and principles. By incorporating the
Utilitarianism can help to incorporate both ‘best’ and ‘satisfactory’ outcome of any decision which
can lower financial misconducts. The promising factor of this theory also supports not to include
wrong promise making which can break faith of people towards an organisation or individual
(Shaw, 2016).

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