Reactive approach led to recurring misconduct: CBA

The CEO of the Commonwealth Bank of Australia (CBA), Matt Comyn, was back in the witness box at the seventh round of royal commission hearings, where he outlined the reasons that he believes the major bank had failed to prevent misconduct on an ongoing basis, even after becoming aware of issues.

Mr Comyn told senior counsel assisting the royal commission Rowena Orr that the major bank tends to “get into a period of ongoing remediation without fundamentally understanding the root cause in each of those matters and making demonstrable steps to ensure that they don’t reoccur”.

The chief executive identified two categories of “root causes” that led to misconduct across the banking group: “customer and culture” and “accountability, governance and capabilities”.

There were four admissions pertaining to the first category of customer and culture, the first being that CBA had “not consistently prioritised customer interests, nor properly appreciated the duties owed to, and the impact of actions on, your customers”, which had led to decisions that resulted in financial gain at the expense of customer interests, whether consciously or subconsciously.

CBA has been “complacent and lacked appreciation of non-financial risks”, which has led to the bank taking a reactive, rather than proactive, approach to the management of risks and compliance issues, less tolerance for poor execution, and slow customer remediation.

Mr Comyn also agreed that the bank had imposed “limited consequences” for misconduct, especially on senior executives, which had contributed to the recurrence of irresponsible behaviour.

The third admission related to the major bank’s “problematic relationship with regulators”, with the CEO confessing that there were many instances where the major bank had “failed to recognise the importance of regulators and was legalistic and defensive in its dealings with regulators”.

Commonwealth Bank has also been “insular” in that it has not “sufficiently [listened] to external voices and appropriately [considered] that in the way that [it runs its] business”, which has led to customer detriment.

There were also four admissions in the second category of root causes (i.e. accountability, governance and capabilities), the first being that in some cases, CBA had “a lack of understanding of its obligations and did not properly appreciate the gravity of its failures to comply with those obligations”. He said that this has led to contraventions to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, which saw AUSTRAC and CBA coming to a $700 million settlement.

CBA had “unclear accountabilities which contributed to weak issue escalation and resolution”, the CEO told the royal commission, as well as “inadequate capability in critical areas, particularly operational risk and compliance”.

Furthermore, CBA’s remuneration and incentive structures “were not, in some instances, aligned to good customer outcomes”, Mr Comyn agreed.

However, the chief executive still defended short-term variable remuneration as it “elicits discretionary effort” by frontline bank staff, subsequently improving their performance and helping create “an even playing field” for financial institutions and intermediaries.

According to Mr Comyn, having a portion of remuneration that is not fixed motivates staff to do their best in whichever way they are measured, adding that CBA is increasingly focusing on customer outcomes.

“In the example of the teller in a branch environment, all of their performance is evaluated on customer advocacy or Net Promoter Score, so we want to ensure that we’re setting an environment where people are striving to do their best and to ensure that their performance is balanced and appropriate,” the CEO said.

“Clearly, the design of the performance management systems [and] routines are very important in terms of ensuring that we do not drive perverse outcomes from either incentive design or financial motivation.”

Mr Comyn, who noted that his short-term variable remuneration cap is 30 per cent of fixed remuneration (down from 60 per cent for predecessors), said that the bank is open to making further changes to remuneration.

“For customer-facing staff that have variable reward of no more than 10 per cent of their fixed remuneration, often the dollars actually seem insignificant... We’ve grappled with the tissue, Ms Orr, and what we’ve tried to do is create consistency through the organisation,” the CEO told the senior counsel.

“Over time, one of the major changes that we’ve made is reducing financial weightings and outcomes. For my role, my short-term variable remuneration is only 30 per cent. For my predecessors, it would have been 60 per cent. We’ve tried to adopt that principle right through the organisation to have alignment.

“I do not sit here today saying that there are no further opportunities to improve remuneration. I think it’s still an open issue in my mind.”

[Related: Australian banks still using KPIs under new guise: FSU]