Royal Commission Report: Commercial and Corporation Law Perspective

This case study delves into the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, examining its terms of reference and focusing on the issue of executive remuneration within financial services entities. It highlights the regulatory bodies' concerns regarding the link between remuneration practices and misconduct, emphasizing the responsibility of boards and management in managing compliance, conduct, and regulatory risks. The analysis covers the design and implementation of executive remuneration systems, including the proportion of fixed versus variable remuneration, the design of variable remuneration schemes, and the availability of clawback provisions. It also addresses the challenges in implementing these arrangements, particularly in adjusting remuneration based on risk management performance and ensuring effective supervision and disclosure of risk-related adjustments. The study references key legislations and reports, providing a comprehensive overview of the issues and considerations within the context of commercial and corporation law.

Running head: COMMERCIAL AND CORPORATION LAW
COMMERCIAL AND CORPORATION LAW
Name of Student
Name of University
Author Note

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Terms of Reference
The Financial Services of the Royal Commission is required by its Terms of Reference
for conducting an inquiry whether there has been any breach of law or duty, recognisation of
professional standards, recognisation of any benchmark that has been adopted widely or there
has been performance of any conduct that can be described to misleading, deceptive or
unconscionable by any entities in the financial services. The FSRC is further required to consider
whether any of the conducts by the entities can be held attributable to their culture or any other
aspects of the system, remuneration practices, and if the financial service industry’s existing
regulations are adequate. It also has to be inquired that whether the superannuation of the
retirement savings of the members of the financial services is used in any way that does not
comply with any of the community standards or expectations or can be seen to be not in the
members’ best interest. The FSRC is also required to inquire the redress mechanism for the
consumers who are seen to be suffering detrimentally for the misconducts of the entities present
in the financial services. Further inquiries are required for the adequacy of the Commonwealth’s
prevalent laws and policies that can be said to be relating to the banking and financial provisions,
the financial services entity’s system relating to their internal workings, all forms of self
regulations made by the industries for the identification, regulation and addressing of various
misconduct and for providing appropriate redress mechanism for the consumers by meeting the
standards and the expectations of the community. The FSRC also needs to inquire if there is any
necessity for any further change in the legal frameworks, financial service practices or the
financial regulators for the minimization of the probability of misconducts of the entities in the
financial services. Without any limitation s to the inquiry or recommendations scope the FSRC is

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directed by the Terms of Regulations to be proposing recommendations for the economy, for
consumer’s access to financial services and its cost, for the stability of the financial system and
for regarding the experience, practices and reforms as compared to international services. The
FSRC is further declared by the Terms of Regulations to make inquiries without being bound by
the Terms. The FSRC is declared as a relevant Commission under the provisions of sections 4
and 5 of the Royal Commissions Act 1902 and has the right to exercise powers under Part 2 of
the Act. The Term also applied item 5 of table of subsection 355-70 (1) of the Schedule 1 of the
Taxation Administration Act 1953. The Term of Reference further defines the term financial
services entity as has been defined under the various legislations like the Banking Act 1959, the
Insurance Act 1973, Life Insurance Act 1995, The Corporations Act 2001, Superannuation
Industry (Supervision) Act 1993 and Public Governance, Performance and Accountability Act
2013.
Executive Remuneration
Particular attention has been given to an executive’s remunerations by the regulatory
bodies that consider the links that are present between the practices of remuneration and the
misconducts as the board and the management of the financial services can be seen to be
responsible for and having control over the management of the risks regarding compliance,
conduct and regulations within the entities in the financial services. In other words the financial
services’ senior management and the board are seen to be responsible for and to be having the
control of greatest degree for ensuring if the culture of good customer outcomes and proper risk
management is encouraged by the entities, if the issues relating to compliance have been

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identified, escalated and addressed in a prompt and effective way and if the relationship is
maintained with the regulators that can be seen to be of open, transparent and constructive in
nature by the entities. It can be seen that the executives are more likely to be engaging in
misconducts if even for their poor performance their remuneration arrangement implementation
allows for large bonus as a reward. On the other hand the likelihood of misconduct of the
executives is less if the remuneration arrangements are implemented in accordance with the risk
management of the executives. In the works of APRA and FSB it can be seen that by the way of
poor implementation of the regulations a well designed system can be seen to be threatened and
in the other way round it can also be seen that it is highly unlikely for a system with poorly
executed design to be achieving good result even if the implementation is competent. Thus it can
be seen that the two areas of designing and implementing have been presented with different
issues and is seen to be requiring separate consideration. In The Term of Reference term
financial services entity has been defined as has been defined under the various legislations like
the Banking Act 1959, the Insurance Act 1973, Life Insurance Act 1995, The Corporations Act
2001, Superannuation Industry (Supervision) Act 1993 and Public Governance, Performance and
Accountability Act 2013.
Issue of Design
A large body of evidence in regards to the designs of the systems of remuneration of the
executives in the Australian banks and other entities in the financial services were received by
the Commission. Although from entity to entity the systems are seen to be different yet there are
some common features in the evidence received from the banks-

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 In each system the executives have been rewarded with both fixed and variable
remuneration. These remunerations can be seen to be varying in proportions for
different roles. From the exhibit 7.141 it is seen that Bendigo and Adelaide Bank
have higher rate of fixed remunerations and from exhibit 7.60 Macquarie is seen
to be having higher variable remuneration proportions.
 In each system a part of the variable remuneration of the executives have been
deferred. The minimum proportion and period of deferral of variable
remuneration has been fixed by the Banking Executive Accountability Regime
(BEAR) since July 1st 2018.
 A distinguish between the short term variable remuneration and long term
variable remuneration has been done by certain systems in relation to the payable
amount of the short term variable remunerations depending on the assessment
criteria, depending on the assessment criteria the payable amount of long term
variable remunerations, although short term variable remuneration was
proportionately deferred but long term variable remunerations are always varied
eligibility of receiving long term variable remuneration is only held by the
executives who are most senior.
 The adjustment of the variable remunerations of the executives that is seen to be
reflecting the risk management skills of the executives is allowed by the system to
the board of entity. The adjustment of the variable remuneration has been seen to
be allowed in all the systems by the way of forfeiting the remuneration deferred
but not yet been vested. In some systems the clawing back of the already vested
deferred remuneration has also been allowed.

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The issues relating to the design of the remuneration system of the executives are being
provided with a framework of examination by the help of the common features. The four
issues mentioned in the report are-
 Remuneration system design experiments
 Fixed and variable remuneration proportion
 Variable remuneration design
 Clawback availability
Remuneration system design experiment
From the evidence that has been submitted before the Royal Commission it was
unsurprisingly apparent that for the entities in the financial system an ideal or optimal
remuneration system of an executive has not yet been identified. It is identified by many that for
ensuring the reduction of risk of misconduct and encouragement of good risk management it is
desirable and necessary for proper implementation of rewards. In its Principle 1 the FSB stated
that like a job in a firm the goals, activities and cultures of a financial firm can also be seen to be
differing.
In the FSB Principles 2 it is stated for all type of risks like reputation risks, liquidity risks,
capital costs adjustment for compensation should be accounted for. For the design and
implementation of the remuneration system risks including compliance risk, reputation risk,
conducts risk is needed to be taken into account. Different forms of remunerations, systems of
incentive can be devised and applied within the limits mentioned. However the value of trying
new systems will be valued if-

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 The encouragement of proper risk management and the reduction of the risk of
misconduct are genuinely directed to the systems
 Identification and possible measurement of the results of application of the systems.
In the transcript of Wayne Byres it is seen to be said by Mr. Byres the standards of prudence
and guidance in regards to remuneration has been in the process of updating by APRA.
Fixed and Variable Remuneration Proportion
There is no right answer in case of effectively managing the risk of misconduct as it not
seen to be dependent on the division of fixed and variable remuneration of an entity in one
way or another. In the application of determination of variable remuneration the effective risk
management can be seen to be dependent.
Variable Remuneration Design
Under the remuneration arrangements of the four large banks of Australia and Macquarie
and Bendigo -
 Assessment of the performance of executive are measured in a range of ways
which include risk management.
 The adjustment of an executive’s variable remuneration for reflecting their risk
management is vested on ht board.
In the information paper on the ‘remuneration practices at large financial institutions’ of
the APRA it was observed that-
The condition allowing the vesting of long term variable remuneration focusing
wholly on the annual return measured on the investor like TSR and ROE.

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Availability of Clawback
Although the arrangements for the remuneration examined under the Commission
it is allowed to the board to take decision for the forfeiture of deferred remuneration of
the unvested portion are very rarely clawed back if vested.
Issue of Implementation
Three issues can be found for implementation of arrangements of remuneration:
 Adjustment related to risks
 Supervising the implementation
 Disclosure of facts
Adjustments related to risks
In 2016 neither ANZ, NAB or Westpac has been seen to be making any significant risk
related adjustment. In contrast in the financial year 2018-
 The variable remuneration of the four senior executives ANZ was reduced by the board
for risk related reasons (Exhibit 7.120, Witness statement of Shayne Elliott)
 The short term variable remuneration of all the group executives of CBA were seen to be
reduced by 20% for prudential inquiry findings (CBA, Annual Report, 2018, 98)
The variable remuneration of the senior executives of the NAB were reduced by 10-75%
by the board for risk and compliance issues (NAB, Annual Report, 2018, 39).

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 The short term variable remuneration of the CEO of the Westpac was reduced by the
board by 15% and 10% for group executives was reduced (Westpac Group, Annual
Report, 2018, 48)
Implementing supervision
For ensuring the continuing implementation of the remuneration policies to encourage the
reduction of risk of misconduct the ongoing and effective supervision of the board’s way of
discharging responsibility is needed to be ensured.
Disclosure of Facts
The final issue that can be addressed very briefly is whether disclosure of information
risk related adjustment to remuneration of executive is needed. Currently the companies that
are listed in the commission are required for the disclosure of of information risk related
adjustment to remuneration of executive.

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Reference
Royal Commissions Act 1902
Taxation Administration Act 1953
Banking Act 1959
Insurance Act 1973
Corporations Act 2001
Superannuation Industry (Supervision) Act 1993
Public Governance, Performance and Accountability Act 2013
Exhibit 7.141, Witness statement of Robert Johanson, 7 November 2018
Exhibit 7.60, Witness statement of Nicholas Moore, 19 November 2018
Exhibit 7.108, Witness statement of Lynda Dean, 2 November 2018, 7–8 [23(c)], 27 [87(f)]
FSB, Principles, 1
FSB, Principles, 2
Transcript, Wayne Byres, 29 November 2018, 7402
APRA, Information Paper, Remuneration Practices at Large Financial Institutions, April 2018
Exhibit 7.120, Witness statement of Shayne Elliott, 22 November 2018, 28–9 [115].
CBA, Annual Report, 2018, 98

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NAB, Annual Report, 2018, 39
Westpac Group, Annual Report, 2018, 48