The Reserve Bank governor has called for harsher penalties for bankers who do the wrong thing, on a day when the Commonwealth Bank’s chief executive admitted he may have to extend a remediation program to cover hundreds of thousands more customers.
CBA boss Matt Comyn told the banking royal commission on Tuesday an internal review had identified 374,000 CBA customers who might need to be repaid because they had taken out credit card insurance when they were ineligible to do so. He also admitted decisions by CommInsure – CBA’s insurance arm - not to update definitions of medical conditions had left some customers who suffered heart attacks without insurance cover.
Philip Lowe, the RBA governor, said in a speech on Tuesday night that Australia’s major banks and financial institutions needed to refocus their efforts on long-term objectives rather than short-term profits, and develop a strong culture of service rather than prioritising sales, because the economy required it.
In his address to the Committee for Economic Development of Australia’a annual dinner, Lowe said it was clear revelations at the banking royal commission had dented the public’s trust in parts of the financial sector.
He said rebuilding that trust would require a harsher penalty regime to “incentivise” bankers to behave properly.
“Too often our financial institutions prioritised sales over service,” Lowe told the Melbourne audience.
“Correcting this starts with the system of internal reward established by the board and management. The vast bulk of the people who work for Australia’s financial institutions do want to do the right thing, and they do want to serve their customers as best they can.
“But, like everybody else, they respond to the incentives they face. If they are rewarded on sales or short-term objectives, it should not come as a great surprise that that’s what they prioritise. So establishing the right incentives is key.
“One of the things that influences incentives is the consequences and penalties that apply when something goes wrong. Strong penalties can play an important role in incentivising good behaviour, and this is an area we should be looking at.”
At the royal commission on Tuesday Comyn endured a second day giving evidence.
He admitted there were a number of examples in recent years where CBA had prioritised financial “objectives” over its customers, including the fee-for-no-service scandal and CommInsure.
Asked by the senior counsel assisting the royal commission, Rowena Orr QC, to give examples of times when CBA had not prioritised its customers, Comyn nominated CommInsure’s decision not to update its definitions of medical conditions, such as heart attacks. The consequence was that customers who suffered heart attacks were not covered by their insurance policies, Orr said.
Comyn said: “Yes, that’s right.”
Comyn also told the commission CBA expected to pay about $15m in remediation to 64,000 customers who were sold CreditCard Plus Insurance when they were ineligible, but an internal review by Ernst and Young had identified another 374,00 customers who might also need to be repaid.
Asked by Orr whether the bank would extend the remediation program to cover those customers, Comyn said: “If it is necessary, yes.”
The CBA chair, Catherine Livingstone, told the commission she was “surprised by the lack of challenge” that the board gave to management when she joined it in 2016, saying there was a lack of urgency in following up issues including the Austrac scandal.
The royal commission heard that by November 2016, CBA had received three statutory notices from Austrac requiring the bank to provide information about its anti-money-laundering activities.
Livingstone told the commission she had raised concerns about the bank’s non-financial risk profile, but had received assurances from CBA management that Austrac “knew we were working hard” to reach compliance.
In June this year, CBA agreed to pay $700m to settle civil proceedings relating to breaches of anti-money laundering and counter-terrorism financing laws, via its use of intelligent deposit machines, a type of ATM that let customers anonymously deposit and transfer cash.