Banking sector face new wave of reforms

The Australian 12:00am February 25, 2017

Richard Gluyas

The Turnbull government is preparing a second wave of financial sector reforms, including consideration of a framework to make senior executives individually accountable for serious lapses in governance and conduct.

The package — which could see executive bonuses frozen when scandals occur inside banks — will require legislative backing and could be released in April, and will be presented as a knockout blow for the Labor Party’s electorally popular call for a banking royal commission.

“The government wants to bundle all these things up,” a source told The Weekend Australian. “The intention is to send a clear signal that all the issues have been dealt with and there’s no need for a royal commission to determine what the issues are.”

As part of the first wave of ­finance sector reforms, announced in response to the banks controversially holding back part of a 25-basis-point Reserve Bank cut in interest rates, the big banks’ chief executives have been required to appear at least once a year before the House economics committee.

One of the key findings from the inaugural examination in October was that no senior bank executive had been terminated despite a series of well-documented scandals.

The committee said in its report that this was unacceptable and showed the industry suffered from an “accountability deficit”.

National Australia Bank chief executive Andrew Thorburn was singled out after he said certain people in the bank’s wealth management business “definitely feel accountable” and “reputations have suffered”.

Mr Thorburn argued that more severe consequences for executives were not appropriate because they were not directly responsible for the misconduct, which he blamed on financial planners.

“The committee disagrees with this assessment,” the report said.

It cited ASIC chairman Greg Medcraft’s view that the major banks have a “poor compliance culture”, and financial system inquiry chief David Murray’s assessment that they had repeatedly failed to protect the interests of their customers.

It is understood Scott Morrison visited the Financial Conduct Authority in Britain last month to assess the FCA’s so-called senior managers regime, which facilitates enforcement action against executives by requiring them to attest to their specific responsibilities.

While traders in Britain have been sanctioned and even sent to jail for manipulation of foreign exchange and interest rate benchmarks, their bosses have escaped the regulatory net.

The new regime, which took effect in March last year, holds executives responsible for governance and conduct failures on their watch, unless they can show they took adequate steps to prevent wrongdoing.

The changes have spread fear in the finance sector.

A senior Santander UK executive said last year: “What I worry about is a big team from the FCA turning up at my offices with 30 guys to go through the minutes of every meeting to second guess a decision I made a few years ago.”

A similar regime is under consideration here, although sources have told The Weekend Australian it is likely to be less strict than the British version.

The House economics committee’s report said it was aware of potential problems with the senior managers regime.

“In particular, there are concerns that part of the regime may undermine businesses’ internal accountability structures, and that the regime runs counter to traditional concepts of criminal and civil liability,” it said.

Also under consideration by the government are rules to defer a proportion of bonus payments, which could be forfeited if misconduct later comes to light.

Regulators in Australia and offshore have often commented on the strong link between remuneration and culture, with Ahmed Fahour’s $5.6 million package at Australia Post the latest example of excessive pay fanning community outrage.

Banking regulator APRA is doing a stocktake of industry remuneration practices to gauge how well existing requirements are being implemented, and how well they are interacting with the risk cultures of regulated institutions. The work, which started last year and has continued into this year, will include a review of the remuneration arrangements and outcomes for senior executives, risk and control staff and risk-takers at a sample of institutions.

The Turnbull government’s financial sector reforms are also expected to include responses to recommendations from a range of recent bank-related inquiries.

They include the Carnell inquiry into small business loans, which reported late last year, and the Ramsay review of the financial system’s external dispute resolution and complaints framework, due to report next month.

While the timing of the reform package is uncertain, the government will be keen to hear first from the major bank chiefs early next month when they appear for a second time before the David Coleman-chaired economics committee.