There is an increasing global perception that banks put shareholders’ and executives’ interests ahead of their customers and the community. This perception is more real for banks than for other corporates as they are seen to rely not only on compliance with strict regulation, but increasingly on the goodwill of the community and government to continue to operate in their current form.
We are seeing heightened scrutiny of Australian banks, including through the recent Standing Committee on Economics (the Committee) inquiry, becoming a regular feature of media and political commentary, notwithstanding eight separate inquiries since 2009.
There are many reasons for this increased level of oversight, with terms such as “trust deficit” and “trust gap” often cited as the root cause.
It has been argued that the financial services industry has lost touch with the core proposition customers are seeking by forgetting its real purpose in society and becoming too inwardly focussed. These themes were repeated in testimony to the Committee.
The Australian Prudential Regulation Authority (APRA) authorises deposit-taking institutions to carry on banking business in Australia under the Banking Act. APRA outlines minimum criteria to operate in Australia with specific capital, risk management and compliance conditions and overarching integrity and prudence requirements. There is another licence that is equally as important – the social licence to operate granted by the community and earned through hard won trust and respect. This comes with ongoing expectations around behaviour and fairness, more than regulatory compliance. These later licence conditions evolved at a time when there were much different expectations on banks.
This social licence has come under fire from commentators due to banks’ perceived inability to fairly deal with customers and the broader community; whether through inadequate compensation for poor advice; protracted resolution (or avoidance) of claims; aggressive sales practices; excessive executive pay; or high profits and returns.
Fairness has been described in various ways, from measures of customer satisfaction, to levels of fees and charges, to the way banks respond internally and externally to the resolution of customer problems.
However fairness is defined, banks have not adequately demonstrated how they balance the needs of customers and the community with the critical role they play in the economy. They have been seen to defend the status quo, which in some quarters has been perceived as protecting executive remuneration, high fees and interest rates.
This has been compounded by the tendency to adopt “business-speak”, which works well in management circles, but comes across as sneaky to politicians, the media and the public. It comes at a time when big business in general is portrayed as self-interested and not attuned to the needs of employees and the broader community.
Strong banks matter a lot to Australia. Every business and every citizen. And at the moment no one is making this point successfully.
Nor can the industry rely on the current Federal Government to run interference. The Government has put the industry on notice that the onus is on them to explain their actions and motives. As Jennifer Hewitt of the Australian Financial Review recently wrote, “The newly required level of self-defence from the banks includes their interest rate policies but also extends to their profits, their executive pay levels and the whole banking culture now attracting so much opprobrium.”
The emerging reality is that a thorough disclosure of the culture, conduct, standards and social licence of the banks is one the banks should embrace. Failure to do so could be catastrophic for the industry and the Australian economy.
And let’s not forget Australian banks largely avoided the FGFC through strong balance sheets, conservative lending policies and a smarter collaborative approach to working well with government and regulators throughout the crisis.
Our banks were, and remain, a lot better managed than international peers.
John McFarlane, Chairman of Barclays PLC recently summed up the situation well: “We must return to the philosophy that banking is a profession as well as a business, and that contribution rather than reward is its centre of gravity. A company needs to make a return but it must also stand for something beyond this. It needs a higher purpose that is the centre of gravity that governs all decisions within the firm.”
McFarlane adds that banks “need to take the actions necessary to earn long-term trust and commitment as a foundation for long-term value creation”.
Unfortunately the reporting of unethical and legal wrong-doing has created the perception that the banks have prioritised short-term financial performance over fair returns and contribution.
To change this situation, Australian banks must take a different approach to earn the trust of the community. They must become more open to criticism and eager to respond and better explain their actions on sensitive issues.
They need to simply and clearly outline their importance to the broader economic well-being of Australia and Australians, and show that without this robust contribution, Australia will be worse for it. The banks employ over 130,000 Australians and pay significant amounts of tax; the banks’ high yielding shares are the foundation of our superannuation system; banks facilitate our foreign trade and investment; and as is often forgotten, the settlement of our daily banking transactions.
This is not to say that the Australian banks are not aware of these problems as we have seen in their presentations to the Committee. The banks need to demonstrate tangible and greater empathy with community concerns and provide real evidence that they have a clear purpose and principles-based operating model, in a way that is easily understood and accepted.
Read the full Major Banks report here