The House of Representatives economic committee talks to lead financial regulators, APRA, ASIC and the ACCC on Friday.
The committee’s members had better have read a speech from last week by an APRA board member which revealed that risk culture is close to top of the list of issues for regulators, the answers could surprise them and make them understand they should have called the regulators first. The risk cultures at banks and other financial groups are worrying regulators.
Geoff Summerhayes, the APRA member overseeing the insurance industry (life insurance has been one of the problem areas for the banks, especially the Commonwealth) made it clear in a speech to an insurance industry seminar (http://www.apra.gov.au/Speeches/Pages/The-view-from-the-other-side-of-the-table-Regulation-trust-and-social-licence.aspx) last week that risk culture and trust were high on the regulators list of concerns. All areas of finance have been probed. All four bank CEO’s at last week’s hearings knew about an update in the area of risk culture that APRA is undertaking. Not one mentioned it and not one question was raised because the committee members were ignorant, even though APRA released the speech on Wednesday.
“APRA will soon publish an update on our work in this area (risk culture) and while I won’t duplicate this here, I want to highlight one simple point that, in my view, is rather telling. In developing our thoughts on risk culture, APRA undertook a series of engagements with some of our largest regulated institutions across banking, insurance and superannuation, probing them on aspects of their risk culture, including whether they believed they had a strong risk culture. Most believed they did,” Mr Summerhayes told his audience.
"Why then, are we observing such a flurry of damaging issues to do with trust and conduct that go to the heart of risk culture? While arguably less pronounced in the general insurance industry, these issues do present an opportunity for all financial institutions to reflect on the effectiveness of their own risk cultures.” This is the key point for the committee hearings, and is behind the upsurge in complaints from customers and why the ALP and the Greens want a Royal Commission into the financial services sector.
Mr Summerhayes was named to APRA, the lead financial regulator late last year after being CEO of Suncorp Life since 2008. Before than he spent more than 20 years at Lend Lease, MLC and NAB. In other words he’s well-versed on finance, insurance and property – three of the key concerns for APRA and other regulators, the Reserve Bank ACCC and ASIC. The APRA inquiry into risk culture across the finance sector is a big deal. It tells us the key regulator is not convinced the banks, super funds and insurers are on top of the problem and the update is bing carried out to drive home this concern. And if the House of Reps Committee had thought about it, it would have burnished its image by asking APRA first to outline these concerns.
Risk culture is the biggest concern regulators have the world over at all types of companies, including many outside finance. It is best captured by the phrase ‘ this time it is different’ as a way banks, their customers, regulators,insurers, brokers,investment banks and their advisers, and governments convince themselves that they won’t repeat past mistakes because we have learned from past failures. We haven’t, and we don’t – the GFC is a perfect example (as was the lending practices of the Big Four and other banks in the lead up the crisis, especially in commercial property where Moody’s warned of looming problems for the banks in some cities in a report issued on Monday night).
Lehmann Brothers fell over because of poor risk culture, as did many other companies. State banks in Victoria, NSW, South Australia and WA fell over in the 1990’s recession because of imprudent lending and poor management. HIH collapse for the same reason, triggering a $5.3 billion plus cost. Bankwest, St George Bank, Suncorp and the Big Four banks all needed capital billions of dollars of injections or takeovers (Bankwest by the CBA, St George by Westpac) in the wake of the GFC because of weak lending practices and poor oversight by management.
And why is risk culture so important? According to Mr Hayes
"APRA’s over-arching mandate is to maintain financial stability and this can be threatened when the community doesn’t have trust in the financial institutions whom they rely upon to provide them with valuable services. Let me be clear: we are not entering consumer protection territory when we speak of trust. This sits squarely with our ASIC counterparts, who we work collaboratively with on a range of issues, and this collaboration has increased in recent times.
"Our point is that institutions, despite having stronger financial settings since the global financial crisis, are now arguably less ‘trusted’. Trust is at the heart of most financial businesses: you are, after all, managing other peoples’ money. Any lack of trust has the potential to impact the viability of your business, in one form or another. So it is our business, as it is yours and others, to have this conversation in the interests of long-term financial stability.”
These points have also behind the thinking at the Reserve Bank’s campaign against weak bank culture for the past two years or more. And a point the new RBA Governor, Dr Phil Lowe made to the same House of Reps committee in his first appearance in September.
"I cannot help but agree with you that there have been too many examples of poor outcomes, particularly in the wealth management and insurance industries. That is disappointing to us all,” Dr Lowe said….I think it comes down to incentives within the organisations, and that is largely remuneration structures. That is a responsibility of management. And, probably, APRA can play some constructive role in encouraging remuneration structures that create the right incentives within organisations. If there was one thing that I could focus on—it is not my responsibility; it is not the Reserve Bank’s responsibility— is making sure that the remuneration structures within financial institutions promote behaviour that benefits not just the institution but its client.
"What I would like to see is, really, banking return to be seen as a strong service profession. I do not know how far away from that we are. Banking, historically, has been a profession—a profession of stewardship, custodians, service, advisory, counsellor. Is not a marketing or product-distribution business; banking is a profession.”
Also on Friday the RBA releases its second Financial Stability Review of the year. It will no doubt contain more about the performance of the banks and their attitudes towards risk. Watch for comments on commercial property lending (which will include financing apartments). APRA and the RBA are getting toey about the looming apartment overhang in Sydney, Melbourne and especially Brisbane. That’s what risk culture is – whatever threatens financial stability and depositors and customers, and the economy as a whole. Apartment lending is clearly doing that.
