Pressure is mounting on the Australian banking system. The old-school establishment is under threat as the government and regulators question the integrity of the big banks and their profit-driven cultures are put under the microscope.
Earlier this month, APRA and ASIC answered questions before a parliamentary committee about the banks’ decision to lift rates in response to macro-prudential measures intended to cool investor and interest-only lending.
The two regulatory bodies gave very different responses over whether CBA’s reasons, which it claimed were “regulatory requirements”, were valid for a 30 basis point increase on existing mortgages.
APRA chairman Wayne Byres deflected the question, telling the committee on 13 September that he was eager to hear what ASIC and the ACCC had to say on the matter.
The following day, ASIC chairman Greg Medcraft responded affirmatively when asked if CBA has “a lot of skeletons”.
Next in the parliamentary firing line are the major banks themselves, according to Steve Weston, who held a number of senior leadership positions at major banks in Australia and the UK. His most recent role was CEO of mortgages at Barclays in the UK.
“The four major bank CEOs will be before Parliament, and I suspect they will be asked the same questions,” Mr Weston told Mortgage Business.
“If they are found to have misled consumers about their reasons for lifting their back books as is being suggested, they may then be asked what else they have been disingenuous about. This could be a pivotal moment for banking in Australia.”
A major turning point for Australian banking this year was the Turnbull government’s decision to beef up regulator powers through the Banking Executive Accountability Regime (BEAR).
ASIC’s Mr Medcraft told the parliamentary committee this month that BEAR “is a very good starting point” but is part of a “journey” on ongoing regulation similar to what has been implemented in the UK.
He explained that the accountability regime will require management to demonstrate that they took reasonable steps to stop something going wrong, as opposed to pleading ignorance.
Mr Weston, who witnessed the transformation of the British banking model first hand during his time at Barclays, said that BEAR will “change the game completely”.
“Today, most banks make decisions for the benefit of their shareholder even though they want to do the right thing by customers. That is changing. Tomorrow, decisions will be made with the customer in mind, at the expense of the shareholder in the short term,” Mr Weston explained.
“While medium-term profitability will most likely be impacted, longer-term profitability becomes more sustainable, which is what you are starting to see happen in the UK. And more importantly, banks making tough decisions that genuinely favour customers will start to win back customer trust.
“The returns on capital [that] the major Australian banks are making are among the highest in the developed world; that can’t and won’t continue. The next two to three years will be really interesting because we are likely to see an iceberg of issues come out of the water. That will make it very difficult for chairmen and CEOs to stay in their job because they have been saying the issues we have found to date are isolated and not reflective of our culture, we don’t need a Royal Commission or more regulation.”
This week, the Australian Bankers’ Association (ABA) took the government to task for its seven-day consultation period on the new accountability regime.
BEAR would give APRA the power to defer up to 40 per cent of a bank CEO's total remuneration, veto executive appointments to banks and issue substantial fines.
ABA chief executive Anna Bligh labelled the week-long consultation period as "grossly inadequate" and as "playing fast and loose with a critical sector of the economy".
[Related: APRA probe to examine CBA corporate culture]