APRA and ASIC have vowed to take a hard line against poor culture in the financial services industry in an effort to weed out “pervasive conduct problems”.
In his opening speech at the ASIC Annual Forum in Sydney yesterday, ASIC chairman Greg Medcraft said culture was a key driver of conduct, and good conduct led to good outcomes for investors and consumers.
“Inevitably, it is the stories of poor culture and poor conduct in the financial industry which are splashed across the front page of the newspaper, which pop up in our newsfeeds, and which are the subjects of heated discussion on social media sites,” Mr Medcraft said.
“This is particularly so in recent times with financial advice, and now Bank Bill Swap Rate (BBSW) and life insurance on everybody’s minds.”
Mr Medcraft said ASIC was incorporating culture into its risk-based surveillance reviews. He noted the release of an ASIC report yesterday which outlined the findings of a review of conflicts management practices in vertically-integrated businesses in the funds management industry.
The report emphasises the role that remuneration and incentives play as a driver of the behaviour of firms.
“For example, conflicts can arise or be exacerbated where incentives reward high-risk, short-term business strategies,” Mr Medcraft said.
“From our review, we found that some firms take conflicts management seriously. We found some good practices such as separate boards for subsidiaries which may help to manage conflicts,” he said.
“However, we remain concerned that some policies may have been adopted without sufficient attention to genuinely addressing the underlying conflicts.”
“So what we are now doing is bringing the elements of culture together and considering whether they indicate a cultural problem.
“Where we think there may be a problem, we will ask questions and do a ‘deeper dive’.”
Mr Medcraft said this helped the regulator to not only identify instances of misconduct, but also “broader, more pervasive conduct problems”.
“We want to uncover these problems early, and to disrupt and address them,” he said.
Mr Medcraft’s comments followed those made by APRA boss Wayne Byres during his appearance before the House of Representatives Standing Committee on Economics in Canberra on Friday.
Mr Byres said culture was an issue that APRA was “delving into across all of the industry sectors” that it supervised.
“Our interest in culture reflects our prudential mandate – a good culture helps protect against poor outcomes,” he said.
“Our work is primarily directed to detecting the potential for the financial institutions we supervise to be badly mismanaged, such that they put their own viability at risk.”
While Mr Byres conceded that APRA was not the lead regulator when it came to instances of consumers being unfairly treated, it was “very interested” in what those episodes reveal about the culture within financial institutions, and the extent to which incentives might be operating to encourage imprudent behaviour.
“A little over twelve months ago, we also instituted a new standard that, amongst other things, introduced an explicit requirement on boards to form a view about the risk culture of their institutions, assess whether it was consistent with their strategy and risk appetite, and – if they felt change was needed – ensure something was done about it,” he said.
“While we would observe that boards are giving more attention to issues of culture, I think it also fair to say that they are still grappling with how best to do this in a robust and systematic manner.”
[Related: APRA targets bank culture and remuneration]