The fundamental challenge in rebuilding the public’s trust in the financial services industry is putting the best interests of customers at the centre of organisational culture, decision-making and remuneration arrangements.
So says Dr John Laker, the chair of the Board of The Banking and Finance Oath and former chair of the Australian Prudential Regulation Authority.
He says Australia is not alone in facing the challenge of rebuilding trust in financial institutions. ‘The decline in trust has been a global phenomenon; other countries wracked by major banking failures and scandals have had to face the challenge earlier and although progress is being made, trust lost takes a long time to regain.
Laker notes that, up to a few years ago, the story of the Australian financial system was a very positive one. Strong capital footings, conservative risk management, and robust regulation and supervision all helped banks emerge from the crisis largely unscathed compared to other countries. As he told a recent global conference, that positive retrospective has turned instead into a cautionary tale.
He says the proven resilience of the financial system has helped reinforce the community’s trust that banks will keep customers’ money safe. Over the past few years, however, the level of trust that banks and other financial institutions have been acting in customers’ best interests has been badly eroded.
He wonders whether the continued success of Australia’s financial services industry could be a root cause of this loss of trust. Institutions that become used to a steady diet of sustained volume growth, high returns on equity and lucrative remuneration arrangements can easily fall prey to complacency and a loss of focus on customers.
Laker acknowledges that financial institutions are now committing substantial financial, management and consultant resources to strengthening their organisational cultures. They are focusing on key ‘foundational’ elements — the leadership of the institution and the tone set at the top, accountability, remuneration and behavioural norms, such as how bad news is treated and whether staff feel genuinely empowered to speak up.
‘But if you step back from these elements, the crucial point is that an organisation must have a clear sense of its purpose,’ he says.
One might think that’s straight forward and obvious, but it isn’t — as Commissioner Hayne’s focus on the pursuit of short-term profits and greed in his royal commission report shows.
‘Some institutions seem to have struggled with the simple but profound question ‘What are we for?’, and with what they have perceived as a choice between purpose and short-term profit. Surely, for a financial institution, the purpose is to improve the financial wellbeing of its customers, and the community more generally, by providing a range of financial products and services appropriate to its customers’ needs. In turn, good customer outcomes drive sustainable profitability.
…achieving an appropriate balance of the interests of all relevant stakeholders and avoiding a fixation with short-term profitability gets to the heart of the trust issue.
‘The choice between making customers happy and making profits is not a binary choice. The Group of 30, an authoritative international body of leading financiers and academics, has described the trade-off between customer outcomes and profitability as ‘a false dilemma’ — purpose and profit both need to be pursued together and be aligned. There should be no dilemma between good customer outcomes and sustainable profitability.’
Laker quotes noted Financial Times journalist Martin Wolff, who said recently: ‘If a business substitutes making money for purpose, it will fail at both.’
‘I think that achieving an appropriate balance of the interests of all relevant stakeholders and avoiding a fixation with short-term profitability gets to the heart of the trust issue. That should be the starting point for the rebuilding exercise’
Turning to culture, Laker acknowledges that this is an inherently complex force, which will necessarily differ from one institution to another and is difficult to observe. He thought William Dudley, then-Governor of the New York Federal Reserve, captured that difficulty when he observed: ‘Culture reflects the prevailing attitudes and behaviours within a firm. It is how people react not only to black and white, but to all the shades of grey. Like a gentle breeze, culture may be hard to see, but you can feel it. Culture relates to ‘what should I do’ and ‘not what can I do’.’
‘In any large institution, there may well be sub-cultures where leadership does not aspire to the institution’s values and where, for example, staff are discouraged from speaking up,’ Laker says.