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Bank boards will have to find new ways to incentivise staff, according to the UNSW Centre for Law Markets and Regulation (CLMR) Director Professor Dimity Kingsford Smith.

Speaking about today’s release of the Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Professor Kingsford Smith said remuneration arrangements were crucial in rebalancing the current prominence of the financial voice in banks. 

“The Commissioner’s view is that currently much of the misconduct ‘can be traced to entities preferring pursuit of profit to pursuit of any other purpose’,” she said.

“Finding and instilling purposes that motivate bank staff to treat customers well may be the Commissioner’s biggest challenge to bank boards.” 

Professor Kingsford Smith said banks and their executives should also be prepared for more ongoing scrutiny internally and externally on non-financial risk and customer welfare.

Regulatory reform

She said the interim report shows there is a need for greater focus on the customer, stronger regulatory action and greater use of sanctions at the higher levels such as civil penalties and even prosecution. 

“Amongst the many questions raised by the Commissioner, are reservations about whether more regulation would be useful, although in areas such as mortgage broking he suggests that legal clarifications would be helpful,” she said.

“Rather, he raises many questions, in a climate of sharpened political will for regulatory reform, and better resourcing for regulators. Boards used to their banks influencing the regulatory agenda, will have to respond.”

Professor Kingsford Smith said there will be more external regulatory scrutiny of banks and this will require greater responsiveness to regulatory requirements such as breach notices, and more resources for remediation of customers and faulty systems like misleading web-site disclosure or fees for no service.

She suggests banks will have to better resource legal compliance, internal audit and risk processes so that these areas could have greater authority over banks’ business units. 

“Banks should also scrutinise executive performance on failure to ensure customer financial well-being and bank reputation, and consequences should include haircuts on executive remuneration and even loss of tenure,” she said.

“Banks need to ‘do it right, and put it right for customers’ – cost, complexity, broken processes and lack of information are no excuse. These problems are all in the control of boards and executive leadership.  

“This includes considering remuneration arrangements so that the mind-set and practices of dealing with customers changes.”

Legal matters

She said banks need to manage the gap between community expectations of customer treatment and the standards set by the law. 

“The Commissioner holds nothing back in his expectation, shared by the community, that banks should comply with the law,” Professor Kingsford Smith said.

“He and counsel assisting have often asked witnesses, did you understand you were breaking the law? And, to regulators, why did you not enforce the law?

“In his report the Commissioner observes ‘Compliance appeared to have been relegated to a cost of doing business.’”

Professor Kingsford Smith said remediation has been tardy and inadequate when risks realise losses to customers and added: “The community finds this unacceptable, and the Royal Commissioner seems to share this view.”

The following experts are available for comment on the Banking Royal Commission interim report:

Professor Dimity Kingsford Smith, director, CLMR at UNSW

Financial consumers; fairness in financial services; law and regulation of financial services (especially financial advising); regulators and their work, strengths and short-comings; enforcement and sanctions for misconduct; duties of directors and officers of financial institutions.

Dr Scott Donald, deputy director, CLMR

Superannuation and fund members; super funds and their regulation; super trustees and their regulation; APRA and APRA enforcement.

Dr Rob Nicholls, research fellow at CLMR

Competition and banking; digital economy and competition.