Clancy Yeates, June 8, 2017
The government's plan to beef up the banking regulator's powers could see executives facing stiff penalties for "honest, if mistaken, risk judgments", Commonwealth Bank director Harrison Young says.
Amid intense debate about how banks can improve their battered public reputations, Mr Young on Thursday weighed in on the new executive accountability facing banks which will give the regulator new powers to ban senior bankers.
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"It's a very difficult thing to put into place and I'm not sure how it will work," Mr Young said of the new powers given to APRA.
"Language in the Treasurer's announcement suggested bankers, not just the bank, but individual bankers, starting with the CEO and down into the organisation, could be punished for bad judgment regarding risk."
CBA director Harrison Young says new powers given to APRA could punish "honest if mistaken risk judgments". Photo: Josh Robenstone
Mr Young said that was very different from punishing misconduct in dealing with individual customers.
"It seems to me you're sort of mixing up what seem like criminal penalties with honest, if mistaken, risk judgments."
The new regime, announced in the budget, will require the Australian Prudential Regulation Authority to approve very senior appointments and influence how they are paid.
Treasurer Scott Morrison has said the regulator will also have the power to act more quickly against executives who are "found guilty of crimes or caught in illicit activities where it affects their ability to do their job with competence, honesty, or integrity."
Banks tend to offer the best mortgage deals to new customers or those who refinance or threaten to leave.
Mr Young said that if the laws were intended to only capture flagrantly stupid choices such as some banks made leading up to the global financial crisis, that might be acceptable, but it would be very difficult to write regulations that made that clear.
Speaking later, he said that "risk management in banks is a team sport. It's like a continuous conversation, with individuals constructively challenging each other. It would be hard to make that sort of process work if you were assigning blame for bad decisions."
The comments came as a former senior Barclays banker, who also spoke at a conference on ethics backed by the Banking and Finance Oath, highlighted mortgage pricing as another dimension of the debate about banks' ethics.
Steve Weston, a former head of mortgages at Barclays who now chairs a local peer-to-peer lender rival to banks, said Australian banks' practice of charging new home loan customers lower interest rates than many existing clients is the type of behaviour that will increasingly fall short of society's expectations of the financial sector.
How do [you] look customers in the eye and go, 'Hold on, guess what, this is what happens for loyalty – you pay more than the new person'.
Steve Weston, OurMoneyMarket.
"There are things that we are doing in Australia today, that if I went back to my former colleagues in the UK and said, 'How do you feel about these intro rates, how do you feel about differential pricing on standard variable mortgages between old customers and new', and they would go 'What? You're kidding,'" he said at a conference on banking and finance ethics.
Mr Weston, who now chairs a non-bank competitor in OurMoneyMarket, questioned if that was an ethical practice on the part of banks.
"How do [you] look customers in the eye and go, 'Hold on, guess what, this is what happens for loyalty – you pay more than the new person'."
The comparison with the UK – where banks had to be rescued by the taxpayer during the global financial crisis, and where scandals uncovered have been more widespread than Australia – was played down by the chief executive of Westpac-owned BT Financial Group, Brad Cooper.
Mr Cooper pointed out that Australian banks had not been embroiled in the same "mis-selling" scandals as banks in the UK.
"Yes, we've still got things to do, but I think we're at very different starting points as well here, compared to where the UK was," Mr Cooper said.
Another difference between the two markets is that most UK home loans are fixed-rate products, which are more difficult to renegotiate mid-way through a loan term.
Mr Weston, who also advises banks on conduct issues, said some senior bankers realised the risks associated with some behaviour, but there was no incentive to be the "first mover". This idea – in economic jargon it is known as a "collective action problem" – is a key focus among regulators.
Australian Securities and Investments Commission deputy chair Peter Kell said this tendency, whereby no bank wanted to move first to stamp out behaviour that might be questionable but was also profitable, was "pervasive" in finance.
"That has a corrosive impact on outcomes for consumers and for people's adherence to basic ethical standards," Mr Kell said at the same conference.
Mr Weston said mortgages were just one example where banks priced products in a way that was hard to justify. He also pointed to their use of "introductory rates" – where banks offer an attractive deal for a limited time, before customers revert to being more profitable for the lender.
Several major local banks, for instance, have in recent months cut interest rates paid to long-term savers while boosting introductory rates, which are prominently advertised but paid to fewer people.
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