CBA Jeff Morris whistleblower

The conflict of interests in the case

There various conflicts of interests arising from the case include the conflict between the clients and the financial advisors. Considering the stakeholder theory, an organization is expected to operate in a way that does consider the interests of both various stakeholders (Moreno, Hervias & Martínez, 2016). In the interest of clients, the Commonwealth Bank’s greatest social responsibility is to ensure its consumers receive quality products including provision of truthful and honest information about their financial investment products (Jamali, 2008). Therefore, CBA is expected to conduct its businesses in best public interests through provision of reliable information to all its clients as well as safeguard them from misleading information (Tietzel & McGrath, 2014). However, the CBA scandal demonstrates a clear conflict of interests arising from the actions of the financial planners indulged in irresponsible and self-serving actions. For example, ASIC Investigations found two advisers Mr. Jade Zaicew and Mr. Baker guilty of misleading and deceptive conduct, and non-compliance with the established standards accordingly (Parliament of Australia, n.d). It is argued that, the conflict of interest raised in this case is derived from incentives that include the initial or ongoing commissions, assets-based fees, and bonuses, which is extra payment for advising certain financial products or services (Kollmorgen, 2015). In addition, CBA’s financial advisors were charging clients a percentage of the value of the total portfolio as it is the bank services fee strategy, regardless of the quality of services provided to clients (Commonwealth Bank Financial service guide, 205). Accordingly, financial advisers were motivated in expanding their income generation by offering more and more financial products to client, thus leading to an aggressive sales culture in the effort to gain commissions and protect their jobs through achievement of set targets (Tietzel & McGrath, 2014). Accordingly, the company was experiencing many complaints from clients served by the bank’s financial advisors. Such actions not only have negative implications on the clients but have resulted into compromise of the Banks own interests such the need to attract and retain clients and even of greater importance, CBA’s reputation in the Australian banking sector (Ramsay & Smith, 2009).

Also, the conflict of interests in the case can include the conflict between the shareholders and the management. According to stakeholder theory, management is expected to manage and engages in fair and honest business practices to strive for a competitive return on investment, and to maximize shareholder wealth (Vilaseca, 2002). Considering the financial scandal that took place, the management of the company was involved in concealing and ineffectively monitoring the financial advisors’ activities. For example, in 2008 Mr. Morris found that a group of CFPL management was involved in covering up Mr. Nguyen’s malpractices (Parliament of Australia, n.d). It is clear that this group of managers were not practicing in the best interest of shareholder as their incentives were towards either to protect their positions or maximize their power (Fama, 1980). This can be demonstrated by the fact that they did not consider the interests of the shareholders in the process of making vital decisions. As a result, the shareholders conflicted with the managers as they expect the managerial practices to be geared towards increasing the wealth of the shareholders (Joshi, Cahill & Sidhu, 2010).

The other conflict of interest arises between the regulatory body established under the Australian Securities and Investments Commission Act 2001 and the large financial institutions in Australia. It has been argued that the body has been reluctant in taking actions against some financial institutions despite complaints of malpractices from clients and whistleblowers (Speed, 2013). In this case, the regulatory body fails to take immediate action against the bank by arguing that proper inquiry is needed as well as safeguarding its reputation under the argument that it has no sufficient power to Act (ASIC, 2006).

Royal commission

CBA’s established the Open Advice Review Program between 2003 and 2012 administering justice to the affected clients. The review program was carried out by the Commonwealth Bank themselves, hence failed to offer amicable solutions to clients (Janda, 2014). Previous efforts through public inquiries, reluctance by people holding key information, and lack of compliance by the senior executives when called upon to such inquiries have left formation of a royal commission as the only expeditious way to resolve the matter (Bishop, 2016). Therefore, an independent commission of inquiry such as the Royal Commission is required to ensure no conflict of interest in the investigations (Clarke, 2016). Since the royal commission has the power to call witnesses and collect evidence safeguard the interests of parties involved in the case (Henderson & Conifer, 2016). Institution of the royal commission has been supported by the Governance institute of Australia responsible for educating secretaries and corporate risk managers because the problem is not only in CBA but rooted across the financial sector (Clarke, 2016).

References

ASIC. (2006). Managing Conflicts of interest in the financial services industry. Consultation Paper 73, ASIC.

Bishop, M. (2016). CBA approach to Senate inquiry showed need for royal commission into banking sector. The Sydney Morning Herald, May 2, 2016. Retrieved from
http://www.smh.com.au/business/banking-and-finance/cba-approach-to-senate-inquiry-showed-need-for-royal-commission-into-banking-sector-20160502-gok3cl.html

Clarke, T. (2016). A history of failed reform: Why Australia needs a banking royal commission.

ABC News, Retrieved from
http://www.abc.net.au/news/2016-09-12/why-australia-needs-a-banking-royal-commission/7835922

Commonwealth Bank Financail Service Guide. (2015). Commonwealth private limited
https://www.commbank.com.au/content/dam/commbank/about-us/news/on-the-record/2014/cba-fsi-final-submission.pdf. Retrieved from

Fama, E. F. (1980). Agency Problems and the Theory of the Firm. The journal of political economy, 288-307.

Janda, M. (2014). Commonwealth Bank boss Ian Narev says sorry for multi-million-dollar financial planning scandal, ABA.
http://www.abc.net.au/news/2014-07-03/commonwealth-bank-responds-to-financial-planning-inquiry/5568504 Retrieved from

Jamali, D. (2008). A stakeholder approach to corporate social responsibility: A fresh perspective into theory and practice. Journal of business ethics, 82(1), 213-231.

Joshi, M., Cahill, D., & Sidhu, J. (2010). Intellectual capital performance in the banking sector: An assessment of Australian owned banks. Journal of Human Resource Costing & Accounting14(2), 151-170.

https://www.choice.com.au/money/financial-planning-and-investing/financial-planning/articles/fofa-financial-adviser-reformkollmorgen, a. (2015). FoFA financial adviser reforms Will they put an end to conflicted advice?. choice. Retrieved from

Moreno, C. O., Hervias, E. A., & Martínez, D. M. (2016). Conflict of interests. Letters to the Editor52(2), 107-117.

Parliament of Australia. (n.d). Chapter 8: Commonwealth financial planning limited: What went wrong at CFPL and why?http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/ASIC/Final_Report/c08 Retrieved from

Ramsay, J., & Smith, M. (2009). Managing customer channel usage in the Australian banking sector. Managerial Auditing Journal14(7), 329-338.

Speed, R. (2013). Inquiry into the performance of the Australian Securities and investments Commission. Senate Economics References Committee. Retrieved from http://www.ruleoflaw.org.au/wp-content/uploads/2013/11/Rule-of-Law-Institute-Submission-Inquiry-Performance-of-ASIC1.pdf

Tietzel, N & McGrath, P. (2014). Australian Commonwealth Bank Fraud scandal. Retrieved from http://abalinx.com/wp-content/uploads/2014/06/AUSTRALIAN-COMMONWEALTH-BANK-FRAUD-SCANDAL.pdf

Vilaseca, A. (2002). The shareholder role in the family business: Conflict of interests and objectives between nonemployed shareholders and top management team. Family Business Review15(4), 299-320.