Australia’s major financial institutions need to better understand their social risks and social conditions, which a new report has found to be just as important as its financial condition.
A paper prepared for the Actuaries Institute by former APRA deputy chair Ian Laughlin and principal at Finity Consulting Hadyn Bernau have found that the state of a financial services relationship with stakeholders is as important as their financial condition.
“We believe that the social condition of a financial services business is no less important to its long-term success than its financial condition,” said Mr Laughlin.
The paper said that many organisations would regard customer relationships as important to their success, but these had often not been handled well.
“The response of the various markets to unfolding events at the royal commission graphically demonstrated how social or relational events can destroy significant business value.
“In turn, this shows the considerable worth of the social capital of these organisations, and its inherent volatility and fragility,” it read.
The paper was prompted in part by the findings of both the royal commission and APRA’s prudential inquiry into CBA and the findings of the paper could pre-empt the problems exposed by such inquiries.
The paper makes the case for a social condition report that functions like a Financial Condition Report which provides a comprehensive view of the financial dynamics of businesses.
“Conceptually, an SCR would be a comprehensive report to the board about the quality and value of the relationships with key groups in society. It would identify key groups in society with whom the business has a relationship and assess and measure the quality of the relationships and the risks,” the report read.
The report would also involve a comprehensive and integrated assessment and it would propose specific actions and defined objectives for management.
The paper acknowledged that many businesses would currently be working on implementing new programs but was sceptical about its effectiveness.
“While it is likely that wide-ranging programs will be implemented, many responses are likely to involve being more diligent, working harder, applying more resources, improving reporting etc – basically pedalling a lot harder. We are sceptical about the effectiveness and efficiency of such approaches,” it read.
Actuaries Institutes chief executive officer Elayne Grace said the group was supportive of the paper and its findings that would help address risk in the industry.
“The Actuaries Institute is very supportive of this kind of thought leadership to address broader risks in our industries,” she said.