Just when AMP was taking the brunt of the Royal Commission's criticisms and the banks were welcoming a scapegoat, APRA's Prudential Inquiry issued a stinging assessment of the Commonwealth Bank. If the new CEO, Matt Comyn, wanted a catalyst for change, he now has it in spades. The Treasurer, Scott Morrison, jumped on it:
"The Report, I think, is required reading not only for every institution in the country but, frankly, it should be the next item on the agenda of every single board meeting in this country regardless of whether you're a bank or not."
The Report said CBA's financial success had dulled its senses to a deterioration in the risk profile, especially non-financial risks:
"These risks were neither clearly understood nor owned, the frameworks for managing them were cumbersome and incomplete, and senior leadership was slow to recognise, and address, emerging threats to CBA's reputation." (page 3)
A strange feature of the APRA Report is the repeated identification of executives as 'previous', 'former' and 'new' without naming them. Current staff are generally not blamed for the systemic failures. For example, the Report says:
"There was some evidence at the BRC [Board Risk Committee] that the reputation of the previous Chair of the BRC and CRO as industry experts with a 'scholarly gravitas' stifled the level of challenge at Committee meetings." (page 18)
The previous Chair of the BRC was Harrison Young (who left the Board in November 2017 at the same time as Laura Inman) and previous Chief Risk Officer was Alden Toevs, who left CBA in 2016. Chief Financial Officer David Craig retired in 2017.
APRA's Report is an indictment on the culture created under former CEO, Ian Narev, and former Chair, David Turner. In the Culture and Leadership section, it says:
"Executive Committee members commonly described the 'socratic' questioning style set by the previous CEO leading to some 'decisions being driven by the best debater rather than the person with the most robust position.'" (page 88)
Indeed, how many times have we all seen that? The King is dead, long live the King.
Many more Royal Commission seasons to come
The daily broadcast of the Royal Commission is taking a break, and it feels like the end of the football season or completion of binge-watching a series of Fargo. Bring on Season 3. We've seen the removal of villains (taking their booty with them), fainting and ambulances, gold medal performers and shredding of reputations. It's rare to hear a CEO called out in public for lying, as Mark Costello did to Dover's Terry McMaster:
"That's a lie, isn't it? I put it to you it is Orwellian to describe this as a Client Protection Policy. The entire intention of this document is to minimise Dover's liability for the work of its authorised representatives."
And soon after, Terry McMaster collapsed, topping two weeks of high drama.
There has also been much focus on AMP amending the so-called independent report by Clayton Utz. Consultants or regulators commonly offer an opportunity to comment on a draft report, but this is now likely to change. The main issue here is not so much the amending of the report, but passing it off as an independent third party assessment.
The Royal Commission may also be causing a further tightening of mortgage lending conditions. The latest CoreLogic Home Value Index shows combined capital city values had the first annual decline since 2012, although Hobart continue to shine.
Source: CoreLogic Hedonic Home Value Index, April 2018
This week focusses on financial advice. Jonathan Hoyle gives 15 questions to ask a financial adviser in the wake of the revelations, while John West and Trevor Schuesler check whether advisers have much success selecting fund managers. Daryl Wilson dissects 15 years of S&P data for investment lessons and Vinay Kolhatkar explores the perverse incentives exposed by the Commission.
Back on investing, Anton Tagliaferro emphasises the value of dividends while Adam Kibble offers tips on currency exposure as markets fall. Robert Miller gives three checks when an investor is faced with company earnings downgrades.
In a change of pace, well-known fundie Rob Prugue takes us on his sabbatical walking the 800 kilometre El Camino in Spain, with plenty of twists along the way, and an unexpected plea about how to think about superannuation.
The White Paper from Challenger argues for greater focus on retirement income and advice targetted at the needs of retirees.
Last week's Special 250th Edition ebook on investing mistakes was extremely popular, and is available on the home page of our website for anyone who missed it.
Graham Hand, Managing Editor
Edition 251 | 4 May 2018 | Editorial | Newsletter