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Banking & Finance | Legal | Uncategorised

Remuneration and regulation post Hayne

4 Mar 2019, by Amy Sarcevic

The dust has now settled since Commissioner Hayne released his final verdict following the years-worth of industry interrogation, that formed the backbone of the Royal Commission into banking misconduct.

Many of his recommendations were applauded by industry analysts, while others have been met with doubt, concern and outright resistance.

Cutting through the wealth of industry commentary, risk management expert, Professor Elizabeth Sheedy, and Gilbert & Tobin Partner, Richard Harris, spoke with us ahead of the Australian Financial Review Banking & Wealth Summit 2019 and Consumer Law 2019; providing their views on the new penalties regime; and on Hayne’s endorsement of balanced scorecard remuneration.

Balanced scorecard remuneration

Approaches to remuneration and, more specifically, short term variable (STV) remuneration, came under fire throughout the Royal Commission proceedings; as instances of misconduct were invariably traced back to inappropriate financial incentives.

The interim report provided examples of shortcomings with the balanced scorecard, a performance measurement system that is used to determine STV remuneration.

But, despite the strength of evidence against it, Hayne’s remedy for non-compliance – to persevere with the balance scorecard – was in Prof. Sheedy’s words “paradoxically weak”.

“There is no evidence that the balance scorecard fosters compliance with policies. If anything, quite the contrary”, said Prof. Sheedy.

“In no other industry would a decision of this weight and magnitude be enforced without the backing of data – yet there is, to date, no empirical evidence to support the theory that the balanced scorecard model is effective”.

Prof. Sheedy is behind a quantitative research study, led by Macquarie University, exploring the effect of various remuneration models on compliance.

The research found that fixed remuneration was significantly better for compliance outcomes than STV remuneration based on the balanced scorecard and, interestingly, that the use of fixed remuneration models did not negatively impact productivity (as had been suggested in the defense narrative).

Prof. Sheedy says that the non-financial criteria that contribute to the balanced scorecard are difficult to measure. “Poor metrics are easy to fudge and are often not taken seriously by employees. They are often subjectively assessed by a manager and everyone typically gets the same rating”, she said.

Elaborating further, Sheedy said that if financial services employees needed STV remuneration in order to perform their job well, then they were not the right people for the profession.

“The industry needs people who are motivated by a sense of purpose and pride in their profession; not short term financial incentives that will get them rich quick”, she argued.

Prof. Elizabeth Sheedy is a financial risk expert, based at Macquarie University. Prior to joining the university she worked for Macquarie Bank and Westpac where she worked in derivatives. She now teaches courses in Financial Risk Management in the Master of Applied Finance program. Since 2012 she has been conducting research on governance, culture and remuneration in financial services.

Prof. Elizabeth Sheedy will form part of an expert panel at the Australian Financial Review Banking & Wealth Summit 2019, where she will be joined by fellow commentators Julia Angrisano, National Secretary, Financial Sector Union of Australia; Fahmi Hosain, Managing Director and Co-Founder, Rhizome; and Karen Den-Toll, Partner – Governance, Regulation & Conduct, Deloitte.

Penalties regime

The heightened expectations of financial services businesses likely to emerge from the implementation of Hayne’s recommendations took on greater significance, following the passage of enhanced penalties for corporate contraventions in late February.

Among the recommendations were the introduction of civil penalties; materially increased fines (up to $525 million per contravention); a tripling of the maximum prison sentence (from five to fifteen years); a substantial increase of maximum penalties for civil contraventions; an extension of civil penalties to other forms of misconduct not previously captured; and disgorgement in civil penalty proceedings.

Gilbert & Tobin Partner, Richard Harris, believes many of the resultant penalties are “disproportionate”, with regard to the vast array of laws that financial services businesses are obligated to; and the kinds of misconduct which were examined during the Royal Commission.

“Obviously much of the conduct examined in the Commission was serious in nature but, in the majority of those cases, it was not found to be deliberate; in fewer still was it found to be dishonest. Mostly the report was about mistakes, delay and complexity”, said Harris.

“Assuming that is the case, significant increases in penalties are unlikely to impact conduct”.

Harris is particularly concerned about the ‘default to litigation’ narrative that emerged from Hayne’s recommendations, which will see firms being summoned to court on a default basis i.e. unless there are strong grounds for not doing so.

“Litigation is a blunt instrument to find the truth and to coerce a financial institution to be law-compliant”, said Harris.

“For the most part, banks are trying very hard in a complicated environment. Default to litigation – combined with excessively strong penalties – may inadvertently cause the relationship between banks and the regulators to deteriorate, in a manner which harms rather than helps outcomes”.

Richard Harris is a partner at Gilbert + Tobin, where he heads the Disputes and Investigations group; and specialises in regulatory investigations, disputes and class actions. He regularly advises banks, large corporations and their boards on major dispute, regulatory and governance issues.

Presenting at the Consumer Law Conference 2019, Richard Harris will give further commentary on the Hayne’s verdict and what this means for the sector.


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