How banking culture should be fixed
Significant fines and a shift away from variable remuneration are needed if the industry is serious in addressing misconduct and improving bank culture.
This is the assessment of Macquarie University’s Applied Finance Centre Associate Professor Elizabeth Sheedy.
Sheedy, a financial risk expert has also worked for Macquarie Bank and Westpac. Recently, her research focus has shifted to the role of governance and culture in determining the outcome for banks.
Sheedy said she was “disappointed with the final report and “hoped for a bit more”.
In his final report, Commissioner Hayne said that the “primary responsibility for misconduct in financial services lies with the entities concerned and those that control them including the boards and senior management.”
Sheedy questioned that assessment.
“Boards and banks are run for the benefit of shareholders. The consequences for misconduct are tiny. Why would they change their tune?”
Here, Sheedy was hoping for an overhaul that would really drive change within the banks.
“Banks have been running cultural change programs for so long. Yet nothing has changed.”’
Sheedy would like to see serious penalties for misconduct akin to that of Europe where substantial fines really impacted the bottom line – in some cases cutting the profit of banks by one-third.
“As it currently stands, fines in Australia barely make a dent on the bottom line. Banks just consider it as a cost of doing business.”
“Shareholders and executives are the ones that need to bear the consequences. Only then will shareholders and executives start to apply pressure to manage for the long-term, and for the benefit of customers.”
According to Sheedy, remuneration systems being used by many financial institutions do not encourage the right kind of behaviour adding that again she was disappointed because of Hayne’s recommendation to implement the principles in the Sedgwick Review - that is the balanced scorecard.
In fact, she was surprised by this recommendation given that in the interim report, a few cases were highlighted that proved how poorly the balanced scorecard has worked.
“The balanced scorecard has proven to be an abject failure. The Commissioner knows it’s nonsense. He knows the research. For a man to turn around and recommend such an approach is quite extraordinary.”
In fact, rigorous research conducted by Sheedy and her colleagues has proven that highest rates (75 per cent) of compliance were achieved under a fixed remuneration structure, whereas compliance rates fell significantly (62 per cent) under a simplified balanced scorecard system.
The recommendation for APRA to oversee the remuneration standards of the banks was a “nice idea” but again Sheedy sees shortcomings.
A similar approach was adopted a few years ago when the prudential regulator tried to set up a remuneration and culture team – it was subsequently disbanded after the staff left to set up their own consultancy team.
“Practically speaking it’s terribly difficult for the regulator to supervise culture. It’s difficult to find people with the right skills. Where will the experts come from? Where will you get the resource from? It seems implausible to me.”