“No, I don’t think the big banks are too large and unwieldy to manage,” he told AFR Weekend. “Vigilant attention to risk management is the key and is always critical.”
And he appears disappointed that fault-lines have developed in the strong risk culture he injected into the Sydney-based bank.
“You will recall that Westpac had serious lapses in risk management in the 1980s and early 1990s, but for over 25 years they appear to have been quite good, considering the millions of customers and billions of transactions over that period,” he says.
“Now we have this reported issue of a control failure in a correspondent banking product. I wish I knew more about it.”
Joss says not enough detail has emerged so far to understand exactly what went wrong.
“What is needed right now is a thorough investigation and analysis of the facts so the breakdown in risk management can be understood and fixed, and accountability for failure can be assigned.”
It is a task, he says, that could easily have been managed by Hartzer and Maxsted.
“I know both Lindsay and Brian, and am confident they could have investigated and solved this very effectively; but external pressures would seem to have made it necessary for them to take public accountability and step aside for the good of the company.
“Time and the facts will tell just how warranted that was.”
Joss’s comments reflect a widespread incredulity as to how the Sydney-based bank – which was generally considered to be well-run – could have been embroiled in a disastrous money-laundering scandal that includes allegations it failed to stop transactions to the Philippines involving child sexual exploitation.
“Don’t let us forget that Westpac prided itself on its risk management system, and my understanding is that risk was the No.1 focus at the start of board meetings,” says Ian Martin, who two decades ago ran BT’s highly successful funds operations, and who is now chairman of QIC Limited and Unisuper. “They clearly didn’t get it right, but it wasn’t for lack of trying.”
As a consummate banker, Joss is conscious there are any number of control failures that could have been responsible for Westpac’s latest woes.
“Perhaps a poorly conceived or designed product; perhaps a failure to imagine what could go wrong; perhaps a failure to design in proper controls to prevent and detect the risks of something going wrong; perhaps a failure to monitor and audit that the controls were operating and effective; perhaps a failure to escalate concerns or to investigate concerns,” he says.
A tougher verdict
Other leading bankers deliver a tougher verdict. They argue that the scale of Westpac’s failing suggests a cultural problem within the bank that stopped issues percolating to the top.
“There must have been somebody inside the bank who knew about this and didn’t get the message up the line,” says one.
“So you have to ask about the dynamic that made that person shut up. Were they afraid of the consequences for their career, or for their bonus?”
One of the country’s most highly regarded chairmen agrees it is seriously concerning that the issue wasn’t brought to the attention of Westpac’s senior management.
They clearly didn’t get it right, but it wasn’t for lack of trying.
— Ian Martin, chairman of QIC Limited and Unisuper.
“It raises the question of whether or not an appropriate message from the top was being sent about the importance of compliance in general, including AUSTRAC,” he says.
He adds that all large organisations face a challenge ensuring a proper flow of information.
“It’s very easy for senior people to give the impression that messengers will be shot,” he says. “It’s very, very hard to convey the message that bad news will be welcomed.
“So it does raise the question of whether the Westpac board and senior management did enough to encourage the elevation of bad news.”
QIC’s Martin says he suspects there were two or three factors at play in Westpac’s disaster, to which the whole financial industry should pay heed.
“The first is the extent to which complexity across the financial sector has increased dramatically over the last decade or so. There are a number of reasons for this, such as technology advances and innovation in the sector.
“But there’s also been the layering of regulation on top of regulation.
“Typically that’s done with very tight deadlines, so what happens is that you’re building all these new changes on top of legacy systems. That in itself creates complexity.”
But, he says, eventually organisations reach “the situation where you need to step back and be prepared to make a significant investment in upgrading that itself is very expensive and very, very complex.
“And, arguably, that decision has been difficult to achieve in an environment when all the focus is on returns. So there’s a question about whether the incentive structures have been right.”
Martin also points out that the failure to invest in proper risk management and compliance systems isn’t confined to Westpac.
“It’s a problem across the financial sector. It was one of the major issues that came out of the [banking] royal commission with respect to AMP and MLC.
“They had inadequate systems and they let the administrative consequences of poor systems persist. They thought they would get to them in due course, and they didn’t realise it was such a big deal.
“They didn’t think about how it would look to someone coming in from outside – they didn’t get the optics.
“They didn’t take into account community attitudes around these issues.”
One question troubling investors is whether they’ve seriously under-estimated the riskiness of the big banks, which face a potential challenge from the big US tech groups, at a time when their own business models are under pressure.
As credit ratings agency Moody’s noted this week, the AUSTRAC proceedings against Westpac “come at a time when Australian bank profitability is facing pressure from low interest rates amid weak credit growth and intense competition, while costs relating to compliance, regulation and investments in technology are elevated”.
“I think they have become riskier, but not because of operational risk or credit risk,” says one leading professional investor.
“What has become riskier is the social and political environment for banking – the risk around the social licence to operate.
“That was always known to be a risk in theory. Now it is a big risk in practice.”
The change in the social and political environment, he says, means the regulatory risk for banks “has gone through the roof”.
Critics allege that the big banks were far too slow to feel the winds of change sweeping through their industry.
“When there were 26 votes on the royal commission, every one of those banks should have realised that they needed to do a serious review of all their risk controls,” says one respected company director.
“Because when you start getting that noise, it’s not going to go away.
“Eventually someone is going to knock on your door. And it’s much better for you to find out if you’ve got a problem before someone else does.”
Instead, he says, at Westpac “they just had the blinkers on. It was immensely successful, highly profitable. There were big bonuses, and everyone thought ‘this is a great place to be’.
“But they forgot to do the introspection piece properly – they were lulled into a false sense of security.
“And deluding themselves into believing that their risk control systems were working is part of the hubris.”
He adds there’s a risk that bank bosses may think their risk management problems can be solved by bringing in highly paid external consultants.
“If the other banks aren’t self-examining, they need psychological help.” he says.
“There are going to be other problems they haven’t yet identified and they need to go and find them.
Not just because someone else will find them, and they’ll get beaten up. But because they have a responsibility to the community to make sure everything is working well.”