Commonwealth Bank facing probe by APRA

An inquiry will be held into CBA, as a money-laundering scandal adds to concerns about its culture and governance.

Commonwealth Bank CEO Ian Narev. Pic: James Croucher

The banking regulator will launch an investigation into the Commonwealth Bank, as allegations the nation’s largest lender failed to prevent money laundering raise further concerns about the bank’s culture and governance.

Australian Prudential Regulation Authority chairman Wayne Byres said “a number of issues” had prompted the inquiry, which will be conducted by an independent panel that will produce a public report after a period of six months.

Shares in CBA declined $1.04, or 1.34 per cent, to finish at $76.68 - their lowest close since November, 2016.

The regulator’s move follows a series of scandals to engulf the bank in recent years.

Most recently, the anti-money laundering agency Austrac filed a civil case in the Federal Court early this month alleging CBA (CBA) failed to properly report more than 50,000 transactions to the government while criminal syndicates were allegedly washing money through the lender’s smart ATM network.

The bank has also suffered from the exposure of questionable advice given by its financial planning arm, allegations doctors at insurance subsidiary CommInsure were pressured to change opinions and a first strike against executive pay at last year’s AGM.

APRA’s inquiry will focus on governance, culture and accountability frameworks and practices within CBA, and will make recommendations as to how they are promptly and adequately addressed.

The prudential regulator said it will include, at a minimum, considering whether the group’s organisational structure, governance, financial objectives, remuneration and accountability frameworks are conflicting with sound risk management and compliance outcomes. Determinations to specific matters relating to the Austrac allegations would not be made.

The news of the imminent inquiry came as Treasurer Scott Morrison took to the airwaves to declare the government had been working closely with regulators to ensure “a full court response” to the money laundering allegations.

Mr Morrison said he was “confident” the full response was being provided by regulators, citing ASIC’s current work to further investigate whether directors met their responsibilities in relation to the Austrac revelations.

“We have Austrac with the case before the courts and the directions hearing on that is soon,” Mr Morrison said. The hearing takes place on Monday.

Reputational risk, organisational culture and trust in the financial system have been a key focus for APRA in recent years.

“The overarching goal of the prudential inquiry is to identify any core organisational and cultural drivers at the heart of these issues and to provide the community with confidence that any shortcomings identified are promptly and adequately addressed,” Mr Byres said.

“CBA is a well-capitalised and financially sound institution. However, beyond financial measures, it is also critical to the long-run health of the financial system that the Australian community has a high degree of confidence that banks and other financial institutions are well governed and prudently managed,” he said.

“The Australian community’s trust in the banking system has been damaged in recent years, and CBA in particular has been negatively impacted by a number of issues that have affected the reputation of the bank.

“Given its position in the Australian financial system, it is critical that community trust is strengthened. A key objective of the inquiry will be to provide CBA with a set of recommendations for organisation and cultural change, where that is identified as being necessary.”

CBA chairman Catherine Livingstone said the bank recognised the last few years have damaged the community’s trust with the lender.

“We have been working hard to strengthen trust, and will continue to do so. We welcome this opportunity for independent parties to review the work we have already undertaken and advise on what more we can do,” Ms Livingstone said. Commonwealth Bank will foot the bill for the inquiry.

“APRA’s oversight of this inquiry will ensure the independence and transparency needed to reassure all our stakeholders,” she said.

Chief executive Ian Narev, who will retire by the end of the financial year, said: “We know that our mistakes have hurt our reputation.

“An independent and transparent view on the work we have done, and the work we still have to do, is an important element of strengthening trust. So this inquiry has our full support, to ensure it is as effective as possible,” Mr Narev said.

CBA earlier this month unveiled a record $9.9 billion profit. Despite the bumper result, executive bonuses were slashed. The bank was harshly criticised for not reducing generous bonuses the year prior, which saw Mr Narev take home more than $12m in pay.

Thw Finance Sector Union said the announced review was another example of why a royal commission into banks was needed.

The APRA inquiry was into CBA, yet there were poor customer outcomes and bad behaviour across the finance industry, the FSU said. Only a royal commission had the powers to identify the problems and recommend solutions.

”We need to have a close look at all the banks because FSU members report concerns about culture and governance issues across the industry,” said FSU national secretary Julia Angrisano.

“Despite the industry’s desire to bridge the trust gap by conducting endless reviews and inquiries, there is now less trust and confidence in banks than there was a year ago,” she said.

“If anyone had any doubts about the need for a royal commission a year ago, there can be no doubts today.”