The head of the Australian Banking Association has called for “tolerance of failure”, “flexibility” in regulatory lending guidance, and a “careful” approach to drafting the best interests duty for brokers to ensure meaningful and sustainable changes are made in the industry post-royal commission.
Speaking at the Banking and Finance Oath’s recent Crossroads conference, the CEO of the Australian Banking Association (ABA) Anna Bligh reflected on the Kenneth Hayne-led financial services royal commission, saying that while there is a “sense of urgency” to act on the recommendations made by the commissioner, no “shortcuts” should be taken to fully absorb and reflect on the report.
“The final report is the most important and tangible outcome from the royal commission, and I think it is extraordinary food for thought… The richest insights, in my view, from commissioner Hayne are not in his recommendations. They cannot be gleaned by focusing on those recommendations alone or in isolation,” Ms Bligh said.
“It’s the accompanying commentary, the background and the conclusions that he reaches, and the reasons he gives for those conclusions in which I think the deepest insights can be found.”
She said that when it comes to the introduction of the Hayne-recommended best interests duty for mortgage brokers, which Ms Bligh believes “everybody would well agree with”, there needs to be “careful and rigorous drafting and thinking”.
“The recommendations should be seen as just the beginning,” Ms Bligh said.
While commissioner Hayne did not propose any changes to responsible lending laws, the ABA chief said the same careful and rigorous approach should be applied to amending the responsible lending regulatory guidance (RG 209), which the Australian Securities and Investments Commission (ASIC) is currently in the process of.
‘Hard cases can make bad law’
Ms Bligh said that banks have been grappling with the “tango of issues” around the areas of lending that can be dealt with through “principles-based law” versus “black letter law”, adding that “hard cases can make bad law”.
“If you respond to a particular case that had devastating consequences for the individual in the wrong way, you might affect in a disadvantageous way a much broader group and cohort of people,” the ABA chief executive said.
“Trying to get that balance right is absolutely critical.”
Ms Bligh continued: “The commissioner himself said just obey the law. That, of course, is the right thing to do. But where the law requires interpretation, as it often does in practice, how is that best managed?”
“We've got questions from the regulator about whether or not the current guidance requires more prescription. Do banks need a much longer list of things that they have to check and do they need more prescription about how that checking is verified and documented?”
She called for “sufficient flexibility” in the regulatory guidance, saying that if the industry is to take into account the individual needs of customers – which is one of the “bigger lessons” from the royal commission – then the amended guidance should allow lenders to take into consideration individual circumstances and tailor products and services accordingly.
Tolerance for failure
Commenting on the Australian Prudential Regulation Authority’s (APRA) yet-to-be-finalised regulatory guidance on executive remuneration (CPS 511), the ABA chief executive called to question whether “prescription can really allow for real and meaningful differences between individual roles within one company, as well as different companies in different sectors of the economy”.
Late July, the prudential regulator launched a consultation on its proposed remuneration standards, which include:
- To elevate the importance of managing non-financial risks, financial performance measures must not comprise more than 50 per cent of performance criteria for variable remuneration outcomes;
- Minimum deferral periods for variable remuneration of up to seven years will be introduced for senior executives in larger, more complex entities. Boards will also have scope to recover remuneration for up to four years after it has vested; and
- Boards must approve and actively oversee remuneration policies for all employees and regularly confirm they are being applied in practice to ensure individual and collective accountability.
Ms Bligh noted that non-financial metrics can be “distorted” as well.
“If you get those customer metrics wrong, just like any other metric, they can have a distorting effect on behaviour that is unintentional and [cause] real harm or poor outcomes,” she said.
“Just because it’s a customer metric doesn’t mean that it’s without potential for distortion.”
The ABA chief called for “tolerance of failure” as banks adapt to a new environment of executive accountability
“These are new areas of corporate governance,” she noted.
“We do need to move to an environment where we can have some tolerance for failure. If a company genuinely attempts to get it right with the new remuneration environment, they put in place something that hasn’t been tried before, they introduce new metrics… some of that is going to work really well, [while others not so well].”
Ms Bligh concluded: “If we can accept all of that, and we do get it right, then corporate governance in Australia around this issue could actually be world-leading.”