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Can Hayne really change bank culture?

The Financial Services Royal Commission has done an excellent job uncovering poor behaviour, including conduct that is already contrary to the law. It has exposed negligent regulatory practices, particularly in financial advice and insurance. Some parts of banking, such as the use of mortgage brokers and loans to small businesses, have been examined in detail. The list of "Issues that have emerged" starts on page 327 of the Interim Report. It's notable in this list that the majority of bank activity that directly affects its customers has avoided any detailed scrutiny.

In his Executive Summary, Commissioner Kenneth Hayne is refreshingly honest that simply passing new laws is unlikely to change much:

"The law already requires entities to ‘do all things necessary to ensure’ that the services they are licensed to provide are provided ‘efficiently, honestly and fairly’. Much more often than not, the conduct now condemned was contrary to law. Passing some new law to say, again, ‘Do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?"

The Commissioner goes on the examine bank behaviour and culture, and Treasurer Josh Frydenberg used that 'culture' word repeatedly in his comments:

"This Interim Report is a frank and scathing assessment of the culture, conduct and compliance in our financial system ... having the right culture depends on people having the right standards and doing their jobs properly."

Surely, this issue of 'culture' and problems defining it and changing it are the biggest hurdles to achieving long-term, sustainable change. One page 317, the Commissioner gets to the heart of this difficulty:

"Changing culture in the Australian banks may not be easy and may take time. It cannot be assumed that entities will embrace change willingly or immediately. It cannot be assumed that entities will make desirable changes at all levels of the organisation."

And there's the critical issue. This is not about the bank CEOs offering apologies and accepting responsibility. It is about the thousands of day-to-day decisions made across the banks which affect millions of Australians which the CEOs never know about. In particular, the most significant impact on loans, deposits and services is what happens in the bank pricing committees.

We've gone down the culture path many times before

ASIC is heavily criticised in the Interim Report for its failure to take stronger action against the banks on regulatory failings. This seems justified, but the former Chairman of ASIC, Greg Medcraft, did attempt to raise the culture issue and often found critics.

For example, at the 2016 ASIC Annual Forum, the overall theme was ‘Culture Shock’, and Medcraft said:

“Inevitably, it is the stories of poor culture and poor conduct in the financial industry which are splashed across the front page of the newspaper, which pop up in our newsfeeds, and which are the subjects of heated discussion on social media sites.”

In response, former CBA Managing Director, Chair of the Financial System Inquiry and current Chair of AMP, David Murray, shot ASIC a cannonball when he told a Fairfax Media event on 5 April 2016 that it was:

“... extraordinarily disappointing that ASIC should go down this culture tangent which will do more damage than good … It’s anticompetitive, it’s inefficient, and to be perfectly candid, there have been people in the world who have tried to enforce culture. Adolf Hitler comes to mind."

He later apologised for the Hitler reference, but this illustrates attitudes at senior levels of banking, and it was only a few years ago that Murray's Inquiry was lauded for its work.

The then Prime Minister, Malcolm Turnbull, weighed in with these strong words at a Westpac function on 6 April 2016:

"We expect our banks to have high standards, we expect them always rigorously to put their customers' interests first, to deal with their depositors and their borrowers, those they advise and those with whom they transact, in precisely the same way they would have them deal with themselves. This is not idealism, this is what we expect ... Wise bankers understand that banks need to very publicly demonstrate that their values of trust, integrity, placing the customers first in every way, they must be lived and not just spoken about."

So we've done the culture and behaviour rounds many times before.

... including 300 pages in 2001

I chronicled my experiences in the way banks price their products in a book published by Allen & Unwin in 2001 called Naked Among Cannibals: What Really Happens Inside Australian Banks. As recently as 13 March 2016, Noel Whittaker quoted the book in the Courier-Mail:

“Despite the predictable protests from the banks [about rate-fixing and life insurance], there is nothing new in this. In 2001, ex-bank executive Graham Hand published his bestseller Naked Among Cannibals, which contained more than 300 pages about corporate greed and unethical behaviour by Australian banks.”

Anyone wanting to take a journey into bank culture 17 years ago can read the contents page and first three chapters for free on Amazon books here or purchase the 320 page eBook version here.

Banks have no equivalent of best interests duties

The Corporation Act 2001, Section 601FC(1), under ‘Duties of a responsible entity’ says:

“In exercising its powers and carrying out its duties, the responsible entity of a registered scheme must … (c) act in the best interests of the members and, if there is a conflict between the members’ interests and its own interests, give priority to the members’ interests.”

These duties apply to superannuation trustees, and therefore much of the wealth management industry, but not banks. There is no legal fiduciary duty in banking, and so culture and ethics must play a greater role in determining appropriate actions. Culture is the combination of beliefs, values and attitudes that guide behaviour.

What are examples of bank culture problems?

In 2003, I presented a Perspectives segment on ABC’s Radio National. The text is linked here. It was called ‘A Banker’s Dictionary’. I explained five terms - entanglement, milking, mating calls, lagging and parasites - we used in our Pricing Committee. It’s unlikely in these days of political correctness that all the terms are still used.

Do the activities these words describe still exist? Consider the current Westpac term deposit interest rate schedule, as shown below for 28 September 2018.

The rates highlighted in red are the ‘special’ offers. Why is the 3<4 month rate 2.00% when the 2<3 month rate is only 1.70%? It does not reflect the shape of the yield curve. Westpac has no particular need for 3<4 month money. It is the rate designed to attract new clients, and if you happen to be an existing client with a rollover for four months, you miss out on the higher rate.

It's an excellent way to extract more profit margin from customers over time. Banks can vary where they offer the highest rates based on where the existing rollovers occur. For example, if a previous special offer means a large volume of maturities occur at a particular time, a lower rate will be set for this maturity. Like all banks, Westpac relies on what we called ‘retail inertia’. The majority of investors don’t ring the bank for a higher rate, they simply allow the deposit to rollover for the same term.

Is it fair that the 85-year-old who is living on term deposit savings does not realise better rates are readily available from her own bank? Few people want 1.85% for 4 months when 2.0% is available for 3 months. Why should a loyal, existing customer earn less than a new client or one that makes a call or shops around? It's even been called a 'disloyalty premium'. The same thing happens with loans at special rates only for new borrowers. The Commissioner should give Rowena Orr the chance to ask a bank CEO why customers must ring up to receive a market rate. It’s highly profitable in interest cost savings with billions of dollars of term deposits rolled over each year.

For the record, if CBA does not hold rollover instructions for a client, it places maturing term deposits into a Term Deposit Holding Facility (earning a rate of 1% for amounts between $10,000 and $99,999) until instructions are received from the client. You can judge whether this is a fair policy.

Banks also know that the more a customer is ‘entangled’ in an account, the less likely they are to leave. The best examples are at-call (cash) transaction accounts which link to direct debits to pay electricity bills, loan repayments, credit card balances etc., and direct credits receiving interest, salaries, dividends, etc. These accounts are so entangled that most clients cannot face the paperwork of changing to another bank or product. So why would the bank bother paying a decent interest rate on the balance? Most money in at-call or cheque accounts receives negligible interest despite all banks or their subsidiaries having more attractive deposit products. Shall we tell the client to switch to the online account that pays 3%? Are you mad?

There are many examples like these: slowly lagging cash rate reductions into lending rates but passing on increases quickly, or charging interest rates on credit cards of over 20% (which have so many embedded direct credits and debits that it’s hard for people to leave). And the mysterious calculations of early repayment fees on fixed rate loans, as previously described here.

Will the Royal Commission be a cultural turning point for banks?

Every major bank CEO has responded to the Royal Commission along the lines of this from Westpac's Brian Hartzer:

“The Royal Commission has identified many examples of misconduct across the industry. I apologise to any customers who have been impacted by mistakes that we have made.”

Again, there is nothing new in these statements. At the 2015 AGM of the Commonwealth Bank, Chairman David Turner said on the bank's ethics:

"We see it down the road as being an ultimate competitive advantage. We think we will be the ethical bank, the bank others look up to for honesty, transparency, decency, good management, openness. That is exactly where we are trying to go."

And two-and-a-half years ago, the Chairman of National Australia Bank, Ken Henry, said in a speech on the future of banking on 5 April 2016:

"In a successful business the customer drives product design and the suite of products offered. No customer is encouraged to buy something they don’t need or charged more than they need to be charged to cover the cost of providing the product. No customer of a successful business buys something that they don’t understand well enough to have a high degree of confidence that the product will deliver what they want, when they want it."

That's a high bar to jump. How does it fit with NAB transaction accounts paying interest of 0.01% and NAB credit cards with interest rates of 21.74%? I went to university with Ken, and he's a good bloke. But I do wonder if he has closely studied his bank's pricing policies.

Where will changes in ethical culture come from?

The Royal Commission offers no silver bullets on how to change culture, and the CEOs and Chairs of the banks need to find a way to embed a better balance between all stakeholders, not only the "profit before people" that Kenneth Hayne describes.

Change seems to come only when forced on the banks, as Carl Rhodes, Professor of Organizational Studies at UTS, summarised:

"This is not an ethical responsibility the banks have taken on voluntarily through their 'ethical cultures'. Responsibility was thrust upon them as a result of the actions of citizens, employees, regulators, and journalists. If it wasn’t for them, the scandals would remain covered up." 


Graham Hand is Managing Editor of Cuffelinks and he sat on the pricing committees of three banks from 1979 to 2001. While the current day examples remain relevant, anyone should feel free to comment on the present culture of these committees.


Richard McLean
October 10, 2018

My first job out of school 30 years ago was working for a bank and over the years since I've worked for CBA, NAB &amp; Westpac in various roles - retail, ops &amp; then advice. The corporate culture I experienced was remarkably similar &amp; disappointing at all of them, varying between greedy/complacent to totally toxic. Lots of enforced words about "values" that were supposed to drive the culture without any actual change in management behaviour or culture. We used to take bingo cards to the meetings and cross off all the empty &amp; meaningless corporate buzzwords as they were regurgitated! The only answer is healthy competition (a la Uber vs. taxis) that will force them to put their loyal customers &amp; their own employees on at least an equal footing with their profit. David Murray was in the thick of all this at CBA back in the 90's!

Anthony Asher
October 04, 2018

I hope the RC is reading the article and the comments - all great.

Consensus seems to be that people in the current organizations cannot really change culture. Graham's book showed culture changing with the changed structures of the nineties. Perhaps undoing them would do the trick? The banks are shedding their wealth management businesses of their own accord. Would it be too radical to split the rest three ways between commercial and investment banking and housing finance? It would force the new managements and boards to rethink their purpose and give an opportunity to get the culture right. I think it would also be good for the economy as there would be less of a focus on milking retail mortgages and more on supporting businesses.

Ethical Banker
October 03, 2018

"What is worse than a profitable bank? A bank that is not profitable."-Peter Costello

Robert Hutchings
October 01, 2018

Yes, a great article, and also a very informative Royal Commission. I share the concern that Bank behaviour will not change and that "culture" hides the true problem of lack of ethical and lawful behaviour. While Haynes correctly advises that more laws won't change behaviour, I would like to see some legislated definitions for Bank individual, and Bank corporate unlawful behaviour so that the mere identification of that behaviour makes successful prosecution possible - without having to further prove that financial loss has also occurred. ie anyone falsifying a customers signature - designated as fraud (with automatic penalties applying, including immediate barring from further participation in the financial industry), any manager is deemed complicit if they haven't called in Fraud Squad within 2 hours of discovering such instances with similar penalties, any higher level manager who is aware of such occurrence and doesn't call in Fraud Squad within 2 hours then commits the whole Bank to complicity in criminal Fraud etc. Hopefully a range of typical behavious (such as given in the article) would be similarly profiled to constitute unlawful behaviour so that prosecution is simplified, less costly, and there is real guidance for Bank personnel and institutions about what they do, and should not do.

James Williamson
October 01, 2018

the issue can be fixed with competition. If there was more competition then they would be nicer to their customers. Currently there is no fear of clients leaving on mass as everyone knows the other "major" player is just as bad/good.

Geoff Nunn
September 30, 2018

Well said Graham,

When I worked in HR and Remuneration for one of the major banks some years ago the issue of culture was often raised. The CEO at the time showed great insight when he said "Culture! yes, we need some of that around here".

The Commissioner is right when he says it will take a long time to change bank culture. These are organisations with long histories and deeply held underlying values. These values are not the ones that appear in the annual reports and on websites. But what really goes on underneath the surface.

Any change needs to start in the boardroom with directors reviewing their own dynamics and ethos.

The current model of executive remuneration in the major corporates (mostly Fixed Remuneration 1/3, Short Term Incentives 1/3, Long Term Incentives1/3) is a real stumbling block. The heavy weighting attached to financial metrics in the incentive schemes is implicated in the behavior revealed by the Commission. Compulsory executive minimum shareholding requirements make it difficult for balanced decision making.

Keep up the good work.

September 30, 2018

Let's all have a go at all industries not just banks. Name me one industry that says "Let's lower our profits to ensure we give all clients the best deal".

Don't forget that we have one of the most profitable banking industry in the world which helped Australia through the GFC better than most countries.

Where ever you shop it's always up to the customer to look for the cheapest and best deal....No company will tell you they have a better deal for you unless it is also more profitable for them.

Ethical Banker
October 03, 2018

And it's not always about the cheapest deal. It's about the human relationships, the ability to talk to a real person, what is most suitable and convenient for the client as well.

September 30, 2018

Even worse than banks not being forthcoming with existing customers re special rates (although it is on offer if they realise it and ask for it) is the situation where special 4-6 month rates are only on offer for new depositors as a one-off, and actually denied to loyal customers.

My wife and I banked with CBA for two decades and then had to move an amount around every few months to other banks, one at a time, to get this special rate.

Loyalty premiums? No sir, a loyalty penalty, for staying loyal as a customer.

RateCity talks about this penalty for loyalty:

September 30, 2018

No, Hayne cannot change 'bank culture', and even recommendations yet to be made will still have a limit. The moat around Australian banking is so formidable that banks really don't need, much less want to change, much - 'profit' will always be the name of the game. The major banks are also in such a position partly because of the (often unwitting) acquiescence or relative disinterest of customers. As pointed out in your articles, many aspects of the activities uncovered have until now been hidden, but many have not, simply ignored - including by customers - or unpoliced, even where laws or regulations already exist. So it's the attitude of customers that really needs to change, and that of ASIC and APRA - only then will banks really get the message.

September 30, 2018

In almost all of the instances in this article the word “culture” can be replaced by “ethics”.

To step back from the current issues of banking practices, unprincipled behaviour is so widespread world-wide and at all levels of societies particularly in commerce because of the absence or disregard of ethics – the way that people interact with each other. We try to remedy this with laws and regulations, which are then also ignored or sidestepped.

Locally, introducing ethics into society through schools suffers as follows :

". . .the Premier agreed to change the NSW school enrolment form so that it only included a checkbox allowing parents to enrol their children in SRE/religion classes, and to remove enrolment checkboxes for ethics classes and 'supervised activities'. Just a few days before the end of the school year, all principals in NSW were sent a memo authorised by both the Premier and Minister for Education, advising them to not give parents any information about the existence of ethics classes unless they had already opted their children out of SRE."

Where to from here ?, more laws and regulations, more powers to supervisory authorities, more fines and penalties; or perhaps try to provide some ethics input into education so that ethical behaviour might start to guide commercial (and political) behaviour and that banking "culture" might become banking "ethics" – but I won’t hold my breath.

Jonathan Hoyle
September 30, 2018

Great article Graham. The culture of an Organisation is based on what they DO not what they SAY they’ll do. Whilst cash rates remain at 0.1%, credit card rates at 21% and new customers treated better than existing customers, assume nothing has changed.

But we should expect nothing less from a taxpayer-guaranteed oligopoly.


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