Scathing report criticises Commonwealth Bank for widespread complacency

Sydney

AUSTRALIA'S beleaguered banks are facing up to a bleaker future.

In another bad day for the industry, a scathing report released on Tuesday into the country's largest lender found that a "widespread sense of complacency" from the top down blinded it to risks that led to a massive breach of anti-money laundering laws.

And in a stark warning that the good times are over for some of the world's most profitable banks, the head of the country's No 4 lender said that a two-decade "golden period" is coming to an end.

The damning report into Commonwealth Bank of Australia piles further woe on an industry that has lost public and political trust amid revelations of widespread misconduct - ranging from lying to regulators to falsifying documents and taking bribes. The outcry has crimped the banks' pricing power and emboldened regulators, threatening profit growth.

"The litany of issues facing the banks and financial services is extraordinary and dismaying," said Judith Fox, chief executive officer of the Australian Shareholders' Association. "This is the moment for the board to step up to the plate and deliver. Not just at this bank, but across all banks."

The 109-page report found financial success "dulled the senses" at Commonwealth Bank and engendered complacency. The report, commissioned by the banking regulator in the wake of the money laundering scandal, called out insular attitudes, a lack of intellectual curiosity, and a pay structure that had "little sting" for senior staff if things went wrong.

"A widespread sense of complacency has run through Commonwealth Bank, from the top down," the report said. "Commonwealth Bank turned a tin ear to external voices and community expectations about fair treatment."

The bank has also been hit by a succession of allegations about mistreating customers, from giving poor financial advice to failing to honour insurance claims. The report was critical of the tardy response to such issues, saying that a "slow, legalistic and reactive, at times dismissive, culture also characterised many of Commonwealth Bank's dealings with regulators."

In the only financial sanction, the Australian Prudential Regulation Authority has applied a A$1 billion (S$1 billion) add-on to Commonwealth Bank's minimum capital requirements.

"My job is to fix what is broken and do what is necessary to earn back trust," Commonwealth Bank CEO Matt Comyn said, as the lender promised to implement all 35 of the report's recommendations. "It's certainly a challenging environment in banking at the moment."

Mr Comyn, who replaced Ian Narev last month, is already dealing with the fallout from a separate widespread inquiry into financial system misconduct that has swept up the other banks and seen the CEO and chairman of wealth manager AMP Ltd resign.

"The pressure will not relent until there is demonstrable evidence that Commonwealth Bank has turned the culture around," said Daniel Smith, Australian head of CGI Glass Lewis, the governance analysis and proxy voting firm. "While the report is targeting Commonwealth Bank, the other major banks will do well to heed the comments and look themselves in the mirror."

The damage from the scandals plaguing the industry was recognised by Australia & New Zealand Banking Group Ltd CEO Shayne Elliott. "Our sector has had a golden period for 20-plus years and we don't think that's going to continue," he said on Tuesday, after the bank posted a small increase in first-half profit. "I imagine there will be lots of changes that ourselves and other participants will make," he said.

Patience among investors with bad behaviour is also running out.

"Companies that fail to grasp the importance of managing non-financial risks learn the hard way that these factors lie at the heart of their sustainability," said Louise Davidson, CEO of the Australian Council of Superannuation Investors, whose members collectively manage A$2.2 trillion in assets.

Treasurer Scott Morrison, who had previously opposed setting up the inquiry into the banks, joined the chorus of criticism, saying the "rap sheet from APRA is very damning".

"This should be a wake-up call for every board member in the country, particularly those who are the custodians of the savings and share holdings of millions of Australians," he said. "They have been let down, terribly." BLOOMBERG