In February 2019, Commissioner The Honourable Kenneth M Hayne released the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The report addressed the alleged misconduct of Australia’s banking and financial services industry and proposed 76 recommendations following the review of more than 10,000 public complaints. Understandably, subsequent investigations costing banks a minimum of $50 million in legal and advisory fees, have shifted organisations’ focus away from rebuilding investors’ and customers’ trust in the bank. As a result, many banks have experienced substantial damage to their reputation due to a loss of consumers’ trust and confidence in their products. In trying to protect the reputation of their bank, many executives have acted unethically when trying to cover up their mistakes or deny the Royal Commission of documents needed for the investigations. This has in turn put the banks’ name under further scrutiny from both the Banking Commission and the general public.
What is reputational risk in the financial industry?
When addressing the risk of putting their reputation on the line, Deutsche Bankdescribes reputational risk as “the risk of possible damage to the brand and reputation, and the associated risk to earnings, capital or liquidity arising from any association, action or inaction which could be perceived by stakeholders to be inappropriate, unethical or inconsistent with the Bank’s values and beliefs”.
Likewise, HSBC’s definition of reputational risk is “the risk of failure to meet stakeholder expectations as a result of any event, behaviour, action or inaction, either by HSBC itself, our employees or those with whom we are associated, that may cause stakeholders to form a negative view of the Group”.
How is the public viewing banks currently?
Australia’s financial services sector is the largest contributor to the economy with an injection of approximately $140 billion to GDP annually and employs around 450,000 individuals nationally. Every year, RepTrak in conjunction with IBIS World 2,000 list, measures the reputation of the largest companies by revenue in Australia through an online survey method. The target audience are Australians aged 18 and above who are familiar with the company being rated. Every company is assessed based on the following criteria:
· Familiarity with the company
· Level of trust
· Level of good feeling
· Level of esteem
· Level of admiration and respect
Based on RepTrak’s 2019 ranking report, the reputation of key players in the banking industry as a whole has plummeted due to the public losing trust and confidence in the banking system following the findings of the Banking Royal Commission:
· National Australia Bank (NAB) has slid 15 spots down to 58th;
· Commonwealth Bank of Australia (CBA) has maintained its position at 57th;
· Westpac Banking Corporation (Westpac) is down 9 spots to 55th;
· AMP has lost 18 spots and ranks last at 60th; and
· Macquarie Group dropped 5 spots to 42nd.
The only bank that rose through the ranks is Bendigo and Adelaide Bank which climbed 7 spots up the ladder to 11th. According to the bank, their reputation has improved due to their strong financial performance in the individual measurements of citizenship and governance.
Which banks experienced reputational risk?
The publication of the report scrutinised CBA publicly, particularly Ian Narev who left following damage to his reputation even before the Royal Commission was officially launched. When Hayne delivered the report, he also reprimanded NAB’s chief executive, Andrew Thorburn, and chairman, Ken Henry for not taking the Royal Commission seriously. Andrew and Ken subsequently resigned from NAB, leaving behind a bank that is expected to repay more than $100 million for the alleged fee-for-no-service indiscretions.
What can be done to improve banks’ reputational risk?
A Deloitte Reputation at Risk survey identified that there is an 80% likelihood that a company loses 20% of its value in any single month over five years following a crisis in the company’s reputation. This is certainly reflected in movements in the stock market when people sell their stock upon a company’s reputational crisis.
Many organisations run the risk of damaging their reputation as they grow bigger in size – especially those offering advisory services. This is due to advice being provided by a team of consultants with various levels of expertise. To ensure the company is not putting its reputation at risk, senior management needs to ensure that all members of the team are well-trained and supervised so that correct information is provided to clients at all times. The focus should also be on offering an ethical financial service rather than managing the risk of public scrutiny following a reputational crisis. Commissioner Haynes further recommended a change in corporate culture within financial institutions to rectify any reputational risk.
Has the Royal Banking Commission impacted your organisation?
In the wake of the Royal Banking Commission, the risk and compliance market has opened many job opportunities. We have more clients looking to hire risk and compliance specialists and given the limited pool of candidates, this has further pushed salary levels upwards.
Should you have any questions or would like to find out how your organisation can mitigate reputational risks, feel free to contact us on 02 8251 2120 for a confidential discussion or visit our LinkedIn page to learn more about what we do.