Is it weird to admit I’ll spend a little time over summer looking forward to the final report?

Hayne’s interim report was written so well, clearly, simply. It was a pleasure to read.

What have we learned from the last fortnight?

Commissioner Hayne will have a lot to work with in his final report, which is due to be submitted to the governor general by 1 February 2019.

He won’t be getting much of a break over summer.

The final report will be published two months before the budget and three months before we go to the federal election.

The evidence from CEOs from the last fortnight will not fill Hayne with confidence.

The boardroom culture in Australia’s major banks is woeful.

Despite repeated scandals – affecting millions of customers and costing billions of dollars – our senior bank executives have continued to collect multimillion-dollar bonuses, receiving large pay cuts only in extreme cases only. What did our boardrooms do about it? In some cases, they waved through bigger bonuses.

Bank CEOs have offered multiple apologies for the behaviour of their institutions in recent years but the royal commission was not interested in their apologies.

It’s clear that our regulators – the Australian Securities and Investments Commission (Asic), and the Australia Prudential Regulation Authority (Apra) – require a significant boost in funding and manpower.

Will the government be prepared to provide that?

Orr says the royal commission has left the media alone to this year to do its job.

The commission has sought to do what it can to assist the media in performance of their job but we’ve done that by making information available generally to the public.

The commission has not sought to influence how the media has reported. We’ve not backgrounded, we’ve not provided the media or anyone with any information about what witnesses are to be called or subjects covered except by posting what we have on the website.

We’ve not commented on what has occurred in the course of evidence. It has been for the media and for the media alone to decide what will be the subjects of their reports and what, if any, comments they may choose to make about what the commission has done.

And that, again, is as it should be.

Orr has provides a few facts about this year:

Since February, the commission has conducted public hearings over the course of 68 hearing days.

It heard evidence from 134 witnesses, some of whom gave evidence more than once. Almost 400 witness statements were tendered, and more than 6,500 exhibits were tendered.

Orr has thanked the many witnesses who attended, particularly the consumers who agreed to give evidence.

“Many of them travelled long distances and gave evidence about their private financial affairs in a very public forum. I know that they did not always find that easy but their willingness to give evidence about their experiences has greatly assisted the work of the commission, and I am grateful to them.”

Senior counsel assisting Rowena Orr QC has read a summary of the last fortnight’s proceedings.

Orr:

Over the course of the past two weeks, we’ve heard evidence from the CEOs of six of the largest financial service entities in Australia, CBA, Westpac, Macquarie, NAB, ANZ and AMP. We’ve heard evidence from the chairs of the boards of three financial services entities, CBA, NAB, and Bendigo and Adelaide Bank.

And we’ve heard evidence from the chairs of the two regulators, Asic and Apra.

As I said in our opening address last week, this round of hearings was different to the first six rounds. Our focus was not on identifying further instances of misconduct, but on understanding why misconduct occurred and what can be done to prevent it in future.

For that reason, unlike in previous rounds of hearings, counsel assisting will not identify any particular findings as being open on the evidence. Nor will there be a process for the entities involved in this round of hearings to make further submissions to the commission.

Instead, we anticipate that the matters raised over the past two weeks will play a role in informing the recommendations that you make in your final report.

Sorry for the break in transmission.

Some urgent things came up which I needed to attend to.

But I’m back now. And funnily enough in the time I’ve been away the hearing’s wrapped up. But I’ll bring you up to speed with the things I’ve missed.

Please stay with me.

Hodge: “When you think about it, does it tell you anything at all about the effectiveness of the job that Apra do?

Byres:

Yes. I mean, I’ve thought about this and I think there’s a broader lesson from fees-for-no-service, from some of the issues that we didn’t go deep enough on and subsequently had to be revealed by the panel and the Commonwealth Bank, in the work that we’ve done on mortgages, that we have – and this is simplifying – but in all those cases, I think there’s a sense that we have looked at robustness of frameworks, we’ve looked at policy documents, we’ve looked at procedures and we’ve relied on audit and compliance functions to do the detailed testing, both internal and external. And, conceptually, that if you have a good set of frameworks and policies and you – your audit and compliance function are doing their job to make sure that exceptions to those are being picked up – then actually things should broadly work as intended.

But – so my general lesson, which applies to fees for no service but I think also applies to some of those other issues I have talked about is – we have to think more about how do we get deeper, potentially doing more transaction testing or other things, or asking other people to do it on our behalf that would help us more readily identify these issues earlier.

Commissioner Kenneth Hayne jumps in here.

He wants to know about Apra’s “inattention to detail”, a phrase used by Byres.

Hayne: Money would come in to the entity as amounts that had been deducted for payment of fees?

Byres: Yes.

Hayne: Money would go out in payment of fees?

Byres: Yes.

Hayne: There would be a difference?

Byres: There would be, yes.

Hayne: Not a small difference?

Byres: It’s turned out to be a very large difference.

Hayne: Now, is it inattention to detail not to notice that money in, money out are different to the extent that we’re talking about here?

Byres: I don’t pretend to know the intricacies of the accounting system but there would be money going in, money going to a holding account in the general ledger, money going out, there would be residual sitting in that general ledger. Periodically that would be cleared out.

Hayne: Cleared out where?

Byres: Well, cleared out to an institution, yes.

The question becomes one about the point at which the “difference” becomes a materially sufficient number that it should have alerted regulators and auditors. Hayne says the difference shouldn’t have been there in the first place.

Hayne: We’re now talking of hundreds of millions in remediation?

Byres: Yes, if not more.

Hodge: Just for one entity.

Hayne: Per entity.

Hodge: Yes, that’s right.

We hear how Apra has been working with old and clunky systems, which its staff find frustrating.

It sounds like resources are a huge problem for this regulator.

The ANAO’s analysis found that Apra has listed risks on a register for periods between three and 15 months before scoping papers were provided to the Superannuation Industry Group for approval.

In three of the four papers, activities had been initiated in response to the risk prior to the approval of the scoping paper. None of the papers identified delivery dates and responsible officers for all activities.

Hodge: “Without clear strategies and plans for managing heightened industry risks that identify outcomes, delivery dates and responsible officers, it is possible that relevant actions are not undertaken to address risks and that Apra is unable to assess its progress in managing risks?”

Byres: “Yes.”

Hodge: “And has this issue of how Apra will go about dealing with scoping studies for industry-wide risks been addressed now?

Hodge: “Yes.”

Hodge turns to superannuation.

He wants to talk about how Apra’s dealt with problems in the super industry in recent years.

In 2016, the Australian National Audit Office completed an independent performance audit of Apra’s regulation of superannuation entities.

It identified a number of problems with Apra’s processes, and made four recommendations.

The ANAO’s audit noted:

In recent years, similar superannuation entities have received varying levels of supervision and higher risk entities have not consistently been subject to more intense supervision.

Further, many of the activities reviewed by the ANAO were late and not recorded in the issues and document management systems and Apra has limited external reporting of its supervision of the superannuation industry.

Apra does not have a quality assurance framework. It does not undertake independent reviews of supervisors’ work such as financial and qualitative analysis of interactions with entities.

There is limited oversight by Apra’s executive of the implementation of supervision activities and Apra can better specify its key performance indicators to measure the timeliness, quality and implementation of superannuation activities.

Byres says Apra had to work incredibly hard to prepare for the introduction of the BEAR regime, because the policy had a tight turn around time.

That’s why Apra hasn’t released a paper explaining how it will enforce the regime yet. It’s a matter of resources.

However, he thinks the regime should be extended, eventually, to cover other industries beyond just banking.

In Apra’s submission in response to the interim report, it argued there would be benefits to adopting a similar accountability regime across other sectors of the financial system including insurers, and superannuation companies or trustees.

Byres says the Banking Executive Accountability Regime (BEAR), introduced by the Turnbull government, which came into effect on 1 July this year, will help to drive change.

Regarding the warning from the G30 report – that Australia’s banking industry is only starting its long journey of cultural repair – Byres says the BEAR regime will assist that journey.

The point of the BEAR regime is to make senior executives in Australia’s financial institutions accountable for their decisions. To ensure there are clear consequences for individual executives in the event of a material failure.

Byres says until now there has been a problem of accountability – or rather a problem of “diffused responsibility” – because no clarity of accountability has been the heart of the problem.

“No one has had responsibility, no one has actually taken responsibility for issues. Boards have not known how to apply consequences because it’s not clear who was responsible for things,” Byres says.

Byres says Apra is considering whether it ought to broaden its focus to try to identify cultural drivers of misconduct as part of its supervisory work.

To wit: remuneration comes into this.

Byres: “In the same way that we talked about yesterday, we’re thinking about how you factor that into the work we’re doing on remuneration. I mean, these things, as we talked about, are intertwined. There would be no point going a bit further on remuneration if you weren’t correspondingly aligned when you’re looking at culture.”

Byres: “We have to think about how do we most efficiently use our resources

“The proposition I was trying to put was that not every organisation needs the CBA-style review, or the other organisation that we did the pilot on. So we need to balance and efficiently target our resources where they’re most needed.”

Byres says the CBA inquiry was a “fabulous” piece of work.

He says it was valuable for Apra because it helped Apra realise that its ordinary supervisory work – before the CBA inquiry – had not had a great influence on CBA’s behaviour.

Hodge: “The ordinary supervisory activity had not been effective or as effective at driving cultural change?”

Byres: “It hadn’t been fully effective, that’s right. We had had some successes but we were continuing to battle hard there.”

Hodge: “But the problem is from Apra’s perspective, one of resources, to be able to roll that out across other financial institutions?”

Byres: “Yes.”

Hodge is asking Byres about Apra’s decision around 2016 to try to focus more on the “culture” and “risk culture” inside Australia’s financial institutions.

Byres says Apra had come to the view it would be beneficial to conduct reviews with the primary purpose of assessing a bank’s culture, rather than including culture as a part-time or adjunct or add-on to some other primary activity.

By June 2017, Apra had formulated a pilot program for a risk culture review. Part of the program would involve Apra making an independent assessment of each institution’s risk culture.

However, Apra quickly butted up against resource constraints. Some Apra staff had to be redirected to work on the CBA inquiry.

Apra is ready to “ratchet up the mongrel” and be tougher on banks to help address widespread misconduct.

Under its more aggressive approach, the prudential regulator may force Australia’s major banks to change the way they pay their senior executives to reduce the focus on financial results.

The Apra chairman, Wayne Byres, conceded the regulator should have called out inadequate remuneration practices at Commonwealth Bank earlier, amid CBA’s scandals in 2016.

Apra’s team supervising CBA were aware of most of the issues identified in Apra’s inquiry into CBA – released in May this year – according to a June 2018 document revealed at the banking royal commission yesterday.

The document referred to the supervision “mongrel” and the need for stronger support of the supervisory “gut feel”.

The mongrel reference was inspired by parting words about rallying the troops from prudential inquiry panel chair and former APRA chairman John Laker after a meeting with the regulator’s board.

Good morning everyone.

We’re back with Guardian Australia’s live blog of the banking royal commission.

Wayne Byres, the chairman of the Australian Prudential Regulation Authority (Apra), is back in the chair.

Apra is the “prudential” regulator, which means its job is to ensure that Australia’s banks and insurance companies remain financially strong and meet their obligations to policy holders, fund members and depositors.

Apra was established in 1998 following a recommendation from the Wallis Inquiry.

Senior counsel assisting the royal commission, Michael Hodge QC, is leading the questions.

Hodge is focusing on Apra’s approach to risk culture.