'We let you down': CBA boss sorry as regulator slams culture

The Commonwealth Bank of Australia has agreed to be supervised by the banking regulator and will add another $1 billion in capital to shore up its balance sheet from scandals after a major investigation found the bank's culture wanting.

A review commissioned by the Australian Prudential Regulation Authority into CBA's culture found the board of the bank had "inadequate oversight" of non-financial risks, including reputational risks. The review also found a sense of complacency within the bank when addressing non-financial risks.

The review found a sense of complacency within the bank when addressing non-financial risks.Credit: James Alcock

APRA chairman Wayne Byres said the inquiry's findings showed CBA’s governance, culture and accountability frameworks and practices were in need of considerable improvement.

"As the panel notes, CBA has itself identified and begun taking steps to address many of these issues, but there is much to do and a risk that the same issues which have led to the need for the inquiry undermine the bank’s efforts to comprehensively and effectively respond to the recommendations of the panel," he said.

"As a result, CBA has given to APRA an enforceable undertaking, which establishes a framework by which CBA will demonstrate it is addressing the full set of recommendations made by the panel in a timely manner. Until such times as these recommendations are addressed to APRA’s satisfaction, an add-on to CBA’s operational risk capital requirement will continue to apply."

'Fall from grace'

The report found the despite CBA’s financial success the bank had “fallen from grace” in the eyes of the Australian public because of its cultural issues that were caused by the bank being “reactive” to issues and having a “tin ear”. “CBA’s continued financial success dulled the senses of the institution,” the report found.

Its release comes just days after the second round of hearings at the banking royal commission, which heard CBA was the "gold medallist" for charging its customers fees for no services, including customers who had passed away.

Overview of APRA recommendations and CBA change priorities.

The APRA inquiry specifically looked at CBA management's handling of risks including money laundering and terrorism financing.

The review was sparked after CBA was sued by Austrac for more than 50,000 breaches of anti-money laundering laws (known as AML) and counter-terrorism financing.

The report found serious failings with the board’s oversight of these issues.

Red flags

“The most pertinent example of this shortcoming related to anti-money laundering and counter-terrorism financing (AMLCTF) matters,” the report found. “There were three 'red' audit reports on this topic, the first in 2013, highlighting a series of repeated issues."

APRA said: “The second red audit report in 2015 noted that 'this issue was raised in our 2013 AML/CTF audit and has not progressed due to a lack of ownership of the Group’s AML/CTF processes’.”

CBA chairman Catherine Livingstone said the findings of the report would be a key focus for the bank’s board.Credit: Brook Mitchell

CBA chairman Catherine Livingstone said the findings of the report would be a key focus for the bank’s board.

“The board will now oversee a comprehensive response to APRA, using the report to assess the adequacy of steps already underway, and to address the additional improvements needed to implement all its recommendations,” Ms Livingstone said. “We will also appoint an agreed, independent reviewer to report to APRA on our progress.

“We understand the scale of change which is necessary and its seriousness in order for us to become a better, stronger bank for our customers, staff, regulators and shareholders.”

CBA chief executive Matt Comyn said the report was a 'critical but fair assessment of the issues facing us'.Credit: Peter Braig

The bank’s recently appointed chief executive, Matt Comyn, said: “We have embraced the report as a critical but fair assessment of the issues facing us and we will act on its recommendations, and the requirements of the enforceable undertaking, in an open, transparent and timely way."

'I am sorry'

One of the key recommendations that will bite inside the bank is APRA's insistence that it sees remuneration consequences for responsible executives within CBA.

APRA's report noted that until the Austrac matter, there were few examples of CBA's top brass taking a bonus hit for scandals that happened under their watch.

On a call with analysts on Tuesday morning, Mr Comyn said the report was confronting but fair.

“We let down our customers, we let down our regulators and, as management, we let down our people. I am sorry and can assure you that I am committed to doing what it is necessary to put things right,” Mr Comyn said.

We let down our customers, we let down our regulators and, as management, we let down our people.

CBA CEO Matt Comyn

“Some of our leaders may think that the report is unfair, some will think it describes the Commonwealth Bank but not them or their teams. I will make it clear that this report describes the bank. It describes me and it describes every one of us,” Mr Comyn said.

Mr Comyn told analysts that CBA will be able to apply to APRA to reduce its $1 billion additional capital requirement as it implements APRA’s recommendations.

He said that CBA would give an update at its August results of the expected cost of its responses to regulatory reports and inquiries including the APRA review.

The APRA recommendations include that CBA introduce a more rigorous board and executive committee-level governance of non-financial risks, and a substantial upgrade of CBA's risk management and compliance systems. It also recommended "an injection into CBA’s DNA of the "should we" question in relation to all dealings with and decisions on customers".