Philip Lowe, Governor of Reserve Bank of Australia (RBA), has railed against what he calls a culture of placing ‘sales over service’ as the fallout from the Royal Commission inquiry into financial misconduct threatens to spill over into 2019.
He said that there has been a serious erasure in the level of trust placed in major financial institutions by Australian citizens, which makes it harder for RBA to keep the economy running on the same system. Lowe also took a swipe at how the ‘sales-first’ culture does not focus on meeting each customer’s needs. The inquiry highlighted several shocking revelations suggesting that many major lenders were not offering the right products because they stood to benefit financially.
In addition, Lowe remarked on serious inconsistencies in how bankers received payment, which led to confusion with the regulators around who was earning money fairly and who was receiving additional benefits despite potentially not deserving them.
One of the banks under heavy scrutiny over the last year was Commonwealth Bank of Australia (CBA). Its CEO, Matt Comyn, recently admitted that it could have handled certain processes better.
Comyn said that the bank’s previous leadership had presided over a culture that allowed misconduct to happen. He added that CBA has sought to move away from the idea of prioritizing sales over their customers.
CBA Chair Catherine Livingstone also criticized the prior leadership and said that the CBA board lacked the stomach to question the management despite the obvious flaws in operating procedures. This led to a raft of problems, including the failure to appropriately report any instances of misconduct to the regulators within a suitable timeframe.
Lowe said that one of the biggest contributors to the problem was that some of the bonus pay structures specifically rewarded sales regardless of how they affected the customer, so it was only natural that company dealings would veer toward that kind of sales-first approach.
He added: ‘Correcting this starts with the system of internal reward established by the board and management.’
Lowe also spoke about the interest rates that RBA has in place currently and confirmed that there is little desire to change them in the immediate future. He did concede that any changes in the next year would be to raise rates rather than the other way around but added that the bank aims to leave them alone for as long as possible in the hopes of stimulating wage growth as the US dollar rises.
RBA does not want to provoke economic movement at its end until the major banks have done more to fix the problems that pose a large underlying risk to the economy. Presently, Lowe feels that it needs to switch its focus to the long-term, which will also provide more stable economic indicators to work with. He said that in order to make this happen, banks need to reflect this strategy in their internal incentives.
Noting that ‘short-termism can weaken the long-term franchise value of the bank,’ Lowe added that there was little point in boosting shares in the interim just for them to plummet back down again.