The Commonwealth Bank’s financial planning debacle is far more profound than a simple unrecognised management mistake, albeit a huge one. It raises the question as to whether Australian banks have the culture to successfully pursue financial planning alongside their banking business.
More seriously, the challenges looming for banking underline the dangers of this diversion.
On governance issues it shows that the elaborate government systems that all banks have inserted into their board practices are probably flawed. Let’s start with the governance question first.
My friends who are on bank boards have often expressed frustration that the first day or so of any board meeting is all about ticking boxes, which means there is less time for strategic discussion. And there are so many boxes that need to be ticked that it makes it easy to make governance mistakes. Most big corporate mistakes have a very similar management pattern. The CBA financial planning errors follow that pattern.
After the initial error has been made, the managers of a particular operation claim the problem is small and can be fixed. Suddenly divisional management then has a vested interest in containing the problem because their jobs are at stake. So the problem gets bigger before senior management and directors start to deal with it.
By that time the next step is to try to contain the damage to shareholders. When a large number of customers or suppliers is involved in the mistake this is a very dangerous trap, and one which the Commonwealth Bank fell into.
Finally, when you realise that it is a big mistake -- a Senate inquiry is a good signal -- you have to confess all sins and do whatever is necessary before that action is forced upon you. But as the Commonwealth Bank is finding out, what would have been a courageous step if taken earlier becomes insufficient when public rage has been ignited by a Senate inquiry.
When I look at the Commonwealth Bank board I see a wonderful set of directors and I remain stunned that they couldn’t have picked this up much earlier because it was widely publicised in the press. That tells you they didn’t properly understand the financial planning business, which has a totally different culture to banking.
The base of the financial planning industry that the banks bought into was often a life office (CBA’s Colonial, NAB’s MLC) which, generations ago, developed a culture of hard sell and big commissions. That culture is very different to banking.
On the board of the Commonwealth Bank there is only one person who is very familiar with this sort of operation: former AMP managing director Andrew Mohl. In that role, Andrew Mohl was a corporate hero because, with his chairman Peter Willcox, he literally saved AMP from potential bankruptcy caused by other people’s errors in Britain.
But the AMP culture was based on the strong belief in the commission system, even though at different times in various life offices it was abused. That abuse did not cause ramifications, but when a bank gets involved in a commission abuse scandal it can lead to royal commissions.
In simple terms, in my view the old insurance commission model is not appropriate for modern Australia and Australians have made that decision themselves in superannuation.
A third of the Australian superannuation market is now in self-managed funds and we are headed towards 60 per cent of the people who rely on superannuation for a pension setting up their own superannuation fund.
This is a diabolical indictment on the management of bank-owned superannuation because bank customers have voted with their feet and ignored the bank products and taken their own actions. And they did that, in part, because they refused to accept the reduction in their savings that the high-commission life office culture meant. It wasn’t so much that the culture was so wrong, it is just that it is not appropriate for today’s world and certainly not appropriate for banks.
The banks feared the development of self-managed funds and fought it with a lobbying ferocity rarely matched in Canberra. Again, what they should have been doing is developing low-cost, non-commission products for their customers who started self-managed funds.
Right at the moment banks are rolling in profits and enjoying a wonderful time but their shareholders are receiving dangerously high dividends. As a result, the banks are not investing anywhere near enough in their own business.
When any industry makes that mistake in today’s world they lose market share to newcomers. In the banks’ case it will be mobile phones and other new applications that take the place of other conventional banking products.
Banks should be investing vast sums into these new areas but they are trapped with the investment industry stake and the demand for high dividends. Maybe the Commonwealth Bank’s financial planning debacle will be the wake-up call banks need.