tag:theconversation.com,2011:/au/topics/banking-scandal-42739/articlesbanking scandal – The Conversation2020-06-23T14:13:32Ztag:theconversation.com,2011:article/1411412020-06-23T14:13:32Z2020-06-23T14:13:32ZElectronic banking fraud in Nigeria: how it’s done, and what can be done to stop it<figure><img src="https://images.theconversation.com/files/343219/original/file-20200622-54985-15pc17f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A warning sign advising users to be aware of their surroundings while playing a video game. </span> <span class="attribution"><span class="source">Stefan Heunis/AFP via Getty Images</span></span></figcaption></figure><p>Six years ago, a <a href="https://www.cbn.gov.ng/cashless/">cashless policy</a> became fully operational in Nigeria. The aim was to encourage electronic transactions with a view to reducing the amount of physical cash in the economy. The logic was that this would minimise the risk of cash-related crimes. </p>
<p>But a major downside of the policy has been <a href="https://nairametrics.com/2019/10/24/fraud-cases-hit-major-payment-channels-across-nigerian-banks/">pervasive</a> electronic banking fraud (e-fraud). Although the cashless banking system was designed to foster transparency, curb corruption and drive financial inclusion, it’s threatened by the growing perpetration of fraud. </p>
<p><a href="https://ndic.gov.ng/wp-content/uploads/2019/09/NDIC-2018-ANNUAL-REPORT.pdf">About N15.5 billion</a> was lost to bank fraud in 2018. About 60% of the fraud was perpetrated online owing to available internet-based and tech-rated banking services. </p>
<p>Our <a href="https://journals.sagepub.com/doi/full/10.1177/0306624X20928028">research</a> investigated dimensions of electronic fraud in Nigeria. We found three: internal fraud carried out by banking staff; external fraud carried out by ordinary Nigerians; and collaboration between fraudsters and banking staff. </p>
<p>We found that inefficient supervision, non-performance of oversight by regional heads of banks, and poor follow-up on customers’ addresses (Know Your Customer) accounted for the fraud that took place.</p>
<p>Our study provides the banking industry, banking public and investors with critical pointers on how to reduce fraud. </p>
<h2>Different types</h2>
<p>Our study involved collecting data as well as conducting interviews with 30 people. These included victims of bank fraud, bank customers who did not subscribe to the cashless policy and fraud detectives at the Economic and Financial Crimes Commission (EFCC). </p>
<p>These were the common patterns we uncovered.</p>
<p><strong>Insider fraud:</strong> By insider, we mean those working with banks or those in a relationship with account holders. Here, the fraud was exclusively executed by members of staff in the banking system who exploited the strategic position they held in the system and their grasp of how it works. Banking institutions and customers were their victims.</p>
<p>An example we came across during our research was the case of a N90 million (US$452,261) fraud perpetrated by an account officer of a major eatery in Lagos State. The job of this account officer was to collect the eatery’s takings and deposit them at the bank. A fraud detective told us that:</p>
<blockquote>
<p>As the account officer he would collect money on a daily basis and was expected to credit the company’s account. However, he would collect money on Monday and lodge it and collect on Tuesday and not lodge it. He was missing one day out. He did this continuously until he was able to rake in N90 million. At this time, when the eatery management raised the alarm on their account, he ran away and could not be found. We however used his sister to arrest him. We were only able to recover N8 million naira from him. He had used part of the money to organise his wedding, had a baby and almost completed a four-bedroom bungalow at another area in Lagos.</p>
</blockquote>
<p>Bank fraud is often successful because many Nigerians don’t subscribe to transaction alerts. The eatery management trusted their account officer but did not know that he was dishonest.</p>
<p><strong>Outsider fraud:</strong> These perpetrators were external to the banking system. They thrived on their internet skills and sometimes on their understanding of the victims’ routine and identity.</p>
<p>An example we came across was the fraudulent use of <a href="https://www.cbn.gov.ng/Out/2017/BPSD/Circular%20on%20the%20Regulatory%20Framework%20for%20BVN%20%20Watchlist%20for%20Nigerian%20Financial%20System.pdf">bank verification numbers</a> (BVN). These were made compulsory by the Central Bank of Nigeria in 2014. All bank account holders had to undertake biometric registration. The intention was to ensure security and check fraud. </p>
<p>But fraudsters have found a way to cheat the system by sending bank customers false emails asking for their bank verification details. As one victim explained to us:</p>
<blockquote>
<p>I needed to make some transactions and I headed for my bank. I had called my account officer ahead of time. On getting to the bank, I connected my computer and got a mail from a supposed same bank. I was asked to click on a link and supply my BVN details for update of my account or face service suspension on the account. I just clicked the link and supplied my details and behold, N1 million debit alert came on my phone within five minutes! I was shocked and devastated but before we could do anything they had withdrawn everything.</p>
</blockquote>
<p><strong>Collaborative fraud:</strong> This involved collaboration between bank staff and fraudsters outside the banking system. Banks and individual account holders were the victims. For example, bank staff could provide account details of customers to the collaborating fraudster.</p>
<h2>Governance gaps</h2>
<p>Despite this weak governance architecture, which is still not fraud proof, bank executives reported having in place mechanisms which had limited the incidence of fraud. One was sending out information to customers who subscribed to electronic alerts. Through this, banks contact and send anti-fraud messages to their customers. </p>
<p>Owing to reputational risk, banks try to refrain from public prosecution of erring staff. We found that banks adopted shaming as a mechanism for instilling discipline within their organisations while attempting to ease out “bad eggs” through flagging of their images on computers and across the banking industry.</p>
<p>There is a need to check fraud through customer awareness and financial literacy education. </p>
<p>While fraudsters continue to design new ways of working on customers’ vulnerabilities, Nigerian banks need to use the <a href="http://www.nigerianlawguru.com/legislations/STATUTES/CYBERCRIME%20ACT%202015.pdf">Cybercrime Act </a> to prosecute offenders as a way to boost confidence in the banking sector and deter fraud in the future.</p><img src="https://counter.theconversation.com/content/141141/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Oludayo Tade receives funding from the Regents of the University of California, Institute for Money, Technology and Financial Inclusion (IMTFI), Irvine, USA.</span></em></p>Nigeria’s cashless policy seeks to minimise cash-related crimes, but it seems to have replaced that risk with another: electronic fraud.Oludayo Tade, Researcher in criminology, victimology, electronic frauds and cybercrime, University of IbadanLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/865182017-11-08T02:32:24Z2017-11-08T02:32:24ZIt’s time for a royal commission into banking regulation<p>The handling of recent financial scandals show that regulators are confused about what they do, or <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">should do</a>. And as a result the regulation of the financial system, which is vital to a strong functioning economy, is just not working effectively. </p>
<p>We can see the problem in the recent <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F61c9ed97-7db3-4a67-a14e-a5114c0258b8%2F0000%22">testimony to the House Economics Committee</a>. Recounting the sequence of events that led the Commonwealth Bank to inform regulators of the <a href="http://www.austrac.gov.au/media/media-releases/austrac-seeks-civil-penalty-orders-against-cba">alleged breaches of money-laundering legislation</a>, CBA Chair Catherine Livingstone said:</p>
<blockquote>
<p>We were having board meetings at the time I was being called to Canberra by the Treasurer. When the board meeting, which went over multiple days, finished, which was lunchtime on the Wednesday, I immediately phoned the other two regulators, ASIC and APRA.</p>
</blockquote>
<p>This raises a raft of questions. Having known about the allegations of money laundering since 2015, why did CBA not inform the regulators until August 2017? Why did the treasurer warn CBA before CBA talked to the two regulators? When did the Treasurer first hear of the money-laundering breaches? And why did the treasurer not instruct AUSTRAC (an agency of the <a href="https://www.ag.gov.au/CrimeAndCorruption/AntiLaunderingCounterTerrorismFinancing/Pages/AUSTRAC.aspx">Attorney General’s department</a>) to inform <a href="http://asic.gov.au/about-asic/what-we-do/our-role/statements-of-expectations-and-intent/statement-of-expectations-april-2014/">ASIC</a> and <a href="http://www.apra.gov.au/AboutAPRA/Documents/140417-SOE-APRA-Statement-of-Expectations.pdf">APRA</a>? </p>
<p>In a previous parliamentary hearing, Greg Medcraft, Chairman of ASIC, had <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F61c9ed97-7db3-4a67-a14e-a5114c0258b8%2F0000%22">said</a>:</p>
<blockquote>
<p>I met two days before with the chairman of the Commonwealth Bank, the chair of risk and the chair of the audit committee… There was no mention of what happened. Then I saw the announcement and, about a week later, the chair called me in to apologise. Timeliness and transparency are big issues in this one</p>
</blockquote>
<p>So, either ASIC and/or APRA were aware of the allegations of money laundering at CBA and took no action <a href="http://www.abc.net.au/news/2017-08-28/commonwealth-bank-to-face-independent-inquiry-apra/8848004">until prompted</a> by the treasurer, or the communications between the various agencies of government are not working as planned. Either way, this is no way to regulate a modern financial system.</p>
<h2>Even more regulatory confusion</h2>
<p>Just as he is due to <a href="http://www.abc.net.au/news/2017-10-17/asic-james-shipton-to-replace-greg-medcraft/9057190">leave his role as head of ASIC</a>, Greg Medcraft managed to end two high profile cases with modest wins. </p>
<p>Both <a href="http://www.afr.com/business/banking-and-finance/why-anz-and-nab-settled-asics-bbsw-case-20171026-gz9d90">ANZ Bank</a> and <a href="http://www.smh.com.au/business/banking-and-finance/nab-admits-staff-wrongdoing-as-it-settles-bbsw-20171027-gz9zva.html">NAB</a> have settled with ASIC for their parts in <a href="https://theconversation.com/years-on-asic-still-grappling-with-swap-rate-fixing-scandal-35851">manipulating the BBSW intereset rate benchmark</a>. Although the settlement remains to be approved by the Federal Court. </p>
<p><a href="http://www.abc.net.au/news/2017-10-25/rate-rigging-trial-adjourned-anz-nab-finalise-settlement/9083894">Westpac</a> remains the hold out, and the <a href="http://www.smh.com.au/business/banking-and-finance/westpac-traders-talked-openly-about-rigging-interest-rate-asic-alleges-20171030-gzbgx6.html">prosecution’s case has opened</a> in the Federal Court.</p>
<p>But in the euphoria at ASIC, a niggling question remains – what about the Commonwealth Bank?</p>
<p>For some time, Medcraft has <a href="http://www.theaustralian.com.au/business/opinion/john-durie/asic-and-cba-hold-their-ground-on-bank-bill-swap-rate-case/news-story/9b50dc7f7628ac630ac37c11e0e2ce33">warned</a> that action against CBA had not been ruled out and that <a href="http://www.smh.com.au/business/banking-and-finance/cba-braced-for-fourth-rate-rigging-case-20160608-gpecc4.html">information was being gathered</a>. Recently Medcraft confirmed that the regulator had “plenty of time” to <a href="http://www.financialservicescareer.com.au/news/regulator-circling-cba">take action against CBA</a>.</p>
<p>This also raises a number of questions. Not least why ASIC has not filed claims against CBA or announced that there would be no action taken against the bank. If CBA has no case to answer then ASIC should come out and exonerate the bank and relieve its long-suffering shareholders. </p>
<p>But if CBA has even a minor case to answer, and the regulator has held off hoping that the bank would settle without going to court, then ASIC may have been much too clever for their own good.</p>
<p>As a result of a <a href="http://www.abc.net.au/news/2017-08-23/commonwealth-bank-faces-shareholder-class-action/8833860">shareholder action</a> following the alleged money-laundering scandal, ASIC is <a href="http://www.abc.net.au/news/2017-08-11/asic-to-investigate-cba/8796542">now looking at</a> whether the CBA board “complied with continuous disclosure laws when it decided not to alert investors to the suspicious behaviour”.</p>
<p>This leaves ASIC in an extremely difficult position - looking at a possible failure to disclose the money-laundering scandal at CBA, while at the same time hinting that CBA may have done the same thing with BBSW.</p>
<p>But ASIC is not the only regulator to be operating in the dark. The latest Banking Executive Accountability Regime (BEAR) legislation only adds to the <a href="https://theconversation.com/bankings-new-bear-is-a-teddy-bear-not-a-grizzly-85687">confusion</a> on how best to regulate financial services.</p>
<p>When questioned in recent <a href="http://parlinfo.aph.gov.au/parlInfo/download/committees/estimate/c419b06c-d059-4ecb-b033-6d08bd9b7c6d/toc_pdf/Economics%20Legislation%20Committee_2017_10_26_5679.pdf;fileType=application%2Fpdf#search=%22rowell%22">Senate Estimates</a> about the regulatory impact statements that have been done for <a href="https://www.legislation.gov.au/Details/C2017B00229/Explanatory%20Memorandum/Text">new BEAR legislation</a>, Helen Rowell, deputy Chair of APRA, replied that she personally had “not seen them; I couldn’t say whether anyone else within APRA has seen them”. </p>
<p>This is despite the fact that APRA has been given an extra A$40 million over four year to handle the new legislation - for what, and where did this figure come from? </p>
<p>Again, this is no way to regulate a banking system. The confusion around what regulators do and how they do it, must be sorted out. </p>
<h2>Where next?</h2>
<p>The most obvious answer to clearing up this mess is to initiate a royal commission that looks specifically at banking regulation. In particular, what form a modern banking regulation system should take; which regulators should do what; what the responsibilities of parliament, ministers and regulators should be; and how regulators should share information and tackle common problems (such as <a href="https://theconversation.com/why-bankers-so-often-fail-to-comply-with-policies-and-regulations-82159">banking culture</a>).</p>
<p>Such a royal commission should concentrate on clearing up issues of regulatory philosophy, structure, legal requirements and administration. Whether or not there is an <a href="http://www.abc.net.au/news/2017-10-30/coalition-mps-may-cross-floor-for-banking-royal-commission/9100838">all-purpose banking royal commission</a>, the failures in the current system have to be remedied.</p>
<p>Of course, the government has only got itself to blame for getting in this mess. </p>
<p>The government’s own <a href="http://fsi.gov.au/">Murray Inquiry into the Financial System</a> made a recommendation that could have helped. The inquiry recommended the establishment of a new <a href="https://theconversation.com/to-clean-up-the-financial-system-we-need-to-watch-the-watchers-38359">Financial Regulator Assessment Board</a> (FRAB), which would:</p>
<blockquote>
<p>advise government annually on how financial regulators have implemented their mandates. Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.</p>
</blockquote>
<p>Sounds sensible? Not to the government, as it chose to accept all of the major recommendations of David Murray’s inquiry <a href="https://treasury.gov.au/publication/government-response-to-the-financial-system-inquiry/attachment-government-response-to-financial-system-inquiry-recommendations/">except for this one</a>. </p>
<p>And, instead of having one professional body that looks at the performance of regulators, there has been a nonstop procession of “independent” inquiries, by <a href="https://www.commbank.com.au/guidance/newsroom/comminsure-releases-deloitte-report-into-claims-handling-201702.html">banks themselves</a>, the <a href="https://www.bankers.asn.au/media/media-releases/media-release-2016/review-into-retail-banking-remuneration-begins">banking industry </a>and even <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">regulators</a>. No big picture, just a patchwork of unconnected recommendations. And undoubtedly <a href="http://www.heraldsun.com.au/business/bank-chiefs-deny-raterise-gouging-at-parliament-hearing/news-story/0cedbd4a36dc41a731780a8054ff8524">more to come</a>. </p>
<p>An opportunity missed.</p><img src="https://counter.theconversation.com/content/86518/count.gif" alt="The Conversation" width="1" height="1" />
Parliamentary hearings reveal a lot of confusion between government, regulators and industry around banking regulation. This needs to be fixed.Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/863122017-10-26T23:56:39Z2017-10-26T23:56:39ZFor bankers, acountability does not start at home<p>When the CEOs of the four major banks <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F61c9ed97-7db3-4a67-a14e-a5114c0258b8%2F0000%22">fronted the House Economics Committee</a>, the common thread was that accountability does not lie with them. Even after a decade of scandals like <a href="https://theconversation.com/why-rigging-of-the-bank-bill-swap-rate-hurts-everyone-55826">interest rate rigging</a>, <a href="http://www.heraldsun.com.au/business/bank-chiefs-deny-raterise-gouging-at-parliament-hearing/news-story/0cedbd4a36dc41a731780a8054ff8524">gouging of interest-only mortgagees</a> and <a href="https://theconversation.com/allegations-against-the-cba-show-the-need-for-a-royal-commission-into-the-banks-82063">alleged money laundering</a>.</p>
<p>In August, AUSTRAC <a href="http://www.austrac.gov.au/media/media-releases/austrac-seeks-civil-penalty-orders-against-cba">filed a claim</a> against the Commonwealth Bank for some 52,000 infringements of money laundering laws, and ASIC finally got to hear about it. </p>
<p>The true hierarchy of power and the realities of regulators’ supposed independence were laid bare by Commonwealth Bank Chairwoman Catherine Livingstone when relating the sequence of events:</p>
<blockquote>
<p>We were having board meetings at the time I was being called to Canberra by the Treasurer. When the board meeting, which went over multiple days, finished, which was lunchtime on the Wednesday, I immediately phoned the other two regulators, ASIC and APRA</p>
</blockquote>
<p>Obviously, the Treasurer pulls the strings and banking regulators are last to know.</p>
<p>The whole charade illustrates why the Treasurer’s latest piece of regulatory fiddling around, the <a href="https://www.legislation.gov.au/Details/C2017B00229/Explanatory%20Memorandum/Text">Banking Executives Accountability Regime</a> (BEAR), is a <a href="https://theconversation.com/bankings-new-bear-is-a-teddy-bear-not-a-grizzly-85687">waste of time and money</a>.</p>
<h2>Where is the personal accountability?</h2>
<p>First and most obvious, none of the many issues addressed in the Committee’s hearings would fall under the new BEAR legislation because they do not threaten the prudential standing of the banks. </p>
<p>The issue of collective, as opposed to individual, accountability was brought into the open by Ms Livingstone in another exchange. </p>
<p>The CBA board’s remuneration committee had OK’d a performance bonus for the bank’s senior staff even though the money-laundering problems had been known for at least a year.
This decision was partially reversed after the AUSTRAC allegations came to light:</p>
<blockquote>
<p>The board took the view that there was collective accountability at the board and the senior executive level for the impact on the reputation of the bank of AUSTRAC pursuing civil proceedings. So in recognition of that collective accountability, we determined to reduce the bonuses to zero and to take the penalty on the directors’ fees.</p>
</blockquote>
<p>When pressed by a committee member about individual accountability for the scandal, Ms Livingstone gave the standard response:</p>
<blockquote>
<p>No, the issue, as I’ve said, is that we have to actually go through all the processes through our subcommittee to determine the facts and where the individual accountability lies.</p>
</blockquote>
<p>And when he, too, was pressed, Commonwealth Bank CEO Ian Narev fell back on the old “this is the subject of legal proceedings” response. No sign of anyone standing up and taking personal responsibility for any of the <a href="https://theconversation.com/where-the-accountability-problems-started-at-cba-83809">numerous scandals</a> that CBA has been involved in over the past decade. </p>
<p>Nor will they have to under the BEAR, because the bar has been set too high to hold any one individual to account. But lest it be thought that CBA was the only bank to run away from accountability. </p>
<p>In the session with the CEO of NAB, <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F61c9ed97-7db3-4a67-a14e-a5114c0258b8%2F0000%22">Andrew Thorburn</a>, the committee opened the touchy issue of why no-one had taken the hit for the scandal where some 220,000 customers had to be reimbursed for “incorrectly charged fees for financial advice”. </p>
<p>When asked why the then head of the bank’s wealth unit had received an increased bonus and had been promoted, Thorburn countered that he thought that the manager concerned:</p>
<blockquote>
<p>does understand accountability. He’s been before a number of committees. He speaks to me a lot and speaks to our board a lot. I think he does understand it.</p>
</blockquote>
<p>So for NAB, accountability is attending meetings and talking to bosses. By that definition almost everyone in NAB is “accountable,” so no need to regulate?</p>
<p>Nor is NAB alone. In the <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2Faf124b58-f8c9-4d0f-81ef-23504fcea693%2F0002%22">first set of hearings</a>, Brian Hartzer, CEO of Westpac, was questioned about the <a href="https://www.westpac.com.au/about-westpac/media/media-releases/2017/15-march/">enforceable undertaking </a>(EU) signed with ASIC concerning the manipulation of foreign exchange benchmarks. He replied that “none of the traders involved are with us anymore”. </p>
<p>Fair enough, but what about the senior managers involved, do they still work for the bank?</p>
<blockquote>
<p>The most senior executives do, yes, but that is after looking very carefully at the steps that they took both before and after to deal with the issue. I can say — and I think ASIC will agree — that the response of our executives when this issue emerged has been exactly what you would want in terms of getting into the detail and making sure control issues were addressed.</p>
</blockquote>
<p>So actions, such as <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-065mr-asic-accepts-enforceable-undertakings-from-westpac-and-anz-to-address-inadequacies-within-their-wholesale-fx-businesses/">colluding with competitors</a> to rig the <a href="https://theconversation.com/asic-finally-pulls-the-bbsw-trigger-on-anz-55766">BBSW rate</a> did not trigger any accountability issues, beyond the alleged perpetrators. This says everything about where Westpac considers accountability lies, i.e. with the person who gets caught?</p>
<p>And finally ANZ Bank, where CEO, Shayne Elliot, discussed the “hypothetical” that ANZ would settle the long-running BBSW case with ASIC. Not completely hypothetical as ANZ <a href="http://www.abc.net.au/news/2017-10-23/asic-settles-court-case-against-anz-bank/9076140">settled the case</a> a few days later, after what had been prolonged negotiations. </p>
<p>In the light of the ASIC settlement for a <a href="https://www.bloomberg.com/news/articles/2017-10-22/anz-bank-settles-rate-rigging-case-with-securities-regulator">reputed A$50 million</a>, Elliot’s response was illuminating as regards individual accountability. When asked, “are there any of those potential bonuses affected that now won’t be vesting because of things that you’ve uncovered in the course of dealing with this case?”:</p>
<blockquote>
<p>Not to my knowledge. We have a lot of people at the bank. There’s a list of equity and deferred comp that vest in people now-ish, and we’re going through the process of approving and making sure that those things should still take place. I’m not aware that any of those individuals [who had left the bank] are receiving any, but I might be wrong. I’d have to go back and check.</p>
</blockquote>
<p>Given the impending payment of some A$50 million of shareholder’s money, one would hope that going back and checking was not necessary, but the off-hand answer illustrates where ANZ considers accountability lies - that is, with the last person to leave the bank.</p>
<p>The common thread of the CEOs’ responses to questions of where does individual accountability lie is “not with us”. Even after considering the government’s new BEAR legislation, the concept of individual accountability for wrongdoing by employees appears to be completely alien to the senior leaders of these banks. </p>
<p>With such a lack of understanding, the BEAR legislation is doomed and should be put out of its misery.</p><img src="https://counter.theconversation.com/content/86312/count.gif" alt="The Conversation" width="1" height="1" />
New banking legislation hopes to hold executives accountable, but there weren’t good signs at the latest parliamentary committee meeting.Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/834112017-09-05T02:08:52Z2017-09-05T02:08:52ZHas APRA just outsourced its job?<p>The Australian Prudential Regulation Authority APRA has <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">announced</a> an independent inquiry into the Commonwealth Bank of Australia, “focusing on governance, culture and accountability frameworks and practices within the group”.</p>
<p>Hold on a minute. Isn’t that what APRA should have been doing all along? According to the <a href="http://www.bis.org/bcbs/publ/d328.htm">principles of corporate governance for banks</a> (that APRA helped author), it has both the right and obligation to talk to anyone in the bank, at any time, to discuss corporate governance.</p>
<p>One of the key principles of <a href="http://www.bis.org/bcbs/publ/d328.htm">corporate governance for banks</a> relates specifically to the “role of supervisors” (regulatory speak for regulators):</p>
<blockquote>
<p>Supervisors should provide guidance for and <strong>supervise corporate governance</strong> at banks, including through comprehensive evaluations and <strong>regular interaction with boards and senior management</strong> </p>
</blockquote>
<p>This principle means that regulators are meant to be participants in, not merely spectators to, banking regulation. This requires, for example, “improvement and remedial action, as necessary”. </p>
<p>Among the relatively few things that regulators are required to provide is guidance into the internal organisations of bank boards.</p>
<p>In order to do that, APRA is required to have “processes in place to fully evaluate a bank’s corporate governance”. These evaluations are conducted “through regular reviews of written materials and reports [for example, board minutes], interviews with board members and bank personnel”. Importantly:</p>
<blockquote>
<p>the evaluations should also include regular communication with a bank’s board of directors, senior management, those responsible for the risk, compliance and internal audit functions, and external auditors</p>
</blockquote>
<p>So, assuming that APRA does have processes in place to evaluate a bank’s corporate governance, why does it feel the need to outsource its own job? Who knows (<em>or who should know</em>) CBA and its governance processes better than APRA? </p>
<h2>Corporate Governance and board size</h2>
<p>Corporate governance is not an easy concept, especially questions of how much is enough. In particular, how many directors are needed to oversee management and what skills should they bring to the board? The Basel principles require that:</p>
<blockquote>
<p>The board should be comprised of individuals with a balance of skills, diversity and expertise, who collectively possess the necessary qualifications commensurate with the <strong>size, complexity and risk profile of the bank</strong>.</p>
</blockquote>
<p>In short, APRA is required to ensure that there are sufficient and adequately skilled directors to oversee a bank as systemically important as CBA. </p>
<p>Until this week, there were eleven directors of CBA and its subsidiaries. Each of these subsidiaries, such as <a href="https://theconversation.com/comminsure-case-shows-its-time-to-target-reckless-misconduct-in-banking-55748">CommInsure</a>, is bigger than most Australian companies. </p>
<p>After the <a href="http://www.smh.com.au/business/banking-and-finance/commonwealth-bank-in-board-shakeup-20170904-gya3pe.html">recent board shakeup</a>, two CBA directors were dropped and one was brought on board. A future retirement was also announced. Altogether this is a reduction of almost 25% of the board’s experience. </p>
<p>But are nine board members enough? Who knows - presumably APRA does and has no problems with a board of this size. </p>
<p>In <a href="https://researchers.mq.edu.au/en/publications/strategic-risk-management-practice-in-systemically-important-bank">2010</a>, there were 11 directors of CBA, so APRA must have felt (despite <a href="https://theconversation.com/banking-inquiry-findings-ask-the-wrong-questions-get-the-wrong-answers-69421">numerous scandals</a>) that they could sanction the reduction in the board of Australia’s biggest company (at the time) by two directors (a drop of around 18%).</p>
<p>But it is not only CBA. In the same period APRA has (presumably) felt happy with the axe being taken to the boardrooms of the other three big banks. Aside from <a href="https://www.shareholder.anz.com/sites/default/files/anz_-_annual_report_2016.pdf">ANZ</a>, which has had eight directors since 2010, <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2016_Westpac_Annual_Report">Westpac</a> has dropped from ten to eight and <a href="https://www.nab.com.au/content/dam/nabrwd/About-Us/shareholder%20centre/documents/2016-annual-financial-report.pdf">NAB</a> from 13 to nine. </p>
<p>Overall, according to their own annual reports, the number of directors in the largest banks in Australia has dropped some 16% since 2010.</p>
<h2>Board experience and expertise</h2>
<p>But maybe it is not all about board size. What about quality?</p>
<p>Presumably APRA accepted that Catherine Livingstone, appointed Chairperson of CBA <a href="https://www.commbank.com.au/guidance/newsroom/CBA-announces-new-chairman-201610.html">last year</a>, is not a banker but an accountant from the medical industry. They must also have been happy that the CEO who was put in place after banker Ralph Norris left CBA in 2011, was a management consultant, <a href="https://www.linkedin.com/pulse/unwanted-advice-dead-man-walking-patrick-mcconnell">Ian Narev</a>. </p>
<p>And presumably APRA was not unhappy that the latest two CBA directors are a <a href="https://www.commbank.com.au/guidance/newsroom/cbas-new-non-executive-director-201606.html?ei=gsa_newsroom_board">lawyer</a> and a <a href="https://www.commbank.com.au/guidance/newsroom/changes-to-board-of-directors-201503.html?ei=gsa_newsroom_board">technology specialist</a>, not bankers. In fact today, bankers make up less than a third of CBA’s board directors. </p>
<p>That in itself would not be too much of a problem, except that the <a href="https://www.linkedin.com/pulse/cba-case-groupthink-patrick-mcconnell">executive management committee</a> of CBA is packed with management consultants and lawyers, with less than 40% having significant banking experience. </p>
<p>Having experience outside of banking is very important for bank directors. But a lack of in-depth experience can also lead to problems. In the UK, a damning <a href="http://www.bankofengland.co.uk/pra/Documents/publications/reports/hbossum.pdf">report</a> on the failure of the Halifax/Bank of Scotland (HBOS) found that: </p>
<blockquote>
<p>As a group, the non-executive directors (NEDs) on the [HBOS] Board lacked sufficient experience and knowledge of banking. […] The lack of experience and knowledge of banking amongst the NEDs was compounded by similar lack of banking experience within the executive management team.</p>
</blockquote>
<p>CBA is definitely not HBOS, although HBOS was a star performer until it became unstuck. Nonetheless APRA should pay heed to the warnings of its fellow regulators.</p>
<p>Since 2010, APRA has overseen a significant reduction in the size of boards across the banking sector and a dilution of seasoned bankers on the board of CBA. </p>
<p>When its senior staff had regular communication with the bank’s directors and senior management, APRA should have picked up on the risks and scandals that CBA has become embroiled in in the last decade. </p>
<p>They would have shared “information on corporate governance with other supervisors” such as <a href="http://www.austrac.gov.au/media/media-releases/austrac-seeks-civil-penalty-orders-against-cba">AUSTRAC</a> and ASIC. APRA would not have been surprised when the CBA board <a href="https://www.commbank.com.au/guidance/newsroom/CBA-ASX-update-on-AUSTRAC-matter-201708.html?ei=card-view">threatened</a> to fight the latest money-laundering allegations in court.</p>
<p>This is why it comes as a surprise that APRA, an independent regulator with unparalleled access to the inner workings of all major banks and bristling with internal expertise, should need to outsource its inquiry of corporate governance at CBA.</p>
<p>If APRA cannot evaluate a bank’s governance, who can?</p>
<p>Or maybe APRA is embarrassed that somewhere along the line it has dropped the ball and become far too cosy with the banks it is supposed to regulate.</p>
<p>Maybe an inquiry into APRA should be on the cards?</p>
<p>Quis custodiet ipsos custodes? Who regulates the regulators?</p><img src="https://counter.theconversation.com/content/83411/count.gif" alt="The Conversation" width="1" height="1" />
If APRA cannot evaluate a bank’s governance, who can?Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.