Peter Kell had a front row seat to a series of inquiries into serious misconduct issues that unfolded following the GFC, culminating in the Royal Commission.
And as a lifelong champion of consumer rights - with credentials that include CEO of Choice, and Deputy Chair of both the ACCC and ASIC - it’s clear he still has a keen focus on customer outcomes in his private sector role.
The Managing Director at Promontory Financial Group, who joined former APRA chair Dr Jeff Carmichael at the Australian arm of the IBM consulting group in December 2019, spoke to The Standard about the way the regulatory landscape has changed over the last few years in significant ways.
“It’s not just in Australia – in many countries we’ve seen a revamp in the approach to regulation in financial services. This has occurred across prudential, conduct and financial crime regulation,” he says.
“In Australia there has been a very wide range of regulatory reforms. To help make sense of these changes we can identify some key themes that emerged following the Royal Commission and other financial sector reviews, as well as the large number of parliamentary inquiries. Five stand out.
“The first is a greater focus on enforcement. This includes greater expectations of court-based enforcement in appropriate cases. It’s not just with ASIC, you can see this focus across Australian regulators.
“The second is a more proactive approach to regulation and risk management. This means taking action to prevent problems emerging or acting earlier when problems do emerge to reduce the risk of harm to a larger population or the risk of systemic failures.
“There is always a balance in regulation between reactive and proactive work, and regulators have to be careful not to impose unreasonable burdens upfront. However, it was clear from the reviews and inquiries that there is a greater expectation that the balance would tip towards a more proactive approach where possible.”
After all it’s preferable, where possible, to act earlier rather than allow problems to become systemic, he says.
The third trend, according to Kell, is a greater focus on outcomes and fairness, and less reliance on upfront disclosure.
“Are your customers in the right product? Are they getting good advice? Are they having a poor experience with insurance claims? Are they being treated fairly?” he asks.
In the past there was a lot of reliance on upfront disclosure. However, a strong message coming through from the Royal Commission, and other reviews, was that disclosure often failed to correct market problems. “So you also have to take account of the outcome for your customer,” he says.
He points to reforms around product design and distribution as an example of this.
A fourth trend is a growing focus on governance, culture and accountability.
“Regulators in financial services are now explicitly calling out issues with a firm’s governance and culture in a way that simply wasn’t happening a decade ago. This is, in part, a recognition of the importance of managing non-financial risk.
“With the benefit of hindsight, you can argue that non-financial risk was neglected compared to the focus on financial outcomes.
“We’ve seen this theme coming through in major reviews of large financial institutions or thematic reviews of governance by regulators. There’s a clear expectation that firms should prioritise a sound culture and strong accountability.
“These things matter. They're not just nice to have, they drive a firm’s behaviour and customer outcomes in important ways. So you've got to get them right, and this needs to start with the board.”
The fifth theme is a demand for greater transparency, reporting and public data. Kell highlighted that expectations on firms to report breaches in a timely manner, or publicly report their complaints data, are growing around the world.
“I would argue that this trend is not unique to financial services. There is a growing expectation of greater transparency around the performance of firms, both good and bad,” he says.
“That data is going to have to be there, accessible to the regulators, and in many cases accessible to the public. This has interesting implications for the way data systems and technology are developed in firms.
“Just saying, "Trust us" is not a sustainable position. You have to demonstrate that that trust is earned, and part of that is being transparent around your performance and the outcomes you're generating across the board.”
ESG poses interesting challenges especially for the larger firms as it is increasingly a global environment when it comes to the expectations, according to Kell.
“So for firms operating across borders you not only have to take into account the expectations in your own jurisdiction, but the expectations around how you perform in these areas as they apply in other countries,” he says.
“That can be challenging, as there are inconsistencies around reporting requirements. But that's the reality of working across the globe.
“You can see governments and regulators looking to take lessons from both the policy frameworks and the regulatory approaches in other jurisdictions. This includes ideas around substantive legal requirements through to issues such as the use of technology in regulation.
“You can anticipate that something that might currently apply in the UK may well end up being applied here in a few years’ time, or vice versa.
“The question you have to ask as a board and executive is "Do we get ahead of the game? Or do we wait? Where possible it makes sense to think about emerging requirements now," he said.
Kell believes that these five trends still apply as we emerge from the COVID pandemic.
“Banks and other financial institutions have had an opportunity with COVID to understand their customers, to work with their customers, to show that they can get on top of a really serious and unanticipated event, like the pandemic.
“It’s provided an unanticipated opportunity to demonstrate that they've learned some lessons about how to better ensure they can meet customer needs in a responsible and responsive manner.
“Having said this, there are clearly still challenges arising from the impact of the pandemic. Some of the more difficult decisions will still be facing financial institutions down the track.
“It will require a sustained focus on getting it right. This includes dealing with the difficult cases that inevitably arise in a sensitive, practical and consistent way. Good systems and data will be essential. After all, the Royal Commission provided some examples of what can go wrong if you don’t treat all customers with respect.
Acknowledging the accusations around the regulators not being fit for purpose that were levelled at ASIC and APRA during the Royal Commission, Kell says: “Australian regulators and financial institutions were probably a little overconfident about the way in which Australia emerged from the GFC.
“Because some of the prudential outcomes were relatively good following the GFC there was less focus on conduct risks and consumer outcomes. But I think the risk of underestimating potential conduct risks coming out of COVID is less.
“Regulators will be much more attuned to the possibilities of negative outcomes and will want to get on top of those earlier and more vigorously. Furthermore, recent reforms mean that regulators now have more effective toolkits to deal with these problems compared to the past. They will, for example, be requiring greater information about customer outcomes in this environment.
“So it makes sense, if you're in the finance sector to get across these issues yourself.
“The Hayne Inquiry underlined that key parts of the finance-sector regulatory regime were arguably no longer fit for purpose. And as a result we've seen changes to the powers of ASIC and APRA and a significant increase in penalties.
“But it also highlighted that community expectations around Regulators had grown. A more proactive approach is necessary when it came to dealing with significant financial problems.”