Day 352: It's a wrap
An introductory weekday newsletter from Schwartz Media. Counting the days since the banking royal commission was established.
Good afternoon and welcome to day 351.
Almost a year on from being established, the Hayne royal commission has adjourned for the final day, wrapping up 68 days of hearings.
Labeled an “opportunistic populist whinge” by then Treasurer Scott Morrison, it grew into what more than one bank chief called a “deeply confronting experience” for the sector. For many it was, as former Westpac chief Gail Kelly described today: “More confronting than I thought it was going to be at the start."
There’s more to come of course, when Commissioner Hayne makes his recommendations on February 1 next year.
We’ll be back to normal programming next week, but for now, here are the three things we think are most likely to feature in those recommendations.
-- Charis
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A complete rethink on executive pay.
Hours of questioning at the Hayne royal commission has been devoted to executive pay - from how to reward the minions for flogging bank products, to the multi-million dollar bonuses in the executive suite.
With each of the big four at various stages of reforming executive pay, Commissioner Hayne seems headed for a clash with bank shareholders, some of whom are yet to be convinced banks should embrace anything but pure capitalism. ANZ chief Shayne Elliott told the commission:
"There are some shareholders, not all, who would prefer that our only objectives were financial, and, frankly, have no time for what they would term softer measures around customer outcomes, employee engagement, diversity, etcetera."
Trailing commissions are clearly on the nose for Commissioner Hayne, but few bankers seem to have answers on how to drop them and still protect their lucrative broking arms. We learnt via the royal commission that the Commonwealth Bank came within inches of moving to a fixed fee for mortgage brokers, but as then chief Ian Narev warned:
"History is littered with banks, even big ones, who try to take on the broker channel and lose."
Some, like Yellow Brick Road, still seem in denial that commissions lead to bad customer outcomes. One thing is sure, the banks won’t make this change voluntarily. Legislation seems the likely recommended course, but before that expect yet another inquiry, possibly from the Productivity Commission, into the consequences of forced changes to renumeration structures.
In the meantime, enjoy this too-close-to-the-truth satire from the Betoota Advocate.
Hug a BEAR
Commissioner Hayne could fast-track his final report and simply write the words “stop being bastards” in large typeface as the entire executive summary. Or, as is more befitting a sector littered with acronyms, he could recommend the Banking Executive Accountability Regime (BEAR) be extended and legislated to cover misconduct by executives at all financial services firms.
Getting bankers to put the interests of customers over the interests of shareholders is what the FoFA reforms failed to nail. It’s now down to Commissioner Hayne to decide whether you can legislate culture, something the regulators are strongly opposed to. Or, if there’s an alternative way to make bankers act more like doctors and actually abide by codes of ethics.
Board and governance shakeup
It’s hard not to conclude, given the damning APRA report and testimony given to the royal commission, that bank boards were anything but asleep at the wheel. Except when it came to defending executive pay. This was perhaps best summed up by Commonwealth Bank chairman Catherine Livingstone’s testimony.
In the same day Livingstone expressed her surprise that the board didn’t ask more questions of management, she also let us know how former Chairman David Turner refused to hand back the 40% of his bonus the rest of the group had agreed to amid the many scandals engulfing the bank.
There’s more to this than pay though. Senior counsel assisting Rowena Orr’s line of questioning suggested there will be recommendations designed to make boards more accountable and improve governance. And if the AFR’s commentariat are warning of '“unintended consequences” you know it’s not going to be good for business:
“The Hayne governance era looks something like this: verbatim records of conversations held by board and sub-committee members, longer board meetings, more extensive board room information packs, intensive director induction programs, more robust challenging of management, and increased employment of lawyers and accountants as non-executive directors.”
The Commentariat
In addition to some choice phrases like “can I show you a document?’” and “Hayne Pain”, the royal commission has unearthed the opaque dealings and often flawed decision-making processes within boards and management at our financial institutions, write The Australian’s Joyce Moullakis and Ben Butler.
“That rare insight and public shaming should now lead to action and change. Or in other words, Hayne’s encore.”
It’s the banks themselves that will need to lead the resurrection of the broader industry, writes the AFR’s Chanticleer.
“The final round of hearings has been at turns shocking, insightful and frustrating.
“But it has also been somewhat disheartening to see Hayne and his team hunt for solutions that, in the commissioner's own words, are harder to grasp than a column of smoke.”
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