Ethics and Financial Services

This article discusses the impact of corporate culture and remuneration on the success of financial institutions and the findings of the Royal Commission on financial scandals in Australia. It also provides examples of financial scandals in other countries and the role of government regulations in preventing them. The article is relevant to students studying finance, business, and corporate governance.

Running head: ETHICS AND FINANCIAL SERVICES
Ethics and Financial Services
Name of the Student
Name of the University
Author note

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Introduction:
Corporate Governance is the framework which is used by various companies worldwide for
specifically outlining the different operations and guidelines for their employees. It is a unique
constitution which is carefully built around the organisation’s values and missions. It is due to the
corporate governance that companies are able to frame their internal policies which enables them and
their work force work peacefully, keeping in mind all their aims and objectives. Its purpose is to
design different business opportunities for the organisation concerned and through this way, it is able
to maximise its profits. A set of rules and operational procedures is followed and maintained, under
the veil of corporate governance, which ensures in maintaining a minimum work ethic and corporate
discipline amongst the employees of the organisation.
Part A:
According to the Journal of International Financial Market Institutions and Money, Australian
banks had an improved efficiency after the introduction of the ASX Principles of Good Governance in
2003. Board size increased, and community meetings improved drastically. After its introduction, the
Australian banks were able to maximise their revenue for any kind of borrowing and operating
expenses, from both non-lending as well as lending activities. It also revealed that the big four banks,
the NAB, ANZ, Commonwealth and Westpac, performed far better than any regional ones.
The purpose of the Royal Commission is to investigate into the police and government
corruption and various cases of organised crime (Hutchens, 2018). The commission has a wide range
of coercive powers, rested upon it, which it efficiently utilises in investigating the cases of corruption
charged against the corrupt public officials who use their position and power for all the wrong
reasons.
There are three primary reason for the creation of a Royal banking Commission into the
banking sector. Firstly, Australian banks have been plagued with innumerable cases of fraud and

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financial scandal, spanning well over a decade. Secondly, the banking sector’s aggressive sales driven
working culture emphasising profit earning at all cost has done them more harm than good, and
thirdly, the flawed compliance structure in addition with the adamant attitude of the bank officials in
making any senior banking official accountable for his or her action, has led to the creation of this
commission (afr.com 2018).
There were resistance in the form of opposing carried out by Prime Minister Malcolm
Turnbull and his Liberal party, who had spent a year and a half, in resisting the formation of a Royal
Commission into the banking sector of Australia, because of the vested interests of his ministers into
the various scandals, which ensued after that. It has been widely speculated that the Prime Minister
and his government had been protecting the interests of the banking companies (abc.net.au 2018).
Part B:
As per the findings of the Royal Commission of Australia, there have been some key findings
regarding alleged bribery, cases of forged documents, and repeated failures of banks in verifying the
documents of the customers in important matters such as granting of loans, receiving financial advice
and in cases of selling of insurance services (Yeates 2018). Majorly, the big four banks, are involved,
with the name of Commonwealth Bank coming up repeatedly. Many other companies are also on the
list of perpetrators such as AMP, BT Financial, St George and many others.
There have been cases of conflict of interests. The banks sold their financial advices to the
customers and gained heavily, if that advice resulted in the purchase of financial asset from them.
This would result in a profit loop, which is also known as the ‘Vertical integration’ business model.
The quality of the financial advises of two largest financial advice organisation owned or controlled
by the Commonwealth, Westpac, ANZ, NAB have been closely scrutinised. The commission looked
at the quality of their financial advices and concluded that there is an existence of an inherent conflict
of interest which had been appearing from the banks and institutions, selling such advices to its
customers (aicd.companydirectors.com.au 2018).

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Organisational culture and remuneration plays a vital role in ensuring the success of a business
organisation, be it banks or any other financial institution. Many corporate sectors across the world
and seen in the Australian corporate environment prevalent in the banking sector is that culture
provides a competitive advantage towards its competitors. Culture brings about certain kinds of
implicit as well as explicit reward mechanisms (Www2.deloitte.com, 2018). The same is true for the
banking and the financial sector as well. The kind of culture preached by those institutions is reflected
in their performance and treatment of employees. The recent financial scandals, in Australia, bears a
testimonial to the rampant corrupt culture, which is present in the banking and financial sector. The
vicious corporate culture of earning profits at all cost, has led the bankers to confuse themselves
between a an advisor and a salesmen, forgetting the former exists to work in the best interests of the
clients and is not present to sell his or her company’s products. This has led to the corruption of
banking officials on a large scale.
There have not been any specific examples of government organisations and or banks, where the
corporate culture has been evaluated as corrupt, as a result of which examples could not be cited in
this regard. The impact of corporate culture on any organisation, bank or any financial institution is
profound. A strong culture increases the likelihood, that when there arises any kind of inconsistent or
corrupt behaviour, it stands out (Pontell, Black and Geis 2014). Culture plays a strong role in telling
officials and employees on how to go about doing certain things, but it never helps in ascertaining any
rogue individual resorting to corrupt practices.
Part C:
There has been wide spread agitation against the launch of the Royal Commission, after the initial
reports emerged from its investigation into the financial scandals, involving some big players of the
financial and banking sector of Australia. There has been severe impact on the working of these
organisations, making them more transparent and accountable to its set of stakeholders. These
organisations become much more aware about the long term implications of their wrongdoings. They
conducted enquires into the number of cases, launched various kinds of strict rules and regulations

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with respect to grafting and bribery and launched a zero tolerance policies towards corruption. They
ensured that the customers, one of their biggest stakeholders are not cheated and exploited as a result
of which brought about a change in their vigilance department and respectfully co-operated with the
findings of the Commission.
ASIC notes that there exist a link between risk and reward and advocates that the
remuneration and performance management practices are intertwined for the purpose of
promoting ethical conduct. ASIC advocates the rewards are integrated with the prevalence of a
good organisation culture prevalent in the organisation (asic.com 2018). However, it does not use
the sticks; it has in case of any wrong doing by the banks. ASIC has the power to ban someone, if
they do not comply with the 912A section of the Corporations Act, which deals with all the
obligations of the holding a financial service license. In spite of this, when the new Chair of the
ASIC was expected to talk tough, amid growing number of financial scandals, he said that the
non-compliance with 912A may or may not lead to a penalty, indicating his softer stance.
According to Ian Ramsey (Corporate Law expert, University of Melbourne) and his team’s
investigation into the penalties levied by ASIC, for the period August 2010 and July 2014, ASIC's
market disciplinary panel had practically sent out penalties of just under 10 per cent of the level which
could have been issued, if the books are to be followed. This has raised questions, regarding the
competence of ASIC in punishing such nature of violations and white collar crimes.
The ASIC must bring out stricter warnings for the board of directors, leadership of companies
and the CEOs, in the form of conducting cultural audit in the organisations as culture plays a major
role in drop of share prices and financial wrong doings. There must be recommendations on including
the criteria’s in terms of CEO selection, strict penalties must be imposed and exemplary measures
must be bring into the extreme cases of financial and disciplinarian violations.
A series of recommendation must be provided by the Commissioner based on the findings of the
commission. The commissioner must put forward the different types of criminal proceedings must be
brought forward in case of the bribery, forging of documents for attaining short term financial gains,

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misleading customers who couldn’t afford them. The commissioner must refer to these cases to the
commonwealth and must recommend publishing its investigative reports for ensuring transparency, as
already the customers, have been kept in the dark, all this while.
One of the biggest impacts, which might result in the wake of the recent crackdown
of the Royal Commission on the banks across the Australian sub-continent, is that the
customers would face larger and increased amount of problems, as getting home loans would
be comparatively harder. The banking companies will now be much more cautious about their
lending standards and procedures. According to ANZ Bank’s Mr Elliot, the enquiries,
findings and investigations is leading to a much more cautious mind-set, among the bankers.
The ultimate problems would be faced by the customers, who would had to face increased
compliance measures while taking a loan, form the banks, making them wait a bit longer than
usual and adhering to an increased number of legal formalities.
Part D:
Over the last decade financial frauds and crimes have engulfed many countries, apart from
putting up rosy performances and profits. Some large and reputed companies and the organisations of
these countries had committed financial fraud under the veil of window dressed profits. In India, the
potential depositors of one of its biggest government controlled banks, the Punjab national bank
committed a $2.3 billion financial fraud, which was committed by Damon trader Nirav Modi, using
forged documents for receiving loan permissions and lax attitude of the bank officials. In the United
States, Bernie Madoff developed the biggest ponzi scheme in 2008, aggregating a total of $65 billion
(Young 2013), spanning five decades fooling thousands of investors, the MF Global Bankruptcy in
the year 2011, is also a stark reminder of the large amount of foul play involved in the financial
market of US, when its head Jon Corzine fooled his investors and was dealing with high risk repo to
maturity trades, which resulted in its bankruptcy, resulting in a loot of $41 billion worth of assets
(Markham 2015).

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These cases of financial scandals are common to all the countries mentioned above, be it the
U.K, U.S.A, India or New Zealand, where the political nexus with the big corporate have led to the
increased amount of financial scandals for a long period of time (McMeel 2013.). In the case of the
U.S, there has been increased de-regulation in the financial service market, which has led to the US
companies be globally competitive, while offering world class financial services ( Richman 2013). In
some instances there have also been increased regulation and government interference in the activities
of the financial markets and organisations, where it has been said by 51% of the CFA members, that
the current market regulations is way too much and rather it should concentrate more on the fraud
related incidents, than on the other trivial issues (cfainstitute.org, 2018). In the case of UK, the bank
of England, Prudential Regulation Authority and the Financial Conduct Authority have increased the
legislation into the financial services and financial markets matter and the FCA along with the
government has increased its intervention into the happenings of the financial markets and its
components (Bates 2014).
Conclusion:
The Australian government and regulatory bodies should up their ante and uphold the above
mentioned laws and regulations, for preventing the increased amount of financial scandals. Thus in
order to root out the problems related to the financial scandals taking place in the Australian financial
and banking sector, the Royal Commission must be provided much more freedom in exercising its
powers and functions. Substantial amount of work is also required in the improvement of the
corporate governance and corporate culture of the different organisations of the banking and the
financial sector as well.

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References:
afr.com. 2018. Good culture will boost company profits. Retrieved from
https://www.afr.com/leadership/workplace/why-good-culture-will-boost-company-profits-20160413-
go5q88
aicd.companydirectors.com.au 2018. Retrieved from /membership/the-boardroom-report/volume-16-
issue-7/emerging-governance-issues-from-the-hayne-royal-commission
Bates, J., 2014. The strategic importance of information policy for the contemporary neoliberal state:
The case of Open Government Data in the United Kingdom. Government Information
Quarterly, 31(3), pp.388-395.
Hutchens, G. 2018. Banking royal commission: all you need to know – so far. Retrieved from
https://www.theguardian.com/ Emerging governance issues from the Hayne Royal Commission.
Linda Rittenhouse, J. 2018. Regulation in the United States: Too Much, Too Little, or Just Right?.
Retrieved from https://blogs.cfainstitute.org/marketintegrity/2016/11/28/regulation-in-the-united-
states-too-much-too-little-or-just-right/
Markham, J.W., 2015. A financial history of the United States: From Enron-era scandals to the
subprime crisis (2004-2006); From the subprime crisis to the Great Recession (2006-2009).
Routledge.
McMeel, G., 2013. International issues in the regulation of financial advice: A United Kingdom
perspective-the retail distribution review and the ban on commission payments to financial
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Pontell, H.N., Black, W.K. and Geis, G., 2014. Too big to fail, too powerful to jail? On the absence of
criminal prosecutions after the 2008 financial meltdown. Crime, Law and Social Change, 61(1), pp.1-
13.

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Richman, D., 2013. Federal white collar sentencing in the United States: A work in progress. Law &
Contemp. Probs., 76, p.53.
Should ASIC cancel the big four's operating licences if they behave badly?. (2018). Retrieved from
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licences/9921210
www2.deloitte.com. 2018. Shape culture Retrieved from
https://www2.deloitte.com/insights/us/en/focus/human-capital-trends/2016/impact-of-culture-on-
business-strategy.html
Yeates, C. 2018. The Hayne effect: Home loans will be harder to get and take longer. Retrieved from
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
Young, J., 2013. Bernie Madoff, Finance Capital, and the Anomic Society. How They Got Away with
it: White Collar Criminals and the Financial Meltdown, pp.68-81.