Beyond Australia’s Royal Commission– on the eve of reform

The Australian royal commission (RC) into banking adjourned its public hearings at the end of November 2018 finishing up to complete its final report to be handed by February 2019. The expectation is that it will contain recommendations for major changes in finance industry practice, its key regulators and potentially for the laying of criminal charges. All of which presages an unfortunate convergence of timing that coincides the imminent national election due March but, most likely to be held in May. Opening for the further potential of the much-needed financial reforms being subject to political footballing between the major political parties as well as the aggravated risk of spoiling intervention from balance of power holding minor parties of the parliament.
In what in the words of the national Australian Broadcasting Service (ABC) describes as a “…year of dragging out the dirty laundry of Australia’s banks: appalling scandals, executive inaction and bad decisions that hurt customers.” The RC can only be described as an unmitigated disaster for the Australian banking and Finance industry. And one of its own foreseeable making.
Where again in the words of the ABC, “Tens of thousands of honest bankers, who understandably held a position of great trust in the community, have been tarnished by the actions of a few, but the culture of many.”
While the withering bad news stories of over-charging, financial abuse and toxic & dangerous sales cultures drip fed to the mass media throughout the year, the final weeks of the inquiry into October and November saw the CEO’s and Chair’s of the board being subject to intense scrutiny. A show that left few impressed with their individual and collective performances with the standard apologetic CEO mea culpa’s straining the credulity of their contriteness in the face of at best mediocre testimony of selected Chairs and in the case of the Chair of the National Australia’s Dr Ken Henry performance, coming across as “…display that visibly and verbally appeared condescending, petulant and dismissive, (sic) came across as the arrogant face of banking — openly scoffing at questions of the QC.”
The message is clear Australian banking has lost the popularity contest and in danger of losing also the trust of its customers in what has been an uninspiring year for finance in Australia.
Of course, the initial primeval response is to punish senior banker’s salaries and bonuses. Certainly, competitors such as Industry superannuation funds, as major investors in Bank stocks and competitors for their client’s wealth business have voiced concern at the continuing payment of bonuses. Especially when as new evidence of misconduct emerged daily from the RC and as shareholder returns declined, the funds were arguing no bonuses should not have been paid given the litany of missteps and destruction of customer trust.
And this of course is in addition to the class actions, remediation’s and refunds now in train as an outcome of the initial findings of the RC.
The bruising and demoralizing inquiry though is giving the green shoots of a more nuanced Australian financial system into the middle of the 21^st century. While still early days and ahead of the report of the commission and indeed the political and legislative washing machine that awaits it into 2019 there are articulated voices of reform.
ANZ’s CEO Shayne Elliot for one, while understanding some shareholders would view the only metric of performance as financial, believes longer term metrics of success (and some say softer) such as around customer outcomes, employee engagement, diversity et al need to be more firmly embodied in how stakeholder tensions are negotiated and alignments achieved.
But it is in the “how” that an ultimately well-designed measures around risk and compliance will seriously be implemented. While the RC is the very act of publicizing of not just individual or firm wide misconduct, but system wide miscreants and regulatory failure – the fact remains most of financial system players already had invested in large risk and compliance functions – and they still failed their key stakeholders. For the many failings reported to the RC of finance players, be they by intent, neglect or just ignorance are of such breath, the necessary reforms to be effective will need of like wide dimension and depth.
Now while the final report has yet to delivered, nonetheless the incumbent regulators and financial industry associations have already given thought and voice to the likely main themes of reforms proposed into the New Year across the gambit of industry behaviors from individual to the collective, organizational and even Macro-prudential.
At the individual banker and financier level, a combination of clear personal accountabilities ensconced within industry professional and ethical stand points including the widespread adoption of the ‘Banker’s oath’ as already championed by FINSIA, the country’s prior finance professionals body is the first likely outcome. Something already legislated with respect to senior bankers already.
To overcome the rationalizations and ethically disempowering cultures and incentives – reform of personal and collective remuneration and incentivisation regimes to more closer align and balance the long term best interests of ‘all’ concerned stakeholders will be seen, not just short term shareholding investors. Some that will not be confined to senior management and board members – but pushed down to all staff consistent with the above principles.
Past lip service given to so-called balanced scored cards that remained chronically and opaquely short term financially obsessed will give way to clearer long-term metrics of success are required with reward structures to match.
From an organizational point view, risk and compliance functions will need to be reformed and forced to broaden its remit from the current narrow operational-legal risk focus to one that takes in enterprise wide conduct risk management principles and policies – and their implementation.
Regulators too will need to be part of the reforming solution and are being asked to more proactive in the monitoring, guidance and enforcement implementation of both the letter and spirit of the country’s financial and commercial laws. This does not exclude the likelihood of more intrusive surveillance and the actual embedding of regulatory officers in regulated enterprises to which it is hoped a spirit of cooperative & proactive behaviors will emerge- rather than just defensive “compliancism” that so failed firms and the system of the recent past.
From the perspective of industry structure, the erstwhile popular but conflicted vertically integrated models of the past 2-3 decades will like be a thing of the past as banking groups will continue to exit their wealth businesses that had caused them so much legal, regulatory and reputational grief.
In the sum and on the eve of the royal commissions final summing’s, from so much anguished testimony of fault and folly under the probing questioning of queens counsel, the stage is set for the real reform process of the Australian Financial System to begin. 2019 looks set to be one of opportunity for the new embolden reforming impulse as well as to be expected, opposition from the relics of past business models. Backgrounded as they both are by the remorseless challenges of the new technologies and process changes indifferent to history.