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Bank chief tells royal commission why he doesn't like the word 'bonus' – live Bank chief tells royal commission why he doesn't like the word 'bonus' – live
(35 minutes later)
We’re now examining a decision by CBA in 2017 to remove financial incentives for its tellers. Comyn agrees that he had hoped the decision would improve customer outcomes. Has it affected the performance of tellers?
I have not observed a deterioration in their performance to date.
Comyn explains that removing bonuses would cause significant problems, particularly in the home lending space. He said a similar approach caused dramatic changes in the UK. He said this had caused more mortgages to originate with brokers:
If you look into the UK you will see all of the major banks there are shutting branches because, in effect, what is happening is more and more of their customers are dealing with intermediaries, which is putting more financial pressure on their branch network, they close their branches, it helps the intermediaries more and you get into a precipitative cycle down.
Matt Comyn concedes he has the ultimate power to make a decision about bonuses, or as he calls them, “short-term variable remuneration”. He said he had considered it, but so far decided against it.
Comyn says remuneration is always under consideration. He says he understands the link between short-term variable remuneration and poor customer outcomes.
Orr:
But you decided not to respond to those links by removing variable remuneration?
Comyn:
We’ve made a number of changes to variable remuneration ... I would certainly be committed to, if they are not completely successful, then it may – and it probably will be – necessary to take further steps.
Orr has taken Comyn to examples where bonuses have motivated CBA staff to do the wrong thing. One was the Dollarmites scandal, which involved branch staff depositing small amounts of money – either the bank’s or their own – to create or top up children’s accounts to meet their own personal targets.
Comyn agrees bonuses can lead to “perverse outcomes”.
Comyn accepts that bonuses create the risk that banking staff will put their own interest ahead of the customers. He says:Comyn accepts that bonuses create the risk that banking staff will put their own interest ahead of the customers. He says:
There have been examples of that, yes.There have been examples of that, yes.
Orr asks:Orr asks:
Do you accept that is an inherent risk of short term variable remuneration? Do you accept that is an inherent risk of short-term variable remuneration?
Comyn:Comyn:
I do.I do.
Orr helpfully lists other ways CBA could motivate its staff, sans bonuses. These, Orr says, include positive feedback, encouraging them to take pride in their work and be satisfied with helping customers, giving them additional responsibilities, promotion, and a higher base pay.Orr helpfully lists other ways CBA could motivate its staff, sans bonuses. These, Orr says, include positive feedback, encouraging them to take pride in their work and be satisfied with helping customers, giving them additional responsibilities, promotion, and a higher base pay.
Orr:Orr:
But do you maintain that it is necessary to have another form of motivator which is short-term variable remuneration?But do you maintain that it is necessary to have another form of motivator which is short-term variable remuneration?
Comyn:Comyn:
I would suggest that all of the elements that you raised are appropriate, and things that we, of course, do.I would suggest that all of the elements that you raised are appropriate, and things that we, of course, do.
But, as always, Orr has laid a trap of sorts.But, as always, Orr has laid a trap of sorts.
She produces an email from Comyn to the head of the bank’s remuneration committee, David Higgins. The email says the most “fundamental” care of CBA staff is job security and career and personal development. The email read:She produces an email from Comyn to the head of the bank’s remuneration committee, David Higgins. The email says the most “fundamental” care of CBA staff is job security and career and personal development. The email read:
At its most fundamental, our people care about job security, personal growth, a positive environment, and career advancement. CBA has a strong service culture and our people are intrinsically motivated by feeling that they are helping customers and playing their part in a winning team.At its most fundamental, our people care about job security, personal growth, a positive environment, and career advancement. CBA has a strong service culture and our people are intrinsically motivated by feeling that they are helping customers and playing their part in a winning team.
Comyn agrees these are motivators, but says bonuses are too.Comyn agrees these are motivators, but says bonuses are too.
We’re now getting into another cause of so much of banking misconduct: bonuses. We’ve seen example after example in the royal commission of banking staff putting their own financial gain ahead of the interests of the customer.We’re now getting into another cause of so much of banking misconduct: bonuses. We’ve seen example after example in the royal commission of banking staff putting their own financial gain ahead of the interests of the customer.
Comyn doesn’t like the word “bonus”. He describes it as “short-term variable remuneration”. Orr asks why:Comyn doesn’t like the word “bonus”. He describes it as “short-term variable remuneration”. Orr asks why:
Because I think it sends the wrong message, that it’s something in addition to or part of just coming to work. We tend to think about both the combination of fixed remuneration and short-term variable reward as total remuneration, and there are some principles about why we think short-term variable remuneration is appropriate.Because I think it sends the wrong message, that it’s something in addition to or part of just coming to work. We tend to think about both the combination of fixed remuneration and short-term variable reward as total remuneration, and there are some principles about why we think short-term variable remuneration is appropriate.
He goes on to say he believes “short-term variable remuneration” is important to motivate and incentivise his staff to boost performance. Orr asks why he can’t just pay them more:He goes on to say he believes “short-term variable remuneration” is important to motivate and incentivise his staff to boost performance. Orr asks why he can’t just pay them more:
Orr:Orr:
Why does not paying an adequate and appropriate level of fixed remuneration adequately motivate and incentivise your staff?Why does not paying an adequate and appropriate level of fixed remuneration adequately motivate and incentivise your staff?
Comyn:Comyn:
Well, I accept that for the vast majority of people it may be hard to understand why a fixed component wouldn’t – would not be sufficient.Well, I accept that for the vast majority of people it may be hard to understand why a fixed component wouldn’t – would not be sufficient.
He gives an example of a lender who does 30% less work without bonuses.He gives an example of a lender who does 30% less work without bonuses.
I do accept that it’s an open discussion and I do not sit here today saying there are no further opportunities to improve remuneration. It’s still an open issue in my mind.I do accept that it’s an open discussion and I do not sit here today saying there are no further opportunities to improve remuneration. It’s still an open issue in my mind.
Comyn says one of the problems within his organisation has been a reluctance to hear criticism. He says there has been a “fragility” among the bank’s executives.Comyn says one of the problems within his organisation has been a reluctance to hear criticism. He says there has been a “fragility” among the bank’s executives.
I think at one point maybe in my witness statement I make the point that there was too much focus on not just collaboration but also – actually it’s in the prudential inquiry interview – too much of a sense of relationship at all costs. And so we need to bring much more sharpness and a willingness to listen, and in the past I think there’s been too much fragility of – on the part of individuals to – to hear criticism.I think at one point maybe in my witness statement I make the point that there was too much focus on not just collaboration but also – actually it’s in the prudential inquiry interview – too much of a sense of relationship at all costs. And so we need to bring much more sharpness and a willingness to listen, and in the past I think there’s been too much fragility of – on the part of individuals to – to hear criticism.
We hear another “troubling” response to the Apra report by a senior CBA executive, the general manager for compliance, Larissa Shafir. She warned that changes were needed to ensure that CBA’s “decisions are made on the basis of an understanding of compliance risk, and that compliance is not viewed as a blocker or a rubber stamp function”. Orr summarises Shafir’s note to Comyn:We hear another “troubling” response to the Apra report by a senior CBA executive, the general manager for compliance, Larissa Shafir. She warned that changes were needed to ensure that CBA’s “decisions are made on the basis of an understanding of compliance risk, and that compliance is not viewed as a blocker or a rubber stamp function”. Orr summarises Shafir’s note to Comyn:
Ms Shafir referred to the lack of authority of the compliance function which she said was rooted in senior management’s lack of appreciation of the regulatory environment, and the legitimate expectations of good conduct the community place on an organisation of CBA’s size, scale and history.Ms Shafir referred to the lack of authority of the compliance function which she said was rooted in senior management’s lack of appreciation of the regulatory environment, and the legitimate expectations of good conduct the community place on an organisation of CBA’s size, scale and history.
Orr asks Comyn whether this is an “indictment” on CBA. Orr:Orr asks Comyn whether this is an “indictment” on CBA. Orr:
Mr Comyn, Ms Shafir’s comments are an indictment of the culture within CBA in relation to treatment of compliance risk, and operational risk, more generally. Do you agree?”Mr Comyn, Ms Shafir’s comments are an indictment of the culture within CBA in relation to treatment of compliance risk, and operational risk, more generally. Do you agree?”
Comyn:Comyn:
Yes, I do.Yes, I do.
Orr asks Comyn about a review by Apra, the banking regulator, into banking misconduct. Comyn says he sent it to his 500 top executives and asked them to discuss it with their teams and report back to him.Orr asks Comyn about a review by Apra, the banking regulator, into banking misconduct. Comyn says he sent it to his 500 top executives and asked them to discuss it with their teams and report back to him.
One note, from Marianne Perkovic, executive general manager for Commonwealth Private, is read out by Orr.One note, from Marianne Perkovic, executive general manager for Commonwealth Private, is read out by Orr.
It’s a revealing letter. She told Comyn:It’s a revealing letter. She told Comyn:
I moved to Commonwealth Private as an opportunity to lead growth but much of that has been shadowed by transformation. My drive and motivation to lead these challenging opportunities where I put my brand and reputation in the firing line for CBA has always been a personal commitment to putting things right for our clients. I am proud that this is how I operate but I also feel disappointed as I know I have let some of our clients, people and the community down by not speaking up loud enough to stand up to behaviours that I knew were not right.I moved to Commonwealth Private as an opportunity to lead growth but much of that has been shadowed by transformation. My drive and motivation to lead these challenging opportunities where I put my brand and reputation in the firing line for CBA has always been a personal commitment to putting things right for our clients. I am proud that this is how I operate but I also feel disappointed as I know I have let some of our clients, people and the community down by not speaking up loud enough to stand up to behaviours that I knew were not right.
Comyn says this was not a common theme in the responses given to him.Comyn says this was not a common theme in the responses given to him.
Perkovic also told Comyn the bank was far too reactive. It only acted on misconduct issues where they were reported in the media, went to the regulators, or were raised by the CBA board.Perkovic also told Comyn the bank was far too reactive. It only acted on misconduct issues where they were reported in the media, went to the regulators, or were raised by the CBA board.
We have relied too much on legal, finance and consultant’s views on how to run our business at the expense of customer and community expectations. We are too reactive and only increase our sense of urgency to fix things if issues become mandatory compliance.We have relied too much on legal, finance and consultant’s views on how to run our business at the expense of customer and community expectations. We are too reactive and only increase our sense of urgency to fix things if issues become mandatory compliance.
Orr asks Comyn another open question. What’s going to be the hardest thing for CBA to address? He says CBA’s culture is difficult to measure, and therefore difficult to change. He also says the bank will find it difficult to better manage “non-financial risk”.Orr asks Comyn another open question. What’s going to be the hardest thing for CBA to address? He says CBA’s culture is difficult to measure, and therefore difficult to change. He also says the bank will find it difficult to better manage “non-financial risk”.
The larger change around the culture of the organisation, that is in some ways harder to measure, and obviously the management of non-financial risk has been a clear failing ... but I think that is something that is more readily observable.The larger change around the culture of the organisation, that is in some ways harder to measure, and obviously the management of non-financial risk has been a clear failing ... but I think that is something that is more readily observable.
Rowena Orr asks Matt Comyn what he personally sees as the most concerning failing of the CBA, common across all of its misconduct.Rowena Orr asks Matt Comyn what he personally sees as the most concerning failing of the CBA, common across all of its misconduct.
I think is because in too many instances we did not understand the relationships, the various relationships which do differ [across CBA’s products] ... and therefore a clear understanding of the duties and obligations associated with that.I think is because in too many instances we did not understand the relationships, the various relationships which do differ [across CBA’s products] ... and therefore a clear understanding of the duties and obligations associated with that.
Orr asks for clarity about what he means. He explains he means the relationships the banks had for different customers across the wide range of its businesses. He said understanding those relationships was key to knowing the bank’s obligations to each customers. It would have prevented the bank from charging customers for fees without service, for example.Orr asks for clarity about what he means. He explains he means the relationships the banks had for different customers across the wide range of its businesses. He said understanding those relationships was key to knowing the bank’s obligations to each customers. It would have prevented the bank from charging customers for fees without service, for example.
Orr asks how the bank could not have understood its obligations to customers. Comyn says:Orr asks how the bank could not have understood its obligations to customers. Comyn says:
I think we should have, Ms OrrI think we should have, Ms Orr
Orr responds:Orr responds:
Why didn’t you? What do you put that down to, Mr Comyn?Why didn’t you? What do you put that down to, Mr Comyn?
Comyn:Comyn:
Well, a culture of us not learning from issues of misconduct in the past.Well, a culture of us not learning from issues of misconduct in the past.
Matt Comyn is now giving evidence. Rowena Orr is asking him about a submission made by CBA about the causes of misconduct.Matt Comyn is now giving evidence. Rowena Orr is asking him about a submission made by CBA about the causes of misconduct.
Orr:Orr:
You identified two categories of root causes, do you recall that?You identified two categories of root causes, do you recall that?
Comyn:Comyn:
Yes . I do.Yes . I do.
Orr:Orr:
The first relates to what you describe as customer and culture.The first relates to what you describe as customer and culture.
Comyn:Comyn:
Yes.Yes.
The “customer and culture” cause describes a failure by CBA to prioritise customer interests, or consider properly the duty they owed to customers. It has led – “consciously or unconsciously” – to decisions that put the bank’s financial gain over the customer interest.The “customer and culture” cause describes a failure by CBA to prioritise customer interests, or consider properly the duty they owed to customers. It has led – “consciously or unconsciously” – to decisions that put the bank’s financial gain over the customer interest.
The bank has also failed to properly consider non-financial risks in its practices, Comyn said. It also failed to properly consider external voices.The bank has also failed to properly consider non-financial risks in its practices, Comyn said. It also failed to properly consider external voices.
The second root cause is failings of “accountability, governance, and capability”.The second root cause is failings of “accountability, governance, and capability”.
The bank had inadequate capability in critical areas, particularly “operational risk and compliance”. Orr asks “how did that happen”, in a business as big as CBA? Comyn says:The bank had inadequate capability in critical areas, particularly “operational risk and compliance”. Orr asks “how did that happen”, in a business as big as CBA? Comyn says:
I don’t have an adequate explanation for that.I don’t have an adequate explanation for that.
While we wait, let’s quickly recap what we’ve previously heard from Matt Comyn. He’s only been in the top job since April, but has worked at CBA since 1999.While we wait, let’s quickly recap what we’ve previously heard from Matt Comyn. He’s only been in the top job since April, but has worked at CBA since 1999.
We heard from him at an inquiry by the House of Representatives standing committee on economics last month. He offered an apology and described CBA’s conduct as “unacceptable”. He told that inquiry:We heard from him at an inquiry by the House of Representatives standing committee on economics last month. He offered an apology and described CBA’s conduct as “unacceptable”. He told that inquiry:
Our customers and the community rightly expect that we always do the right thing, but we have seen far too many instances of unacceptable customer outcomes. As the royal commission has shown, there have unfortunately been failures of judgment, failures of process, failures of leadership and, in some instances, greed.Our customers and the community rightly expect that we always do the right thing, but we have seen far too many instances of unacceptable customer outcomes. As the royal commission has shown, there have unfortunately been failures of judgment, failures of process, failures of leadership and, in some instances, greed.
We have been too slow to identify problems, too slow to fix underlying issues and too slow to put things right for customers. We became complacent. Our capability has been inadequate in critical areas, particularly operational risk and compliance. We have underinvested in prevention, even though we have invested significantly in customer remediation.We have been too slow to identify problems, too slow to fix underlying issues and too slow to put things right for customers. We became complacent. Our capability has been inadequate in critical areas, particularly operational risk and compliance. We have underinvested in prevention, even though we have invested significantly in customer remediation.
This is completely unacceptable.This is completely unacceptable.
Rowena Orr talks a little about the decision to call the chief executives of the big four banks. She says they were chosen because they play a “pivotal” role in the operation of the banking sector in Australia.Rowena Orr talks a little about the decision to call the chief executives of the big four banks. She says they were chosen because they play a “pivotal” role in the operation of the banking sector in Australia.
It is not possible to call executives from every entity that has been the subject of a case study ... as a result the commission will call a selection of executives from a selection of entities.It is not possible to call executives from every entity that has been the subject of a case study ... as a result the commission will call a selection of executives from a selection of entities.
The big four were chosen because of their size and influence, she says.The big four were chosen because of their size and influence, she says.
These four institutions hold approximately three-quarters of the total assets held by authorised deposit taking institutions in Australia.These four institutions hold approximately three-quarters of the total assets held by authorised deposit taking institutions in Australia.
One way or another, the operation of these institutions affect the lives of most Australians.One way or another, the operation of these institutions affect the lives of most Australians.
Orr also acknowledges the critical role board members play in setting the strategic direction of the banks. To that end, we will hear from the chairs of CBA, NAB and Bendigo and Adelaide Bank. The commission will also hear from the chairs of Asic and Apra, the two regulators.Orr also acknowledges the critical role board members play in setting the strategic direction of the banks. To that end, we will hear from the chairs of CBA, NAB and Bendigo and Adelaide Bank. The commission will also hear from the chairs of Asic and Apra, the two regulators.
The purpose of calling these witnesses is not to go over old ground or seek more apologies or expressions of regret.The purpose of calling these witnesses is not to go over old ground or seek more apologies or expressions of regret.
That concludes Orr’s opening address. We will hear from CBA’s chief executive, Matt Comyn, shortly.That concludes Orr’s opening address. We will hear from CBA’s chief executive, Matt Comyn, shortly.
Rowena Orr makes one thing perfectly clear from the outset. We’re not here to hear more apologies from the banks. Some have already said sorry or given “expressions of regret”, she says. But this will do little to help the royal commission. Orr tells the commissioner, Kenneth Hayne:Rowena Orr makes one thing perfectly clear from the outset. We’re not here to hear more apologies from the banks. Some have already said sorry or given “expressions of regret”, she says. But this will do little to help the royal commission. Orr tells the commissioner, Kenneth Hayne:
The purpose of this round of hearings is not to hear further apologies or expressions of regret. We do not think that will assist you in fulfilling your task.The purpose of this round of hearings is not to hear further apologies or expressions of regret. We do not think that will assist you in fulfilling your task.
Instead, the final round of hearings will do two things:Instead, the final round of hearings will do two things:
1. Examine why misconduct in the banking sector occurred to such a significant degree. Orr says:1. Examine why misconduct in the banking sector occurred to such a significant degree. Orr says:
What caused the conduct that has been examined? Why did these things happen? Was it because of particular practices of financial service entities?What caused the conduct that has been examined? Why did these things happen? Was it because of particular practices of financial service entities?
Was it because of the culture of financial service entities or their governance practices?Was it because of the culture of financial service entities or their governance practices?
2. Find ways to stop it happening in the future. Orr outlines some questions that will be examined. Do we need new accountability structures for the banks, law changes or changes to the practices of regulators? Do we need new mechanisms of oversight for financial service regulators? Are there barriers to the banks improving themselves? If so, how do we remove them?2. Find ways to stop it happening in the future. Orr outlines some questions that will be examined. Do we need new accountability structures for the banks, law changes or changes to the practices of regulators? Do we need new mechanisms of oversight for financial service regulators? Are there barriers to the banks improving themselves? If so, how do we remove them?
And we’re off.And we’re off.
The senior counsel assisting, Rowena Orr, QC, is outlining the purpose of the current round of hearings to the commissioner, Kenneth Hayne.The senior counsel assisting, Rowena Orr, QC, is outlining the purpose of the current round of hearings to the commissioner, Kenneth Hayne.
“Our focus is on understand why misconduct has occurred and what can be done to prevent further misconduct.”“Our focus is on understand why misconduct has occurred and what can be done to prevent further misconduct.”
So, what can we expect from this round of hearings? The royal commission is hoping to delve into the root causes of misconduct. What caused the big banks and wealth management firms to, for example, charge fees for no service? Why did they fail to act when it came to their attention?So, what can we expect from this round of hearings? The royal commission is hoping to delve into the root causes of misconduct. What caused the big banks and wealth management firms to, for example, charge fees for no service? Why did they fail to act when it came to their attention?
To do this, the royal commission will examine “culture, governance, remuneration, and risk management practices” in Australia’s banking system. It will also probe the senior banking executives on possible responses to misconduct, including reforms to banking regulation.To do this, the royal commission will examine “culture, governance, remuneration, and risk management practices” in Australia’s banking system. It will also probe the senior banking executives on possible responses to misconduct, including reforms to banking regulation.
The royal commission also plans to examine the role of the regulators, both the Australian Securities and Investment Commission and Australian Prudential Regulatory Authority in “supervising the actions of financial services entities, deterring misconduct by those entities, and taking action when misconduct may have occurred”.The royal commission also plans to examine the role of the regulators, both the Australian Securities and Investment Commission and Australian Prudential Regulatory Authority in “supervising the actions of financial services entities, deterring misconduct by those entities, and taking action when misconduct may have occurred”.
Hello, and welcome to our live coverage of the banking royal commission’s last round of hearings.Hello, and welcome to our live coverage of the banking royal commission’s last round of hearings.
It’s set to be a blockbuster final fortnight. We’ll see the top brass from each of the big four banks front up to explain just how they allowed serious misconduct to flourish without consequence.It’s set to be a blockbuster final fortnight. We’ll see the top brass from each of the big four banks front up to explain just how they allowed serious misconduct to flourish without consequence.
First up, we’ll hear from the Commonwealth Bank’s chief executive, Matt Comyn, and the chairman, Catherine Livingstone. It’s set to be an uncomfortable hearing for the CBA leaders. They’ll be expected to explain what they’ve done to change culture and internal systems to ensure the kinds of flagrant abuses we’ve seen from the big banks are not repeated.First up, we’ll hear from the Commonwealth Bank’s chief executive, Matt Comyn, and the chairman, Catherine Livingstone. It’s set to be an uncomfortable hearing for the CBA leaders. They’ll be expected to explain what they’ve done to change culture and internal systems to ensure the kinds of flagrant abuses we’ve seen from the big banks are not repeated.
Stick with me as we watch the morning unfold.Stick with me as we watch the morning unfold.