Trust Wilts Under Fierce Royal Commission Glare... What Now?

Filling the Banking Trust Deficit

A lifetime to build, seconds to destroy

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia is now reaching a climatic close as it focuses on policy questions that emerged from the first six rounds. The seventh and final round of public hearings brings the commission to its 60^th day of cross examining the banks. Major bank CEOs and chairmen from the Big Four, Macquarie and AMP along with regulators ASIC and APRA are on the stand for interrogation by Commissioner Kenneth Hayne, AC QC, senior counsel Rowena Orr, QC and counsel assisting Michael Hodge, QC.

The ongoing fallout is difficult to fully reconcile. Be it bank profits and competition - an area under immense scrutiny - or outright public relations and reputational damage, sentiment towards the banks continues to plumb new lows. All this despite the banks well publicised importance to the share market representing over a quarter of ASX market capitalisation, resulting dominant component of superannuation, as lenders fuelling business growth as the largest value-added sector contributor to GDP, key element of foreign direct investment confidence and overall market stability.

Very few banking divisions have been left unaffected by 'poor customer outcomes' cited emotively and frequently. Reputations have been tattered as the nation's financial leaders who were recently lauded as setting a world standard in capital adequacy, innovation, shareholder value creation and playing a critical role in guiding the Australian economy through the worst of the 2008 Global Financial Crisis without a single bank collapse are now openly vilified...what now? When the blood letting ceases how will the financial industry rebuild its place as a trusted institution as was the case in the not so distant past.

Real outcomes

All stakeholders demand decisive action however the terms of the inquiry state that it cannot resolve individual disputes, award compensation or order actions to be taken. From Federal Government policymakers to regulators, shareholders, retail customers and business banking clients the message is loud and clear however – apologies and mea culpas are unacceptable. 'Change' must be wide ranging and swift in order to commence the lengthy process of rebuilding hard won trust.

Bank bosses are at great pains to highlight damaging operational faults have already been identified, external consultants called in to uncover the 'root cause' and measures taken to implement safe guards with more stringent checks and balances to prevent repeat offences. But does that go far enough? Not in the eyes of the Commission which is pushing strongly for greater accountability, punitive damages and deeper punishment at the highest executive levels. According to the Australian Institute of Company Directors over 80 percent of directors’ favour tougher penalties for corporate misconduct.

The federal government has acted by announcing a further A$51.5 million in funding for the Commonwealth Director of Public Prosecutions (CDPP) to target criminal misconduct in the financial services sector while expediting civil claims. A new small business ombudsman has been created to settle disputes, the AFCA, and the government has launched a A$2 billion fund to stimulate SME lending.

Can banking actually change?

Financial System Inquiry chair David Murray, AO emphasised the pitfalls associated with attempting to change culture within the banks and the challenge regulators face. "We came to the conclusion you can't regulate for culture”. NAB CEO Andrew Thorburn has stated that until the findings from the final report, due to be submitted to Governor-General Sir Peter Cosgrove by 1 February 2019 are published, you may not “get a more settled environment for banks to prove their worth and to grow again. There’s no question that the banks are strong, it’s a question of are they getting it right enough of the time, and I think we have to be balanced around that because the banks are so big, we’ll not get it right 100 per cent of the time, mistakes will be made.”

As banks ready themselves for the dauting task of restoring trust, a key indicator of progress remains elusive. East & Partners research, based on direct interviews with CFOs and corporate treasurers, indicates friends and colleagues are nominated as the primary source of advice for complex corporate treasury, lending and financial management needs in preference to bank relationship managers, suppliers or competitor banks.

Following the UK example

Customer advocacy has never been more important, particularly among small businesses who display a distinctly antagonistic relationship with their bank. This factor was identified in the United Kingdom by the banking regulator, compelling the Competition and Markets Authority (CMA) to enforce a legally binding requirement for British banks to publicly publish independent service quality research citing customers preparedness to recommend their provider. This research is intended to make it easier for customers to find out if another bank has a better offer and introduced to drive up competition between banks, leading to a better overall quality of service for those who use them.

Compliance with the program is incumbent on the banks by threat of fines and penalties however, the Australian financial services sector has the opportunity to launch a similar industry standard measuring and monitoring customer experience. Will Australian banks take the initiative to show the Australian market they can do better, or wait until it is forced upon it?