Governance, Conduct, Culture & Trust

"The focus on culture and community expectations, especially in relation to dealings with retail customers, is the hallmark of this Commission.

The lasting legacy of this Commission will no doubt be a signal change for the better in the culture and governance of Australia’s large financial institutions. Significant steps were taken by APRA last year in its review of CBA’s governance and management of non-financial risks. This is just the start.

On a broader front, corporate governance practices of boards and senior management will be encouraged to change across all sectors of the Australian economy, doubtless for the better."

Relevance & consequences for industry

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The final report has brought to the forefront the importance of, and the links between, remuneration, culture and governance, and reiterated that the primary responsibility for culture and conduct lies with the board and senior management.  The Commissioner pinned responsibility for past misconduct on boards and senior managers, not “bad apples”. It is the role of the board to seek further or better information where required and to review and challenge management’s actions as required.

The Commissioner reaffirmed that when considering the best interests of the corporation, directors must consider more than the financial returns available to shareholders and that considering the interests of customers supports the best interest of the corporation. “The best interests of a company cannot be reduced to a binary choice.”

Directors of superannuation trustees

The role of directors of superannuation trustees was specifically called out.  While the Commissioner accepted that shareholders appointing directors is a fundamental feature of company law, the final report suggests that the appointment of directors of superannuation trustees should be by reference to the best interests of members only, rather than as a representative of the shareholder(s). 

What will happen now?

Specifically, as a result of the final report:

  • the BEAR:
    • will be amended to require that an additional responsibility be added to accountable persons of ADIs – the additional responsibility will relate to end-to-end management of products;

    • will be extended to apply to all APRA regulated financial institutions (including insurers and superannuation trustees). In addition, the Government intends to extend the regime to AFSL and ACL holders, market operators and clearing and settling facilities so that the accountability regime has a similar scope to the UK Senior Managers Regime;

    • will be jointly administered by ASIC and APRA with ASIC overseeing consumer protection and market conduct and APRA overseeing prudential aspects; and

    • will be amended so that ADIs and accountable persons must deal with ASIC in an open, constructive and co-operative way. This may affect a fundamental legal right, insofar as it impacts broad principles of self-incrimination or even privilege;

  • non-financial risks (such as misconduct and compliance risk) will need to be managed, and considered for remuneration purposes, alongside financial risks.  For APRA regulated entities, the prudential standards will require remuneration systems to be designed to encourage management of non-financial risk;

  • culture will be assessed, but not prescribed, by regulators – initially, APRA will assess the culture of APRA regulated entities;

  • increased attention will be given to minute taking at board meetings to record when directors have requested additional information and engaged in debates; and

  • the quality of information provided to boards will be further considered and refined – APRA has been encouraged to include guidance on the quality of information to be provided to boards.

What you should do next

  • Increase oversight of remuneration - the quality of risk, non-financial performance and remuneration information being provided to the board should be improved.

  • Get ready to expand annual reviews to include culture and governance: management of conduct and compliance risk, identify and deal with problems proactively, and consider whether previous changes have been effective.

  • Ensure that board minutes properly reflect deliberations and identify matters on which there are disagreement and how those are resolved.
  • Review the information provided to boards to determine whether the right information is provided to enable the board to challenge management, including on issues related to standards of conduct.

  • Prepare for the broad implementation of the BEAR – this will include identifying your “accountable persons”, reviewing their roles, and preparing an accountability map and accountability statements.

  • Consider how the additional responsibility will be implemented for ADIs.

  • Directors of superannuation trustees should also review their delegation and outsourcing arrangements, and the supervision of and reporting by delegates and service providers, especially where related parties are involved.

Authored by: Tim Bednall and Miriam Kleiner.

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