If you thought the performance of the AMP was pretty weak after the revelations at the banking royal commission, then think again. A report from the key bank regulator, APRA has damned the culture, management and board performance of the country’s biggest financial group and bank, the Commonwealth (CBA).
As a result APRA has hit the CBA with the largest ever financial penalty against an Australian company by telling the embattled Commonwealth Bank to find $1 billion dollars and add its to its capital buffers. That will remain until APRA is satisfied the CBA has lifted its game.
It is a message to all Australian companies, especially in the financial system and to weak regulators, like ASIC, that existing laws can be used to impose the most draconian of penalties where warranted.
It is also further confirmation that the Commonwealth Bank, which was the original target of many complaints in financial planning (Storm Financial a decade ago for example), insurance, lending to small companies, poor super management, high fees and charges, retains that unwanted title, despite the determined attempt by the AMP to grab the prize.
"The Report raises a number of matters of prudential concern. In response, CBA has acknowledged APRA’s concerns and has offered an Enforceable Undertaking (EU) under which CBA’s remedial action in response to the report will be monitored. APRA has also applied a $1 billion add-on to CBA’s minimum capital requirement,” APRA said in a statement issued with the report on Tuesday morning.
APRA appointed a three person committee to examine the CBA’s culture, management and other problems in the wake of the huge money laundering allegations made against the bank by Austrac, the government group that tracks cash movement through the financial system.
Austrac’s case and its 55,000 or so claims, has already cost Ian Narev his job as CBA CEO and seen the bank replace four directors, while a number of other senior executives have departed as well.
The APRA report’s main conclusion was that “CBA’s continued financial success dulled the senses of the institution”, particularly in relation to the management of non-financial risks.
“The Report also found a number of prominent cultural themes such as a widespread sense of complacency, a reactive stance in dealing with risks, being insular and not learning from experiences and mistakes, and an overly collegial and collaborative working environment which lessened the opportunity for constructive criticism, timely decision-making and a focus on outcomes.
"The Report raises a number of matters of prudential concern. In response, CBA has acknowledged APRA’s concerns and has offered an Enforceable Undertaking (EU) under which CBA’s remedial action in response to the report will be monitored. APRA has also applied a $1 billion add-on to CBA’s minimum capital requirement.
"Until such times as these recommendations are addressed to APRA’s satisfaction, an add-on to CBA’s operational risk capital requirement will continue to apply."
“As some of the recommendations deal with the way in which CBA interacts with customers, APRA will work closely with the Australian Securities and Investments Commission (ASIC) to ensure that the recommendations are addressed in full.”
APRA chairman Wayne Byres said the inquiry’s findings showed CBA’s governance, culture and accountability frameworks and practices were in need of considerable improvement.
“As the panel notes, CBA has itself identified and begun taking steps to address many of these issues, but there is much to do and a risk that the same issues which have led to the need for the inquiry undermine the bank’s efforts to comprehensively and effectively respond to the recommendations of the panel," Mr Byers said.o ensure that the recommendations are addressed in full.”
The importance of the $1 billion extra for the CBA’s capital base cannot be underestimated. It will reduce its already high return on equity of 14.5%, which in turn will lower earnings, impact bonuses and other payments to executives and the board and increase costs.
And on executive remuneration inside the CBA, APRA wants to see more consequences ie loss of income.
APRA’s report noted that until the Austrac matter, there were few examples of CBA’s top executive taking a bonus hit for scandals that happened under their watch.
The CBA has already set aside $200 million for the cost of regulatory actions. This was though to relate to the Austrac action. But the banking royal commission haas raised the possibility of other costs, and charges by regulators, such as ASIC. But there could be more costs, judging by some of the revelations already from the banking royal commission.
At December 31, the CBA had capital of 10.4% (the APRA level is 10.5%). That will have to be built up to 11.5%.
The CBA has finance that from earnings, a capital raising, or by cutting the dividend/making its dividend reinvestment plan more attractive and it can’t finance that from debt. It has to be high quality capital.
No other Australian company has been hit by a penalty the size of APRA’s.
The $1 billion levy on the CBA can be likened to the $US1 billion fine levied by American banking regulators in April against Wells Fargo, America’s third largest bank, for selling dud insurance and advice to hundreds of thousands of customers.
Earlier Wells Fargo was been fined $US185 million for forcing staff to open 3.5 million false accounts and credit cards for customers who did not need them.
