On Monday, the Australian Prudential Regulation Authority (APRA) announced that it would establish an independent prudential inquiry into the governance, culture and accountability framework of Commonwealth Bank of Australia (CBA, Aa3/Aa3 stable, a26). APRA’s focus on CBA’s culture and practices is credit negative and could damage the bank’s reputation as well as compel it to incur costs and use resources to address any mandated remedial actions.
APRA has stated that it will make the findings of its review public and that the inquiry will take around six months from its formal commencement. APRA’s regulatory review is the latest of several regulatory issues for CBA. On 3 August, the Australian Transaction Reports and Analysis Centre (AUSTRAC) commenced proceedings against CBA for non-compliance of the Anti-Money Laundering and Counter-Terrorism Financing Act. AUSTRAC alleges that CBA did not carry out a specific assessment of the money laundering and terrorism financing risk of intelligent deposit machines until three years after their introduction, and inadequately monitored and reported suspicious transactions.
We expect more information about the timing of AUSTRAC’s proceedings at the first case-management hearing scheduled on 4 September. We also expect CBA to file a statement of defense. CBA also faces a potential class-action lawsuit from shareholders that allege the bank did not meet its continuous disclosure obligations in relation to the AUSTRAC allegations. The Australian Securities and Investments Commission (ASIC) also has announced that it will investigate whether CBA did not meet these obligations.
In recent years, CBA has dealt with a number of conduct-related issues that have negatively affected the bank’s reputation. In August, ASIC announced that CBA would refund more than 65,000 customers approximately AUD10 million, after selling them unsuitable consumer credit insurance. In March 2016, the bank’s life insurance business, CommInsure, was accused of deliberately avoiding or delaying paying claims to its customers, but in March 2017, ASIC cleared CommInsure of any breaches of the law. However, ASIC identified areas that CBA should improve, which CBA has already done or is committed to doing. Also, CBA in 2014 announced an Open Advice Review program relating to the poor quality of advice and compliance breaches by its financial planning businesses, Commonwealth Financial Planning and Financial Wisdom.
Operational and compliance problems of this nature highlight the challenges of maintaining tight controls at large and complex institutions that span multiple business lines such as retail, commercial and institutional banking, insurance and wealth management. We note that the strong profitability of Australia’s major banks’ domestic franchises and the low credit costs amid an extended period of unusually low interest rates elevates the risk that banks become complacent in the their approach to operational and governance risks.
