Key outcomes from the Interim Royal Commission

The interim report has not made direct recommendations. While the final report may still form recommendations to the government, the likely outcome is that the existing law is adequate – and that we are likely to see changes in interpretation, outcome and enforcement of current laws and regulations, rather than a raft of new legislation.

The way that banks, government, regulators, the courts and the general public respond to the change of interpretation will be significant. Next steps are likely to include:

Community expectations – a new ‘North Star’

Banks will need to manage themselves beyond simple compliance with the law and regulation, to also meet community expectations.

The Royal Commission required the banks to disclose instances where their conduct failed to meet community expectations. Community expectations is not a term defined in banking law and unlikely to have found its way into the policy and procedures of the banks.

The hearings have presented numerous examples where the conduct of the banks were clearly morally egregious, but presumably there will be many, many, grey areas.

Community expectations will change over time and banks will need to be flexible enough to adapt themselves.

How banks define these expectations, translate them into policy and procedures, and train 25,000 – 40,000 employees to execute good judgement on a day-to-day basis is an extraordinarily complex undertaking.

Conflicts of interest – smaller and simpler banks

A number of the banks have already taken the decision to dispose of their wealth management and insurance businesses.

There remains a number of outliers to this process, notably Westpac and it’s retention of BT.

Where banks choose to be multi-product and/or provide in-house manufacturing and sales capability, the banks will need to demonstrate that the segregation of duties, information and commercial decision-making is at a standard even higher than non-multi product institutions.

Claiming ‘share of customer wallet’ and incentives for cross-selling products to customers will be viewed suspiciously by authorities.

Banks are likely to offer fewer products, and the products are likely to be simpler and more standardised, particularly those aimed at retail customers.

Professionalism – individual accountability

The largest banks employ tens of thousands of staff across hundreds of locations. At times, it is difficult to identify individuals with day-to-day and ultimate responsibility for decisions and outcomes. A result of the Royal Commission will be a requirement for greater clarity of individual responsibility which may manifest itself in a number of ways.

BEAR II

The Bank Executive Accountability Regime came into effect for the large banks on 1 July 2018. It seeks to directly link obligations to the banks’ top executives. In light of the Royal Commission, the span and reach of accountabilities and responsibilities may grow. Additionally, the exercise may persist through to middle management and front-line staff.

The way bankers work together

Banks in many cases have increasingly adopted technology and agile management practices that encourage collaboration, team driven outcomes and shared responsibility. Banks may need to revert or rebalance to more structured management styles to support the more demanding post Royal Commission environment.

Banks will need to encourage greater internal challenge, where individual employees are expected to speak up, rather than hide behind a team or agile structure.

Consequence management

The interim report noted, ‘when misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done.’ The responses are likely to be:

  • Restructure of consequence management programs within the banks that are more invasive and provide for harsher penalties.
  • Support positive consequence and communicate and promote examples of exceptional levels of customer support.
  • Negative consequences shared across the industry, either within industry bodies or via the regulator, to protect against an individual exiting one financial institution and remerging at a second unsuspecting institution.
Remuneration

The large banks typically have complex scorecards with many KPIs driving remuneration including financial performance, customer satisfaction, staff satisfaction, diversity and compliance.

The Royal Commission may rebalance these components – with greater weight on meeting the highest level of compliance and customer expectations. Compliance dominated score cards may be pushed down from executive levels to line managers. Deferred compensation and claw-back provisions will again be a matter of focus.

For more commentary from Deloitte on the Interim Report click here


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