An Industry Shift is Required in Response to The Australian Royal Commission

The Australian Royal Commission into Misconduct in Banking, Superannuation, and Financial Services publicly released their Final Report earlier this week. Today, the Governance Institute of Australia (“GIA”) weighed in with their perspective on how the industry must respond to the report which caps a traumatic year of testimony and public scrutiny into the culture and practices of its members.

Recognizing the fundamental impact the industry has on the economy as a whole, the GIA notes that “How these institutions respond to Hayne’s report will be vital, because building long term stability and performance of the sector will determine the health of the Australian economy as a whole.”

At the root of the scandals and misconduct revealed by The Royal Commission is a common culture which treated compliance as a purely mechanistic exercise while failing to as the fundamental question which is “Should We?”. Instead, management teams across the industry chose to ignore clear warning signs because their activity was technically ‘compliant’. In the GIA’s words, “[Reform] cannot be based around an attitude of it being a ‘box-ticking’ exercise for compliance purposes.”

What is needed is a wholesale rethink of governance and the tools that executives use to measure and manage their cultures for accountability and to rebuild trust with the public.

Read the article: Royal Commission: Governance Culture of ‘Box-ticking’ is Over

Read the Royal Commission final report: Final Report – Australian Royal Commission into Misconduct in Financial Services

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Australian Royal Commission Signals Changes to Come in Australian Regulatory Oversight

Starling Team

The Australian Royal Commission into the financial services industry is entering its final phase but it is already having a profound impact on the Australian financial sector – and not just in how banks manage misconduct, but in how they are regulated as well.

To this point, following on the Interim Report from the commission, the Australian Financial Review offered an editorial on how the Commission will potentially change how regulation is handled in Australia. The report, published this past September, had an implicit message that “…trust in the banks won’t be restored unless the public trusts their watchdogs to enforce the laws of the land.” Initiatives such as the Royal Commission are finally recognizing that misconduct is not a problem of lone wolf actors. Rather, it is a systemic problem that requires both banks and regulators to adopt new strategies to manage.

The final report is due in February and whatever that report says, it’s clear that banks should expect greater enforcement efforts from ASIC and APRA and that “more legal cases, especially criminal matters, will sharpen the focus of boards and management on risk culture, and send a strong message to the public that misbehaviour is not tolerated, while acting as a deterrence.” In fact, the new Bank Executive Accountability Regime (BEAR) will hold individual executives liable for failures to provide adequate oversight.

The G30 adopts a similar philosophy to the Hayne interim report. They suggest in their most recent whitepaper titled Banking Conduct and Culture Change: A Permanent Mindset Change that stamping out misconduct doesn’t require extensive new regulation. Instead, the regulators will be looking to the banks to come up with better measures for and means (i.e. technology and tools) of managing such risks.

Read the article (paywall): Banking royal commission: How Hayne will change the regulation of banks

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Elevating Risk Management Beyond the 2nd Line

Starling Team

As the risk management function matures, firms are looking to evolve beyond a focus on high-profile risk mitigation towards a more cost-efficient and strategic business function. This transformation comes as many banks are incorporating artificial intelligence into their 1st line of defence operations to increase efficiencies and to reduce opportunities for misconduct to affect bank activities. As these authors from Grant Thornton discuss in this article on the Risk Management website, bank leaders are increasingly looking to the risk management function to take on a more strategic role.

There are a number of forces driving this trend. First, banks are realizing that effective risk management must be tightly integrated into business strategy and receive strong support from leadership. Second, management is looking to streamline costs even as they also feel pressure to justify the effectiveness of that spend. Finally the scope of risk management is expanding as it must accommodate new innovations being introduced in the largely unregulated fintech sector. Going forward, risk management will not be viewed as merely a “second-line activity”, but will be viewed as having a prominent role in improving business performance.

The authors go on to recommend that, “Institutions need to establish a framework for measuring risk effectiveness as a first action.” At Starling we are working with executives across the globe to apply Starling’s predictive behavioral analytics platform to measure the key behaviors that support effective risk management and to predict how those behaviors drive critical risk outcomes.

Read the article: Transforming the Risk Function to Increase its Effectiveness

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Trust is a Competitive Advantage | Inc Magazine

Starling Team

In one of the larger studies we’ve seen on this subject, Accenture has published an analysis of over 7,000 firms on the factors that drive revenue and profitability. The study focused on key dimensions related to agility, the ability of the firm to respond to external challenges and adapt to new markets and challenges. AFter analyzing over 4 million data points, the study found that metrics related to Trust impacted the outcomes disproportionately.

In this review by Greg Satell, author of the book Mapping Innovation, Satell points to a number of interesting nuances in the report’s findings. Above all, events leading to a loss of trust can be devastating to a firm. The author points out that these impacts extend well beyond the firm’s customers to include other stakeholders such as employees, investors, and regulators – a point we’ve made ourselves here.

This damage impacts firms differently depending on their industry but at least as important is how a firm responds. The difference comes down to having a well planned and disciplined response as well as a strong foundation of trust built up ahead of time.

Read the article: New Accenture Strategy Report Shows How Trust Can be a Competitive Advantage

Read the Accenture Report: The Bottom Line on Trust

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Absorbing the Lessons Learned from Lehman | Financial Times

Starling Team

The 10th anniversary of the failure of Lehman Brothers has inspired a lot of soul searching as to what went wrong and, more importantly, whehter we’ve done enough to prevent such a crisis from happening again.

In this article Michelle Scrimgeour, CEO of EMEA for Columbia Threadneedle Investments, argues that unless firms have addressed their culture, they can’t really be confident that they’ve addressed the fundamental problems that led up to the crisis in the first place. Regulators have taken some initial steps in this direction through initiatives like the UK Financial Conduct Authority’s conduct regime which applies personal liability to all employee for bank misconduct.

However, regulation, particularly top-down rules-based approaches, are not ideally suited to improving culture. Management must be committed to encouraging the right behaviors and to setting the correct priorities.

Read the article here (paywall): Lessons since Lehman about corporate culture

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