The criticism of the behaviour of Australia’s financial services industry hit fever pitch in the past weeks with the Federal Opposition calling for a royal commission into the sector and even the Prime Minister Malcolm Turnbull criticising the big four banks for damaging public trust.
A royal commission might give us all a chance to be outraged at the banks’ naughty behaviour but it would not reveal anything we didn’t already know, nor is it likely to examine the underlying societal value that is the root of the problematic culture.
Two recent forays by financial service regulators into considering the impact of culture on recurrent problems failed to do it, so why would a royal commission be different? That is, a dominant value demonstrated in Western capitalist cultures is the belief that, profit in business has value above all things. And maximizing the profit of a business is more important than the interests of any other stakeholders, including its customers. It is essentially alright to milk your customers for outrageous fees, unsuitable investment products and insurance products that are impossible to claim on, if you are adding to the bottom line for another ‘record profit year’ to report to the market.
Earlier this month, the banking regulator the Australian Prudential Regulatory Authority (APRA) warned that it had some concerns about the level of household debt in Australia and the Australian banks’ exposure to the mortgage market. ABC’s 730 Report showed a revealing piece of footage of APRA chairman Wayne Byers testifying at last year’s Senate Estimates Committee that the regulator was “a bit surprised by how much the competitive pressures in the industry and the competitive dynamic in the industry had led people to do things that were, you know, really, in our view, lacking in common sense.”
The issue of lending money to secure market share, beyond a point that is a suitable risk for the lender and the borrower, is directly linked to the value of making a sales target to bolster the company’s profits. In a running bull market, the banks allowed their retail mortgage divisions to be focused on market share, and remuneration packages for sales employees will be geared to sales targets. Time and again, insufficient risk assessment of what that exposure is doing to the whole business is ignored or downplayed and the customers are allowed to borrow their way into a disaster.
Meanwhile, the funds management regulator, the Australian Securities and Investments Commission (ASIC) was also pondering the role of culture in driving conduct and conflicts of interests in fund management companies that both create and manage funds and sell them through financial advisory arms that they own. In ASIC’s Report 474: Culture, conduct, conflicts of interest in vertically integrated businesses in the fund management industry, released this March, ASIC pointed out that where a financial services company manufactured an investment product and owned the distribution chain through financial advisory services, there was a strong chance that sales representatives were pressured to sell the ‘own brand’ products, whether they were the most suitable for the customer or not. This feathers the nests of the sales representatives through salary incentives aligned with the organisation’s own profit maximisation strategy. The needs of the people paying for the service, the customers, are secondary. This is a mis-selling scandal waiting to happen.
By failing to consider the values that underpin our culture, we condemn ourselves to making the same mistakes over and over again. These mistakes erode our faith in the financial services sector that is crucial to a healthy economy.
Making a profit is a cornerstone of a healthy business sector, but endlessly pursuing record profits is a short road to poor ethical choices because it turns the focus away from the customers’ requirements and prioritizing a business’s own desires. Rather than just driving up the share prices of companies that make bumper profits, perhaps we should spend more time considering how the profits are made and punish the share price of companies that put their own interests above all others to get their pot of gold.