What's really changed in financial services? And can it be sustained?

Just as the post-Hayne dust was settling, and before the financial services industry had time to catch its collective breath, a serious new challenge has emerged shining an even more dramatic spotlight on its role in a distrusting community – the wildfire spread of, and the global economic/societal response to, the Coronavirus.

It’s a little over twelve months since the final report of The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, unquestionably one of the most hotly debated and controversial public inquiries ever held in Australia. Commissioner Hayne’s report spared no punches in recommending a myriad of changes to almost every aspect of the financial services sector in response to extraordinary revelations of poor standards in risk, governance and compliance management.

We have also seen the exit of several key protagonists at the very highest levels of our most trusted financial institutions, including NAB, AMP, Westpac and CBA. Major banks issued a multitude of statements recognising significant changes were needed in their approach to wealth management services, internal risk management and in how they met their external regulatory responsibilities. The banks also have set aside large amounts of funds to compensate customers for “fees-for-no-services” conduct.

It was fair at that important juncture to ask the questions: What has really changed? What are banks and other financial institutions doing to regain society’s trust?

Just over three short months ago, the Treasurer, Josh Frydenberg, initiated a public consultation process seeking comments on the Government’s Draft Legislation package for implementing its legislative responses to the report’s recommendations. In all, the government said it intended to meet legislative requirements for all of the 54 recommendations directed to the government as well as 18 other additional issues it had decided to address.

Now, with the world reeling from the devastating health effects of COVID-19 and the economic impacts of measures designed to contain the virus, the banks are once again being closely watched as they react to significant social and economic suffering: Will banks again seek to only protect the interests of their shareholders ahead of the customers they serve and the people they employ? Or will they recognise their unique capacity to promote the economic welfare of all stakeholders? Early evidence suggests that, for the most part, our banks have indeed stepped up to the plate and are playing an important part in Australia’s reaction to this crisis.

Are we seeing early signs of a shift in culture?

Poor organisational values in our financial institutions were at the epicentre of all misconduct revealed during the Hayne public inquiry process. Commissioner Hayne recognised this, devoting an entire chapter in the final report to the importance of organisational culture in driving proper conduct. The report emphasised, “…the culture of an entity can be described as ‘shared values and norms that shape behaviours and mindsets’ within the entity. It is ‘what people do when no-one is watching’.

Culture drives and encourages conduct

The importance of culture is once again in sharp relief as Australia looks to the financial services industry to share the difficulties faced by all Australians by effectively acting as a financial shock absorber for the Australian community, rather than being just another earnings maximiser in a tough economic environment.

We had seen little in the aftermath of the Hayne Commission’s report release to indicate how banks, insurance companies, mortgage brokers and financial advisory firms will deal with the cultural reforms needed to ensure past misdemeanours are not repeated. The lack of attention to organisational culture  in  our  banking  sector  is  particularly  surprising   given   the   findings   in   an   earlier 2018 Productivity Commission (PC) report on competition in the financial sector. Recognising that weak cultural standards adversely impacted bank customers, the PC report recommended that as a condition of the banking license, an independent Principal Integrity Officer be established within banks with the power to report independently to the Board of Directors and to APRA.

There are some early tentative signs of a more considered approach by banks and other financial institutions towards customers burdened with loan obligations while facing substantial income losses as a result of Australia’s social and economic lockdown. Some evidence also suggests a more flexible attitude to the pressures and challenges faced by employees who have to work from home – and to remote-management of a significant proportion of the workforce.

So what does it take to sustain culture change? 

Based on its response to the Hayne report, the industry seems to view organisational culture as a by-product of top-down directives: If organisational leaders put out the correct messaging, that will be enough to bring about appropriate behavioural change among staff. But the reality is, people don’t generally change their behaviour simply because they have been told to do so. To truly achieve culture transformation, top-down directional changes must be complemented by appropriate bottom-up procedural changes. Furthermore, culture change will not be achieved by a once-off initiative. Repetition over time is required.

To change the culture, processes must be put into place to support change in an organisation’s collective mindset. These processes have to be designed with two clear objectives:

1. Changing behaviours: This starts with helping staff recognise the type and tone of internal mental conversations they have with themselves about their role and how they create value for customers. That then extends into the conversations people have with each other in the workplace and, most importantly, with their customers. This objective should have the effect of engraining new thinking patterns until they become habitual — in other words, ensuring appropriate outcomes from “what people do when no one is watching”. 

2. Creating a framework that promotes sustained cultural change. This entails setting up processes that keep the momentum of change on a sustainable footing and will require:

• ongoing programs (e.g. equipping leaders and managers with strong coaching skillsets and mindsets) designed to convey and reinforce the correct parameters for internal behaviours and
• regular activities that support learning and application of effective communication skills.

Ensuring the customer comes first

From what we saw come out of the Hayne Commission process, one obvious and critical cultural shift must occur within all sales organisations. There’s an urgent need to replace the emphasis on product with a strong customer focus, where the customer, not the firm’s products and service offerings, takes centre stage. For companies operating in Australia’s financial services sector, this means ethical sales training will be essential in order to shift and sustain culture. An ethical sales culture is crucial for any organisation, but it’s particularly vital in a sector that’s experiencing an erosion of community confidence and trust.

The challenge is to redefine the culture, from one incentivised to gaming the system in order to achieve sales quotas, to one that sees customer focus as the best strategy for increasing sales revenues. Ethical sales training for financial services companies and banks can help employees develop this new perception by helping them change their mindsets. One effective way to do this is to overturn distorted perceptions of selling as a “transactional” process to an approach that sees selling as a customer- focussed service aimed squarely at delivering value for the customer. This will make it easier to not only inspire ethical behaviours but also drive revenue growth.