Speaking at the House of Representatives Standing Committee on Economics on Friday (17 August), RBA governor Philip Lowe was asked about the impact that the Royal Commission into Banking, Superannuation and the Financial Services Industry is having on the finance sector and the economy more generally.
Mr Lowe replied: “Like most Australians, I’ve been following what has been happening very carefully. I have to say, I am incredibly disappointed and, in many cases, I have been appalled at the behaviour that has come out through the royal commission.
“The whole process is really showing the benefit of sunlight — [it is putting] a microscope on the behaviour — [and] the community is getting a better understanding and will get better outcomes in the financial sector as a result of this.
“So, sunlight is acting as a very good disinfectant here and we need this disinfectant and it’s actually working.”
Mr Lowe told the committee that the foundations of finance were “trust, delivering service and good risk management in financial institutions” and that the royal commission had revealed “deficiencies in all three areas”.
“The trust between financial institutions and communities has been strained, there has not been enough focus on customer service, it has been more of a sales mentality than a service mentality, and risk management has not been all it should have been in financial intuitions,” the governor said.
Mr Lowe said that there have been several themes coming through the hearings, including conflicts of interest and remuneration structures.
The RBA governor said that conflicts of interest “seem[ed] pervasive in the financial services sector and dealing with those conflicts has not been top of mind in many financial institutions and it should have been”.
Mr Lowe said: “Conflicts can be dealt with, they can be managed, but they need to be top of mind. If they are not top of mind in financial instructions, then it continues to strain the bonds of trust between institutions and the public and there is not enough attention paid to customer service, doing the right thing by the customer.
“Dealing with the conflicts of interest is a priority.”
He added that another theme was that “remuneration and incentives drive behaviour” and that the commission has shown that some remuneration structures have driven “quite poor behaviour in many cases and they need to be looked at as well”.
Mr Lowe continued: “The conflicts of interest and the remuneration structures within financial institutions seem to me to be high priorities because we need to rebuild trust, we need to have a very strong focus on delivering service, rather than sales, and risk management.”
He added that it was “incredibly important” that the banks look at their whole processes from top to bottom and say how those processes are helping deliver good products to consumers.
The RBA governor concluded that the next six months and the recommendations that come out of the royal commission are going to be “particularly important”.
“The solution to the problems that we’ve currently seen, I don’t think, is more and more regulation,” the governor told the committee.
Mr Lowe added, however, that “despite all the terrible stories, Australia has a very good financial system”.
“From a safety and stability perspective, it is very strong,” Mr Lowe said.
“When I go overseas, people often ask me about the success of Australia’s financial system. It’s done a reasonable job of intermediating between savers and investors in providing finance to the real economy, to have our economy grow now for 27 years.
“So, despite this terrible shortcoming, we actually have a productive and effective, safe and secure financial system and we need to keep that. So, in responding to the terrible examples of behaviour that we’ve seen [in the royal commission], we need to strike a balance, and so the next six months and the recommendations from the commissioner are going to be critical there.”
Royal commission damaging public trust in the sector
Mr Lowe’s comments come amid a growing dissatisfaction with the financial industry. Continuing scandals and revelations from the financial services royal commission and inquiries are further eroding Australians’ trust in the ethical behaviour of companies, a new ethics index has found.
Governance Institute of Australia’s annual Ethics Index, which measures Australians’ expectations and perceptions of ethics across a wide range of sectors and industries, recently found that the banking, finance and insurance sector now has the lowest ethics index score of all sectors, dropping from -3 to -15.
Looking at the banking, finance and insurance sector, it was found that bank managers, financial planners and mortgage brokers all saw their net ethical score drop this year, with brokers suffering the greatest drop in figures, from -3 last year to -12 this year.
According to the GIA’s chief executive, Steven Burrell, the drop in the trust in the ethical behaviours of the banking, finance and insurance sector comes down to the negative attention and cases of misconduct highlighted by the financial services royal commission.
“Australians expect high standards from their financial institutions, but our research suggests that these are far from being met,” the chief executive said.
“The community’s faith in some of the country’s biggest corporations has been sorely tested, following a turbulent 12 months in Australia’s banking finance and insurance industry.
“The index suggests numerous high-profile scandals and the alarming corporate breaches being revealed on a daily basis by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, are undermining confidence in the sector,” Mr Burrell said.
He continued: “For the third year in a row, Banking, Finance and Insurance was the lowest category in the index. Its net score has dropped dramatically from last year with a score of -15.
“It has never before scored this badly; 55 per cent of respondents consider the sector unethical and only 28 per cent view it as ethical.”
Further, a survey of 1,000 Australian consumers by Essential Media recently found that nearly half of respondents had less trust in the major banks, while 14 per cent expressed greater trust in the big four.
In another survey of more than 1,000 Australians conducted by Essential Media, almost a third of respondents, or 32 per cent, said that they were more likely to consider switching banks in the wake of the royal commission’s findings.
[Related: Trust in banking sector ‘deteriorating’]