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Are we making the changes needed for a financial services profession or tinkering at the edges?

by Lewis Panther | 12 Mar 2020
Are we making the changes needed for a financial services profession or tinkering at the edges – coming up with important and laudable regulatory or industry responses that on their own will not secure lasting cultural change?
That was the question ASIC Commissioner Cathie Armour posed during her talk on professionalism at FINSIA’s Business Leaders Series in Perth.
“Since the Global Financial Crisis, there are many examples of poor conduct in financial services which have caused real harm in communities in Australia and overseas.
One homegrown example is the so-called “fees for no service” misconduct. 
Since 2015, ASIC has been overseeing the remediation of conduct where firms systematically deducted from bank and superannuation accounts, fees for the provision of financial services that were never provided. 
Our largest firms have paid compensation to date of over $600 million to nearly 900,000 affected customers.
Over this post GFC period, we, in the regulatory and financial community, have taken all manner of steps to address misconduct.
Regulators have well and truly delved into their regulatory toolkit – laws have been enforced against firms; individuals involved in misconduct have been removed from the industry; licences have been cancelled, amended or agreements entered into requiring programs of work to force change at firms.
There have also been changes to the regulatory toolkit–for ASIC this has involved a range of new powers including a proposed Financial Accountability Regime, an uplift in penalties for misconduct, expanding our banning powers, a much tougher education and testing regime for financial advisers, new product intervention and design powers and strengthening reporting obligations by firms.
All good steps forward but… I can’t help but ask whether there might be something more fundamental that regulators and industry also need to address?
Are the culture and conduct issues we have seen in the industry, also a product of our collective failure to continually tend to that most important precondition to a fair financial system – the insistence on the basic norms of ethical and conscientious behaviour.?
At ASIC we are asking whether or not the notion of professionalism has been well enough entrenched into the long-term financial services operating environment.
I know this is a subject central to the work of FINSIA – but I am not raising it simply because it would be polite to do so here.
For me this question should be an underlying theme in the discussions today.
What Did We learn from the Financial Services Royal Commission?
Now the Royal Commission reported more than 12 months ago but still, I would like to reflect on its foundations and how its work underlies my thesis on professionalism
Tellingly, this Royal Commission was asked not to just enquire into instances of misconduct that were breaches of the law. Its terms of reference also demanded it examine:
“conduct, practices, behaviour or business activities by financial services entities that fell below community standards and expectation”.
These terms of reference, reflected the government’s (and by extension community) angst after a serious of misconduct matters. 
They made it clear the inquiry was predicated on, “all Australians have the right to be treated honestly and fairly in their dealings with banking, superannuation and financial service providers. 
The highest standards of conduct are critical to the good governance and corporate culture of those providers.”
And as we all know, the Commission held public and televised hearings over a year where victims of unscrupulous conduct explained in a very confronting way the consequences to them of sharp practices in the industry.
And what did the Commission really tell us?
Well, at its heart for me, was the conclusion that the many instances of misconduct examined often occurred because firms and individuals acted in the ways they did because they could. 
They were not constrained by norms of behaviour.
The Royal Commission report outlined six basic ‘norms of behaviour' – which are, I think you will agree, uncontroversial. I will not repeat them here today.
The Commission made it clear that primary responsibility for misconduct in the industry lay with the firms and those who managed and controlled those firms. 
Close attention, the Commission said, must be given to those firms’ culture, governance and remuneration practice.
So, reflecting on the lessons from the Royal Commission about the absence of these key norms, at ASIC we have been regularly emphasising the need for professionalism and fairness in financial services - professionalism as the standard, and fairness embraced and embedded in everything done.
What are the hallmarks of professionalism? Broadly, these are competence (that is having the right skills), and conscientiousness (that is caring about other people and acting ethically).
And what about fairness? The Commission saw that fairness ‘may lie at, or at least close to, the heart of community standards and expectations about dealings with customers’.
Interestingly, this notion of fairness is a well-entrenched principal in our regulatory framework. Licensees are required to act ‘efficiently, honestly and fairly’.
Before March last year, a breach of this obligation did not carry with it a penalty. 
At ASIC we had treated this no penalty obligation as part of our ‘protective’ rather than ‘punitive’ powers. 
We often did not ask courts to consider breaches of this standard; instead we would enter into agreements or adjust licence conditions to require changes to the processes and policies relating to the particular incidence of poor conduct for a product or group of customers.
Had we missed an opportunity to better embed concepts of professionalism in the industry? The Royal Commission was concerned our approach meant the benefits of general deterrence from court based legal action were lost.
So, one of the things we are doing differently now is more energetically enforcing this regulatory standard in the courts.
Due to the lags inherent in regulatory work, we are still enforcing breaches that occurred before the penalty regime was put in place, but early indications are that in any event this enforcement is bearing fruit.
In a recent case, one of our larger bank’s conduct was examined against this standard by the Chief Justice of the Federal Court. 
He confirmed the requirement to act “efficiently, honestly and fairly” is “legislative policy to require social and commercial norms or standards of behaviour to be adhered to.”
What else are we doing to encourage professionalism?
Beyond using our licensee standard to enforce these important behavioural norms, we are also trying new supervisory approaches.
These new approaches are in addition to our normal regulatory supervisory activities. 
They are designed to address culture and conduct issues and to find ways to embed standards of behaviour at financial firms.
We have added to our supervisory work for the largest financial firms, a program we call close and continuous monitoring. 
Senior executives from ASIC, called Chief Supervisory Officers and their teams, work with the boards and senior executives of these firms. 
This program examines cultural, organisational and management failings that could lead to conduct problems, breaches of the law and unfair outcomes. 
Our focus is beyond current known non-compliance and to look at factors that create significant risk of future breaches.
We are on-site at the firms as much as possible looking at how particular themes are dealt with across the firm. 
We then provide detailed feedback to boards and senior management about gaps that if left untended may manifest in poor customer outcomes or breaches of the law. 
We require boards and senior management to develop and oversee work plans that address the gaps we identify.
Another change has been a supervisory program that focusses on practical aspects of governance at both financial firms and other large listed companies.
As you know, APRA’s inquiry into governance, culture and accountability at CBA in 2018 found that the bank’s continued financial success dulled the senses of the institution, particularly in relation to the management of so called non-financial risks - operational, conduct and compliance risk.
Our governance supervisory program built on this inquiry by APRA. 
It delved into director and officer oversight of non-financial risk at 7 large financial institutions. 
Our work was aimed squarely at the governance practices at these firms and highlighting ways for improvement. 
A report setting out the observations from our surveillance and identifying the types of questions all listed boards and their senior management should ask to test their own management of non -financial risk was released late last year. 
It included a generic analysis of board behaviours from a behavioural expert we commissioned to examine board interactions. 
Formal feedback was provided to each individual firm.
The second stage of this governance program is examining how boards of 21 of our largest listed companies are actually applying their discretion to determine the variable pay of senior management. 
We know that variable pay can act as a key driver of conduct so we think there is much merit in examining better and poorer practices by boards and senior management in making these remuneration decisions.
In conclusion, today’s themes of professionalism and fairness are crucial.
ASIC has an important role to play in encouraging the finance industry to fulfil its societal purpose.
It is essential that in our work, we not only supervise and enforce the laws we are responsible for but that we find ways to reinforce and support efforts to make fundamental changes to the behavioural norms for the finance industry. To entrench professionalism and particularly, fairness in the fabric of the industry."


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