“A company’s culture often shapes its approach to corporate governance and its response to its regulatory obligations, and it drives conduct within the firm,” argued John Price, Commissioner of the Australian Securities and Investments Commission (ASIC), in a speech this week. “And that can be either good or bad conduct. This is why culture matters to ASIC.”

ASIC has made improving governance and accountability at the firms it supervises a key strategic priority. In this direction, the regulator has formed a corporate governance taskforce to conduct targeted reviews of the practices of the firms it oversees. “We have an important role in promoting an ethical culture in business and an ethical approach to business decision-making,” Price said, outlining several measures that ASIC will undertake in order to help drive bank culture reform:

  • Reviewing and reporting on industry practices and approaches to corporate governance;
  • Identifying and addressing significant harm to consumers, investors and markets;
  • Accelerating enforcement outcomes where there is a need for general or specific deterrence for poor conduct;
  • Implementing new approaches to supervise regulated entities; and
  • Promoting the adoption of regulatory technology (“RegTech”) by business.

 
“At the heart of the work of the corporate governance taskforce is a desire to build understanding and improve current corporate governance practices that can support changes towards a more ethical culture in business decision-making and so enhance trust in our financial system,” Price concluded.

These remarks from the regulator come on the heels of recent findings that Westpac Banking Corp — one of Australia’s “Big Four” retail banks — had permitted “widespread, systemic and frequent failures” to adhere to anti-money laundering laws, resulting in transactions that facilitated the sexual exploitation of children.

The Australian Home Affairs Minister said that Westpac leadership had “given a free pass to paedophiles,” while the Prime Minister called the offenses “appalling and distressing.” A broad perception of “indifference by senior management and inadequate oversight by the board” caused public outrage and led to the resignation of CEO Brian Hartzer shortly after the scandal erupted.

Hartzer is the third Big Four bank CEO to be removed from his post as a consequence of inadequate non-financial risk management. Their heads have rolled in quick succession: in August 2017, Commonwealth Bank CEO Ian Narev was forced to resign in the wake of a money-laundering scandal that engulfed his firm; and, in February this year, National Australia Bank CEO Andrew Thorburn was forced out after a host of misconduct issues at his firm were revealed by a Royal Commission inquiry into misconduct throughout the Australian banking industry.

This latest bombshell to explode over the Australian banking sector demonstrates that inadequate attention to non-financial risk management remains the industry’s Achilles Heel, despite heightened attention to culture and conduct risk among regulators in recent years. Past approaches to non financial risk management have clearly failed. Increased investment in traditional tools would therefore be ill-advised. Rather, firms need to adopt new risk management mindsets and methodologies. Regulators have a key role to play in this regard and, as Price notes, RegTech firms should feature prominently in the effort to devise more successful solutions.

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