In focus: the Financial Services Royal Commission

Spotlight on the Financial Services Royal Commission

Is the Royal Commission into misconduct in the banking and financial services industry outcome-focused or just a political circuit breaker?

The deafening calls for the Financial Services Royal Commission were based on the fact that the public had lost faith in the financial sector. Who would blame them? The media had been saturated with stories relating to money laundering, inappropriate lending practices, exorbitant fees, super profits, lack of transparency, rate fixing and lack of compensation to victims of bad banking practices.

But will the Royal Commission pacify society’s concerns or will it merely highlight what we already know, given there have been more than 80 enquiries into the banks in this country since the GFC?

Brooke Consultant Rosemary Hayman takes a closer look based on what we know so far.

Terms of engagement

The terms of reference for the Financial Services Royal Commission give us some indication as to what the enquiry hopes to achieve. To paraphrase the Letters Patent, it is looking to establish whether or not some activities undertaken in the financial services sector have fallen below community standards and expectations.

It also asks the question as to whether or not any actions deemed below community standards are the result of poor risk management, corporate governance, remuneration, culture or values of the industry.

The last part of the investigation looks at the regulations, regulators and the supervision currently in place, and questions the adequacy of these measures.

Climbing Document Mountain

The Royal Commission must submit an interim report no later than September 30 this year. Given the volume of information that the banks, super funds and approved deposit taking institutions have been asked to provide, it is doubtful the Royal Commission will be able to properly consider all the facts. To put things into perspective, The Australian newspaper reported that one of the major banks retrieved one million documents from its systems and after much work, submitted thousands of documents to the enquiry. So much information has been collected that three of the four major banks sought an extension of time to submit information.

In addition to the information provided by financial service providers, the Financial Ombudsman Service have also made a submission to the Commission. In a summary published on the FOS website, the watchdog noted that since 2008 it had identified 1120 possible systemic issues within the industry. Of these issues they determined 463 were considered definitely systemic and were spread across 171 organisations. Three quarters of the organisations had one or two systemic problems, and a staggering 12 percent had five or more systemic issues. The submission also reported that complaints against financial services providers have continued to increase over the years, suggesting measures undertaken to improve bank conduct are failing.

Expecting the expected

No doubt the Royal Commission will find many instances and examples of misconduct and attribute them to problems with risk management standards, culture, mismanagement and poor governance. The Financial Ombudsman Services highlighted that the current regulatory framework was, according to a previous enquiry, “not sufficient to deliver fair treatment to consumers”. This will probably be highlighted as a gap in the current system.

It is highly likely the Commissioner will find that APRA, ASIC and the self-regulating bodies do not have the resources to adequately supervise the financial sector. Given the large number of financial service providers and the even larger number of products offered, this will always be the case.

Royal Commission must ask the right questions

In order for the Royal Commission to have a real impact further questions must be asked:

  • Does the current structure actually promote activities that are below community standards?
  • Is the financial service provider focusing on the return to equity, or the customers?
  • What must be done to restore the public’s faith?

Financial institutions must take real action

The financial institutions must address the holistic process of banking, corporate governance and risk management. The problem is that most of the institutions won’t know where to start, or will simply reach for the old levers of control.

Anecdotally, a banker who runs a division for one of the four major banks recently told me he was informed by risk management that he and his group must adhere to more than 500 compliance protocols. Auditors and regulators can review pricing models, they can look at balance sheets and they can “check off“ 500 items on the compliance list. But in most instances they will not be able to pick the misconduct issues unless there is a culture of disclosure and transparency. Imposing further government regulation will only add to the complexity.

Reform must be undertaken as a whole of enterprise exercise. At Brooke we advocate that in order to make real transformations, organisations examine not only their risk profiles, but their management structure, the values of their institution, the business processes they have in place, the roles and skills they utilise and the technology they use. By instigating proper processes and focusing on the fair treatment of customers, the financial sector will see a real change in their core values. This is what the public wants and what our society needs.

It is vital that Australia has a healthy banking, superannuation and financial services industry. Systemically stable, well-regulated organisations are fundamental to the Australian economy.

Looking through a management consultant lens, the Royal Commission is no panacea. It is not outcome-focused and will therefore fail to meet the public’s expectations. It will do little to restore faith in financial services providers. The cost to the taxpayer will be substantial, further regulation will be recommended and we will wait for the next enquiry.