Banking royal commission: Round 7 — policy and CEOs
After 68 days and 134 witnesses, Kenneth Hayne has adjourned his landmark financial industry inquiry.
Thanks for joining our to our live coverage of the seventh and final round of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, held in Melbourne.
Today was the royal commission’s final day of hearings.
This morning senior counsel assisting the commission Michael Hodge QC resumed his questioning of APRA chairman Wayne Byres.
Mr Hodge questionined Mr Byers on matters including
- a proposed program of reviews of companies,
- APRA’s prudential inquiry into CBA
- and the implementation of the BEAR regime for bank executives.
- APRA’s role relative to counterpart regulator ASIC
- The appropriateness of the measures used to describe superannuation funds.
After Mr Byres’ evidence, senior counsel assisting Rowena Orr made a brief final statement sumamrising the hearings of the past two weeks.
Then after a brief summation of his own, Commissioner Hayne adjouned the hearings for the final time.
His final report is due to be submitted to the Governor General by 1 February.
Thanks again for joining us and keep reading The Australian to stay up to date with the developments that will continue to flow from Hayne royal commission.
1.41pm: Final statements
Ms Orr now makes the final summing up of the commission’s hearings.
“As I said in our opening address last week, this round of hearings was different to the first six rounds. Our focus was not on identifying further instances of misconduct, but on understanding why misconduct occurred and what can be done to prevent it in future,” she says
For that reason there will be no identification of findings open to the commissioner this time.
Ms Orr tells us that since February, the Commission has
- Conducted public hearings over the course of 68 hearing days.
- Heard evidence from 134 witnesses,
- Tendered almost 400 witness statements and we have
- Tendered more than 6500 exhibits,
Ms Orr details the witnesses that have appeared, giving particular thanks to the members of the public that have shared their stories with the commission.
“Many of them travelled long distances and gave evidence about their private financial affairs in a very public forum. I know that they did not always find that easy, but their willingness to give evidence about their experiences has greatly assisted the work of the Commission, and I am grateful to them,” she says
Ms Orr also thanks the team that has worked with her during the course of the commission, both at the hearings and unseen in the background.
Commissioner Hayne also recognises the work of the team, with special mention of the work done by the Australian Government Solicitor.
“I should say publicly that I recognise the intensity of work that has been required of those acting for the entities whose conduct has been the subject of examination. And I should also say publicly that I recognise that, much more often than not, those acting for the entities and agencies concerned have sought to cooperate with the Commission and with solicitors assisting in seeking to deal with the requirements that the Commission has made,” he says.
He also makes mention of the media and its role in what has been a very public inquiry.
“We will adjourn,” Commissioner Hayne then says, and with that the landmark inquiry comes to an end.
1.39pm: Measuring super funds risks
Mr Hodge draw attention to a problem that APRA identified with the quality of the information that is being provided to members about risk and target returns.
Mr Byres says that its not a bad measure for those who understand investment risk but that its not complex enough.
“My mother would understand that risk metric.
“She is concerned about how many times it might go negative.
“So it’s a risk metric that appeals to the less - I don’t wish to insult my mother here but the less financially literate, because it is a concept how many times might I get a negative return.”
He says that if he gave his mother metrics which would be used to really understand risk, she would not be able to understand it.
“So we are - I think I’m agreeing with you that there is a - it’s a very simple measure.
“It has limited information content. It’s better than nothing.
“And it’s not clear what the superior measure would be.”
Mr Hodge asks if APRA might need to play a role in trying to figure out how to better inform people about the returns and risks involved in their returns.
“We could certainly try to do that when it comes to most disclosure related issues, ASIC is - is lead there,” Mr Byres says.
“We would be happy, I’m sure, to contribute to that… but I’m conscious that it’s not for want of trying already that (the current) measure emerged.”
Mr Hodge says he has no futher questions for Mr Byers and he is excused.
1.28pm: Defining super fund strategies
Mr Hodge moves to talking about industry metrics about what constitutes a growth super fund, highlighting issues arising from a speech that Mrs Rowell gave in 2015 in relation to MySuper investment strategies.
He says that more recently, this year, there have been, some public discussion about what exactly constitutes a growth asset as compared with a defensive asset.
1.22pm: Productivity commission draft report
Mr Hodge turns to the productivity commission’s draft report, and asks if APRA agrees with its observations.
“Not entirely, no,” Mr Byres responds
“We don’t think the blurring is quite as suggested and we think our - as I said on a number of other occasions, I think our supervisors are out - day-in day-out pushing for change and improvement.”
1.18pm: Regulators tripping over each other
Mr Hodge talks about APRA saying it didn’t want to duplicate work when ASIC had said it was already investigating fees for no service.
On the NULIS MLC issue, Mr Byres says there were other issues they were grappling with at the time.
“So the idea of diverting resources and replicating the ASIC work didn’t seem to be a particularly sensible thing to do,” he says.
Mr Hodge points out that APRA knows that ASIC had no mandate in respect of any breaches of the trustees duties under the SIS Act, so couldn’t have thought that ASIC would be taking up those issues.
“No,” Mr Byres says.
Mr Hodge says that given that ASIC has no mandate in respect of breaches of the relevant duties under the SIS Act, and that the breaches had been reported to APRA, he questioned if it would make sense to say, “Well, this is something that we can leave to ASIC”.
“No. I think what we would say is we’ve got another regulator that is looking at, essentially, the same facts, the same documents, the same actions, overlap of people,” Mr Byres says
“It’s actually inefficient and sometimes unhelpful to have two regulators investigating the same thing at the same time.”
1.04pm: Further ‘investigation’ required?
Mr Hodge turns to a witness statement, detailing that MLC had been charging adviser service fees across where it shouldn’t have been, since 2007.
That was discovered in 2014, the commission hears.
Mr Hodge asks Mr Byres whether he would now expect APRA, to investigate further on being notified of an issue that had been going on for seven years, and where it was said that there were no continuous controls from a risk perspective over the end-to-end process.
Mr Byres says he’s wary of the word “investigate” in the sense of formal investigations under the Act.
He says they would make further inquires though.
12.55pm: Slow remediation
Turning to the remediation for fees for no service, Mr Hodge says it has taken a very long time for some entities, and Mr Byres agrees.
“Do you have a view about what that tells you about the culture of those organisations?,” Mr Hodge asks.
Mr Byres says that organisations had been slow to identify issues and that attention to detail is an issue.
“One of the reasons it’s taking so long is because of a problem with basic record keeping,” he says.
“So I think I’m coming back to these issues of inattention to — to detail, paying attention to compliance.”
Commissioner Hayne then makes a comment about the notion of inattention to detail.
“Is it inattention to detail not to notice that money in, money out are different to the extent that we’re talking about here?” he asks.
“The question is, really, at what point did it become a materially sufficient number that it should have alerted people, auditors, et cetera, that that number was — or that — actually, that balance shouldn’t have been there in the first place.”
12.49pm: Does APRA recognise systemic issues?
Mr Hodge says APRA has now received notice of fees for no service issues across more than 10 RSE [registrable superannuation entities] licensees.
Mr Byres doesn’t know the answer but says it wouldn’t surprise him.
Mr Hodge asks if he thinks it’s a systemic issue within the RSE licensees regulated by APRA and says ASIC reports indicate it is.
On APRA’s supervision of licensees, Mr Byres says there are limits and that the regulator doesn’t audit accounts.
“To some extent, we are dependent on institutions bringing issues to our attention,” Mr Byres says.
“When we’re talking about those sorts of matters of detail.”
12.38pm: ANAO on super
Mr Hodge turns to superannuation, and asks Mr Byres to consider the way in which APRA has dealt with some problems in relation to superannuation.
He turns to a 2016 performance audit by the Australian National Audit Office into in relation to APRA and superannuation entities
“We see the objective of the audit was to assess the effectiveness of APRAs processes for the prudential regulation of superannuation entities,” Mr Hodge says.
It said APRA had varying levels of supervision, limited external reporting, no quality assurance framework and limited oversight.
APRA agreed with all of them, Mr Byres says.
They discuss further issues identified in the audit about APRA’s supervision of the super sector.
“Did you find it helpful to have the ANAO go through and identify all of these issues in relation to your approach to supervision?,” Mr Hodge asks.
Mr Byres says it brought clarity to the issue, but said APRA didn’t agree with all of the conclusions the audit committee found.
12.35pm: ‘Significant shortcomings’ at NAB
Joyce Moullakis reports that NAB has found “significant shortcomings” in its management of risks, including conduct, and that executives did not apply “sufficient intensity and urgency” to longstanding issues.
NAB’s “self-assessment” of governance, accountability and culture, submitted to the Australian Prudential Regulation Authority, recommends 26 initial actions to strengthen the bank’s governance. It spans areas including conduct, systems and culture.
The document follows APRA’s damning report in May into rival Commonwealth Bank’s culture, systems and governance. The regulator then pushed other banks to undertake their own assessment.
“Weaknesses were found in areas such as conduct, compliance and the integrated management of operational risk,” the NAB report said.
12.22pm: Was NAB ‘dishonest’?
Mr Hodge turns to APRA’s response to NAB’s super arm NULIS.
He asks Mr Byres if he has a view on whether deducting fees from members’ accounts where it’s not authorised and no service has been provided is dishonest conduct.
“I guess it depends on how that came about, but in the layman’s sense of the word, potentially it could be, yes,” Mr Byres responds.
“So if — if it was, you know, deliberately done with intent, then yes, I would say that’s dishonest.
“If it was a processing error that occurred despite all efforts to the contrary to prevent those sorts of things happening, then I probably wouldn’t use the word dishonest.”
12.17pm: Is this the strategy?
Mr Hodge then brings up another document.
This one is titled, “What is APRAs enforcement strategy and why is it appropriate?”
Mr Byres says he first saw the document last night and that so doesn’t know on what basis it was prepared.
“You don’t know whether this is actually APRAs enforcement strategy or not?,” Mr Hodge says.
Mr Byres says that based on a read-through last night, it appears to be a reasonable articulation, but it’s not a board-approved document or a board-approved articulation of strategy.
Mr Hodge questions whether it seems problematic that APRA doesn’t have an approved enforcement strategy, given its conduct role in relation to superannuation.
“As I said, I think the — the general approach to enforcement’s probably articulated within the enforcement manual in various ways,” Mr Byres says.
“But having — I can take your point.
“Having a single pager that articulates strategy would probably be useful.”
12.16pm: Group of 30 report
The Australian banking industry is only beginning a long journey to repair its conduct and culture, a group of the world’s top financial figures has warned. The Group of 30, a private international body of leading financiers and academics, has released a report on banking culture on conduct. “With the ongoing royal commission and pending recommendations, as well as continued revelations of retrospective misconduct among Australia’s financial institutions, we anticipate that the Australian banking industry is only beginning its long journey to repair its conduct and culture,” it said.
You can read more about the report here.
12.11pm: Enforcement strategy review `
If the decision had been made to review the enforcement strategy, then why would the executive team need to consider if it needed to be reviewed — as per the document — Mr Hodge asks.
It was a stream of consciousness of issues that ASIC needed to think about and say in the submissions, Mr Byres says.
Mr Hodge tables that document.
He says it seems the decision for a review of the enforcement strategy was made after the round five royal commission hearings.
Mr Byres clarifies to say it was a part of prioritising Mr Londsdale’s role when he started with APRA.
12.01pm: Need some direction
Mr Hodge turns to a document written by Mr Byres with the headline “Feedback to Royal Commission after round 5. Need some top down direction on some issues”.
The enforcement strategy was identified as one of the issues.
Mr Hodge then asks if APRA had an enforcement strategy at that time.
Mr Byres responds by saying APRA doesn’t have a document that says “this is a strategy document” but he said there is enforcement documentation that talks about how APRA does things.
Mr Hodge then asks Mr Byres about the second question posed, which was whether the enforcement strategy could or should be reviewed.
“So at that stage you hadn’t made the decision to review your enforcement strategy?,” Mr Hodge asks.
Mr Byres disagrees, saying he had spoken to Mr Lonsdale about it and that looking at enforcement strategy would be one of his tasks upon starting at APRA.
“We have to think about how to apply them,” he says.
“That will have implications for supervision and enforcement more generally. So yes.”
11.51am: New powers for APRA
Mr Byres says he has been thinking about an enforcement strategy ever since the regime emerged, because it seemed as if APRA would be handed significant new powers.
“We had to think about whether we were equipped to utilise those powers,” he says.
“There’s no doubt after the range of issues emerged in round 5 [of the royal commission] that that gave impetus to pushing that work along. It also coincided with the arrival of Mr Lonsdale at APRA, who started in October and was tasked with taking charge of, among other things, BEAR and enforcement.”
Mr Hodge turns again to APRA’s enforcement plans for the regime (or lack thereof).
Between then December of 2017 and July of 2018, when the regime came into force, what was the work that was being done about enforcement, he asks.
Mr Byres says that work was being done to make sure decision process were in place and how issues would be escalated under the regime.
“So that was where the time and attention was devoted,” he says.
He says he remembers when APRA had the disqualification power that BEAR reintroduced.
“And we tried to undertake a number of disqualifications, and — and for various reasons they were overturned at the AAT [Administrative Appeals Tribunal],” Mr Byres says.
“So it seemed to me that it was going to be important that as we thought about how we use the power again in the future that we didn’t fall into saying well we used to do it this way and we will do it that way again because actually that way didn’t work that well.”
11.43am: Who does what on BEAR?
Mr Hodge turns back to the unresolved issue of enforcement and how it could be done in conjunction with ASIC.
“I think you have to sort of think through pretty carefully to make sure that it didn’t jeopardise the core prudential task that APRA would still presumably be left with,” Mr Hodge points out.
He talks about the issues that could present themselves when trying to carve up the responsibilities when it came to civil penalty proceedings.
Mr Byres says it should still be a “twin peaks” model.
11.30am: Bigger BEAR needs ASIC
Mr Hodge asks if applying the regime to financial institutions beyond the banking sector would require joint administration between ASIC and APRA.
“If it went to wider set of organisations beyond our current prudentially regulated industries, then I would say, yes, you would leave that to ASIC to deal with,” Mr Byres says.
“My short answer is yes, I think you do need dual administration if you broaden it.”
Mr Byres says the regime is modelled on a UK regime, which covers investment firms, investment banks, stockbrokers and other sorts of financial intermediaries.
11.14am: Half-baked BEAR
Mr Hodge asks Mr Byres about BEAR, which came into force for the big four on July 1, and will come into effect for other Australian deposit taking institutions (ADIs) in July next year.
Mr Byres says the way APRA will deal with breaches to the regime is yet to be determined, because the regulator has been caught up in a broader thinking about enforcement strategy.
Mr Hodge clarifies: “Just so I’m clear, the reason that APRA has not to date explained how it will approach enforcement of BEAR is because that has been caught up as part of the broader review of enforcement strategy?”
Yes, Mr Byres says.
“Would it not have made sense to put out something before 1 July 2018 about
your approach to enforcement of BEAR, that is, before it actually came into effect for the big four?” Mr Hodge asks.
“It would have been,” Mr Byres says. “It would have been nice to do, I suppose, yes.”
“And do you have a view as to why that didn’t happen?”
“That was just resourcing.”
11.06am: ‘No one takes responsibility’
Mr Hodge moves to talk about the bank executive accountability regime, better known by its acronym BEAR.
Commissioner Hayne interjects to point out that, according to a paper released today by the international ‘Group of 30’ financial institutions, the Australian banking industry is only beginning its long journey of repair to its conduct and culture. He asks Mr Byres what APRA’s role is in the recovery of the culture banking industry.
Mr Byres says that BEAR is an example, but says it only applies to one sector.
“But the general concept of clarity of accountability, or, more to the point, the problem of diffused responsibility and no clarity of accountability has been the heart of the problem,” Mr Byres says.
“No one has had responsibility, no one has actually taken responsibility for issues.
“Boards have not known how to apply consequences because it’s not clear who was responsible for things.
“So a strengthening of accountability.”
He then says that the multitude of issues means can’t help but think that compliance and audit functions are not strong enough in organisations.
“So these issues persist too long before they are detected.
“And it’s evident also in ASIC’s breach work, that issues can go for such a long period of time in organisations without being identified.
“It’s probably fair to say that the prudential framework, if you look for references to compliance and internal audit, they’re fairly cursory and short and will need to think about how we give them more prominence in our assessment of risk management because it has traditionally been, as you’ve said, the sort of financial soundness perspective.”
He says that audit and compliance should be at the forefront, saying that regulators “can’t find all this stuff”.
“We can’t be the first line of defence,” he said.
10.55am: Does BEAR need to get stronger?
Mr Byres suggests that APRA’s existing standards are effective in describing the role of the board but they don’t place as much focus on the role of the chief executive and management.
“And so the answer may not be to more strongly mandate the role of the board; it may be to, perhaps, part of BEAR [the Bank Executive Accountability Regime], etc, to more strongly articulate the obligations of management to fill in the total picture,” he says.
10.48am: A very hard task
Mr Hodge turns to APRA’s statement, which indicates that APRA is reconsidering whether its work on culture should have an exclusively prudential focus.
He asks how APRA would look at issues of culture and remuneration within institutions, if it were to move from reviews to a focus on how the entity assesses its risk culture.
Mr Byres says a “slight step back” in the way it works wouldn’t preclude it from identifying issues of misconduct.
“Many of the drivers, I think, will be related to issues of incentives that we’ve already talked a lot about,” he says.
Mr Hodge then asks if financial institutions have become comfortable with the requirement that they form a view of the risk culture of their institution.
Mr Byres says no, because financial organisations are so large and different cultures exist in different divisions.
“I think they accept and acknowledge the importance of the task and that it is something they should do,” he says.
“But it’s actually a very hard task.”
10.37am: “We were battling”
Mr Hodge asks if Mr Byers thinks the pilot and CBA inquiry were useful.
Mr Byers confirms that they were.
“They provided insights into the culture of the two organisations?” asks Mr Hodge. “Absolutely. They were fabulous pieces of work.”
In the light of the CBA inquiry, APRA had come to the view that its more routine activities had been less effective at driving cultural change at CBA, Mr Hodge suggests.
“Yes,” says Mr Byers. “We were battling hard.”
On the subject of resourcing, Mr Byres says while APRA may not be able to roll out intensive review across all financial institutions, the regulator could undertake deeper reviews in if it thought there was something very poor about the risk culture of the entity.
“It would probably require us to perhaps utilise external resources to support us doing that work,” he says.
“But we have sufficient powers that if we thought we wanted to go and do one of those really deep sort of exercises like in the CBA review, we could do that.
Commissioner Hayne steps in to ask if the premise of Mr Byres’ prior statement, on deeper reviews only when necessary, is that there is not now observed to be a deep problem.
Mr Bynes disagrees, because “boards are now highly attuned to this issue” and such, a thorough, CBA-style review isn’t necessary in every case.
“They recognise that there is work to be done just about in every organisation, and so it’s not that the issues aren’t getting attention and that there isn’t work to do,” Mr Byres says.
“But for us to be able to do that CBA-style review or the initial pilot review, given all the other things we have to do, there is a resourcing constraint.
“And we have to think about how do we most efficiently use our resources.”
10.27am: Studies were resource intensive
Mr Hodge points out that instead of holding a workshop to provide feedback on risk culture, APRA moved to provide feedback in writing, which he says would be based on its consideration of the entity’s own assessment of its risk culture.
Mr Byres agrees with Mr Hodge that change was shifting to a less resource intensive way of approaching risk culture.
He says the original plan was to do five pilots but APRA didn’t get to the second one after it looked at CBA.
“The pilots were a very intensive process,” Mr Byres says.
“Very reliant on key people.
“And there was always a question mark as to how scaleable it was going to be across the APRA population.
“The conclusion that we reached … (was that) we just didn’t have the resources to get anywhere near the coverage that we would need.”
10.20am: Pilot reviews
Mr Hodge turns to look at APRA’s governance, culture and reputation team, which he says was created in 2015 and is supporting the supervisory teams.
The team was initially three people and grew to about 10 people.
Mr Hodge tell us APRA had a program to make an independent assessment of each institution’s risk culture.
But Mr Hodge points out that the wider program was suspended because the resources were redirected to the CBA prudential inquiry.
Mr Byres says which CBA was seen as a priority at the time.
“We had a — obviously, a couple of key resources who were our core expertise in this area, and they were redirected to do similar sort of work in relation to risk culture for the CBA inquiry because that was seen as a priority,” Mr Byres says.
The commission hears that in late 2017 and early 2018, a number of the senior members of the governance, culture and reputation team resigned, and APRA then decided not to proceed with the risk culture pilot reviews their original form.
10.10am: APRA having a view
Mr Hodge says APRA’s approach to risk culture “seems to be very focused on what is the quality of the information coming up to the board for the board”.
“That seems to be slightly distinct from the idea of the supervisor forming their own view about risk culture and then trying to intervene to proactively prevent problems,” Mr Hodge says.
Mr Byres agrees that APRA would have to form a view in order to test the effectiveness of CPS 220.
“I think if you want to test and challenge, which I think is going to the heart of your question, we have to have a view, and we will see if it’s aligned with the board’s view,” he says.
In essence, APRA needed to be confident of what its own view was if it was to challenge boards, effectively, we hear.
9.59am: ‘Ensure’ at issue
This morning we start with senior counsel assisting the commission Michael Hodge QC continuing his questioning of APRA chairman Wayne Byres.
Mr Byres says there has been a need to apply the concept of risk culture more broadly.
“As I said yesterday, I think APRA and ASIC can manage that well, but it’s an issue that we have to think carefully about,” Mr Byres says.
Mr Byres agrees with Mr Hodge that the approach APRA takes, whereby it surveys what the norms of Australian boards are, is different from the approach of regulators in the Netherlands, where the regulator itself forms a view about the risk culture within the organisation
“I would say the Dutch, if I look internationally, I would say the Dutch are something of an outlier, or certainly furthest along on the spectrum,” Mr Byres says.
“And, you know, we’re developing a process that I think is more what I would call more normal among our peers.
“But different people — no one’s exactly the same.”
9.51am: APRA chairman returns
This morning we start with senior counsel assisting the commission Michael Hodge QC continuing his questioning of APRA chairman Wayne Byres.
Mr Byres says there has been a need to apply the concept of risk culture more broadly.
“As I said yesterday, I think APRA and ASIC can manage that well, but it’s an issue that we have to think carefully about,” Mr Byres says.
9.00am: Westpac facing strike on pay
Governance and executive remuneration has been a frequent topic during the final round of the commission’s hearings. This morning Andrew White reports that
Westpac is set to face investor fury, and potentially a first strike, after three proxy advisory firms told investors to vote against its remuneration report.
Westpac will test the waters at its annual general meeting on December 12, ahead of its rivals ANZ and National Australia Bank who will also face pressure at their respective meetings the following week. Commonwealth Bank has a June 30 year end.
The Australian understands advisory firm Ownership Matters is telling institutional investors to vote against Westpac’s pay report and also recommend against the re-election of non-executive director and former AMP chief Craig Dunn.
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