Banking Royal Commission

Royal Commission a boon or bane?

The final report of Commissioner Haynes was released on 4th February 2019. To conclude
whether the Royal Commission (RC) is a boon or bane for the industry would be too early at this
moment because it’s just a couple of months since the report is published. However, prima facie
it appears that the report focuses on the flaws in the industry and measures to improve them. It is
argued that in the long run, the RC will be a boon for the financial industry. The answer outline
how the borrowing procedures will be affected, impact on the remuneration of financial service
executives and the role of regulators.

The report made recommendations on 7 broad areas: banking; financial advice; superannuation;
insurance; culture, governance; and remuneration and regulators role (Chartered Accountants
Australia and New Zealand, 2019). There are a total of 76 recommendations. These
recommendations are very strict in nature and their implementation will be difficult. For
example, the report recommends mortgage brokers to act in the interest of the borrowers, not the
banks and it also recommends that the trailing commission should be banned. The mortgage
borrowers get business from these banks, if they do not serve their interest, it will impact the
communication process and will cause operational hindrance. Further, the trailing commission
constitutes a significant part of the overall revenue of these brokers which comes from
comparatively less efforts, banning it will demotivate them. The recommendations also increase
the accountability of the executives sanctioning the loans. Now, they will fear more before
sanctioning any new loan. Stein (2019) argued in an article of ABC news that the mortgage
brokers will increase their upfront fee in order to balance their pay off, and still, if these brokers
are hit hard they will not be able to serve small lenders and it will lead to big banks dominating
the market even more. With a lack of motivation for brokers, increased accountability of sanction
officers and risk of future of small banks, it can be concluded that RC has made it more difficult
to obtain loans.

Mr. Haynes recommends that there should be an annual review mechanism for the executive’s
remuneration. There is a relation between remuneration and misconduct (PWC, 2019). A large
part of the executive’s remuneration consists of variables that are linked to their performance.
The performance is measured with respect to their contribution to shareholder’s wealth
maximization and not linked with their performance for the financial sectors (Sunday Morning
Herald, 2019). This led to adapting objectives of executives, however, these are in alignment
with corporate governance principles and recommendations issued by ASX. However, the SMH
article highlights that APRA can direct these institutions to include non-financial metric into
performance measure standards. Further, as reported by ABC News (2019) incidents occurred
when financial advisors charge a fee for no services even after their client passed away, RC
report advocates that no fee shall be charged if no service is provided.

APRA is a prudential regulator which take care of investor’s interest by supervising banks,
insurance, and other financial institutions whereas ASIC is a financial market regulator in
Australia which promotes transparency and fairness in financial markets (ASIC, 2019). These
two regulators role will increase and encompass the role of implementation of RC report’s
recommendations. There is no regulator to monitor the issues raised by the RC report, the
responsibilities will be distributed among both APRA and ASIC. The model will be twin peak
where APRA will oversee the prudential aspect and ASIC the regulatory. ASIC will be
overseeing superannuation and APRA will soon have extra power of the civil court to impose
penalties for breaches of superannuation laws (ABC News, 2019). Further, the Australian
Financial Review (2019) reported that APRA will be required to oversee the remuneration
mechanism of financial institutions as more regulated remuneration will reduce the risk of
misconduct. They will be receiving additional funds to perform these responsibilities (Australian
Financial Review, 2019). However, the report recommends that a new authority will be set up to
oversee these two bodies respective activities.

Critical evaluation of RC recommendations

Remuneration:
The Banking Royal Commission (RC) report gives various recommendations for financial
advisory. This includes a renewal of service agreements; disclosure of independence where
conflict of interest arises; the cap on commission; not charging a recurring fee for the services
that are not provided subsequently (PWC, 2019). The Australian financial advisory has built a
negative reputation for itself through the wrong practices followed by financial advisors. They
were entering into agreements with their client of providing regular advice and charing fee on
annual basis, but one time advice was provided only in the first year, and no consecutive advice
was provided later on. These charges were recorded through a reduction in investment values.
The RC report recommended that such fees shall not be charged by these financial providers as
these are unethical practices. Further, the commission on the products of life risk insurance is
very high. The commission recommended that a cap shall be imposed on these commissions and
it shall be reduced year on year. The reduction should be so progressive that at a point the
commission shall be reduced to zero. The recommendations also support that grandfathered
commission shall be banned. Over the years such type of remuneration practices has developed a
culture of its own kind. Conflict of interest has increased and risk of on compliance with legal
norms has increased. Although, the RC recommendations imply that these practices shall be
reversed but it will surely cause disruption in the industry. The executives are motivated by the
monetary incentives, Chamorro (2013) highlighted in an HBR journal that there is a direct
correlation between remuneration and employees motivation. If the variables are reduced or the
remunerations are capped then the executives will lose motivation to excel. Further, the industry
won't accept it easily, it might lead to chaos. However, these recommendations are sought to
benefit in the long run, there is no reason for them being not implemented. The government shall
implement these recommendations but not completely in one go. This should be implemented
progressively so that the shock is absorbed and the appropriate time would be available to
counter any negative effects.

Culture and Governance:

The recommendation highlights that the remuneration system of the front line staff and top
executive of financial entities shall be reviewed at least once in a year (PWC, 2019). Further, the
entities shall also review their culture and governance every year including any need for the
changes and how the changes of previous years have been incorporated. It was observed that
culture was developed where executives prioritize maximization of sales because their
remuneration is linked to such sales. This led to skipping legal requirements and ethical
practices. Further, the disciplinary board over financial advisory services has been abolished
recently which led to the risk of indisciplined activities in the services of these advisors. The
recommendations also suggest less use of financial linked performance evaluation measures.
Better governance requires more ethical practices. The recommendation has all the positive
outcomes as an organization with better governance and healthy culture increases the overall
efficiency. The government shall implement these recommendations. These recommendations
will lead to better governance practices and the unethical element will be eliminated. Further, it
will re-establish the good image of the financial service industry to the public at large, more trust
gained will increase the confidence of the industry and help the industry to flourish.
References
ABC News 2019, Banking royal commission calls for compensation, crackdowns and an
overhaul of financial regulators, ABC News, retrieved 15 April 2019,
<https://www.abc.net.au/news/2019-02-04/banking-royal-commission-report-at-a-
glance/10777188>

ASIC 2019, The APRA – ASIC Relationship, ASIC, retrieved 15 April 2019,
<https://asic.gov.au/about-asic/what-we-do/our-role/other-regulators-and-organisations/the-apra-
asic-relationship/>

Australian Financial Review 2019, Banking royal commission final report: APRA told to rewrite
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and-finance/banking-royal-commission-final-report-apra-told-to-rewrite-executive-pay-
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Chamorro. T 2013, 'Does Money Really Affect Motivation? A Review of the Research', HBR

Chartered Accountants Australia and New Zealand 2019, Banking Royal Commission Final
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<https://www.charteredaccountantsanz.com/news-and-analysis/news/banking-royal-commission-
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PWC 2019, Resetting Standards - now for the indstry to deliver, Sydney: pwc.

Stein, L 2019, Buying a house? Here's how the banking royal commission affects you. ABC
News, retrieved 15 April 2019, <https://www.abc.net.au/news/2019-02-10/heres-how-the-
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Sunday Morning Herald 2019, Hayne ends the executive remuneration debate. SMH, retrieved
15 April 2019, <https://www.smh.com.au/business/banking-and-finance/hayne-ends-the-
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