Date posted: 6/02/2019 3 min read

How the Royal Commission impacts advisory and risk management services

From the final report, CAs in advisory and risk management roles learn how systemic risks can develop within large financial institutions despite the good intentions of employees, senior managers and Board members.

In brief

  • Hayne’s poses the question of whether the Board getting the right, quality information
  • The Board’s focus should not just be on shareholders, but rather on the corporation itself
  • The Final Report highlights the difficulties encountered by management in addressing the types of risk associated with misconduct such as compliance, conduct, regulatory and operational

The role of the Board

Commissioner Hayne highlights the important role of the Board in effectively challenging management and following through to see if its decisions have been implemented.

His summary of two case studies involving CBA and its CML\CTF compliance issues and NAB's charging adviser fees to members of superannuation funds are sobering.

The quality of communications between the Board and management, as well as the interrogative ability of audit committees are squarely raised. The Commissioner also says Boards must do more to first ascertain who is actually accountable, and then create a culture of accountability.

Hayne's poses the question simply: Is the Board getting the right, quality information?

Engagement with regulators

The quality of the engagement between financial institutions and regulators was also found wanting in a number of case studies.

Negotiations with regulators tended to be prolonged – it took too long to report breaches and in deciding what was to be done.

Communication is a two-way street, and both regulators and the regulated clearly need to improve.

Re-setting Board priorities in the wake of the Final Report

Commissioner Hayne's comments on the priorities a Board should have in carrying out its task may prompt a re-assessment of priorities.

Hayne argues that the Board's focus should not just be on shareholders, but rather on the corporation itself, which he says "demands consideration of more than the financial returns that will be available to shareholders in any particular period".

Any re-setting of Board priorities clearly requires a well thought through communication strategy for the many stakeholders who keenly observe Board decision-making.

Management of non-financial risk

The Final Report highlights the difficulties encountered by management in addressing the types of risk associated with misconduct – compliance risk, conduct risk, regulatory risk and operational risk.

Hayne acknowledges these are more difficult to measure than most types of financial risk but says "financial services entities must give sufficient attention, and devote sufficient resources, to the effective management of non-financial risks".

Hayne urges APRA to consider how that requirement can be made more prominent in its prudential standards.

Ethics and cultural issues

Commissioner Hayne clearly thinks some entities are unwilling to recognise and accept responsibility for misconduct.

He warns against tokenism by any entity that "contents itself with statements of purpose, vision or values, too often expressed in terms that say little or nothing about those basic standards that underpin both the concept of misconduct and the community's standards and expectations".

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