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Appearing before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry on Wednesday (30 May), the Commonwealth Bank of Australia’s (CBA) chief risk officer, David Cohen, admitted to failures in the lender’s operation and compliance risk functions.
During the course of the week, the commission heard from several former Bankwest business customers who were placed under financial stress after the risk profiles of their loan facilities were re-assessed, with one customer forced to declare bankruptcy.
The commissioned has alleged that Bankwest’s loan re-assessments were prompted by CBA’s “Project Magellan”, which involved a review of Bankwest’s business loan portfolio in order to reduce CBA’s exposure to commercial property, following its acquisition of Bankwest in 2008.
Last week, the commission also heard from CBA’s general manager of retail, Clive van Horen, regarding the bank’s overcharging of interest to its simple business overdraft (SBO) and business overdraft (BOD) customers.
After chief risk officer David Cohen acknowledged such failings, counsel assisting the commission Michael Hodge asked Mr Cohen whether he believed they were a sign of failings in CBA’s risk function.
“Does it follow then, from what you are saying, if you are identifying some of the issues that have been faced by CBA as intersecting with the risk functions, that there has been some failure of the risk function over time?” Mr Hodge asked.
Mr Cohen replied: “Well, I think it’s fair to say that the risk function has not always performed as it should have. So, in that sense of a failure, yes.”
Remuneration incentive not a factor in risk failings
However, Mr Cohen denied that remuneration incentives had contributed to risk failings.
Mr Hodge asked: “If we take the things that might have contributed to it, is one of them concerned with remuneration incentives?”
In response, Mr Cohen said: “I don’t think that’s a factor in the risk function, no.”
Mr Cohen, however, did not deny that remuneration incentives had contributed to general failings of the bank.
Mr Hodge added. “I just want to be clear: you are not suggesting you don’t think remuneration incentives have some relevance to the problems more generally. You are just referring specifically to the risk function, is that right?”
Mr Cohen said: “Yes, that’s correct.”
During the first round of hearings, which looked into consumer lending, CBA’s executive general manager, Daniel Huggins, noted that he agreed with findings from the Sedgwick review, which found that certain remuneration incentives led to “poor consumer outcomes”.
CBA grilled further by Hayne
Moreover, Commissioner Kenneth Hayne questioned Mr Cohen about CBA’s failure to produce evidence of misconduct to the commission prior to the commencement of the first round of hearings.
Commissioner Hayne asked whether he was familiar that towards the end of the first round of hearings, the counsel assisting “produced two tables of identified misconduct relating to the previous five years”.
When Mr Cohen affirmed that he was, Commissioner Hayne continued: “What, if anything, does that course of events tell me about Commonwealth Bank’s capacity at the start of this calendar year to identify events, including breaches of law, in the immediately preceding five or perhaps 10 years?”
The CBA executive replied: “Commissioner, I think it tells you that the state of our systems that recorded and aggregated instances of misconduct, such as those that were eventually provided to you, were not particularly advanced. They were not particularly well connected.
“The difficulty that the bank experienced was that various incidents of misconduct were recorded on different systems in different business units, without necessarily being all encompassed in a single business unit.”
The hearing continues.
The third round of hearings began on Monday (21 May) and focuses on loans to small and medium-sized enterprises, with responsible lending and unfair contract terms coming under the spotlight.
The fourth round of hearings, which will begin on 25 June, will focus on issues affecting Australians who live in remote and regional communities, including farming finance, natural disaster insurance and Aboriginal and Torres Strait Islander Australians’ interactions with financial services entities.