APRA - Shifting perceptions

Geoff Summerhayes explains why the financial sector requires a change in mindset to preserve trust and social licence.

Changing times call for changing methods, strategies and approaches. They also demand a change in mindset. It is this mindset that I want to challenge, against the notion of trust and social licence. The financial sector has received plenty of negative press in recent times. No industry has been spared – banks, insurers and health funds have all been the subject of allegations relating to the customer experience. As a result, consumer sentiment and trust in the financial sector as a whole has arguably diminished. Heightened government, regulatory and public scrutiny is an inevitable consequence in this environment and the spotlight has increased on how financial sector companies conduct themselves in relation to the customer.

In observing the various industry reactions to such adverse community perceptions, it is apparent that financial services is not as well-prepared to respond effectively to these issues. Perhaps the necessary focus by regulators and institutions both globally and here in Australia on capital strength and solvency, has meant not enough focus on the equally important need to maintain strong community trust in the financial sector.

The Australian Prudential Regulation Authority’s (APRA’s) overarching mandate is to maintain financial stability and this can be threatened when the community doesn’t have trust in the financial institutions whom they rely upon to provide them with valuable services. Let me be clear: we are not entering consumer protection territory when we speak of trust.

This sits squarely with our Australian Securities and Investments Commission counterpart. Our point is that institutions, despite having stronger financial settings since the global financial crisis, are now arguably less “trusted”. Trust is at the heart of most financial businesses: they are, after all, managing other peoples’ money. Any lack of trust has the potential to impact the viability of an institution, in one form or another. It is APRA’s and the industry’s business, to have this conversation in the interests of long-term stability.

The insurance industry settles claims effectively for the vast majority of Australians. The challenge is to do better. Judging by my conversations with executives and boards, there is both a desire and considerable effort to lift performance in this area and improve customer centricity overall. Attention to this area is critical because, whatever the cause of issues that invoke customer discontent, bad news travels fast and faith in the industry drops each time we hear of a new problem in insurance.

Insurers need to ensure the customer is at the heart of their business, have processes that reduce the risk of unfair customer outcomes and be prepared for adverse sentiments. It is my view, from the other side of the table, that how much APRA trusts an institution is also important. This is the area that surprised me most when I stepped into the regulator’s shoes. While in industry, I had a rather narrow view of APRA and how it monitors the financial health of its regulated entities. It was very clear to me that APRA was highly focused on capital, risk management and governance. I observed at arms-length APRA doing an effective job at influencing positive changes in industry. What was less obvious to me was the weight that APRA placed on the calibre of the people they were dealing with in institutions; their willingness to be open and transparent with the regulator, the prevailing cultural norms, attitudes and behaviours exhibited by boards and senior management, and whether these characteristics were “trustworthy”.

The extent to which APRA trusts an institution is critical to our supervisory intensity settings and is taken into account against the more quantifiable financial metrics to form an overall view of the an institution’s risk profile. We expect institutions to be open, tell us the truth and volunteer information, both in good times and in bad. APRA’s mandate is to promote financial safety and system stability. Regulation, trust and social licence are all essential ingredients. Putting the customer and the communities that institutions serve at the forefront of their business will help preserve the social licence under which they operate.