Because primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who manage and control them, effective leadership, good governance and appropriate culture within the entities are fundamentally important. And culture, governance and remuneration are closely connected. But it now must be accepted that regulators have an important role to play in supervision of these matters. Supervision must extend beyond financial risk to non‑financial risk and that requires attention to culture, governance and remuneration.
Some recommendations relate to APRA’s prudential supervision of APRA‑regulated institutions and the content of its prudential standards and guidelines and recommend:
- APRA’s giving effect to the Financial Stability Board’s publications concerning sound compensation principles and practices (Recommendation 5.1); and
- APRA using supervision, prudential standards and guidance to:
- promote and encourage sound management by APRA‑regulated institutions of not only financial risk but also misconduct, compliance and other non‑financial risks (Recommendations 5.2 and 5.3); and
- take steps (identified in Recommendation 5.7) to encourage entities to give proper attention to sound management of conduct risk and improving entity governance.
Other recommendations urge:
- all financial services entities to review the design and implementation of remuneration systems for front line staff at least once each year (Recommendation 5.4);
- banks to implement fully the recommendations of the Sedgwick Review (Recommendation 5.5); and
- all financial services entities to assess, as often as reasonably possible, the entity’s culture and governance, identify any problems, deal with them and determine whether the changes have been effective (Recommendation 5.6).
There are also other ways in which the recommendations seek to address culture. These are by requiring AFSL holders to:
- take steps (identified in Recommendation 2.9) in cases where they detect a financial adviser has engaged in misconduct;
- reference check and share information relating to termination of financial advisers (Recommendation 2.7); and
- report ‘serious compliance concerns’ (Recommendation 2.8).
Equivalent recommendations are made in respect of ACL holders when dealing with mortgage brokers (Recommendation 1.6).
Then there are the more particular recommendations to increase protections.