Royal Commission interim report: reaction from UNSW Centre for Law Markets and Regulation

  • Legal

BANK BOARDS will have to find new ways to incentivise staff, according to the University of NSW (UNSW) Centre for Law Markets and Regulation (CLMR) director, Dimity Kingsford Smith.

Bringing clarity to the September 28 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’,” Prof. Kingsford Smith said. 

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

Prof. 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.

She said the interim report showed there was 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,” Prof. Kingsford Smith 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.”

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

She suggested banks would 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,” Prof. Kingsford Smith 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.”

She said banks needed 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,” Prof. 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’.”

Prof. Kingsford Smith said remediation had been tardy and inadequate when risks realise losses to customers.

“The community finds this unacceptable, and the Royal Commissioner seems to share this view.”


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