Due process is crucial to accountability
This article first appeared in the opinion section of the Australian Financial Review on the 28th November 2019. Click here to view the original version.
For those of us who were hoping that there would be no nasty surprises post financial services Royal Commission (me being one), we have been sadly mistaken. And unfortunately for the industry, we are now well beyond the point where an institution can take solace in the misdeeds of a competitor – the misdeeds have been sufficiently widespread, frequent and significant that all institutions are now tarred by the same brush. One suffers, they all suffer.
Although in many ways unique, the Westpac money laundering incident once again illustrates some of the common themes that underpin the array of ethical failures that have plagued the financial services industry. As always, teasing these themes out and identifying exactly what role each played is not as straightforward as many think.
To begin with, there is the significant dependency these large institutions have on complex IT platforms. The failure to properly invest in these and incorporate the necessary compliance safeguards has, some years down the track, come back to haunt them. Addressing these shortcomings is a significant undertaking, in some cases nigh on impossible.
There is the relentless focus on profitability and hitting targets. When directors, executives and investors alike were celebrating superior returns in the years leading up to and following the global financial crisis, this came at a cost (refer previous paragraph). No doubt the incumbent directors would retrospectively gladly sacrifice some of these healthy returns given what they are now experiencing.
There is the failure in culture. Specifically, how can it be that, despite AUSTRAC’s warnings many years prior, CEO Brian Hartzer allegedly only became aware of some of the suspicious transactions as recently as October? Who in Westpac was aware of the issues? And why wasn’t this made known to the powers that be?
Unlike financial risks, it is very difficult to measure an institution’s exposure to conduct risk. Arguably the most reliable indicator of a conduct risk issue is the incident itself (and for obvious reasons post hoc indicators are less than ideal). An institution’s best bulwark to conduct risk is creating an environment where people feel comfortable raising concerns and ensuring these concerns are properly addressed.
Yet a recurring theme in all of the ethical failures in the financial services industry is that directors had no knowledge of wrongdoing and are caught by surprise. To be fair, it is impossible for boards of large institutions to know what is happening in every corner of the organisation. But more often than not the messages that matter either don’t reach the board or are delivered in a form that sugar coat reality.
Overcoming this and understanding what role (if any) they play in abetting it is a key challenge for directors.
Finally, there is accountability. In the years preceding the Royal Commission, accountability was lacking in the financial services industry. Despite there being no shortage of incidents demanding that someone take responsibility, there was no willingness amongst boards and executives to accept it or regulators to assign it.
The FX trading scandal at the NAB, an incident in which I was publicly named as a "whistleblower", arguably still stands as the paragon for accountability in the financial services industry. After an independent review was completed, four traders and their superior were dismissed and a number of other senior executives (including the chairman and CEO) resigned.
Comparisons are odious, but it is difficult to find another example where an institution has responded so swiftly and unequivocally in the aftermath of an ethical failure. Therefore, the steps legislators and regulators have taken to address the lack of accountability should be welcomed – it is an important piece of the integrity puzzle. When designing systems that are more resilient to ethical failure, an important feature is that consequences are associated with wrongdoing.
But in some ways, the events of the past week also call for some reflection. It is natural in the current environment for the pendulum to swing. Accountability is rightly demanded. But the public outcry and baying for blood created the impression that nothing short of a public execution would suffice, regardless of the underlying circumstances or the outcome of an investigation.
To be sure the allegations against Westpac are significant. If proven, no CEO could justify their position. And I am all for honourable resignations. But as the NAB FX scandal also illustrated, some form of due process should apply. If resignations are demanded prior to proper independent investigations being completed, we are inviting a whole raft of other issues.