ASIC's Greg Tanzer says the regulator's investment banking team has recently delivered a questionnaire "to a number of investment banks to better understand their appetite, attitude and approach to conduct". Photo: Katherine Griffiths

The boards of several investment banks have been issued with reports on potential deficiencies in their corporate culture, as scrutiny of remuneration and potential conflicts of interest in the industry gathers pace.

"There is a need for a cultural shift in the financial industry – and it needs to happen now," Australian Securities and Investments Commission commissioner Greg Tanzer said. 

The ASIC investment banking team has recently delivered a targeted questionnaire "to a number of investment banks to better understand their appetite, attitude and approach to conduct", Mr Tanzer said. He did not name the investment banks.

ASIC is investigating UBS for potential breaches of the Corporations Act over a research report debacle during the NSW election campaign. Macquarie Group is also subject to an ASIC enforceable undertaking relating to failures in its wealth business.

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ASIC is also investigating various investment banks and commercial banks over potential rigging of the benchmark interest rate and for potential foreign exchange rate manipulation inquiries.

ASIC's recent questionnaire was designed to help it identify broader conduct risk in the banks.

Mr Tanzer suggested that incentive structures and the way in which staff were promoted were part of the inquiries.

Promotes good conduct

"It is crucial firms recognise performance in a way that not only promotes good conduct but penalises poor conduct as well," he told a Thomson Reuters conference in Sydney on Wednesday. 

"On rewards, ASIC has been saying for some time that one of the issues in the financial advice industry relates to the incentive structures they use."

ASIC has reported back to the banks' boards and executive teams on their answers to its questionnaire, and to staff via some town hall meetings at the banks.

Professor Ian Ramsay, of Melbourne University's Centre for Corporate Law and Securities Regulation, said the "inherent tension" at financial institutions between performance and compliance meant ASIC was right to continue to prosecute the case for cultural improvement. He said Mr Tanzer was "right to draw on the growing amount of research showing that the right culture in institutions is a positive, powerful force".

Mr Tanzer said he was concerned that in the context of the foreign exchange manipulation, staff at the banks had known about the possibility of problems arising but might not have had the opportunity to raise concerns and have them considered properly.

Anatoly Kirievsky, the compliance officer for Australia at Bank of America Merrill Lynch, said when thinking about conduct risk, the investment bank was seeking to make decisions that it would be comfortable making with the regulator in the room.

"It comes back to transparency. Your core internal discussions and decision making should be robust enough you would be comfortable explaining that to a regulator." 

Better training

Christian Hunt, the global head of compliance and operational risk control at UBS, said the investment bank was seeking to change the behaviour of its bankers through better training, enhanced mechanisms for whistleblowing, and amending remuneration to make sure that turning away bad business is recognised.

"It is about empowering your people to take the right decision, even when there is no one looking over their shoulder and they think they might get away with something ... That takes time and you really need to work on it. " 

The Australian Prudential Regulation Authority has also been closely monitoring culture in banks and has told boards of directors about the importance of maintaining high ethical standards. APRA's intensified focus on risk and the series of scandals in bank wealth divisions has ensured that the commercial banks in Australia are focused on improving risk culture and avoiding potential regulatory sanctions and damage to their brands from misconduct.

"Risk culture is the new black," Richard Gray, the head of regulatory reform at Westpac Banking Group, told the conference. "It has been the new black for several years and it is simply going to increase in importance." 

Mr Tanzer highlighted the costs to shareholders from poor culture and conduct scandals abroad. The London School of Economic and Political Science has found the cost of poor conduct for the 10 most-affected global banks was about $US250 billion ($323 billion) from 2008 to 2012. And since 2011, KPMG has found the big British banks have paid almost 60 per cent of their profit in fines and repayments to customers.

But "research has shown that businesses with a strong culture tend to have sustained high performance over the longer term", he said.  

Professor Ramsay said in large companies, "corporations with effective ethics and compliance programs, those companies had half the number of compliance contraventions as companies without effective programs". 

He pointed to strong whistleblower programs as a good example and said the role of remuneration in shaping culture was especially important in financial institutions, where incentives were generally much higher than other parts of the business world. 

"The very fact that shareholders have focused on incentive effects of remuneration tells us that how you change people changes their behaviour. If the remuneration structure supports short-term behaviours, that clearly does influence culture," he said.  

WITH JAMES THOMSON