Analysis of Banking Royal Commission Report

The assignment provides a detailed analysis of the banking royal commission report, highlighting key findings and recommendations. It also explores corporate governance principles and ethics issues in financial institutions, discussing the importance of regulatory frameworks and accountability measures. The report concludes by emphasizing the need for vigilance in dealing with global financial crises.

Accounting: Ethics and Financial
Services

Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................3
QUESTION 3...................................................................................................................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Code of ethics is an internal part of every business organisation and its operation. No
sectors can be spared to not to abide by the same, financial sectors is also one of them. They
must act in accordance with the code of ethics and standard issued by the regulatory bodies.
In the present report three different questions are answered which are related with
separate matters. One question is related with determination of the facts that banking and
financial institution are engaged in such practices that have increase the greed in the market,
evaluation so carried out with presentation of case with relating them with agency theory. For
the second question of the report, comparison of the behavior and actions of banking and
financial service sectors of Australia and USA is carried out in context of global financial crises.
QUESTION 1
Agency theory: this theory explains the relation between principle and the agents. In the
business world it can be defined as determination of the relationship of one party with another
party where one determine the works and another completes the work (Agency theory: Review of
Theory and Evidence on Problems and Perspectives, 2018). The theory addresses the problems
that arise due to differences between the goals or desires between the principal and agent. This
situation may occur because the principal isn’t aware of the actions of the agent or is prohibited
by resources from acquiring the information. Another importance thing that is dealt by the
agency theory is handling the various level of risk between principle and agents. This can be
explained with an example of company as principle and shareholder as agent. Contribution is
made by the shareholders as financial contribution to the organisation use the same on their
description power. The agent has difference level of tolerance power for risk associated than the
principle because of uneven distribution of the risk.
Background and impact of remuneration incentive:
Reasons
In relation with ascertaining the reasons behind facilitating the remuneration and
incentive by banking sector to its employees is for motivating them to make more efforts as well
as enhance their greed to retain higher monetary benefits. Moreover, it will help them in
achieving fruitful gains and meeting the competition at the right time.
Background
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By considering the concept of making payments to an individual it will be on the basis of
their efforts and skills and talent in the organisation. Thus, they will be paid on the basis of their
operational efforts and job roles assigned to them. Incentives on the other hand, will be fruitful
for motivating staff towards making efforts for attaining the higher monetary benefits.
It can be effective in encouraging the banking professionals in making more operational
efforts which in turn impacts on raising the business performance. Therefore, with such motives
there will be increment in the work efficiency of the banking industry which will be effective in
raising the revenue generation of the firm.
Impacts
As per considering the impacts of such monetary greed is that it motivates the workforce
towards making more operational efforts in respect to retaining higher earning. On contrary it
will be profitable for the banking industries in terms of retaining higher success. There will be
raise in market share of the banks as it will enhance the capital stability as well as financial
condition of the banks.
Case study:
1. CBA personal overdraft: in this case, a computer application used by the CBA bank of
Australia, faced certain programming error. The software was an automated calculator which is
used by CBA to assess certain applications for personal overdrafts. The error was discovered in
September 2015 and it had occurred in July 2015 (The royal commission's interim report –
volume 2 case studies, 2018). For this time period bank failed to take into consideration the
declared housing and living expenses of approx 11059 consumers and this resulted in breach of
CBA the lending obligation under NCCP Act. In this case study misconduct was found out for
section 133 of NCCP. This states that banks are prohibited to enter into credit contracts when
they are not suitable. The lending to the borrowers were not appropriates relevant for them this
was duly accepted by the bank.
2. ANZ processing errors: this case is related with numerous errors made by ANZ bank related
with home loans in 2003. Total five processing errors were determined from a period of 2006 to
2013 (The royal commission's interim report – volume 2 case studies, 2018). In this, consumers
were charged with an interest rate higher than they should have been and certain customers who
had selected a particular home loan package after draw down or had linked an existing home
loan to a new home loan package were not given the benefit of being linked to an offset account.
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3. Bad advice, Dover: this case was related with fault in two aspects of the financial institution,
one is related with recruitment of new authorized representatives and another is related with
compliant of the client of authorized representatives (The royal commission's interim report –
volume 2 case studies, 2018).
The all three cases can be linked with the agency theory as one factors is recreation
incentives and another factors is culture of greed. The BA bank have neglected compliance with
regulatory legislation the cost of doing business (Banking royal commission key findings from
Kenneth Hayne's interim report, 2018). Loans and mortgages were landed to the borrower with
liberal policies in order to get more liquidity and lending more loans to the people. The financial
institution, mere providing the advice does not serve purpose of the client but it profited the
adviser bad this is termed as dishonesty for the second case of ANZ, the former statement can be
linked directly as it provided them with new loans to client but did not link them new loans with
offset account, here, agency theory is also proved to be true as providing more incentive in
disguise but banks was ensuring its personal benefit of getting more money. For the case of
Dover, it is also determined that greed was from both the sides that is advisers and licensee.
Borrower did not understand the step taken by the lender of ending the loans and more over they
were not told about the same (Banking royal commission condemns greed of financial sector in
first report, 2018). There has been reluctance, therefore, not least on the part of small business
owners themselves, to take up proposals for increased protections.
QUESTION 2
There are various principles and recommendations which are governed by ASX council
in effective manner. It can be assessed that various principles and recommendations are as
follows-
Laying solid foundations for management and oversight-
It provides that ASX listed company should disclose the respective roles and
responsibilities of board and management and performance should be monitored (Shaub, 2017).
Structuring board to add value:
It states that appropriate size, composition, skills and commitment should be made for
discharging duties in effective manner.
Acting ethically and responsibly:
The firm has the liability to act ethically and in responsible manner.
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Safeguarding integrity in corporate reporting:
ASX listed company should have effective formal and rigorous processes in order to
indefinitely safeguard integrity in reporting (Rezaee and et.al., 2012).
Making timely disclosure:
It postulates that listed entity must have balanced and timely disclosure of reports as it
would have material impact on person or value of securities.
Respecting rights of security holders:
It is the right that should be provided with appropriate information to organisations so
that they may be able to exercise their rights.
Recognise and manage risk:
It is needed that listed company should develop sound risk management framework and
also review the same in effective manner.
Remunerate fairly and responsibly:
This principle and recommendation says that appropriate remuneration to directors must
be paid which should be sufficient to keep them retained for long.
Thus, it can be justified that data revealed by Royal Commission which shows poor
corporate behavior. The call of Mr Frydenberg can be achieved by financial sector by putting
people before profits. For accomplishing this, it is required that firm should effectively follow
and abide by the principles and recommendations which has not been followed by it. Moreover,
monitoring framework of Board should be reviewed from time-to-time for providing ethical
behavior.
QUESTION 3
Financial stability goals are often framed in terms of addressing and managing systemic
risk. For instance, the Financial Stability Board, an international group that has led the
coordination of regulatory reform efforts across major financial jurisdictions, says that it
“promotes global financial stability” via “a three-stage process for the identification of systemic
risk in the financial sector, for framing the financial sector policy actions that can address these
risks, and for overseeing implementation of those responses (The royal commission's interim
report – volume 1, 2018).
At the time of Global financial crisis there were many countries which were facing issues
and weak banking systems in way of sustaining into their economic growth within following the
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period. At that time there were certain number of countries like that of USA and UK already
having very strict financial conditions were highly regulated with all sort of practices. These
countries will be having serious downtime into economic activities into financial crisis tending to
severe and prolonged. While it was also noted that all banks in Australia were having stronger
and highly capitalised banking and financial sector. This was due to fact that banks in Australia
were having rigorous supervision with having world-class and better financial regulators which
protected the economy of Australia (The royal commission's interim report – volume 2 case
studies, 2018). This was very important feature of their regulatory infrastructure for too many
years as they were having good understanding between their government and regulators.
The banks of Australia were not having much of the impact on their systems and
financial support was very much strong as well there were none of the taxpayers would were
bailed out with money. It could also be noted that all banking services and institutions in
Australia were into very stronger position at time of Global financial crisis as compared to the
other country’s financial services. There were many significant structural challenges which were
faced by banks of Australia after the time of GFC. The sort of challenge which it faced was that
of raising up of funds on the cost competitive terms into environment and not able to achieve the
competitiveness into the customer banking solution. There was also one of the major challenge
which companies of financial institution faced within Australia that was into implementing the
G20 international regulatory response to that of GFC.
While on the other hand the banking and financial institution of USA were having strong
reflection of the GFC within their stability and actions which were that taken by government and
the central bank of USA (Kehoe, Eyers, Turner, McInnes & Frost 2018). There were very rapid
changes which took place after the impact of global crisis like structure and rules of financial
system was changed. As there was bankruptcy of Lehman Brothers in 2008 which mostly shock
the economy of USA with ambitions to be among those left to pick over what was left after the
subprime crisis had run its course (ASX corporate governance principles and recommendations,
2018). The share of the largest bank of USA was into more panic that they might also be
collapsing into next line.
It can be analysed that findings as per the interim Royal Commission are broker loans
which are been reliably associated with higher amount of leverage even for customers having
identical risk. Another findings were loans written through brokers have higher amount of
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incidence of interest-only repayments (Gould, 2011). Moreover, having debt-to-income levels
and loan to value ratios and cost compared with loans which were directly negotiated with the
bank. Moreover, overtime brokers have high amount of leverage and have more likelihood of
incurring arrears and pay their loans more slowly and on average basis, more interest is paid for
customer dealing directly with the bank. The Banking Regulation act 2016 of Australia will be
regulating the economy and its banking or financial institution which is providing clears
guidelines and outline. While the Reserve Bank of Australia (RBA) will be retaining the central
banking functions including like that of responsibilities for most of the payment systems and
setting of monetary policies.
It can be justified that banking financial sector is required to abide by rules and
regulations which are provided by ASX principles. By incorporating the same, firm will be able
to attain benefits, if it complies with council principles and recommendations in effective manner
and as a result, such findings will be minimized up to a major extent (Abdolmohammadi and
Reinstein, 2012). Furthermore, if it does not follow the principles and recommendations as
incorporated by council, then sector will be vanished in near future quite easily. Thus, it is
required that firm will be able to enhance position in effective manner.
CONCLUSION
From the above report it can be concluded that banks and financial institution were under
misconduct and did not follow the regulatory framework for business operations. For this
consumer were also responsible as they did not act on time and took no action. With comparison
of steps taken by USA and Australia it can be interpreted that both were vigilante in dealing with
global financial crises.
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REFERENCES
Books and Journals
Abdolmohammadi, M. J., and Reinstein, A., 2012. Practicing accountants’ views of the content
of accounting ethics courses and course effects on attitudes and behavior. Advances in
Accounting Education: Teaching and Curriculum Innovations. 13. 213–236.
Gould, S., 2011. Accounting for sustainability, Accounting Plus, Vol. 1. pp. 19-20
Rezaee and et.al., 2012. Corporate governance and ethics education: Viewpoints from
accounting academicians and practitioners. Advances in Accounting Education: Teaching
and Curriculum Innovations. 13. 127–158.
Shaub, M. K., 2017. In T. J. Rupert & B. B. Kern (Eds.). Advances in Accounting Education:
Teaching and Curriculum Innovations (Vol. 20. pp. 181–216). Advances in Accounting
Education: Teaching and Curriculum Innovations. Bingley, UK: Emerald Publishing
Limited
Online
Banking royal commission key findings from Kenneth Hayne's interim report. 2018. [Online].
Available through :<https://www.abc.net.au/news/2018-09-28/bank-royal-commission-
kenneth-hayne-key-findings/10317752>.
Banking royal commission condemns greed of financial sector in first report. 2018. [Online].
Available through :<https://www.theguardian.com/australia-news/2018/sep/28/banking-
royal-commission-condemns-greed-of-financial-sector-in-first-report>.
Agency theory: Review of Theory and Evidence on Problems and Perspectives. 2018. [Online].
Available through :<https://journals.sagepub.com/doi/pdf/10.1177/0974686217701467>.
The royal commission's interim report – volume 1. 2018. [pdf]. Available through
:<https://financialservices.royalcommission.gov.au/Documents/interim-report/interim-
report-volume-1.pdf>.
The royal commission's interim report – volume 2 case studies. 2018. [pdf]. Available
through :<https://financialservices.royalcommission.gov.au/Documents/interim-report/
interim-report-volume-2.pdf>.
ASX corporate governance principles and recommendations. 2018. [pdf]. Available
through :<https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-
recommendations-3rd-edn.pdf>.
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Kehoe, Eyers, Turner, McInnes & Frost (2018) – full article. 2018. [pdf]. Available
through :<https://search-proquest-com.ezproxy-
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