Banks urged to put ‘stronger focus’ on customers

The final report from “independent governance expert” and former auditor-general Ian McPhee AO outlines the work undertaken by the Australian Bankers’ Association’s (ABA) package of six initiatives to “better protect consumer interests, increase transparency and accountability, and build trust and confidence in banks”.

The six initiatives, first outlined in the Banking Reform Program published in April 2016, focus on:

1. Strengthening alignment of remuneration and incentives and customer outcomes
2. Making it easier for customers when things go wrong
3. Reaffirming support for employees who blow the whistle on inappropriate conduct
4. Removing individuals from the industry for poor conduct
5. Strengthening the commitment to customers in the Code of Banking Practice
6. Supporting ASIC as a strong regulator

Update on work taken

According to Mr McPhee, overall, the industry’s commitment to the package of initiatives has been “positive, well supported and worthwhile”.

The report provided an update on the six initiatives, outlining that:

• All remaining banks that had not yet published their overarching principles on remuneration and incentives have now done so.
• The ABA introduced its Conduct Background Check Protocol for bank employees and is working to expand the coverage of this to non-banks (however, it has noted the “practical challenge” of administrating this operation given some non-banks are not members of the ABA).
• Any further work on an industry register of those with poor conduct will commence by June 2019, following completion of the royal commission.
• The association is working with ASIC to approve the Code of Banking Practice, which it hopes will be approved in May 2018 and implemented within the following year.
• All but one participating banks have confirmed their intention to adopt the new code, with the final bank assessing its subscription status, pending finalisation of ASIC approval.
• The ABA has recently announced that retail banks will be required to subscribe to the new Banking Code of Practice as a condition of membership.

Some initiatives, such as the prospective last resort compensation scheme, will be deferred until the royal commission has finished (as it will examine many of the issues involved), while others, such as strengthened whistleblower protections, require legislation to pass before being implemented.

Concluding remarks and recommendations

Mr McPhee concluded that, two years after the initial industry announcement, the industry-led work for 11 of the 13 planned measures has been completed, with three of those 11 measures still dependent on statutory underpinnings for finalisation.

He commented: “As I have said during the course of my review, it is the outcomes that matter most, and the success of the Banking Reform Program will ultimately be judged on whether the very tangible changes made result in better outcomes for customers.

“While suitable bank policies and processes are without doubt important, the role of boards, chief executive officers and other senior executives in showing the way and shaping the culture of individual banks is essential to build confidence and trust in the banks.

“The stronger focus on customers and their individual circumstances needs to become an integral part of the way the banks do business.”

The former auditor-general continued: “Trust and confidence takes time to build yet can be quickly eroded.

“Consequently, ongoing reinforcement of bank values and expectations by the leadership of each bank is important to avoid any drift from the expected behaviours in delivering services consistent with statutory obligations and bank policies.”

He therefore recommended that the ABA, on behalf of the banking industry, commits to “the development and introduction of a policy which would provide for individual banks to publish appropriate performance indicators and commentary to give greater transparency to their success in achieving the industry’s goals of building trust and confidence”.

This recommendation has reportedly been accepted by the ABA and the industry.

Mr McPhee concluded: “Good progress has been made to date on the reform program and, in a rapidly changing world, it will be important for momentum to be maintained if the industry’s goals are to be achieved.”

Australian Banking Association CEO Anna Bligh thanked Mr McPhee for his expert work over the last two years providing “independent governance advice” and monitoring, adding: “Ian McPhee and PricewaterhouseCoopers have done a rigorous job over the last two years in their independent monitoring of the implementation of the Better Banking Reform Program. 

“The industry has set a cracking pace on some of the toughest reforms in over a decade, as detailed in Mr McPhee’s final report; however, there is still further work to be done to bed these down.”

Ms Bligh continued: “Banks are on track to meet the 2020 deadline set by the Sedgwick review to reform the way they pay their staff, including abolishing direct sales incentives and scrapping mortgage broker commissions directly linked to loan size.

“While this is the final report by Ian McPhee, the industry has taken his advice and will be putting in place further arrangements for public reporting.

“Banks will be making further regular public reports on the success of the program and their ongoing implementation of the Sedgwick recommendations and the new Banking Code.” 

[Related: Banking reform agenda moves to implementation stage]