Australian financial services institutions will be forced to operate in a very different environment once the royal commission hands down its final report.
The impact of the Hayne inquiry on the Australian financial system shouldn’t be underestimated. Jobs have been lost, remuneration structures have changed, remediation programs are underway, products have been shelved, businesses divested, a financial advice dealer group has gone out of business and the banks have lost a combined $2 billion in market value since the royal commission was announced.
But the greatest harm to Australian banks, insurers, wealth managers and super funds has been one of perception: their reputation, above all, has arguably suffered the most.
Reputation and trust are extremely valuable commodities in the financial world, where, to a certain extent, you rely on your name to attract customers who don’t fully understand how your business operates. All they know is that they need to put their money somewhere and hopefully see it grow.
The royal commission showed the world how the finance game is really played and it wasn’t pretty.
A report from the World Economic Forum found that more than 25 per cent of a company’s value was on average directly attributed to its reputation. Meanwhile, the Deloitte ‘Reputation at Risk Survey’ rated regulation risk as the top strategic business risk and that it was highly vulnerable.
You can bet your bottom dollar that Aussie banks are in crisis mode right now; scrambling to hire the best PR gurus from around to help them reclaim the reputations that they once held so dear. Unfortunately, it’ll take more than a few spin doctors to clean up this mess.
Warren Buffett famously said that “it takes twenty years to build a reputation and five minutes to ruin it.” In the case of Australia’s banks, those five minutes were spent in Hayne’s witness box for much of 2018. It was during the royal commission hearings that a new term was introduced to the vernacular: community expectations. This became the high-water mark by which Commissioner Hayne measured the behaviour of financial services providers and their staff.
Deloitte believes community expectations will become the new ‘North Star’ and that banks will need to manage themselves beyond simple compliance with the law and regulation.
“The royal commission required the banks to disclose instances where their conduct failed to meet community expectations. Community expectations is not a term defined in banking law and is unlikely to have found its way into the policy and procedures of the banks,” Deloitte said in its analysis of the royal commission interim report last year.
“The hearings have presented numerous examples where the conduct of the banks was clearly morally egregious, but presumably there will be many, many, grey areas.
“Community expectations will change over time and banks will need to be sufficiently flexible to adapt themselves.”
It is these grey areas and shifting sands that are fast becoming the new playing field for financial services organisations in Australia. It shouldn’t take a genius to work out that there are huge risks in setting your business model to something as elusive as the expectations of the community. However, noble this pursuit may be, there is an inherent danger of pandering to the masses, driven by the fear that your tattered reputation can be restored if you just do whatever your customers want.
It will be a tricky period ahead for the banks, who must now define what on earth community expectations are and act accordingly.
How banks define these expectations, translate them into policy and procedures, and train 25,000–40,000 employees to execute good judgement on a day-to-day basis will be an extraordinarily complex undertaking, according to Deloitte.
The final report is due to be published on 1 February. It will cite countless examples of misconduct and behaviour that has fallen below community expectations. It will also make recommendations that will likely force banks, wealth managers, insurance providers and superannuation funds to change the way they operate.
If banks will adjust their sails to ‘community expectations’, they better be sure that they’re on the right course. Personally, I fear that the community itself isn’t too sure what it expects from banks. I reckon they just enjoy a good public flogging.
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