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BFCSA: Trust gap growing, it's time for a royal commission into Banks and Regulators of all things "Financial".

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Sydney Morning Herald August 12 2017 - 1:49am

Adele Ferguson


There is hardly a senior figure in Australia that hasn't put the boot into the Commonwealth Bank – and the banking sector – in the past week for cultivating a culture of profit at all costs.

The latest was the Reserve Bank governor Philip Lowe who used a Senate economics committee in Melbourne to rip into the banks for a short-term profit mindset and cultural collapse.

"The desire for short-term profit has meant not enough attention is being paid to risk management, trust has been strained, banks know that," he said.

At the same time, in a separate parliamentary committee held in Sydney, Australian Securities and Investments Commission chairman Greg Medcraft was doing likewise, talking about the importance of culture and trust.

"If the culture and values of a business are not aligned with customer outcomes, it is easy to see how a trust deficit will emerge, and this will impact its long-term sustainability," he said.

It would seem the latest in a long list of scandals is finally gaining traction. Austrac alleges in a statement of claim that CBA breached anti-money laundering and counter terrorism laws. In some cases it enabled criminals to create fake names which enabled drug dealers, organised crime syndicates and terrorists to launder and transfer money overseas.

For the RBA governor to wade in this manner is a watershed moment.

Medcraft, for his part, is also talking tough, confirming to Parliament that the regulator would launch an investigation into whether officers and directors at CBA complied with their duties under the Corporations Act, whether CBA complied with its continuous disclosure obligations, whether they complied with their licensing obligations and whether they complied with their financial reporting obligations, including reporting contingent liabilities.

It is a potent list that puts the directors of CBA in the firing line. At the end of the day the board is responsible for overseeing the tone and culture of a company. It is also responsible for ensuring that a company meets all necessary compliance and risk management requirements, has the right senior management in place and remuneration policies.

The board's handling of various scandals, including the financial planning scandal, life insurance scandal, and others, has been a great disappointment.

While it has taken some action since the Austrac scandal broke, a cynic could be forgiven for asking why it took a public backlash for them to step up to the plate. Even then, it is nowhere near enough.

At the end of the day, if the new CBA chairman Catherine Livingstone wants things to change she will need to pull the trigger on a board refresh. Having one director with bank experience is not near enough.

She will also need to think about her own actions in relation to ASIC; assuming she knew about the Austrac investigation when she met Medcraft days before the legal action was launched.

The issue of who knew what and when in terms of the Austrac investigation will be key to a number of inquiries, including continuous disclosure, whether the bank should have included a contingent liability in its accounts and informed other regulators. It will also play a role in any class action.

Medcraft was clearly shocked and appalled at the lack of courtesy and respect the bank had shown the regulator by not giving it the heads up about the Austrac investigation. He clearly assumes it knew.

Twice he told the parliamentary committee that ASIC had met with CBA two days before Austrac's announcement and nothing was raised. He said he had met Livingstone and the chairman of the risk committee to discuss matters including risks and any other concerns. During that meeting they were asked if there were any other issues the bank was facing.

"There was ample opportunity," he said. "That's why when I saw the announcement, you can imagine I was a little stunned."

He said it would take Livingstone another week to call Medcraft to apologise.

"I thought we had a good relationship and I've worked very hard to build that relationship," he said.

For Medcraft, it is a problem of culture in the organisation. "Among many of the major banks, we routinely encounter a culture of seeking to delay and frustrate our surveillance, investigation and enforcement work," he said.

ASIC has a balancing act to maintain with business. On one hand it wants to be seen as the tough cop on the beat. On the other it wants a good relationship with them.

It is a delicate balancing act that at various times has resulted in it being accused of being too close to the big end of town. Previously it got caught sharing draft press releases with the banks for vetting before issuing them to the media and public. In some instances ASIC behaved more like an extension of the banks' PR team than a regulator.

In 2014 a Senate inquiry into ASIC and the CBA found it was a "timid, hesitant regulator, too ready and willing to accept uncritically the assurances of a large institution". It was referring largely to its poor handling of CBA's financial planning scandal, which exposed forgery, fraud and a cover-up by management.

Indeed, during the inquiry Medcraft said he had been too trusting of the bank.

Reflecting on the commentary on Friday you have to wonder if regulators can't trust the banks, how can we?

A global banking survey by Ernst & Young released last year quantified the trust gap between customers and banks. It found a massive four out of five Australian customers don't trust their bank to give unbiased advice and put their interests first.

Banks trade on trust, and for the past few years that trust has been breached as they built cultures based on profit before people – they sold inappropriate products, delayed or denied life insurance policy claims and failed to pass on interest rate cuts across home loans, small business loans and credit cards.

Part of the problem is greed, fuelled by the structure of remuneration packages. Another is the vertically integrated business model which is riddled with conflicts that make it virtually impossible to put customers' best interests first.

For now the banks can stay safe in their oligopolistic cocoon, secure in the knowledge that they have most Australians tied up with their home loans, credit cards, deposits and so on.

But as Medcraft warned, the world is changing. "If organisations are not behaving in the right way, the crowd will let them know, if not the headlines – often with damaging effects on their brand and reputation."

He cited a study by Accenture which showed that one in three Australians see themselves as financial nomads, which means they have no loyalty to the banks. They are worth up to $2 trillion. It said six in 10 consumers would consider setting up a bank account with a supermarket or retailer.

Over three-quarters said they would set up with Facebook or online providers. "This should come as a big warning to the banks in terms of trust."

With the digital economy come profound disruptions not just to industry but the way information is shared and trust lost and won. With a trust gap growing, it's time for a royal commission.



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