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Fiduciary Assignment On Remuneration And Reward Schemes

Question

Task & Timing: The Topic Report (40%) involves exploring a contemporary issue in marketing financial services, assessing the evidence, and making evidence-based recommendations for marketers. Reports are due by 4.00pm on Friday of Week 6.

Report Topics
Select a topic area from the options below and address the contemporary issue for that topic. The textbook and lectures will introduce each topic. Students should then source additional insights and evidence from academic journal articles, industry publications, and general media.

Topic Area
1. Marketing Orientation of the Big Four Banks
2. Conscious Leadership and Decision Making
3. Fiduciary Responsibility and Rewards

Contemporary Issue
1. Page 4 of the Deloitte (2019)* report speaks of reorienting systems towards consumers and having smart solutions. What has been the dominant marketing orientation of the Big Four banks and what are the consumer-oriented alternatives? What is behind this call for change and what smart solutions would help the Big Four to make such changes?
2. Page 7 of the Deloitte (2019)* report speaks of the Banking Executive Accountability Regime (BEAR) and the accountable persons obligations specified by APRA (2018, p9). What prompted the introduction of the accountable person regime for ADIs? What is the likely impact on leadership and decision making? How can ADIs use this regime as an opportunity to create shared value for stakeholders?
3. Page 8 of the Deloitte (2019)* report speaks of replacing remuneration schemes that incentivize problematic conduct with purpose-aligned approaches that will ultimately benefit wider groups of stakeholders. In what ways have remuneration schemes fostered problematic conduct? How would purpose-aligned approaches be different and generate benefits for other stakeholders? What exactly might such schemes involve for staff at different levels?

Answer

Executive Summary
This report on fiduciary assignment has been made regarding the problems created by the current remuneration and reward schemes in the Australian banking sector for fulfilling the fiduciary responsibilities of the bank. In the recent past, the Australian banking sector has experienced exposure to the different scandals which has impacted the interest of the different stakeholders of the Australian banks negatively. The major reason for these scandals happening in the Australian banking sector is the problematic structure of the remuneration of the banking management and employees which is solely dependent on the short term profit of the banks. This dependence of the variable payment of the employee upon profit of the bank is motivating them to manipulate or increase the profit of the bank of a particular period through unethical practices like fake loans, bribery and overcharging the customers. To reduce these type of unethical practices in the Australian banking sectors, the variable payment or incentives of the banking employees and management should be linked with the different aspects of the banks excluding the short term profit, like risk management. Also, the payment of the incentives should be made after the risk of the scheme failure is over for the banks.

Part 1: Fiduciary Responsibility and Rewards
The main issue which will be discussed in this fiduciary assignment is problematic remuneration scheme and work culture in the Australian financial sector. It has been observed by many experts and reports like Hayne’s report that current remuneration scheme in the Australian financial institutions are formed in such way that its main focus is to increase the wealth of the executives and board of directors of the bank rather than the wealth of the customers and investors of the bank (Wishart and Wardrop, 2018).

One of the core concepts related to this issue is the fiduciary responsibility of the banks. Fiduciary responsibility means the responsibility which is taken over by an organisation or individuals by taken over the task of managing some other individuals’ assets. Some of the responsibility which is undertaken by banks under this concept is the good faith and trust of the customers and investors of the banks as the banks are mainly financed by the share capital invested by the investors and the deposits taken from the customers of the bank (Peck and Halloran, 2016). Therefore, it is the fiduciary duty of the bank and its management to increase the wealth of the investors and customers. In reality, the Australian banks’ remuneration schemes are made in such a way that senior and middle management’s main objective is to manipulate the profit of the bank to increase their remuneration. Therefore, rather than working for the interest of the investors and customer, the management work toward increasing its pay which violates the fiduciary duties of the banks and its management.

One of the theories which found this issue a highly concerned matter is “the critical resource theory of fiduciary duty” which states that the critical resource which in this case is the deposit of the bank and capital invested in the bank is the basis of the formation of the fiduciary relationship. In this relationship, the fiduciary has to keep the food faith and interest of the beneficiary in mind who is the real owner of the asset in time of management of the asset (Miller, 2018).

There is another perspective which supports the current remuneration schemes being aligned to the profit of the bank is Adam Equity theory. It states that the employees which in this case is the management can only be motivated to work when they feel that they are getting a fair amount of output which in this case of fiduciary assignment is the profit-based remuneration and reward in the exchange of the input provided by them in the progress of the organisation (L?z?roiu, 2015). This is the basis of the current remuneration and reward scheme which aligns the profit of the bank with the remuneration and reward of the management.

This issue has high relevance to marketing practice in the current Australian financial market as sometimes the wealth of the investors in the financial market get negatively affected by the different activities of the banks which look to increase the short term profit of the bank risking the long term financial condition of the bank. This is being done by the bank management to ensure the bonus or the variable remuneration of them get maximised.

Part 2: Marketing Practice
There are some of the real-life examples in the current Australian Financial market explored in this fiduciary assignment which show that the fiduciary duty is not fulfilled by the bank and they look to use unethical methods to increase the profit of the bank to increase their variable pay. The first such instances are some of the major Australian banks including Commonwealth Bank Australia, ANZ and many other banks overcharging its customer for services of the bank which has not provided to the client effectively (The Straits Times, 2019). One such example about how this overcharging occurred is that for when a financial advisor of the customer has retired, the bank has failed to appoint a new financial advisor for them which lead to the customer not getting report that he is charged for. This is a violation of fiduciary duty of the bank as the customers of the bank who are real owner of the cash of the bank are charged financial service fee for no service.

This has been done by the banks to increase their bank profit, which leads to higher remuneration of them. The higher remuneration of the upper management of these banks can be a reason for this unethical overcharging of the customer as many of these stated banks have also come under the scanner of high bonus pay of their executive which is risking the interest of the customers of the bank (NewsComAu, 2019). This scandal was called fee for no service scandal, and this scandal was exposed by the banking royal commission. After this scandal was exposed, the banks not only have to pay high compensation to the affected customers but the banks saw a high dip in their pre-tax profit level (PerthNow, 2019). For example, Commonwealth Bank has seen a decrease in their pre-tax profit of around $40million which affect its customer and investor negatively in the market (Asic.gov.au, 2019). These events even lead to cut in the dividend payment of the bank investors for making allowance of the compensation that has to be paid. Another real-life example discussed in this fiduciary assignment in the Australian banking sector of banks not fulfilling its fiduciary duties is the National Australian Bank staffs being involved in the bribery scandal, which will lead to higher remuneration of these staffs. In this scandal, it has been discovered that the staff has paid cash bribe to secure loan which leads to their higher variable remuneration payment. For this purpose, the National Australian Bank staffs have faked different documents needed for the approval of the loan like payslip or medicare card and many other documents like these. The staffs have done which to increase their incentives under an incentive program of the bank to sign up new customer (Hutchens, 2019). This is again another example how the current remuneration scheme is leading to bank failing to fulfil their fiduciary duties where fake or risky loan given to the customers to increase the variable payment of the bank management. All these above stated are two real-life examples how the remuneration schemes are causing banked to fail in the fiduciary responsibilities.

Part 3: Assessment
After assessing the different aspects of this remuneration and reward scheme in the Australian banking sector, it has concluded that the remuneration structure of the bank’s management is only fulfilling the needs of the employees and not the other stakeholders of the banks. The different aspects of the banking remuneration schemes are being manipulated in such a way that the interest of the customers and investor of the banks are getting negatively affected. The recent Banking royal commission report exposed how the manipulation of banking management to increase the profit of the bank unethically and unsustainably. Some of these ways which are stated in the fiduciary assignment has been discussed in the previous section like overcharging the customers of the bank by charging for the services that are not provided to the customer or bribing and faking document for securing the loan under the incentive scheme of the bank.

This is not only impacting the customers of the banks who are being overcharged or whose deposit are giving fake or risky loans but also the other stakeholders of the banks in different ways. One of the other stakeholders who is being affected by these unethical activities of the banking management is investors of the bank in the share market as the banks unable to generate sustainable earnings of the bank from these activities. Also sometimes these activities lead to banks paying the compensation for their unethical activities from the dividend payment to the investor (Ft.com, 2019). In this way, these are effecting the long term and short term return of the investor of the banks in the share market. By failing to cater to the interest of the customers and investors of the banks, banks and its management is failing to fulfil the fiduciary responsibilities of it as they are failing to manage the cash and capital of the business in an efficient way whose real owners are the investors and customers of the banks.

The remuneration scheme in the banking sector should be changed and made more balanced that can cater the needs or interest of the stakeholders of the banks. This can be done alignment of the different aspects of the banks with the variable payment of its staffs and management and not only focusing on the short term profitability of the banks.

Part 4: Recommendations
There are some recommendations or idea of action for the Australian banks illustrated in this fiduciary assignment by which it can better the remuneration scheme of its management and employees which will better the working culture of the banks and these recommendations will be discussed here.

The first recommendation will be to align the remuneration of the management with different aspects of the bank which can affect the sustainability of the bank in the long term period and not only concentrate on the short term profitability of the bank. Under this recommendation, the remuneration or the incentives pay of the banks should be aligned with different risk management of the bank assessment. For example, how the strategic risk of the bank meaning the risk which is taken by the bank by providing different types of financial services have been managed by it should be assessed under this type of remuneration structure. This would lead to more responsible management of the resources by the banks which would benefit the different stakeholders of the bank.

The risk management performance assessment of the banks should be done by an independent body like banking regulator like APRA in the Australian market. This will also increase the power and scope of the APRA and make the financial market more regulated than before. This will lead to more sustainable earnings of the banks, which will benefit the investors and customers of the bank by providing them with a more stable return from the bank.

The second recommendation outlined in this fiduciary assignment is for bettering the remuneration scheme and working culture is to make the payment of the incentive under the different schemes and activities of the bank only after the period in which there is the risk of the scheme failure is over. This means the payment of the risky reward scheme or incentives should be made only after it is assessed that the period in which there is financial risk or any other potential risk which is related to the scheme can occur in the business is over. For example, the payment of bonus should be made under the new customers' inclusion scheme should be done only after the customers acquired under this scheme has remained with the bank for a reasonable period and gave the bank a reasonable amount of business. It is mentioned in this fiduciary assignment that this will lead to management or employees not misusing any scheme. This will benefit the different stakeholders as they do not have to faces negative consequences of a scandal occurring from the misuse of the schemes.

Reference List
Asic.gov.au. (2019). Fees for no service: Remediation | ASIC - Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/fees-for-no-service-remediation/ [Accessed 31 Aug. 2019].

Hutchens, G. (2019). Banking royal commission: details of NAB staff in bribery ring emerge. [online] the Guardian. Available at: https://www.theguardian.com/australia-news/2018/mar/13/banking-royal-commission-public-hearings-open-on-litany-of-misconduct [Accessed 31 Aug. 2019].

L?z?roiu, G., 2015. Employee motivation and job performance. fiduciary assignment. Linguistic and Philosophical Investigations, (14), pp.97-102.

Miller, P.B., 2018. The identification of fiduciary relationships. The Oxford Handbook of Fiduciary Law (New York: Oxford University Press, 2019).

NewsComAu. (2019). Do bank CEOs deserve these huge wages?. [online] Available at: https://www.news.com.au/finance/work/leaders/how-much-australias-banking-and-finance-ceos-earn/news-story/3b4c9c9959955fb1637d5deec8172e21 [Accessed 31 Aug. 2019].

Peck, R.R. and Halloran, M.J., 2016. Fiduciary duties of financial institution directors and officers in the post-Dodd–Frank era. International Journal of Disclosure and Governance, 13(3), pp.221-235.

PerthNow. (2019). Banks facing hefty compensation bill. [online] Available at: https://www.perthnow.com.au/business/banking/australian-banks-face-115b-compensation-over-fee-for-no-service-scandal-ng-b881132170z [Accessed 31 Aug. 2019].

The Straits Times. (2019). Scandal-hit Australian banks earmark billions to repay customers. [online] Available at: https://www.straitstimes.com/business/banking/scandal-hit-australian-banks-earmark-billions-to-repay-customers [Accessed 31 Aug. 2019].

Wishart, D. and Wardrop, A., 2018. What can the Banking Royal Commission achieve: Regulating for good corporate culture?. Alternative Law Journal, 43(2), pp.81-88.

Ft.com. (2019). Australia’s NAB cuts dividend as remediation costs soar | Financial Times. [online] Available at: https://www.ft.com/content/9715d838-6c6d-11e9-80c7-60ee53e6681d [Accessed 31 Aug. 2019].

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