Insights / December 7th, 2018

Banking Royal Commission: seventh round of public hearings

Focus of Final Round

In the final round of hearings the Commission heard evidence from the Chief Executive Officers (“CEO”) from each of the major banks, and the chairs of both the Australian Prudential Regulation Authority (“APRA”) and the Australian Securities and Investments Commission (“ASIC”).

In opening submissions, counsel assisting Commissioner Kenneth Hayne QC, Ms Rowena Orr QC, said that the Commission would explore issues relating to industry practices, including:

  • risk management

  • recruitment and remuneration

  • culture and governance

  • legal, cultural and structural reforms to deter future misconduct

Cross-examination by Ms Orr QC and Mr Michael Hodge QC emphasised the Commission’s interest in understanding the structure of incentives utilised by financial services entities, how they encourage or discourage poor conduct, and whether there are alternative incentive systems which can deter future misconduct.

Summary of Witness Evidence

CBA CEO Mr Matt Comyn stated that it was important to have some variable remuneration in order to elicit “discretionary effort” and motivate staff. He did note, however, that these benefits are only attainable if the remuneration structure is well-designed and that there are other ways to motivate staff behaviour.

It was acknowledged by CBA that the tone set by the board will have significant influence on the organisation’s culture, acknowledging that the style of the CBA board under its previous chair exhibited a “lack of challenge” and follow up of CBA management.

Westpac CEO Mr Brian Hartzer denied the suggestion that Westpac had a culture resistant to change, and said that impact on profitability was not the “main driver” of Westpac’s opposition to certain reform suggestions.

Mr Hartzer conceded that there should have been clearer ownership and accountability by management to ensure compliance. However, he maintained Westpac’s opposition to numerous reform suggestions from the Royal Commission’s interim report, including the prohibition of financial adviser remuneration based on sales volume, and strengthening the legal effect of industry codes of practice.

NAB CEO Mr Andrew Thorburn admitted that NAB’s business was not sustainable due to its short-term focus and a sales-driven culture. When asked how long it will take for NAB to undergo the necessary cultural change, NAB Chair Dr Ken Henry predicted it may take as long as 10 years. However, Mr Thorburn pointed out that it had taken steps to implement recommendations from the Sedgwick review (an independent review into retail banking products in 2017), including the adoption of a fixed remuneration model for frontline staff.

Acting AMP CEO Mr Mike Wilkins blamed the fees for no service controversy on a lack of education of financial advisers. He stated that it was the cultural norm of the industry to engage in transaction-by-transaction type arrangements, such as trail commissions. Mr Wilkins believed that the future of financial advice reforms represent a difficult mental shift for advisers, who no longer acted as a distribution network for product manufacturers, but as professionals with a duty to act in the best interests of their clients.

In cross-examination, ANZ CEO Mr Shayne Elliott revealed that the bank maintained a remuneration system where high-performing senior executives could be entitled to variable remuneration equivalent to 300% of their fixed remuneration.

Cross-examination of Macquarie CEO Mr Nicholas Moore revealed the bank’s remuneration structure was substantially different from the other institutions. Managing executives had relatively low fixed salaries with variable remuneration set each year as a percentage of profit share. The structure is informed by principles which could be applied to future reform in the sector, namely an emphasis of profit sharing over individual bonuses, and the use of non-financial metrics.


The cross-examination of ASIC Chair Mr James Shipton focused on the regulator’s close relationship with financial institutions, and whether this may have impacted on its ability to undertake enforcement action. This was denied by Mr Shipton, who emphasised it is important to have a professional relationship with Australia’s financial institutions. It was acknowledged that communication between ASIC and the banks was sometimes informal: minutes of meetings and notes were not taken. Mr Shipton responded that a lack of formalities was to ensure conversations were “free-flowing”.

Mr Shipton stated that the regulator was under-resourced when compared to its counterparts in other jurisdictions, which meant that ASIC was constrained in how it deployed resources for surveillance and supervision of financial institutions. Mr Shipton acknowledged that more needs to be done in relation to enforcement, but that present resources restrain this capability.


APRA Chair Mr Wayne Byres acknowledged the regulator’s readiness to be tougher on banks in addressing misconduct. In particular, APRA is willing to undertake a systematic review of the cultural drivers of misconduct inherent in many financial institutions, but like ASIC, asserts that it lacks resources to do so. APRA recognised that the Banking Executive Accountability Regime (“BEAR”) which comes into effect from 1 July 2019, will help drive some of this change. Indeed, there may be benefits in adopting a similar accountability regime in other sectors of the financial industry, including insurance and superannuation.

Next Steps

Ms Orr QC anticipates that matters raised during this final round of the Commission will form part of Commissioner Kenneth Hayne’s recommendations in the final report, which is due for submission 1 February 2019.