Australian banks learning lessons from financial scandals

Monday 26 October 2015

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In the wake of a spate of high profile financial planning scandals, Australia’s major financial institutions are continuing to spend huge amounts on remediation programs. In this environment, banks are being challenged to use the lessons of the past as they confront the future.

While controls - particularly those biased towards protecting the banks - have been a traditional focus area, non-financial risks, such as culture and conduct, are now also receiving unprecedented levels of attention.

These findings are revealed in EY’s 2015 risk management survey of major financial institutions, Rethinking risk management: banks focus on non-financial risks and accountability. This is the sixth annual survey conducted by EY and the International Institute of Finance (IIF) since the global financial crisis. Chief Risk Officers and other senior risk executives from a total of 51 banks across 29 countries, including all of Australia’s major banks, participated in the study.

Among the major findings globally:

  • 89% of banks report increased board and senior management attention to conduct risk;
  • 75% of banks are making changes to their culture and 81% say that cultural change is very much a work in progress;
  • 46% say that messages not cascaded effectively throughout the organisation are a major cause of a breakdown in risk culture;
  • 64% cite weak oversight controls as main causes of loss events; and
  • 70% rated product mis-selling as the number one conduct risk, followed by money laundering (52%) and market abuse (36%).

While 94% of survey respondents said business heads were responsible for managing risk, major programs are underway to make this accountability more meaningful with many banks rethinking risk management to include a greater focus on front-office accountability.

Australian participants reported a sharper increase in attention to both risk culture and conduct than their international peers.

“It wasn’t long ago local bank executives were inclined to argue that conduct was a UK issue and risk culture couldn’t really be measured,” EY partner, Rob Walsh says.

“But we’re now seeing Australian regulators challenging those views and, as a result, conduct has moved firmly to the top of the boards’ agendas. Regulators want to be shown, not told, why they should be comfortable with the banks’ risk cultures. Banks are expected to be able to demonstrate the underlying data on which the assessment of their risk culture is based.”

Walsh says achieving a balance between a sales-driven front office culture and a more risk focused culture is a core challenge for the banks.

“They’re complex businesses and most banks realise simply saying the business is on the hook isn’t enough,” Walsh says. “There’s a big push to re-establish front line accountability but, at the same time, recognition that the front line need support, investment and up skilling.”

“Almost every incident we’ve been assisting in remediating was once lauded a success story,” Walsh says. “We now hear banks acknowledging they may not have been sceptical enough with staff that shot the lights out from a sales perspective. Rather than challenge the means by which the results were being achieved, they were often applauded. That’s why the focus on culture is so critical to getting this right.”

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