The Final Report of the Financial Services Royal Commission has arrived after a tumultuous year of hearings and submissions. In this short article, it is impossible to do justice to the enormity of the report and its 76 recommendations. The inquiry dealt with many issues, but some of the most difficult to address are matters of organisational culture.
Clearly there are problems in the culture of many financial institutions. The culture focuses on short-term profits over longer-term sustainability and the interests of shareholders over other stakeholders. Changing that is like turning around the Titanic! Culture exists because it has worked historically to serve the organisation well – why change if it’s delivering the goods? Culture is most likely to change when the external environment changes, and the old ways of doing business can no longer continue.
That’s why this Royal Commission is so important, because it has the potential to change the external environment. We need serious consequences for financial institutions, and their senior leaders, when misconduct occurs. Serious consequences for misconduct will change attitudes – its not worth taking the risk of being caught if there is the possibility of fines and other consequences (like loss of license to operate) that really hurt the shareholders and the senior leaders.
Consequences: Creating a customer-first culture change finance businesses depends on executives and institutions facing serious ramifications if misconduct occurs.
Shareholders and executives are the ones that have benefited from all the misconduct; shareholders and executives are the ones that need to bear the consequences. Only then will shareholders and executives start to apply pressure to manage for the long-term, and for the benefit of customers.
So does the Final Report deliver in that respect? Some of the relevant recommendations include:
- Criminal charges over ‘fee for no service’ scandal
- Expansion of the BEAR (banking executive accountability regime)
- Encouragement for APRA to do more to supervise culture and remuneration
- Encouragement for ASIC to go to court more often
- Executive accountability to apply to the regulators
- A new oversight authority to assess the performance of the regulators.
On the vexed question of remuneration, The Royal Commissioner, the Honourable Kenneth Hayne has said “It was apparent from the evidence before the Commission … that no-one has identified an ‘ideal’ or ‘optimal’ system of executive remuneration for financial services entities.” (p. 350) Here at Macquarie University we’ll continue our program of research investigating financial services remuneration and its implications for misconduct.