The 7th round of hearings at the Royal Commission started this week, with the chiefs of the major banks and ASIC facing interrogation. It is focusing on 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. Commissioner Hayne said he wanted to explore with bank bosses some of the policy “issues” identified in his interim report.
The Interim Report
Following the previous round of hearings, the RC released a 1,000 page interim report at the end of September, which blasted Australia’s large financial institutions for a litany of appalling conduct. It said they had put “greed” and “the pursuit of short-term profit at the expense of basic standards of honesty”. Hayne identified “selling” as having become the focus for banks and financial services entities, and as a result, more often than not the “sole focus” as banks “searched for their share of the customer’s wallet”. The report indicated incentives inside the companies were geared to the pursuit of profit, and from “the executive suite to the front line, staff were measured and rewarded by reference to profit and sales”.
The report also criticised the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), the two key regulatory bodies in charge of overseeing the industry. “When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done,” the interim report said. Officials from both regulators have been asked to give evidence as witnesses again this month.
Play On – Nothing To See Here
So far CBA chair Catherine Livingstone and new CEO Matt Comyn have given evidence, and currently Westpac chief executive Brian Hartzer is in the dock. Hartzer has blamed the culture inside Westpac for ignoring ASIC’s views about responsible lending requirements for credit limit increases for two years because “there wasn’t a specific error by an individual”. Livingstone's responses during her time under examination created a picture of CBA executives that has been described variously as greedy, weak, and incompetent. In the big ticket media item from yesterday it was revealed that the CBA board asked former chairman David Turner to return 40% of his annual fees following a critical report from APRA in 2017. Turner said no - apparently saying he didn’t agree with APRA’s assessment of the board’s performance. It’s like when the father of cricket, WG Grace was clean bowled, but refused to leave the field, reportedly saying “play on”. Turner’s refusal to accept the decision was however not exposed for everyone to see - the incident was kept secret from shareholders and the public. Publicity seems a key issue regarding remuneration. Although the CBA claims it has stripped more than $100 million worth of remuneration from its employees over the past two financial years in response to a string of scandals, Livingstone conceded that since 2011, senior CBA executives had only had their short-term remuneration reduced for a “risk-related issue” if the issue has become public.
Former CBA Exec’s Thrown Under a Bus
Testimony from the CBA chiefs basically threw former high office holders under a bus, basically saying they were the ones responsible for not taking action to reform some processes that later were identified and exposed in the Royal Commission. Turner, former CEO Ian Narev and former Head of Wealth Annabel Spring, all came in for a bashing and were hung out to dry. Apparently Comyn had been trying to stop selling junk add-on insurance products, such as credit card insurance and loan protection insurance. According to Comyn, he also disagreed with Spring over what to do about selling insurance on lending products like credit cards. The money quote from all these interactions came after Comyn repeatedly lobbied Narev to cease selling these products - at a meeting between the two was told by Narev to "temper your sense of justice". Obviously the new guy Comyn is a crusader for the customer and Narev is the “scoundrel”. How the “scoundrel” was awarded $12.3 million for a year’s pay in the financial year (2015/16) that these exchanges took place shows how lonely it must have been for Comyn…
Problems Actually Decades in the Making
As much as the PR arm of the CBA might like to blame the previous executives and departed board members (those responsible are gone – we will be better now!) for the deceitful behaviour and other revelations exposed in the Royal Commission, the truth is the blame for the CBA’s shortcomings cannot be sheeted home in such a short-sighted matter. A more nuanced view of the problems in the Australian finance sector has been articulated by Robert Gottliebsen, writing in 'The Australian'. He notes that around two decades ago, a confluence of circumstance was the genesis of todays problems.
A new breed of large institutional shareholder was one factor, and this combined with banks acquisition of wealth arms that were originally borne and driven by the “hard selling and high commissions” culture of traditional life insurance, was the beginning of the rot.
“As Australian interest rates began to fall, the need for greater returns from banks began to increase…the institutions (institutional shareholders) began putting intense pressure on bank boards to deliver greater earnings per share. Bank boards were sucked in and salary packages of senior bankers began to change so rewards were much more closely aligned to earnings per share and sometimes even the share price.” This was the beginning of the “cultural change” process when customer outcomes started playing second fiddle to profits and share prices.
Gottliebsen continues… “During this cultural change process, the banks believed that if they entered the wealth management and life businesses there would be incredible synergies and big profits. In theory they were right - but they did not understand the culture of the industry they were getting into” and they did not “fully appreciate that they were buying enterprises that were based on a totally different ways of doing business”. This analysis may go some way to explaining how the "sales and profit" culture infiltrated our finance system, and how it infected other factors at the heart of Hayne's current inquiry.
It is an interesting argument and goes much deeper that simply blaming former executives. To the extent that the Royal Commission is looking at culture, governance, remuneration and risk management practices, it may shed some light about the potential fixes Hayne may recommend. How to remedy the financial sectors woes? How to unscramble the broken eggs in this highly concentrated market? Successful recommendations to these questions on an industry wide level will be recommendations worth waiting for.