APRA inquiry condemns CBA's culture, adds $1 billion to its capital requirement

Photo: Peter Parks / AFP / Getty Images.
  • APRA calls the Commonwealth bank’s culture “insular” and an environment where learning from experiences and mistakes was ignored.
  • The bank’s the board of directors had “inadequate” oversight of emerging non-financial risks. And its senior executives had a lack of ownership of key risks.
  • CBA’s pay structure had little sting for senior managers when customers had poor experiences with the bank.

The Commonwealth Bank has been hit with an additional $1 billion capital requirement following an investigation by APRA (Australian Prudential Regulation Authority) into the bank’s governance, culture and accountability.

APRA says the Commonwealth Bank’s pursuit of success “dulled the senses of the institution”, particularly in relation to the management of non-financial risks.

The inquiry also found a number of prominent cultural themes: “A widespread sense of complacency, a reactive stance in dealing with risks, being insular and not learning from experiences and mistakes, and an overly collegial and collaborative working environment which lessened the opportunity for constructive criticism, timely decision-making and a focus on outcomes.”

The report of the inquiry says: “These risks were neither clearly understood nor owned, the frameworks for managing them were cumbersome and incomplete, and senior leadership was slow to recognise, and address, emerging threats to CBA’s reputation. The consequences of this slowness were not grasped.”

The bank has been caught up in a series of scandals including providing poor financial advice to customers. These are being investigated by the financial services royal commission.

The Commonwealth also faces court action over breaches to anti-money laundering regulations identified by AUSTRAC, Australia’s financial intelligence and regulatory agency.

APRA Chairman Wayne Byres says today’s findings show CBA’s governance, culture and accountability frameworks and practices are in need of considerable improvement.

“The findings of the Report provide important insight for all financial institutions, particularly about the need to maintain a broad focus on all aspects of risk and stakeholder interest and not allow financial success to mask or detract from other important measures of an institution’s performance and risk profile,” he says.

This latest investigation by APRA identified at the Commonwealth:

  • Inadequate oversight by the board of directors and its committees of emerging non-financial risks.
  • Enclear accountabilities, starting with a lack of ownership of key risks at the Executive Committee level.
  • Weaknesses in how issues, incidents and risks were identified and escalated through the institution and a lack of urgency in their subsequent management and resolution.
  • Overly complex and bureaucratic decision-making processes that favoured collaboration over timely and effective outcomes and slowed the detection of risk failings.
  • An operational risk management framework that worked better on paper than in practice, supported by an immature and under-resourced compliance function.
  • A remuneration framework that, at least until the AUSTRAC action, 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 Commonwealth has signed an Enforceable Undertaking under which CBA’s remedial action in response to the report will be monitored.

APRA’s recommendations include a more rigorous Board and Executive Committee level governance of non-financial risks, more exacting accountability standards reinforced by remuneration practices and an injection into CBA’s culture of the “should we” question in relation to all dealings with and decisions on customers, and cultural change that moves the dial from reactive and complacent to empowered, challenging and striving for best practice in risk identification and remediation.

A wake up call for all directors

Treasurer Scott Morrison says the report is a wake-up call for every director in the country, particularly those who are the custodians of the savings and share holdings of Australians.

“The report, I think, is required reading not only for every financial institution in this country but, frankly, it should be the next item on the agenda of every single board meeting in this country regardless of whether you’re a bank or not,” he says.

The APRA inquiry was announced in August 2017 to examine governance, culture and accountability at the bank, following a number of incidents that damaged the reputation and public standing of the bank.

The Commonwealth today confirmed it will implement all the recommendations.

“Addressing the findings of the Report is a key focus for the Board and management to ensure that our governance, culture and accountability frameworks and practices are significantly improved and meet the high standards expected of us,” says CBA Chairman Catherine Livingstone.

“Changes have been underway throughout 2017 at Board and operational levels, and have continued this year, helping to rebuild customer and community trust. This includes the process of Board renewal. Together they represent a significant change program and the APRA Report provides us with a clear roadmap for the hard work still ahead of us.

“We understand the scale of change which is necessary and its seriousness in order for us to become a better, stronger bank for our customers, staff, regulators and shareholders.”

Matt Comyn cancels his bonus

CEO Matt Comyn revealed today he had asked the board of directors to cancel his 2018 short term bonus.

“I was already hearing from customers, some of whom had come up to me in the street to share some of their anger and frustration about what they were seeing in an organisation that they had known, banked with, and in some cases long term shareholders,” he says.

“I formed a view then it would just be inappropriate given those circumstances to accept a short term incentive.”

He says the bank has embraced the report as a critical but fair assessment of the issues.

“Change starts with acknowledging mistakes,” he says.

“I apologise to the Bank’s customers and staff, our regulators, our shareholders and the Australian community for letting them down.

“We will make the necessary changes to become a better bank and we will be transparent about our progress. This includes establishing a much higher level of accountability and consequence for our actions and the impact we have on customers. This starts with me.”

The bank says it will work with APRA to implement all of the report’s 35 recommendations.

Here’s an overview of the recommendations and CBA’s change priorities:

Source: CBA

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