Corporate Governance and Ethics in Financial Advice Industry

Governance 1
CORPORATE GOVERNANCE AND ETHICS
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Governance 2
Corporate Governance and Ethics
The focus of this report will be to discuss the issue of “Financial Advice” (see pages 119-
135 of volume 1) from a culture, governance and remuneration point of view
The Commonwealth of Australia Royal Commission Misconduct in the Banking,
Superannuation and Financial Services, found three pertinent issues pertaining to financial
advice. According to the author, Commissioner Hayne, the financial advice industry is yet to
undergo a complete transition from an industry solely dedicated to selling financial products,
to a profession that offers financial advice (Hayne, 2019). Hayne’s scepticism is largely
because of evidential findings relayed to the Commission from a wide range of sources.
Despite an acknowledgement from sources within the financial services industry that
financial advice was not yet a profession, the people involved in seeking financial advice
would tend to disagree (Hayne, 2019). This brings to light the fact that customers seeking
financial advice have confidence it and in financial advisors.
Commissioner Hayne, in his inquiries, raised three issues he believed to be affecting the
provision of services in the financial advice industry. These are fees for no service, poor
service provision, and the undefined and often ineffective disciplinary measures taken against
financial advisers (Hayne, 2019). Hayne further links these issues to the financial advice
industry’s history, in an effort to contextualize them. The main takeaway from studying the
history of the financial advice industry is its propensity to prioritize sales over quality of the
services rendered. This is particularly why Hayne insists that the financial advice industry is
yet to transform into a profession (Hayne, 2019).
From a historical context, it is clear to see how the issues related to the financial advice
industry are related to culture, governance and remuneration. The sales culture, which was

Governance 3
cultivated decades ago has ultimately spilled over to the current business system, and
influenced the behaviour of financial advisers (Hayne, 2019). Financial advisers continue to
be driven by the desire to earn hefty remuneration packages, which is directly linked to an
increase in sales. Remuneration packages for financial advisers have long been commission
based, characterized by hefty one-off payments and trail commissions for year thereafter.
This has led to issues with conflicted remuneration, which the Commission inquiry found to
effect on the quality of service rendered to customers, as most financial advisers are only
looking to make a quick sale (Hayne, 2019). This is evident in the huge, and in some cases
life-changing losses incurred by customers after the Global Financial Crisis.
The sales culture witnessed in the financial advice industry can be said to a direct result of
governance issues. Ultimately, any aspect of organizational culture is formed at the top,
reinforced at the bottom, and replicated in every level of an organization (Bowles, Bradley
and Knoll, 2019). This implies that at any given time new employees will emulate the culture
they have found to be existent in an organization. The longer a culture has been embedded,
the more difficult it is to uproot.
Hayne recommended a more customer-centred approach to service delivery in the
financial advice industry, one that upholds the best interest duty (Hayne, 2019). He also
suggested that financial advisers improve their professional standards through education and
certification (Lim et al., 2019). The effect of conflicted remuneration was also to be removed
if the quality of services rendered in the financial advice industry is to be enhanced (Lim et
al., 2019). These recommendations bare some similarity to those of Stephen Sedgwick, who
also noted the endemic that is the sales culture in the Australian banking industry (Rowe,
2017). In particular, conflicted remuneration was found to be a problem, with service
providers influencing customers to make risky financial decisions. Sedgwick’s findings

Governance 4
revealed an interesting fact, that increased sales and remuneration influenced the choice of
leaders in banking institutions (Rowe, 2017). Middle management in particular, comprised of
individuals that were successful sales people. With such leadership in place, it is clear to see
why the sales culture is deeply entrenched in the financial services industry.
Although Sedgwick’s inquiry and findings were based on the banking industry, they can
also be related to the financial advice industry. This is because vertical integration has seen
various institutions in the financial services industry, including banks, merge with institutions
that offer financial advice. Hayne, in his report, also recommends the adoption of Sedgwick’s
recommendations when dealing with issues related to remuneration (Hayne, 2019). A total
overhaul of the existent culture is required if change is to be implemented in the financial
advice industry. A top-down approach to governance will be ideal, as financial advisers will
learn from their leaders, while also being aware of disciplinary actions against them in the
event of misconduct (Bowles, Bradley and Knoll, 2019).
Identify and assess the effects on the stakeholders affected by this issue using Carroll and
Buchholtz’s (chapter 3) 5 questions
Carroll and Buchholtz have largely based their studies on issues related to corporate social
responsibility (CSR). This term is multifaceted but commonly refers to the ethical, economic,
legal, and discretionary obligations that a business owes the society at any point in time
(Carroll and Buchholtz, 2018). Their latest work highlights the influence of stakeholders on
business outcomes. Stakeholders are individuals or groups that are set to be affected by the
policies, actions, decisions, goals, and practices of a given organization. Stakeholders can
also be defined as having varying stakes in an organization, either legal or moral (Carroll and
Buchholtz, 2018). They have a valued expectation they purpose to receive from an
organization. Legal stakes can either be a right to be treated in a certain manner or to receive