The Royal Commission into banking has handed down its final report. Our CEO, Phil Vernon, says it exposes the lack of empathy at the heart of financial services.
Over the past year the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has revealed scandalous behaviour in the financial services sector. Commissioner Kenneth Hayne uncovered behaviour that included charging fees to dead people, charging fees for no advice, lying to regulators and selling useless insurance to indigenous Australians. Following these revelations we have carefully considered all of our investments in the financial services sector, leading us to divest from AMP and IOOF. The final report makes 76 recommendations that, with a few exceptions, have been accepted by both sides of politics. Our CEO Phil Vernon discusses the final report and what it means for Australian Ethical.
The report begins by noting that customers have been relegated to second place. Do you agree with this assessment?
Phil: I think that’s the right observation. Where the financial system goes wrong is its tendency to always put shareholders first. But we’re not just here for shareholders, we’re here for all stakeholders – and customers should be on an equal footing. No business can survive without their customers. If organisations were genuinely committed to a multi-stakeholder philosophy the customer would figure as much as the shareholder, if not more.
Is Commissioner Hayne correct to point to an “imbalance of power and knowledge between those providing the product or service and those acquiring it”?
Phil: Yes, unfortunately. And it’s fairly endemic in financial services. I went to a post-Royal Commission conference just the other day and the irony was pretty stark. The theme was all about needing to ‘engage the customer more’ but it descended into jargon. Even for me, someone who is in the industry, it was difficult to follow what was being discussed. Insurance, superannuation, funds management – we can do so much better if we look at the way we communicate. We try to use really human language in our business but there are still plenty of things we can do to help improve financial literacy.
Do you think incentive structures are the cause of the misconduct that has been uncovered?
Phil: I disagree slightly. A lot of the debate since the Royal Commission has been about incentives, but personally I think they are the second-order issue. The starting point should be getting the culture right and the underlying philosophy of the corporate business model, which at its core should be all about empathy – being conscious of the impact your actions are having on others. If empathy for the customer was truly at the heart of financial services then the incentive structures wouldn’t have been set up the way that they were. Conflicts of interest would be obvious and customers would always be put first.
From an ethical standpoint, do you think the report went far enough?
Phil: Yes, I do. It’s good that the Royal Commission has not tried to reinvent the wheel. One clear message is that we already have good regulatory frameworks and principles in existing legislation and reports. We just need to implement and enforce them. Certainly in individual cases there is room for the argument that further changes could be made, and this can be debated as legislation and regulation is developed to implement the recommendations. I hope the report is used as a positive opportunity for the sector to fundamentally rethink its purpose – and that includes governance, conduct and culture.
What is Australian Ethical’s position on the banking sector?
Phil: Banking itself is not a bad thing because it allows the free flow of capital around society. If we didn’t have banking as a mechanism we’d still be in the barter economy, because you wouldn’t be able to buy and sell goods and services. Standards of living wouldn’t be as high as they are and people wouldn’t have been lifted out of poverty. But the Royal Commission is right to point out the entrenched cultural problems that exist within the banks.
How does Australian Ethical’s culture differ from other financial services companies?
Phil: Our business is underpinned by five core beliefs. The first one is that a focus solely on profits and returns places our planet at great risk. But we also believe ethical and financial outcomes can be achieved together. The third belief is that capital has enormous power to do good, and the fourth one is that individuals can effect change through their investing and purchasing decisions. Finally, we believe that no change can occur without showing leadership and taking action.
Australian Ethical’s culture is driven by all five beliefs, but it’s the first one that really sets us apart. We believe the way the corporate model and financial system have developed to date is absolutely fundamentally wrong and needs to be completely turned around. What’s missing in the financial system is empathy – a consciousness about the broader impact of our decisions. Because without it, corporations are by definition psychopathic – and I think the findings of the Royal Commission have proved that.