MGT712: Financial Advice Report - Royal Commission Analysis

This report provides a comprehensive analysis of financial advice, focusing on the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. It examines the issues of culture, governance, and remuneration within the financial advice sector, exploring their effects on various stakeholders using Carroll and Buchholtz’s 5 questions. The report investigates the ASX Principles and Recommendations of financial institutions prior to the Royal Commission and assesses the diversity and inclusion of the boards investigated. Furthermore, it offers an overall ethical analysis employing Normative Theories of Ethics and sustainability approaches to provide a holistic understanding of the subject matter. The report aims to provide a deep insight into the ethical and governance failures within the financial sector.

Running Head: CORPORATE GOVERNANCE
CORPORATE GOVERNANCE
Name of the Student
Name of the University
Author’s Note

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Table of Contents
INTRODUCTION:..........................................................................................................................1
FINANCIAL ADVICE:...................................................................................................................1
ETHICAL QUESTIONS AND THE REPORT:.............................................................................3
ASX PRINCIPLES AND RECOMMENDATIONS:.....................................................................5
DIVERSITY AND INCLUSION OF BOARDS INVESTIGATED...............................................7
NORMATIVE THEORY APPROACH AND SUSTAINABILITY APPROACH TO THE
COMMISSION REPORT...............................................................................................................8
CONCLUSION:............................................................................................................................10
REFERENCES:.............................................................................................................................11

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INTRODUCTION:
The Royal Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry is also known as the Hayne Royal Commission incorporated in 2017 by the
virtue of the Royal Commissions Act 1992 to investigate and report matters related to
misconduct in banking, superannuation and the industry of financial services.
FINANCIAL ADVICE:
The banking industry comprised of monetary transactions with respect to lending and
borrowing with money, however, it emerged out as a mode for transaction services. Until the
1970s, the industry comprised only of superannuation and life insurance companies (Malcolm
Edey and Gray 1996). The scope for investment of money by the financial institutions on behalf
of the customers was less. Regulation of financial market in Australia led to introduction of
foreign banking and restrictive rates by banks and other banking related matters became easier
and at the same time the industry boomed with floatation of the Australian Dollar and liquidation
of securities markets. It diversified the development of financial products offered by the banking
industries.
Culture and Governance:
The report was an analysis upon the misconduct in banking, services and superannuation
in the industry. However, the report established the culture of acquisitiveness among various
financial institutions in Australia (Fergusan 2014). An inquiry initiated by the Parliament laid
down for the establishment of a royal commission upon the matters related to regulatory
intervention by the government authorities and its impact on financial institutions (McGrath and

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Janda 2014). However, after the investigation by the royal commission it was found that the
financial institutions were involved in irregular activities like money laundering for drug
syndicates and terrorism financing. They further failed to exercise their reporting duties as
established by the statute, and improper methods adopted in foreign exchange trading. Thus it
can be established that the Financial advice played a major role in regulating the culture of
irregularities, which can be seen in the exposing of scandals like that of Storm Financial (ASIC
vs. Cassimatis (No 8) (2016) 336 ALR 209, 1023 [1]) wherein the Storm’s clients were advised
to take loans against their homes and use the funds for market investment through index funds.
Thus by the end of 2008, many clients suffered loss due to negative equity positions. ASIC had
to intervene to initiate proceedings against the Storm for the breach of Directors duty.
This case also highlights the governance regulations which was established by the
commission through ASIC and regulating the exercise of governance powers more thoroughly so
that no irregularity goes unseen. The royal commission was aimed to provide guidelines for the
misconduct in banking industry. Referring the above case, ASIC vs. Cassimitis, it can be
explained that the Directors breached their duty under section 180-183 of the Corporation Act
2001 (Cth) and their misconduct caused loss to numerous people. Further, in 2010, it was
highlighted by a whistleblower about the ASIC inspection into the misconduct of financial
advisors under the employment of CFPL, a subsidiary of CBA (Simon 2014). This instance
explains the misconduct of the financial advisors for which the parent company CBA had to
initiate a second program for compensation. Such programs for compensation or systematic
cover up by the management, and investigation by ASIC into it ensures that the governance of
the company is not compromised by the irregularities.
Remuneration:

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In this aspect the Future of Financial Advice (FoFA) reforms were offered. It has three
essential elements:
 Imposition of obligation to best interest of the customers by the financial advice given by
the professionals including the retail clients.
 Conflicted remuneration has been banned.
 Ensure transparency in the fees imposed upon the customers in exchange of the advice
given including the agreement of the customer and disclosure of the fees structure and its
basis of calculation in association with the services observed.
Thus, the FoFA reforms prioritizes the clients interest over that of the financial advisers and
the Australian financial services license holders (Corporation Act 2001 section 961B(1) and
961 J (1)).
ETHICAL QUESTIONS AND THE REPORT:
• What
are your personal ethics?
The duty of a manager in a baking organization involves the monitoring and controlling the
workforce and the organizational practices. As per the code of ethics, a manager should ensure
the fairness of the working procedure and policies and restrict all forms of misconduct. The
personal ethics of a manager should reflect the integrity and compliance with the standardized
banking ethics. The management also needs to ensure that there is no illegal or corrupt policies
or activities are being practiced by the employees. They also should treat all the employees fairly
and equally. Therefore, my personal ethics towards my profession reflects the notions of fairness,
honesty and integrity. (Oates and Dias 2016)

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 What
are your organization's ethics?
The organization ratifies the prescriptions of the code of ethics in banking. It upholds the
customers’ interest as its primary concern. Further, it follows the guidelines of neutrality
honesty, integrity, reliability, transparency, fight against laundering of proceeds of crime and
combat against financing of terrorism. It also tries to ensure that neither the employees nor
anyone from the management engages in any sort of misconduct so as to violate the rights of the
customers (Paulet, Parnaudeau and Relano 2015). Information abuse is also dealt very seriously.
Maintaining the code of ethics as well as the code of conducts within the organization facilitates
the organization with a fair reputation and helps build a better relationship with the stakeholders
such as the customers, shareholders and the employees, based on reliability and credibility with
the customers (Howell 2015).
• What
are the ethics practice in your industry?
The banking industry of Australia follows the normative guidelines of the code of ethics. As per
the code, it is observed that the bank maintain the following ethical practices (Howell 2015):
1. Confidentiality of information: This regulation directs the banking organizations to
preserve the sensitive and personal information of then stakeholders such as customers,
employees as well as the bank and use them solely for banking purposes, not in any
personal interest or for generating profit
2. Conflict of Interest: A bank employee should not engage in any other activity or
represent the organization where he/she might have a material or financial interest

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3. Dishonest Activities: An employee should never engage in any misconduct or fraudulent
activities. Moreover, the managers and supervisors should be aware of any misconduct
within the bank
4. Ethical Banking: Banks should manage their conduct in alignment with socially and
environmentally conscious practices.
• What
are society’s ethics?
Society’s ethics denotes the principles and regulations that individuals need to follow while
interacting with one another. Human conducts are the primary scope of ethics, where it suggests
that people should considering others’ perspectives rather than his or her private interest alone.
According to the utilitarian theory of ethics, it is regarded that whatever brings the maximum
amount of happiness for the maximum number of people are considered as ethical (Mill 2016).
However, a more specific guideline of society’s ethics is found in Kant’s Deontology, where he
maintains that the societal framework of ethics should be based on duty and universality
(Chandler 2019).
• What global ethics
are in practice today?
The major ethical issues practiced globally in the recent times can be identified as employment
practices, human rights, corruption, moral obligation to the stakeholders, i.e. society and the
environment (Hutchings 2018).
ASX PRINCIPLES AND RECOMMENDATIONS:
The ASX Principles and Recommendations establishes the set of practices meant for
corporate governance applicable on ASX listed companies.

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 Earlier, the Australians who were in requirement of the financial advice often tuened
to the bankers, brokers and others in this field but the role of financial advisers was
recognized only after the concept of superannuation and investment products
developed and amounting in sale of these advises in exchange of consideration
(Brown 2008). The profession developed as an outcome of development of the
banking industry but the regulation of corporation governance remained the same
binding the service providers with the same principles and recommendations.
 The privatizations and demutualizations increased the ownership of shares among
people and hence the need of corporate governance and establishment of its principles
and recommendation became a necessity as a part of regulation of the company (ASX
2014).
 The framework for Corporate Law Economic Reform was released by the Treasury in
1997 (Treasury 1997) with respect to the sales and advices to the insurance and
superannuation matters. Therefore the framework emerged as the establishing
foundation of independency of the financial advisers from the product issuers.
However, the employment of advisers by the issuers is possible along with the
governance principle to advice in the good faith and the best interest of the customer
and not that of the corporation employing them. However, the advisers owe their duty
to the corporation as well to maintain secrecy about their competitive products that
they are selling and not to use its information against the company.

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DIVERSITY AND INCLUSION OF BOARDS INVESTIGATED
The primary responsibility of the conduct of the institutions in the financial service
industry is implicated upon the entities themselves and these entities are controlled and managed
by their Board of Directors and the Senior Management. It means that if an entity under the
financial services industry is found to be at misconduct, it shall be assumed that the law has not
been obeyed and subsequent consequences shall be implied thereof.
The Report explicitly states that the regulators and the senior management play a pivotal
role in the governance of the entities with respect to culture, management and remuneration
(Lumsden 2019). The report challenges the efficacy of the Board with respect to compliance
failings and their information about the corporate governance model of Australia. In other words,
this means that the banks and their management Board should be at par with the governance
principles with respect to the conduct of their supervisors and charging of the fees of the
advisors. The Commonwealth Bank of Australia in particular has been brought under the
supervision of the Australia’s compliance provisions with respect to money laundering and
counter-terrorism financing provisions of law and the financial adviser’s fees being charged by
the National Australia Bank with special reference to superannuation and remuneration of the
fund members. It was stated in the report that the Board had not given efficient supervision to the
non-financial risks being associated with the bank’s non-compliance activities. The banks and
their Board also did not ensure the availability of enough information about the gravity of the
situation. Thus, such inefficiency of the Board towards the functioning of the Bank amounted to
the damaging of bank’s reputation with respect to its relation with its existing customers as well
as the potential customers.

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However, it must be stressed that not receiving adequate information does not mean that the
Board should ensure more information is received by them. The information should be availed
with respect to its quality and not the quantity. Therefore, it must be assessed the potential risks
with the available information and the Board should then further go in-detail for the linked data
sources with those information.
The six basic norms been suggested by Hayne Report is to obey the legal provisions, not to
engage in misleading or deceptive activities, to act in all fairness and good faith towards the
entities, provide the financial services which is at par with the requirements of the customer,
such services should be delivered with reasonable skill and due diligence to ensure the interest of
the customer is well protected, if a bank is acting for another entity, such bank should act in the
best interest of the entity it is representing. According to Davis 2019, it has been explained that
the Hayne Royal Commission has provided recommendation to the banking and financial
services sector in Australia. However the lasting effect of such recommendation, strongly
depends upon the Board’s behavior and attitude towards the proximity of its norms and ethical
values.
NORMATIVE THEORY APPROACH AND SUSTAINABILITY
APPROACH TO THE COMMISSION REPORT
The normative theory approach means the moral philosophy of behavior determining
what is right and what is wrong. In other words it involves the computation of moral rules and
values to have direct implication on the human actions and its formed institutions. According to
Pearson 2019, the Hayne Report was rejected to be applicable in the court of law on the grounds
of moral obloquy. The report morally binds the banking industry to be ethical in their actions to

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ensure that their actions are made in good faith of the company and the best interest of the
customer. However, such moral values has been emphasized in the report along with the
efficiency of the Board to receive information which should be assessed based on the quality of
the data received. The information should be morally assessed to determine the risks associated
with the same. If the information expressly states that the act of the organization is not at par
with the morality and its values, such information should be dealt sensitively to ensure that the
actions are rectified to meet the ethical stands of the organization.
Sustainability approach means that the development which includes both the modern
values and developmental grounds along with the traditional values which are preserved to meet
the needs of the people. According to Lehner and Harrer 2019, it has been explained that the
organizations should be made accountable for the sustainability of their environmental, social
and governance values implying the traditional approach to gel up with the modern approach so
that the best of both the approaches can be availed by the organization. Depending on a single
approach may not be beneficial for the organization as every approach has its own set of pros
and cons and only the molding of both the traditional and the modern approaches can ensure that
the best of both has been implied in the governance policies of the organization. According to
O’Brien 2019, it has been explained that the corporate culture has been defined with the purpose
to informally infuse the authentic sustainable financial performance of services and goods, but
the rationale of the concept can only be observed in the inherent fragile social interdependence of
the legal obligations with the moral values.

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CONCLUSION:
The Royal Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry is also known as the Hayne Royal Commission incorporated in 2017 by the
virtue of the Royal Commissions Act 1992 to investigate and report matters related to
misconduct in banking, superannuation and the industry of financial services.
The ASX has adopted the precautionary approach by binding the corporates in the
banking industry to the legal obligations along with the implications of the moral values.
However, the report has laid down Recommendations for the organizations to ensure the
misconduct in the banking industry shall be dealt sternly because it involves both financial and
non-financial risks. In spite of losing the customer’s money, the losing of customer’s trust and
confidence may lead to complete failure of the banking industry in the market. Providing
financial advices to the customers involve their savings of lifetime and the trust they put upon the
professionals so that they do not lose money otherwise, involves both the financial and the non-
financial risk and hence, it should be done with care, due diligence and utmost good faith
towards the customers. Hence, the conduct of the organization has been given pivotal emphasis
to ensure the banking industry does not collapse due to the lack of trust and confidence in its
customers.