Wayne Byres, the chairman of the Australian Prudential Regulation Authority, attended a meeting of the Commonwealth Bank board just before Christmas in 2015 and delivered an unequivocal message: your success has made you arrogant.
Then chairman David Turner and the rest of his directors had reason to be cocky. CBA's bank's profits had soared on the back of a massive housing boom; as the biggest provider of mortgages, the banking product with the highest profitability, CBA was on a high.
The board had also presided over a big turnaround in customer satisfaction and the bank was widely acknowledged as the market leader in technology innovation.
But success can breed complacency. As the prudential inquiry into CBA said in its report on Tuesday, its "first ranking on many financial measures created a collective belief within the institution that CBA was well run and inherently conservative on risk, and this bred over-confidence, a lack of appreciation for non-financial risks, and a focus on process rather than outcomes."
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APRA had been trying to get CBA's board to focus on improving its risk culture for some time. But as the report also outlined, the bank has shown a "reluctance to proactively volunteer information on matters of regulatory concern" and there were "frequent delays in compliance with regulatory requests".
APRA conducted a prudential review of CBA's operational risk management framework in late 2015. It found several specific control gaps. So Byres decided the board needed to hear a strong message, directly from him.
'Legalistic lense'
At its December board meeting, Byres "characterised CBA as "bureaucratic and arrogant", elaborating that "arrogance" referred to the complacency that can develop within an institution after a long period of success, Tuesday's report said.
"It was only after this review that the board increased its attention to long-outstanding issues."
With the final report of the prudential inquiry calling for CBA to "strengthen its dialogue and engagement with regulators", chairman Catherine Livingstone told reporters the bank has heard the message loud and clear.
"The board has made it clear the legalistic lense is not helpful, and is not in the interests of the way we interact with our customers and regulators," she said. "Over the last year or so, the board has been taking a different approach to our engagement with regulators."
She pointed to the more transparent approach towards this inquiry itself, and the way the bank will accept all 35 recommendations. CBA has worked with APRA and its independent panel during the five months since it was formed following the AUSTRAC allegations, and "we are recognising it's a very tough report but it is very fair, and we are embracing its recommendations in full", she said. "We are not disputing or taking a legalistic approach to the report to aspects of the report – we are taking it in full, as it stands."
CEO Matt Comyn agreed that "at times we have been defensive, legalistic and, as the authors of the report note, perfunctory in some of our interactions. That is something we have been aware of and that's something this needs to change and rapidly.
"I would like to think we are making some progress on that front now, but that needs to be something we are demonstrating through our actions and our interactions, with the media and the regulators."
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