Misconduct in Financial Services Entity
Added on 2020-03-16
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The Terms of Reference: According to the terms of reference, the following matters wererequired to be inquired by the Commission. These included:The nature, extent and effect of misconduct on the part of a financial services entity (includingits directors/employees or officers). Any conduct, business activity, behavior or practices of financial entity that do not meet thecommunity expectations and standards.The use of retirement savings of superannuation members by a financial services entity for anypurpose that does not meet the expectations and standards of the community or is not in the bestinterests of such members. The effectiveness of the mechanisms related with the redressal for the consumers of financialservices, if they have suffered the loss due to the misconduct of the financial services entity.The adequacy of (i) Current legislation and policies of Commonwealth related with the provision of financialservices; (ii) Forms of industry self-regulation, including the codes of conduct of the industry; and (iii) The initial internal systems of financial services entities to identify, regulate and address any instances of misconduct in the financial services industry, tomeet the expectations and standards of community and provide appropriate redressal to theconsumers. The effectiveness and the ability of the regulators of financial services entity of identifying andaddressing misconduct by such entity.
Whether any further changes to:Legal framework;Financial regulators; andPractices within financial services entities;are required to decrease the chances of misconduct by the financial services entities in future Background: In view of the account fraud scandal that hit the US bank Wells Fargo. In 2014, anexpose of a self driven culture within the financial planning division of the Commonwealth Bank(CBA) was described at profit at all cost. Later on, it was recommended by a Senate committeeinquiry that a Royal commission should look into the fraud scandal due to which thousands ofCBA. Customers have lost millions of dollars.1 The committee gave a report on the performanceof the ASIC. After many days, the then chief executive of CBA, Ian Narev made an unreservedapology to the customers who have lost money as a result of the financial planning scandal in thebank. The erstwhile treasure, Joe Hockey mentioned that the bank failed to act quickly to dealwith the problem. His mother was also affected by this scandal. Later on, the CBA was alsoinvolved in another matter, which included money laundering on behalf of drug syndicates,ignoring statutory reporting responsibility for nearly 3 years in case of 750,000 accounts, turningblind eye to terrorism funding and improprieties in foreign exchange trading. In 2015, the National Australia Bank (NAB) was involved in a series of scandals related withfinancial planners. It was revealed that NAB paid millions of dollars as compensation to a largenumber of clients regarding what it was considered as inappropriate financial advice given by its1 K. Davis (2011). ‘Regulatory Reform Post the Global Financial Crisis: An Overview’, a Report Prepared for theMelbourne APEC Finance Centre, APEC Study Centre at RMIT University with Funding Provided by AusAIDunder the PSLP Program, March.
staff members during 2009 and 2015. It was claimed by a whistleblower that a toxic, volatileculture was present within the bank. The staff of NAB was prohibited by the ASIC as earlier theywere licensed to give financial advice. Later on, it was also revealed that NAB has also beenimplicated for improprieties in foreign exchange trading. There were allegations against Westpac that it had rigged key interest rates of Australia, becausethe bank bill swap rate. Later on, it also faced litigation under responsible lending legislations, asit had used an automated process for the purpose of deciding if the home loan applications madeby the people, fulfilled the lending criteria. Moreover, a banker from Westpac had to faceimprisonment because he had fraudulently lent millions of dollars to pensioners.2 After theinvestigations by the ASIC, Westpac had to donate $3 million to Financial Literacy Australiaafter it was discovered that the employees of the bank gave confidential details of the clientsorders to foreign exchange traders. These are some of the circumstances and the backdrop of which, the Royal commission wasannounced by the government.Some issues and problems with the conduct of major banks: Under these circumstances, theopposition leader, Bill Shorten made a speech at the National Press Club, where he outlined hisplans for the Royal commission to look into the banking sector in case the Labour governmentwins in the 2016 in federal elections.3 The call for Royal commission also received support fromLiberal MP Warren Entsch and also the CBA whistleblower Jeff Morris, who had documentedthe "systemic bad behavior" of the industry since 2008. Despite an attempt made in 2016 to2 K. Davis (2013). ‘From Where Do We Begin?’, Funding Australia’s Future project, Australian Centre forFinancial Studies3D. W. Drezner, (2012). ‘The Irony of Global Economic Governance: The System Worked’, InternationalInstitutions and Global Governance Program Working Paper, Council on Foreign Relations
protect the interests of the consumers and to increase accountability and transparency and also tocreate confidence and trust in the banks, in view of the rising concerns of the community, ingenerated on 1725 members of Australian banking Association launched an initiative namedBetter Banking with a view to provide improved product services and a better culture as well asto offer the customers helpful resources and information. A former senior public servant ofAustralia, Steve Sedgwick was commission to look into the pay and conditions of the bankers.He recommended that the bonus payments to retail bank employees should be terminated, whichare related with sales performance.4 A report was also delivered by the ASIC regarding thefinancial advisor compliance in the sector. The Turnbull government introduced legislation in2017 for establishing the Australian Financial Complaints Authority. This was an externaldispute resolution body established with a view to simplify the way consumer complaints wereresolved with the banks and other financial entities. However, the ASIC had to face a lot ofcriticism for its activities as the regulatory body including the supervision of banks. The issues faced during Global Financial Crisis (GFC) and lessons: The significance ofhaving a stable and safe banking system in order to achieve sustainable economic developmentwas brought into focus as a result of the global financial crisis of 2007 and 2008. In case of thecountries where the banking systems were weak, the economic activity faced a severe downturnas a result of this crisis. Some of the significant examples that can be given in this regard is theUnited States and the United Kingdom. As revealed by these examples, the economic downturnscaused by the global financial crisis tend to be more severe and prolonged in case of suchcountries. On the other hand, the Australian banks are highly rated and well-capitalized.Therefore it can be safely stated that as a result of the years of rigorous supervision by worldlevel financial regulators, the banks in Australia had benefited significantly. However this quality4 J. Eyers (2014) ‘Shadow banks pose small risk in Australia, says RBA’, The Australian Financial Review, 14 May
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