The Wash Up from the Royal Commission. Part 4 in a 4 part series – “This is the Royal Commission we had to have”

This fourth and final article reviews the tumultuous last six months and looks to the future as we await Commissioner Hayne’s final report. But first a quick re-cap.

When the hearings began, most of us had little idea of lay ahead. Not so for Commissioner Kenneth Hayne and his team, lead by loyal lieutenants Rowena Orr and Matthew Hodge. They knew exactly what they wanted to achieve and the inquiry was planned to perfection.

Instead of working out what evidence they might need and then subpoenaing it, they simply told the banks “Come clean and give us everything you have on any conduct that may have fallen below “Community standards and expectations.” This elicited tens of thousands of documents in which they found all the incriminating evidence needed to formulate and prosecute their strategy.

The hearings progressed through seven stages – Consumer Lending, Financial Advice, SMEs, Regional & Remote Access, Superannuation, Insurance culminating in the the final stage which delved into the causes of the conduct uncovered in earlier hearings.

Webcast viewing was compulsive, much like a reality TV show, except with this show there was never any doubt who would win. The inquiry opened strongly as we heard heartbreaking and mind boggling stories of just how badly some customers had been treated and banks had behaved. A number of bank witnesses were put up by their bosses likes lambs to the slaughter, powerless against the meticulously prepared and executed probing by counsel assisting.

But it was not until the last round of hearings, when bank CEOs and Chairmen took the stand, that we finally were able to understand what happened and why. In simple terms bank executives, to varying degrees, lost the plot and neither their boards nor the regulators put a halt to it.

I will not endeavour to preempt the recommendations, all will be revealed soon enough. The report must be submitted to the Governor General by February 1st 2019 and the government will then review it before deciding when it will be released.

What is most significant about the timing is that by February we will, officially or unofficially, be in election mode. Whilst it is never over until it is over, the Coalition appears to be heading for one of the biggest defeats in Australia’s political history. The ALP has no shortage of issues to campaign on but high on the list will be the Coalition’s massive political blunder in stubbornly resisting the establishment of a RC.

ALP adverts featuring then Treasurer Morrison saying that the call for a RC “is nothing but a populist whinge from Bill Shorten that could undermine the banking and financial industry’s confidence” are no doubt already in the can.

On the reasonable assumption there will be a change of government, life will get even tougher for the banks. A Shorten Government will not have the same cosy relationship as Coalition governments have had. Nothing like a “Hey ScoMo, thanks for your support mate but this isn’t going to go away so we reckon you may as well just call a Royal Commission now.”

The ALP is ideologically opposed to big banks and as they are likely to have at least two terms in office, the banks should prepare for a long and testy relationship. Here are some of the likely banking initiatives on a Shorten government agenda:

– The possible extension or renewal of the RC.
– Review of the Government guarantee on deposits.
– Increased funding for regulators with a demand for greater accountability.
– Mechanisms (an independent board?) to regularly monitor banks’ progress in implementing APRA and RC recommendations.
– More incentives and encouragement for new competitors as a means of reducing the power of the big banks.
– And they will want to see “heads roll”.

In the most improbable event the Coalition is returned, they would be politically obliged to adopt a similar approach anyway.

So whilst Commissioner Hayne and his team are busy writing up their final report, what are the other stakeholders likely to be up to?

What about the banks?
The banks will appreciate a reprieve from the intense media attention but with the AGM season starting next week this will be short lived. On December 12th Westpac holds its AGM in Perth whilst ANZ and NAB will face their shareholders on 19th December in Perth and Melbourne respectively.

No doubt they are all working furiously on their presentations. One concern will be if shareholders use the AGMs and in particular their voting rights on remuneration reports as a means of expressing their displeasure.

At the same time, directors and executives are engaging in serious collective and individual self-reflection hopefully addressing basic questions like:

– What share of the responsibility do I need to take?
– What personal learnings have I gained from this experience?
– Do I have the professional and technical skills to do the job that is now required?
– Am I up for the challenge i.e. do I have the “fire in the belly?”
– Perhaps the most difficult challenge for the remuneration committees of bank boards is “where will we find the right new people prepared to take on these roles?”

Will they change?
The big question is “will the banks change?” There have been many mea culpas and some contrite acknowledgments at and outside the confines of the RC. CBA and NAB have promised to implement a series of recommendations and actions arising from APRA’s Prudential Inquiry but so far we have seen and heard more defences than substantive changes.

Behaviourists tell us that past behaviour is the best predictor of future behaviour and on this basis it is difficult to be optimistic about the capacity and resolve for change by existing bank boards and CEOs.

The number of times at the RC that bank chairmen and CEOs blamed others was cringeworthy. Yet to date, there have been no high profile casualties aside from AMP’s Chairman Catherine Brenner and CEO Craig Meller and NAB’s wealth management boss, Andrew Hagger. Perhaps the banks are waiting for their AGMs to announce outcomes of any board and management renewal programs. This will be a litmus test.

Bank leaders have talked about the pressure from shareholders and analysts to produce short term results. The ACCC Chairman Rod Sims rightly dismissed this as a cop out. And Ken Henry’s long-winded dissertation about the state of capitalism and the need to consider modifying the law so that director’s responsibilities to customers and other stakeholders were clarified was a lame attempt to divert attention from his board’s failings.

The “it was just a few bad apples” defence seems now to have been permanently discarded with the reluctant acknowledgement that the problems have not been caused by isolated instances but cultural and systemic failures.

Another defence is the “Risk of a recession argument” that says the RC could lead to a recession because it could make it harder for banks to operate. This is a definitely a risk although it should not be allowed to be used as an excuse for inaction. Commissioner Hayne and the government appear to be mindful of the balancing act that needs to be played.

My view is the risk of a recession induced by a tightening of bank credit is less of a concern than the risk of the collapse of the Australian banking system which, in time, may well have happened had this RC not been called.

Imagine the predicament a government, particularly an ALP government, would face if it was confronted with the decision as to whether to bail out one or more of the big banks because a crisis had caused a run on deposits or the withdrawal of wholesale funding?

This explains why, to paraphrase former PM Paul Keating,“this is the Royal Commission we had to have.”

What about the regulators?
The rightly chastised regulators will be less conciliatory and more litigious. Under a Shorten government, regulators will be better resourced but more accountable. Poor bank conduct will be met with heavier fines and consequences. This more formal approach will also be slow, expensive and public.

The regulators also should engage in self-reflection on their own roles and capacity to change. And those who appoint the regulators, like those who appoint bank boards and CEOs, need to ask the question “are the people who got us to where we are today, the best to take us forward?”

What about institutional bank shareholders?
For years, superannuation funds and managed investment funds have backed the big banks. We heard very few public adverse comments as the RC’s revelations unfolded.

Interestingly, at CBA’s AGM last month, institutional support saw approval of the remuneration report at a whopping 92.5 per cent. One institutional shareholder voted for the report because, “We believe the remuneration committee has responded well to shareholder concerns and the board has demonstrated that it will use its discretion where necessary.” Readers can draw their own conclusion.

These days there are a number of “ethical” funds which will not invest in companies, for instance, that mine coal. How many of these funds have said or now might say “we will not invest our clients’ funds in big banks?”

Broker Arrangements?
The big banks need brokers and brokers need the big banks. The issues of flat versus variable commissions and fees for service are complicated but a way needs to be found to enable banks and brokers to work together to ensure customers’ interests are protected and optimised. A starting point would be the codification of the duty of the broker to act in the best interest of the customer.

LESSONS FOR BANKS & ALL BUSINESSES
Australia owes a huge debt of gratitude to Commissioner Hayne and his team. Without this inquiry we can only guess what the end result might have been.

So here are five clear and simple lessons that the banks and all businesses can learn from this experience.

1. Put customers first.
In 2015 Ken Henry said, “A bank that truly puts the customer at the centre of everything it does should not need regulation.” The average Net Promoter Score of the big four banks of -10 confirms that the banks are failing miserably on this measure. At least the banks have now acknowledged they have lost sight of the customer. A problem cannot be fixed until first it is acknowledged.

2. Leaders need to lead.
Shareholders, customers and staff want leaders who are trustworthy, ethical, authentic, courageous, loyal, visionary and accountable. They will support those who exhibit these attributes and they will disengage with those who don’t.

3. Good times don’t last forever.
ANZ’s Shayne Elliott made a valid point when he talked about what it means not to have had a recession in nearly three decades. This has contributed to our leaders displaying traits including complacency, over confidence, arrogance and, at the extreme, hubris. Based largely on escalating house prices, we supposedly now have the highest net wealth per capita in the world. Warren Buffett once said, “You only find out who is swimming naked when the tide goes out.” Don’t get caught naked, be prepared.

4. It shouldn’t be all about the pay.
For years, bankers have been living in “La la land” when it comes to pay. I wrote about this two years ago “Bank execs should take a pay cut.” ”

Banking was not always a highly paid profession but bankers did feel privileged to serve and the reward for this came from knowing they were valued, respected and trusted by their customers and communities. There is still much to be said for these “traditional values.”

5. Diversity is good for business.
The big banks have been slow to move on diversity and their failure to fully embrace all its aspects in this rapidly changing environment has been a contributing factor to losing touch as well as opportunities.

2018 has been an “annus horribilus” for the big banks. 2019 is shaping up as being at least as challenging. The RC has identified the problems and their causes and we will soon learn of its recommendations to fix them. We all hope this will give the banks, the incoming government and its agencies a clear blueprint to enable them to begin the long task of restoring lost trust in the banks.

To finish, my four word summary from the RC is simply this…. “Just do what’s right.

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