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As Commissioner Hayne is due to hand down the final report in February, global firms are already undertaking detailed self-assessments following the real-life cases highlighted in the royal commission, writes Kevin Nixon.
The Royal Commission into Misconduct in Australia’s banking, superannuation and financial services has captured the attention of the industry and regulators globally. This is more than just a passing interest – hearings are being watched closely and in full; transcripts and supporting documents are being studied and cross-referenced.
This might seem like a bold statement, given the size of Australia’s GDP, and the major scandals that have already rocked the world in the wake of the financial crisis.
This could be dismissed as just being our turn, and often used phrases like ‘this is Australia’s GFC’ reinforce that notion. But if that is the case then why is it garnering so much attention?
It is precisely because of everything that has gone before at home and abroad – the regulatory changes that have taken place, the punitive actions, the inquiries, the public discourse, the industry codes of conduct and structural changes – that the spotlight is on the Royal Commission.
For more than five years culture has been at the forefront of regulatory dialogue. Go to the website of any financial regulator in the world and you will find speeches from regulatory leaders, often going back several years, that talk about culture as being one of their top priorities.
No other topic is more consistently mentioned globally. However, culture is not like capital. There is no formula, and you can’t improve culture by raising a number, modifying a formula, or altering a definition. It is human-centred. It is about values and beliefs, and it is about the decisions one makes.
Perhaps the most powerful aspect of the Royal Commission has been the use of case studies. And the most impactful and insightful moments have come not from the stories from the front line, but the stories from up the line.
Certainly, the frontline stories have been devastating for the individuals involved. But the up-the-line stories have revealed how the management of institutions in these instances approached the issues, and therefore indicated the probability of events being addressed or repeating themselves.
For the executives involved it came down to: What did you know? When did you know it? And what did you do about it? This is the heart of culture. And why the Australian situation has captured attention worldwide.
The countdown is now on for the issuance of the final report. For Australia there will be many detailed recommendations, and, sight unseen, one can assume the government will adopt most, if not all, of those detailed recommendations.
There will be much work to be done at home on many fronts. But what will the impact be beyond our borders?
The case studies are valuable. They provide worked examples of where things can go wrong.
Foreign firms are already undertaking detailed self-assessments, walking through those same case studies internally to assess their own practices, risks and gaps.
Regulators will no doubt use the case studies as the basis for conducting thematic reviews in their own financial markets. Ultimately, asking the simple question: Could this be happening here?
Response and responsibility of management has been a key factor in the hearings. The Bank Executive Accountability Regime has only just been implemented in Australia. So it is new and not yet tested. But it does follow the introduction of similar initiatives in places such as the UK and Hong Kong.
The case now is even stronger. And it will provide the impetus for policy-makers to accelerate the introduction of similar regimes elsewhere.
For the industry, it is about reviewing their own policies and procedures, and ensuring the right disincentives are in place to discourage poor or lax behaviour.
The issue of incentives and disincentives has featured strongly. Bonus reforms were one of the first global reforms introduced after the crisis.
While introduced around the world nearly ten years ago, the hearings have raised the question of how effective these reforms are in practice. In addition, the use of commissions and the potential for conflicts of interest has been a distinct point of concern.
Review of sales practices and pay structures going forward will be informed by the Australian experience.
Finally, information and reporting frameworks are set for review. There is an unquestionable need for more effective internal and external reporting. It is not the root cause of failures. But effective reporting is a necessary tool in monitoring for, and addressing, failures.
Of course, these themes are also critically important for Australian firms, but they will also extend beyond our border.
Getting culture right is important for customers, the economy, trust in the financial system, and the long-term interests of shareholders.
In that context, and on a lighter note, it may be that the Australian Royal Commission proves to be a valuable export to the global financial system.
For more commentary from Deloitte on the Royal Commission click here.
To see Kevin Nixon on Your Money discussing the Royal Commission and what to expect post the verdict in February, click here.
Author: Kevin Nixon is a Senior Advisor to Deloitte and Co-leader Deloitte Centre for Regulatory Strategy. Formerly MD Regulatory Affairs, IIF Washington D.C. He was also a former banking Exec Director Regulatory Reform and Capital Markets Director investment banks.