What we know so far
The year-long inquiry into the Banking and Financial Services sector began on 12 February with the first hearing of The Royal Commission, and the second set for 13-23 March. The Financial Services team at Grant Thornton has been researching all the available information, listening to the hearings and most importantly, speaking with our clients. The below summarises what we know so far, what we’d like to see and what our financial services clients can prepare for.
The Royal Commission is focusing heavily on misconduct. In an industry that has been under scrutiny for some time with several high-profile misconduct situations, and several inquiries currently taking place including the Productivity Commission report into Banking, the CBA Prudential Inquiry and The Royal Commission, this is no surprise.
The Commission will redefine the way we think about conduct, including standard industry practices. Institutions can begin to look at their processes and procedures and establish a conduct framework to demonstrate they are being proactive in minimising conduct risk.
Corporate Governance and Culture
Tied closely with conduct risk is the culture of the organisation and the corporate governance that drives this culture. In terms of corporate governance the following are likely to be of focus.
- Incentives and remuneration
- Bonus culture
- Quantity and quality debate of the sales process
- The focus of community and customer in conduct policies
- Product governance /product lifecycle
- Disclosure of sufficient information to customers which is clear and easily understood
- Complaints management
- A culture of continual improvement so accepted practices of the past may be challenged
Organisations that are member-owned or profit-to-members based will have a stronger starting base. However, all organisations must review their corporate governance with the customer perspective top of mind. The focus should be on a long-term sustainable customer relationship, rather than a transactional approach to customer complaints and incidents.
The impact to small and mid-size institutions
Many small and mid-size financial institutions will see The Royal Commission as a burden taking valuable resources in time and money. Their size does not allow them the luxury of having people dedicated to The Royal Commission and large legal expense budgets, but instead will take senior executives away from the strategic direction and growth of their business. With a sector so heavily focused on the Four Majors, or now Five Majors, there will be concern from the smaller players around how the recommendations will be implemented without crippling them and removing their ability to compete and contest the market. And is this not in opposition to what the Commission is aiming to achieve?
Grant Thornton sees that small and mid-size financial institutions have many characteristics in which they can take advantage of, to be in a better competitive position post The Royal Commission to what they are now, including:
- Lack of a vertically integrated business model
- Community alignment
- Member-owned and member-focused
- Industry association benefits
The United Kingdom’s Financial Industry has recently undergone similar scrutiny. There are many lessons to be learnt here, as well as much of the work being done in a similar economic environment and culture. It is expected that the outcomes from The Royal Commission will be similar to those prescribed in the UK, focusing on conduct risk and ensuring satisfactory customer outcomes.
Reviewing the scope of The Royal Commission’s Terms of Reference shows the volume of what it is expected to achieve in twelve months. For an industry of its magnitude, economic importance and international power, media scrutiny and size of employment pool and customer base, will they be able to get through it and provide an outcome that is of benefit to the consumer, the industry and the economy? Or for there to be more than a box ticking exercise, will more time be required and if so, will it be granted?
The Commission’s tight timeframes and volume of submissions already received may lead it to extract case studies which may be unrepresentative of the industry as a whole.
Given the only topic that seems to be removing The Royal Commission from the front headlines is the current misconduct of the country’s politicians, how much The Royal Commission will be swayed by politics and upcoming elections will make for interesting news commentary.
The next hearing of The Royal Commission is set for:
Tuesday, 13 March 2018 – Friday, 23 March 2018
Commonwealth Law Courts Building, 305 William St, Melbourne VIC 3000
The first round of hearings will focus on consumer lending practices within the context of credit products such as home loans, car loans and credit cards