Addressing attendees at the CEDA Annual Dinner in Melbourne on Tuesday night, RBA boss Philip Lowe pointed to the Hayne royal commission to illustrate how trust in financial institutions has been eroded.
“Too often our financial institutions prioritised sales over service. Correcting this starts with the system of internal reward established by the board and management,” Mr Lowe said.
“The vast bulk of the people who work for Australia’s financial institutions do want to do the right thing, and they do want to serve their customers as best they can. But, like everybody else, they respond to the incentives they face. If they are rewarded on sales or short-term objectives, it should not come as a great surprise that that’s what they prioritise. So establishing the right incentives is key.”
Mr Lowe suggested that financial institutions take a long-term focus and reflect that in their internal incentives.
“Managing to short-term targets might boost the share price for a while, but this short-termism can weaken the long-term franchise value of the bank. We have seen evidence of this recently,” he said.
“I would argue that the franchise value is more likely to be maximised if our financial institutions have a long-term perspective, treat their customers well, reward loyalty rather than take advantage of it, and invest in systems and technology that deliver world-class financial services for Australians. Doing this would not only be good for bank shareholders, but also for the broader community.”
The Reserve Bank governor reminded the financial services community of the first line of the Banking and Finance Oath, which states: ‘Trust is the foundation of my profession’.
“I encourage everybody in the finance sector to read this oath regularly and to live by it,” he said.
