Financial Services Update: Culture, culture, culture: why all the hype?

In this edition:

  • Culture, culture, culture: why all the hype?
  • ASIC relief for REs wishing to amend constitutions

Culture, Culture, Culture

‘Culture’ has got to be the buzz word of the year – organisational psychologists and academics rejoice! You cannot read the business section of any paper at the moment without at least one reference to it. But what is it? Discussions are rampant about what it means with phrases such as “common sets of values and beliefs” and “the way we do things around here” being bandied about the nation’s boardrooms and beyond.

For the rest of us, particularly those within the financial services industry, when the term is used within a regulatory context by ASIC it is ambiguous, confusing and unclear.

Perhaps a good place to start when trying to find a meaning is the period after the GFC which saw a global trend of significant regulatory action and intervention within the financial services industry. Since 2008, fines imposed on the largest banks operating in the United States have exceeded $100 billion. It’s a similar story in the UK with over £38.5 billion in fines imposed on UK banks to date. Both jurisdictions have seen government intervention and, as an absolute final straw, bank bailouts.

As an organisation, receiving a government bailout is as close to death as you can get from both an operational and reputational perspective, so you would expect such events to have a significant impact on any organisation’s ‘culture’ and its approach to business. However the fact that bad behaviour has continued to occur in the industry suggests that a bailout is not as negative as one would expect. Consequently, banks are increasingly regarded with mistrust by consumers and governments.

And when we talk about trust, we usually mean an action or wrongdoing by someone that is in accordance with what they said they would do. So when that trust is breached and is breached in such a systemic and wholesale manner that it cannot be blamed on a few “bad apples”, it has got to be the result of something bigger and more pervasive – something like culture.

In Australia, the conduct of banks and other players in the financial services industry has not been great but neither has it been as severe or detrimental to our economy as experienced in the US or UK. However, it could be said that Australia has somewhat jumped on the global cultural bandwagon, following the likes of the US and the UK where the business case and arguments are bigger and more obvious – a sub-prime mortgage crisis and failing banks come to mind.

At the Senate Standing Committee on Economics in June 2015, ASIC Chairman Greg Medcraft said “culture is a major risk to investor trust and confidence” and the orderly operation of financial markets. He also said that ASIC would seek to enforce the law when it perceives the “wrong culture” is “driving bad outcomes”.

So, how does ASIC regulate culture? It’s a good question and one that has given rise to some robust comments. Remember David Murray’s comments back in April?

For all the ASIC rhetoric, and that of others vying to be leading experts on compliance culture, the answer of what culture means in this context is really very simple –  compliance with the general AFSL provisions outlined in section 912A of theCorporations Act. Today’s focus on culture is a rebranding exercise, if you will, because the requirement has been there since the Financial Services Reform in the early 2000s.

We know what you’re thinking: surely it’s more than that given all the hype? And you would be right – to a point. Compliance with the general licensing conditions is one half of the culture equation, the other is ASIC’s increasing attention and enforcement effort.

Let us explain. The general licence obligations in section 912A require a licensee to have in place:

  • risk management systems;
  • compliance systems (to provide financial advice honestly, fairly and efficiently, and to comply with all financial services laws);
  • adequate systems for dealing with conflicts of interest;
  • adequate resources (financial, staff, technological); and
  • a dispute resolution process (for retail consumers).

‘Systems’ is shorthand for all the actions and activities required to perform a requirement.

In May 2015 ASIC Commissioner Greg Tanzer gave a speech discussing the attributes which go towards culture.

According to the Commissioner, these include:

  • tone from the top;
  • translating into business practices – including decision making, continuous business improvement, trend analysis of complaints, claims and issues, and consequences for breaches;
  • accountability, governance and controls; and
  • recruitment, training and rewards.

In short, simply another way of describing how a licensee should be meeting its general obligations.

A good example of how ASIC may approach this new focus on compliance culture within the financial services industry can be seen in the ASIC report on conflicts of interests within the funds management sector, released in March this year.  The ASIC report demonstrates how culture has a big part to play in how organisations manage conflicts. We will explore these issues within our upcoming webinar on 16 June 2016.

Another example of ASIC’s approach to culture can be seen in a review of its recent enforcement activity, particularly the enforceable undertakings (EUs) that ASIC has been entering into. The EUs highlight the existence of a poor culture at the organisation, being evidenced by licensees failing to meet their general obligations. The EU entered into by ACE Insurance in February is one such example.

So it seems fairly clear that the issues regarding a compliance culture (or lack thereof) within the Australian financial services industry often originate from weaknesses in an AFSL holder’s ability to bring the general obligations to life in a meaningful and often holistic way, rather than the old tick and flick approach adopted by some.

Has anything changed? Section 912A remains largely as it always has, but regulatory focus is definitely changing. In its final report the Financial Services Inquiry recommended that ASIC should be proactive in its supervision and enforcement to reduce the risk of significant detriment to consumers. ASIC has responded to this recommendation by investing significant effort talking about culture and dipping its toe into culture-focused enforcement activity. In doing so, it has made it clear that a collection of policies on the shelf collecting dust is not going to cut the mustard, suggesting such practices are often an indicator of wider ‘cultural’ issues.


ASIC grants relief to responsible entities of registered schemes who wish to amend their constitutions

To assist responsible entities who choose to implement the new tax system for managed investments trusts, ASIC has announced that will it allow responsible entities (REs) of registered schemes to make changes to their constitutions without automatically holding a members’ meeting. The instrument providing the relief is intended to come into effect on or before 20 June 2016.


In order to rely on the relief, REs will need to post a statement on their website explaining:

  • the intention to amend the constitution;
  • the reasons for the amendment;
  • the effect of the amendment; and
  • that members can make a request within seven days that a meeting be called.

The statement will also need to include an email address for members to make the request. If five per cent or more of the total number of members request a meeting, a members’ meeting must be held to approve the amendments. If less than five per cent of members request a meeting, the RE can make the amendments without member approval.

Next Steps

In preparation for ASIC’s instrument (which is being drafted), REs wanting to implement the new tax system for managed investment trusts in the new income year should consider taking the following actions now:

  • drafting changes to its constitution;
  • drafting the statement that will need to be placed on their website; and
  • undertaking internal approval procedures.
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