The white paper – released today by global professional services firm BTS – draws on research from the company’s extensive work with financial institutions globally and its joint research with the Economist Intelligence Unit.
The report highlights that the recent measures announced by regulators, the Australian Bankers Association (ABA) and individual banks underestimate the magnitude of the task involved in ensuring banks are transparent, accountable and customer-centric.
The report concludes that while initiatives such reviewing remuneration and implementing better risk management structures are important, banks need to address their risk culture head-on if they want to eliminate unethical behaviour.
“Australia’s financial institutions are in a period of turmoil, after years of growing discontent by the public with their conduct,” BTS Australia managing director Mark Jackson said.
“With a crackdown by APRA and ASIC and a potential royal commission into banking conduct looming as we wait to see the outcomes of the upcoming election, banks need to act quickly,” Mr Jackson said.
“They need to address their risk culture, making sure it’s high on the agenda. It is crucial that there is a well-defined culture in place that will ensure risks are easy to identify, reported on and escalated. And more importantly, not covered up.”
The report discusses the bank sector’s need to proactively define and shape their risk cultures, making employees both the first and last lines of defence. Mr Jackson said this requires ensuring an understanding of the importance of risk management and ethical behaviour.
“Every bank employee knows that the best risk governance structures are virtually worthless if not supported by a strong risk culture,” he said.
“Risk management must be the responsibility of every employee and this requires significant mindset and behavioural shifts within Australian banks.”
According to Mr Jackson, this can only be achieved by banks taking proactive steps to directly shape their risk cultures and create a deep understanding of the critical importance of the right behaviours.
The report comes amid revelations ASIC chairman Greg Medcraft’s future regulation of financial services will depend less on “black letter law” and more on the vocal demands of a digitally switched-on public.
Speaking at the Thomson Reuters Australian Regulatory Summit in Sydney this week, Mr Medcraft drew a distinction between the legal licence to provide financial services and the ‘social licence’.
The social licence, he said, is the corporate culture that the community expects of financial services firms.
The rise of social media and the 24-hour news cycle are combining to close the gap between the social licence and the legal licence, Mr Medcraft said.
“Customer regulation” – or the influence of “the crowd” – is becoming particularly relevant for companies.
“Often in discussions with companies they’ll [tell me], ‘We’ve improved our conduct dramatically since the [global financial crisis]’... I say, well the market’s moved,” Mr Medcraft said.
“You’ve got to keep an eye on what the community is thinking and you’ve got to make sure that that gap that’s emerging doesn’t get too wide."
The vocal influence of the ‘crowd’ is likely to affect how policymakers – and perhaps even the courts – interpret legislation, according to Mr Medcraft.
“If you don’t care about the regulator, you’d better care about the crowd because they’re getting stronger and stronger. There has been a shift of power,” he said.
“In the future, ‘black letter law’ is going to be a problem, because you’ve got to have principles, given that the digital world is constantly changing.
“Principles-based approaches are the only way of the future and you’ve got to allow that flexibility because the law cannot keep up otherwise.”