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Commonwealth Bank hit with $1b capital charge after scathing APRA report

CBA chairman Catherine Livingstone and CEO Matt Comyn will brief shareholders and the media on Tuesday morning on the APRA report. Peter Braig CBA chairman Catherine Livingstone and CEO Matt Comyn will brief shareholders and the media on Tuesday morning on the APRA report. Peter Braig

The prudential regulator has slammed Commonwealth Bank's board, senior management and culture in a scathing 110 page report that lambasts the bank for its widespread complacency, overconfidence, excessive complexity and insularity.

It has forced CBA to carry an additional $1 billion in regulatory capital and enter into an enforceable undertaking to conduct remedial action and implement the report's 35 recommendations.

The independent investigation into CBA's governance, culture and accountability launched after last years' money-laundering scandal has found the bank had a "widespread sense of complacency" and a "reactive stance in dealing with risks". It described the nation's largest bank as "insular", saying it had not learned from experiences and mistakes and its "continued financial success dulled the senses of the institution". 

"CBA turned a tin ear to external voices and community expectations about fair treatment," the report said, adding the bank was "desensitised to failings with customers". 

The report has landed at a politically sensitive time for the banking sector, which has had its reputation shredded in recent weeks by the banking royal commission.

The report has landed at a politically sensitive time for the banking sector, which has had its reputation shredded in recent weeks by the banking royal commission.

The Australian Prudential Regulation Authority (APRA) report chastised CBA for a "slow, legalistic and reactive, at times dismissive, culture" and said "an overly collegial and collaborative working environment [had] lessened the opportunity for constructive criticism, timely decision-making and a focus on outcomes". 

APRA chairman Wayne Byres said the report should provide important insights for all financial institutions "about the need to maintain a broad focus on all aspects of risk and stakeholder interest and not allow financial success to mask or detract from other important measures of an institution's performance and risk profile". 

Mr Byres called on all regulated institutions to conduct a self-assessment "to gauge whether similar issues might exist in their institutions" and said APRA supervisors will expect institutions to demonstrate how they have considered its issues. 

Board under fire

The CBA board of directors was criticised for having insufficient rigour and urgency. The panel said there was no evidence of board level review of the systemic risks from customer complaints. It also said that prior to the appointment of chairman Catherine Livingstone last year, the board agenda was "relatively static" and face-to-face meetings between former CEO Ian Narev and the former chair David Turner were not sufficiently frequent.

The report said the board had failed to challenge management strongly enough, and its "strong confidence and trust in senior management's 'high IQ' and their ability to 'take care of all things' meant that the board also did not challenge management strongly, or hold them to account over longer time frames".

"In this way, the encouragement to challenge at CBA has been more nominal than real."

The panel - comprising former APRA chairman John Laker, former Australian Competition and Consumer Commission (ACCC) chairman Graeme Samuel and corporate director Jillian Broadbent - found unclear accountabilities, starting with a lack of ownership of key risks at the executive committee level. 

The report cites "multiple examples of complacency throughout CBA [which] could be described as a repetitive cycle of inertia" and said "one of the main drivers of the inconsistent influence of the risk function has been the amount of bureaucracy built up in CBA, resulting in risk management being perceived as a low priority 'administrative task'." 

Bank response

CBA chief executive officer Matt Comyn said in a statement to the ASX the bank has "embraced the report as a critical but fair assessment of the issues facing us and we will act on its recommendations". 

He will meet the top 500 senior managers of the bank on Tuesday afternoon to brief them on the findings. "I will make it clear this report describes the bank, it describes me, and everyone one of us," Mr Comyn said on a conference call with analysts, describing the report as "clear, fair, insightful and confronting". 

CBA chairman Catherine Livingstone said in the ASX release that addressing the findings of the report would be a key focus for the board, which will now oversee a "comprehensive response" to APRA and use the report "to assess the adequacy of steps already underway, and to address the additional improvements needed to implement all its recommendations".

CBA told the ASX the $1 billion capital penalty would increase risk weighted assets by $12.5 billion and reducing common equity tier 1 capital (CET1) ratio by 29 basis points from 10.4 per cent to 10.1 per cent. The penalty is not severe in a historical context.

In 2004, APRA forced National Australia Bank to add 100 basis points to its Tier I capital ratio after the foreign exchange fraud debacle - three times larger than the impact to CBA's capital position.

Treasurer, APRA response

Treasurer Scott Morrison said he expects more resignations from the bank the said the report should serve as a wake-up call for executives and board members of other banks and called for it to be read by every board in the nation. 

"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," he said. "It says to the heart of what responsibilities of board directors are." 

Mr Byres said the report provides CBA "with a clear path towards restoring its public standing" and said the report "goes to the heart of the issues that led to the damage to CBA's reputation". 

"More importantly, the report's recommendations provide a roadmap for the CBA Board and executive team to deliver organisational and cultural change across the CBA group," he said. 

The report said CBA has a "self-perceived, but incomplete, focus on the customer". The report acknowledged "the undoubted financial strength and acumen of the CBA, its global standing, and its avowed commitment of staff to servicing customers, but said it needs to translate its financial strength and good intent into better meeting the community's needs and the standards expected of a systemically important bank in Australia". 

Various concerns on the report include:

• inadequate oversight and challenge by the Board and its committees of emerging non-financial risks;
• unclear accountabilities, starting with a lack of ownership of key risks at the executive committee level; 
• weaknesses in how issues, incidents and risks were identified and escalated through the institution and a lack of urgency in their subsequent management and resolution;
• overly complex and bureaucratic decision-making processes that favoured collaboration over timely and effective outcomes and slowed the detection of risk failings;
• an operational risk management framework that worked better on paper than in practice, supported by an immature and under-resourced compliance function;
• and a remuneration framework that, at least until the AUSTRAC action, had little sting for senior managers and above when poor risk or customer outcomes materialised and, until recently, provided incentives to staff that did not necessarily produce good customer outcomes.

'I'm sorry'

Mr Comyn, who ran the retail bank before being elevated to the top job in April, took responsibility for the range of shortcomings. "I apologise to the bank's customers and staff, our regulators, our shareholders and the Australian community for letting them down," he said. 

"We will make the necessary changes to become a better bank and we will be transparent about our progress. This includes establishing a much higher level of accountability and consequence for our actions and the impact we have on customers. This starts with me."  

CBA will appoint an independent reviewer to be approved by APRA to report to the regulator every three months from September on the bank's compliance with the EU. 

The panel was formed by APRA in the wake of allegations by AUSTRAC that it had breached money laundering reporting obligations by failing to prevent potential money laundering and terrorism financing.

APRA wanted the report to provide the community with confidence that shortcomings at CBA had been identified are were being adequately addressed, realising it is critical to the long-run health of the financial system that the Australian community has a high degree of confidence that banks and other financial institutions are well governed and prudently managed. 

Since the inquiry began its work,  a report prepared by the risk management leadership team in July 2016 for the board released by the banking royal commission revealed CBA was struggling to control and organise its data with a high proportion of the its processes to manage cyber and technology rated "marginal or unsatisfactory".

The final report, delivered to APRA on Monday, comes after an interim report in February said the panel had been had been trying to understand "the public 'fall from grace' of an otherwise iconic and financially very successful Australian financial institution".

The interim report was released three days after Mr Comyn was appointed chief executive to succeed Ian Narev from April 9. 

The government is already attempting to tackle the issue of excessive complexity in the management reporting lines of major banks, with its Banking Executive Accountability Regime introducing requirements for all large banks to draw up maps that pin down individual responsibility for every process in a bank. 

The report was completed after the panel conducted interviews with current and former CBA staff, including former CEO Narev and the group executives. It conducted a survey of 10,000 CBA staff to get a view on culture and risk management from the bank's grass roots, and reviewed more than 10,000 documents, including board and executive committee papers. 

Mr Laker was chairman of APRA between July 2003 and June 2014, and is working as an adviser to the International Monetary Fund and Australian Securities and Investments Commission. Ms Broadbent is a career banker who left her senior executive position at Bankers Trust to become a non-executive director; she sits on the boards of Woolworths and Swiss Re. Mr Samuel was chairman of the Australian Competition and Consumer Commission between 2003 and 2011 and is chairman of Data Governance Australia.

CBA paid the inquiry's costs.

The bank will provide a public update on its agreed remediation plan in early July and said it will disclose the costs in its annual results on August 8. 

This article was first published by http://www.afr.com/
Author:  James Eyers - Jonathan Shapiro
Last modified onTuesday, 01 May 2018 23:04

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