Financial services firms face a regulatory crackdown unless they take active steps to fix their deficient internal cultures and stamp out pervasive fraud and malfeasance, the Australian Securities & Investments Commission has warned.
Laying down the gauntlet at a finance conference in Sydney yesterday, ASIC commissioner Greg Tanzer signalled the corporate regulator was fed up with the “fleecing” of ordinary investors and wanted to see business leaders promote integrity among more junior staff.
“It is unquestionable we need a fundamental shift in the culture of the financial industry ... now,” he said, reeling off the growing list corporate wrongdoing among financial services companies, here and abroad, since the global financial crisis in 2008.
“Trust and confidence have significantly been eroded over the past few years due to poor conduct within the financial industry.”
Mr Tanzer’s remarks follow ASIC’s investigations into a number of Australian banks including UBS, Commonwealth Bank and Macquarie Bank, variously for misselling of financial products or governance problems.
They also come a week after US and British regulators slapped $7.6 billion of fines on six global investment banks, bringing the cost of poor conduct for the 10 most affected global banks to more than $US240bn since 2008.
“ASIC is concerned about culture because it is a key driver of conduct within the financial industry. Bad conduct flourishes, proliferates and may even be rewarded in a bad culture,” Mr Tanzer said.
He revealed ASIC had sent “targeted questionnaires” to investment banks to gauge their “appetite, attitude and approach to conduct” and was in the process of a “roadshow” through the investment banking community to inculcate the importance of good conduct.
“It is going to be challenging and significant time will be required to change culture and embed new attitudes,” he said.
The commissioner said studies showed good conduct, such as putting customers’ long-term interests first and having a remuneration structure that encouraged “doing the right thing”, was also in firms’ long-run benefit.
Separately, Reserve Bank deputy governor Philip Lowe flagged potential regulatory changes in the rapidly growing funds management industry to make roles and responsibilities clearer in a time of financial crisis.
“Many of these vehicles allow investors to redeem their funds at short notice, even though the underlying assets are not particularly liquid, and are likely to be even less liquid at a time when there are large-scale redemptions,” he said, noting the value of industry assets had surged from 40 per cent of GDP in the early 1990s to around 125 per cent today.
At the same Thomson Reuters conference, Dr Lowe suggested not enough investors might understand that the perception of liquidity can be misleading in times of a crisis, when the underlying assets become illiquid.
“This needs to be clearly understood by both investors and fund managers. This has not always been the case,” he said.
He also said Australian banks’ mortgage portfolios had become riskier in recent years. “Household debt is high, property prices are very high, income growth has slowed and the unemployment rate has drifted up,” he said.