The Australian Prudential Regulation Authority (APRA) has announced it will undertake an independent prudential inquiry into the Commonwealth Bank of Australia (CBA) focusing on governance, culture and accountability frameworks and practices within the group. The prudential inquiry will be conducted by an independent panel, to be appointed by APRA.
Subject to settling the final terms of reference, it is anticipated that the panel will provide a final report to APRA around six months from the formal commencement of the inquiry, and that this report will be made public. APRA Chairman Wayne Byres said the decision to initiate a prudential inquiry followed a number of issues which have raised concerns regarding the frameworks and practices in relation to the governance, culture and accountability within the CBA group, and have damaged the bank’s reputation and public standing.
Conduct of the inquiry
APRA states that the names of the panel members and the agreed terms of reference will be finalised and published at the commencement of the inquiry. The costs of the inquiry will be met by CBA.
Goal of the inquiry
According to the APRA announcement, the goal of the inquiry is to identify any shortcomings in the governance, culture and accountability frameworks and practices within CBA, and make recommendations as to how they are promptly and adequately addressed. It would include, at a minimum, considering whether the group’s organisational structure, governance, financial objectives, remuneration and accountability frameworks are conflicting with sound risk management and compliance outcomes. The independent panel would not be tasked with making specific determinations regarding matters that are currently the subject of legal proceedings, regulatory actions by other regulators, or customers’ individual cases.
CBA response
In a statement to the market, CBA Chairman Catherine Livingstone said: 'CBA recognizes that events over recent years have weakened the community's trust in us. We have been working hard to strengthen trust, and will continue to do so. We welcome this opportunity for independent parties to review the work we have already undertaken and advise on what more we can do…APRA's oversight of this inquiry will ensure the independence and transparency needed to reassure all our stakeholders'.
CBA CEO Ian Narev is also quoted in the statement as commenting: 'We are confident that our 50,000 people come to work each day to give their best, for the benefit of our customers. At the same, we know that our mistakes have hurt our reputation…An independent and transparent view on the work we have done, and the work we still have to do, in an important element of strengthening trust. So this inquiry has our full support, to ensure it is as effective as possible.'
Mr Narev is also quoted in The Australian as stating in relation to the CBA's risk reporting: 'Given the nature of banks and the need for finance expertise, risk expertise, IT expertise, a significant level of crossover and matrix reporting is inevitable…[APRA's inquiry would look at whether there were organisational, cultural or reporting improvements that could improve 'the specificity of accountability. And not just to who might be responsible for after-the-fact reactions, but obviously even more critically specific tasks, whose job it is for them to be done so there are no gaps or overlaps'.
Treasurer's comments
The treasurer has welcomed APRA's announcement saying in a media release 'I support the key objective of APRA’s inquiry to identify the core organisational and cultural drivers at the heart of recent issues relating to the CBA. I fully expect the Inquiry and CBA’s response to provide the community with confidence that any shortcomings identified are promptly and adequately addressed.
I look forward to the forthcoming announcement by APRA of the panel members and the detailed terms of reference for the inquiry. I note that the report will be made public and am pleased that CBA will meet the costs of the Inquiry and fully co-operate with APRA'.
Royal Commission unnecessary?
In an interview for Sky News, the Treasurer indicated that a royal commission into the financial system was unnecessary because the actions being undertaken by APRA, in addition to new legislative controls to be introduced in the short term and the creation of a new financial complaints authority will address the cultural issues at the CBA: 'It [a royal commission] can make some recommendations, but it can’t make a finding that gives anybody anything. What we can do is what we are doing, and that is taking action right now with a better complaints authority, stronger regulations on banking executives; the regulators doing their job in addressing any governance or organisational or cultural problems that are occurring in these institutions.'
In a separate ABC report, the Treasurer again dismissed calls for a royal commission 'It's not going to get anything happening now, it's just going to kick the issue down the road for another three years…The things that a royal commission could potentially recommend, we're already doing that'.
Timing of the inquiry?
The Conversation writes the timing of APRA's announcement has 'raised questions' about whether APRA should have acted sooner. Andy Schmulow, from the University of Western Australia is quoted in the article as commenting: 'Morrison has stated that APRA is independent, and that this is APRA’s decision, not his. But the timing raises questions in light of the Treasurer’s obvious pique, motivated no doubt by the political capital that the Turnbull government has expended resisting a royal commission - no mean feat for a government with a one seat majority and trailing badly in the polls…The question is whether APRA’s announcement of an inquiry should have come earlier - possibly years earlier - and if so whether APRA’s announcement today is mere coincidence, or whether it is responding to pressure from the Treasurer'.
The Australian also questions the timing of the inquiry and suggests that it was launched at the behest of the Treasurer: 'Treasurer Scott Morrison has granted three of the big four banks breathing space after it focused the government's "full court" of regulatory powers on Commonwealth Bank, pushing the prudential regulator to launch a landmark investigation into the nation's largest lender in the wake of allegations of extensive money laundering.'
Implications for other investigations?
The Conversation writes that that the APRA inquiry may have implications for inquiries yet to be launched by international regulators 'Reports indicate that Hong Kong and Malaysian authorities are requesting information from CBA about cross-border anti-money laundering and counter terrorism failures. What would be of even greater concern is that any transactions that involve US dollars would have to go through and be cleared in New York, and in the past the US authorities have taken steps against, among others, Australian entities for illegal conduct. This includes conduct that went nowhere near the US. So this potentially opens multiple battle fronts for CBA both foreign and domestic'.
CBA statement: Compliance and transaction monitoring in offshore jurisdictions
The CBA have issued a statement in response to media reports regarding offshore monitoring and compliance of accounts. The statement says that the CBA 'maintains proactive relationships with all relevant global regulators on these and other matters. A Committee of the Board of the Bank was established on 8 August 2017 to oversee the Bank’s response to AUSTRAC’s statement of claim. This Program is working to strengthen the Group’s anti-money laundering frameworks. The Committee, which meets weekly, is requesting and considering information and reports from management relating to the progress of the Program, as well as making recommendations to the Board on matters of accountability. The Committee comprises four independent directors: Mary Padbury, who chairs the committee, Catherine Livingstone, Brian Long and Shirish Apte'.
CBA 'valuation slide' reportedly adds to pressure on the CBA board
The AFR writes that the declining CBA share price — it has reportedly dropped 9.5% since the start of August — is placing additional pressure on the CBA board to identify a new CEO. Reportedly, the longer the selection process takes, the more likely that the share price will be adversely impacted. The report adds that a new CEO and 'proactive chairman' may see the CBA settle AUSTRAC allegations out of court.
In a separate report, The AFR writes that global credit rating agencies are 'on alert' following news of APRA's investigation. Reportedly they have warned that it could lead to a credit downgrade of the bank. S&P Global are quoted as stating that any 'material adverse findings' from the inquiry from the could weaken the bank's credit profile and that any indications of weakness in the CBA's governance and risk management frameworks uncovered by the inquiry could also weigh on its rating.
Australian Bankers' Association to appoint independent chair?
The Australian writes that the usual rotation of the Australian Banker's Association (ABA) Chair would mean that current CBA CEO Ian Narev would be appointed to the role before the end of the year. Reportedly, for the first time, the ABA is considering appointing an independent chair.
