Wednesday, April 18, 2018

The fish rots from the head - the Financial Services Royal Commission

I wasn't a supporter of the proposed Australian banking Royal Commission or to give it its proper title the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. For the benefit of international readers, the Royal Commission came about following sustained pressure from a small group of backbenchers especially in the National Party concerned about irregularities and injustices in the Australian financial services sector.

I believed that there had been irregularities and injustices over a considerable period, I had experienced some myself, but felt that changes were finally being made and that a Royal Commission was too blunt an instrument to address the problem. Boy, was I wrong. Before going on, here are a few of the stories from the last few days:
You can find transcripts from the hearings here.

We have talked here before about problems in the banking and financial services sector. Just based on the evidence to this point, those problems would appear to be far deeper and more systemic than I had realised. kvd might say told you so!

I said systemic because there are clearly inter-related problems including:
  • problems with IT platforms
  • lags in recognising problems and then in responding especially where there are response costs or reduced income or a combination of the two
  • incentive scales and performance measures that, in combination with cross-selling arrangements, encourage behaviour that disadvantages customers
  • ethical problems at individual and organisation levels where the pursuit of the sale becomes dominant to the exclusion of everything else. I couldn't help thinking here of the old saying that a fish rots from the head.  . 
One thing I find especially sad is that the AMP,  arguably once Australia's most respected financial institution,. has become just another financial institution since demutualisation.

I think that one of the problems in all this is going to be the avoidance or at least minimisation of new layers that simply increase costs and reduce choice, especially for the smaller investor.

4 comments:

2 tanners said...

I see BJ had the guts to say he was wrong in opposing the Royal Commission.

Others have jumped straight from abusing the ALP for 'lowering international confidence in the banking and finance industry' by calling for a Royal Commission, to abusing the individual members of the industry. They never quite get around to mentioning their own opposition to the Royal Commission, or criticising the firms and their incentive structures.

The rotting fish that are our big 4 banks and their financial subsidiaries need to have their heads looked at very much more closely. Starting with the boards and the policies that are meant to guide these firms.

Anonymous said...

Those "rotting fish that are our big 4 banks" have served us pretty darn well for too many years to count. Certainly for far too many years to ever think of letting our numbskull pollies provide a "solution".

The "problem" - and there's just not 1 problem - is a dislocation of mission from outcome, exacerbated/encouraged by unrealistic "performance" rewards, combined with poor top-down supervision and responsibility.

But, as the solution will no doubt be more government regulation, I expect it will only get worse - more's the pity.

kvd

2 tanners said...

Pretty much my point. The regulations are already in place. The companies confessed they were breaking the existing law. And some of us have been rather less well served than others.

Jim Belshaw said...

kvd wrote; The "problem" - and there's just not 1 problem - is a dislocation of mission from outcome, exacerbated/encouraged by unrealistic "performance" rewards, combined with poor top-down supervision and responsibility.

But, as the solution will no doubt be more government regulation, I expect it will only get worse - more's the pity."

I agree. The problem with top down is that it's a compounding problem. As more control has been sucked to the top, as compliance has become more important, responsibility down the chain lessens.