A compelling way to change bad bank culture is to require financial institutions to be continually closely challenged by customer associations.
This would counter the “striking asymmetry of power and information between bank and customer that favours the bank” as noted in the Interim Report of the Hayne Royal Commission.
No changes in law may be required. The establishment of customer associations could be introduced by ASIC as the conduct regulator, and/or APRA, the prudential regulator.
They could require any customer of a financial service institution to automatically obtain voting rights to elect professionally qualified customer advocates for each firm.
The regulators would determine the professional qualification of advocates and their pay. The cost would be reimbursed by the relevant business.
Anyone with the required professional qualifications could self-nominate to be elected to create market forces for cost effectiveness.
The idea of banks funding customers to take corrective action was raised by Ken Henry, the chair of National Australia Bank.
Henry pointed to out to Commissioner Hayne that the Australian Taxation Office provides such funding for disputes with taxpayers.
Stakeholder advocates could make redundant the international practice of regulators embedding members of their staff in financial institutions. The remit of such staff is limited to compliance issues not to the quality and competitiveness of customer service.
In any event embedded staff are typically restricted to an intermittent presence. They do not provide continual challenge to management.
Their tenure is not dependent upon obtaining customer satisfaction to be re-elected the following year.
A role for customer advocates
Unlike embedded staff of regulators, or government ombudspersons, customer advocates take on dual duties.
They can mentor bank managers to be “efficient fair and honest” as proposed by Haynes to act as co-regulators as well as improving efficacy and competitiveness of customer service.
They can negotiate win-win solutions in a much more immediate, nuanced and cost effective ways that need not involve the regulators or for issues that are not relevant to regulators.
The efficacy of customer advocates has been proven by the success in the US of Customer Utility Boards (CUBs).
These were established by Ralph Nader to counter price regulators being captured by privately owned utilities providing electricity, gas and telecommunication services.
Proof of their success is that customers had to donate money and personnel involvement.
Such stakeholder involvement also occurs locally as illustrated by the Australian Shareholders Association and Choice, described as “Australia’s leading consumer advocacy group”.
The involvement of Australian customers could be higher in Australia than in the US because the cost of participation could be negligible and benefits far greater.
Australian Banks and other financial service providers who pay the costs could also achieve significant net benefits.
A preference for accepting stakeholder advocates rather than embedded regulators was accepted by the CEO of the Australian Institute of Company directors during a briefing for directors at the Sydney convention centre last September.
Another role of customer advocates would be to determine Key Performance Indicators (KPIs) for protecting and furthering the interests of customers.
These KPIs and the actual performance of each bank could be required to be reported at Annual General Meetings of the financial institution.
In this way shareholders could make informed independent views on how well their directors were protecting the source of their dividends share values.
It would allow investors like BlackRock to assess if the company benefits “all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate”. BlackRock has $US6.4 trillion under management to make it the largest fund manager in the world.
The introduction of stakeholder advocates to challenge management would provide a way for directors to avoid “Group Think” as sought by BlackRock.
Stakeholder associations provide a way to introduce what BlackRock describes as “A new model of corporate governance”.
More importantly the actual achievement of KPIs by firms would provide a way for Parliament to continually evaluate the performance of its regulators.
Dr Shann Turnbull is principal of the International Institute for Self-Governance