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Bank chief tells royal commission why he doesn't like the word 'bonus' – live CBA chief agrees executive's scathing note an 'indictment' on bank – live
(35 minutes later)
We’re back. And we’re back into evidence about CBA’s approach to mortgage brokering. The royal commission hears CBA considered shifting to a model where customers pay a fat flee for mortgage advice, following a positive experience in the Netherlands.
It would be a significant change from the commission model used by CBA. It would also disrupt brokers significantly, but Comyn believes it worked well in the Netherlands.
Comyn said:
So in the context of our situation, it would prevent – let’s say the fee being set that a customer would pay a broker – let’s call it $2,000 but a financial institution such as ourself couldn’t charge $2,000 because we were prepared to subsidise, because of our size, that would create an unfair advantage. So it required some regulation to ensure there was no beneficial or undue advantage gained.
Comyn said he believed it would improve customer outcomes. It would also reduce the broker’s share of the home loan market.
The royal commission has broken for lunch.The royal commission has broken for lunch.
There were no huge revelations from this morning’s evidence. As anticipated, the commission was not attempting to reveal new instances of misconduct or extract a grovelling apology from the CBA’s chief executive, Matt Comyn. Instead, it was aimed at trying to understand the causes of banking misconduct. This is what we heard:There were no huge revelations from this morning’s evidence. As anticipated, the commission was not attempting to reveal new instances of misconduct or extract a grovelling apology from the CBA’s chief executive, Matt Comyn. Instead, it was aimed at trying to understand the causes of banking misconduct. This is what we heard:
Comyn believes the bank’s most concerning failing was that it did not properly understand the different relationships between various parts of its business and customers. That meant it did not properly understand its duty to customers.Comyn believes the bank’s most concerning failing was that it did not properly understand the different relationships between various parts of its business and customers. That meant it did not properly understand its duty to customers.
Comyn believes CBA’s culture will be one of the hardest aspects of the business to change, because it is difficult to measure.Comyn believes CBA’s culture will be one of the hardest aspects of the business to change, because it is difficult to measure.
CBA’s head of compliance, Larissa Shafir, wrote a scathing note to Comyn following an inquiry by APRA, the regulator, into the bank’s conduct. Shafir said the report was accurate and vindicated the concerns previously expressed by her team. She said changes were needed to ensure that compliance was not seen merely as a “rubber stamp” exercise. Comyn agreed to the royal commission the note was an “indictment” on CBA. CBA’s head of compliance in its retail division, Larissa Shafir, wrote a scathing note to Comyn following an inquiry by Apra, the regulator, into the bank’s conduct. Shafir said the report was accurate and vindicated the concerns previously expressed by her team. She said changes were needed to ensure that compliance was not seen merely as a “rubber stamp” exercise. Comyn agreed to the royal commission the note was an “indictment” on CBA.
The royal commission spent much of the morning addressing the role bonuses played in misconduct. Comyn said he had the power to address staff bonuses himself. He said he had considered removing bonuses, but decided against it. He said such a move would have significant impacts on parts of the business, particularly in home lending. Comyn says bonuses are important to motivate and incentivise staff to perform well, though he conceded his thinking had shifted somewhat since seeing more examples of bad customer outcomes.The royal commission spent much of the morning addressing the role bonuses played in misconduct. Comyn said he had the power to address staff bonuses himself. He said he had considered removing bonuses, but decided against it. He said such a move would have significant impacts on parts of the business, particularly in home lending. Comyn says bonuses are important to motivate and incentivise staff to perform well, though he conceded his thinking had shifted somewhat since seeing more examples of bad customer outcomes.
CBA removed bonuses for its teller staff last year, and it had no impact on their performance.CBA removed bonuses for its teller staff last year, and it had no impact on their performance.
The former CBA chief executive Ian Narev had hinted to Comyn that the bank may not need bonuses anymore. Comyn said they were necessary to “uncover the unserved financial needs of our customers and ensure we always provide good customer outcomes”.The former CBA chief executive Ian Narev had hinted to Comyn that the bank may not need bonuses anymore. Comyn said they were necessary to “uncover the unserved financial needs of our customers and ensure we always provide good customer outcomes”.
The hearing will resume at 2pm.The hearing will resume at 2pm.
We’ve moved into an examination of mortgage brokers. It’s a significant part of CBA’s business. The bank also owns mortgage aggregators.We’ve moved into an examination of mortgage brokers. It’s a significant part of CBA’s business. The bank also owns mortgage aggregators.
We hear CBA conducted a five-year study on the effect of commissions on the flow of home loans through brokers. The higher the commission, the more home loans flowed, the commission hears.We hear CBA conducted a five-year study on the effect of commissions on the flow of home loans through brokers. The higher the commission, the more home loans flowed, the commission hears.
A bit more on that email chain. Narev, the former CBA chief executive, told Comyn in 2016 that the bank needed to develop its core philosophy on remuneration. They needed to work out what they “actually believe” is the link between bonuses and behaviour, Narev said.A bit more on that email chain. Narev, the former CBA chief executive, told Comyn in 2016 that the bank needed to develop its core philosophy on remuneration. They needed to work out what they “actually believe” is the link between bonuses and behaviour, Narev said.
Narev was hinting at the idea that bonuses may not be needed at all.Narev was hinting at the idea that bonuses may not be needed at all.
In his response to Narev, Comyn offered a few quick thoughts. He said staff needed to be proactive in selling CBA products to customers.In his response to Narev, Comyn offered a few quick thoughts. He said staff needed to be proactive in selling CBA products to customers.
We want our staff to be motivated to uncover the unserved financial needs of our customers and ensure we always provide good customer outcomes.We want our staff to be motivated to uncover the unserved financial needs of our customers and ensure we always provide good customer outcomes.
He continued:He continued:
Customers lack the financial literacy to understand their needs and the products that best served their needs.Customers lack the financial literacy to understand their needs and the products that best served their needs.
Asked about the letter, Comyn says he has certainly seen more examples of bad outcomes for customers and hints that he may be shifting in his thinking on bonuses.Asked about the letter, Comyn says he has certainly seen more examples of bad outcomes for customers and hints that he may be shifting in his thinking on bonuses.
We’re now talking about an email chain between Comyn and Ian Narev, his predecessor, in 2016. Comyn was informing him of changes to remuneration in the Netherlands, where a cap was introduced on variable pay for bank staff, and in the United Kingdom, where the regulator had warned and punished banks for incentivising staff on product sales performance.We’re now talking about an email chain between Comyn and Ian Narev, his predecessor, in 2016. Comyn was informing him of changes to remuneration in the Netherlands, where a cap was introduced on variable pay for bank staff, and in the United Kingdom, where the regulator had warned and punished banks for incentivising staff on product sales performance.
Evidence suggested the changes resulted in better customer outcomes in both countries, the inquiry heard.Evidence suggested the changes resulted in better customer outcomes in both countries, the inquiry heard.
Comyn explained to Narev that Australia was different, because the banks here were not responsible for the global financial crisis, and so hadn’t been subject to the same sort of regulatory scrutiny. He also said there was “no evidence of widespread mis-selling in Australia” and that Australian banks were more customer-focused.Comyn explained to Narev that Australia was different, because the banks here were not responsible for the global financial crisis, and so hadn’t been subject to the same sort of regulatory scrutiny. He also said there was “no evidence of widespread mis-selling in Australia” and that Australian banks were more customer-focused.
But he also told Narev CBA’s incentive schemes needed to avoid four risks. The first was “bad customer outcomes”, which included customers receiving loans “they don’t need”. CBA also needed to avoid “broken promises, perceived inaction, and customer needs going unmet”.But he also told Narev CBA’s incentive schemes needed to avoid four risks. The first was “bad customer outcomes”, which included customers receiving loans “they don’t need”. CBA also needed to avoid “broken promises, perceived inaction, and customer needs going unmet”.
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?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.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: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.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.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.Comyn says remuneration is always under consideration. He says he understands the link between short-term variable remuneration and poor customer outcomes.
Orr:Orr:
But you decided not to respond to those links by removing variable remuneration?But you decided not to respond to those links by removing variable remuneration?
Comyn: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.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.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 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 in the bank’s retail division, 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.