Risking it to support the economy

Banks and financial institutions are playing a critical role in stabilising Australia's economy during the COVID-19 pandemic. They are providing financial resilience and a reassuring sense of stability at a time of great uncertainty.

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In March, the Australian Banking Association (ABA) announced relief packages for small business, with many banks also implementing wide-ranging assistance for individual customers. By April, the Federal Treasurer Josh Frydenberg was urging businesses to contact banks for help while waiting for government support to become available.

"In designing responses to this crisis, banks must consider not only the legal framework surrounding their activities but also community expectations.”

However, the vitally important role played by banks in managing this crisis is not without risk.

Vital artery

As Australia's economy enters uncharted waters, so do banks’ lending policies, procedures and capital adequacy maintenance provisions. In designing responses to this crisis, banks must consider not only the legal framework surrounding their activities but also community expectations.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry noted “the banking system is a central artery in the body of the economy”.

Not just misconduct but any conduct, practices, behaviour or business activities by financial services entities that fall below community expectations may damage that vital artery with material consequences for a bank, its customers, the community and the economy.

While concepts of ethics, fairness and community expectations are easy principles to integrate into an organisation's purpose, vision, values and goals, applying them can be challenging in practice, particularly during a crisis like COVID-19.

Unclear end

One of the defining features of COVID-19 is uncertainty. While providing emergency relief is a key short-term priority, any measures taken now must also be designed to support fair, long-term outcomes for customers and stakeholders, consistent with the bank’s organisational culture, values and goals.

Take, for example, hardship relief for existing customers. Usually, in an unexpected crisis, the solutions reflect customer expectations a 'return to normal' will soon occur. Interest-free periods, payment moratoriums and other temporary measures become more difficult to apply when the end of the crisis is unclear. A good example of this may be the mismatch between the Government's timeline for providing support and a customer's personal experience of hardship.

If a timeline cannot be clearly ascertained for a temporary measure, more permanent measures might be chosen. These carry their own risks; customers asked to sell assets may be adversely affected by a property downturn, while those who refinance may take on obligations inconsistent with their financial goals.

On notice

From a conduct risk perspective, bank measures must focus on outcomes that align with community expectations.

It is likely COVID-19 has changed these expectations and they may change again as the effects of the pandemic ripple through the community and the Australian economy. All banks must remain adaptive to these changes if they are to remain effective in managing conduct risk.

In these unprecedented times, banks find themselves on notice. Customers have come to expect a bank will take appropriate measures reflecting these extraordinary circumstances. However, these expectations must also be balanced against obligations to other stakeholders – employees, shareholders, regulators and the broader community.

There is no silver bullet to managing incidents like COVID-19. However, an awareness of the importance of community expectations is critical in shaping a COVID-19 response, helping mitigate the conduct risk faced during these times.

Australian banks hold a privileged position in this country and it is incumbent on them to consider the expectations of customer and the broader community as they navigate through this period and into the post-COVID-19 world.

Nicola Greenberg is Senior Associate and Kerensa Sneyd is Managing Associate at Allens

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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