The fourth roundtable in our client series discussing the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry continues to highlight key themes and concerns emerging as a result of the hearings – the biggest one being the likelihood of increased regulation and how smaller banks and credit unions can navigate these changes.
Can mid-sized financial institutions succeed in commercial lending?
Continuing on from the last roundtable, there is an appetite from smaller banks and credit unions to increase their exposure to commercial lending. There was agreement that there are a number of essential elements to ensure the process is managed correctly from day one. This includes complex risk assessment, ensuring the right expertise within the organisation, as well as having robust policies, procedures and frameworks in place.
The Royal Commission has highlighted concern around banks having the correct skill and capability for commercial lending to be managed responsibly. For smaller banks and credit unions, the issue is actually having the scale to take on the risk profile of commercial lending. One solution proposed was to collaborate and offer shared services across the sector.
When looking to get involved in commercial lending, it is important to go back to the basic components of responsible lending and make sure you do the due diligence. You not only need to have a strong understanding of someone’s business plan and cash flows etc., you also need to be able to say no to loans which are outside your appetite. To do commercial lending you need to have the right people, systems and processes.
Dealing with vulnerable customers
Round four of the public hearings focussed on financial services entities and their effect on Australians who live in remote, rural or regional communities and Aboriginal and Torres Strait Islander people across Australia.
As many of our clients operate outside city centres, this certainly resonated and brought up questions around how organisations deal with vulnerable customers in a broader sense – including those with disabilities or struggling economically. It was agreed that financial institutions have a role to help support these communities. The question was posed, where is the line between when to help and when to say no to a loan? Will we see an increased propensity by vulnerable customers to take their complaint to EDR and an increased propensity for EDR to find in their favour?
APRA has been under severe pressure regarding to how they regulate financial institutions. This latest round of hearings has brought to light concerns that the regulator has been far more focused on organisational policies and procedures rather than what is actually happening on an individual customer level.
It has been acknowledged by APRA that conduct is a prudential issue, and we should expect to see changes from the regulator to support a more customer-outcome focused financial services industry.
Responsibility of customer’s v organisations
A regular theme coming out of our discussions with clients has been the uncertainty of what the actual impact on reporting and regulation will be as a result of the Royal Commission findings.
Ideally, APRA will be proactive and anticipatory about the changes that need to be made and will handpick the policies that will actually make a difference and be effective and manageable for organisations to implement.
There is also a question around how ‘community expectations’ have been defined – should organisations be held to the Commissions’ definition, and how much individual responsibility do customers need to take , or how expectations might change over time?
Customers need to be more informed and have more advice – the more well informed they are, and the more they understand the decision making process, will enable customers to better identify if they should question a financial institutions decisions.
The sixth round will continue its examination of the Superannuation industry with the seventh round of public hearings, from 19-30 November, focussing on policy questions arising from the first six rounds. Organisations should expect more intense supervision from regulators in the coming months, as well as emerging clarity on what regulatory impact the Royal Commission will actually have on the industry in the longer term.
The best thing that smaller banks and credit unions can do is prepare early. Look at an organisational health check, review your governance and culture, and review your risk framework to protect your organisation and prepare for the inevitable wave of regulation and change.