Overview of APRA Chair Wayne Byres' speech to the FINSIA Summit 2018 Sydney: Good Banking, by Good Bankers

In the wake of the release of the Financial Services Royal Commission's Interim Report, APRA Chair Wayne Byres has given a speech in which he has called on industry to raise standards of professionalism and has signalled that the regulator will also reconsider its regulatory approach.

Introduction

In a speech entitled 'Good banking, by good bankers' Australian Prudential Regulation Authority (APRA) Chair Wayne Byres has called for greater professionalism in Australia's financial services sector to address issues raised in the Financial Services Royal Commission Interim Report, and to restore trust in the sector. Mr Byres also flagged that the regulator will reconsider its current approach to enforcement following the release of the Financial Services Royal Commission's Interim Report, noting that 'based on what has been revealed' during the Commission hearings, the suggestion that 'regulators can and should do more to actively enforce standards of behaviour within the financial sector and punish those who breach them' appears to be a 'quite reasonable conclusion'.

Some key points

  • The financial system remains financially sound: Mr Byres commented that 'It’s important that we continue to recognise and acknowledge that the Australian financial system remains financially sound. APRA certainly continues to work to keep it that way' Mr Byres said.
  • Change in the sector is necessary and will 'ultimately be positive for the industry': Commenting (briefly) on the Financial Services Royal Commission Interim Report, Mr Byres described it as 'confronting' and 'uncomfortable to read'. He said that the report 'raises serious questions and issues for the financial industry, regulators and policymakers to contemplate, and the Commission will inevitably change many elements of the way institutions currently operate, as well as the way they are regulated. As much as the industry, and those of us associated with it, are feeling the intense glare of the Commission’s scrutiny, I have no doubt it will be for the best. The Royal Commission will ultimately be positive for the industry, as well as consumers'.
  • Addressing the issues identified in the Commission's interim report will require cultural change at an organisational as well as at an individual level: Mr Byres emphasised that addressing the issues identified by the Financial Services Royal Commission 'will require enormous effort from everyone who understands the importance of a well-functioning financial system that serves the community. Entire companies, sometimes comprising tens of thousands of employees, must change their policies and cultures. But ultimately it comes down to people – collectively and individually. Everyone in the industry has a role to play'.
  • The business of banking is 'not [yet] a profession': Commenting on the need to raise standards of professionalism in the sector, Mr Byres said that 'the business of banking at least thus far, is not a profession'. He went on say that 'the combination of compulsion, opacity and materiality inherent in many financial products generates, as a quid pro quo, a heightened expectation that financial institutions will exhibit high standards of behaviour in the way they operate. Yet…there is no defined body of knowledge or high entry standards for those who perform key roles. Where codes of conduct exist, they are often totally voluntary. And on the evidence before the Royal Commission, the balance between self-interest, company interest and serving the community’s interest has not always been appropriately struck'. My Byres added that though the standards currently under development by industry are a ‘very welcome development’, 'increased professional standards are not a panacea'.
  • Technology may assist, but cannot wholly address poor decision making – 'people are still paramount': Though technology won't solve the entirety of issues identified over the course of the Financial Services Royal Commission, Mr Byres noted, the Commission 'process has shone a light on the all-too human flaws that have badly tarnished trust in the financial sector'. Mr Byres went on to suggest that the 'the increasing dependence on technology may help address some of these issues, by removing those flaws from some decision-making'. Having said this, Mr Byres added that 'correcting flaws in corporate governance and culture will require traits that only humans can provide: leadership, judgement, a deep understanding of the fundamentals of their businesses, a strong ethical and moral compass, and the ability to successfully balance the interests of the company, shareholders, consumers and society in general. The future may be on built on technology, but to get this all right, people are still paramount'.
  • APRA's role in the process: the regulator will consider a change in approach. Mr Byres commented that the Financial Services Royal Commission 'has suggested, amongst other things, that regulators can and should do more to actively enforce standards of behaviour within the financial sector, and punish those who breach them. Based on what has been revealed, that is a quite reasonable conclusion. Consistent with prudential supervisors around the world, APRA has traditionally examined cases of poor conduct as an indicator of risk, but not a direct prudential risk in and of itself, unless it was likely to jeopardise the stability of the system or an individual institution. We will clearly need to reflect on that approach'.

Australian Banking Association (ABA) supportive 'in principle' of ‘the professionalization’ of banking

In a speech entitled 'Earning back trust and the role of self-regulation' ABA CEO Anna Bligh said (among other things) that the ABA Council 'support in principle the professionalization of banking as important to raising training and conduct standards' and that industry is working with FINSIA and stakeholders to develop a model for the Australian context.