Insights from the First Round of Hearings of the Royal Commission

The first round of public hearings for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was held from 13-23 March. 

It considered aspects of the treatment of consumers by banking and financial services providers in connection with a number of credit products, including residential mortgages, car finance and credit cards, as well as the arrangements and practices of banking and financial services providers and their intermediaries.

While the Commission hasn’t shown the Financial Services Industry in the most positive light, the overarching view from a recent roundtable discussion we held with our clients is that this can be an opportunity for Mutual Banks to demonstrate their point of difference of customer centricity and learn from the mistakes of their larger competitors.

Oversight of Brokers

Looking at the issues that have come out of the Royal Commission around third party channels for mortgage distribution, lenders need to ensure they have oversight over broker underwriting and the extent of credit risk assessment performed by the lender.

One of the challenges of ensuring robust compliance and regulation for those in the mutual space is the lack of time and resources and the struggle between speed and due diligence.  A good and proper outcome does not always equal a satisfied customer, even if it is in the customers’ best interest.

Training, compliance and risk, remuneration

A key takeaway from the hearings is that staff within the big banks has been trained to sell a product, not necessarily to understand what they are selling or the customer considerations. When looking at training, an organisation’s code of conduct should inform the overall framework, with a focus on risk management and customer value.

Training on risk and compliance should be mandatory for senior leaders so they understand the implications of not having a focus on customer value. There is also opportunity for executives to continually challenge their teams and visit branches to understand the customer experience first-hand.

Detecting and reporting fraud

Issues of misconduct that fall within the category of fraud can happen to any organisation. Where employees or mortgage brokers engage in such conduct, industry practice has been to remove the individual as a “bad apple”.  Rarely is the incident reported to authorities such as law enforcement or professional associations.

There was a strong consensus during our roundtable discussion that increased reporting around fraud is required, and organisations need to show that the behaviour will not be tolerated via actions, not just words.

Organisational culture, prioritisation of risk and compliance

Cultural issues can often be unseen in larger organisations as they manifest in the middle layer of the organisation. In order to overcome this issue, organisations should focus one how this layer of the organisation can be given a voice and build a mechanism to drive the behaviours and culture expected, to prioritise member/customer outcomes.

Another key takeaway from the hearings is that operational risk is not prioritised by the big banks. Areas such as capital, liquidity and interest rate risk are given a much higher priority by the executive.

Next steps

The second round of public hearings will be held from 16 – 27 April and will focus on the financial planning and wealth management industry. They will consider the conduct of financial services entities that provide financial advice to consumers, including the treatment of consumers, compliance with the law and community standards and expectations, and the sufficiency of the current legal and regulatory structure.