TREASURER:
You would be aware this morning of the release of the report of the prudential inquiry into CBA and I wanted to make a number of remarks on that. On the 8th August of last year, I met with the chair of the CBA, Catherine Livingstone, following the revelations in relation to AUSTRAC. I called the chairman to Canberra to discuss those matters, because at the end of the day, in all of these institutions, it's the boards that I hold accountable for what happens in each of these organisations. They employ the executives, they set the tone, they're the custodians of the companies or the institutions' culture and values. At the end of the day, that is where the action has to be taken in these institutions to set the right course. I thank Catherine Livingstone for coming on that day and the work that she's been doing since that day to address what have been very serious issues in that institution.
A few weeks after that, on August 28, APRA initiated, with the very strong endorsement and encouragement of the Government, an inquiry into the governance, culture and accountability at CBA. It looked at a series of issues that had been taking place within CBA at the time. This was all happening in August of last year. And I want to thank in particular, Wayne Byres, the chairman of APRA, and as well those who undertook the inquiry, John Laker, Graeme Samuel and Jillian Broadbent, they have done an excellent job at getting to the heart of what the issues are here in that institution.
The report found the following. It found there was a complacent culture, dismissive of regulators, an ineffective board that lacked zeal and failed to provide oversight, a lack of accountability and ownership of key risks by senior executives, a remuneration framework that had no bite and they were reactive, slow, and had under resourced internal systems and processes. I want to stress that while the CBA is a sound financial institution, and that issue is not in question, that rap sheet that I've just read out there from APRA is damning.
The report, I think, is required reading not only for every financial institution in this country, but, frankly, it should be the next item on the agenda of every single board meeting in this country, regardless of whether you're a bank or not. It goes to the heart of what responsibilities of board directors are. It's not a retirement job. It's a very serious job I know that there are thousands of board directors around the country who take that job incredibly seriously. But this should be a wake-up call for every board member in the country, particularly those who are the custodians of the savings and shareholdings of millions of Australians. They expected better, those shareholders, of board members on this occasion and they have been let down, terribly. In addressing these issues, in addressing these issues, the Government has already taken action to give both CBA and other institutions some key tools to deal with this issue. Before I say that, I should stress I welcome the fact that APRA is requiring, of particularly the systemic banks, a written assessment to be provided to APRA once they have reviewed the recommendations of this report. We need to be reassured, we need to have assurances provided by all of those key institutions that what has been identified here in CBA to the extent that it exists in other institutions, that is identified and being addressed, or has been assessed as not being present. I think that is a very important process that APRA will now undertake.
But I want to turn to a couple of parts of the report. And on page 59 of the report, it says, "A lack of accountability is a common theme. An inability to identify who is accountable when things have gone wrong. Inadequate remuneration outcomes for adverse risk and compliance outcomes. Weak issues escalation, management and closure of those issues, insufficient executive committee oversight and inadequate business unit supervision of functions performed elsewhere in the group".
It goes on in another part of the report when talking about accountability, is says "internationally prudential regulators, it’s on page 58, have long recognised that maintaining high standards of accountability is a key attribute of the financial institution corporate governance. In Australia, the Government has recently enacted the Banking Executive Accountability Regime which strengthens APRA's powers in assessing transparency and accountability of decision-making processes within authorised deposit-taking institutions. The regime will require an ADI to notify APRA’s accountable persons with defined areas of responsibilities and obligations and authorises APRA to disqualify individuals who breach the required standards, importantly each ADI must maintain accountability maps setting out who is accountable for key risks". That legislation also carries fines for institutions of up to and over $200 million. And in Recommendation 22 of the Report says, "CBA, building upon the foundation established by BARE, incorporate the accountability principles set out in this report".
It was the beginning of last year, when I went to the United Kingdom, to look at the various accountability measures that they had put in place in the UK and I returned and sat down with the chairs of all the banks and said we would be doing the same thing here in Australia. I announced that in last year's Budget. It was legislated in February of this year. This is serious action that the government was taking knowing full well of the issues that needed to be addressed in this sector. It goes to accountability, identifying the accountability and the risks that are associated with it, mapping it out, and making sure that those accountabilities are lived up to within the governance structure of these organisations.
This Government took action last year in last year's Budget to address the very issues that are at the heart of APRA's findings here as a result of this inquiry. Many other things have been done in this area as you know, additional resources for ASIC, the Australian Financial Complaints Authority, and all the other measures we've spoken of. The increased penalties now, which flowed from the FSI Review which began back in 2016 when we started that process of looking at those penalties which now include doubling the jail time from 5 to 10 years as well as other stiffer penalties. There is a lot of action that has been taken. I welcome the fact that CBA has provided the response that they only could have made today. They have entered into an enforceable undertaking with APRA. They have set out very clearly that there will be reports required by the end of June, which will include what will be happening to claw back bonuses and others enforcement sanctions that will be applied to those who are responsible. That is appropriate. It will be for APRA to oversee that process as well as the other oversight measures that have been put in place.
At the end of the day, it's up to these institutions to step up, to step up for their board members to step up. And to ensure that they never see these things happen in their organisations again. The Government is doing its job and has been for some years now, to provide them with the tools as I've just demonstrated. These institutions have to step up to this challenge. That's where they find themselves, the chairs of these institutions, the CEOs, the senior executive teams. They are the ones who have been letting these institutions down, not the front-line staff who I know would have been copping an earful, I suspect, from many customers and others walking in. Not their fault. They’re probably, I'm sure, just as shocked and disappointed as the rest of the country. So, give them a break. We need to focus where the real responsibility and accountability lies here and it is in these boards and it is with these executives. That is what I expect to happen, what the Government expects to happen and you can be assured they'll be getting my very keen focus.
QUESTION:
The front-line staff, you talk about Treasurer, if they were found to have the sort of, in your words, rap sheet that this board has, of being ineffective, lacking zeal, being reactive, slow to respond and all the rest of it, they would expect to be sacked on the spot. What should this board do?
TREASURER:
A number of the board members, as you know, have already gone. A number of executives have already gone. And my understanding is there will be others who will be leaving and that's what I would expect to be happening.
QUESTION:
Can I just go through some of the technicalities of this, you talk about claw-backs and [inaudible]. The $1 billion in extra capital that is applied…
TREASURER:
Correct.
QUESTION:
…[inaudible are they linked up [inaudible]?
TREASURER:
Sorry, I missed that over the shutters.
QUESTION:
…are those things linked in the strategy, that is, is there sort of an actual requirement that those claw backs and so forth, remuneration structures…
TREASURER:
In the BEAR? Yes.
QUESTION:
…does that have a flow-on effect to the $1 billion capital adequacy?
TREASURER:
No, the set provision which has been put in place by APRA happens under their existing powers and provisions and that is, I should stress, that is not a fine. They are required to hold additional capital in relation to these matters until these matters have been resolved to the satisfaction of APRA and that's an appropriate additional response by APRA, as you would expect them to do.
QUESTION:
So essentially if those things are ticked off, over time, the extra capital might gradually reduce in proportion to the size of the balance sheet?
TREASURER:
Yes, that's my understanding.
QUESTION:
Treasurer, now that these banks and financial institutions have been exposed effectively by the Royal Commission. Is there a need to bolster the regulators here? And will we see anything in the Budget to assist them in further investigating and exposing what is truly happening?
TREASURER:
I should stress, what we're talking about today is a result of something that began last August, well before the Royal Commission. These were matters the Government acted immediately on, through APRA, to put in a very high-powered inquiry which has now reported back. Here it is. The report is back now. And the action that is now being taken by the CBA is happening now. Executives are gone, board members are gone. More will go. The BEAR regime is there in place for that to now be used, not just in CBA, but in all of the major banks, to ensure that the accountability is very, very clear. And now, I know firsthand that in these organisations since we have introduced the BEAR which was resisted, also in the Parliament, I should stress, they wanted us to delay it, but we pressed on. The BEAR is changing the conversations that happen inside the banks, because the question is being asked, "Who is accountability for this and how will we make sure that that accountability is being lived up to." Chris?
QUESTION:
What are the Australian people to make of the organisations? Every time a rock is turned over, a new roach seems to run out from under it. These are organisations essentially have assumed government protection, we saw it during the financial crisis. Their major aim seems to be to prop up their bottom line and to fill the pockets of the executives. What are the Australian people to make of these financial pillars of Australia right now?
TREASURER:
I think they should be as disappointed as I am and I think all Australians are. When you raised the issue of – in terms of the implicit guarantee that existed there for those banks – I mean, it is true that our banking and financial system remained rock solid during the Global Financial Crisis…
QUESTION:
Propped up by the taxpayer…
TREASURER:
…and that is true, it was. There was the wholesale funding guarantee, which was specifically put into it at that time. You will also know that in last year's Budget, I put the bank levy on the major banks. They resisted that as well. And that was even sought to be delayed as well. And that bank levy, I should stress, by the time that the full corporate tax cuts have moved across the entire economy, that bank levy would have raised over $16 billion, $16 billion will be taken from the banks in that bank levy over that period of time. So the Government has never shied away from actually fronting up here. We've been taking the action quite sternly, to the great resistance on occasion, by the institutions, and often without the support of the Parliament. But we've persisted and we will keep persisting. We are taking action to ensure that this can't happen again but that requires not just the Government to act, but it requires the bank boards to step up. But not just bank boards, I really just don't want this to be a wake-up call for the banks. There are boards sitting around this country today who also need to read this closely, they need to read it very closely, and ask themselves the hard questions at the next meeting. And I expect them to do so and their shareholders should expect them to do so and their customers should expect them to do so or they should take their business somewhere else.
QUESTION:
Another day, another damning report, is it making your job of selling company tax cuts that much harder again?
TREASURER:
I’ll just make the point that I just did – when it comes to the banks themselves, the bank levy, $16 billion will be raised by the time all the company tax cuts go right across the entire economy. We've had a very specific measure to deal with those major institutions and we introduced that. The Turnbull Government introduced that. People thought that was a bit harsh last year, we shouldn't have done it, but we persisted with the measure. And that is a permanent measure, not a temporary measure, it’s a permanent levy on those major banks.
QUESTION:
Beyond those claw backs Treasurer, you are saying this is a message for all boards. Doesn't it suggest that the whole remuneration structure of senior executives and board members in Australia should really be being pressured and rethought by shareholders? They are earning very large amounts of money. According to this, the management is not in control of what it's actually doing?
TREASURER:
Laura, I think they are all excellent points. What was found in this report is that the REM structure and oversight was weak. Money for jam. I mean, even with things go wrong. And the BEAR legislation was designed to ensure that bank boards, at least, actually fix that and put in tough claw-back provisions on REM structures and required it. Not only that, the banking executives and board members for that matter, because the BEAR applies to board members as well, could be effectively deregistered from working in the banking and financial industry. That is the toughest banking legislation this country has ever seen. But frankly, it needs it, because of what is happening. And that legislation pre-empted the findings of this report, that legislation pre-empted the Royal Commission even being called. The question previously about resources for ASIC and other institutions, we have already provided an additional $124 million to ASIC. That’s already happened, that was in the Budget before last. So we’ve acted on resources, we’ve acted on powers, we’ve acted on penalties, we’ve acted on legislation to enforce accountability. And Laura, you make a very good point about the REM structures within these organisations. These boards have to look seriously at it and address it. We don't want to be in a situation where you have to go in and be prescribing things within these organisations where you've effectively got the Government running companies. I don't subscribe to that view either. But when they fall down, they have got to get up and they have got to get it right. Thanks very much.