Legal Governance, Risk, and Management: CBA Report - [University Name]

This report provides a situational analysis of the Commonwealth Bank of Australia (CBA), a leading financial institution. It examines the bank's characteristics, including its diverse financial services and community involvement. The report delves into legal governance, management, and relationship issues affecting the CBA, such as weaknesses in management, unethical conduct, and compliance failures, particularly highlighting the impact of the financial crisis and regulatory scrutiny. Specific legislation, including the Commonwealth Banking Act 1959, is discussed for its importance. The report identifies areas of high legal risk, like compliance and operational challenges, and analyzes their short-term and long-term implications. Strategic options for risk management, including compliance risk assessment and establishing a cross-functional team, are proposed. The report also explores initiatives to improve the culture and ethics within the bank, offering recommendations for effective risk mitigation and overall improvement in its legal and operational environment.

1
Managing the legal environment: Commonwealth Bank
Student’s Name
Course
Professor’s Name
University
Date

2
Executive summary
The Commonwealth Bank can be considered as one of the leading financial
institutions in Australia and other parts of the world. The bank offers integrated financial
services such as retail, business, and institutional banking. Moreover, the bank also offers
financial management, superannuation’s, insurance cover, brokerage of shares among other
services. Notably, in recent years since the financial crisis, community trust in banks has been
affected significantly. Globally, the financial crisis exposed huge scandals involving
banks .This included Weakness in management, Unethical conducts, serious professional
misconducts, lapsed ethical conducts and failure to comply with the established laws. All
these issues have resulted in significant financial losses and penalties due to multiple
litigations. Multiple management issues have infiltrated the CBA and most regulators have
clearly pointed out the dangers associated with such moved.

3
Contents
Introduction...........................................................................................................................................4
Characteristics/features of the organisation.........................................................................................4
Legal governance, management and relationship issues that affect the Commonwealth Bank............6
Management Issues...........................................................................................................................6
Legal governance Issues....................................................................................................................8
Relationship issues............................................................................................................................8
Specific legislation that is of particular importance (Commonwealth Banking Act 1959)...................10
Areas of high legal risk for the organisation........................................................................................11
Compliance risk...............................................................................................................................11
Operational challenges....................................................................................................................13
Implications of this legal risk for the organisation both short –term and those that may arise in the
long-term.............................................................................................................................................14
More time would be required to is set the appropriate cultural tone for the organisation............14
More time will be required for constructive consultations.............................................................15
Significant effects on its overall operations.....................................................................................15
Describe strategic options for management of Commonwealth Bank................................................17
The assessment of compliance risks through the internal audit process.........................................17
Recommendations...............................................................................................................................18
Establishment of a cross-functional team........................................................................................18
Outline and assess all the key elements of an effective risk mitigation plan...................................19
Initiatives that would improve the culture and ethics.....................................................................20
Conclusion...........................................................................................................................................21
References...........................................................................................................................................22

4
Introduction
The main objective of this paper is to show situational analysis of Commonwealth Bank of
Australia. This paper also analyses various organisational structures of the bank and the legal
strategies that the institution that ought to put in place in order to ensure that its operations
are efficient. Since every business requires to take various actions that would assist the
company to maintain a better position, it is important to find the cause of various barriers and
establish the strongest resolutions. The useful information in this paper will assist the
company choose the most appropriate resolutions, and develop strong corporate strategies
which would eventually assist them in achieving their objectives.
Characteristics/features of the organisation
As one of the leading banks in Australia, the company has multiple branches, ATMs,
Agencies and an all-round accessible call centre, as well as internet banking services. The
bank's visions are to ensure that it excels and enhancing financial services and securing the
well-being of its customers and the community at large1 (Sheridan, & Jang, 2012). The
company is a long-standing contributor to various community development programs such as
schools, athletics, among other programs through the community funds drive, volunteering,
sponsorships, and grants. From technological innovations and development of new products
and services, the company ensures that it has an unwavering attention to consumer needs and
the regulations set forwards to ensure that quality is guaranteed.
The way the company conducts its business, it is much easier for customers to
manage their own financial wellbeing. As an international financial institution, the
commonwealth bank has also put into consideration all the communities in which it operates
within. Since the company takes its social obligations seriously, it always ensures that they
build a constructive association with the communities in which it operates in as well as their
1 Sheridan, N., & Jang, M. B. (2012). Bank capital adequacy in Australia (No. 12-25). International Monetary
Fund.

5
culture. On legal matters, the company has been a member of the UN Global Compact since
2009 and it is still committed to the development of Global Compact principles that would be
covering human rights, professional environment, labour laws and anti-corruption among
other constructive agendas2 (Stapledon, 2009).
2 Stapledon, N. (2009). Housing and the global financial crisis: US versus Australia.

6
Legal governance, management and relationship issues
that affect the Commonwealth Bank
Management Issues
It is important to note that CBA was resilient all through the crisis but its managerial
techniques are far from unblemished. Failures in the provision of financial guidance to its
clients, misleading lending practices and challenges in establishing benchmark interest rates
have undermined the management practices of the company. Management is the foundation
of any bank, and improper management goes to the extent of undermining the confidence or
might even harm the consumers3 (Salim, Arjomandi, & Seufert, 2016). Over the years, the
Commonwealth bank has worked to earn the status of financial icon, built on integrity and
innovation. Therefore, as one of the largest financial institutions in Australia, customers
always hold high expectations for the institution. However, the company has succession of
misconducts and various compliance issues with one of the recent one being the
AUSTRAC’s legal action4 (Davis, 2011).This has resulted in most customers losing trust
with the company which in turn has resulted in huge financial losses5 (Turner, 2011).
A recent report by the Australian Prudential Regulation Authority (APRA) on the
legal accountability of the bank has stripped away the idea that the bank is being run properly
within a proper mode of governance. The reports showed that all managerial aspects of the
company are weak, ranging from the board of directors to the executive management. The
responsibility to rectify such issues lies with the bank itself. However, more could be done
including placing stringent regulations on the company, removing non-performing members
from the board as well as the executives6 (Schlagwein, Thorogood, & Willcocks, 2014).
3 Salim, R., Arjomandi, A., & Seufert, J. H. (2016). Does corporate governance affect Australian banks'
performance?. Journal of International Financial Markets, Institutions and Money, 43, 113-125.
4 Davis, K. (2011). The Australian financial system in the 2000s: dodging the bullet. The Australian Economy in
the 2000s, 313-314.
5 Turner, G. (2011). Depositor protection in Australia. Bulletin of Reserve Bank of Australia December
Quarter, 142.
6 Schlagwein, D., Thorogood, A., & Willcocks, L. P. (2014). How Commonwealth Bank of Australia Gained
Benefits Using a Standards-Based, Multi-Provider Cloud Model. MIS Quarterly Executive, 13(4).

7

8
Legal governance Issues
Issues of corporate governance and management are cyclical. Waves of managerial
reforms and increased regulations often occur in a company’s bad times. It is the time in
which leadership of any company is re-examined and new viable regulatory systems are put
in place. Rather than making sure that the necessary mechanisms are put in place, the
company’s management systems merely focuses of financial gains instead of compliance
issues. Market systems are volatile and so for the laws governing various businesses. Such
issues exert multiple compliance risk on the company, there being the pressure for the
company to perform. Legal compliance issues have led to the company being granted
regulatory sanctions due to its failure to comply with the banking laws, recent cases of money
laundering and not considering the conducts that are applicable to its activities7 (Pearson,
2009). Compliance obligations are much broader than just stringent legal requirements as it
includes standards of ethical conducts that the company ought to follow. That being said,
Compliance risk by the Commonwealth bank has been on the rise due to the ever-changing
nature of the set rules and regulations. However, the APRA has played a huge role in
ensuring that the CBA complies with the set regulations.
Relationship issues
Perhaps the most challenging thing for the commonwealth bank is their relationship
with various regulators. The appropriate way of reconciling the need for close and
cooperative work with the regulators and the enforcement of these laws is fundamental. The
challenges might vary depending on which regulations that the company considers more
applicable within its existing circumstances8 (Schlagwein, Thorogood, & Willcocks, 2014).
The challenge is much bigger particularly for the Commonwealth bank due to the issues that
have been raised in the past few years about its conducts. In order to accomplish its financial
7 Pearson, G. (2009). Financial Services Law and Compliance in Australia. Cambridge University Press.
8 Schlagwein, D., Thorogood, A., & Willcocks, L. P. (2014). How Commonwealth Bank of Australia Gained
Benefits Using a Standards-Based, Multi-Provider Cloud Model. MIS Quarterly Executive, 13(4).

9
goals to the satisfaction of its customers, the Commonwealth is required to appreciate the
provisions under the Commonwealth Bank Act in order to ensure that it conducts its services
to the satisfaction of its customers and shareholders altogether9 (Penn, & Haynes, 2009). It
would be much important for the commonwealth bank to further appreciate the capacity of
the enforcement activity to reshape its business structures in compliance with the guiding
laws. The reforms to the ways in which certain laws will organise the bank’s system would
be of great importance as the changes that would be brought to the institution would ensure
that operations are much effective and employee conducts are in compliance with the
law10(Allen, & Powell, 2012).
The Australian Prudential Regulation Authority (APRA) is an Australian body that
established and enforces the rules and regulations that govern the Australian banks. The
existing set of rules require conservative application while at the same time considering the
international capital standards passed by the Basel Committee on Banking Supervision
(BCBS). (Bamberger, 2009).APRA specifically introduced regulations for the
Commonwealth bank back in 2008 as a set of guiding principles that would ensure that the
company is adherent to the rules of law. Central to its designing of the laws, the standards set
by the APRA, are the frameworks that the commonwealth bank should always consider to its
focus on succeeding. The regulations often focus on integrity and the necessary regulatory
frameworks that the bank need to follow11 (Wilson, 2012).
9 Penn, G., & Haynes, A. (2009). The law and practice of international banking. Sweet & Maxwell Ltd.
10 Allen, D. E., & Powell, R. (2012). The fluctuating default risk of Australian banks.
11 Wilson, T. A. (2012). Supporting social enterprises to support vulnerable consumers: the example of
community development finance institutions and financial exclusion. Journal of Consumer Policy, 35(2), 197-
213.

10
Specific legislation that is of particular importance
(Commonwealth Banking Act 1959)
The Commonwealth banking act of 1959, forms the foundation of the regulations that
the Commonwealth bank needs to follow. The law has abolished the term “banking” in an
effort to ensure that the laws cover other financial institutions. The financial sector reforms
number 199811, established the idea of authorised deposit-taking institution’ (‘ADI’). Section
5 of the Act defines ADI as a corporate body that is authorised by the APRA regulations
under section 9 of the Banking act to conduct banking business. The inclusion of fairness in
the Act and ethical behaviours as contractual obligations ensures that the commonwealth
bank recognises ethical conducts while serving its clients12 (Ffolkes-Goldson, 2015).
Moreover, the inclusion of fairness in the act sits comfortably in the existing bank’s
obligations under the banking act 1959. This further includes the adherence to its obligations
under APRA as a financial service licence provider. Acting ethically is arguably no more
than the most necessary obligation to act with integrity and honesty. However, it might
require a more considerate choice between the legally available causes of actions. It further
includes the responsibility to advise its customers in case of circumstances deems necessary13.
As Boudriga, Boulila Taktak, & Jellouli, (2009) suggests, there have been increased pressure
on various corporate institutions in Australia to consider moral issues and establish the
bottom line for such fundamental factors14 (Boudriga, Boulila Taktak, & Jellouli, 2009). It
would be great to see how commonwealth bank would decide the application of various
codes of banking practices, identify the necessary conducts applicable within the institution
12 Ffolkes-Goldson, S. C. (2015). Corporate governance as a mechanism for the deterrence of economic crimes
in the Commonwealth Caribbean.
13 Takáts, E., & Tumbarello, M. P. (2009). Australian Bank and Corporate Sector Vulnerabilities: An International
Perspective(No. 9-223). International Monetary Fund.
14 Boudriga, A., Boulila Taktak, N., & Jellouli, S. (2009). Banking supervision and nonperforming loans: a cross-
country analysis. Journal of financial economic policy, 1(4), 286-318.

11
and how it would avoid a breach in statutory prohibitions such as deceptive activities, money
laundering, and misleading conducts among others15 (Williams, 2016).
Areas of high legal risk for the organisation
Over the years since the Commonwealth bank was established, there have been a
number of high-risk areas that have significantly affected the bank operations: These include
compliance risks operational and managing litigation risks. This section of the paper shall
discuss compliance risks and the impact it has had on Common Wealth Bank.
Compliance risk
Compliance risk can be described as the risks or loss that might be as a result of non-
compliance with legal issues, systems of the people working in the company. They can also
be external events that include legal risks among others. A recent report by APRA revealed
that the CBA’s compliance risk management framework was very effective on paper than
when it was put into practice. This is because the framework was supported by a weak and
under-resourced legal compliance framework.
Compliance risk and problems with operations have received the highest attention as
they have emerged as the key contributors to the operational challenges faced by CBA.
However, the attention that has been given as well as the established resolutions have never
guaranteed timely and effective solutions. A lagging, legalistic and at some point dismissive
culture has been characterised to be in most of the dealings of the company. Such factors
have led to a sense of inexistent “chronic ease” that has proven to be a very simple strategy
that can never be effective in driving a safe culture within the industry16.
It is important to note that, for any company, the positive treatment of customers is
paramount. Therefore, the reputation of CBA rests on how it operations towards satisfying
15 Williams, B. (2016). The impact of non-interest income on bank risk in Australia. Journal of Banking &
Finance, 73, 16-37.
16 Bamberger, K. A. (2009). Technologies of compliance: Risk and regulation in a digital age. Tex. L. Rev., 88,
669.

12
consumer needs. The company often focuses on an aggregated framework of consumer
satisfaction which at some points leads to ignoring some other important needs that are
necessary to consumers. A collective focus often leads to a blurred vision of what consumers
want. Such failings in the way the institution operates have led to a weakening of the ‘voice
of risk’ and the “consumer voice” which didn’t offer better counterweights to a strong and
‘voice of finance’ in making sure strong risks countermeasures17 (Selvarajan, & Vadivalagan,
2013).
Under the existing management, regular board refresh are conducted with a strong
emphasis on non-financial risks. However, there is a lot that needs to be done. There is a need
for CBA to strengthen its governance as well as the management of compliance risks, boost
its capabilities in other non-financial risks and compliance with legal matters. This would
ensure that over time its risk culture will be strengthened significantly18. Historically, the
Commonwealth bank has never had an executive level council to supervise its compliance
risk profile. The current management has considered issues of legal risk periodically and not
issues that require huge emphasis. Instead, issues concerning the compliance risks of the
company need to be discussed at group level committees and monthly updates be provided to
the CEO19 (Fenna, 2013).
Operational challenges
Given the problems with consolidating risk information, the approach used by CBA’s
management has limited the company’s ability to establish a consolidated view of its legal
risk profile, and to further monitor the developing risks. Schuster, et al., (2010) have provided
17 Selvarajan, B., & Vadivalagan, G. (2013). A study on management of non performing assets in priority sector
reference to Indian bank and public sector banks (PSBs). Global Journal of Management and business research.
18 Demirgüç-Kunt, A., & Detragiache, M. E. (2010). Basel Core Principles and Bank Risk: Does Compliance
Matter? (No. 10-81). International Monetary Fund.
19 Fenna, A. (2013). The economic policy agenda in Australia, 1962–2012. Australian Journal of Public
Administration, 72(2), 89-102.