Whether the culture of greed was the result of the remuneration disincentives

Based on the Australian Royal Commission’s interim report and consequent circulation of the same in the Australian Financial Review a detailed research based analysis is done in order to analyze the various aspects reflected including the application of ethical principles, evaluation of the effectiveness of the corporate governance principles along with the Comparison of the actions and behaviors of the Australian and US Financial market in response of the Global financial crisis and why it is important to ensure the enforcement of the existing laws. All the aforesaid things have been analyzed with the help of the three questions raised through the report and finally by providing justifiable answers of these questions (Wellmer, 2018).

To answer whether the culture of the greed is the result of the remuneration disincentives as concluded by the Royal’s Commission it has been decided to evaluate this conclusion of the interim report by taking the circumstantial evidence of the three cases as provided by the commission.

The first case being taken here was the CBA Broker relation and accreditation in which it was clearly shown that there was conflict of interest arose between the brokers of the CBA and those customers to whom the loan was provided (Webster, 2017). The commission or the rewarding structure in this case was such that it was directly linked with the size and length of the Loan, hence higher the amount of the loan and longer the period for which it was extended, the larger amount of the commission the broker used to obtain. In this case though these brokers were representing the CBA, it was the commission structure of the CBA that led them to engage in the misconduct. Further it was found by the CBA that those loans that was provided by it to the customers through brokers were having higher debt-to-income -ratio, higher loan to value ratio. In this case the accredited brokers were fetching disincentives from the Chait is because those brokers which got accreditation from the CBA, their customers (borrowers) could get more priority in fetching loans and most importantly it is to be observed that the CBA in its later submission accepted that their commission structure was not suitably designed.

The second case that is being referred is the Aussie home loan brokers misconduct where it was found that four home loan brokers of the AHL investment Pty limited were involved in the practice of misconduct just because of the ill structured remuneration package implemented by the lender. These four brokers were found guilty of falsification of the documents submitted on behalf of the proposed borrowers of Home loan, which included the Pay in slip, letter of employment and Bank statement of the Proposed borrowers. Here the major practice of loan processing structure was such that for each of the loan applications submitted by the broker of Ausbie would fetch it upfront and trail commission (Iggers, 2018). Again, a portion of this commission received by the Aussie was passed on to those brokers I terms of their reward. While the decision to decide that what should be the amount of brokerage to be passed through the brokers it took the basis of the amount of the settled loan to calculate the same. Due to which value of the settled loan became the basis, hence higher the value of settled loan higher the amount of the passed through upfront commission received by these brokers (Kaufmann, 2017). Not only this Aussie imposed a minimum loan amount obligation target to be achieved by its brokers every month. Again, out of these four brokers one broker was also found guilty of submitting more than the 50% of the loan application to a single lender that was Westpac. Hence again it was reflected that the principle of the agency theory was breached as the brokers did not act in the favor of their principal’s interest (Coate & Mitschow, 2017).

Why despite the corporate governance principles the number of poor corporate behavior are so many

The third case which is the ANZ responsible lending programmed of the home loan application in which case too just because of the way the commission structure was formulated gave rise to the misconduct by its broker for having higher gain in terms of commission. In this case while extending loans to its customers ANZ highly relied on its brokers to collect information on their financial status to decide their eligibility to get the loan. (Henriksen, 2018) For which one of the document as submitted with the ANZ was the statement of the financial position of the customers which were to be signed by the customer as well as the broker before submitting the same with the ANZ. One of the element of the customers living expenses was found to be inconsistent with that of the same element present in the statement of the financial position by the customer.  At the same time ANZ did not put sufficient effort to verify the submission made by the customer. Rather in the given case it was the Broker who gave the reason that making strict enquiries on the submission made by the customer would be disadvantageous for the customer because of his inability to fulfill the relevant criteria (Charles H, et al., 2015).

In all of the above cases the major points that was common was the breach of the agency theory by all of the agents who acted not in the interest of its principal and the second thing was that the greed of all these agents was the result of ill structured remuneration package designed by their relevant principals who were the giants of the Banking and Financial Industry.

In this part an attempt has been made to justify the reason of corporate governance principles and to evaluate whether they are at all effective to prevent such fraud in the Banking and Financial industry which is still showing its rise level in terms of the corporate behavior.

The major reasons of the widespread poor corporate behavior are attributed to the following:

1. Monopolistic position of the Bank in the economy- In Australia Banks are licensed by the commonwealth and none of the entity can perform the Banking business without such license. This makes the difficult for the new entrant to enter the market(Borit & Olsen, 2012). Hence the level of competition is very weak. That puts the Banks in the monopolistic position as customers are heavily dependent on the Bank. This makes them non-compliant.
2. Approach of the Banking Industry- The is one of the major fact that these banks are profit oriented undertaking whose primary motive is to earn the highest profit at any cost.
3. The weaker framing of the law that induces for the permissible behavior hence banks can easily seek apology through the framing of words(Boghossian, 2017).

Further lifting the corporate governance principles is not the solution but there is the need to create an inductive environment so that these financial institutions can voluntarily go for complying with the same by having the sense that it shall assist in their image building in the Banking industry and provide a basis for their value addition.

Putting people before the Profits is acceptable but lifting the corporate governance principles can never provide the permanent solution.

Comparison of the Australian and US Banking

The major difference that was noticed in the approach, behavior and actions taken by the Australian banking Industry and United States Banking and Finance Industry in response to the Global Financial crisis was that it was the US which first relied on the principles of the Empower, Enforce and Educate policy to bring the Banking and finance industry in its track.

It is better to explain in brief that the meaning of empowerment is to strengthen the legal and regulatory system in such a way that enforcement of the legal provisions be ensured which were otherwise escaped easily by the players in the Industry. Third was one of the major thing that is educate the people working in this industry that should be adequate to prevent the misconduct in the industry. The need of education was felt because ignorant staff can commit much non-compliances than a knowledgeable staff (Belton, 2017).

The change of the law through the enforcement of the new legal provision should not be recommended unless it has a clear identified advice. In such a case the major things to be evaluated are the existing law should be fair, not misleading, people should willingly obey it, it should provide the services fit for the purpose, it should have the ability to deliver the services with reasonable skill and care.

The major logic behind implementing the existing law is that additional legal provision may very hamper the real intention behind framing the statue and can act as a burden for those for whom it was framed. It is because people have a common tendency having seen a legal provision that whether can I do it? If such provision provides the message that should I do it then it won’t be proving to be effective (Awasthi, et al., 2018).

In most of the cases the common reason as found behind the noncompliance was the complexity of the law due to which it leads to noncompliance. It is because the actual implementation of such law is on the functional level staff. But if such staff are not able to interpret the true intention of the legislature then it becomes difficult to implement the same.

In brief these are the major reasons why it is being suggested that existing law should be enforced rather than framing the new one as it unnecessarily puts oversight the real intention of the legislature (Abdullah & Said, 2017).

Conclusion:

From the above it is quite clear that the report of the Royal commission provided us a strong base to evaluate the current miserable scenario of the Banking, Superannuation and the Finance Industry across the world. Again, it is this report that provided us list of case studies along with the real-life examples to justify its conclusion. It’s also can be used as a tool for preventing the misconduct in the Banking Industry along with the financial service Industry. It forms the basis to determine the effectives of the corporate governance principles by saying that laying down the principle is never sufficient enough, but it the way or the approach adopted for its implementation. But no existing law should be criticized rather an attempt is required to ensure that if there are some lacking in the existing law then how that can be removed so that people come voluntarily to adopt the same rather than finding the way to escape it. Again, one of the most important factor is that it tells us what the appropriate remuneration structure tin should be the finance industry to prevent the misconduct

References:

Abdullah, W. & Said, R., 2017. Religious, Educational Background and Corporate Crime Tolerance by Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, pp. 129-149.

Awasthi, A., Omrani, H. & Gerber, P., 2018. Investigating ideal-solution based multicriteria decision making techniques for sustainability evaluation of urban mobility projects. Transportation Research Part A: Policy and Practice, 116(2), pp. 247-259.

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Iggers, J., 2018. Good News, Bad News: Journalism Ethics And The Public Interest. s.l.:s.n.

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Webster, T., 2017. Successful Ethical Decision-Making Practices from the Professional Accountants’ Perspective. ProQuest Dissertations Publishing.

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