sign up log in
Want to go ad-free? Find out how, here.

Australian Productivity Commission proposes a formal, accountable reporting line to bank board and regulator putting substance to banks' marketing claim they put customers first

Australian Productivity Commission proposes a formal, accountable reporting line to bank board and regulator putting substance to banks' marketing claim they put customers first

In an idea described as "very attractive" by Australian Prime Minister Malcolm Turnbull, Australia's Productivity Commission is recommending the country's banks should be forced to install a Principal Integrity Officer with independent status who acts in customer interests.

The recommendation comes from a 674-page report by Australia's Productivity Commission - Competition in the Australian Financial System. The Productivity Commission's report suggests the Australian Prudential Regulation Authority should impose on all authorised deposit taking institutions, as a condition of their banking licence, the appointment of a Principal Integrity Officer.

"Many banks claim to put the customer first. A formal, accountable reporting line to both board and regulator would put substance to this marketing. There will be a cost, but savings for banks may be inherent in other aspects of our remuneration reform. Design details of this notable addition to accountability amongst ADIs [authorised deposit taking institutions] should be determined through a consultation process," the Productivity Commission says.

Here's the crux of the recommendation.

The Australian Government should mandate the appointment of a Principal Integrity Officer (PIO) in parent financial entities — authorised deposit-taking institutions in the first instance, but with potential extension to other Australian Credit Licensees and Australian Financial Service Licensees. The PIO should have independent status within the entity and would have a direct reporting line to its board.

Once created, the position must not be vacant for more than a minimal period defined in legislation.

The PIO should have a statutory duty to advise the entity’s board on performance related to remuneration and practices that may be inconsistent with serving a customer’s best interests, including breaches of commission or other remuneration benchmarks and regulations. The PIO should also review internal business practices as they develop over time that may be inconsistent with the entity’s obligation to act in the customer’s best interests.

The PIO would be required to report independently to ASIC [Australian Securities and Investments Commission] on unsatisfactory responses to its reports, including persistent failure of its board to observe standards supporting consumer best interest obligations. The PIO should be protected from adverse action by statute where they do so report.

Details of the PIO, related legislative changes and penalties, should be determined through a consultation process starting by end-2018.

The Productivity Commission says the role would;

(i) minimise risks of negative customer outcomes from remuneration structures, including conflict with the requirement to act in the customer’s best interest; and

(ii) constantly re-evaluate the impact of integrated supply chains on fulfilling customer best interests. The Officer would act, in the first instance, via direct reporting to ensure a board is well-informed on the subject, but (as a fail-safe device) have an obligation to report to ASIC where advice is ignored.

Payments related to finding or placing mortgage products are the Productivity Commission's principal focus. Although it suggests the Principal Integrity Officer could be used in potentially conflicted payments in other areas of insurance and financial advice such as grandfathered tail commissions. 

Meanwhile, the Productivity Commission compares the role to that of a Chief Pilot at an airline.

The PIO’s dual responsibilities - to the regulator, as well as the board, much as the Chief Pilot has in an airline - is essential if this is not to be another wasted add-on to the regulatory structure. This model is meant to come with such serious implications if red flags are ignored that no ADI would fail to respond to the PIO’s advice.

In creating this dual line of responsibility, we have drawn on other regulatory models that seek to prevent day-to-day commercial pressures from causing companies to lose sight of crucial responsibilities. The priority that is given to airline safety - which extends beyond an airline’s commercial interests to its passengers’ safety - is being replicated here because the commitment by an ADI to act in the customers’ best interests is meant to be central to trust in the banking system (Australian Government 2014).

Penalties for breaches of standards and regulations exposed by a Principal Integrity Officer could be monetary, or include invoking ASIC’s under development product intervention powers.

"A range of penalties have already been defined as part of ASIC’s licensing frameworks, and include recently strengthened civil and criminal penalties for corporate and financial misconduct," the Productivity Commission says.

*This article was first published in our email for paying subscribers. See here for more details and how to subscribe. 

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Meanwhile Aussie Financial Services Minister Kelly O'Dwyer and Treasurer Scott Morrison now say they will embed ASIC staff in the Commonwealth Bank, National Australia Bank, ANZ, Westpac and AMP to monitor governance and compliance actions.


To have the words'Bank' and 'Putting customers first', is a complete oxymoron.


Of course they do - without customers there is no one to fleece!


An old adage about biting the hand that feeds you comes to mind.

The glasses the Productivity Commission seem to be wearing must have a serious rose tint, they are so optimistic. they must have gone to the same school as our RBNZ Governor!


Just lower of money you can borrow to 65% and decrease it for every other property you want.. That should solve most of it. Save harder folks.