While the primary business focus has been on the AMP debacle this week, the Australian Prudential Regulation Authority this morning revealed that, even without criminal charges, the Commonwealth Bank and its board is every bit as bad as AMP and probably worse. So bad that APRA has slapped the biggest financial penalty ever on an Australian company and damned the bank’s weak culture and hopeless board oversight.
APRA appointed a three person committee to examine the CBA’s culture and processes in the wake of AUSTRAC’s money laundering allegations, which have already cost CEO Ian Narev his job and seen the bank replace four directors. The report from former APRA chair John Laker, businesswoman and RBA board member Jillian Broadbent and former ACCC head Graeme Samuel is scathing. “CBA’s continued financial success dulled the senses of the institution”, it concludes, particularly in relation to the management of non-financial risks (like complying with the law). It was “complacent” and “desensitised to failings with customers”. It was “reactive”: “operational risk and compliance issues tended to receive attention only once they had emerged … a slow, legalistic and reactive, at times dismissive, culture also characterised many of CBA’s dealings with regulators” and it was “insular” — including “[turning] a tin ear to external voices and community expectations about fair treatment.”
Worse, the board provided “inadequate oversight and challenge … of emerging non-financial risks” and a remuneration structure that “had little sting for senior managers and above when poor risk or customer outcomes materialised (and, until recently, provided incentives to staff that did not necessarily produce good customer outcomes).”
The bank has offered an Enforceable Undertaking about its remedial actions to deal with the array of issues identified in the review. But just to give the EU some bite, $1 billion has been added to the CBA’s minimum capital requirement and will remain “until such times as these recommendations are addressed to APRA’s satisfaction”. The APRA capital requirement is currently 10.5%; that will increase to 11.5%; at December 31, the CBA had capital of 10.4%.
No Australian company has ever been hit by a penalty this big. It’s not exactly a fine, but the additional requirement will reduce the bank’s (high) return on equity of 14.5%, lower earnings, reduce bonuses and other payments to executives and the board and increase costs. And it comes on top of the $200 million the CBA has already set aside for the cost of regulatory actions relating to the AUSTRAC actions — as well as any other costs or fines by regulators that might flow from the banking royal commission. APRA, at least, has demonstrated that Australian regulators can have the spine to inflict serious hurt on the big banks.
The report also confirms that the line peddled by the big banks and the government about bank scandals, that it was always just a few bad apples, that there was nothing systemic or cultural about the fact that the industry produced one scandal after another, was a lie. It’s in the Laker/Broadbent/Samuel report, in black and white: from the board down, risk wasn’t taken seriously enough, the remuneration system did nothing to discourage it, the processes designed to handle it were poor and overly bureaucratic and the bank didn’t give a damn about its customers.
Meantime, the Business Council — which now more than ever is essentially a branch office of the Liberal Party — continues to complain of “an anti-business agenda” and an “anti-business climate”. Instead of running political campaigns for the government like the one revealed by the ABC, maybe Jennifer Westacott and her cronies should be asking why two of their most senior Australian members, AMP and CBA, have done so much to create an “anti-business climate” through their own misconduct, criminality and systemic flaws that the doyens of Australian business who sit on their boards have done nothing about for so long.
So the non-penalty primarily hits the shareholders (by reducing profitability slightly) while management keeps all the excessive pay and bonuses accrued to date. I suggest a few prison sentences would send a better signal.
More than a few prison sentences are needed. Corral all the CEOs and Board Chairpersons (and complicit subordinates) and start with 10 years hard labour for the worst offenders. Fine the top dogs their total remuneration since the dates of the crimes committed. This might mean their entire tenure in the Bank.
In fact I am surprised that a ‘contract’ has not been put out on a top dog. For $15K a service to the community could be performed, one life lost or seriously maimed, and many customers saved into the future.
Reason this: The Big Bank has just ruined you at age 60 by lousy advice and you will now have to work to 80 or die prematurely; it has foreclosed on viable businesses which never missed a loan repayment by unilaterally ‘re-rating’ the assets and sent people like my wife’s closest friends to the wall.
A lost business of 30 years hard work, lost home and early death of husband has resulted. Your life will be shite for the next 15-20 years in any case.
Why not serve the next 15 years at her majesty’s pleasure, well fed and watered, respected by the other inmates, running the library and giving trade classes and having conjugal visits. Revered by all those in a similar position, darling of the media, and striker of terror into all the finance spivs and grubs into the distant future. You know it makes sense.
Bernard and Glenn . . . Best post have read in last six months. APRA has genuinely delivered a calculated whack on the knuckles likely to bring tears to eyes for some time into future. And now we await the RC’s contribution. Let’s hope they seriously address the political/ finance industry linkage as well as individuals. This Commission surely has an opportunity to completely ignore false apologies; protection or threats by those in high places; and endless cries of pain or remorse.
Just the first of the glossy reports. We’ve been here before. I await the coming faux mea culpas and effete new regulations. ALP, save your affected outrage, you guys were only marginally better when you were in power, think of sensible policies to take to the next election instead.
“Thanks ever so much for showing us where we went wrong. This is the most humble day of our lives.”????
Big business? What does it say about the moral compass of those “in charge” that an outside body had to come in to show them the way? What does it say about those that appointed such amoral twats to these positions?
So, poor old Ian Narev lost his job. $12 million a year. He clearly wasn’t up to it, but let’s just let him run off into the sunset with his loot, paid for not being able to do the job he was overpaid to do! A fish goes off from the head.
Ian was the head.
He allowed all of this to criminal activity to happen on his watch.
Let him apply for Centrelink and he’ll be in the clink before he can blink. But of course he’ll be more likely meeting up with Malcolm at some time ‘offshore’ to compare notes.
I’m for bringing Narev back in a tumbril, fining him all his ill gotten gains and putting him on trial with the end game a 10 year sentence. Similar for the Mike Smiths, Gail Kellys and all the other fleas who have fleeced the punters.