Australian Banking and Financial System Free Essay


Australian banking and financial institutions are regulated by the two Australian regulators namely; Australian Securities and Investment Commission and Australian Prudential Regulation Authority. While the former seeks to promote fairness, transparency, and efficiency within the Australian financial system, the latter is obligated to protect the Australian financial consumers by a promotion of cautious control of regulated financial institutions to always meet their mandate (Commission, n.d.-b). In the recent wake of the fee-for-no-service indignity, the two institutions have been on toes aiming ensuring that they meet their obligation to the Australian people. It has since forced 5 major Australian financial institutions to recompense their clients amounts of over $260 million. The fee-for-no-service is a scandal in which financial institutions charged their clients for services they never provided for them (Hutchens, 2018b). This paper discusses the culpability of the Australian regulatory bodies that is the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority in the bad behavior of Australian banking and financial systems.

The Australian Banking and Financial systems

The oldest Australian wealth manager AMP alongside 4 other institutions including Westpac, ANZ bank, and the CBA have been adjured to refund their clients an amount within $225 million for failure to offer individual advice to their clients which they were charging advice payments for years. In addition, the Australian Securities and Investment Commission abbreviated as ASIC is supervising similar recompense to clients for fee-for-no-service (abbreviated as FFNS) by other Australian proprietors (Commission, n.d.-a). The case against AMP was heard by the Royal Commission as various counts of misconduct by the wealth management institution were brought to question particularly on superannuation super members. It came to light that some clients had paid more charges than what they were earning on their investments with the institution. In addition, not only did some customers get wrongfully charged fees, but other 47,000 clients who had invested their entire superannuation savings in cash experienced a 3-year negative return (Barrett & Duran, 2018). Therefore, the firm was directed to pay its over 12,500 clients and former employees a refund as well as reduction of administration fees.

The Australian Prudential Regulation Authority (abbreviated APRA) brought the irregularity into knowledge of AMP top management and asked them to check more on their cash services. On the questioning by the Royal Commission, it was found that they had failed to advise their clients even when they knew that the clients’ investments would not bear any returns or lower returns whereas the client continually paid advice fee to the institution. AMP’s distribution model involves authorizing outside advisors to market and sell their investment and insurance services to clients and has over 2,600 advisers who work on AMP’s planning models (Irvine, 2018). Together with other companies, this kind of distribution model is under fire since it would be obvious that such a system is only institution-centered other than customer-focused therefore is deemed a misconduct.

Besides these counts of misconducts, AMP also interfered with an independent report by a law firm called Clayton Utz which was signed up to probe AMP’s FFNS scandal. Admitting that its culture was shareholder-focused than customer-focused, the Royal Commission was made aware that AMP had deceived the ASIC the least of 20 times. During the inquiry, the Royal Commission was also told that even retired clients were pooled together and charged in the FFNS plan. As al the misconduct reports came up, AMP told the Australian Securities and Investment Commission that it had launched an independent probe which was not to be since 25 reports were presented to AMP board and altered intentionally to protect the CEO of the firm (“Australia’s big banks,” 2018). Those who were questioned had no mortification as they made a mock of their wrongdoing.

The Royal Commission then precipitated the resignation of the top executive of AMP including the CEO, Chairperson, and a number of its directors. Whilst the move was a positive one, critics have come aloud asserting that the publicly obligated institutions; the ASIC and the APRA are equally culpable for these misconducts. Among Frydenberg who has laid blame at the regulator for the misconduct of financial institutions, at the same time asking for expedite compensation of the maltreated clients under his proposed flagship of “remediation powers”. He asserts that the ASIC failed in its mandate when it failed to notice these misconducts on time, and they failed to issue penalties against the financial institutions (“ASIC blamed for banks,” 2018). This is despite the increased powers that the legislation has accorded the Australian Securities and Investment Commission.

Initially, in Australia, banking institutions were confined just to deposits and loans to clients, charging a reasonable amount as a service fee. In the wake of the 21st century, they expanded into wealth management and financial advice to the clients. Banks took over insurance corporations as well as wealth management institutions for example Commonwealth Bank buying the Colonial First State. Banks further undertook the acquisition of financial planners as the case of NAB acquiring GMW Advisers Services. Not only did the banks manufacture financial products as lending, superannuation, and other funds, they also employed autonomous financial advisors so as to offer advice to customers on what products to purchase, a move often described as “vertical integration” which has since seen many clients disproportionately invest their money in banks who in fact own the advisers from whom they sought the investment advice (Irvine, 2018).

This was a classical conflict-of-interest upon which the two regulatory bodies; the Australian Securities Investment Commission and Australian Prudential Regulation Authority should have acted on a structural distinction between typical banking and wealth management (Hutchens, 2018a). This is because an advisor will work to ensure profit for his employee which leaves the customers’ interest out of the equation. There were a bribery and racket in yet another of Australia’s financial institution; NAB, wherein its Western Sydney outlets, various counts of inappropriate lending were seen. In addition, NAB would have to make refunds for clients after overcharging them of a payment for linked adviser; a product they never used. The evidence that was brought showed that NAB did not notify ASIC of any breach of conduct. Even more appalling was the fact that after 2 years of awareness of wrongs, NAB did not immediately refund their clients, claiming that they were working on knowing the exact number of clients affected. They further asked the Royal Commission after hearing not to reveal their wrongdoings publicly.

The Commonwealth Bank of Australia was also involved in breaching of laws against money laundering. Westpac had to disclose many instances of falsification and acceptance of forged documents related to home lending applications in the recent years. In addition, it has been accused of offering credit card limit additions to over 2 million customers who are probably unable to service the debts without proper checks on their details. This profited the bank but left many people on an economic struggle (Hutchens, 2017). These counts had been noticed by the Australian Securities and Investment Commission noticed these mishaps but little was done on the misconduct of Westpac. Similarly, Labor blamed the ASIC and APRA for being co-related with the county’s financial and banking institutions since it hardly divulges the misconduct to the public. This arrangement has prevented the shareholders from acting promptly on the financial institutions’ wrong deeds.

Various stakeholder and shareholder theories which try to explain the malpractices of banking and financial institutions’ failure exit. Adolph Berle’s shareholder primacy theory can be considered inapplicable since it fails to appreciate the fact that businesses need to adopt socially responsible activities. Berle asserts that companies ought to only center on maximizing profitability and any other socially binding deed is viewed as unbecoming of the executive. This theory supposes that shareholder wealth should not be sacrificed by socially motivated influences. This assumes that the wider society will eventually benefit when the maximized profits result in the industrialized state. This theory is espoused by Milton Friedman who posits that social responsibility ought to be a consideration in line with an increment of stakeholder profit otherwise it would then be also illegal (GROSSMAN, n.d.).

Friedman asks questions on the way business which is not living is restrained by a social responsibility. According to him, financial institutions are only obligated to place prominence on stakeholder profitability and not be constrained by moral right or a will aimed at the public good. These theories are opposed to Corporate Social Responsibility which requires businesses to adopt comprehensive and objective models apart from maximizing profits. Friedman and other theorists are opposed to such an assertion as according to them that would erode the business profits (GROSSMAN, n.d.). The Corporate Social Responsibility (acronym CSR) on the other hand is supported by Dodd who contends that the societal interests must be protected by institutions alongside those of the shareholders even if it means sacrificing profits.

The Australian Corporations Act of 2001 does not provide directives for a social benefit which points out that it is an adoption of Berle’s theory. Legally, corporations are not bound by social responsibilities, therefore, financial institutions do not care as long as they make profits even if they are exploiting their own employees. The financial institutions’ misconduct is in contempt of the Corporate Social Responsibility’s agenda since they have resulted in harm for the Australian people, for example the people who have been affected by Westpac’s misdeeds at the expense of profitability of shareholders. AMP’s executive’s responses on inquiry which were mocking to the very public which mandates them and trusts them with their retirement savings are bespoke of Berle’s shareholder primacy philosophy (“corporate”, n.d.). It seems that the executives of banks and financial institutions are only focused on the corporate profits.

Previous scandalous behaviors of Australian banking and financial institutions such as the National Australia Bank’s internal alteration of profits to cover up losses were a classical violation of the Corporate Social Responsibility. Australian financial institutions argue from an economic viewpoint where they suggest that external influences make operations inefficient, not unless the interests of stakeholder groups are recognized and managed well. The misconducts exist albeit the law takes cognizance of responsibilities of corporations on product safety, labor relations, as well as health and safety. The Australian Corporations Act and the Competition and Consumers Act enacted in 2001 and 2010 respectively requires businesses to conform to social standards of professional ethics (GROSSMAN, n.d.).

ASIC has opened up about the whole Australian financial and banking systems whom they say that in writing, the banks and financial systems misleads people that they act with probity and do what is right besides being customer focused when in reality their practices are in contravention of the professional ethos. ASIC had to wait until there was hue and cry so that they could act. ASIC’s statements only appear that they are looking for more powers for the identification of misconducts of the banking and financial systems instead of focusing on stemming the misconduct by imposing harsh penalties (Hutchens, 2017). It is indeed a fact that ASIC is culpable as well since it depends heavily on banning advisors and settling with the institutions who are in contravention of the law such as AMP’s 2006 scandal where it was indicted with funneling customers into its superannuation services and ASIC only directed it to an undertaking instead of a court proceeding.

ASIC and APRA only focus on bringing criminal cases to court where small businesses are in question and not in bigger banking institutions. In the recent fee-for-no-service scandal of AMP, together with counts of intentional interference in an “independent” report, ASIC and APRA should have acted accordingly to this violation of subsection 2 of 1308 in the Corporations Act which makes it a crime for anyone to give ASIC a falsified or deceptive information. AMP should have been fined at least if not made to meet high penalties (Treasury, n.d.).

On the other hand, APRA’s directive to Australian financial institutions to raise principal requirements due to mortgage price rise is seen as a reactive instead of proactively disallowing banking institutions to give investors and interest-only loans. In fact, a conflict of interest by the ASIC was brought up in the AMP scandal as a former chair to the ASIC had a personal relationship with an AMP general counsel during the inquiry period. A similar case of conflict of interest was seen in 2015 when ASIC was accused of influence from Investment and Financial Services Association, and while they were not found of any misdeeds, they were urged by the ombudsman to review its conflict of interest’s policy (Hutchens, 2018a).

My position on culpability of ASIC and APRA

ASIC’s history of performance is short of expectation given the runaway misconduct of Australian banking and financial systems. Its concession that it has usually preferred negotiations is unbecoming of a publicly mandated institution. The history of ASIC in the recent past is as follows. It has never instigated a prosecution of any individual who has failed to report a misconduct or breach of law within its predefined ten days limit since evidence standards are expectedly high and licensees are accorded more time to probe misconducts. Within the last 5 years, ASIC has never initiated even a single civil fine order. ASIC’s success is a suspension of only 2 licenses as well as cancellation of the same (Letts, 2018). These are clear evidence of a failure by the two regulatory commissions on their obligations which means that they were irresponsible which makes them culpable.

Only a single criminal case has been instigated by the regulator within the last ten years. Further, it has instigated 6 civil fine cases against license-givers from 2013 as the new law were enforced which allowed such an action. In addition, from the year 2008, the regulator has made over 200 bans against finance planners almost half of which were permanent. During the inquiry before the Royal Commission, ASIC claimed that it was only simpler to instigate court proceeds against individuals other than corporations as the latter would take up much time (“Australia’s big banks,” 2018). The increased misconduct of financial and banking institutions can be seen as the reason why corporations can violate the law since they are well aware that only a sacrificial individual in the company would be investigated by ASIC and not the whole company.

Personally, my position is ASIC and APRA are equally culpable for the misconduct of the banking and financial institutions’ misconduct and therefore it would only be right for the heads of these institutions to also resign. From the above outcomes, it could be that the heads may have had a conflict of interest and thus were unable to undertake their duties duly. The resignation of these individuals would send across a strong message to the whole banking and financial system that the public is ready to fully committed to fighting the ills bedeviling the system. At the same time, one would cut them slack if John Braithwaite’s regulations pyramid theory which contends that it is quite impossible for an agency to fully detect and enforce all contraventions of the law. Its decisions to settle rather than instigate court proceeds are in agreement with Braithwaite’s theory of when to instill punishment and when to persuade. There is a need for legislation that accords these two regulators more powers so as to protect the Australian people’s interest.