Australian giants’ ESG failures to trigger industry changes

As the scope of Australia’s royal commission investigating the banking sector expands into other areas of financial services, local industry players agree the revelations around 'fees for no service' will result in a much-changed industry once the commission’s report is published next year.

The internal investigations have already begun; some bank senior executives have lost their jobs without pay-off and bonuses have been cut. AMP chairman Catherine Brenner's resignation was announced on Monday morning, following several days of speculation about her future since the resignation last week of chief executive Craig Meller.

Externally, financial advisors will face higher entry hurdles and the battle to rebuild trust among investors is expected to bring about deeper change in the attitudes towards corporate governance for financial services companies.

AMP’s misdemeanors and those of other big banks, notably Commonwealth Bank (CBA), have come to light during a royal commission and separate investigations by the Australian Prudential Regulation Authority (APRA). Among the details to come out, it had been revealed that AMP was charging customers for services it never intended to provide. The firm then compounded this breach of trust by making a series of false statements to the regulator with regard to this activity.

As a result, the company and individuals involved could now face possible criminal charges.

Last Friday, the royal commission’s special counsel Rowena Orr said AMP could face criminal proceedings for misleading the regulator, the Australian Securities and Investments Commission (ASIC).

TRIGGER FOR CHANGE

Gordon Noble, Melbourne-based superannuation industry consultant and director at FenElpi Partners, told AsianInvestor that he considers these events will mark a change in how clients and investors look at financial services companies.

“In essence this is a classic ESG (environment, social and governance) story,” he said, pointing out that these practices could have been eradicated long ago if stakeholders had dug deep enough. “There is a lot of talk about organisational culture, but responsible investors have not done enough to understand the factors that influence it, and how it can be best managed.

"This is the next chapter in the evolution of responsible investment, where the analytical work takes on deeper, complex issues that cannot easily be fed into a discounted cashflow analysis.”

One of the arguments made by responsible investors is that the costs of badly managing ESG factors is the threat of more regulation. Noble’s view is that investors tend to ignore this threat, for a number of reasons. “Firstly the threat seems sufficiently down-the-track not to impact short-term performance, and, secondly, to be frank, most investors have no idea how politics actually works.”

The royal commission heard that Australia’s four largest banks are in the process of repaying almost A$220 million in compensation to 300,000 customers who were charged fees for no service. The largest share of compensation payments, $118 million, is being made by CBA, which in some cases was shown to have continued to charge clients long after they had died.

In a separate ruling on Monday, APRA forced CBA to carry an additional A$1 billion in regulatory capital after an investigation into money-laundering found that the bank had a "widespread sense of complacency".

"CBA turned a tin ear to external voices and community expectations about fair treatment,” said the report.

QUALITY OF ADVICE

The recent regulatory findings have also highlighted the lack of professional qualifications in the financial advice sector. ASIC deputy chairman Peter Kell told the royal commission the banks’ financial services divisions were well set up to collect revenue, but not so well structured to ensure that the client received the proper financial advice.

Special counsel Orr told the hearing that the number of financial advisers had increased from around 18,000 to 25,000 since 2009. According to ASIC, only 35% of financial advisors had stated they had a university degree to bachelor level.

New educational requirements are expected to come into force next January, requiring financial advisers joining the profession to have a relevant university level degree. Those already operating in the industry will need to come up to a minimum standard equivalent to a university degree by January 2024. 

To restore trust in its management, the board of AMP says it is taking collective responsibility for the commission's findings and their impact on the reputation of AMP by reducing fees for all AMP directors by 25% for the remainder of 2018 (calendar year). The employment and remuneration consequences for individuals implicated in the 'fee for no service' issue will be determined once the ongoing external employment review is finalised, which is expected shortly, the company said.  

New chairman Mike Wilkins said: “AMP respects the royal commission process. On behalf of the board, I reiterate our sincerest apology to our customers, and know we have significant work to do to rebuild their trust.” Wilkins will now lead the selection process for a new AMP CEO.

AMP will be making a formal submission to the royal commission this Friday in response to matters raised in closing submissions. The royal commission's interim report isn't due until September 30, with the final report due early next year.