The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) commenced its seventh and final round of public hearings on 19 November.  The focus of this round of hearings, which will run until 30 November, is on the policy questions arising from the first six rounds of hearings.  More particularly, the focus of the hearings will be on the causes of misconduct and conduct falling below community standards and expectations by financial services entities (including culture, governance, remuneration and risk management practices), and on possible responses, including regulatory reform.  In addition, the hearings will consider the role of the regulators, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) in supervising the actions of financial services entities, deterring misconduct by those entities, and taking action when misconduct may have occurred.

A high level overview of the issues to be explored during the hearings as highlighted by Counsel Assisting Rowena Orr QC in her opening statement to the Commission and of some of the issues arising in the course of questions to CBA Chair Catherine Livingstone, and CBA CEO Matt Comyn, Westpac CEO Brian Hartzer and Macquarie CEO and Managing Director Nicholas Moore is below.

Opening statement

• Causes of the misconduct and how future misconduct can be prevented in future: Counsel Assisting Rowena Orr QC said that the focus of this round of hearings would not be on identifying 'further instances of misconduct' but rather on 'understanding why misconduct has occurred and on what can be done to prevent future misconduct'.  She added that 'The purpose of this round of hearings is not to hear further apologies, or expressions of regret'.
• Questions to be considered over the course of the hearings:
  •  Causes of the misconduct: Ms Orr said that the Commission would explore whether misconduct is attributable to: 
    • risk management, recruitment, or remuneration practices;
    • the culture of financial services entities or their governance practices;
    • practices common to the financial services industry or to specific parts of that industry.
  • Consideration of changes to prevent a reoccurrence of misconduct in future: Ms Orr said that the causes of the misconduct would inform consideration of whether changes are required.  Ms Orr added that consideration would be given to whether the regulators need to change, whether new mechanisms for oversight of the regulators is justified, whether there are barriers to financial services entities and regulators improving their own practices and if so, how these could be removed.

  Submissions received

  • Over 2000 submissions received: Ms Orr said that the Commission received close to 2000 policy submissions from financial services entities, consumer advocacy groups, regulators, government, academics, industry organisations, community organisations, and members of the public in response to the policy questions identified in the Interim report and in response to Round 5 (superannuation) and Round 6 (insurance).
  • 'Divergence' of views in submissions, but also 'substantial agreement' in some areas: Ms Orr said that across the submissions, 'there is considerable divergence in views about the need for reform and the manner in which any reforms should occur, but that there were also are a number of areas in which there was ‘substantial agreement'.
  • Ten examples on which there was 'substantial agreement' across submissions: 
    • Simplification of the law: Ms Orr said that there was 'widespread support for simplification of the law' across submissions.
    • Clarification of the duty owed by a mortgage broker to their clients: Ms Orr said that there was 'substantial agreement that the duty owed by a mortgage broker to their clients would benefit from clarification'.  Ms Orr noted however that 'views were divided about the precise ways in which the duty should be clarified'.
    • Ending grandfathered commissions: Ms Orr said that there was 'very strong support for ending grandfathered commission payments to financial advisers and from superannuation accounts'.  Ms Orr added that each of the major banks has already announced steps to reduce or eliminate grandfathered commissions in their financial advice businesses, and that they (along with other industry participants) had expressed support for legislation to repeal the grandfathering provisions under the Corporations Act 2001 (Cth).  Ms Orr said that the Association of Financial Advisers (AFA) was alone in its opposition to ending grandfathered commissions.
    • Simplification of disclosure requirements: Ms Orr said that there was 'broad support for further simplification of disclosure requirements' with some submissions suggesting that the current extensive and complex disclosure requirements may actually make it more difficult for consumers to understand the information being made available to them.  Ms Orr noted that some consumer groups had warned that 'simplification should not result in consumer protections being watered down.  Some consumer groups also emphasised that disclosure alone would not prevent most of the types of misconduct examined by the Commission'.
    • Support for a national farm debt mediation scheme and measures to improve accessibility of banking services in remote/regional areas: Ms Orr said that there was 'strong support across the major banks' for a number of measures to assist those in regional and remote areas and to improve the accessibility of banking services.  For example, there was widespread support for a national farm debt mediation scheme (to be modelled on the existing NSW scheme), although some suggested that creating a national system would offer an opportunity to identify the best practice components of the existing Acts and consider alternative approaches.  There was also support for the use of dedicated staff to assist Indigenous customers, ceasing any practice of charging a dishonour fee on a no fee or low fee account, and ceasing the practice of charging default interest on loans in drought declared areas or in areas where some other natural disaster had occurred.
    • Funeral insurance: Ms Orr said that there 'was almost universal support to bring expenses only funeral insurance within chapter 7 of the Corporations Act and the consumer protection provisions under division 2 of part II of the ASIC Act'.
    • Civil penalties for breach of SIS Act obligations: Ms Orr said that there was 'widespread support for legislative changes to impose civil penalties for a breach of the requirements in the SIS Act that the trustee of a superannuation fund or directors of the trustee perform their duties and exercise their powers in the best interests of beneficiaries'.
    • Add-on insurance: Ms Orr said that there was 'support from several major banks and industry groups for certain forms of add-on insurance to be sold only through a deferred sales model'.
    • Extension of UCT provisions to insurance contracts: Ms Orr said 'there was broad support for extending the unfair contracts terms provisions to insurance contracts, including from ASIC a number of consumer bodies, and most insurers'.
    • Introduction of a compensation scheme of last resort: There was also substantial support for the introduction of a compensation scheme of last resort, which would provide compensation where consumers had a valid claim against a financial services provider but could not get the claim paid, for example because an advice firm had become insolvent. 

Commonwealth Bank of Australia (CBA)

As flagged, in her opening statement, Counsel Assisting Rowena Orr QC's questions to CBA CEO Matt Comyn and CBA Chair Catherine Livingstone focused on the reasons why issues occurred, the management/response to those issues and the steps implemented or in the process of being implemented to ensure that there is no reoccurrence.

Remuneration of bank staff, mortgage brokers and executives

• Payment of variable remuneration to frontline staff: Mr Comyn was asked to explain why CBA uses short term variable remuneration for front line staff.  He responded that CBA regards this form of remuneration as 'important' both for 'eliciting discretionary effort' (‘the difference between what they might have otherwise done, if – if they were paid a fixed remuneration, versus if they had at least a proportion of their remuneration that was in addition to what they could earn from their fixed remuneration) and as an accountability mechanism (i.e. a means of making clear 'consequences' for poor conduct to individuals).  He acknowledged that there are 'multiple ways to motivate staff' and also that there are a number of other mechanisms to impose consequences for poor conduct, and also that variable remuneration could 'drive perverse outcomes' if poorly designed. Though consideration had been given to moving away from variable remuneration, the Commission heard that it remains in place to date at CBA.
• Broker remuneration: 
  • Flat fee model? The Commission heard that consideration had been given by CBA to moving away from a commission based model (including payment of upfront and trailing commissions) but that to date, no move has been made.  When asked whether he would like to move to a flat fee model Mr Comyn agreed that this was the case, but that in the absence of regulatory intervention, it would be unlikely other lenders would follow. His preferred model, were a flat fee model implemented, would be the model used in the Netherlands whereby the customer pays a flat fee upfront.
  • Sedgwick Review implementation: Asked what plans were in place at CBA to implement recommendation 18 of the Sedgwick Review (removal of the link between loan size and payments to brokers), the Commission heard that CBA is waiting on the Commission's recommendations before formulating a plan as to how to implement the change.
  • Banning trail commissions: Asked whether trail commissions should be banned, Mr Comyn agreed that they should be banned as part of a more 'holistic review' of the payment model for brokers.  He added that the abolition of train commissions for brokers, in his view, requires legislative change.
  • Extension of the best interests duty to brokers: Also on the topic of brokers, Mr Comyn expressed agreement that the best interests duty (for brokers to act in the best interests of their customers) should be extended to cover brokers as a means of addressing potential conflicts of interest.  Asked whether he agreed with brokers that this would be 'very onerous' for them, Mr Comyn said that it 'didn't seem overly onerous to me'.   
    Counsel Assisting noted that the Combined Industry Forum (CIF) has not supported the extension of the best interests duty, but instead had advocated a 'customer first duty' which, though still in development, would require customers’ interests to be placed above those of the providers or those of their organisation, based on the information reasonably known to the provider at the time of providing the service.  Mr Comyn confirmed that this was case, adding that the 'obligations as they apply to a financial adviser should not necessary just transfer over' to brokers, though the duties and expectations on the broker are 'similar to a financial adviser'.   Asked whether he viewed the 'best interests' duty as 'underpinning' both the duty of the financial planner or adviser and the duty of the mortgage broker, Mr Comyn said that he agreed that this was the case.
• Payment of variable remuneration to executives
  • Why variable remuneration is necessary: CBA Chair Catherine Livingstone was asked why executives are paid any variable remuneration (rather than an 'appropriate salary').  Ms Livingstone explained that the 'balanced scorecard' (which includes financial and non-financial measures of performance) indicates to executives 'very clearly…that we expect balanced outcomes across financial outcomes, customer outcomes, people and strategy'; that variable remuneration enabled the board to highlight priorities; that it ensures alignment within the risk management framework; that it enables CBA to reward executives based on their performance and that in relation to deferred remuneration, that it enables CBA to 'deliver consequences' where necessary. Ms Livingstone disagreed that fixed remuneration would achieve the same objectives.
  • Use of total shareholder return (TSR): The Commission heard that CBA’s long-term variable remuneration framework places ‘significant’ emphasis one measure, total shareholder return (TSR).  Counsel Assisting noted that in April 2018, APRA released a report into remuneration practices at large financial institutions which expressed concern about ‘excessive’ emphasis being placed on this measure, and that the UK Prudential Regulation Authority (PRA) had expressed similar concerns on the basis that ‘measures like total shareholder return are not suitably adjusted for long-term risk factors, and may incentivise highly leveraged activities the use as a measure of performance on the basis that excessive focus on this measure’.  Ms Livingstone was asked whether in light of this she considered it ‘appropriate to have such a large proportion of the long-term incentive for your group executives depend on a purely financial matter’.  Ms Livingstone said ‘I think as reflected in our structure at the moment, we do think that that is – it’s a measure we can use.’
  • Consideration of CEO remuneration recommendations: Counsel Assisting also asked a series of questions challenging the approach by the remuneration committee (in the past) to considering the appropriateness of CEO recommendations regarding risk adjustments to executive remuneration, whether there was sufficient detail provided to enable the committee to form a view, whether sufficient time was allowed for consideration and discussion of the recommendations (10 minutes was allowed in the example under discussion) and whether the committee sufficiently challenged the recommendations.
  • Commissioner’s comments on the communication of remuneration decisions in the annual report: The Commissioner queried how clearly decisions about remuneration (and therefore what the organisation values and does not value) is communicated in the annual report: ‘How does what appears in the annual report help to convey to the whole of the organisation what it is that the board is saying to the senior leadership team about what is valued, what is not valued, what is deprecated, what will be condemned?’ he asked.  He went on to query why the reasons behind decisions were not made more apparent: ‘And isn’t that message of why an important message to send down through the organisation, the senior leadership team has been docked X per cent, Y dollars, whatever it is, because what this organisation values is this, and what it will condemn is that.  Now, you say communication to staff is something to look at.  It’s a one-page document, isn’t it?  A fairly simply – not simply written;  it’s a document that’s written simply, which is a radically different task.  It’s a document that should be available to the most junior teller, isn’t it?’ he asked.  To which Ms Livingstone agreed.

  Culture

  • Level of board oversight required? Commissioner Hayne asked Ms Livingstone: 'how important is it that the board be aware of a number of species of conduct': a) intentional conduct; b) unintentional behaviour, c) 'the careless, the silly' conduct that may lead to 'unintended consequences'; and d) positive conduct (conduct where staff have 'done something that has gone well and truly beyond what they need to'.  Ms Livingstone responded that 'the board has to be aware across all four of those that you describe to different levels' in particular, she said that the board 'needs to know about every example of wilful misconduct'.
  • Tone from the top: Counsel Assisting asked for Ms Livingstone's views on the importance of the tone that the board sets in relation to the management and importance of misconduct and compliance issues.  Ms Livingstone said that in her view, the 'tone from the top' has significant influence on the culture of an organisation and more particularly, that the tone set by the board could influence 'the behavioural norms, what’s acceptable, what’s not acceptable. It can influence the systems, in the sense of investment in systems or not investment.  It can influence the policies, as we have done, by requesting that there be a complete review of the policy framework and rewrite, and simplification'.
  • Measurement of culture: Asked whether she thought culture was difficult to measure, Ms Livingstone agreed that it is, but that the task of assessing it could be facilitated by breaking it down into 'four elements' (behavioural norms, the conduct, the effectiveness of policies, and whether effective processes are in place).  Asked what indications would demonstrate to her satisfaction, positive cultural change at CBA, Ms Livingstone said: 'I want to see that our code of conduct is actually lived.  And I want to see that people are actually disciplined through their — the policy environment, so they understand what it is they have to do, and their duties….that we have systems that are all fit for purpose.  And in all of that, I would like to see more situational awareness' [immediate reaction to something that is 'not right,' or something that 'might be wrong'.]  Asked how she would achieve situational awareness, Ms Livingstone said that CBA is it is a work in progress.
  • Culture of challenge: Ms Livingstone said that historically the board had 'not sufficiently challenged' management, that follow up on issues had been slow and that the board had relied too extensively on the assurances of the executive team.  There was 'Insufficient challenge and, again, as the inquiry highlighted, too much store placed in assurances from management, which has, effectively, then led to insufficient challenge' she said.  Asked about the changes she had implemented since becoming Chair in relation to these issues, Ms Livingstone identified the following: changes to the composition of the board (to change the way in which the board challenged management); the 'complete change in the management team' (including the appointment of a new CEO); changes to ensure there was more time allocated for consideration of important issues in meetings, a greater focus on accountability (in the context of discussion about strategic, operational and compliance issues) and improvements in the board papers as well as a greater focus on customer complaints analysis in board reports. Ms Livingstone said that as a result of these, and other changes, 'the degree of challenge at the board is significantly greater, and the non-acceptance of assurances, in the sense of it’s more of a show me, don’t tell me.  So we seek much more evidence of what actually has been done.  And there’s more urgency in terms of closure of the issues and less acceptance of long timeframes for closure'.
  • Minutes of meetings: The Commission heard that the minutes of meetings did not reflect Ms Livingstone's account of some board discussions and more particularly, that they did not appear to record discussion of some 'significant matters'.  Ms Livingstone responded that the minutes did not reflect the exchange (under discussion), but that the exchange did occur 'it’s not possible for minutes to record every single question in a board meeting, and most of the questions are, in fact, very serious questions.  That is the purpose of the board meeting' Ms Livingstone said.  Counsel Assisting appeared to suggest that this omission may have constituted a failure to comply with the requirement in relation to the keeping of minutes under the relevant section of the Corporations Act.  Ms Orr said '…Failure to comply with the requirements in relation to the keeping of minutes under section 251A of the Corporations Act is an offence?... I’m not expecting the minutes to record verbatim what was discussed, Ms Livingstone.  The keeping of accurate minutes of the board of an organisation like CBA is very important because those minutes are the evidence of the matters that are discussed in the meeting?'.  The completeness of information provided to the board in information packs/reports, as well as the length of time devoted to important issues at meetings was also questioned by Counsel Assisting.
  • Director induction programs: In the context of the issue of ensuring new directors are well prepared/informed about what may be ongoing issues for an organisation, the Commissioner observed that 'it does take a new director some months to become aware of what issues are alive and running within the organisation' and that other 'organisations are used to assembling briefing papers to allow newly joining members to know what the current issues are'.  Asked whether this is 'not a practice that could be applied and modified' Ms Livingstone agreed that it is and that CBA has reviewed the director induction program to ensure it is 'a more fulsome induction than it has been in the past, because the briefing pack that was provided was more a description of the organisation and how it runs, as distinct from the issues'.  Going forward, Ms Livingstone said that this would be the CBA's practice.

  Westpac

  Questions to Westpac CEO Brian Hartzer also focused on the causes of past issues and changes implemented to prevent their recurrence.  Counsel Assisting’s questions included questions on the themes of culture, remuneration, engagement with ASIC, as well as questions in relation to the issue of vertical integration.

  Vertical integration

   A number of questions to Mr Hartzer centred around the issue of vertical integration and whether it is possible to avoid conflicts arising from a vertically integrated structure.  Mr Hartzer expressed the view that 'the organisational structure itself does not create the conflict, nor does it protect against potential for conflicts'.  Conflicts he said, arise both within and outside vertically integrated financial institutions, and therefore, it's a question of having appropriate measures in place to manage them.

  Remuneration

  • Payment of variable remuneration: Mr Hartzer said that he viewed it as both appropriate and consistent with all relevant stakeholders’ interests, for some component of variable remuneration to be based on the employee’s measurable contribution to the financial performance of the company.  More specifically, he said that incentivising staff (through incentives) to contribute to the net growth of deposits, net growth of customers and net growth of share balances was also in the interests of shareholders.  Asked whether incentives linked to the sale of products could also incentivise poor conduct, Mr Hartzer agreed that it was possible ‘if it’s structured badly’ but added that incentives could, in his view, also ‘drive good behaviour’.
  • Continued payment of flex commissions: The Commission heard that though Westpac has acknowledged in the past, that the flex commission model of remuneration carries the risk that some dealers may prefer their own interests to the interests of consumers (creates a conflict of interest between dealers and consumers) and that therefore flex commissions were not in the best interests of customers, it has not abandoned flex commissions (though it has implemented caps).  The Commission heard that the reason Westpac did not move away from the practice was because it was of the view that ‘being the first mover’ would not achieve industry wide change.  Instead, Westpac’s preferred approach ‘was to make our view plain that it should stop, to be supportive of that, and to advocate with ASIC for it to stop.  So it was not suggesting that we were prepared to endure it forever, it was that we thought a good way forward was to make the practice stop with an intervention from the regulator’.
  • Grandfathered commissions: On the issue of the continued payment of grandfathered commissions until this year, Mr Hartzer said that Westpac had not acted to turn off grandfathered commissions earlier because ‘there was an industry practice at the time [2013].  It was part of the transitional arrangements.  And, as I said earlier, we expected the process to naturally flow off as – as advisers renewed their statements of advice with their clients.’

  Culture

  • Engagement with the Australian Securities and Investments Commission (ASIC): Mr Hartzer was asked a series of questions in relation to the approach Westpac has taken in the past to engaging with ASIC.  He said that in the past ‘insufficient weight’ had been given to ASIC’s views and that Westpac had not been sufficiently proactive in its engagement with the regulator (for example, in relation to the approach taken to credit increases).  Asked to reflect on this particular example, and whether it was indicative of a cultural issue at the lender (at that time) Mr Hartzer did not agree that this was the case.  He said: ‘I think there was clearly a deficiency in understanding the seriousness with which regulatory disagreements needed to be dealt with.  There needed to be clearer ownership within the first line business management for the fact that they were accountable for making sure they met their compliance requirements.  And I think the combination of those things today would lead to a very different engagement with ASIC’ and outlined a series of changes made to ensure that this was the case.
  • Measuring the effectiveness of changes implemented: Mr Hartzer described a number of  changes implemented to address issues with the way in which the lender dealt with ASIC historically as well as changes implemented to promote a strong compliance culture at the lender more generally.  Asked why he thought the measures implemented would be effective, Mr Hartzer said ‘on their own they’re not sufficient, but I think that it’s – it’s a mechanism we’ve used to communicate much more directly with our people the importance of compliance, meeting the code of conduct, having an open relationship with regulators, logging issues when they arise, and the like’.  Asked how the effectiveness of the measures would be assessed, Mr Hartzer said that they would be assessed through a ‘number of lenses’ including for example, staff surveys and whistleblower tools which would enable reporting and tracking of issues.
  • Opposition to some proposed reforms in the interim report: Mr Hartzer was asked whether Westpac’s opposition to potential reforms raised in the interim report was based on the effect they would have on the profitability of the bank’s business.  The reforms referred to are: Westpac’s opposition to preventing authorised representatives from recommending a product manufactured or sold by the licensee; prohibiting remuneration of financial advisers based on value or volume of sales; requiring annual as opposed to biennial opt-in notices for ongoing fee arrangements; requiring the structural separation between product manufactures and advisers; opposing any duty being imposed on intermediaries beyond that proposed by the combined industry forum (in the context of consumer lending); banning trail commissions for intermediaries; banning introducer programs; and industry codes being given legal or further legal effect) is based on commercial considerations.  Mr Hartzer said that though profitability is a ‘component’ it is not ‘the main driver.  Mr Hartzer added that ‘The way you described that sounds like we’re completely opposed to change which we’re not, but each of those points has subtleties around them’.
  • Development of an ‘ethical culture’: Asked more generally to explain how the ‘right ethical culture within an organisation is developed’, Mr Hartzer said that ‘it starts with clarity of purpose of the company, and the way that the senior leaders talk about what they’re trying to do, and then the way you embed that in what we think of as the hard wiring and soft wiring of the company’.

  The role of APRA/engagement with APRA

  • Changes to APRA’s role? The Commissioner asked Mr Hartzer for his views on the role of APRA as a prudential regulator and more particularly whether a more ‘formalised elaborate structure’ would be preferable to the use of ‘its existing supervision personnel and mechanisms as means and mechanisms of questioning, nudging, inquiring, suggesting, challenging’. Mr Hartzer said that the existing approach works well: ‘I think we’re pretty lucky with APRA.  I think APRA is a very good regulator that serves the country well and performs its role very well.  I think a bit more formality around the BEAR has been broadly helpful.  I think it’s important that it not devolve into a box ticking exercise which I’m sure we would all agree.  But if you start with the premise – and it is my premise – that we set out to do the right thing, we set out to manage our company in a good way.  We set out to have a strong balance sheet, we set out to deliver good outcomes for customers.  Then an interactive relationship with the regulator where they do poke and prod and it is more back and forth and what do you think about this and we’re worried about that, is really helpful and we find that incredibly valuable’ he said. 
  • Should approaches in other jurisdictions be emulated in Australia? The Commissioner asked whether the approaches applied in other jurisdictions to prudential supervision, and more particularly the way in which regulators are ‘starting to take a closer interest in matters of conduct, compliance, regulatory risk, and matters of that kind’ should be implemented in Australia, Mr Hartzer said that though ‘there’s been a massive hit to trust for the – for the sector and it’s really important that we restore that’ it is also important to ensure that things do not ‘go too far’.
  • How should APRA engage with the entities it regulates? Asked whether APRA as a prudential regulator should be able ‘in effect, unbidden to start challenging the board, the chair of the board, or should it be dealing only with the executive level of the bank?  How do you see APRA intersecting with the entity itself?  At what levels or level?’ Mr Hartzer said that the regulator should interact with entities at ‘all levels’ and added that in his view this already occurs. ‘The chairman of APRA and the senior APRA people come and meet with our board at least once a year.  It might be twice.  And there’s a formal discussion part of which I participate in and then at some point I leave so they can have that conversation without any executives present.  I think that’s appropriate’.  Mr Hartzer went on to say that day to day interactions should be at management level, ‘I do think day-to-day the interactions should be with the management because in the – you know, I think there is a danger of asking board to become management.  But I think it – clearly the board needs to get comfortable with its responsibilities for overseeing the risk appetite and the risk management framework, and in that they should absolutely have feedback and consultation with the regulators’.

  Macquarie

  The focus of questions to Macquarie Managing Director and CEO Nicholas Moore, was largely on two issues, the issue of the management of conflicts and the structure of remuneration at Macquarie.  A brief overview of some of the issues to arise in relation to Macquarie’s remuneration structure is below.

  Remuneration

  • Variable remuneration: The Commission heard that the way in which all Macquarie executives are paid is different to the way in which employees and executives within retail banks are paid.  Macquarie executives have a relatively low fixed salary at a senior level and then receive a ‘substantial profit share that’s deferred over a number of years’.  This variable component is in effect unlimited, because it is set each year as a percentage of profit share.  The decision to award the variable component is based on consideration of four factors: financial performance, risk management and compliance, business leadership (including client outcomes) and risk management.  The Commission heard that the process is one of ‘intuitive synthesis’ where there is a focus not only on financial performance but on other factors.  This reflects, Mr Moore said the ‘underlying performance of the business’.  At CEO level, up to 80% of the CEO’s salary is deterred for a period between 4 and 7 years, the aim being to ensure ‘long term alignment in terms of the outcome for the shareholders and the clients and remuneration’.
  • What elements of the model employed at Macquarie might be applicable to other institutions? The Commissioner queried what is ‘generalisable’ from the Macquarie remuneration model.  ‘Are there either principles or elements of the remuneration model that Macquarie adopts that you think yield more generalizable ideas?’ he asked.  Mr Moore identified three factors that could be applicable more generally:
  1. Profit share as opposed to bonuses: ‘I think the idea of profit – a profit share is more powerful than bonus.  Bonuses often relate to revenue rather than bottom line outcomes’ he said.
  2. Deferral: ‘I think deferral – to see the outcome of decisions being made in finance, as we know, decisions being made today have consequences over many years.  And so making sure there is that alignment over a period of time I think is – is very important.’
  3. Use of non-financial metrics: And the third element as we’re talking about, it’s not just being driven off a financial metric;  it has a broader application to all the other elements that are critically important to the success of an organisation and to the success of clients’.
  • Use of non-financial metrics: The Commissioner queries whether the need to ‘synthesise a number of factors, some of which are incapable of reduction to numbers, yield decisions that are sometimes difficult to explain or difficult to have accepted by those to whom they’re applied?  Are there issues about – that emerge then in the management of the system with the staff understanding and those below understanding what’s happening?’.  Mr Moore said that though there will be ‘natural pushback’, that ‘mostly’ though the outcomes may be debated, they are generally accepted if there is clear communication.  Mr Moore also linked the remuneration model used, and the use of profit share, as important for retention of staff and for building a sense of accountability within the business.  That ‘consciousness, we think, is the greatest safeguard we have in terms of the long-term health of the organisation and the client outcomes.  And it’s – we are constantly reinforcing in terms of staff training and staff review, that idea of accountability’ he said.
  • Mortgage brokers and broker remuneration: Asked to explain Macquarie’s concern about changing the current commission structure for brokers, Mr Moore said that part of the concern was due to uncertainty about the form that regulation could take, ‘our general point is one of caution to say there can be unintended consequences of regulation’ he said.  He added that Macquarie is dependent on the broker network for mortgage business and that ‘having regard to history, that the broker network does provide genuine competition, and that genuine competition has reduced the cost for all mortgages.  So our nervousness would be regulation could severely hamper that broker – broker business, and so we’re providing a note of caution in terms of any thoughts about changing the regulatory structure that people think broadly about what the implications may be’.  Asked for his views on the consequence if Macquarie was prohibited from being able to pay mortgage brokers any commission or in fact make any payment to brokers and brokers instead were paid a flat fee by the customer he said that it ‘doesn’t sound as attractive…as the current structure’. 

  [Sources: Royal Commission into Misconduct in the banking, superannuation and financial services industry (Financial Services Royal Commission): 19 November 2018 – Draft Transcript for Day 60; 20 November 2018 – Draft Transcript for Day 60; 21 November 2018 – Draft Transcript for Day 61; 22 November 2018 - Draft Transcript for Day 62]