The Impact of the Banking Royal Commission on Risk and Compliance
The importance of auditing corporate culture is growing, in large part thanks to the recent Royal Commission into misconduct in the banking, superannuation and financial services industry in Australia and subsequent report from Commissioner Kenneth Hayne.
Royal Commissions are defined as major ad-hoc formal public inquiries into specific issues, with previous examples of such proceedings occurring in Australia concerning aged care quality and safety and institutional responses to child sexual abuse. Similar proceedings have taken place in the UK, New Zealand, Canada and Saudi Arabia. Their aim is to bring to light areas of failure and look to provide solutions moving forward.
As far as the banking misconduct issue goes, Hayne’s underlying message highlighted the need for the Board to step up in its role of creating a culture of accountability, both within the financial services sector and industry-wide.
The repercussions of both the commission and Hayne’s report has seen the demand for talent within risk, compliance and governance grow. With factors including employee misconduct, a need for employee training, a microscope on documentation provided to the Board and a sharper focus on compliance from the regulators; risk and compliance professionals are tasked with a critical role in returning the moral compass of corporate Australia.
Bringing the customer back into focus is undoubtedly at the top of the priority list when it comes to the immediate impact of the commission. Lining shareholders’ pockets must become a thing of the past and thus the necessary procedures should be installed to keep a close eye on things and ensure such activity is properly monitored and ultimately stamped out to uphold the ‘customer first’ ethos.
Corporate culture was something Hayne interwove throughout his entire report, reinforcing its role in creating and maintaining a workforce who are in sync with each other and their superiors.
Compliance and risk professionals alike would do well to properly assess the culture of an organisation in their work. Particularly in the case of conduct risk, where Hayne asserts that the “root cause” of misconduct in the financial services industry comes from a laissez faire attitude where culture is concerned. Encouraging senior managers and the Board to demonstrate the right kind of behaviour is the first step in implementing this culture of accountability.
Individuals working in risk or compliance should also familiarise themselves with Future of Financial Advice (FOFA) legislation when it comes to remuneration. The goal is to identify any alignment issues with the remuneration system within their organisation. Coming back to the customer first concept, the idea is to make things clear when selling or promoting products and services so clients know whether the advice they’re getting comes at a cost.
Financial advisors need to be kept in check too when it comes to promoting and recommending the products to clients that they have a vested interest in. Here lies a conflict of interest which must be absorbed by the risk and compliance teams, whose job it is to ensure clients do not become disadvantaged by a process that sells them products they don’t need or that involve fees well above market rates. If you’re in a compliance job or risk role you should be au fait with the conflict management provisions outlined in current legislation. The least you should be doing is making sure your company is adhering to those provisions but if you see that work needs to be done in this area get involved in putting in place the necessary systems and procedures.
Risk and compliance teams should also be installing clear frameworks with regards regulatory breaches to ensure there is no delay with informing clients or delivering remediation. This comes back to that culture of accountability highlighted in Hayne’s report. Holding not only an organisation’s leaders liable for compliance failings but the organisation as a whole will go a long way to minimising conduct risk as individual employees are forced to take responsibility for their actions.