The banking Royal Commission was a watershed for the financial services industry, but one year on, what's really changed in governance, culture and accountability?

    On February 4, a year ago, the three-volume final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry landed with a thud in the Australian business community. Commissioner Kenneth Hayne AC QC’s findings exposed to the public the entrenched nature of misconduct, lack of customer focus and accountability, and governance failures at Australia’s largest financial institutions.

    After months of testimony and 75 case studies, it resulted in 76 recommendations and 24 referrals for further action, drily reminding all of the basic principles that should be embedded in decision-making — starting with “obey the law”.

    Following the global financial crisis, financial services entities and regulators in Australia and elsewhere gave close attention to financial risk. However, Hayne flagged that in Australia, too little heed had been paid to regulatory, compliance and conduct risks, often grouped under the umbrella of non-financial risk.

    “Too little attention has been given to the evident connections between compensation, incentive and remuneration practices and regulatory, compliance and conduct risks,” wrote Hayne. “The very large reputational consequences that are now seen in the Australian financial services industry, especially in the banking industry, stand as the clearest demonstration of the pressing urgency for dealing with these issues.”

    Hayne quoted the G30 in his final report: “As the Group of 30 said in November 2018, ‘getting culture and conduct right is not a supervisory requirement. It is necessary for banks’ and banking’s economic and social sustainability’.”

    Pledging immediate action, the boards and CEOs of our financial institutions stepped up investment in systems and personnel to work through a mounting list of issues and began publicly reporting on their remediation of failures. With NAB singled out for special comment, CEO Andrew Thorburn and chair Ken Henry AC headed out the door, joining a growing list of exits.


    A chastened and beefed-up Australian Securities and Investments Commission (ASIC) got busy with a tougher enforcement mission and long list of expected prosecutions. Meanwhile, the AICD began its extensive member consultations and developed its Forward Governance Agenda — a program of work responding to the debates on governance practice through the streams of standards and professionalism, culture, director duties and stakeholders, demonstrating accountability, and remuneration.

    By May 2019, the Australian Prudential Regulation Authority (APRA) diplomatically revealed the enormous scale of the quest and the weaknesses in its paper summarising the results of the self-assessments by 36 regulated institutions on their governance, accountability and culture. APRA demanded additional capital requirements of $500m each from ANZ, Westpac and NAB to reflect higher operational risk — following the $700m penalty imposed on CBA in 2018, after APRA’s prudential inquiry into the bank.

    APRA chair Wayne Byres GAICD said Australia’s major banks were well-capitalised and financially sound, but improvements in the management of non-financial risks were needed. “This will require a real focus on the root causes of the issues that have been identified, including complexity, unclear accountabilities, weak incentives and cultures that have been too accepting of long-standing gaps,” he said. “Their self-assessments reveal they have fallen short in a number of areas and APRA is therefore raising their regulatory capital requirements until weaknesses have been fully remediated.”

    However, by November, AUSTRAC’s federal court allegations of anti-money laundering breaches at Westpac left seasoned directors dismayed. Had anything really changed?

    Fiona Shand FAICD, a non-executive director and long-time AICD course facilitator says many she’s spoken to in the director and investor communities are deeply frustrated at how little has changed in the past year. “Every day when you open the newspaper, it may be a different person or organisation, but they are the same fundamental issues. It’s Groundhog Day. We can all accept the baggage of legacy problems and systems in large organisations, but where is the sense of urgency to effect real change? With a few exceptions, we haven’t seen boards and companies transparently accepting responsibility and making the behavioural changes communities expect.”

    Shand says there is still a deep disconnect between boardrooms, directors and communities they operate in. “Companies and directors cannot continue to say ‘trust us to fix the mess we made‘ and expect to be believed.”

    Certainly, that was the lesson for Ken Henry. Reflecting on what went wrong during his time as NAB chair, he told the ABC it was not responding fast enough. “We should have pressed harder. There’s no doubt.”

    The issue, he said, was “not dealing quickly enough with emerging problems, being prepared to interpret emerging problems as being of an administrative or technical nature rather than something that goes to the way that the bank impacts on its customers”.

    However, Rahoul Chowdry, partner and head of the financial services industry group at MinterEllison, who joined the AMP board in December 2019, says there must be an appreciation of the deep-rooted issues and scale of change required. “Many of the issues that have surfaced during and post the Royal Commission are deep-seated, so it’s simplistic to claim that financial institutions have learned nothing. The issues will take time to resolve.” Every bank is under pressure, he says, and organisations must make up an investment deficit in data and non-financial reporting information, regulatory reporting, compliance and risk management reporting — and invest in technology.

    The numbers

    $10b+ remediation provisioning

    $790m paid to 1.2 million consumers

    $81.3b 2019 total income for Westpac, CBA, ANZ and NAB (down 3.7%)

    $26.9b 2019 cash profits, (down 7.8%)

    $65b reduction in credit growth

    2.5% credit growth for year to October 2019

    49% of Australians trust their bank to keep its promises

    26% trust all banks to keep their promises

    Sources: ASIC, Deloitte, RBA

    “There’s no question, many organisations are finding it a big challenge to keep up with the speed technology is changing and the sophistication that is required while also dealing with many legacy systems and controls that are no longer fit for purpose,” says Chowdry. “This is a particular issue for organisations that are product- rather than customer-centric. Boards are a lot more probing and questioning. That’s reflected in their response to their roles as directors. One of the great things [the Royal Commission] has done is to force a general uplift in governance standards in this country.”

    Chowdry says sound products, efficient operations, good culture and an appropriate customer focus are a recipe for sustainable shareholder value. “Those that fall short will experience pressure on profits and the ability to maintain dividends. We’re already seeing this play out. And the cost is being borne by shareholders.”

    Shand says that 12 months on, “we’ve learned a hell of a lot, but we haven’t put it into play. With a few exceptions, we haven’t made the behavioural change we’re going to need. In order to make that change, we’re going to need for directors and management of organisations to go.”

    She describes the lack of connection between board and community as the “hubris of the legacy mirror” — a belief by senior directors that they have a right in that space. “There is a behavioural shift we have to make. We have to say: the emperor has no clothes. We need fresh eyes to see fresh issues and solutions — and a maximum board tenure of 12 years.”

    John Connolly FAICD, who runs issues management consulting company John Connolly & Partners, says directors must be acutely aware of the changed social context. This is also being fed by revelations of broader business shortcomings.

    “A lot of good has come out of the Royal Commission, but the environment has become more toxic,” he says. “What’s happened for everyone is the accountability has narrowed. Go back a couple of years, it was about companies and then about executives; and now it’s about directors. People want to see the directors go. That’s the seriously big difference and if you are a director of a large public company now, you have to be thinking about the fact that you’re much more accountable than you were before.”

    Connolly says directors must focus more deeply on what’s going on in the organisation, even though they may still have concerns about blurring the line over their duties with management. “Everyone’s been talking about reputation and communication. You have to work out if this is a communications problem or an operating problem. In many cases, 60 per cent of problems are operating problems, not communications problems. People being underpaid is not a communications problem, people not being cared for properly in nursing homes is not a communications problem. There is wilful blindness... as to what’s been going on.”

    Connolly says boards and management should do scenario planning and focus groups to get a grip on the real issues and concerns. “The reality is, the experience of employees and customers is completely different to that of a board executive.”

    Westpac Expectations gap

    Does the community have a good grasp of the director’s role? Is the community expecting too much of directors? On 10 December 2019, the AICD co-hosted a round-table director discussion with The Australian on the issues. These are several director perspectives.

    Jane Tongs

    There’s an interesting question with the large banks as to whether the model they have of governance is actually workable, because if you look at the four large banks, all four have been in a lot of trouble in the past two years.

    Somebody’s got to be held accountable. Whether ‘going’ means going the next day is healthy for the business, that’s a different question.

    They [had] repeated warnings they had AUSTRAC issues, but weren’t getting beyond middle management. That, to me, is a cultural issue and the CEO is the biggest driver of the culture. Why wasn’t it getting to him? Is it again because the banks are so complex it can’t reach him? But again, if we’re going to keep having banks of this size, we have to come up with a model that actually works.

    One of the things that’s really changed in the past two years is getting the voice of the customer into the boardroom. It varies by organisation as to what that means, but it has actually been quite a change. I sit on the boards of a few insurance companies. We are actively trying to hear the voice of the customers and it’s very healthy. It’s brought a whole new perspective.

    Simon McKeon AO FAICD

    Whether we like it or not, the expectations of politicians and the public, particularly for these complex financial services organisations, are sky-high. There’s no sense in complaining about that. That’s the world we live in.

    Peter Hay FAICD

    The expectations are very high in the wake of Hayne, in particular. I don’t have a problem with high expectations.

    The question on all boards is: do you have enough knowledge around the table to ask the right questions?

    The AUSTRAC legislation was passed a long time ago and it was obvious at the time it was going to require major system change in banks because they had to look at the payee about 100 times more intensely than they previously had to.

    Rebecca McGrath FAICD

    The challenge now will be to attract people with what I would call experience-based judgment... based on real experience and understanding the risk. Anecdotal [evidence] and my network would suggest it is going to be hard to get that quality now, when we probably most need it.

    Helen Kurincic FAICD

    At the end of the day, we are accountable, there’s a marked shift and it’s high time it came, in terms of people actually accepting the responsibility that directors have. That does include being across the detail — full risk management in a way people haven’t necessarily done before. It’s an evolution in how we discharge our responsibilities.

    KEY ISSUES IN 2020

    Rebecca McGrath FAICD

    Significant organisations will struggle to attract directors. Another related issue is the ability to get D&O insurance and pay it, even for small organisations. Most public companies, certainly in the ASX 100, would’ve seen their D&O insurance go up by up to 100 per cent. These are not trivial amounts of money.

    Simon McKeon AO FAICD

    How do we actually create shareholder value? The reality at the moment is we have to acknowledge the pendulum has swung an awful long way and is having a paralysing effect.


    Peter Hay FAICD

    We’re living in an age of a regulator-friendly world. All of a sudden, the regulators are being urged to be a lot harsher... so you will see action being taken increasingly at the margin.

    Simon McKeon AO FAICD

    There will be successful prosecutions over the next few years. But as a percentage of corporate activity, it will still be negligible.

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