19 May 2016
Dear Mr McPhee
Letter of engagement
Thank you for our recent discussions on suitable arrangements to be put in place to oversee and report on the implementation of the banking industry’s recently announced package of initiatives to protect consumer interests, increase transparency and accountability and build trust and confidence in banks.
This letter sets out the arrangements we have agreed for your appointment as the independent governance expert overseeing and reporting on progress with implementation of the industry’s announcement. We have agreed these arrangements following consideration of the advice provided by Gina Cass Gottlieb of Gilbert + Tobin.
On 21 April, the banking industry announced a package of measures, including initiatives to address consumer concerns about remuneration, the protection of whistleblowers, the handling of customer complaints and dealing with poor conduct.
As part of that announcement, the industry committed to putting in place governance arrangements around:
1) The implementation of the industry’s package of initiatives.
2) The review process.
3) Quarterly public reporting.
4) An independent expert to oversee implementation.
In summary, and as discussed with you, the role of the independent governance expert is to ascertain and report publicly on the progress the industry is making to deliver upon its commitments in its 21 April statement.
To enable this to work effectively, the industry will work with you to ensure:
- The initiatives are specifically and clearly defined
- Roles and responsibilities for the initiatives are clearly set out, and
- Specific milestones and target dates are established, against which progress can be measured and reported.
We would anticipate that, to fulfil your role, you would seek input from individual banks and the Australian Bankers’ Association (ABA) on the progress they are making, including evidence to substantiate that progress. You will have the option to meet with banks individually, or collectively through the ABA.
You would also seek input from a range of other stakeholders, including regulators, consumer representatives, community organisations, unions and other industry associations, on their views regarding progress and the industry’s efforts.
More detail on the governance arrangements and your role, based on the advice provided by Gilbert + Tobin, is set out below.
Specifying initiatives and key milestones
The industry, in consultation with and guided by you in your role as the independent expert, will further specify the nature of each announced initiative and the key milestones associated with the implementation of each of those initiatives.
The further specification of each initiative is intended to establish between the industry, yourself and the public a clear understanding of what each initiative will involve, including what is in and out of scope and what is required and expected of each participant.
Milestones will be specific enough to ensure you can maintain reasonable oversight of the industry’s reported progress in implementing each initiative, and report or respond to any delays or difficulties in a timely way. However, they will not be so detailed as to introduce inflexibility or delay into the process or appear to reflect a desire to report something every quarter rather than representing meaningful progress.
Specifications and milestones may be reviewed and refined where doing so would improve the process or its outcomes, but only in consultation with you and other key stakeholders who may be affected. Any changes to specifications and milestones may be reported by you in your quarterly reports.
Assigning roles and responsibilities
In consultation with and guided by you in your role as independent expert, the industry will assign roles and responsibilities in relation to each milestone. Key roles and responsibilities are likely to rest with:
- Individual banks
- The ABA
- External advisers, and
- Other participants, such as regulators, consumer representatives, community organisations, unions and other industry associations.
These roles and responsibilities will be performed and discharged according to each participant’s usual decision-making processes.
Roles and responsibilities may be redefined or reassigned where doing so would improve the process or its outcomes, but only in consultation with you and other key stakeholders who may be affected. Any changes to roles and responsibilities may be reported by you in your quarterly reports.
Establishing and reporting against timeframes
In consultation with and guided by you in your role as independent expert, the industry will establish timeframes for each milestone that is reasonably within the industry’s control. Timeframes may be expressed relative to an external event or another party’s actions, where appropriate.
The entities and persons responsible for each milestone will regularly report to you their progress against these timeframes. This input may not be reproduced in your reports to the extent that it is reasonably identified as commercially or competitively sensitive. However, you may report whether or not the industry or individual banks have reported and provided evidence of meeting particular milestones associated with each of the initiatives.
Timeframes will take into account the timing of your quarterly reports, with progress reported in sufficient time for you to review that progress and consult with the responsible person if you have any questions. Sufficient time will also be allowed for you to consult other stakeholders, both within and outside of the financial services sector.
Timeframes may be reviewed and refined where necessary, but only in consultation with you and other key stakeholders who may be affected. Any changes to timeframes may be reported by you in your quarterly reports.
Oversight by independent expert
The industry has committed to publishing quarterly reports on its progress in implementing the recently announced package of initiatives, with the first report due by 21 July 2016. These reports will be prepared independently by you with input from:
- Individual banks and the ABA on steps taken and steps planned to achieve particular milestones, and
- Third party stakeholders, including regulators, consumer representatives, community organisations, unions, other industry associations and other relevant interested parties.
To assist with preparation of reports, you and the industry may wish to establish a reporting framework or template to ensure consistency across the participants reporting to you, and across the different initiatives being reported against. This framework may include particular qualitative or quantitative criteria against which progress is to be assessed, and you may report whether or not, in your expert judgement, you are satisfied that the industry or individual banks are progressing the initiatives in good faith and consistently with the intentions of the industry announcement.
A draft of each report should be provided to the ABA and individual banks to enable them to inform you promptly of any statements they consider to be factually incorrect. In this context, you will not be required to make any changes requested by the ABA or individual banks and must use your own independent expert judgement.
You are also invited to make specific recommendations to the ABA and individual banks where you consider it would be useful to assist in developing and implementing the industry announcement if, for example, you observe a delay or difficulty relating to implementation. Such recommendations would be focussed on progressing implementation of the industry’s announced initiatives and should not be directed at expanding or changing the nature of those initiatives. It is also expected that you would consult with the ABA and individual banks in relation to any recommendations in advance of publishing your report.
In addition to these reports, you may write directly to individual banks if you identify an issue with the progress of implementation associated with a particular bank. Each bank will nominate a suitable contact for this purpose and a suitably senior contact for escalation if you consider it necessary. The contents of any letter would be confidential unless the bank chose to release it, but you may report the fact that a letter had been written if you consider doing so would facilitate the progress of implementation or increase public confidence in the oversight of the initiatives.
Confidentiality and intellectual property
On occasion, it may be necessary for a bank to provide information, particularly specific evidence of how a bank is implementing an initiative, which is commercially or competitively sensitive. That information may be provided in written form or through consultations with you. The bank will identify such information as confidential and that confidentiality will need to be respected. Without breaching confidentiality, the information may be used in an aggregated form to assess progress with implementation.
You agree that the ABA owns all intellectual property in any materials created, developed, modified or adapted by you in the course of your provision of the services (including methodologies processes, tools and documents). You agree to do all things necessary to assign all intellectual property rights to the ABA as requested. You also agree to waive any moral rights you have in the project materials.
You have been appointed to this role having regard to your work as the former long standing Auditor General of the Australian National Audit Office, amongst your other qualifications. As an expert appointment, it is expected that you will undertake the role impartially, exercising your own judgement and expertise and without undue regard for the interests and concerns of the ABA or individual banks.
To assist you in your role, the industry will arrange for support to be provided to you by PwC. This support will be in the nature of:
- Secretariat functions relating to reviewing and assessing plans, reports and materials provided by the ABA and individual banks in relation to implementing the industry’s initiatives.
- Assistance in the preparation and drafting of your quarterly reports.
- Assistance in relation to broader stakeholder consultation and research.
- The provision of senior banking industry expertise and advice in relation to industry practices and trends, including overseas trends as necessary.
You will be able to draw on this support directly, without going through the industry or the ABA.
Details of the fees and expenses payable in respect of the services being provided are set out in the Confidential annexure to this letter.
The appointment will continue until the package of measures is substantially implemented. We anticipate this will be 18 months from the date your appointment is announced. The appointment can be shortened or lengthened through mutual agreement with the industry. At the end of the process, you have the opportunity to issue a final report on progress overall.
If the above arrangements are acceptable to you, I would appreciate you returning a signed copy of this letter to me. Please note that, in the interests of transparency, the industry may choose to release this letter publicly, excepting the Confidential annexure, which remains confidential to the parties.
Chief Executive Officer
Ian McPhee AO PSM
19 May 2016