Humiliated banks learn hard lesson
Reforms in Australia after damning inquiry will have implications for New Zealand operations, says John Berry.
Guilty as charged – that’s the tacit admission from some of Australia’s largest financial institutions as they prepare for sweeping changes in the wake of the ongoing royal commission of inquiry into the finance sector.
The Commonwealth Bank of Australia (CBA) has announced it will separate out its wealth management and mortgage broking businesses into a new entity, CFS. It is also looking to sell its general insurance division.
ANZ has recently sold its Australian financial advice business, OnePath Pensions and Investments, and National Australia Bank (NAB) plans to sell its wealth management division, MLC.
Australia’s financial institutions are facing up to the significant conflicts between those parts of their businesses that manufacture investment products and those that provide investment advice.
Put simply, the duty to maximise shareholder profits (and sell as much of their own financial products as possible) conflicts with customer expectations that the financial institutions will look after their interests when they get financial advice.
As the evidence before the royal commission has shown, customers suffer when these institutions put profit first. They didn’t just fail to look after many clients, they went further and took advantage of their trust.
They charged fees for no service, charged fees to dead people, misled the banking regulator, breached responsible lending practices, provided financial advice against client interests, sold ‘‘junk insurance’’ (insurance that could never be claimed on) and made secret cash payments to staff.
The dramatic structural changes under way in the Australian financial services industry matter to New Zealand. These institutions have substantial operations here. CBA owns ASB and NAB owns BNZ. ANZ, Westpac and AMP are all integral to New Zealand’s financial system. Changes to their businesses in Australia will likely be mirrored here.
It’s unfair to lay blame for the failures solely on frontline staff if an organisation is structured to promote shareholder interests at the expense of client interests. While customer service staff have let clients down, the bigger failure is organisational leadership.
As the royal commission noted in its interim report released this week, the problem lies in the incentives for employees and the extent to which financial institutions maintained proper oversight.
‘‘All the conduct identified and criticised in this report was conduct that provided a financial benefit to the individuals and entities concerned,’’ the royal commission noted in its report.
‘‘For individuals, the conduct resulted in being paid more. For entities, the conduct resulted in greater profit. The governance and risk management practices of the entities did not prevent the conduct occurring. The culture and conduct of the banks was driven by, and was reflected in, their remuneration practices and policies.’’
Structural separation by selling business units is just the first step; organisational change is also needed. Leaders at large financial institutions must recognise the conflict between shareholder and customer interests and build their culture, processes and ownership structures to address this.
There are signs this has started – for example, staff incentives are now tilting from sales bonuses to client servicing bonuses. The banks are also now paying greater attention to a customer’s true financial position before lending large amounts.
But further work is needed. The Australian royal commission is more than an exercise in laying bare stories of customers being treated very badly. At a deeper level it’s about finding business models that fairly balance both shareholder and customer interests. Recent structural changes at the large banks and insurance companies are hopeful signs that they’ve started to take their medicine. John Berry is co-founder and chief executive of Pathfinder Asset Management, a specialist responsible investment fund manager. He is also a member of the Government-appointed Financial Advice Code Working Group.