Frosty responses complicate Hayne review

The industry's steely profit maximisation ethic, a relentless focus on product sales and "complexity" on the part of both banks and regulators sums up responses from major stakeholders to the interim report of the financial services royal commission.

Iconoclastic analysis is mostly found in the paper from the Finance Sector Union, with the FSU suggesting little has changed, contrary to a year's rhetoric from the big banks.

Commonwealth Bank skirted around the nub of many of the key points in the interim report from Kenneth Hayne, often citing the report of APRA's prudential inquiry to explain why CBA was so often on the back foot at hearings this year.

"There are several causes of the misconduct examined by the royal commission, many of which were accurately identified in the APRA Report [including] 'a complex interplay of organisational and cultural factors has been at work' that spanned accountability, governance, systems, remuneration and leadership."

CBA accepted that "the group's culture became complacent, it did not take its obligations seriously enough and it underinvested in key areas, particularly operational risk and compliance.

"The balance between short-term outcomes and long-term shareholder and customer interests was not right."

ANZ used more direct language.

"As a generalisation, it can be said that, over a number of years and due to various events, the financial services industry developed a culture that became overly focused on revenue and sales," the bank wrote.

"A contributing cause in certain failures involving ANZ was the complexity resulting from the systems and processes applied to deliver banking and financial services, and the design, number and breadth of products offered by ANZ.

"It is apparent with the benefit of hindsight that, in some cases, products or systems were not well designed from the outset, which compounded these difficulties."

NAB, in a submission signed by its CEO Andrew Thorburn, wrote: "There has been a shift in the way we view our customers and our role, leaving our industry open to your challenge that we have put 'profits before people'.

"Secondly, banks, including NAB, have moved over time from taking a long-term view to a short-term one. This perspective has skewed the focus to … profitability.

Thorburn too noted "a shift from a time when the majority of people in the sector were remunerated with fixed pay" pinning part of the cause on "most people receiving variable rewards, calculated by reference to short-term considerations including sales, growth and profits."

And, in an echo of others he said "banks have become more complex, in part due to increasing regulation, compliance obligations and legacy systems."

He added:  "It has also meant our bankers have in many cases lost the deep local connections they had with customers and the communities they serve."

Bendigo and Adelaide Bank, keeping its response short and direct, concurred with the denigration by Hayne over "the prioritisation of short-term profits over longer term benefits."

This, the bank said, "reflect a departure from the simple notion that banks perform a fundamental service to society, which should benefit all parties.

"Significant factors that have contributed to this departure have included the structure of the industry, the expectations of shareholders, and the regulatory framework that has emerged over time."?
Westpac, its response argued it is "appropriate and consistent with all relevant stakeholders' interests for some component of variable reward to be based on the employee's measurable contribution to the financial performance of the company.

"The sales process has a necessary and legitimate role in banking, and motivating employees to do it well (subject to appropriate safeguards) encourages employees to improve customer service and customers' outcomes.

"The sale of banking products is not, in and of itself, problematic."

The Finance Sector Union contradicted the high-minded narrative of big banks about recent and planned reforms on the way staff are paid.

"The union has seen no retreat from … an agenda to maximise profit without proper regard to the consequences," it contended.

"As the royal commission has progressed there has been no change to the issues confronting employees.

"Branch staff continue to be performance managed for failing to sell sufficient numbers of products; leader boards, revenue targets and sales competitions remain common; branches continue to be closed in rural and regional areas; staff continue to be retrenched and replaced by less trained staff, or automated processes; and pay increases continue to be focused on variable and contingent pay."

Raising a dimension not much discussed, the FSU argued the failure by the banks to acknowledge the breadth of the sector's cultural issues "is indicative of a deep disconnect between bank leadership and what is happening within banks."

The FSU labelled this as "permafrost", said to be a "lack of processes and avenues to ensure that bank leadership are aware of the organisational culture and issues facing employees and consumers."