Following the release of the Financial Services Royal Commission’s final report, Australian banks must now work through how to best adopt the recommendations while also focusing on the important task of rebuilding community trust in the sector and restoring their reputations.
This rebuilding of trust is particularly important in light of competition from new, non-traditional market entrants, as well as increasing expectations from consumers, government and regulators around key issues such as culture, leadership, conduct and governance.
This is a defining moment for the sector. Banks need to make visible changes in how they are interacting with their customers and they need to make sure these changes stick. The regulators too need to make visible changes around the areas of enforcement and accountability. It will be important for the sector to get this right, or else run the risk of facing even greater political and consumer scrutiny in future.
As Hayne pointed out in the final report, the “failings of organisational culture, governance arrangements and remunerations systems lie at the heart of much of the misconduct”. In the final report, he sent a clear message that the responsibility for misconduct lies with the entities concerned and those who manage them – their boards and senior management. So, while the banks’ management and boards are busy planning for and executing the changes needed to implement Hayne’s recommendations, they also need to communicate more actively, regularly and openly with regulators, shareholders and customers to keep them engaged and informed during this extended period of disruption.
The final report recommends strengthening regulatory oversight of culture, governance and remuneration practices across the financial services industry to achieve lasting change. To prepare for this shift in regulatory supervision focus, and to meet the Commissioner’s broader recommendations for a public demonstration of a commitment to change, the banks will need to prioritise a coordinated and strategic view of organisational and risk culture, as well as their governance and remuneration practices.
Another major source of disruption for the banking sector arising from the final report are the recommendations around the distribution of mortgage and retail credit products. With these changes, Hayne is steering the market towards a user pays model, with customers paying for a broker’s services. These recommendations will fundamentally reshape the distribution model for consumer credit products.
Moving to a fee-for-service model will change the future relationship between lenders, brokers and aggregators. This leaves big questions over the future effectiveness of the current broker model. Alternatively, this may present an opportunity to redesign their operating model, invest in digital and exploit the opportunities that Open Banking may present.
Another of the key changes for the banks will be the extension of the Banking Executive Accountability Regime (BEAR). This will require the banks to rethink the way their product governance and lifecycle models work. Given responsibilities are often distributed across multiple divisions and functions, implementing a clear accountability statement across the end-to-end product lifecycle will be challenging. While some institutions are in the early stages of identifying a single point of accountability, many have still not commenced this work. Banks will need to prepare for these obligations by critically examining their product suite and strengthening their product governance framework.
In the post-Commission era, banks also will need to be able rapidly identify and report on their compliance obligations. They will need to be able to: identify who is accountable for each obligation; identify the controls in place to ensure that obligations are being met; report on deficiencies in the control environment; and demonstrate meaningful progress in the remediation of those deficiencies. To achieve these objectives, the banks’ compliance functions will require ongoing funding and support from senior management and the board.
While Hayne has made only minimal changes to regulation, a line has been drawn in the sand for banks, intermediaries and regulators. The road map for the banking sector to improve their conduct and meet community expectations will be long and challenging – a task that cannot be underestimated.
Against the back drop of a slowing domestic economy, contracted credit growth and pockets of global instability and uncertainty, boards and management will have a full agenda.
The views expressed in this article are the views of the author, not EY. The article provides general information, does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Liability limited by a scheme approved under Professional Standards Legislation.