While the primary business focus has been on the AMP debacle this week, the Australian Prudential Regulation Authority this morning revealed that, even without criminal charges, the Commonwealth Bank and its board is every bit as bad as AMP and probably worse. So bad that APRA has slapped the biggest financial penalty ever on an Australian company and damned the bank’s weak culture and hopeless board oversight.
APRA appointed a three person committee to examine the CBA’s culture and processes in the wake of AUSTRAC’s money laundering allegations, which have already cost CEO Ian Narev his job and seen the bank replace four directors. The report from former APRA chair John Laker, businesswoman and RBA board member Jillian Broadbent and former ACCC head Graeme Samuel is scathing. “CBA’s continued financial success dulled the senses of the institution”, it concludes, particularly in relation to the management of non-financial risks (like complying with the law). It was “complacent” and “desensitised to failings with customers”. It was “reactive”: “operational risk and compliance issues tended to receive attention only once they had emerged … a slow, legalistic and reactive, at times dismissive, culture also characterised many of CBA’s dealings with regulators” and it was “insular” — including “[turning] a tin ear to external voices and community expectations about fair treatment.”
Worse, the board provided “inadequate oversight and challenge … of emerging non-financial risks” and a remuneration structure that “had little sting for senior managers and above when poor risk or customer outcomes materialised (and, until recently, provided incentives to staff that did not necessarily produce good customer outcomes).”
The bank has offered an Enforceable Undertaking about its remedial actions to deal with the array of issues identified in the review. But just to give the EU some bite, $1 billion has been added to the CBA’s minimum capital requirement and will remain “until such times as these recommendations are addressed to APRA’s satisfaction”. The APRA capital requirement is currently 10.5%; that will increase to 11.5%; at December 31, the CBA had capital of 10.4%.
No Australian company has ever been hit by a penalty this big. It’s not exactly a fine, but the additional requirement will reduce the bank’s (high) return on equity of 14.5%, lower earnings, reduce bonuses and other payments to executives and the board and increase costs. And it comes on top of the $200 million the CBA has already set aside for the cost of regulatory actions relating to the AUSTRAC actions — as well as any other costs or fines by regulators that might flow from the banking royal commission. APRA, at least, has demonstrated that Australian regulators can have the spine to inflict serious hurt on the big banks.
The report also confirms that the line peddled by the big banks and the government about bank scandals, that it was always just a few bad apples, that there was nothing systemic or cultural about the fact that the industry produced one scandal after another, was a lie. It’s in the Laker/Broadbent/Samuel report, in black and white: from the board down, risk wasn’t taken seriously enough, the remuneration system did nothing to discourage it, the processes designed to handle it were poor and overly bureaucratic and the bank didn’t give a damn about its customers.
Meantime, the Business Council — which now more than ever is essentially a branch office of the Liberal Party — continues to complain of “an anti-business agenda” and an “anti-business climate”. Instead of running political campaigns for the government like the one revealed by the ABC, maybe Jennifer Westacott and her cronies should be asking why two of their most senior Australian members, AMP and CBA, have done so much to create an “anti-business climate” through their own misconduct, criminality and systemic flaws that the doyens of Australian business who sit on their boards have done nothing about for so long.