The chief executives of Australia’s big four banks are this week being called before a House of Representatives economics committee. We asked a panel of experts what questions the committee should be asking.
Anna Olijnyk, Lecturer at Adelaide Law School, University of Adelaide
One possible outcome of the banking inquiry is the creation of a banking tribunal. What does this mean? How would a banking tribunal differ from existing arrangements?
The first thing to note is that the word “tribunal” does not have a fixed legal meaning. A vast range of bodies with different functions have carried the label tribunal.
The government’s limited comments so far on the proposed banking tribunal suggest they envisage a body that can award compensation to people who have lost money because of banks’ misconduct. Isn’t that what courts are supposed to do? Well, yes.
But courts have evolved an elaborate, formal way of deciding cases involving strict technical rules about evidence, procedure and legal argument. These processes are designed to reach the legally correct outcome in the most fair and rigorous manner possible.
However, as anyone who has had contact with the court system knows, these processes also make court proceedings slow, expensive and virtually impossible to navigate without a lawyer. Going to court is particularly daunting when your opponent is a big organisation with a bottomless litigation budget.
On the other hand, tribunals are usually more informal, efficient and accessible than courts. They are widely used throughout Australia to deal with the sort of issues that affect large numbers of ordinary people. For example, this could include social security, immigration, residential tenancies and consumer complaints.
The other piece of the existing puzzle is the Financial Ombudsman Service, which deals with thousands of consumer complaints each year. The ombudsman offers a free, relatively informal dispute resolution process, somewhat similar to the function a tribunal might perform. But this is a non-government organisation and may not satisfy the current appetite for banks to be publicly accountable.
So a banking tribunal has the potential to be a welcome port of call for those who have claims against the banks, but for whom litigation isn’t worth the time, money or heartache. Let’s not get carried away, though.
The detail will be crucial: the efficacy of any new tribunal will depend on exactly what powers and functions it is given. Finally, tribunal decisions are always subject to review in the courts, so even if you win in the tribunal, you still might end up in court.
Rod Maddock, Vice Chancellor’s Fellow at Victoria University and Adjunct Professor of Economics, Monash University
One of the most interesting issues that arose from the questioning of Commonwealth Bank of Australia CEO Ian Narev by the economics committee was punishment. Labor members seemed quite certain that CBA should have sacked some of its employees in the light of the evidence that some customers were badly treated by the bank.
There is no argument that some clients were poorly served. The stories such as that of the bank denying that a particular death was accidental in the face of a coroner’s finding was harrowing, and the use of outdated rules about other illnesses to make decisions, was disturbing.
Providing good quality service is fundamental to the banking and insurance businesses. These are service companies. To have stories about clients who have received inappropriate service splashed across the media is clearly damaging to the CBA brand, and its reputation. The bank itself obviously has a very large incentive to try to make sure things like this do not happen.
Should it sack staff as part of the process? There seem to be three broad issues.
Clearly people made mistakes but should those mistakes lead to them being sacked? If the staff concerned followed normal process and tried to apply the rules diligently it is hard to blame them.
Imagine someone making dozens of decisions a month and making the occasional mistake. If they were over-zealous they may require coaching, but probably not sacking.
If they applied the procedures poorly, then they may lose bonuses or be denied promotion, but it would not usually be a sackable offense. If they disobeyed the rules to the detriment of customers, acted unethically or stole, then sacking is appropriate. If just making a mistake at work was sackable then most of us would be out of jobs.
Should the supervisors be sacked? Much of the same argument applies. If a supervisor made a mistake in not updating the rules when medical practice changes, it would be normal to sanction the staff member involved but not normally to sack him or her.
From an organisational point of view it is far better to have staff learn from their mistakes rather than leave the company. From a social point of view that it also probably the right thing to do. It should lead to better decision making over time, and help grow better and more capable decision making within our society.
Should more senior executives lose their jobs? Here it is ironic to have politicians who now never seem to lose their jobs even when millions of dollars of taxpayer money are wasted now preaching that sacking is appropriate. Let’s hope that the sacking rule is applied first to government ministers.
Clearly senior executives are responsible for hundreds of decisions every month. Some will be good, some average and some poor. Some will probably be very bad. It is inevitable that organisations will make mistakes.
To complicate things further, most decisions are also shared between different levels of the hierarchy, and responsibilities often shift as people move between positions. The desire for revenge is obviously deep seated.
At the same time it is not usually the best response. Society has more to gain by learning from mistakes. Individuals should be encouraged to learn and organisations equally should revise their practices in response to mistakes.
Deborah Ralston, Professor of Finance, Monash University
Ian Narev’s comments on bank incentives at the parliamentary committee suggest that the debate on the link between shareholder and consumer’s best interests still has a way to go.
Australian banks need to tread very carefully in areas where they are both manufacturers and distributors of financial products such as insurance, investment products and superannuation.
The issue of conflicted advice occurs when staff are incentivised to sell the bank’s own product, which may or may not be in the customer’s best interest. Incidents such as the failure of Storm Financial, where leveraged margin loans were sold to customers on the verge of retirement, clearly demonstrate this point.
According to the 2014 Financial System Inquiry (FSI) such failures have a consistent theme: poor product design and distribution practices that disregarded consumer behavioural biases and information imbalances played a significant role.
To some extent Future of Financial Advice Reforms legislated in 2015 address this issue but more needs to be done where banks are concerned.
Accordingly, the government has accepted the recommendation of the FSI to legislate for increased accountability for issuers and distributors of financial products to ensure a stronger customer focus in product design and marketing. It will also strengthen ASIC’s power to intervene when products are poorly designed and targeted.
Good business for bankers is satisfied consumers, long-term relationships, and a clean balance sheet with minimal reputation risk. How incentives are shaped has a major bearing on this outcome.
At the end of the day it’s a matter of culture for Boards and management to get this right.
Pat McConnell, Honorary Fellow at Macquarie University Applied Finance Centre, Macquarie University
Just before the bank CEOs were due to face politicians to be publicly flayed, the Australian Bankers Association (ABA) announced that all of the major banks would create a completely new role inside of their organisations – that of the Customer Advocate.
As described by the ABA, the role will be to:
“Enhance existing complaints processes and ensure customer complaints are escalated, and responded to within specified timeframes and that responses are thorough and fair.”
This is a belated admission that banks have basically fobbed off customer complaints until now. It should be noted that NAB, to its credit, had mooted a different form of such a role for its wealth division in 2015.
There are many questions that members of the House committee could ask about the detail of this new plan, but it is no doubt still being worked out.
One salient line of questioning that could be pursued at this time is what is the role of Australian Securities and Investments Commission, the conduct and consumer regulator, in this new process? Has ASIC been involved and given its support to this industry initiative? And if not, why not?
A cheeky politician could also ask if the creation of this customer advocate role is just a delaying tactic.
Necmi Avkiran, Associate Professor in Banking and Finance at University of Queensland
Despite banks being part of the intricate financial system that affects all citizens, in a free market the banks’ primary responsibility is towards their shareholders. Ideally, unfettered competition should look after customers’ interests.
The Federal Government and Reserve Bank of Australia (RBA) already have a policy of “no mergers” among the big four banks designed to nurture competition. On this issue, the key question is whether the big four already hold too much of the market share and stifle competition in an oligopolistic environment.
It should be noted that in July 2016, the big four held 82.57% of the loans to households and accounted for 80.38% of the systemic risk in the Australian financial system. Given the safety net of the bank guarantee offered by RBA, these are rather large numbers that may send the wrong signals about competition in the banking sector.
If the RBA were to increase the rate charged to banks for short-term borrowing, banks would pay more attention to rates charged to customers and the ability of customers to pay back loans. This would also shift the focus from shareholders to customers for a more balanced business model where taxpayers are not expected to pay for any poor decisions made by banks.
If the Big Four are gaming regulatory rules, it is up to Australia Prudential Regulatory Authority to pull them in line. In fact, the Big Four have already come under fire from the vice-chairman of US Federal Deposit Insurance Corporation for low capital levels and the implicit burden on taxpayers.
Deborah Ralston is the Professor of Finance at the Monash University; Anna Olijnyk is a Lecturer at the Adelaide Law School at the University of Adelaide; Necmi K Avkiran is an Associate Professor in Banking and Finance at the The University of Queensland; Pat McConnell is an Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University, and Rodney Maddock is the Vice Chancellor’s Fellow at Victoria University and Adjunct Professor of Economics at the Monash University
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