A decade ago when I joined Westpac’s board, around 90 per cent of risk meetings were spent probing credit and market risks. With the global financial crisis unfolding and banks globally experiencing severe stress, the bulk of our attention was naturally focused on funding, liquidity and the state of the balance sheet.
A decade on, times have changed dramatically.
The bank’s capital levels have increased to unquestionably strong levels, and liquidity and funding ratios have equally strengthened, impacting returns but positioning Westpac among the world’s strongest banks and leaving it well prepared to withstand shocks, as we have for more than 200 years. The bank’s strength will always remain paramount.
But in recent years, there’s been an undoubted step-change in the number and categories of risks to assess and consider, no more so than the various operational risks relating to regulation, conduct and compliance on which the board spends considerable time. You may add to that the time spent on various Inquiries.
The industry is facing several reviews, inquiries and consultations with various regulators, adding to recent legislative reforms such as the Banking Executive Accountability Regime and changes committed to by The Australian Banking Association. Of course, the Royal Commission has and continues to be one of the most high profile and important forums for the public, shareholders, customers and employees – many of whom are working under demanding conditions to manage the process.
When combined with rapid technological and macro-economic change, it’s an environment banks have not previously experienced.
Having just completed our annual review of progress and strategy, there have never been more projects of work underway for both the past, present and future. Firstly, we must finish our transformation projects, such as BT’s new-age platform Panorama and our Customer Service Hub program, and get them working to improve customer experience and attract new customers. Making it easier for employees to help customers is an integral part of these programs.
In the longer term, it is clear the biggest determinant on which banks will win or lose in the next decade is technology. Making the right choices and executing well around which technologies to back, how to best leverage data and artificial intelligence, and who to partner with and how, will be key to being the leading digital relationship bank.
More specifically, following choices by other banks, Westpac will be the sole large bank in Australia able to provide banking, superannuation and investments, a capability many customers still actually want. While the upside from wealth may not be what some banks once thought, BT’s returns remain attractive and we are confident in its future.
But to continue to best position ourselves in the industry in the first place, there remain issues to address and fix.
Many of these have been highlighted through the Royal Commission’s approach of first asking banks for reports on prior issues and then focusing on case studies, many involving financial advice, business loans and mortgages, taken from those submissions.
As many of these cases show, the industry has made mistakes in terms of delivering on our promises to customers and does not have a perfect record. Of course, many of those issues were already receiving attention. But as a board, one of our key reflections has been that the bank hasn’t focused enough on when things haven’t worked out for customers, regardless of the fact that these examples remain very low overall in terms of the number of our customer dealings.
To date, a lot of the public focus from the Commission’s hearings has been on the industry’s lending practices. For context, the banks have been working with regulators for several years to enhance mortgage serviceability assessments and meet lending caps on investor and interest-only loans. We constantly look at these and other lending practices from both a credit perspective and with a responsible lending focus. The Commission has made this process more visible.
As we observe the progress of the Royal Commission and participate in its hearings, the overriding observation from me is that it must be seen in context. The Commission is driven by its brief, its Terms of Reference, and the case study approach it has adopted. It has a mandate to investigate misconduct and practices falling below community standards and expectations. By its nature, quite properly, the focus is on the customer.
But we must also be alert to the broader economic context and the pendulum swinging too far.
As suggested by APRA chairman Wayne Byres this month, the principle of caveat emptor is critical to the functioning of a solid financial system where lenders and borrowers accept certain levels of risk of potential loss. If all the risk shifts to lenders, regardless of whether loans were made fairly and appropriately, the proportionate risk rises for banks’ other stakeholders including depositors, employees and shareholders.
As risk shifts so does cost. A natural reaction to a shift in risk will be to restrict access to financial services for those closest to the margin or to drive up the cost.
But as history – and indeed other industries – shows, it is unlikely that mistakes will never happen, inappropriate advice never given or misconduct entirely removed. And customers should be remediated and put right when this occurs, as Westpac is committed to doing. But where loans and advice are fair and appropriate, borrowers and banks must accept the risk of loss for credit to continue to flow at competitive prices.
Whilst this bank will never walk away from its obligations to act responsibly and fairly, this is a two way street in so many ways.
Borrowers and guarantors must also act responsibly in their provision of information to banks and in taking on obligations. Moreover, again as recently pointed out by APRA, we have very clear obligations and responsibilities to our depositors and shareholders.
This is a message that Westpac will continue to push. Whilst we absolutely respect the role of the Royal Commission; the role of the ACCC; the role of the Productivity Commission as it focuses on competition in banking; the role of ASIC with its focus on consumer protection, we must remember all of these bodies, by Charter or otherwise, focus on particular aspects of financial services which influences their perspective.
Bank boards, prudential regulators and government need to consider the system as a whole.
While banks can do better, the financial system cannot be 100 per cent risk free, 100 per cent of the time, no matter how well the industry and our regulators perform. Should the perception of risk shift too far this way, the changes to the system that has served Australia well for decades may not be the ones desired.