Journal of Operational Risk

Risk.net

Systemic operational risk in the Australian banking system: the Royal Commission

Patrick McConnell

  • The paper presents a systematic review of the Australian Royal Commission into Misconduct in the Australian financial system, in the form of a large case study.
  • Examples of brazen misconduct, such as continuing to ‘charge for advice’ to people even after they had died, seriously damaged the reputations of the country’s major financial institutions, their boards and management and the financial regulators.
  • These examples of Systemic Operational Risk Events (SOREs) resulted in over AUD$ 11 billion in fines and remediation costs, the bulk of which was incurred by the four largest banks in Australasia.
  • The paper concludes by identifying further research into this case that could help identify similar cases of financial misconduct in future, in Australia and elsewhere.

The proceedings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry shocked the Australian public, the government and many in the financial industry. Over a period of just over a year the commission held open sessions in which directors and chief executive officers of the largest financial institutions in Australia were forensically questioned as to cases of serious misconduct in their firms and related entities. During the inquiry, many cases of misconduct were unearthed across a range of banking services (eg, consumer lending, including mortgage lending, car finance and credit cards; financial advice; and insurance and pensions). The most egregious of this misconduct was found in many financial institutions (in particular, in the largest banks, which together handle over 75% of banking products in Australia and New Zealand). The commission concluded that the financial institutions identified in the proceedings were at fault and that remediation would have to be paid to any customers harmed. This paper describes the role of the commission, documents some of the most prominent cases of misconduct, which it summarizes in terms of operational risk losses (using Turner’s framework for analyzing organizational disasters) and also details some egregious examples of operational risk events not covered by the commission. This paper can be seen as an analysis of the individual case studies of misconduct as identified by the Commission.

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