Australian Securities and Investment Commission (ASIC) chairman Greg Medcraft has been a vocal critic of Australia's big four banks and their procedures.
He's routinely criticised bank assertions that misconduct is due to a few 'bad apples' and slammed a culture that focusses on short-term profits and promotes the selling of products rather than the providing of quality advice.
'When culture is rotten, it often is ordinary Australians who lose their money. Markets might recover, but often people do not' said Mr Medcraft on Friday (as quoted in Fairfax media).
Never a truer word was spoken, particularly when the individuals suffering are either leveraged to the hilt (think Storm Financial) or haven't got the experience to understand the up-and-down nature of financial markets.
A lack of financial literacy is another criticism with customers often being taken advantage of by 'independent' financial planners (ostensibly acting in the customer's best interests) that nevertheless receive financial rewards from products they sell.
Commonwealth Bank of Australia (ASX: CBA) was front and centre at both the Storm Financial and the financial planning scandal and has drawn recent headlines over a potential bribery claim in its technology arm. National Australia Bank Ltd. (ASX: NAB), Macquarie Group Ltd (ASX: MQG), and Australia and New Zealand Banking Group (ASX: ANZ) also featured prominently in the financial planning fiasco.
Westpac Banking Corp (ASX: WBC) seems to have avoided that one, but it is being investigated as part of the ongoing inquiry into manipulation of the Bank Bill Swap Rate, a situation that has already caused ANZ to suspend seven traders over allegations of wrongdoing.
Wayne Byrnes, chairman of the Australian Prudential Regulatory Authority (APRA), which oversees lenders and insurers, also got into the act on Friday, declaring that:
'It is clear that in many cases, aspirational statements of organisational culture have been no match for the personal incentives that are created for individuals' (quoted in AFR).
Or in other words, banks make a song and dance about how important culture is while simultaneously rewarding employees who sell more products.
A quick web search will show you piles upon piles of banking misconduct issues going back to before the GFC. It seems that little has changed in the past decade except the date, and the nature of the misconduct, which begs the question:
Why ARE the big banks so dodgy?
- Prime directive is to achieve profit growth for shareholders
- Poor incentive structure creates conflict in employees
- Lack of punishment from ASIC, the 'toothless bandicoot'
- Punishments available aren't large enough to act as a deterrent
- Poor risk culture driven by incentives as well as lack of awareness or oversight from supervisors
And the list goes on. But an interesting perspective comes from the research of associate professor Elizabeth Sheedy and Barbara Griffin at Macquarie University. An ongoing study reported in Fairfax media this morning found that:
- Half of the staff in the three major Australian banks surveyed believe that remuneration plans encourage unacceptable risk taking
- 'Machiavellan' personalities (those who manipulate to gain power) are the most ethically problematic
- Executives have a significantly better view of their bank's culture than junior employees do
(The study can be found for free via a web search for "Empirical Analysis of Risk Culture in Financial Institutions: Interim Report")
Tying in with the above points, researchers also found that there is 'significant variation in the risk culture scores in each of the banks at the business unit level' i.e., different branches of the bank (Home Lending, Wealth Management, Insurance) etc have their own risk culture.
The researchers felt that this was 'consistent with the hypothesis that culture is a local construct and very much dependent on interactions with close colleagues and the immediate manager'. They also felt that executives had a better view of culture because of 'avoidance', where awareness of problems is contained to the lower levels of a business (Sheedy & Griffin, 2014).
In other words, it may be pointless to attack senior execs because a) they think their culture is great, and b) they personally have a limited impact on the culture of subsidiary departments.
It's an interesting look at the dynamics of Australia's banking sector and a timely reminder that customers must be cautious before entering into any arrangement that could have a meaningful impact on their finances.
There's no such thing as a risk-free investment.
