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Given the laundry list of grievances and the intensity of the scrutiny facing Australian banks, one might expect a turnaround in culture and governance within the Big Four – but are they capable of change?

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has lifted the lid on Australia’s banking culture, exposing the flaws, even taking a few scalps.

Just days after AMP Chairwoman Catherine Brenner resigned following admissions to the Royal Commission that AMP had lied to regulators, came an excoriating report by the Australian Prudential Regulation Authority (APRA) into the Commonwealth Bank of Australia (CBA).

APRA found cultural problems, a “widespread sense of complacency” and a reactive stance in dealing with risks had led to a number of incidents that had damaged the bank’s reputation.

Concluding that ‘CBA’s continued financial success dulled the senses of the institution’, particularly in how it managed non-financial risks, APRA made a number of recommendations to improve its culture. It also applied a $1 billion add-on to CBA’s minimum capital requirement.

But were the APRA recommendations too lenient to evoke any real changes to the culture, not only within the CBA but other Australian financial institutions?

Dr John Vaz, senior lecturer in Banking and Finance, Monash Business School thinks so.

“The report does not go far enough. There should be greater consequences for the executives involved, not payouts when they leave,” Dr Vaz says.

“While the $1 billion regulatory capital retention mandated by APRA as a result of the review is significant, that cost will just be passed back to the shareholders.”

Dr Vaz feels that it boils down to three issues: competence, culture and incentives. If we throw in regulation and changes to technology, then we have a list of the top five ways to affect banks’ behaviour.

1. Improve competency in a changing market

Just how competent are the directors and senior executives of financial services companies? Many of them cite lack of information or awareness when faced with bad behaviour.

Recently, the CBA and AMP boards have exhibited either a complete lack of awareness of their responsibility or a lack of competence to deal with the complexity of these businesses.

“Bank directors live in a very comfortable environment where they get very high salary packages for little output it seems – they don’t want to rock the boat, they want some stability with their relationship with the CEO and the chairman,” Dr Vaz says.

“If you look at some of the directors, very few of them have the depth of knowledge required in terms of risk management and wealth management to ask the tough questions.”

For CBA, this is not its first rodeo. Serious allegations stemming from a number of operational and regulatory issues emerged last year when the Australian Reports and Analysis Centre (AUSTRAC)  purported 53,800 transactions had contravened the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

CBA is fighting the claim saying it didn’t know about the transactions, but as Dr Vaz explains that it must ensure the right monitoring mechanisms are in place.

Another issue Dr Vaz perceives that the board and the senior management of the larger banks is a lack of contemporary knowledge of the necessary changes to their business from their markets, due to lack of fresh talent.

“Understanding what they have to do in a changed world is a problem. CBA is an old institution and from what I can see they have a culture of promoting from within,” Dr Vaz says.

2.  Change the culture

Any attempt to change the culture will be inadequate unless you change the default behaviour; that is, the conduct inbuilt into the underlying values of the organisation.

“Anecdotally I’ve heard a few people say you don’t disagree with Martin Place (where CBA’s headquarters are based) they make a call and you run with it. If you don’t toe the line then you move on,” says Dr Vaz.

“They’ve got too many of yesterday’s managers and they need to bring in new blood.”

Dr Vaz suggests that apart from changing people, an organisation can redefine culture by changing management and structure and importantly, changing reward mechanisms.

3.  Offer long-term incentives

Vaz marvels at the policy of banks paying huge salaries because they are in the business of managing large amounts of money.

“Just because you sit on top of a big pile of money doesn’t mean you should be paid millions of dollars. How about getting paid for the value you add?” he says.

He suggests taking look at long-term incentives – options and shares rather than salary may be the answer.

“If short-term incentives are used, they should come with clawback provisions for misconduct and breaches of regulation,” he says.

Of the top management team, Dr Vaz says two positions who should not be given any short-term monetary incentives tied to profit: the Chief Risk Officer and the Chief Financial Officer. This is because their roles require that they should be scrutinising compliance, not profit.

4.  Give regulators more teeth and tougher consequences for individuals

Widespread deregulation of the Australian banking and financial system began in the early 1980s. Three inquiries – the 1981 Campbell Report, the Martin Report in 1991 (looking at licensing of foreign banks) and the Wallis Report  in 1997,  all failed to reform the system in any meaningful way to increase competition.

Now the Hayne Royal Commission, with former High Court Justice Kenneth Hayne at the helm, is trying to get to the bottom of misconduct in the banking superannuation and financial services industry.

Dr Vaz believes that based on the APRA report, it appears penalties may not be strong enough to elicit change and without consequences there will be no change.

“Because there have not been any real consequences for the executives, they will not be correcting behaviours of the past,” he says. “The response to adopt APRA recommendations is more like a veneer unless the culture is changed.”

He would like to see the government put a levy on the banks to build up a reserve for their misbehaviour for victims for a period of time – so if they act up they get taxed.

While the banks are regulated by APRA and ASIC, the problem as Dr Vaz sees it is that they have not been tough enough.

“There is a view that the banks are too big to fail. I don’t have that view,” Dr Vaz says.

“More competition is needed with a more level playing field for some of the alternative banks to pick it up.  The four pillar policy recognises the importance of the big banks and for this, it is expected that they will do the right thing – but they haven’t as the Royal Commission is demonstrating.”

5.  FinTech – Let the market forces instigate the change

Financial technology (FinTech) is forcing competition on to the banks in order that they must change or get left behind. There are currently around 1600 cryptocurrencies and not all are currencies. They are technologies for new ways of funding, payments,  lending, insurance, investing and asset management.

Many of them attempt to do this without intermediaries such as banks and they aren’t just operating within their own countries, most aim to be borderless.

So the greatest threat to Australian banks may not be executive competence, regulatory compliance or even their own unprincipled culture. It may be technology.

“Sometimes it takes external forces – brute force to make a significant change. And that’s going to happen with FinTech – it will force them to be more competitive. FinTech, ​including cryptocurrency technologies,​ ​will change the way banks operate,” Dr Vaz says.

“The government will need to ensure these innovations are protected in their early stages so that they are not captured or restricted by the big four banks. FinTechs should have an advantage so that the industry innovates,” he says.

The Federal Budget was silent about company tax reduction to benefit banks, on penalties for poor bank practices or on any significant funding measures to strengthen regulators.

As the Royal Commission continues, in the end, it would appear bankers are unlikely to change. Because after all, you can’t legislate against greed, but perhaps at some stage, you will be able to hold bankers accountable for laws and regulations, if you have the will and resources.