Very little will change until we see a change in bank culture.
The Hayne Royal Commission has done its job in highlighting the extreme abuses and practices that have been the result of a bank culture that has sought to maximise profits and shareholder value at the expense of customers and other stakeholders.
But, even if it the commission process does result in criminal and civil charges, convictions, and other penalties, will it bring about the essential and sustained shift in bank culture?
The culture of banks is set at board level. It is the board that agrees the basic strategy of the bank. It is the board that appoints the CEO to deliver that strategy, and that sets their KPIs accordingly. It is the board that agrees to the remuneration structures, incentives and bonuses consistent with the achievement of that strategy.
Moreover, it is the board that has driven the process of building banks to be “financial conglomerates”, with businesses spreading from traditional retail banking, through wholesale and corporate banking, project finance and investment banking, funds management, wealth management and financial planning, superannuation, insurance, mortgage broking, stock broking, and so on.
All these are actually quite different businesses with different cultures and risks that have been cobbled together under the one culture of what Hayne has called “greed”, with career and remuneration structures and incentives to encourage “cross selling”.
For example, a bank may offer you a mortgage that they can then suggest needs to be insured, along with you and your life, offering to assist with your wealth and superannuation management, credit cards, etc, etc, etc.
In the end, the real value of the Hayne Royal Commission will be whether it actually brings about not just convictions, compensation and changes in legislation and regulations, but changes in that fundamental bank culture, or whether, in time, the banks simply drift back to doing what they did before, perhaps at best somewhat muted?
The key question is whether bank boards actually see and accept their responsibilities in this respect. Clearly, not yet! To date, their response has been to “own up” to certain “bad practices” and “abuses” and offer some compensation or rectification, pay penalties imposed, and so on, the cost of which they will of course seek to “pass on”, in other fees, interest rates, or charges.
Banks enjoy a very privileged and significant position in our economy and society, as a result of having been given a “paper” and a “social” licence. The purposes and responsibilities of these licences have never been clearly defined or specified in legislation/regulation, but even doing so will not be enough.
To a large extent, banks have been left to “self police” with, as we have seen, unacceptable outcomes. The regulatory authorities, APRA/ASIC/ACCC, could and should have done more, but this may still have not resulted in the necessary changes in bank culture and behaviour.
One of the worst reactions so far to the accusation that the banks have lent a lot of money to people who couldn’t afford it, has been that, as these and other excesses have been highlighted, the banks have responded by restricting new credit and tightening up on existing loans, compounding mortgage stress and further weakening an already slowing economy.
In the mortgage market there have also been “restrictions” on foreign buyers, and limits put on, and then taken off, the banks in offering interest only loans, all of which have accentuated, at times, the problem. With house prices now falling, these factors are playing out to the detriment of borrowers and the broader economy.
Unfortunately, our Big Four banks operate in the belief that they are “too big to fail” – that, in the end, in a crisis, they will be bailed out, and ultimately by the taxpayer. In the GFC and global credit crunch, with some 60 per cent of their funding from offshore, the banks were “saved” by being able to restructure their borrowings by using Australia’s AAA credit rating – otherwise they would have hit the wall.
Hence, bank boards MUST start to recognise their privileges and responsibilities, and shift their culture.
Banking should not be seen as a “licence to print money” for themselves!
John Hewson is a professor at the Crawford School of Public Policy, ANU, and a former Liberal opposition leader.
Bank boards must start to recognise their privileges and responsibilities, and shift their culture.