Corporations and Ethics: Banking Royal Commission and its Impact on the Australian Financial Services Industry

TOPIC 9 CORPORATIONS AND ETHICS
The Royal Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry revealed scandals that shocked Australia
There are four major banks, which dominate the banking sector in Australia. These are the
Commonwealth Bank of Australia, Australia and New Zealand banking Group, Westpac banking
Corp. and National Australia Bank. These four banks feature among the largest banks of the
world in terms of market capitalization. At the same time, they are also present in the top 25
regarding the safest banks across the world. These banks are also among the most profitable
banks throughout the world. The financial services sector in Australia is a major contribute to
national economy. It contributes nearly $140 billion to the GDP of the year. In this way, this
sector provides employment to nearly 450,000 people and is a major driver of economic growth.
The responsibility of financial regulation has been dividing Ignacio mainly between the
Australian Securities and Investments Commission (ASIC) and the Australian Prudential
Regulatory Authority (ARPA). The responsibility for maintaining market integrity and also to
protect the consumers has been given to the ASIC. Therefore, it regulates the investment banks
and finance companies (O’Brien, 2019). But in practice, this function is manifested in the
oversight of External Dispute Resolution schemes (EDRs). There are two EDRs approved by the

ASIC that are operating in Australia. The major among them is the Financial Ombudsman
Service (FOS). It receives more than 30,000 complaints annually. The second one is Credit and
Investment Ombudsman. It had received 4760 complaints within a year. Both of these are
nongovernmental, not-for-profit organizations. They are funded by the members who include
financial advisors, banks and other financial service providers. Therefore the banking regulators
have considerable self-regulatory element present. The ARPA has the responsibility for licensing
and prudential supervision of the authorized deposit taking institutions, superannuation funds and
life and general insurance corporations (Sy, 2019). The financial institutions that are regulated by
ARPA are under the regulation, which requires them to report periodically to ARPA.
Banking Royal Commission:
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services
Industry, is also called the Banking Royal Commission. This Commission was established in
2017 by the of Australia in accordance with the Royal Commissions Act, 1902. The part of this
commission was to inquire and report regarding any misconduct in the banking, financial
services and superannuation industry. Under the circumstances, individuals and entities were
invited by the commission to make public submissions (McPhillips, 2017). It is worth
mentioning that the role of this Commission was not to deal with individual complaints, but it
was to arrive at an understanding regarding the systematic failures due to which the complaint
may have taken place. Several background papers were issued by the Commission. These papers
provide details regarding certain aspects of the industry. Several public hearings were also
conducted by the commission focusing on the topics like consumer lending practices, loans to

small and medium enterprises, financial advice, insurance, superannuation and the issues, which
affects the Australians living in remote and regional communities.
In this context, it is important to note that limited power has been provided to the Banking Royal
Commission. Therefore it can take recommendations, but it does not have the authority to order
any form of compensation to be awarded to the consumers. Regardless of the Banking Royal
Commission, the problem faced by the banks in Australia today is that the two main growth
enablers (low rate of interest and the deregulation) from the recent decades have either stalled or
have started to reverse. Therefore further regulatory action is one of the four areas where the
risks created by the Royal commission are present. There are three areas are potential fines,
changes to commission structures for the brokers and the changes to remuneration structures,
moving away from sales focus and towards softer targets. After cracking down on growth,
ARPA is probably going to focus on risk management. Therefore, a internal risk processes are
going to be reviewed, most likely at the cost of the banks. Eventually, the increase in these costs
will be required to the offsets. The result is that the banks have already started introducing job
cuts for nearly a few years. For example, between 2015 and 2017 the staff was reduced by ANZ
to 44,896, coming down from 50,152. NAB has also recently announced its plans of reducing its
employees by nearly 4000 out of the total 33,422. The banks are working for reducing their cost
to income ratios considerably and technology has proved to have a great be a key driver in this
regard (Tessema and Kruger, 2017).
As a result of increased regulation, pressure will be continuously present for the profitability of
the banks.
In this context, the wide-ranging changes that have been recommended by the Royal Banking
Commission include greater protection for consumers and more penalties for lawbreakers.