Shortly after Dr. Andy Schmulow announced that a life insurer shamed in the banking Royal Commission would not be here in five years’ time, he indignantly retracted his statement.
“I made a mistake,” Schmulow told Informa Connect ahead of the Credit Law Conference.
“They won’t be here in five months’ time.”
The well-known academic – one of the first to advocate for a banking Royal Commission in Australia – knows a thing or two about the impact of financial services law.
Alongside his Senior Lecturer role at The University of Wollongong, Dr. Schmulow is a Practitioner in the Supreme Court of Victoria, an Advocate of the High Court of South Africa, and the Principal of Clarity Prudential Regulatory Consulting.
He currently serves on an independent expert advisory panel, convened by the South African National Treasury, advising on the Conduct of Financial Institutions Bill. And more recently, he was asked by CGAP – a division of the World Bank – to lead the creation of the world’s first customer-outcomes indicator framework, to measure consumer financial wellbeing.
“If there is one thing I have learned in my career, it’s that businesses founded on unethical principles will not survive in financial services. Mining….perhaps. Financial Services….no,” Schmulow said.
“As a financial services business, the moment you enter a court of law, you have already lost your trial in the ‘court of public opinion’.
“It doesn’t matter the outcome of your legal dispute because, by the very act of being exposed for unethical (potentially unlawful) behaviour, you will already have lost the trust of your customers. And if there is one sector where trust is essential, it’s financial services,” he argued.
“As a life insurer, you are selling a promise – a credence good: give us money for the next fifty years and we promise to pay you out when you’re gone. It requires the highest level of trust. The moment you breach that – charging fees to the deceased, for example – you put your business in a glittering death spiral.
“Assuming you were able to defend your practices against the Unfair Contract Terms Act, what does it matter? All of your customers who are not dead and who have the opportunity to switch providers will say, ‘hang on a minute, I don’t want to be with a company that has the propensity to do that to me.”
Indeed, some firms shamed by Commissioner Hayne in the proceedings last year – amid the fees for no service scandal – have experienced a mass exodus of public and institutional clients. As a result, some have reported major financial losses and, in extreme cases, are facing insolvency.
Dr. Schmulow believes only businesses founded on good conduct will make the cut in the post-Hayne environment.
“Even twelve months after being publicly exposed in the Royal Commission, ASIC has gone on record revealing that some companies are continuing the very misconduct they were shamed for. This is because their entire business model is founded on these practices. They simply don’t know how to make money without doing that,” he said.
“The key to long term success in financial services – or indeed any business – rests on quite a simple formula: If you put your customers’ needs front and centre of your business, evidence that in everything you do and say, and work hard to deliver value through honest hard work, money will come. If you put money front and centre of your business, you will lose customers and guess what….you will lose money too.”
Dr. Schmulow believes instances of misconduct are rarely discrete within large scale corporations.
“In my view, toxicity within an organisation is contagious, it contaminates everything. When you have a series of unlawful or unethical behaviours, these are not isolated, discrete events. They are a pattern. It’s symptomatic of a broader cultural issue within the organisation. And getting the culture right will be a key ingredient in the post-Hayne ‘recovery phase’,” he said.
To this end, Dr. Schmulow makes several key recommendations.
“Firstly, promote – not oust – whistle blowers,” he said.
“The traditional practice with whistle blowers is to bully them into silence, make them sign a non-disclosure agreement and then kick them out of the organisation,” he said candidly.
“If I were a financial services business today, I’d be doing everything I could to retain that individual. Someone that has the common sense to recognise unethical practice and the courage to speak out on it, is the type of person you want not only in your business, but running it,” he said.
“Secondly, you want to live by your publicised values. There is no use having a ‘zero tolerance’ policy on sexual harassment, for example, if you keep hold of employees that have been exposed for such acts.
“Fining them is not enough. If these people are representing your company, your ‘zero tolerance’ policy becomes void in the eyes of the public. Moreover, should these people be in leadership positions within your company, then unethical practices will prevail.
“Thirdly, I would encourage executives to think with their hearts, not their heads when it comes to deeming what behaviour is appropriate. A narrow, ‘legalistic’ approach is profoundly inadequate.
“If something is unethical then it may well be unlawful too, and if even if you’re let off the hook after a legal battle, the damage will already be done. The court of public opinion can be far more trialling than that of criminal law.”
Finally, he adds, financial services providers need to learn to love compliance teams.
“They are not the ‘business prevention’ department. They are the ‘business salvation’ department. Empower them, resource and equip them, and do what they tell you to do,” he concluded.
Dr. Andy Schmulow is one of the leading voices on financial services law in Australia, best known for his views on captured regulators and Treating Customers Fairly.
Join him for a lively debate on this issue at the 30th annual Credit Law Conference – held as a virtual event on 26-27 October 2020.
Learn more and register.