Failings of organisational culture and governance arrangements, alongside remuneration systems, lie at the heart of much of the misconduct examined in the banking royal commission, according to the final report.
“Culture, governance and remuneration march together,” Commissioner Hayne said in the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which was handed down yesterday at approximately 4.30pm AEDT.
In his comments, the commissioner said that improvements in one area will reinforce improvements in others, while inaction in one area will undermine progress in others.
Placing responsibilities on financial services entities for improvements in all three areas, Commissioner Hayne went on to argue that regulators (such as ASIC and APRA) also have an important role to play in the supervision of culture, governance and remuneration, which in the past, only focused on financial stability and soundness.
“As events here and overseas show, that is too narrow,” he countered.
“Supervision must extend beyond financial risks to non-financial risks, and that requires attention to culture, governance and remuneration,” the commissioner said.
A number of recommendations reflected culture and governance as needing to change, with recommendations 5.6 and 5.7 in particular requiring steps be taken to address cultural drivers of financial institutions.
Recommendation 5.6 outlined that “all financial services entities should, as often as reasonably possible, take proper steps to: assess the entity’s culture and its governance; identify any problems with that culture and governance; deal with those problems; and determine whether the changes it has made have been effective”.
For the supervision of culture and governance, recommendation 5.7 in the report considered APRA as needing to widen the scope of its “prudential supervision” to “build a supervisory program focused on building culture that will mitigate the risk of misconduct; use a risk-based approach to its reviews; assess the cultural drivers of misconduct in entities; and encourage entities to give proper attention to sound management of conduct risk and improving entity governance.”
Commissioner Hayne used 2015 research from the G30 Consultative Group on International Economic and Monetary Affairs to highlight the relationship between organisational culture and the risk of misconduct, and the work that supervisors could do to form a view about the culture of financial institutions to inform his recommendations.
He noted that, until very recently, “there has only been limited overt attention given in Australia, by entities or by regulators, to issues about conduct and culture.”
“There is an important role for supervisors in assessing the culture of financial services entities,” he said.
“I agree with the view of the G30 that ‘[s]upervisors should look on cultural questions as root cause analysis and intervene when they see demonstrably serious problems as opposed to making culture a generalized supervisory add-on’,” Commissioner Hayne continued.
Taking the arguments of the G30 even further, the commissioner considered it as “essential that there be enough supervision resources, and with the right skill sets/seniority and expert support if needed, to engage constructively with banks on these issues.”
“The main objective should be early problem identification and bank-led corrective action,” he argued.
“Conduct and values should be part of mainstream supervisory processes as opposed to a separate add-on.”
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