When the Financial Services Royal Commission final report was handed down, there was a widely held belief that it was not the “root-and-branch” reform of the financial system that many were expecting. Justice Kenneth Hayne did not recommend any criminal prosecutions; vertical integration stayed (albeit with proposed changes); and the current regulatory regime was to remain largely intact.
Indeed, the thrust of the report seemed to be saying that the existing laws are in place to ensure an efficient and just financial services system – they just need to be enforced.
To my mind, that understates the significance of the final report, which, I believe, will underpin significant reform of the financial services industry. For in a similar trend to what is taking place with ‘traditional’ institutions around the world, what the report has done is highlight just how deep is the community’s displeasure with Australia’s financial institutions. Governments of any political shade cannot afford to ignore this message.
It’s not just politicians and regulators, for that matter, that will have to respond to the community’s deep sense of betrayal. Consumers will be far more wary; and demanding, of these institutions in the future: in effect, requiring institutions to have a ‘social license’ to operate.
A good analogy is workplace health and safety (WH&S). Today, no one questions having strict laws to govern health and safety in the workplace. But it wasn’t always so, taking many years after the Industrial Revolution transformed society before employee safety was considered an employer and government responsibility – with laws enacted to enforce this. That change came about because society deemed it totally unacceptable for employees to be injured or die at work.
Now WH&S is central to all industrial operating models and; as a consequence, has changed workplace cultures across all industries, particularly so in industries where historically there has been a higher risk of injury or death such as mining or building. It means organisations place as much emphasis on reporting WH&S as they do financial information – and rightly so. This is what I believe the Royal Commission will similarly achieve for financial services, but it will take time.
It’s hard to remember now, but the words “banks” and “bastards” weren’t always synonymous. Decades ago, when the local branches were central to a community (especially regional and rural communities), when all banking was executed on a personal basis, when branch managers had authority and, more than likely, had personal knowledge of the customers’ finances, banks were held in far greater esteem. That was when a line of credit could be extended in spite of what a client’s financial situation was because the manager just knew the customer was a good risk.
By highlighting the financial institutions’ malfeasance in such a public forum, these organisations will have little choice but to respond in a way that goes beyond uttering empty slogans such as NAB’s “More Give, Less Take”. If they don’t, their customers will vote with their feet, with the $4 billion in enterprise value that has walked out the door at AMP in the past year a clear example they will distance themselves from institutions that don’t change.
While technology has simplified financial life, making it quicker, more efficient and convenient (remember when banks closed at 3pm), it has come at the high price of often divorcing them from their customers. Somehow, these institutions must find a way to reconnect with customers in an era of social media where every misstep can so quickly lead to public opprobrium.
It will not be easy. Changing workplace cultures is akin to turning around the QE2 – it’s slow, cumbersome and must be managed carefully. In a corporate sense, particularly when dealing with complex organisations, culture change is an all-consuming exercise that must start with the ‘tone from the top’ through the board, CEO and senior executive, permeating through the entire institution. As Hayne noted, critical to this will be changing remuneration structures to reward and recognise financial and non-financial elements.
The price for not doing so will be too high to pay; customers will be only too willing to vote with their feet. I might be somewhat naïve, but believe these institutions, once trusted corporate icons, will change to meet new community expectations. If they do, that will Hayne’s greatest legacy.
Rod Bristow is the chief executive of Clime Investment Management