Banking remuneration and culture to be in Royal Commission review
08/12/2017
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A Royal Commission into the banking sector is going ahead after the Coalition Government said the constant calls for a Commission risked undermining the reputation of sector and that a Commission would ensure the financial system is working efficiently and effectively.

The Commission will extend beyond banks, and include insurers and superannuation funds. It will inquire into the nature and effect of misconduct of financial entities, considering conduct, practices, behaviour or business activities that fall below community standards and expectations.

The Terms of Reference include:

1. the nature, extent and effect of misconduct by a financial services entity (including by its directors, officers or employees, or by anyone acting on its behalf);

2. any conduct, practices, behaviour or business activity by a financial services entity th at falls below community standards and expectations;

3. the use by a financial services entity of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations or is otherwise not in the best intere st of members;

4. whether any findings in respect of paragraphs 1(a), (b) and (c):

  • are attributable to the particular culture and governance practices of a financial services entity or broader cultural or governance practices in the industry or relevant subsector; and
  • result from other practices, including risk management, recruitment and remuneration practices;

The government is only allowing 12 months for the completion of the final report. Importantly, the government has stated that the enquiry would not delay the start of proposed new legislation, which would include the Banking Executive Accountability Regime. The proposed BEAR legislation is currently before the House of Representatives. It had been referred to the Senate Economics Legislation Committee, which considered the Bill and tabled its report on 24 November. (See HERE).

Given the scope of the Commission, which will also look into “the use by a financial services entity of superannuation members’ retirement savings for any purpose that does not meet community standards and expectations or is otherwise not in the best interest of members”, it seems unlikely that any investigation of remuneration arrangements will be wide-ranging. Particularly since there has already been the Sedgwick review into banking remuneration (see HERE).

However, an area that has not yet been the subject of a thorough review is the link between remuneration and culture. Indeed, despite all the talk regarding poor culture, and assertions by some regulators, investors, customers, political elites, board directors and the media (among others), there is a dearth of sound, peer-reviewed research that could serve as a basis for investigation. Basically, it’s a mess out there and assertions need to be tested.

So, while a Royal Commission may go some way to assembling facts, discovering new facts, and compiling established research, it is unlikely that in the time available there will be new research to connect the dots between culture and poor prudential, customer service, or investment outcomes.

If you would like to read the draft terms of reference, they can be found HERE.

© Guerdon Associates 2021
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