Source – The Australian: www.theaustralian.com.au
Date – 12 March 2016
Signs of a global war on poor conduct and culture in the finance sector are everywhere, with once-potent international brands that used to be bywords for trust and security now being mercilessly trashed.
Australia, previously quarantined from most of the ugliness, is starting to reveal a somewhat darker underbelly.
The financial services industry worldwide has clocked up $US235 billion ($313bn) in fines and penalties since the financial crisis, and high-profile fund managers are starting to avoid the sector, citing complexity and the risk of “fine inflation”.
Is it any wonder that “Culture Shock” is the theme for the Australian Securities & Investments Commission’s annual forum starting later this month?
ASIC commissioner Greg Tanzer, who is less prone to incendiary language than the watchdog’s chair Greg Medcraft, stops short of characterising the enforcement of certain minimum standards of conduct as a war.
“But I do see it as a wake-up call to boards and management,” Tanzer says. “Many boards are horrified when they hear (from us) about what’s going on in their companies.”
In the last week or so a panoply of poor behaviour has been exposed in the financial services industry, culminating in an abject apology from Commonwealth Bank boss Ian Narev for a life insurance scandal in the bank’s CommInsure unit.
Revelations that doctors came under pressure to change their assessments of customers to avoid payouts, and of delayed payments to terminally ill patients, will further tarnish the CBA brand after its earlier financial planning debacle.
Embarrassingly, only three months ago, chairman David Turner declared to shareholders at the Commonwealth Bank annual meeting that the bank aspired to have a competitive advantage in ethical behaviour, decency and transparency — in short, an institution that others look up to.
It has a long way to go before it achieves that lofty ambition.
Before CommInsure, of course, there was the start of ASIC’s long-awaited Federal Court civil action against ANZ Bank, alleging that traders manipulated the nation’s benchmark interest rate, the bank bill swap rate (BBSW).
Medcraft had a blunt piece of advice to the nation’s major banks — all of which are under investigation in the BBSW matter — in February, several weeks before ASIC lodged its statement of claim.
“Plead guilty,” he said.
Some have speculated that Medcraft’s jihad on culture and hard line on the banks is closely related to his bid for a second term as ASIC chairman.
But the truth is the war flared up some time ago; it’s just the heat and intensity that’s gone up several notches in the past 12 months. Tanzer makes it absolutely clear: the regulator believes there is a cultural problem in Australian financial services, and it’s not just the occasional scandal or the odd bad apple.
“(Our belief) is born of some of us working in the field,” he says.
“But it’s very clear that we’re not the culture police. We firmly see responsibility lying with the board and senior management, which can help set the culture by creating incentives for good behaviour and penalties for aberrant behaviour.
“We say that we have a role to play in communicating with boards and management and about where we see problems.”
ASIC is not alone in its crusade.
Wayne Byres at the Australian Prudential Regulation Authority is also playing an active role, saying there is more to do to ensure that banks are not only “unquestionably strong” in terms of the financial system inquiry, but able to maintain their strength over time.
Last year, the prudential regulator established a small team to drive its supervisory efforts in relation to culture, governance and remuneration.
“We see the three issues as highly interrelated,” Byres, the APRA chairman, said recently.
“Our assessment is that, broadly speaking, governance standards in Australia have probably already addressed most of the issues … but that on culture and remuneration we have more to do before we can be confident that these are genuinely supportive of long-term strength rather than possible threats to it, as we’ve seen in the past.”
Regulators around the world are also targeting culture and conduct as hot-button issues.
Work is under way at the Financial Stability Board, which monitors and makes recommendations about the global financial system, and the trade union of securities regulators, the International Organisation of Securities Commissions, which is chaired by Medcraft.
Just like the war on terror, though, you wonder what will constitute victory and when it will be declared.
Progress is ill-defined, whereas setbacks are all too apparent.
The sheer scale of the fines and penalties imposed since the financial crisis has started to impact the allocation of capital to the sector, with high-profile British fund manager Neil Woodford quitting his fund’s holding in HSBC and now avoiding the bank sector altogether because of “fine inflation”.
Woolford wrote in his blog that fines were now levied according to a bank’s ability to pay rather than the size of the transgression.
In the wake of the BBSW case, CLSA bank analyst Brian Johnson wrote a note to clients pointing out a potential class action was the main financial risk to ANZ, as opposed to fines.
By extension, it can’t be long before investors start probing boards about the level of risk implied by a poor culture.
Martin Lawrence of the proxy advisory firm Ownership Matters says in the CommInsure case, for example, it could be reasonably asked whether directors felt it was OK that they had missed critical information about what was going on in the insurance unit.
And if they did think it was OK and there was no governance lapse, how did the board reach that conclusion?
A director of the giant US retailer Wal-Mart once noted the sheer size of the group’s million-person workforce and mused that if the company were a town it would have a decent-sized jail to deal with transgressors.
Corporate jails. Now that would be an innovative way to deal with poor corporate conduct.