Westpac rocked by ‘immature and reactive’ risk culture finding, steps up change program

Westpac has ramped up its change program as a deep-dive review finds parts of its risk culture are “immature and reactive”.

New Westpac CEO Peter King has promised to ramp up the bank’s cultural change program. Picture: Nikki Short

Westpac is targeting 2022 to improve its battered culture and governance processes after a key review conceded parts of its risk culture were still “immature and reactive”, creating issues for accountability.

The findings were made in a sweeping review of governance and culture released by Westpac on Friday. It showed the bank was overly complex and had a way to go to fix its compliance and accountability problems which had permeated through its ranks.

The report said the bank had begun a change program in an attempt to rectify the shortcomings. The culture, governance and accountability remediation plan follows a similar assessment done during the year of the Hayne royal commission in 2018, and comes after Austrac started explosive legal action against Westpac last year alleging the bank contravened laws on over 23 million occasions.

Westpac chief executive Peter King on Friday said the bank’s 2020 reassessment of culture and governance confirmed the view that management of non-financial risk was not up to scratch.

“It is clear we have more to do to address these shortcomings, including improving our risk management capability and risk culture which is not where we want it to be. As a result, we are embarking on a comprehensive, multi-year program called customer outcomes and risk excellence (CORE). The program is a company priority and as CEO I’m accountable for its delivery,” he said.

The main conclusion from the latest review found that aspects of Westpac’s non-financial risk culture were “immature and reactive”, and it also found weaknesses in the bank’s organisational structure, made worse by complex and duplicate technology systems.

“The reassessment confirmed that Westpac was overly complex, which results in confusion around accountability and challenges in execution,” the bank said.

“Shortcomings in the way Westpac manages non-financial risk have also been identified by each of Westpac’s three lines of defence, with further change required to address identified weaknesses.”

The new review also found awareness of risks and obligations had been inconsistent and employees were not proactive. In some situations leaders reacted to incidents with a focus on blame rather than learning.

Separate probes

The anticipated dates to achieve final targets in Westpac’s CORE program are in March 2022, which the bank said allows time to embed change, although actions to improve culture would “continually evolve”.

The latest governance and culture review was forced by the Australian Prudential Regulation Authority in light of Austrac’s damning court case against the bank. APRA and the corporate regulator are conducting separate probes of Westpac’s potential breaches of financial crimes laws and its disclosure of issues to investors.

In the latest review Westpac chairman John McFarlane and Mr King admitted the first culture and governance program had not “delivered sufficient momentum”, noting deeper change was needed.

“Westpac does not underestimate both the magnitude of the changes that are required and the effort involved,” they said.

Clime Investment Management portfolio manager Vincent Cook said while Westpac had an experienced team to drive change, the task would increase costs and “be challenging” given sizeable loan losses expected to flow through due to COVID-19.

“The nature of the COVID-19 shock involves a high level of uncertainty as we are seeing with the renewed lock down in Victoria. This lock down is going to have significant consequences in terms of small business failures and unemployment,” he added.

“Having said that, history shows that Westpac is one of the safer banks to hold through a credit cycle, which is a positive aspect of its culture as well as a reflection of business mix.”

As well as complexity and immature risk culture the new review found Westpac’s so-called three lines of defence model was “not well understood or embedded”. That was the particularly the case for the first line where it found a shortfall in sufficient non-financial risk management capability and challenges in execution.

The review delved into the “root causes” of Westpac’s governance, compliance and anti-money laundering shortcomings and found “significant commonality” between the areas.

Three key pillars

Austrac’s legal action against Westpac, which led to the departure of former CEO Brian Hartzer and brought forward the retirement of former chairman Lindsay Maxsted, alleged the bank breached the law and failed to properly monitor and report transactions. Some of those transactions carried child exploitation risks.

Westpac and Austrac will square off in the Federal Court in 2021 over outstanding differences on the legal breaches, although the bank has made admissions on the bulk of the claims.

In the review Westpac said the new CORE program would have three pillars and 14 work streams. The pillars include that the board and group executive would set the direction and tone of the bank and promote a “proactive risk culture”.

Westpac will seek to establish “clear risk boundaries for decision making” by simplifying risk management frameworks and increasing capability and resources in that function.

The bank also wants to boost accountability and empower its people by providing additional training.

While Westpac’s 2018 governance assessment contained 45 recommendations for improvement, the bank has implemented 30 recommendations and some of those are still being worked on. Of the 45 recommendations, just 19 recommendations are at a final embed and monitor stage.

“This program is comprehensive and where we find any new issues, they will be dealt with promptly,” Mr King said.

Promontory Australia provided independent assurance over Westpac’s latest report, while a team from consulting firm Oliver Wyman supported the review.