Banks must go back to basics to regain public trust

More regulations won’t help. Banks must go back to the basic tenets of honesty, integrity and accountability.

The royal commission has put the spotlight on the banks’ internal processes. Picture: AAP

One cannot help but be intrigued and disappointed at what is being reported from the financial services royal commission.

The initial findings reveal that the banks’ financial planning divisions had aggressive sales-driven cultures, with a “sales volume and profit at all costs” attitude, leading to scandal after scandal.

There now appears to be a flawed compliance structure in some institutions.

We have seen cases reported on lending practices within the banks and we’ve read about the hardships of the rural sector, which is probably one of the toughest industries to lend to because of the variability of the markets and the climate.

In superannuation, we saw a draft report from the Productivity Commission, which found that inadequate competition, governance and regulation have led to underperformance, with an estimated cost to Australians of $3.9 billion a year.

It suggested that some boards were either not complying with all their regulatory obligations, or applying a “tick and flick” overview without striving to protect and promote members’ best interests.

We are also beginning to see the demise of the bancassurance model, where some banks invested heavily in the past with arguably poor returns on their investment.

The royal commission has to date concentrated on aggrieved customers, and people are now beginning to question how these misdemeanours have occurred and what should be done to prevent further occurrences, given the digital revolution now reported to be challenging the existence of the commercial bank model.

You have to wonder what happened to the internal audit process, the external audit obligations, the Ombudsman’s role, APRA’s overview process and ASIC’s review process.

Our former federal treasurer, Peter Costello, is reported to have spoken “of how the financial crisis made bankers feel like infallible geniuses. It was this belief that led them to lose their way and venture into peripheral profit-making areas outside of banking’s core business”.

Perhaps there is merit in his observations, but all the institutions appearing before the royal commission would have direct and indirect subsidiaries with operations organised for specific purposes, and all of those business activities would have inherent risks.

One would expect they all have stated core values, codes of ethics and operating principles. Two of those basic principles should be to “manage risk well”, and “good ethics” should be seen as good business.

From what I have read so far, one could conclude that there is a breakdown in risk disciplines and in some instances questions raised as to whether a risk framework actually exists.

There has been some concentration on a new credit reporting regime, but credit risk is one element of a risk framework and while repayment history is important when considering loan applications, integrity of the customer and his/her capacity to repay a loan will always be paramount.

One of the other issues emerging from the royal commission’s work so far has been the question of capabilities of employees who deal with customers.

One of the features which emerged in the US following the financial crisis was that some financial institutions had untrained employees selling products about which they had little knowledge, and risk ignorance certainly prevailed.

It is not an unreasonable expectation for customers to be dealing with employees who have the appropriate accreditation to help them achieve their goals, and I suspect a light will be shone on the adequacy or otherwise of employee development programs as the royal commission proceeds.

It is also interesting to observe federal government proposals to ramp up the powers of ASIC; this is reported to be the most concerted effort in more than a decade to deal with financial sector misconduct. Stronger penalties will make our political classes feel as if they are in control, and a clear message to the financial sector that compliance failures are not victimless crimes.

Without detracting from the concentration of the royal commission on its current terms of reference, or condoning the behaviours reported by some bank employees, it is with some concern that I read the calls for more regulation when the commission still seems to be coming to grips with the risks associated with banks, insurance companies, fund managers, technology providers, and the re-emergence of the non-bank financial intermediaries.

In a search for remedies to the misconduct reported, issuing more regulation when we still have to absorb a very comprehensive report into the financial system by David Murray, released in December 2014 and accepted by the government in October 2015, seems to be superfluous.

Given the specific themes outlined in the royal commission and the seriousness of the findings, what is required is a return to basic levels of trust where an adviser is truly independent and not just a fee churner. There is a need for basic tenets of honesty, integrity and accountability. Regulations without a spirit of morality do not work. There must also be clear disclosures provided to consumers.

Having a dense legalised disclosure statement for consumers to read, so organisations can protect themselves, is not the answer.

Customers need to receive advice from accredited/competent employees; fair fees and proper disclosure must be accepted standards.

To assist with a transition to the digital era of banking, appropriate risk frameworks for all products and operations, understood and approved by boards and acceptable to APRA, should begin now.

Customer-facing employees must be accredited and standards introduced to ensure customer demands are fulfilled within a reasonable period of time.

The collapsing of bancassurance models in Australia is gathering pace, but the call to eliminate a vertical integrated model when the intermediation process is beginning to change needs careful thought.

We need to study what has been achieved in other developed economies, and what trends are occurring.

The royal commission has quite rightly raised questions about the knowledge of boards of Australian banks and whether they understood the risks associated with products being sold by people who it appears had little knowledge of the product being sold, not to mention the technology support and how that integrated with the traditional bank systems.

Legacy technology systems are a real challenge for financial institutions when they transform from old platforms to new digitised technology.

Don Argus AC is a business leader.