tag:theconversation.com,2011:/au/topics/big-four-11273/articlesbig four – The Conversation2023-06-07T20:08:13Ztag:theconversation.com,2011:article/2070202023-06-07T20:08:13Z2023-06-07T20:08:13ZHow reliance on consultancy firms like PwC undermines the capacity of governments<figure><img src="https://images.theconversation.com/files/530275/original/file-20230606-23-dzt4d2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>In the wake of the <a href="https://theconversation.com/grattan-on-friday-the-pwc-scandal-should-be-ripe-for-the-national-anti-corruption-commissions-attention-206867">PwC scandal</a>, there is renewed interest in the work of outside agencies within Australian government. </p>
<p>Earlier this year, an audit showed almost <a href="https://www.finance.gov.au/sites/default/files/2023-05/Audit%20of%20Employment%20-%20Report_1.pdf">A$21 billion</a> was spent on external labour hire in the Australian Public Service in 2021-22. </p>
<p>Contained within this figure is a significant jump in the amount spent on consultants. While some outsourcing will be to fill genuine gaps, there is evidence that overreliance on consultancies can undermine the longer-term capability of the public service.</p>
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<a href="https://theconversation.com/grattan-on-friday-the-pwc-scandal-should-be-ripe-for-the-national-anti-corruption-commissions-attention-206867">Grattan on Friday: the PwC scandal should be ripe for the National Anti-Corruption Commission's attention</a>
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<h2>Consulting is a global business</h2>
<p>Australia is not the only country with an interest in consultants. It is a truly worldwide phenomenon that spans government and private business. In 2023, it is estimated the global management consultants market is worth over <a href="https://www.ibisworld.com/global/market-size/global-management-consultants/">$US860 billion</a>. </p>
<p>However, Australia’s consulting industry (made up of public and private sector spending) is the <a href="https://australiainstitute.org.au/wp-content/uploads/2021/10/P1079-Talk-isnt-cheap-Order-for-the-production-of-consultants-reports-Web.pdf">fourth largest</a> in the world, and significantly larger than other comparable countries. </p>
<p>External organisations undertake a broad range of functions, including giving advice on strategy, accounting services and IT services. Sometimes entire government functions (for example, <a href="https://www.theguardian.com/australia-news/2023/may/23/nauru-offshore-detention-immigration-processing-to-cost-australia-485m-22-asylum-seekers">operating offshore detention facilities</a>) are outsourced.</p>
<p>The use of outside labour has a long and interlinked history. Their worldwide rise started following a number of reforms from the late 1970s that aimed to introduce more market-based structures into public services. This <a href="https://www.theguardian.com/books/2023/feb/16/the-big-con-by-mariana-mazzucato-and-rosie-collington-review-how-consultancy-firms-cash-in">transformed the corporate structures of governments</a>. </p>
<p>Governments were encouraged to outsource a range of functions (such as delivering disability or employment services) on the basis that they could contract this to firms that could do this more effectively and efficiently. Governments could stick to making policy and ensuring this delivered the outcomes consumers wanted. </p>
<p>But the separation of policy design and management from service delivery was not as simple as it might have first appeared. In separating these functions, many governments have experienced a “<a href="https://www.themonthly.com.au/issue/2021/september/1630418400/john-quiggin/dismembering-government#mtr200">hollowing out</a>”, losing the knowledge, skills and institutional memory that is key to managing services. </p>
<p>And so this had a snowballing effect, with governments increasingly turning to consultants to carry out the jobs they once did. </p>
<h2>Consultants in the Australian Public Service</h2>
<p>Over the past decade, the total volume of consultancy work undertaken for the APS by the so-called “Big Four” consultancy firms has increased <a href="https://publicintegrity.org.au/research_papers/booming-business-for-big-four-comes-at-a-high-cost/">400%</a> from $282 million in 2012-13 to over $1.4 billion in 2021-22. </p>
<p>Most often the reason given for contracting consultancies is a “<a href="https://www.anao.gov.au/work/information/australian-government-procurement-contract-reporting-2022-update">need for specialised or professional skills</a>”. This may be because, the rationale goes, the skills don’t exist within the APS or because an external perspective is needed that can’t be gained from internal employees. </p>
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Read more:
<a href="https://theconversation.com/consultants-like-pwc-are-loyal-to-profit-not-the-public-governments-should-cut-back-on-using-them-205920">Consultants like PwC are loyal to profit, not the public. Governments should cut back on using them</a>
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<p>But some believe a culture of <a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;adv=yes;orderBy=customrank;page=0;query=Dataset%3AcomSen,estimate%20donnelly;rec=3;resCount=Default">preferencing advice</a> from consultants over the public service has taken hold. At times, this can lead to governments receiving the advice they want rather than a more rounded view of an issue. </p>
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<p>The use of consultants within government doesn’t always mean these skills are not available in the APS. One important issue to consider is the level of APS staffing. After the 2015-16 budget, the previous government constrained the size of the APS to around the 2006-2007 average staffing level of just over 167,500. It is <a href="https://www.abc.net.au/news/2020-09-10/contractors-and-the-public-service-gig-economy/12647956">argued</a> this cap on staffing numbers left the APS unable to undertake all the work it needed to do, making it reliant on consultants to fill gaps. </p>
<p>The Australia Institute argues the $1.1 billion spent on consultancy services in 2018-19 could have employed an extra <a href="https://australiainstitute.org.au/wp-content/uploads/2021/10/P1079-Talk-isnt-cheap-Order-for-the-production-of-consultants-reports-Web.pdf">12,346</a> public servants. It notes that, in reality, consultants are often paid at a much higher rate than public servants. </p>
<h2>Implications for public service capability</h2>
<p>A number of inquiries and reviews have expressed concern that reliance on consultants has long-term impacts for the public sector. </p>
<p>In 2019, the <a href="https://www.pmc.gov.au/sites/default/files/resource/download/independent-review-aps.pdf">Independent Review of the APS</a> found labour contractors and consultants were increasingly being used to do work that had been core public service capability, such as program management. </p>
<p>These findings were confirmed in a 2021 Senate <a href="https://parlinfo.aph.gov.au/parlInfo/download/committees/reportsen/024628/toc_pdf/APSIncunderminingpublicsectorcapabilityandperformance.pdf;fileType=application%2Fpdf">Finance and Public Administration Reference Committee report</a> on the capability of the Australian Public Service. It found that when government spends money on policy advice from private consulting firms, this undermines public service capability. </p>
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Read more:
<a href="https://theconversation.com/pwc-scandal-shows-consultants-like-church-officials-are-best-kept-out-of-state-affairs-205560">PwC scandal shows consultants, like church officials, are best kept out of state affairs</a>
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<p>The Community and Public Sector Union has argued that consultants are often engaged to do <a href="https://www.pc.gov.au/__data/assets/pdf_file/0004/339061/sub001-aged-care-employment-attachment2.pdf">more strategic and complex work</a> that APS employees should be doing. All too often, public servants are asked to provide administrative support to consultants, and therefore miss out on opportunities to develop their skills and expertise. </p>
<p>These issues have also been noted in other countries. Most notably in the UK, Lord Agnew of Oulton <a href="https://www.theguardian.com/politics/2020/sep/29/whitehall-infantilised-by-reliance-on-consultants-minister-claims">noted</a> the UK civil service was “too reliant on consultants. Aside from providing poor value for money, this infantilises the civil service by depriving our brightest people of opportunities to work on some of the most challenging, fulfilling and crunchy issues.”</p>
<p>When consultants undertake entire areas of work, the requisite skills and knowledge are not transferred to the APS. In effect, this sets up a negative feedback loop, where APS employees lose skills and institutional knowledge because of the reliance on consultants, meaning the next project or piece of work needs the input of consultants. </p>
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<h2>Time for change</h2>
<p>Although concerns about public sector capability have been around for more than a decade, there is some sign action might finally be taken. A <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Finance_and_Public_Administration/Consultingservices">Senate Finance and Public Administration References Committee inquiry</a> into the management and assurance of integrity by consulting services is due to report by the end of September. It will likely make a number of recommendations about the use of consultants. </p>
<p>The recent federal budget announced the government was committed to rebuilding the capability of the APS, increasing average staff numbers by around <a href="https://budget.gov.au/content/bp4/download/bp4_2023-24.pdf">10,800</a>. This figure includes a number of individuals on external labour hire arrangements who will effectively be brought in-house. </p>
<p>But restricting the use of consultants will be just one step in rebuilding the APS and its capability. <a href="https://www.abc.net.au/news/2023-03-16/australia-reliance-consulting-firms-high-cost-problem-government/102091810">Significant investment</a> and a change of culture are both needed if the use of consultants is to decrease substantially.</p><img src="https://counter.theconversation.com/content/207020/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Dickinson receives funding from ARC, NHMRC and CYDA. </span></em></p>The growing use of external consultants to do government work has led to a “hollowing out” of the public service.Helen Dickinson, Professor, Public Service Research, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/952232018-04-30T20:16:27Z2018-04-30T20:16:27ZThe big four accounting firms struggle to shake their sexist pasts<figure><img src="https://images.theconversation.com/files/215354/original/file-20180418-163971-1eksrt3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/gender-discrimination-concept-society-1040973067">Kang Hyejin/shutterstock.com</a></span></figcaption></figure><p>In many ways, the big four accounting firms – Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers (PwC) – have influenced how we work, how we manage, how we invest and how we are governed. </p>
<p>Apart from their staff, the brands themselves are the big firms’ most valuable assets. The value of those brands is grounded in the firms’ histories. But looking into their past reveals many stories of discrimination that the firms may have to face up to to re-brand their future.</p>
<p>Globally, the firms dominate key markets for accounting, tax and audit services. Nearly all the largest businesses in the United States and the United Kingdom, for example, are audited by one or more of the firms.</p>
<p>In 2016 their total revenue exceeded <a href="https://economia.icaew.com/en/news/december-2017/kpmg-remains-smallest-of-big-four">US$130 billion</a>. With <a href="https://www.statista.com/statistics/250503/big-four-accounting-firms-number-of-employees/">almost one million staff</a>, the firms are collectively one of the world’s top employers. The number of people who have worked for a big four auditing firm at some point in their career is much larger still.</p>
<p>Today, however, the auditors are facing challenges to their power from <a href="https://www.icaew.com/en/technical/audit-and-assurance/faculty/the-future-of-audit/the-future-of-audit-technology">technology</a> and <a href="https://www.ft.com/content/c1231f40-f695-11e7-88f7-5465a6ce1a00">regulators</a>. But perhaps the most gravest challenge is cultural.</p>
<h2>A chequered past</h2>
<p>All four firms trace their history back to 19th century England. In the firms’ earliest incarnations, their partners and staff were all male. </p>
<p>As the firms spread out across the globe, they retained their overwhelming maleness. As late as 1940, for example, only 175 of the 16,000 certified public accountants in the United States <a href="https://www.thebhc.org/sites/default/files/beh/BEHprint/v023n1/p0241-p0252.pdf">were women</a>.</p>
<p>Strong forces in society kept things that way. Colleges and universities discouraged women from majoring in accounting. If a woman did graduate with an accounting qualification, she found it difficult to find a position in a major firm. </p>
<p>Arthur Andersen, a firm founded by a former Price Waterhouse partner, waited till 1965 before hiring female accountants. Those accountants were mostly confined to junior and administrative roles – comptometrists, ledger-posting clerks – and they <a href="http://www.sciencedirect.com/science/article/pii/S1045235485710337/">had to leave when they married</a>.</p>
<p>At professional gatherings, men opined gravely on the question of women, and <a href="https://www.thebhc.org/sites/default/files/beh/BEHprint/v023n1/p0241-p0252.pdf">what they might be able to do</a>. The opinions awkwardly foreshadowed today’s conversations about digital automation. What accountants said then about women, they say now about robots. </p>
<p>The accounting monoculture’s defining features included blokey, locker-room humour, a competitive, hothouse atmosphere, and a staff induction process that has been <a href="https://www.amazon.com/Final-Accounting-Ambition-Arthur-Andersen/dp/0767913833/">likened to brainwashing</a>.</p>
<p>When inevitably the monoculture began to wane, the clash with modern ideas was ferocious, and often appalling. </p>
<p>In 1990, for example, Ann B. Hopkins of Price Waterhouse alleged she’d been denied promotion to the partnership on grounds of sexual discrimination. A <a href="https://supreme.justia.com/cases/federal/us/490/228/case.html">US judge</a> ordered the firm to offer Hopkins a partnership, and around US$400,000 in back pay.</p>
<p>In 2008, former PwC partner Christina Rich received a significant settlement after a series of alleged incidents that included male partners talking about her breasts. The boys club culture had allegedly thwarted her progression at the firm. In 2014, Erik Pietzka <a href="https://www.telegraph.co.uk/men/relationships/fatherhood/11206484/Father-wins-sex-discrimination-case-after-request-to-work-part-time-rejected.html">won a discrimination case</a> against PwC on the grounds that his requests to work part-time for family reasons had damaged his prospects for promotion.</p>
<h2>Are they really progressing?</h2>
<p>In light of this history, the big four in Australia have recently adopted proactive policies that promote equality, diversity and flexibility. Examples include Deloitte’s <a href="https://www2.deloitte.com/au/en/pages/about-deloitte/articles/globe.html">GLOBE leadership forum</a> and Inspiring Women strategy, aimed at getting an “<a href="https://www2.deloitte.com/au/en/pages/about-deloitte/articles/inspiring-women.html">unfair share of female talent</a>”.</p>
<p>Yet there is a real risk that these policies will not lead to the substantive culture shift that the firms need. The continued emergence of <a href="https://www.wsj.com/articles/ernst-young-partner-files-federal-sexual-harassment-complaint-1524086458">sorry episodes</a> suggests that more work is needed.</p>
<p>The dilemma for the firms’ leaders is this: How to retain the best of their histories while renouncing the prejudices and behaviours that defined the old monoculture? How best to embrace change without dumping much of what defined the firms for so many years?</p>
<p>Beyond further strengthening policies and standards, the firms are becoming more nuanced in the stories they tell about themselves and their past. That past, though, includes an abundance of horrors and blunders.</p>
<p>Sooner or later, the firms will have to fully reckon with their past. When that moment comes, the firms might have to let go of a good deal of their history, their culture, their structure and even their brands.</p>
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<p><em>Dr Stuart Kells and Professor Ian Gow are the authors of <a href="https://www.blackincbooks.com.au/books/big-four">The Big Four: The Curious History and Perilous Future of the Global Accounting Monopoly</a>.</em></p><img src="https://counter.theconversation.com/content/95223/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The big four accounting firms’ brands are grounded in their histories. But looking into their past reveals many stories of discrimination.Stuart Kells, Adjunct Professor, College of Arts, Social Sciences and Commerce, La Trobe UniversityIan Gow, Professor and Director of Melbourne Centre for Corporate Governance and Regulation, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/912282018-02-11T19:09:33Z2018-02-11T19:09:33ZBanks and financial providers one step ahead of consumers who struggle with personal bias<p>There’s more than 30 years of research showing financial consumers have behavioural biases that can lead to poor decisions. Financial providers and banks have known this too, and have designed some products to take advantage of consumer habits rather than benefit them. </p>
<p>Legislation soon to <a href="https://treasury.gov.au/consultation/c2017-t247556/">be introduced to parliament</a> is intended to curb these practices, but credit products are being left out to consumer detriment. </p>
<p>Regulators have relied on two strategies to help consumers with this problem. Disclosure of the nature and prospects of the products providers offer. Also, encouraging consumers to seek financial advice. </p>
<p>Neither of these has worked well. The <a href="http://fsi.gov.au/publications/final-report/">Financial System Inquiry in 2014</a> recognised that disclosure hasn’t closed the gap in consumer capability. Worse, the providers of these products may have incentives through remuneration which may not serve the customer’s interest and only about 25% of financial consumers seek advice. </p>
<p>The <a href="http://www.pc.gov.au/inquiries/current/financial-system/draft">Productivity Commission’s report</a> on competition in financial services, illustrates many of these points in arguing for regulation of mortgage brokers. Brokers are supposed to be the customer’s agent to scout for and advise on the best mortgage terms and cost. Instead they are remunerated by mortgage providers (like the banks), take commissions and, according to the Productivity Commission, generally cost more than loans directly from a bank. </p>
<h2>Bias in financial decision-making</h2>
<p>Consumers are <a href="http://www.fca.org.uk/publication/occasional-papers/occasional-paper-1.pdf">prone to a range of biases</a> which may also impair their financial decisions. For example overconfidence may cause them to ignore new information or hold unrealistic views about how high returns will be.</p>
<p>As we age or as our circumstances change, our tolerance for risk also changes. As we get older our tolerance for risk decreases, while having a higher income increases it. Men are also more risk tolerant than women. </p>
<p>Consumers may also give too much weight to recent events and things they know already and can be unduly influenced by the opinions of friends and family.</p>
<p>This sort of consumer decision-making is no match for providers’ knowledge of financial conditions and product features. Banks and other financial service providers have learned from experience, but most of all their own command of consumer behaviour research. </p>
<p>The latter leaves providers able to <a href="http://www.fca.org.uk/publication/occasional-papers/occasional-paper-1.pdf">design and sell products</a> that benefit from consumers not overcoming mistakes, or at times, exacerbating mistakes.</p>
<h2>Helping customers make better choices</h2>
<p>In a <a href="https://treasury.gov.au/consultation/c2017-t247556/">bill soon to be before the Australian parliament</a>, those selling financial products will have to make a “target market determination”. This records and describes the market for a product (those who would buy it). It must also set out any conditions under which the product must be distributed, for example that it can only be sold with advice. </p>
<p>It’s designed so that financial products meet the needs and financial situation of the people acquiring them. </p>
<p>There are criminal and civil penalty sanctions for failing to make and ensure products are sold in accordance with a determination. Also, for failure to revise and reissue it, if circumstances change. </p>
<p>Twinned with this requirement are new intervention powers for the Australian Securities and Investments Commission (ASIC). ASIC will be able to make interim rules, effectively prohibiting sales or imposing conditions, if continued sale would result in “significant detriment” to financial consumers.</p>
<p>The purpose of product regulation is clearly to allow ASIC to be more active and reduce <a href="http://law.unimelb.edu.au/__data/assets/pdf_file/0014/1710023/108-AustralianProspectusSurvey2.pdf">over-reliance on ineffective disclosure</a>, <a href="http://download.asic.gov.au/media/4632718/rep-562-published-24-january-2018.pdf">conflicted advice</a> and drawn out <a href="https://www.fos.org.au/custom/files/docs/independent-review-final-report-2014.pdf">dispute resolution</a>.</p>
<p>Product regulation is no panacea. This version has a large gap, as credit products (for example credit cards or mortgages) do not require a target market determination. It’s not difficult to read the politics of regulation in this omission. There is also a risk that target market determinations will become pro-forma and add to compliance and not to consumer benefit. Although a description of the target market must be in the advertising, it’s not clear it must be in formal disclosure, so consumers may never read it. </p>
<p>Product intervention powers apply across investment, insurance and credit products but it will never be easy for ASIC to prove the risk of “significant consumer detriment”. Intervention orders also expire in 18 months unless made permanent by parliament. </p>
<p>The regulation of product design and distribution in the spirit of consumer safety has been commonplace (if imperfectly realised) in car, pharmaceuticals and other consumer markets, for decades. There are modest grounds for optimism that in Australia financial product safety might catch on too, but the government needs to include credit products as well.</p><img src="https://counter.theconversation.com/content/91228/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dimity Kingsford Smith advised ASIC on product intervention powers policy in 2015 and was the NAB Wealth Customer Advocate from 2015-2017 and is a general member of the FPA. </span></em></p>Research shows the majority of consumers have low financial knowledge and experience, but they are also prone to behavioural biases that don’t help.Dimity Kingsford Smith, Professor of Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/913962018-02-08T02:15:16Z2018-02-08T02:15:16ZAustralia’s financial regulators need policing<p>A <a href="http://www.pc.gov.au/inquiries/current/financial-system/draft/financial-system-draft-overview.pdf">Productivity Commission</a> report analysing competition in the financial sector has pointed out that our finance regulators have become enablers of an industry that is an impediment to our economic competitiveness and exploitative of their most loyal customers. </p>
<p>It proves the need for a board to oversee the conduct of our financial regulators, policing the bodies that are supposed to be keeping our financial system in check.</p>
<p>It could not have come at a worse time for our big four banks. Perennially pilloried for their rampant market misconduct (fraudulently manipulating benchmark interest rates) and their equally rampant abuse of upwards of hundreds of thousands of consumers across every one of their retail operations at one stage or another – financial advice, life insurance and credit card insurance, just to name a few.</p>
<p>The Australian Securities and Investments Commission (ASIC) most recently launched a bank-bill swap rate manipulation case against the Commonwealth Bank, but only across a very narrow range of infringements. The bulk of the infringements can’t be prosecuted because ASIC has dithered for so long, the statute of limitations has run out, and the alleged crimes have proscribed. </p>
<p>And what of our other financial regulator - the Australian Prudential Regulation Authority (APRA)? The Productivity Commission reckons that APRA’s ham-fisted use of macro-prudential tools, usually used to reduce risk in our financial system, has benefited the big four banks to the tune of A$1 billion.</p>
<p>APRA has been criticised for pursuing stability in a manner that has killed competition, hurt consumers, and starved small businesses of life-giving capital. The dominance by a few banks, whose profits are based on runaway property prices, is its own systemic threat. </p>
<p>The result is that small banks are squeezed out, big banks raking in higher rates, and investors offsetting higher rates against their taxes and so costing the Australian Taxation Office an estimated <a href="http://www.afr.com/business/banking-and-finance/financial-services/apra-delivers-banks-1b-windfall-productivity-commission-20180206-h0ulfe?login_token=t5OaZkgGqQAq1Tr69ZC9eucH2aXeO6iCBSEhhdKfjYoGdRDB3IbogZO9_ToWF-HwHjiFI_SNUNyuwSuQR8EECg&expiry=1517934080&single_use_token=B1cmp7cvDUoQrUAy0QJRAWYLvrkaoQBfdyhPz0DmFDqcIcXD_R7M4TvmiCLaGeKWaKvrIQfoWJwt-Mh-VjEEAw">A$500 million in deductions</a>. As the old saying goes, when your only tool is a hammer, every problem looks like a nail.</p>
<h2>Who will regulate the regulators?</h2>
<p>So what to do about ASIC and APRA? Back in <a href="http://fsi.gov.au/publications/final-report/">2014, the Financial System Inquiry recommended</a> a board of oversight – a regulator for the regulators – to ensure that the regulators discharge their mandates. </p>
<p>So, for example, to ensure that ASIC acts like a cop, not a co-op; that APRA acts with foresight and finesse, as opposed to damaging competition. APRA and ASIC <a href="http://www.apra.gov.au/Submissions/Pages/14_01.aspx">pushed back at the time</a>, and the Abbott government rejected the recommendation.</p>
<p>Now to add impetus to the Financial System Inquiry recommendation, the Productivity Commission says there is a lack of transparency and accountability exhibited by our regulators. Add to that the implications regarding regulator’s efficacy that comes with the establishment of <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">the Financial Services Royal Commission</a>. The public deserves better than this.</p>
<p>A regulator for the regulators – a Financial Regulator Assessment Board – would conduct ex post analyses of how regulators had discharged their mandates, evaluate their policies and the efficacy of their policy tools. It would be a sober second thought, and a crucial mechanism of double redundancy – to pick up on crucial elements that the regulator may have overlooked.</p>
<p>The idea has form. The British have created something similar, called a <a href="https://www.bankofengland.co.uk/about/people/financial-policy-committee">Financial Policy Committee</a>, this body’s aim is to review the British regulators, while keeping a look-out for where the next “bombshell” may come from. </p>
<p>That development in turn builds on the <a href="https://mitpress.mit.edu/books/guardians-finance">work of James Barth, Gerard Caprio and Ross Levine</a> whose research indicates that regulators simply cannot be trusted to perform these crucial functions as the guardians of finance, without oversight. The researchers call their proposed board of oversight the “Sentinel”, and point out that no industry is more adept and more practised at suborning the guardians of finance than banks and insurers. Sound familiar?</p>
<p>Australia’s financial system is increasingly governed by a lawless financial sector, presided over by regulators that are at best misguided, and at worst captured. A board of oversight is the least we can do.</p><img src="https://counter.theconversation.com/content/91396/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow is affiliated with Australian Citizens Against Corruption (ACAC). </span></em></p>Our financial regulators ASIC and APRA need a board of oversight, similar to what the UK has, to keep them in check.Andrew Schmulow, Senior Lecturer, Faculty of Law, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/867572017-11-03T00:00:26Z2017-11-03T00:00:26ZForcing the banks to hand over our credit history might help with a home loan but it has risks<p>The <a href="http://sjm.ministers.treasury.gov.au/media-release/110-2017/">federal government will be forcing banks</a> to hand over half their credit data ready for reporting by mid-2018 (with the remainder available in 2019). </p>
<p>It seems rather quaint in the age of big data that the big four banks have been able to hold onto their treasure troves of loan data for so long. This data reveals how reliable we are at repaying our loans. This information is gold to a lender. </p>
<p>For the government’s proposed legislation to work well, it would need to ensure effective regulatory systems are in place to protect our data and avoid more mortgage stress. To achieve this, lessons need to be learned from the US experience.</p>
<p>The new legislation on credit data promises to open up the consumer credit market to increased competition. This may in turn lead to cheaper loans. </p>
<p>Nimble competitors using new technologies could offer consumers innovative loan products at competitive interest rates. Non-traditional lenders could aggressively expand their market share at the expense of the banks. Consumers would seem to be the beneficiaries.</p>
<h2>Lessons from the global financial crisis</h2>
<p>Australia has long maintained one of the most restrictive <a href="https://books.google.com.au/books?hl=en&lr=&id=if2xjLv74HYC&oi=fnd&pg=PA273&dq=J+Barron+and+M+Staten+%E2%80%98The+Value+of+Comprehensive+Credit+Report:+Lessons+from+the+US+Experience%E2%80%99+in+Credit+Reporting+Systems+and+the+International+Economy+(MIT+Press,+Cambridge+Mass,+2003)+&ots=uD2_nMsTmX&sig=NcDHHieq7GRoeLAbY_lYdMrYmcI#v=onepage&q&f=false">credit reporting systems amongst OECD countries</a>. Australia’s reporting system had only allowed credit reporting agencies such as Equifax and Dun and Bradstreet to report on consumers’ bad credit histories. These histories include things such as bankruptcies, and late loan and rental repayments. </p>
<p>The US system already has required reporting of the positive aspects of a consumer’s credit behaviour, including their timely loan repayments. This has enabled companies to develop statistical scoring models to estimate a consumer’s loan default risk with remarkable accuracy. Credit scoring became the cornerstone for underwriting <a href="https://books.google.com.au/books?hl=en&lr=&id=if2xjLv74HYC&oi=fnd&pg=PA273&dq=J+Barron+and+M+Staten+%E2%80%98The+Value+of+Comprehensive+Credit+Report:+Lessons+from+the+US+Experience%E2%80%99+in+Credit+Reporting+Systems+and+the+International+Economy+(MIT+Press,+Cambridge+Mass,+2003)+&ots=uD2_nMsTmX&sig=NcDHHieq7GRoeLAbY_lYdMrYmcI#v=onepage&q&f=false">decisions for consumer loans</a>.</p>
<p>Unsurprisingly, this led to intense competition. With more accurate data, lenders no longer had to assume that low income consumers represented a higher risk of defaulting on their loans. </p>
<p>With customer loan histories being made available to competitors, low income consumers with a history of being reliable repayers were offered loans. As competition intensified, an ever-expanding <a href="http://www.emeraldinsight.com/doi/abs/10.1108/S0733-558X%282010%29000030A008">sub-prime loan mortgage market developed</a>. Shoddy loan practices became rife, setting the stage for the 2008 global financial crisis.</p>
<p>Australian households overall are <a href="https://www.imf.org/en/Publications/GFSR/Issues/2017/09/27/global-financial-stability-report-october-2017">already heavily in debt</a>. Intense competition resulting from the proposed new legislation risks pushing households deeper into debt. Low income consumers risk becoming more vulnerable to falling into debt traps. </p>
<p>Partly in response to the global financial crisis, Australia introduced responsible lending obligations on lenders, which are designed to stop loans to consumers who lack the capacity to repay them. However, the US subprime experience showed that lenders became adept at dodging the rules, and regulators <a href="https://global.oup.com/academic/product/the-subprime-virus-9780195388824?cc=au&lang=en&">appeared to lack the will to enforce them</a>. The regulators will need to be particularly vigilant to avoid this occurring in Australia. </p>
<p>Compelling the big banks to release loan histories to third parties, such as credit reporting agencies, raises further risks that need to be closely attended to. Lenders will either create their own credit scoring models from the data provided by the banks, or rely on the scores produced by credit reporting agencies. </p>
<p>A bad or inaccurate score will have serious implications for a consumer. They may either be refused loans, or only be offered interest rates that are higher than if their score had been accurate.</p>
<p>There needs to be effective systems in place to ensure consumers have ready access to their score, and that they be able to challenge any inaccuracies. Informational transparency should apply for the benefit of both lenders and consumers.</p>
<p>Yet another risk is that our personal loan information will be stolen by criminals. Earlier this year, credit rating agency Equifax was subjected to a cyber attack affecting <a href="https://www.theguardian.com/technology/2017/oct/11/personal-details-of-almost-700000-britons-hacked-in-cyber-attack">over 143 million Americans and over 600,000 Brits</a>. Australia’s largest credit reporting agency, Equifax Pty Ltd, is a wholly owned subsidiary of Equifax Inc.</p>
<p>The data breach is subjecting US and UK consumers to increased risks of identity fraud and targeted scams. Requiring the banks to release our loan data to third parties increases the risk of data breaches. </p>
<p>Increased competition can offer considerable benefits for consumers. However, overheated competition risks damaging the interests of individual consumers, and the economy as a whole. </p>
<p>Consumers also face the increased likelihood of data breaches. The federal government and its regulatory agencies will need to be highly alert to these dangers, and ever vigilant.</p><img src="https://counter.theconversation.com/content/86757/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin Malbon consults to Comminsure, which is presently owned by the Commonwealth Bank. </span></em></p>The government needs to learn from the mistakes in the US in sharing our credit history information to third parties.Justin Malbon, Professor of Law, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/828862017-08-23T06:37:24Z2017-08-23T06:37:24ZBanks shouldn’t underestimate the risk of concentration in the housing market<p>The view of Australian banks on the risk that mortgage stress poses to our economy and the banks’ own viability is worrying. Shayne Elliott, CEO of ANZ Bank commented in this <a href="http://www.abc.net.au/4corners/stories/2017/08/21/4719901.htm">week’s Four Corners report</a>:</p>
<blockquote>
<p>The reality is that housing loans are pretty good because they’re quite diverse in terms of lots of relatively small loans across ah across the country.</p>
</blockquote>
<p>This view is in contradiction to research from the United States which finds housing markets <a href="https://academic.oup.com/rfs/article-abstract/28/3/913/1576961/Can-Housing-Risk-Be-Diversified-A-Cautionary-Tale">there are less diversified than previously thought</a>. This means any house price shocks will likely occur simultaneously across the country, causing large cumulative losses to borrowers and banks via mortgage defaults. Australian housing markets are likely to be even more concentrated than in the US because of the population size of Sydney and Melbourne.</p>
<p>Banking regulator the Australian Prudential Regulation Authority (APRA) <a href="http://www.apra.gov.au/MediaReleases/Pages/17_23.aspx">has already issued guidelines</a> to the banks on tracking exposure to mortgages and limiting the growth of loans to investors, in particular for interest-only loans. An <a href="http://retailbankingremreview.com.au/">independent review by Stephen Sedgewick</a> on behalf of the industry also recommended banks stop paying mortgage brokers based on the volume of loans they secure, in an effort to reduce risks. But these steps might not be enough to ensure security.</p>
<h2>Australian bank exposure to mortgage risk</h2>
<p>Bank losses during the global financial crisis were in large parts driven by borrowers not being able to make their mortgage repayments. After receiving a loan, borrowers may experience income shocks like loss of jobs or demotion and expense shocks like higher petrol prices or interest rates, that affect their ability to service their mortgages.</p>
<p>Australian mortgage contracts are risky for borrowers in international terms. Unlike other countries, Australian banks offer to lend only up to five years at a fixed rate and the majority of loans are at a variable rate. </p>
<p>This leaves Australian borrowers exposed to interest rate increases. In the past few years, interest rates were lowered as Reserve Bank of Australia economists targeted low inflation rates.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/183088/original/file-20170823-13316-15hy9xp.gif?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/183088/original/file-20170823-13316-15hy9xp.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/183088/original/file-20170823-13316-15hy9xp.gif?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=506&fit=crop&dpr=1 600w, https://images.theconversation.com/files/183088/original/file-20170823-13316-15hy9xp.gif?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=506&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/183088/original/file-20170823-13316-15hy9xp.gif?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=506&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/183088/original/file-20170823-13316-15hy9xp.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=636&fit=crop&dpr=1 754w, https://images.theconversation.com/files/183088/original/file-20170823-13316-15hy9xp.gif?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=636&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/183088/original/file-20170823-13316-15hy9xp.gif?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=636&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">www.rba.gov.au</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Interest rates are now close to zero, limiting the ability of the RBA to stimulate economic growth. There’s the possibility the RBA could raise interest rates, causing shocks to mortgage borrowers. My <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=659451">research</a> shows this shock could increase bank losses substantially.</p>
<p>At the moment <a href="http://www.abs.gov.au/ausstats/abs@.nsf/exnote/6401.0">23% of consumer expenses</a> are housing related and this number is likely higher for mortgage borrowers and could be growing. Interest rate increases, in combination with <a href="https://theconversation.com/home-ownership-falling-debts-rising-its-looking-grim-for-the-under-40s-81619">the current high debt levels</a>, are therefore likely to increase inflation and trigger further interest increases. </p>
<h2>Dealing with the risk of mortgage stress</h2>
<p>Current bank portfolios are not well diversified, if <a href="https://theconversation.com/australian-banks-are-too-exposed-to-mortgages-but-what-if-the-world-was-flat-31000">60% of bank assets are in mortgages</a>. Other loan classes such as commercial real estate loans and small to medium enterprise loans are also often property-backed. </p>
<p>Bank lending standards need to be more consistent to avoid borrowers shopping around for the lender that offers them the highest loan amount. Lending standards should also consider the concentration of housing income and expenses in a borrower’s portfolio.</p>
<p>Banks should promote fixed rate mortgages. This type of mortgage transfers interest rate risk from borrowers to the banks, that are better placed to manage this risk. This may come at an additional cost but should be small compared to the cost borne by consumers <a href="https://theconversation.com/four-ways-an-australian-housing-bubble-could-burst-76505">should the housing bubble ever burst</a>. </p>
<p>There also needs to be more scrutiny of the use of offset accounts and redraw facilities, being used as an offset for outstanding loans. Borrowers often use these funds to purchase additional properties and they may not be available in the case of mortgage default. Instead of promoting offset accounts it may be better to give borrowers a prepayment on their mortgage, but not an option to redraw. Should consumers want to draw down on the equity in their homes, they could then apply for a second mortgage. </p>
<p>Mortgage brokers should act as independent advisers, a tool for consumer information and bank competition, as smaller lenders in particular rely on mortgage brokers. The Sedgwick report suggested the loan to value ratio of mortgages should be considered when paying mortgage brokers. This would mean that loans with high loan-to-value ratios (where the borrower is more likely to default) would earn a lower fee.</p>
<p>The Sedgwick banking review has been a step in the right direction, but the focus should be on banks rather than mortgage brokers, as it’s ultimately the bank that is in a contract with the consumer. </p>
<p>Some of this may require a fundamental value change. It’s not likely the Australian appetite for property will change but this means we need to hedge our bets against any risks by improving diversification and the way banks finance mortgages.</p><img src="https://counter.theconversation.com/content/82886/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harry Scheule does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s not likely the Australian appetite for property will change but this means we need to hedge our bets against any risks by improving diversification and the way banks finance mortgages.Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/793342017-06-13T02:49:10Z2017-06-13T02:49:10ZA better alternative to levying the bank tax<p>In all the noise and fury surrounding the bank tax, a more effective alternative proposal to implementing it has apparently been forgotten. In 2015 South Australian Premier Jay Weatherill proposed that banking should be subject to the GST.</p>
<p>This idea had much sounder economic underpinnings than the current levy, would have raised much more revenue (maybe three to four times), and would have applied to all banks rather than just the big banks. Of course, that last feature would have united the banks in opposition, in contrast to the current divide and (hopefully) conquer approach of Treasurer Morrison. </p>
<p>Unlike other industries, the traditional business of bank deposit taking and lending is exempt from GST. This creates economic distortions and omits a large part of the economy from being taxed.</p>
<p>The omission of banking from the GST is a product of history, because applying it to the banks was seen as too complicated. The reason lies in the nature of the GST as a “value added” tax. </p>
<p>Essentially the 10% tax is added to the sales price of an output good or service, but the seller obtains a GST credit for the tax component of the price of input goods they have bought. The historical view was that it is difficult to identify what are banking sector inputs and outputs, and thus value added.</p>
<p>Is providing a deposit account an input (in making loans) or an output in its own right? And there is generally no explicit fee charged for the service of intermediation between depositors and borrowers, with bank costs and profits covered by the interest rate spread.</p>
<p>The argument that its too complicated is no longer a sufficient justification. At one level the aggregate “value added” by a bank is easy to estimate. It’s the sum of profits and wages. The size of the profits and wage bills of the banks by itself indicates the potential tax revenue foregone and potential economic distortions caused by favourable tax treatment of banking services.</p>
<p>At the product level, while banks receive input tax credits on purchased inputs they do not add a GST cost to the price of deposit or loan products and services. Introducing GST would mean that banks would need to add the tax on their value added to prices charged (directly or implicitly via changes to interest rates) but would be able to utilise the GST credits they currently get on purchased inputs.</p>
<p>The historical complication was determining how much of aggregate value added and various input costs to allocate to each product. How should the cost of bank premises or teller time be allocated between individual deposit and loan customers?<br>
That is a difficult problem. But banking systems of activity based costing, product and divisional profitability have evolved to enable an application of the GST. It might be an imperfect application, but that is arguably a lot better than none at all.</p>
<p>Exempting traditional banking services from GST is a significant cost to tax revenue. But it also creates economic distortions. </p>
<p>One, at an aggregate level, is that banking services get a tax advantage over other forms of economic activity – perhaps helping to partially explain why the financial sector has grown as a share of total GDP.</p>
<p>Another distortion lies in effects on different types of customers. Yes, application of GST to banks would raise the cost of banking services to all customers – since it is unrealistic to expect that this tax, even though effectively levied on bank profits plus wages and salaries, would not be passed on.</p>
<p>But it would mean that business customers would get GST input tax credits on their purchases of banking services to offset against the GST bill on their sales. Households, as consumers would not get that benefit, reducing tax induced distortions to their use of banking services relative to alternative expenditures.</p>
<p>The detail of the GST (including federal – state revenue sharing implications) is a mystery to most people, so it’s easy for counter-arguments to be produced to obfuscate and obstruct the proposal to apply it to banking. But it has merit and warrants serious consideration.</p>
<p>It’s highly unlikely that Treasurer Morrison will want to deal with the fall-out from adding a bank GST impost on top of the “big bank tax”. But perhaps, placing a sunset clause on that and using the lead time to develop a coherent plan for applying GST to banks is worth considering.</p><img src="https://counter.theconversation.com/content/79334/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Applying the GST to banking has much sounder economic underpinnings than the current levy, would have raised much more revenue, and would have applied to all banks rather than just the big banks.Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/773972017-05-11T02:42:47Z2017-05-11T02:42:47ZBudget 2017: lack of competition is why government is moving so hard against the banks<p>With it’s latest <a href="http://www.budget.gov.au/2017-18/content/bp2/download/bp2.pdf">budget</a> the government has made a number of moves to create a level playing field in the banking system. It’s taxing the five largest banks, announced a review of rules around data sharing, a new dispute resolution system for banks and other financial institutions, and new powers for the regulator to make bank executives accountable. </p>
<p>All of this is on top of <a href="http://sjm.ministers.treasury.gov.au/media-release/099-2016/">a Productivity Commission inquiry</a> into the competition within the Australian financial system, announced this week. </p>
<p>While some of these moves - such as <a href="https://theconversation.com/budget-bank-levy-too-big-to-fail-not-too-big-to-take-a-hit-77475">the bank levy -</a> will have a positive effect on making smaller banks more competitive, there are more policies that could be considered. These could include the separating out of the retail arms from the other areas of the large banks, increasing the capital requirements of larger banks to equal those of smaller banks, and developing new sources of funding for smaller banks. </p>
<h2>More for competition</h2>
<p><a href="http://www.budget.gov.au/2017-18/content/bp2/download/bp2.pdf">A new “one-stop shop”</a> for dispute resolution will replace the existing three schemes - Financial Ombudsman Service, the Credit and
Investments Ombudsman and the Superannuation Complaints Tribunal. Called the Australian Financial Complaints Authority (AFCA), it will give consumers, businesses and investors a binding resolution process when dealing with financial services companies. The scheme will provide for a basis for more competition as disputes on financial services are consistently resolved regardless of the provider. </p>
<p>And A$1.2 million has been given to fund a review of an open banking system in which customers can request banks to share their data, which could assist financial startups and other competitors enter the market and compete against the big four banks. Banks will likely be forced to provide standardised application programming interfaces (API) that enable financial technology companies to provide services for interested consumers.</p>
<p>The government has also provided A$13.2 million to the Australian Competition and Consumer Commission (ACCC) to further scrutinise bank competition and to run the AFCA. <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Four_Major_Banks_Review/Report">This follows a House of Representatives report</a> that called for an entity to make regular recommendations to improve competition and change the corporate culture of the financial industry.</p>
<p>The ACCC will provide Treasury with ongoing advise on how to boost competition in the sector. This may include a reduction of cost advantages of big banks, barriers to entry for new firms including change costs for consumers. </p>
<h2>A more concentrated and changing finance sector</h2>
<p>All of these changes come after a decade of consolidation and upheaval in the financial system, which has hurt competition and increased risk.</p>
<p>This chart shows the market shares of the big four Australian banks in terms of Australian loans and deposits:</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/168513/original/file-20170509-20740-1mq5rvj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/168513/original/file-20170509-20740-1mq5rvj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/168513/original/file-20170509-20740-1mq5rvj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/168513/original/file-20170509-20740-1mq5rvj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/168513/original/file-20170509-20740-1mq5rvj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=492&fit=crop&dpr=1 754w, https://images.theconversation.com/files/168513/original/file-20170509-20740-1mq5rvj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=492&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/168513/original/file-20170509-20740-1mq5rvj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=492&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Market share Big 4 banks.</span>
<span class="attribution"><span class="source">Australian Prudential Regulation Authority</span></span>
</figcaption>
</figure>
<p>As you can see, since 2002 their market share has grown from 69.7% to 79.6% for loans and from 66.3% to 77.3% for deposits. Also, the gap between market dominance in loans versus deposits has closed since the global finance crisis. This means the big banks are attracting a greater share of bank deposits, which has an impact on the smaller banks. </p>
<p>With limited access to deposits, which is a relatively cheap way of raising capital, smaller banks have had to rely on the more expensive wholesale debt markets. Small banks also have difficulties to tap other funding sources such as covered bonds. This makes their products less competitive, and they have struggled as a result.</p>
<p>In part, that’s because a number of banks disappeared or merged with the big banks after the global financial crisis. This includes St George, Bankwest, Bendigo Bank, Aussie Home Loans, Adelaide Bank, RAMS and Wizard. </p>
<p>The <a href="http://fsi.gov.au/publications/final-report/">Murray Inquiry found</a> the big four banks have less than half the capital set aside for emergencies than some smaller financial institutions do. Again, this makes the smaller banks less competitive and needs to be addressed. The government should increase the capital requirements of larger banks to close the cost advantage for larger banks.</p>
<p>In addition, rising house prices have led to a further increase in the concentration of mortgage and other housing loans in the Australian banking system. Today Australian banks have about twice as many mortgages on their books <a href="https://theconversation.com/australian-banks-are-too-exposed-to-mortgages-but-what-if-the-world-was-flat-31000">as in the next highest developed economy</a>.</p>
<p>New financial startups, such as <a href="https://theconversation.com/what-you-need-to-know-about-peer-to-peer-lending-38836">peer-to-peer lenders</a>, have entered the banking system. In time they may rival the big banks in areas like personal lending, but they remain small in terms of market share. And the big banks’ unwillingness to share data may be a hindrance. </p>
<h2>Something needed to be done</h2>
<p>The concentration in the banking sector does not provide the best outcome to all Australians. It has led to a low range and low quality of financial services as well as high costs. This needed to be addressed. </p>
<p>The new banking levy will support competition, as it pushes up the cost for the big banks. The review into data sharing could also be a boon to financial startups and other competitors, although we don’t yet know what the outcome will be.</p>
<p>But even stronger government actions may needed to create a level playing field. The government should consider separating out of the retail arms, from the other areas, of the large banks. Failing that, the low capital buffers of the big banks need to be addressed.</p><img src="https://counter.theconversation.com/content/77397/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harry Scheule does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The budget included a few measures to make the banking sector more competitive, but they don’t go far enough.Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/774752017-05-10T06:30:27Z2017-05-10T06:30:27ZBudget bank levy: too big to fail, not too big to take a hit<p>The budget announcement of a 0.06% levy on a subset of bank liabilities looks arbitrary, and is certainly politically opportunistic. But it could be rationalised as a response, albeit probably not the best response, to offset a number of distortions in Australia’s banking market. </p>
<p>The levy will certainly have consequences for bank pricing, forms of funding and competition – and will interact in complex ways with other prudential regulatory changes in the pipeline. </p>
<p>The levy will affect the four major banks and Macquarie. It will apply to liabilities other than deposits protected by the Financial Claims Scheme (ie. under A$250,000) and additional Tier 1 capital instruments. </p>
<p>As a ballpark estimate, it will apply to around 50% of a bank’s total funding. This will raise the overall cost of funding for the affected banks by around 0.03%.</p>
<p>The large banks are perceived to receive a competitive benefit (lower borrowing costs) from an implicit government guarantee associated with being <a href="https://theconversation.com/au/topics/too-big-to-fail-3747">“too big to fail”</a>. On this basis, the levy could be seen as a charge for that benefit. </p>
<p>As it is in Europe, Australia could establish a “resolution fund” to enable the Australian Prudential Regulation Authority (APRA) to facilitate a smooth exit (i.e. by merger) of a failing bank. Although the government is going to set this levy aside for budget repair, rather than being set up in another separate fund, it could be argued that it strengthens the government to support APRA in regulating the banks. </p>
<p>The nature of the regulatory system (such as capital adequacy requirements) creates a competitive imbalance favouring the big four banks. The <a href="https://theconversation.com/apra-fiddles-on-bank-risk-while-rome-burns-72976">imposition of higher minimum capital requirements</a> for mortgage loans by banks (five banks were actually subject to this levy) was only a partial response to this imbalance.</p>
<p>It’s often argued Australian banks have relied too much on funding other than “core/stable” deposits and capital, with potential consequences for safety and systemic stability. Indeed, the large banks have funded their increased share of home mortgage lending since the global financial crisis to a significant degree from wholesale borrowings.</p>
<p>However, there are better ways of dealing with these perceived distortions than the government’s quick, politically opportunistic, measure. And, together with other bank accountability measures introduced in the budget, it may neutralise whatever support exists for a banking royal commission.</p>
<p>The levy is likely to have significant effects on financial markets and consumers of financial services. The levy will flow through the banks’ funds transfer pricing systems to affect loan pricing. </p>
<p>In this regard it is somewhat silly to suggest simultaneously that the big banks shouldn’t increase loan interest rates, as the treasurer has, but that the measure will improve the competitive position of smaller banks. The latter will happen only if the large banks do respond in that way!</p>
<p>The large banks will have incentives to fund loans differently. In particular, by originating and then securitising loans (pooling various types of contractual debt, to get them off-balance sheet and funded by the capital market) they will avoid the levy on that part of their activities.</p>
<p>However, that benefit won’t apply if they use “covered bond” securitisation. This is when a bank issues debt securities collateralised against a pool of assets, giving the investor a claim against both those assets and the bank in general. The levy is thus likely to give a kick to traditional securitisation over on-balance-sheet lending, but stymie the growth of covered bond funding.</p>
<p>The levy will also affect the structure of bank deposit interest rates. Because retail deposits are exempt from the levy, the large banks can be expected to bid for these deposits – pushing up the interest rates offered relative to the cost of borrowing in wholesale and large deposit markets. </p>
<p>That’s going to compound the already apparent effect on relative interest rates due to recent and forthcoming liquidity regulations that APRA is applying. But it will worsen the relative returns that superannuation funds can get on (their large) bank deposits and possibly induce them to look to invest more in securitised products. </p>
<p>It’s worth noting that the budget involves changes that will increase competition for retail deposits. One example is the measure allowing individuals to make limited, tax-advantaged contributions to superannuation which can be subsequently withdrawn for a house deposit.</p>
<p>A further likely effect is to encourage banks to make more use of equity capital and additional Tier 1 (AT1) capital funding (that preferences share structures listed on the ASX and held by many retail investors), relative to Tier 2 capital funding (provided by the wholesale and institutional markets), or other wholesale funding. While more capital funding is still required to meet the “unquestionably strong” criteria proposed <a href="http://fsi.gov.au/">by the Murray inquiry</a>, and accepted by the government, it’s far from clear that increased reliance on the complex AT1 is desirable. </p>
<p>The revenue to be raised is large in absolute dollar amount – but is relatively small as a percentage of current bank profits (in the order of 4-5%).</p>
<p>It could be expected that the banks will pass on some part of the levy to customers, or avoid it by shifting to other forms of funding that do not incur the levy, such that the short-run direct impact on after-tax profits and shareholders is somewhat less than that 4-5% figure. </p>
<p>But the big unknown is how the change, in conjunction with a plethora of other ongoing regulatory changes affecting the financial sector, affects the competitive balance between the big banks, smaller bank competitors and capital markets and their prospects in the long run. </p>
<hr>
<p><em>This piece was co-published with <a href="https://pursuit.unimelb.edu.au/live/budget2017-fairness-security-and-opportunity">Pursuit</a>.</em></p><img src="https://counter.theconversation.com/content/77475/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The new levy on banks from the budget is a small hit to their profit but it could have unintended consequences.Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/773182017-05-09T09:38:57Z2017-05-09T09:38:57ZBudget 2017: bank populism will be paid for by Australians<p>Treasurer Scott Morrison used to like to say Australia “doesn’t have a revenue problem, we have a spending problem”. It turns out this sentiment was true in 2016.</p>
<p>Now this year’s federal budget is a big-taxing, populist, and nakedly political one. It’s not all bad news, or even all bad policy, but it marks a break from the rhetoric and policy attempts of the past.</p>
<p>The treasurer referred to the A$13 billion “zombie” measures the Senate has failed to pass as a “Senate tax”, in justifying the tax increases in this budget.</p>
<p>The first major tax increase is a 0.5% increase in the Medicare levy from 2.0% to 2.5%. This raises over A$4 billion a year on a run-rate basis. It’s also a major slug on the bulk of Australian taxpayers.</p>
<p>The treasurer has a point that both major parties agree the NDIS should be fully funded, but two other points remain. First, the government previously wanted to do it without raising taxes. They have raised a white flag on that. Second, it’s unclear that it really will cover the full costs. Treasury is flying blind trying to forecast the take-up rates and eventual cost of the NDIS. The estimates look low to me.</p>
<p>If it does end up costing a lot more, what then? Another 50 basis point tax hike? Based on Morrison’s logic today that it’s an “insurance scheme” that a decent society has to fund, there is no alternative.</p>
<p>The most extreme measure is the new “bank levy”. This is painted as a “modest” six basis point tax on banks with liabilities of more than A$100 billion. In reality, it’s a A$1.6 billion per annum slug paid for by the big four banks, plus Macquarie. The treasurer made a big deal of how it’s “not a tax on deposits”, but this is nonsense. It’s a tax on 70% of the funding structure of the big banks; it amounts to roughly 4% of their annual profits being yanked away.</p>
<p>Worse still, given the lack of competition in the sector, it won’t be the banks’ shareholders who pay. It will be mortgage holders and other customers. It’s ironic that this nakedly populist bank-bashing attack will end up slugging average Australians.</p>
<p>Last year I was highly critical of the almost absurdly optimistic growth assumptions—particularly nominal GDP. This year’s budget is a little better, but still involves a fair amount of heroics.</p>
<p>Nominal GDP is forecast to grow at 6% this year, and then between 4.0% and 4.75% in the latter years of the forward estimates. If the iron ore price doesn’t hold up, then that 6% number might be missed, perhaps by a lot.</p>
<p>This year the treasurer is putting the rabbit back into the hat with wage price growth. This has been stuck at around (or below) 2% for years, yet the budget has this going from 2.5% to 3.0%, then to 3.5%, and then 3.75%. There is no real reason to believe this will happen.</p>
<p>And the overall faith in global economic recovery that’s mentioned in the treasurer’s speech certainly could come about, and there are some positive signs. But it’s a lot to bet on so heavily. The US Federal Reserve is clearly nervous, China is still heavily indebted. There’s a lot that can still go wrong with global growth.</p>
<p>A welcome change to the way the budget is presented is the distinction between “good debt and bad debt”. This is something I have argued in <a href="https://theconversation.com/vital-signs-why-the-government-still-thinks-it-can-grow-away-the-deficit-77108">favour of for some time</a>. The treasurer has clearly distinguished between recurrent expenditure—such as for Medicare, welfare payments, and schools — and spending that is more capital in nature, such as infrastructure.</p>
<p>Many commentators, myself included, have rightly pointed out in recent days that investments come in many forms, including in human capital. In other words, good debt is not just for bridges, but includes better teachers, more educational resources, preventative medicine, and other things the treasurer left out. Still, the move away from a mantra of “all debt bad” is certainly a welcome one.</p>
<p>Another forward-looking measure is to not “raid” the Future Fund, but preserve it for another 10 years. This will allow, on current projections, it to fully fund the pension liabilities it was designed to, past the year 2100. Raiding it early would have, by way of reverse compound interest, left a huge unfunded liability. As the treasurer said, if you can borrow at 3% but earn 7% (as the Future Fund has), why pull money out? Quite so.</p>
<p>The general reaction in the budget lockup today was that this was a “ho hum” budget. I disagree. </p>
<p>The budget was extraordinary in many ways. It is an abandonment of restraint on taxes by a liberal government. It is nakedly populist. It also acknowledges that government debt can be productive, and that raiding the Future Fund for short-term reasons would be a terrible idea.</p>
<p>There is a little bit to like, quite a bit to dislike, and some heroic assumptions about the future. But boring this budget is not.</p><img src="https://counter.theconversation.com/content/77318/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>The budget was extraordinary in many ways. It is an abandonment of restraint on taxes by a liberal government. It is nakedly populist and it also acknowledges that government debt can be productive.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/750592017-03-23T23:46:33Z2017-03-23T23:46:33ZASIC’s CommInsure pass shows why badly behaving bankers will never fear jail time<p>In October 2014, the Australian Securities and Investments Commission (ASIC) Chairman, Greg Medcraft, was <a href="http://www.smh.com.au/business/australia-paradise-for-whitecollar-criminals-says-asic-chairman-greg-medcraft-20141021-119d99.html">pretty forthright</a></p>
<blockquote>
<p>This is a bit of a paradise, Australia, for white collar criminals.</p>
</blockquote>
<p>Just a day later, reportedly after a phone call with Finance Minister Senator Mathias Cormann, he <a href="http://www.smh.com.au/business/asic-backflips-on-criminals-paradise-comments-20141022-119v22.html">attempted to clarify</a> his remarks.</p>
<blockquote>
<p>I correct that. Basically the point is that we want to make sure we don’t become a paradise.</p>
</blockquote>
<p>But as with much of what it has tried to do in the past five years, ASIC has been spectacularly unsuccessful, aiding the creation of a white-collar paradise, rather than hindering it.</p>
<p>But what would a white-collar hell hole look like? Mr Medcraft, gives us his perspective:</p>
<blockquote>
<p>The thing that scares white-collar criminals is going to jail and that’s what scares them everywhere in the world…The penalties, particularly civil penalties, in Australia for white-collar offences are basically not strong enough, not tough enough. All you’re doing is giving them a slap on the wrist [and] that is not deterring people.</p>
</blockquote>
<p>So since 2014, has ASIC been working assiduously to jail and fine white collar criminals, so they won’t do it again? Not in this paradise - ASIC hasn’t. Two examples, just this month, illustrate this.</p>
<p>First, ASIC has just <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-348mr-update-on-asics-investigation-into-comminsure/">released</a> its long-awaited report into the CommInsure scandal <a href="http://www.abc.net.au/4corners/stories/2016/03/07/4417757.htm#transcript">unearthed</a> originally by the ABC and Fairfax.</p>
<p>In summary, the ASIC report says that: Yes, CommInsure was using out of date medical definitions to deny claimants who were dying; Yes, CommInsure had to pay out millions to claimants who were found to have valid claims after all; Yes, Comminsure’s systems were inadequate and could not be properly audited.</p>
<p>But also no, there is no evidence of undue pressure on doctors to change their opinions; Yes, the firm’s claims processes were less than “best practice”; Yes the claims processes were inconsistent; No, there was no evidence that medical opinions were altered.</p>
<p>ASIC concluded that everything, despite evidence of unfeeling and incompetent behaviour, was legal! </p>
<p>And what punishment did ASIC mete out for such atrocious behaviour? In the sternest tones, Mr. Medcraft sent CommInsure a quiet little <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-065mr-asic-accepts-enforceable-undertakings-from-westpac-and-anz-to-address-inadequacies-within-their-wholesale-fx-businesses/">note</a> asking them to “engage an independent expert by July 2018 to conduct an implementation review”, into recommendations by a half dozen “independent inquiries”.</p>
<p>ASIC is telling CommInsure to do what it should have been doing all along. Let’s forget the past and mistreatment of customers, it’s paradise for firms that prey on the sick and dying.</p>
<p>But it’s not enough to be legal. </p>
<p>In the UK, Payment Protection Insurance (PPI) was, and is, perfectly legal. But that did not stop UK regulators <a href="http://www.telegraph.co.uk/news/2017/03/02/prepare-ppi-plague-fca-planning-42m-ad-campaign-will-spark-nuisance/">forcing banks</a> to pay some £23 billion (and counting) in remediation to customers for mistreatment of claimants who were sold inappropriate PPI contracts. ASIC is still reviewing the local insurance industry’s marketing and sales practices, but don’t hold your breath.</p>
<p>ASIC <a href="http://www.smh.com.au/business/banking-and-finance/cbas-insurance-arm-comminsure-told-to-reassess-rejected-heart-attack-claims-to-2012-20170322-gv4dif.html">claims</a> it has asked the government for more powers to tackle bad behaviour of the type exhibited by CommInsure as regards claims, but is still waiting on the reply.</p>
<p>However, ASIC does not have to wait. Back in 2015, ASIC <a href="https://theconversation.com/asics-fashion-faux-pas-44590">put its hand up</a> to be the “conduct regulator” and defined “conduct risk” as:</p>
<blockquote>
<p>The risk of inappropriate, unethical or unlawful behaviour on the part of an organisation’s management or employees. </p>
</blockquote>
<p>This means that ASIC does not have to prove illegality, merely inappropriate or unethical conduct, to take action. Having shelled out millions of dollars buying off mistreated claimants, not even CommInsure would claim that their behaviour was either appropriate or ethical. </p>
<p>But rather than do its job on tackling misconduct, ASIC has chosen to hide behind a shabby, legalistic defence. </p>
<p>Another example comes from mid-March, when ASIC <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2017-releases/17-065mr-asic-accepts-enforceable-undertakings-from-westpac-and-anz-to-address-inadequacies-within-their-wholesale-fx-businesses/">announced</a> that it had accepted an “enforceable undertaking” with Westpac and ANZ regarding manipulation of a key Foreign Exchange (FX) benchmark. This is where the bank voluntarily enters into a binding agreement to do certain tasks that settle a contravention of the law. In this case failing to ensure that their systems and controls were adequate to address risks relating to the manipulation of the FX.</p>
<p>Just a few months ago, ASIC had <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-455mr-asic-accepts-enforceable-undertakings-from-nab-and-cba-to-address-inadequacies-within-their-wholesale-spot-fx-businesses/">accepted</a> a similar enforceable undertaking with the other banking pillars, the National Australia Bank (NAB) and the Commonwealth Bank. So, all four of the Big Four banks were implicated in manipulating key FX benchmarks. This is despite the claims by their CEOs, at the now-regular <a href="http://www.theaustralian.com.au/business/financial-services/banks-inquiry-nab-westpac-face-parliamentary-hearings/news-story/126e5f5215be19405cc9ec190f663afe">senate committee hearings</a>, that there was, to their knowledge, no “systemic” misbehaviour.</p>
<p>So what were the four banks accused of? Using Westpac as an example of the sort of conduct found by ASIC in all of the banks, over a period from 2008 to 2013, Westpac staff: disclosed confidential customer information to their mates in the market; disclosed the banks’ own positions to supposed competitors; changed their own positions after receiving insider information; and colluded with external parties to fix the market for their own profit. Similar, insider trading and collusion was reported for other banks.</p>
<p>In overseas jurisdictions, <a href="http://www.reuters.com/article/us-banks-forex-settlement-idUSKBN0O50CQ20150520">regulators</a> hit banks with over US$10 billion of fines for exactly the same misconduct, and also <a href="https://www.bloomberg.com/news/articles/2016-08-29/fed-bans-and-fines-ex-barclays-trader-in-fx-manipulation-probe">fined and banned</a> traders. In <a href="https://www.fca.org.uk/markets/market-abuse/regulation">Europe</a>, such conduct has been made officially illegal. </p>
<p>So what did ASIC do to scare the local white-collar wannabees? </p>
<p>They did not fine the banks nor bar the traders, but agreed with the banks that they would make “community benefit payments” of between A$2.5 and A$3 million each to support “financial literacy”. Yes, you heard right- $3 million for charity. </p>
<p>No fines, no sackings, no remediation for customers who were duded, no resignations, no cutting of bonuses, no apologies from the board. No repayment of ASIC’s legal fees (which the taxpayer picks up). No, just A$3 million measly dollars – a tiny amount compared to the banks’ billion dollar profits.</p>
<p>No wonder it’s paradise for white-collar criminals when the policeman has gone off snorkelling.</p>
<p>On the other hand, maybe there’s some genius in ASIC’s madness (for not rocking the boat)?</p>
<p>With Brexit, bankers are already starting to jump from the <a href="https://www.theguardian.com/business/2017/mar/21/goldman-sachs-staff-london-brexit-frankfurt-paris">City of London</a> , where better to set up shop than in Sydney or Melbourne? </p>
<p>No nasty Financial Conduct Authority, handing out big fines, just ASIC. No obnoxious Prudential Regulation Authority, just sleepy old APRA. No parliamentary committees <a href="https://www.ft.com/content/3cef50e6-d42b-11e6-b06b-680c49b4b4c0">harping on</a> about breaking up the banks. No <a href="https://www.fca.org.uk/markets/market-abuse">laws to stop market manipulation</a>. And most definitely, no <a href="http://www.parliament.uk/bankingstandards">Banking Royal Commissions</a>.</p>
<p>We can already see the <a href="http://www.afr.com/news/politics/where-the-bloody-hell-is-our-national-australia-brand-20150930-gjxy9u">marketing campaign</a></p>
<blockquote>
<p>It’s paradise for white-collar criminals down here, where the bloody hell are you?</p>
</blockquote><img src="https://counter.theconversation.com/content/75059/count.gif" alt="The Conversation" width="1" height="1" />
ASIC is telling CommInsure to do what it should have been doing all along. Let’s forget the past and mistreatment of customers, it’s paradise for firms that prey on the sick and dying.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/732762017-02-20T10:02:40Z2017-02-20T10:02:40ZMorrison’s tanty over bankers hiring Anna Bligh was arrogant and absurd<p>Less than three months from his second budget, Treasurer Scott Morrison is not in a happy place.</p>
<p>The last week has been a disaster for him, culminating in the weekend exit of his strategy and communications director Sasha Grebe at the weekend.</p>
<p>Like his now-ex boss, Grebe – who dates from the Howard days – is a tough operator who’s played his part in tensions between the Treasurer’s office and the Prime Minister’s Office.</p>
<p>News of Grebe’s resignation – its precise circumstances are unclear – came as a Monday item by Australian Financial Review columnist Joe Aston <a href="http://www.afr.com/brand/rear-window/aba-anna-bligh-collateral-damage-in-scomos-sasha-grebe-shocker-20170219-gug71f">elaborated on the hissy fit</a> by Morrison and his office over the Australian Bankers’ Association (ABA) last week appointing former Labor premier Anna Bligh as its executive director.</p>
<p>Mostly, Morrison and some others in the government were furious that the ABA had the temerity to select someone from the other side of the political tracks. But also, Aston reported, Grebe, who had been “job hunting for months”, wanted the ABA post.</p>
<p>A spokesman for Morrison said later that “Sasha has been exploring job opportunities outside the office since last year’s election”.</p>
<p>The heat of the eruption over Bligh was evident in the <a href="http://www.theaustralian.com.au/national-affairs/treasury/coalition-mps-in-push-to-deny-banks-company-tax-cut/news-story/4264fcc06134be65a86daa45b47da40a">front page lead</a> of Saturday’s Weekend Australian, co-authored by Simon Benson, who is close to Morrison. It said “Coalition MPs have called for the big banks to be cut out of the government’s plan to reduce the company tax rate after the surprise appointment”, and noted Morrison was only informed of the Bligh decision on Thursday night.</p>
<p>Unsurprisingly, Malcolm Turnbull quickly squashed the idea of excising one sector from the tax cut (which may never come to big businesses, as the Senate is only inclined to vote for a reduction for smaller companies).</p>
<p>On Monday, appearing on his regular spot with 2GB’s Ray Hadley, Morrison was asked “what ducks and drakes” the ABA was playing in appointing Bligh. “Only they can explain that,” he replied.</p>
<p>Morrison’s attitude is part of a feeling in some Liberal circles that business organisations should in effect be an extension of a Coalition government, peopled by its friends and there to serve its interests and argue its case.</p>
<p>Hence the periodic angry attacks on the Business Council of Australia (BCA) by Victorian Liberal president, Michael Kroger. Years ago the Howard government was feral about then BCA chief executive, David Buckingham, who had formerly worked for prime minister Bob Hawke.</p>
<p>The reality is that many companies these days want to maintain a certain distance from partisan politics. They are reluctant to donate money to parties, or they give to both sides, knowing they’ll have to deal with both conservative and Labor governments.</p>
<p>Business lobbies may favour conservative governments’ policies but don’t want to be seen as compliant handmaidens. Thus among the 18 organisations recently calling for a more <a href="https://theconversation.com/plea-to-politicians-on-energy-stop-the-brawling-72849">bipartisan approach to energy policy</a> were the BCA and the Australian Industry Group.</p>
<p>Anyway, the perfectly appropriate appointment of Bligh - who left politics several years ago and is seen by the banks as a good “face” for their message that they are changing - surely is worse for Labor than for the government. Presumably Bligh wouldn’t have been employed unless she was broadly in line with the banks’ views; most pertinently, she opposes a royal commission, to which the ALP is committed.</p>
<p>By being ungracious and – if the Australian Saturday story came from near him, appearing vengeful – Morrison has just stirred another controversy the government doesn’t need right now.</p>
<p>Turnbull’s private reaction on the Saturday story about calls to deny the tax cuts to the banks can only be imagined. Questioned in New Zealand about the idea he said: “The first I heard of it is when I saw it in the media this morning.”</p>
<p>It is clear that the Turnbull-Morrison relationship is again under stress.</p>
<p>Their personalities are incompatible.</p>
<p>Morrison is headstrong – a quality that has marked his career, including before he was an MP. This was shown last week when he insisted the move to tie savings in the Omnibus Bill to the financing of the National Disability Insurance Scheme should be announced quickly despite a caution from the Prime Minister’s Office about the timing.</p>
<p>Morrison is highly ambitious and wants to be the next Liberal leader. This is not suggesting he is doing anything deliberately to undermine Turnbull – rather it is to say that he always has an eye to the future and seeks a high profile. As things have turned out, his ranking in the post-Turnbull leadership hierarchy has gone seriously backwards since he has become Treasurer.</p>
<p>Turnbull is impatient and volatile, grinding his teeth when Morrison makes a mistake or goes off on a frolic.</p>
<p>When we think of history, relations between prime ministers and treasurers are usually complicated and often inclined to finish sourly or catastrophically.</p>
<p>Tony Abbott and Joe Hockey stuck together at a personal level, but Hockey’s failures contributed to the collapse of the Abbott government.</p>
<p>The Kevin Rudd-Wayne Swan partnership ended with Swan switching to Julia Gillard; he later painted Rudd as a maniac.</p>
<p>John Howard and Peter Costello worked successfully together at a policy level but their personal relations were corroded by Costello’s unfulfilled ambition.</p>
<p>Bob Hawke could never have achieved what he did without Paul Keating but finally Keating became his executioner.</p>
<p>As his treasurer has caused him some grief, Turnbull has grown closer to Finance Minister Mathias Cormann. One of Cormann’s strengths is that he is a good negotiator with the Senate crossbench. A few months ago Turnbull made sure that Cormann got public credit for his role in the deal with the Greens over the backpacker tax deal.</p>
<p>The run up to this very difficult budget will be closely watched for the interaction between Turnbull and Morrison. In the longer term, it will go against the balance of recent experience if things end well between these two.</p>
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Less than three months from his second budget, Treasurer Scott Morrison is not in a happy place. The last week has been a disaster for him, culminating in the weekend exit of his strategy and communications…Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/723612017-02-06T19:16:35Z2017-02-06T19:16:35ZIf scandals don’t make us switch banks, financial technology might<figure><img src="https://images.theconversation.com/files/155585/original/image-20170206-18741-9zqh40.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Even when bank customers have a very good reason to switch, research shows they're often reluctant to make the move.</span> <span class="attribution"><span class="source">AAP/Paul Miller</span></span></figcaption></figure><p>An efficient market relies on rational customers being willing to change suppliers when there’s good reason to do so. But what happens when customers stay put regardless? This issue is particularly acute in the banking industry. </p>
<p>Even when bank customers have a very good reason to switch, behavioural economics research shows they’re often reluctant to make the move. For example, big scandals that affect banks have a weak impact on consumer behaviour. However, there is a greater propensity to act among <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5017311/">customers who are directly impacted</a>.</p>
<p>Behavioural economics also shows bank customers are often slow to switch to take advantage of better offers from competitors. In 2016, the UK’s Competition and Markets Authority <a href="https://www.gov.uk/government/news/cma-paves-the-way-for-open-banking-revolution">lamented that</a> only “3% of personal and 4% of business customers switch to a different bank in any year” in the country. In 2013, <a href="https://www.canstar.com.au/transaction-accounts/attraction-of-switching-banks/">Canstar</a> suggested the figure is slightly higher in Australia at 5%. </p>
<p>Despite the slightly higher propensity to switch banks among Australian consumers, there’s much we can learn from the UK’s use of behavioural economics to nudge customers to act in their own best interests. In particular, financial technology companies can provide information platforms to make it easier for customers to switch. </p>
<h2>Why bank customers don’t change</h2>
<p>Behavioural economists have shown that consumer decisions are not rational. In particular, there is a “<a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5017311/">sunk cost bias</a>” that affects consumer decisions. That is, consumers tend to place more value on any previous effort or expenditure they’ve made rather than judging economic value when they make decisions. </p>
<p>If you have left a 20% deposit on an item in a store, you will probably buy it, even if you found the same item for sale at 75% of the price elsewhere. So, customers will tend to stick with the bank they’ve got, despite scandals.</p>
<p>Competition authorities, led by the UK’s Competition and Markets Authority, are increasingly trying the “nudge” options offered by behavioural economics as a way to help persuade an irrational consumer to do what is in their best interests. A nudge is simply a mechanism to encourage people. It might be a reminder as to the consequences of not taking the action or benefits of going ahead.</p>
<p>Regulators have examined ways in which nudges can be given without unintended consequences. For example, should the nudge be a carrot or a stick? And which works best? The UK’s Competition and Markets Authority’s chief economic advisor, Mike Walker, advises regulators to “<a href="http://pwc.blogs.com/economics_in_business/2016/12/behavioural-economics-the-lessons-for-regulators.html">test, learn and adapt</a>”. </p>
<p>A critical part of any nudge is presenting information in a way that can be used easily by consumers. Intermediaries, comparison tools and other financial technology services can provide this information. </p>
<h2>How financial technology businesses could help</h2>
<p>One of the barriers at the moment to getting customers to switch in Australia is a <a href="https://theconversation.com/simpler-account-switching-would-help-keep-our-banks-honest-66264">lack of information on all bank products</a> and financial technology businesses to manage this information.</p>
<p>Although the UK implemented services that make it easier to <a href="https://www.bacs.co.uk/Services/accountswitchingservice/Pages/AccountSwitchingService.aspx">switch between retail bank accounts</a>, the UK’s Competition and Markets Authority found that this didn’t improve competition in the sector. To resolve this problem, it has ensured that customers <a href="https://assets.publishing.service.gov.uk/media/58930677e5274a0ac1000002/retail-banking-summary-of-responses.pdf">have information on other banks and their account options</a> as part of new account-switching regulation.</p>
<p>The way that this works is that customers can compare their existing offering with alternatives using an app that talks to an open electronic interface to the bank. The UK’s Competition and Markets Authority has mandated that the retail banks provide this interface, known as an applications programming interface, to both consumers and to financial technology businesses.</p>
<p>The effect is a space for new businesses to provide comparison tools. These new financial technology businesses will not impose a significant cost on the banks. Each of the UK banks has spent around £1 million each to create these open electronic interfaces, according to the UK <a href="http://theodi.org">Open Data Institute</a>.</p>
<p>The open electronic interfaces will be associated with the European Union <a href="http://www.paymentsuk.org.uk/sites/default/files/PSD2%20report%20June%202016.pdf">Second Payment Services Directive</a>, which will be implemented before Brexit takes effect. This directive will help automate parts of the switching process.</p>
<p>In Australia there’s a new industry initiative called the <a href="http://www.apca.com.au/about-payments/future-of-payments/new-payments-platform-phases-3-4">New Payments Platform</a> to try to make it easier for customers to switch payments and this facilitates account switching. But it’s not likely to have the same degree of flexibility and consistency as the approaches adopted in the UK, as it focuses on financial institution needs, rather than consumer ones.</p>
<p>Regulators in Australia should use behavioural economic analysis to learn more about how consumers use any new information on bank switching or services on this offered by financial technology businesses.</p>
<p>We’re still waiting on evidence on how these new financial technology companies will change consumer behaviour in the UK. But it is likely that in the very least it will increase the intensity of rivalry between the retail banks, this can only be a good outcome for consumers in the UK. </p>
<p>This could also inform a similar implementation in Australia, particularly after a <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Four_Major_Banks_Review/Report">parliamentary committee’s first report</a> on the four major banks is released.</p>
<hr>
<p><em>This article has been amended since publication to correct information around the New Payments Platform in Australia.</em></p><img src="https://counter.theconversation.com/content/72361/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rob Nicholls has previously received funding from the Centre for International Finance and Regulation. He is a member of the Australian Labor Party. </span></em></p>Bank customers usually stay with their bank despite scandals in the sector, however new tech that gives consumers more information might help them switch.Rob Nicholls, Lecturer in Business Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/707342016-12-22T02:55:25Z2016-12-22T02:55:25ZASIC gives the banks cause for Christmas celebration<p>Christmas is a time to forgive and forget and the Australian Securities and Investments Commission (ASIC) sure knows how to distribute good cheer at Yuletide, especially to old friends such as the big four banks.</p>
<p>On (almost) the night before Christmas, ASIC popped down the chimney and gave the banks a great big present. Buried among the usual news about banning car dealers and liquidators, <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-455mr-asic-accepts-enforceable-undertaking-from-nab-and-cba-to-address-inadequacies-within-their-wholesale-spot-fx-businesses/">the regulator announced</a> that it had accepted an “enforceable undertaking” from the Commonwealth Bank of Australia (CBA) and the National Australia Bank (NAB) in relation to the banks’ wholesale spot foreign exchange (FX) businesses.</p>
<p>The conduct revealed by ASIC would be criminal if other firms tried it and <a href="http://www.afr.com/news/politics/government-moves-on-banks--again-20161002-grtg2t">will be criminal in future</a>. Traders at the two banks, had on several occasions between 2008 and 2013: exchanged information about their positions with traders in other banks; shared confidential information about clients’ orders; and, in some cases triggered “stop loss” orders to the financial detriment of clients. </p>
<p>The traders had used inside information to enrich the banks and themselves.</p>
<p>To date, overseas regulators have hit major banks with fines totalling more than US$10 billion for what has become known as the “<a href="http://www.risk.net/journal-of-operational-risk/technical-paper/2435296/modeling-operational-risk-capital-the-inconvenient-truth">forex scandal</a>”. For example, the Financial Conduct Authority, the UK equivalent of ASIC, <a href="https://www.fca.org.uk/publication/final-notices/final-notice-jpm.pdf">fined JPMorgan</a> some A$379 million for the company’s part in manipulating the daily FX Spot Rate benchmark. JPMorgan traders had been found to have committed the same underhand behaviour that has been discovered in NAB and CBA.</p>
<p>So, what were the fines imposed by ASIC on CBA and NAB - wait for it - A$2.5 million each!</p>
<p>Now this is a really big Christmas pressie for the banks. The story that Santa won’t come if you are a bad child, is obviously rubbish. </p>
<p>The banks have also promised to be good from now on and ASIC has required that they employ a nanny (an independent consultant) and that they put in place changes to their “existing systems, controls, monitoring and supervision of employees”. What were they doing before?</p>
<p>And as a very bad Christmas cracker joke, these fines have been dressed up as a “community benefit” payment to - wait for it – advance “financial literacy education related to the aged care sector”. In other words, we will sell you a dodgy <a href="https://www.moneysmart.gov.au/superannuation-and-retirement/income-sources-in-retirement/home-equity-release/reverse-mortgages">reverse mortgage</a> and then tell you why you shouldn’t have bought it from us in the first place.</p>
<p>How did such a Christmas pantomime come about?</p>
<p>If regulation were a beach cricket match, the banks have just asked ASIC to “follow on” and then scuttled them out for a handful of runs. </p>
<p>ASIC is on the back foot, as it was dealt a big blow by the Federal court recently when its <a href="https://theconversation.com/market-manipulation-asic-better-get-it-right-first-time-54388">strategy for prosecuting</a> the banks over the bank bill swap rate manipulation <a href="http://www.theaustralian.com.au/business/financial-services/bbsw-trial-for-anz-westpac-and-nab-pushed-back-to-september-2016/news-story/9ceb91ef8f33981511fe2318d7af885a">was delayed yet again</a>. The banks know that by delaying they are rapidly chewing up ASIC’s (the taxpayers’) <a href="http://www.afr.com/business/bbsw-court-case-will-exhaust-asics-war-chest-20160711-gq3g5d">money to prosecute</a> of A$80 million. </p>
<p>ASIC has had a <a href="https://theconversation.com/new-laws-on-bankers-behaving-badly-dont-matter-in-light-of-asic-inaction-66497">bad year</a>. Earlier in the year, it was <a href="https://theconversation.com/government-backflip-on-asic-could-be-too-little-too-late-58210">found by the government</a> to be a dysfunctional, over-worked and under-resourced organisation. Kelly O’Dwyer, the Minster responsible, leapt into action, and renewed Chairman Greg Medcraft’s contract for only 18 months rather than the usual three years. </p>
<p>It looks like 2017 is going to be much worse for the regulator.</p>
<p>As the bankers take off for their Christmas break, they have the hard job of deciding where to spend their record bonuses. For example, Santa has been very good to Ian Narev, CEO of Commbank, who has <a href="http://www.news.com.au/finance/business/banking/commonwealth-bank-chief-executive-ian-narev-takes-home-123-million/news-story/90bb4fd01d3812e6d27fe7398cf1dee8">pocketed</a> a 50% pay rise, despite a string of scandals, involving not only bankers manipulating the FX market, but also the <a href="http://www.abc.net.au/4corners/stories/2016/03/07/4417757.htm#transcript">CommInsure scandal</a>.</p>
<p>What exactly does a bank CEO have to do to be left off the Christmas card list these days?</p>
<p>Ask the members of the <a href="https://theconversation.com/bank-executives-forced-before-parliamentary-committee-for-regular-health-check-63513">Parliamentary Committee</a> who had the CEOs of the four major banks over this year for a mild roasting. The result was, as the ex-CEO of ANZ said, “<a href="http://www.theaustralian.com.au/business/financial-services/banks-have-no-case-to-answer-former-anz-ceo-mike-smith/news-story/901e86bdab70480960864ca9281b3447">a bit of theatre</a>” – a sort of Nutcracker with the nuts but without the cracker. </p>
<p>Each of the four CEOs was asked about systemic issues and all of them batted back the questions elegantly. Mr Narev, pirouetted around the question noting that he had “lost count of the number of times I have emphasised throughout the organisation the importance of escalation”. The committee members, bedazzled by the consulting speak, did not follow up. </p>
<p>As it turns out, Mr Narev must have been negotiating with ASIC over just the sort of industry-wide misconduct that the members were asking about, but it must have slipped his mind. Likewise, Andrew Thorburn, CEO of NAB, was asked about systemic issues but deflected the questions - nothing to see here – even though, at the time, he too must have been negotiating with ASIC on manipulating the FX benchmark.</p>
<p>Next time, if there is a next time, the Committee must follow up and <a href="https://theconversation.com/banking-inquiry-findings-ask-the-wrong-questions-get-the-wrong-answers-69421">ask the right questions of the right people.</a> </p>
<p>So, the banks are the undoubted winners in 2016, lots of scandals, laughable fines, no Royal Commission, couldn’t get any better. And they certainly plan to have a Happy New Year.</p><img src="https://counter.theconversation.com/content/70734/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Just before everyone sits down for their Christmas dinner ASIC has handed two of Australia’s big four banks a big present.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/695542016-11-29T09:32:37Z2016-11-29T09:32:37ZACCC rejects the banks colluding to bargain on Apple Pay<p>The Australian Competition and Consumer Commission (ACCC) <a href="http://www.accc.gov.au/media-release/accc-proposes-to-deny-authorisation-for-banks-to-collectively-bargain-with-and-boycott-apple-on-apple-pay">is planning to deny</a> the Commonwealth Bank of Australia (CBA), Westpac, National Australia Bank (NAB) and Bendigo and Adelaide Bank (the banks), petition to collectively bargain with and boycott Apple on Apple Pay.</p>
<p>Justifying the decision, ACCC chairman Rod Sims said that the likely benefits of allowing the banks to collectively bargain does not outweigh the potential negative affects.</p>
<p>The banks are desperate to get access to Apple phones, not least as ANZ <a href="http://www.smh.com.au/business/banking-and-finance/apple-payled-surge-in-anz-card-customers-drives-rival-banks-to-renegotiate-20160509-goppf0.html">recently claimed a surge</a> in applications for their credit and debit cards after striking a deal with Apple. This shift in consumer behaviour could potentially reduce the customer base of the other banks, simultaneously increasing both ANZ’s customer base and the use of its payments services. </p>
<p>But Apple imposes fees and restrictions that the banks currently find prohibitive.</p>
<p>The banks wanted to bargain with Apple over two key issues. The first is access to the Near-Field Communication (NFC) controller in iPhones, which would enable them to offer their own digital wallets to iPhone customers (in direct competition with Apple’s digital wallet), bypassing Apple Pay. The second is to remove the the restriction Apple imposes on banks, preventing them from passing on fees that Apple charges for the use of its digital wallet.</p>
<h2>It’s all about negotiating power</h2>
<p>At the moment only consumers with certain cards issued by ANZ, American Express and card issuers using Cuscal Ltd as their collective negotiator, are able to use Apple Pay. It’s been <a href="http://www.smh.com.au/business/banking-and-finance/apple-payled-surge-in-anz-card-customers-drives-rival-banks-to-renegotiate-20160509-goppf0.html">reported that ANZ agreed to share with Apple some of the fee</a> it charges to process payments in exchange for access to Apple Pay</p>
<p>If the ACCC had decided in favour of the banks they could have, in theory, used their combined negotiating power to strike an even better deal with Apple. Not only would they have been bargaining from a stronger position, they could also have threatened to boycott Apple Pay for up to three years. </p>
<p>The ACCC argued this have would reduced the competitive tension between the banks in their individual negotiations with Apple, which could also reduce the competition to supply mobile payment services for iPhones. The threat of a boycott could also mean a significant period of uncertainty and would result in decreased choice for the consumers whose banks are involved. The other digital wallet options for the banks are Android Pay and Samsung Pay, both of which are available in Australia, but the iPhone popularity with consumers makes Apple Pay very attractive to both consumers and banks. </p>
<p>The ACCC may have decided against allowing the banks to bargain collectively, as this would also have set a precedent for any future disputes between the banks and their service providers. The banks may have over played their hand by also threatening a boycott against Apple.</p>
<h2>Reduced competition could have knock-on effects</h2>
<p>Another deciding factor in the ACCC’s decision was that digital wallets/mobile payments are still in their infancy in Australia and consumers are already using their contactless cards to do “tap and go” payments. A rash decision now to allow collective bargaining with Apple could distort the mobile payment market and further delay the adoption of this technology.</p>
<p>The use of tap and go payments has risen greatly in recent years, <a href="http://www.smh.com.au/business/retail/110bn-australias-contactless-boom-20160805-gqmg7j.html">accounting for up to 75% of all Visa transactions</a>. This has caused many consumers to question, exactly what the advantages are of digital wallets over contactless cards. The absence of an obvious advantage over other payment methods like contactless cards has slowed the adoption of mobile payments in Australia. Any reduction in competition could stall this even longer.</p>
<h2>What next for Apple pay</h2>
<p>The ACCC’s decision is just a draft at this stage and there’ll be further public consultations. It plans to release its final decision on March 2017, but in the meantime there will be further uncertainty about the adoption and use of digital wallets in Australia.</p>
<p>The banks now have two distinct choices. They can either continue to act collectively and seek to persuade the ACCC that the draft decision is not the correct one, or they can independently approach Apple to see if they can negotiate a better or at least an equivalent deal to that already struck by ANZ.</p><img src="https://counter.theconversation.com/content/69554/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Worthington does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The banks could have used their collective bargaining power not only against Apple for Apple Pay but also stall the adoption of mobile payments in Australia.Steve Worthington, Adjunct Professor, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/672392016-10-19T04:07:05Z2016-10-19T04:07:05ZApple Pay dispute may mean less opportunity to pay with your mobile<p>As people increasingly reach for their phone to pay for goods in Australia, existing players in the contactless payment industry are trying to seek competitive advantage. Four of Australia’s leading banks are trying to secure collective bargaining rights for technology that grants access to Apple Pay.</p>
<p>This service is currently is only available to customers with American Express proprietary cards and ANZ American Express companion cards and ANZ Visa cardholders.</p>
<p>The Reserve Bank of Australia’s (RBA) <a href="http://www.rba.gov.au/publications/annual-reports/psb/2016/pdf/2016-psb-annual-report.pdf">Payments System Board noted</a> that innovations in mobile wallets can boost consumer choice and convenience. Cardholders may be able to consolidate a range of payment cards into a single app on their mobile device. </p>
<p>Australia is one of the <a href="http://www.nfcworld.com/2015/05/13/335191/australia-leads-the-way-for-contactless-ownership-and-usage/">leading countries</a> in the take-up of contactless payment transactions. If Apple is blocking banks from offering this service to their customers, it should be questioned. </p>
<h2>Australia ahead when it comes to contactless payments</h2>
<p>The way that Australians pay for the goods and services that they consume is rapidly changing. The use of cash as a payment mechanism <a href="http://www.rba.gov.au/publications/annual-reports/psb/2016/pdf/2016-psb-annual-report.pdf">has continued to decline</a> as consumers shift to electronic payment methods, especially for smaller transactions. </p>
<p>Credit and debit cards are the most frequently used non-cash payments methods. In the financial year 2015-16, Australian cardholders made around 6.9 billion payments, worth $538 billion. That is an increase in value on the previous year of around 7%.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/142286/original/image-20161019-20330-3mbb1g.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/142286/original/image-20161019-20330-3mbb1g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/142286/original/image-20161019-20330-3mbb1g.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=504&fit=crop&dpr=1 600w, https://images.theconversation.com/files/142286/original/image-20161019-20330-3mbb1g.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=504&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/142286/original/image-20161019-20330-3mbb1g.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=504&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/142286/original/image-20161019-20330-3mbb1g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=633&fit=crop&dpr=1 754w, https://images.theconversation.com/files/142286/original/image-20161019-20330-3mbb1g.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=633&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/142286/original/image-20161019-20330-3mbb1g.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=633&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Payments System Board Annual Report</span></span>
</figcaption>
</figure>
<p>This trend is largely due to the prevalence of contactless technology at the point-of-sale. For example, some Australian <a href="https://www.bankingday.com/nl06_news_selected.php?act=2&nav=13&selkey=21635&utm_source=daily+email&utm_medium=email&utm_campaign=Daily+Email+Article+Link">banks claim that 74% of all MasterCard in-store transactions are now contactless</a> and that per capita, contactless payments in Australia are amongst the highest in the world. Added to that, the A$100 cap on such transactions is the highest in the world.</p>
<p>The contactless payments industry has made substantial investments in the technologies that underpin convenient and secure payments. In particular this has seen the deployment of Near Field Communications (NFC) technology, used to accept both contactless card payments and mobile wallet payments. </p>
<p>Merchant terminals that accept contactless payments via the NFC technology are now commonplace in Australia. Mobile payment applications such as Apple Pay, Samsung Pay and Android Pay have all been recently launched in Australia. </p>
<p>Apple Pay arrived in November 2015, originally only for proprietary American Express cards. In April 2016, it was made available also for ANZ issued American Express companion cards and Visa cards. </p>
<p>In June 2016, Samsung Pay launched its mobile wallet application in Australia, in partnership with American Express and Citibank. Finally, Android Pay launched in July 2016 with ANZ, American Express, Macquarie and a wide range of credit unions and mutual banks, using Cuscal as their service provider.</p>
<h2>The Apple dispute</h2>
<p>Four banks – the Commonwealth Bank of Australia, Westpac, National Australia Bank and Bendigo and Adelaide Bank – have applied to the Australian Competition and Consumer Commission (ACCC), to collectively negotiate with Apple Pay in Australia. </p>
<p>In their evidence to the ACCC, the banks accuse Apple of trying to piggyback on their investment in Australia’s contactless payment infrastructure, <a href="http://www.afr.com/business/banking-and-finance/apple-is-closed-and-controlling-say-banks-as-iphone-dispute-heats-up-20161017-gs4590">while remaining “intransigent, closed and controlling”</a>, in dictating terms for access to Apple Pay.</p>
<p>The banks <a href="http://news.nab.com.au/australian-banks-respond-to-submissions/">claim</a> that Apple is seeking for itself the exclusive use of Australia’s existing NFC terminal infrastructure, “which has been built and paid for by Australian banks and merchants for the benefit of all Australians”. </p>
<p>This negotiation is worth a lot to the banks, <a href="http://www.paymentscardsandmobile.com/apple-pay-arguments-oz-banks-superficial-unconvincing/">the banks claim</a> Apple has approximately 40% of the smartphone market in Australia. </p>
<p>The banks dismiss Apple’s claim that opening up access to the NFC function would undermine the security of mobile wallets. The banks point to the experience of Apple in China and Japan, where Apple Pay was forced to modify its demands in order to maintain parity with Samsung Pay.</p>
<p>Besides seeking non-exclusive access to the NFC and standardised security for all mobile payment systems, the four banks want price transparency on transaction costs for mobile payments within Australia. This is an ongoing objective for the RBA.</p>
<p>In its recent <a href="http://www.rba.gov.au/payments-and-infrastructure/review-of-card-payments-regulation/pdf/review-of-card-payments-regulation-conclusions-paper-2016-05.pdf">review of card payments regulation</a>, the RBA set out to ensure that its reforms would promote competition and efficiency in the payments system by improving price signals and thus encouraging efficient payment choices for consumers. </p>
<p>Apple Pay derives most of its income from taking part of the Merchant Service Fee (MSF) that merchants pay to the card issuers. In the USA, where contactless payments have yet to take off, MSF’s are much higher than in Australia. According to <a href="http://www.nfcworld.com/2014/09/16/331523/apple-pay-get-0-15-transaction-fee/">media</a> <a href="http://www.techtimes.com/articles/58654/20150608/googles-android-pay-will-not-charge-transaction-fees-now-what-apple-pay.htm">reports</a>, Apple Pay take around 0.15% of the value of every credit card transaction via its mobile wallet in that country.</p>
<p>In Australia, the average fee paid by merchants to the financial institution for <a href="http://www.rba.gov.au/publications/annual-reports/psb/2016/pdf/2016-psb-annual-report.pdf">transactions on MasterCard and Visa cards was 0.72%</a> of the value of the transaction in June 2016. This followed a review of the calculation of the interchange element of the MSF’s in November 2015. </p>
<p>These interchange fees are now 0.50% of the value of the transaction for the credit card schemes and 12 cents per transaction for the debit card schemes. So there is not as much interchange revenue to share in Australia as there is in the USA.</p>
<p>In its deal with Apple Pay, <a href="http://www.afr.com/technology/in-the-fight-for-electronic-payments-the-banks-have-met-their-nemesis-apple-20160901-gr6x2p">media</a> <a href="http://www.smh.com.au/business/banking-and-finance/apple-payled-surge-in-anz-card-customers-drives-rival-banks-to-renegotiate-20160509-goppf0.html">reports</a> say that ANZ has given up some of its interchange fees to Apple, but the actual amount has not been disclosed. </p>
<p>In a submission to the ACCC, the four banks’ pointed out if Apple Pay were to gain a dominant share of all mobile wallet transactions in Australia, then consumers would not be aware of the costs that are associated with this method of payment.
This would conflict with the RBA’s objective of improving signalling to consumers the price of each payment option.</p>
<p>The four banks have received support for their bid to negotiate collectively with Apple from a number of card schemes, merchants, other banks and payment associations. The ACCC is expected to give its decision on their claim in November 2016.</p>
<p>Is Australia is serious about offering consumers as wide a variety of payment options as possible and making consumers aware of the costs of each option? If so, then everyone should be able to use whichever payment method suits them best, no matter which mobile phone or bank they use.</p><img src="https://counter.theconversation.com/content/67239/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Worthington does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The competition in Australia’s contactless payment industry is heating up as Apple Pay sets up in Australia. However some banks claim the company is making the system less competitive.Steve Worthington, Adjunct Professor, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/664002016-10-04T06:09:07Z2016-10-04T06:09:07ZBig four bank chiefs face parliamentary committee: experts react<p><em>The chief executives of Australia’s big four banks are this week being <a href="https://theconversation.com/bank-executives-forced-before-parliamentary-committee-for-regular-health-check-63513">called before a House of Representatives economics committee</a>. We asked a panel of experts what questions the committee should be asking.</em></p>
<hr>
<p><strong>Anna Olijnyk, Lecturer at Adelaide Law School, University of Adelaide</strong></p>
<p>One possible outcome of the banking inquiry is the creation of a banking tribunal. What does this mean? How would a banking tribunal differ from existing arrangements? </p>
<p>The first thing to note is that the word “tribunal” does not have a fixed legal meaning. A vast range of bodies with different functions have carried the label tribunal. </p>
<p>The <a href="http://www.abc.net.au/news/2016-10-05/banking-tribunal-considered-government-could-force-compensation/7903662">government’s</a> <a href="http://www.afr.com/news/politics/malcolm-turnbull-all-but-confirms-bank-tribunal-20160818-gqw6yb">limited comments so far</a> on the proposed banking tribunal suggest they envisage a body that can award compensation to people who have lost money because of banks’ misconduct. Isn’t that what courts are supposed to do? Well, yes.</p>
<p>But courts have evolved an elaborate, formal way of deciding cases involving strict technical rules about evidence, procedure and legal argument. These processes are designed to reach the legally correct outcome in the most fair and rigorous manner possible.</p>
<p>However, as anyone who has had contact with the court system knows, these processes also make court proceedings slow, expensive and virtually impossible to navigate without a lawyer. Going to court is particularly daunting when your opponent is a big organisation with a bottomless litigation budget. </p>
<p>On the other hand, tribunals are usually more informal, efficient and accessible than courts. They are widely used throughout Australia to deal with the sort of issues that affect large numbers of ordinary people. For example, this could include social security, immigration, residential tenancies and consumer complaints. </p>
<p>The other piece of the existing puzzle is the <a href="https://www.fos.org.au/">Financial Ombudsman Service</a>, which deals with thousands of consumer complaints each year. The ombudsman offers a free, relatively informal dispute resolution process, somewhat similar to the function a tribunal might perform. But this is a non-government organisation and may not satisfy the current appetite for banks to be publicly accountable. </p>
<p>So a banking tribunal has the potential to be a welcome port of call for those who have claims against the banks, but for whom litigation isn’t worth the time, money or heartache. Let’s not get carried away, though.</p>
<p>The detail will be crucial: the efficacy of any new tribunal will depend on exactly what powers and functions it is given. Finally, tribunal decisions are always subject to review in the courts, so even if you win in the tribunal, you still might end up in court. </p>
<hr>
<p><strong>Rod Maddock, Vice Chancellor’s Fellow at Victoria University and Adjunct Professor of Economics, Monash University</strong></p>
<p>One of the most interesting issues that arose from the questioning of Commonwealth Bank of Australia CEO Ian Narev by the economics committee was punishment. Labor members seemed quite certain that CBA should have sacked some of its employees in the light of the evidence that some customers were badly treated by the bank.</p>
<p>There is no argument that some clients were poorly served. The stories such as that of the bank denying that a particular death was accidental in the face of a coroner’s finding was harrowing, and the use of outdated rules about other illnesses to make decisions, was disturbing.</p>
<p>Providing good quality service is fundamental to the banking and insurance businesses. These are service companies. To have stories about clients who have received inappropriate service splashed across the media is clearly damaging to the CBA brand, and its reputation. The bank itself obviously has a very large incentive to try to make sure things like this do not happen.</p>
<p>Should it sack staff as part of the process? There seem to be three broad issues.</p>
<p>Clearly people made mistakes but should those mistakes lead to them being sacked? If the staff concerned followed normal process and tried to apply the rules diligently it is hard to blame them. </p>
<p>Imagine someone making dozens of decisions a month and making the occasional mistake. If they were over-zealous they may require coaching, but probably not sacking. </p>
<p>If they applied the procedures poorly, then they may lose bonuses or be denied promotion, but it would not usually be a sackable offense. If they disobeyed the rules to the detriment of customers, acted unethically or stole, then sacking is appropriate. If just making a mistake at work was sackable then most of us would be out of jobs.</p>
<p>Should the supervisors be sacked? Much of the same argument applies. If a supervisor made a mistake in not updating the rules when medical practice changes, it would be normal to sanction the staff member involved but not normally to sack him or her. </p>
<p>From an organisational point of view it is far better to have staff learn from their mistakes rather than leave the company. From a social point of view that it also probably the right thing to do. It should lead to better decision making over time, and help grow better and more capable decision making within our society.</p>
<p>Should more senior executives lose their jobs? Here it is ironic to have politicians who now never seem to lose their jobs even when millions of dollars of taxpayer money are wasted now preaching that sacking is appropriate. Let’s hope that the sacking rule is applied first to government ministers.</p>
<p>Clearly senior executives are responsible for hundreds of decisions every month. Some will be good, some average and some poor. Some will probably be very bad. It is inevitable that organisations will make mistakes. </p>
<p>To complicate things further, most decisions are also shared between different levels of the hierarchy, and responsibilities often shift as people move between positions. The desire for revenge is obviously deep seated. </p>
<p>At the same time it is not usually the best response. Society has more to gain by learning from mistakes. Individuals should be encouraged to learn and organisations equally should revise their practices in response to mistakes.</p>
<hr>
<p><strong>Deborah Ralston, Professor of Finance, Monash University</strong></p>
<p>Ian Narev’s <a href="http://www.afr.com/business/banking-and-finance/review-of-the-four-major-banks-cbas-ian-narev-20161003-grty36">comments on bank incentives</a> at the parliamentary committee suggest that the debate on the link between shareholder and consumer’s best interests still has a way to go. </p>
<p>Australian banks need to tread very carefully in areas where they are both manufacturers and distributors of financial products such as insurance, investment products and superannuation. </p>
<p>The issue of conflicted advice occurs when staff are incentivised to sell the bank’s own product, which may or may not be in the customer’s best interest. Incidents such as the <a href="http://www.abc.net.au/news/2016-08-26/storm-financial-former-directors-breach-law-justice-finds/7790366">failure of Storm Financial</a>, where leveraged margin loans were sold to customers on the verge of retirement, clearly demonstrate this point.</p>
<p>According to the <a href="http://fsi.gov.au/">2014 Financial System Inquiry (FSI)</a> such failures have a consistent theme: poor product design and distribution practices that disregarded consumer behavioural biases and information imbalances played a significant role.</p>
<p>To some extent <a href="http://futureofadvice.treasury.gov.au/Content/Content.aspx?doc=home.htm">Future of Financial Advice Reforms</a> legislated in 2015 address this issue but more needs to be done where banks are concerned. </p>
<p>Accordingly, the government has accepted the recommendation of the FSI to legislate for increased accountability for issuers and distributors of financial products to ensure a stronger customer focus in product design and marketing. It will also strengthen ASIC’s power to intervene when products are poorly designed and targeted.</p>
<p>Good business for bankers is satisfied consumers, long-term relationships, and a clean balance sheet with minimal reputation risk. How incentives are shaped has a major bearing on this outcome.</p>
<p>At the end of the day it’s a matter of culture for Boards and management to get this right.</p>
<hr>
<p><strong>Pat McConnell, Honorary Fellow at Macquarie University Applied Finance Centre, Macquarie University</strong></p>
<p>Just before the bank CEOs were due to face politicians to be publicly flayed, the <a href="http://www.bankers.asn.au/media/media-releases/media-release-2016/new-voice-for-customers-in-complaints-with-banks">Australian Bankers Association (ABA) announced</a> that all of the major banks would create a completely new role inside of their organisations - that of the Customer Advocate.</p>
<p>As described by the ABA, the role will be to: </p>
<blockquote>
<p>“Enhance existing complaints processes and ensure customer complaints are escalated, and responded to within specified timeframes and that responses are thorough and fair.”</p>
</blockquote>
<p>This is a belated admission that banks have basically fobbed off customer complaints until now. It should be noted that NAB, to its credit, <a href="http://www.moneymanagement.com.au/news/people-products/nab-appoints-law-professor-customer-advocate">had mooted a different form of such a role</a> for its wealth division in 2015.</p>
<p>There are many questions that members of the House committee could ask about the detail of this new plan, but it is no doubt still being worked out.</p>
<p>One salient line of questioning that could be pursued at this time is what is the role of Australian Securities and Investments Commission, the conduct and consumer regulator, in this new process? Has ASIC been involved and given its support to this industry initiative? And if not, why not?</p>
<p>A cheeky politician could also ask if the creation of this customer advocate role is just a delaying tactic.</p>
<hr>
<p><strong>Necmi Avkiran, Associate Professor in Banking and Finance at University of Queensland</strong></p>
<p>Despite banks being part of the intricate financial system that affects all citizens, in a free market the banks’ primary responsibility is towards their shareholders. Ideally, unfettered competition should look after customers’ interests. </p>
<p>The Federal Government and Reserve Bank of Australia (RBA) already have a policy of “no mergers” among the big four banks designed to nurture competition. On this issue, the key question is whether the big four already hold too much of the market share and stifle competition in an oligopolistic environment. </p>
<p>It should be noted that in July 2016, the big four <a href="https://theconversation.com/company-results-wrap-weighing-up-the-risks-behind-the-profits-of-australias-big-four-banks-63396">held 82.57% of the loans to households and accounted for 80.38% of the systemic risk in the Australian financial system</a>. Given the safety net of <a href="https://theconversation.com/kevin-rudd-guaranteed-bank-deposits-and-gave-us-something-we-already-had-53822">the bank guarantee offered by RBA</a>, these are rather large numbers that may send the wrong signals about competition in the banking sector.</p>
<p>If the RBA were to increase the rate charged to banks for short-term borrowing, banks would pay more attention to rates charged to customers and the ability of customers to pay back loans. This would also shift the focus from shareholders to customers for a more balanced business model where taxpayers are not expected to pay for any poor decisions made by banks.</p>
<p>If the Big Four are gaming regulatory rules, it is up to Australia Prudential Regulatory Authority to pull them in line. In fact, the Big Four have already come under fire from the vice-chairman of US Federal Deposit Insurance Corporation for low capital levels and <a href="http://www.theaustralian.com.au/business/us-expert-blasts-big-four-banks-for-way-low-capital-levels/news-story/9c083bcccd64aaff7175727176c45090">the implicit burden on taxpayers</a>.</p><img src="https://counter.theconversation.com/content/66400/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Deborah Ralston is a Professor of Finance at Monash University and Cluster Leader, CSIRO-Monash Superannuation Research Cluster. </span></em></p><p class="fine-print"><em><span>Anna Olijnyk's superannuation fund does invest in several banks.</span></em></p><p class="fine-print"><em><span>Rodney Maddock was a senior executive at the Commonwealth Bank for a decade. He is also a director of the Committee for Economic Development of Australia.</span></em></p><p class="fine-print"><em><span>Necmi K Avkiran and Pat McConnell do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>As the chief executives of Australia’s big four banks come before a House of Representatives economics committee, we ask a panel of experts what questions the banks should be answering.Deborah Ralston, Professor of Finance, Monash UniversityAnna Olijnyk, Lecturer, Adelaide Law School, University of AdelaideNecmi K Avkiran, Associate Professor in Banking and Finance, The University of QueenslandPat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityRodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/633962016-09-09T03:31:44Z2016-09-09T03:31:44ZCompany results wrap: weighing up the risks behind the profits of Australia’s big four banks<p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play</em></p>
<hr>
<p>The biggest Australian banks are fairing well in a year of increased pressure to reform from politicians, international events like the Britain’s exit from the European Union and more regulation from the Australian Prudential Regulation Authority (APRA).</p>
<p>A number of interrelated factors have contributed to the relatively strong performance of the Australian banks. For instance, the banks have limited exposure to the types of securities which led to massive losses for their counterparts in other countries. The banks also heavily rely on domestic loans, particularly the low risk household sector, so better lending standards and a proactive approach to prudential supervision by APRA may have contributed.</p>
<p>The <a href="http://www.bis.org/bcbs/basel3.htm">Basel III regulatory requirements</a>, brought in after the 2008 financial crisis, emphasise holding an increased amount of subordinated debt, as a measure of market discipline. However all the big four banks are holding less and less subordinated borrowings. More specifically, it declined by more than 50% from 2007 to 2014, according to our calculations. </p>
<p>APRA limits banks’ holdings of higher risk securitised assets, these are loans packaged into securities, to a maximum of 25% of the banks’ loan portfolio. These are high risk if not properly understood or defined, as happened with United States home loans, blamed for the start of the global financial crisis.</p>
<p>When Australian banks calculate bank capital requirements, they need to fully account for securitised assets. This is a rule from APRA that goes beyond international standards, to reflect the risk inherent in these products. </p>
<p>Inter-bank liquidity tightened significantly with all banks increasing their holdings of <a href="http://www.rba.gov.au/media-releases/1999/mr-99-02-role.html">Exchange Settlements Accounts at the Reserve Bank</a>, this a form of low risk liquidity. Australian banks have lower interbank deposits compared to their Europe and USA counterparts and are also heavily involved in long term wholesale funding and are required to hold more liquid assets including government debt to deal with liquidity. All of this makes Australian banks less risky in times of crisis because spillover effects from other banks are less likely.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1251&fit=crop&dpr=1 600w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1251&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1251&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1573&fit=crop&dpr=1 754w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1573&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1573&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The big four.</span>
<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>There has been a significant increase in concentration in the Australian banking industry since the global financial crisis. For example with Westpac and the Commonwealth Bank of Australia taking over St. George Bank and Bank West, respectively.</p>
<p>Following mergers, the big four account for 88% of the Australian banking system assets. This reinforces the idea that the banks are <a href="http://www.afr.com/business/banking-and-finance/financial-services/too-big-to-fail-is-alive-and-well-20151025-gkhvpq">“too big to fail”</a>. </p>
<p>The banks have also moved to more fee generating activities, which increases risk, but to a lesser extent in Australian banks. Data shows between 1998 and 2014, on average, 1.2% greater interest income was generated relative to non-interest income for Australian banks, according to our analysis. However, there is also similar evidence for the top eight publicly-listed Canadian banks. They exhibit on an average, a 2.5% increase in net interest revenue relative to non-interest income over the same time period. </p>
<p>This reinforces that Australian and Canadian banks demonstrated extra ordinary resilience during the credit turmoil in the global financial crisis. The World Economic Forum in 2008 reported that Australia and Canada were among <a href="http://www.reuters.com/article/us-financial-soundest-banks-idUSTRE4981X220081009">the top four safest banking systems in the world</a>. </p>
<p>Large banks in Australia are active in international markets through direct ownership of foreign based banks and having offshore operations as a source of capital. Deregulation of banking in countries such as the USA, Canada, Australia and many developing countries has opened up new markets for foreign banks. Australian banks’ largest international exposure is to New Zealand, where all big four banks retain sizeable operations. </p>
<p>Although the growing interdependence among international economies and financial markets is certain to continue, the impact of Brexit on Australian banks remains minimal. It remains to be seen in the long-run how Australian banks will weather the international banking/economic developments.</p>
<p>As a last measure of the bank health, we can measure the domestic systemic risk with <a href="http://onlinelibrary.wiley.com.ezproxy.library.uq.edu.au/doi/10.1111/j.1467-8462.2013.12008.x/abstract">a methodology</a> based on <a href="http://www.bis.org/publ/bcbs255.htm">one used by the official Basel Committee on Banking Supervision</a>. Based on July 2016 monthly data, the big four banks account for 80.38% of the systemic risk in the financial system and the riskiest, from highest to lowest, are the National Australia Bank, the Commonwealth Bank of Australia, Westpac and ANZ.</p><img src="https://counter.theconversation.com/content/63396/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mamiza Haq receives funding from Australian Research Council. </span></em></p><p class="fine-print"><em><span>Necmi K Avkiran does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s big four banks are managing risk well, this could be contributing to their strong performance.Mamiza Haq, Lecturer in Finance, The University of QueenslandNecmi K Avkiran, Associate Professor in Banking and Finance, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/604382016-06-08T20:07:12Z2016-06-08T20:07:12ZIt’s time we broke up the retail arms of Australia’s Big Four banks<p>The idea of separating out the arms of the <a href="https://theconversation.com/au/topics/big-four">“Big Four” banks</a> like insurance and superannuation from their core banking business is gaining traction in Australia. It featured in the <a href="http://greens.org.au/sites/greens.org.au/files/20160531_Banking%20and%20Finance.pdfttp://example.com/">Greens’</a> banking and finance election policy. However this is not a new idea; Australia is just catching up to banking reforms already made by the UK.</p>
<p>The proposals by the Greens are, in international terms, actually quite tame. The Greens talk about “looking at breaking up the banks,” rather than actually breaking them up. They also suggest applying a “tax deductible levy of 0.20% on the asset base of institutions worth greater than $100 billion” on the “too big to fail” Big Four. </p>
<p>Other jurisdictions have gone much further than the Green’s proposals. For example, following the recommendations of the <a href="https://www.gov.uk/government/news/sir-john-vickers-to-chair-the-independent-commission-on-banking">Vickers’ Inquiry</a> into the UK banking system, banks with assets over £25 billion, will be required from 2017 to split off their retail banking activities into separately managed entities that can be floated off, if the holding company goes belly up. Similar rules are also to be enacted throughout the <a href="http://www.out-law.com/en/articles/2015/june/common-sense-prevails-as-eu-finance-ministers-agree-vickers-exception-to-bank-restructuring-plans/">European Union</a>. </p>
<p>Far from local banks being well-regulated, the <a href="http://www.bankofengland.co.uk/financialstability/Documents/fpc/srbf_cp260516.pdf">latest research</a> on managing systemic risk by the Bank of England shows that Australian banks are simultaneously extreme outliers, in regards to size relative to GDP, yet among the lowest of their peers as regards capital requirements. This is extremely risky, especially given the banks’ exposure to the <a href="http://www.businessinsider.com.au/by-global-standards-australian-banking-has-a-scary-concentration-in-housing-loans-2015-8">Australian housing market</a>. </p>
<p>The Australian taxpayer is providing a guarantee for such risky behaviour which the Reserve Bank estimates to be <a href="http://www.rba.gov.au/information/foi/disclosure-log/pdf/151609.pdf">worth</a> some $3.5 billion per year to the big four banks.</p>
<p>One of the Green’s proposed considerations is to investigate: </p>
<blockquote>
<p>“The nature of vertically integrated business models, including: i. the integration of everyday banking, financial planning, wealth management and insurance within a single entity; ii. whether the incentives provided encourage illegal or unethical conduct; and iii. whether the incentives provided are aligned with the duty of care to customers.”</p>
</blockquote>
<p>This term “vertical integration” is a classic illustration of the problems that arise in so-called Universal Banking. The concept of Universal Banking, sometimes called a “financial supermarket”, in which many financial services are sold under the one roof, goes back to the 19th century in Germany.</p>
<p>This is where German banks not only took deposits and made loans, but also funded and even made equity investments in companies. This one-stop shop was credited with helping to make Germany an industrial superpower in the late 19th century. </p>
<p>On the other hand in the UK and USA, there was strict separation of retail banks and so-called investment (or merchant) banks. In the USA, this separation was enshrined in the famous/infamous Glass Steagall Act of 1933 which was an outcome of the <a href="http://www.senate.gov/artandhistory/history/common/investigations/Pecora.htm">Pecora Commission</a> into the Wall Street Crash of 1929.</p>
<p>In the UK, a strict separation lasted until 1984, when the Thatcher government implemented the so-called <a href="http://www.ft.com/cms/s/0/f3c0d500-8537-11e4-bb63-00144feabdc0.html#axzz4AqkYsnCK">Big Bang</a>, which broke down the barriers between commercial and merchant banks. Subsequently, there was a massive consolidation of banks, merchant banks and eventually building societies. </p>
<p>US banks, such as Citicorp and JPMorgan, joined in the takeovers of UK firms even though technically it was still forbidden in the USA. However in 1999, after pressure in the industry and with almost unanimous congressional support, the Glass Steagall Act was <a href="http://www.investopedia.com/terms/g/glass_steagall_act.asp">repealed</a> and the concept of a one-stop shop for financial products became the accepted business model around the world.</p>
<p>In Australia in the year 2000, NAB acquired MLC Life Limited, which was the insurance and investment arm of Lend Lease. Soon afterwards the other big three Australian banks followed suit, acquiring investment firms and insurance companies. For example, Colonial Mutual insurance was acquired by the Commonwealth Bank to become its <a href="http://www.abc.net.au/news/2016-03-21/comminsure-scandal-asic-ramps-up-investigation/7262810">scandal-ridden</a> CommInsure subsidiary. </p>
<p>The prevailing model of Universal Banking in Australia is barely 15 years old.</p>
<h2>Why did Universal Banking become the accepted model around the world?</h2>
<p>There are two arguments usually put forward for Universal Banking: economies of “scale” and economies of “scope.” The argument for scale is, the bigger a bank is, the better it can leverage its resources, especially expensive technology. The more depositors a bank has the more money it can lend and in a sort of virtuous circle, the more depositors the bank can attract, always provided that the banks treat their depositors fairly, of course.</p>
<p>Scale is important. For comparison, the largest retail bank in the world by <a href="http://www.wsj.com/articles/wells-fargo-co-is-the-earths-most-valuable-bank-1437538216">market capitalisation</a> is the US based Wells Fargo bank which has some <a href="https://www08.wellsfargomedia.com/assets/pdf/about/corporate/wells-fargo-today.pdf">70 million customers worldwide</a>, mainly in the USA. That is about three times the population of Australia. </p>
<p>Last financial year, Wells declared net income of around A$30 billion (US$ 22.9 billion) which is almost identical to the total <a href="https://theconversation.com/banking-outlook-threats-from-technology-burst-of-housing-bubble-end-of-mining-boom-55627">declared</a> by the Big Four banks. On a per customer basis then, Wells appears not to be as efficient as Australian banks, or just possibly Australian customers may be <a href="http://www.smh.com.au/business/banking-and-finance/banks-fail-to-pass-on-rba-cuts-to-credit-card-customers-20160603-gpb18z.html">getting a very raw deal</a> from their banks. </p>
<p>Economies of scope means that a bank, using its presence in the market, can expand the products it sells to existing and new customers. This so-called cross-selling is infuriatingly obvious in Australian banks. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/125457/original/image-20160607-31928-11223s4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/125457/original/image-20160607-31928-11223s4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/125457/original/image-20160607-31928-11223s4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/125457/original/image-20160607-31928-11223s4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/125457/original/image-20160607-31928-11223s4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/125457/original/image-20160607-31928-11223s4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/125457/original/image-20160607-31928-11223s4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Under a universal banking system banks are offering customers other types of products, they may or may not want.</span>
<span class="attribution"><span class="source">Alan Clark/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>An example of this is a consumer, when attempting merely to pay in a cheque, can be bombarded with questions about whether they would like insurance with that. It is a form of diversification, expanding and hopefully stabilising sources of income. </p>
<p>In pursuit of scope, the largest Australian banks have all acquired investment management and insurance companies, bundling these acquisitions up into fashionable “Wealth Management” units. According to <a href="https://assets.kpmg.com/content/dam/kpmg/pdf/2015/12/major-australian-banks-full-year-results-2015.pdf">KPMG</a>, these units provided a 25% of the Big Four’s profits in 2015. The problem is that the Big Four banks have proved to be not very good at “wealth management.”</p>
<p>The original reason for diving into the wealth management business was the pot of gold that is Australian superannuation, which is growing year on year through mandatory contributions and today sits at just over A$2 trillion – who could lose? Certainly not the superannuation funds managers. </p>
<p>But could they outperform others? Unfortunately not, as the largest bank-owned retail funds consistently underperform not-for profit industry funds - not really surprising as industry funds operate on a not-for-profit basis. </p>
<p>And all the while, people are deserting the retail sector in droves to run their own Self-Managed Superannuation Funds (SMSFs). In 2016, self-managed assets <a href="https://www.superannuation.asn.au/resources/superannuation-statistics">total</a> some A$592 billion or 30% of the total super pot of just over A$2 trillion, exceeding the retail sector and growing each month. </p>
<p>If the prospect was only ever little more than a pipe-dream, it became a nightmare as pensioners lost their savings in the GFC, created incidentally by banks. And today the prospect of even the middle class living in poverty in retirement has <a href="http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/">become a reality</a>. In Australia, with the average super balance for men at retirement being just less than $300,000 (much less for women), <a href="https://www.superannuation.asn.au/resources/superannuation-statistics">ASFA</a>, the industry body for super funds, concludes that" many recent retirees will need to substantially rely on the Age Pension in their retirement". </p>
<h2>Is the rationale for seeking economies of scope still valid?</h2>
<p>Technology has changed everything. In the 20th century, people still went into banks to withdraw or deposit money, to make payments, to ask for a mortgage or to talk about investments. </p>
<p>It was quite possible then for the banks to catch customers at the counter and sell them something they may not want or need but nonetheless may be good for them, like an insurance policy.</p>
<p>But a lot of people <a href="https://www.theguardian.com/business/2015/jun/14/bank-branch-use-falls-6-percent-as-customers-embrace-digital-advances">don’t go to banks much anymore</a>. They get cash when they <a href="http://www.rba.gov.au/publications/bulletin/2014/jun/pdf/bu-0614-6.pdf">check out</a> at the supermarket.</p>
<p>They visit websites or mortgage brokers when they are looking for a mortgage. They search websites that compare deposit and investments offers, and there are a myriad of ways that people can pay bills or make payments for online goods. </p>
<p>People are deserting bank branches for the internet and the importance of face-to face contact and opportunities to cross-sell have diminished.</p>
<p>If there is no pot of gold at the end of the Wealth Management rainbow for banks nor their <a href="http://www.smh.com.au/business/the-economy/superannuation-alert-1-million-isnt-enough-to-retire-in-comfort-20150419-1modsc.html">customers</a>, then the boards of Australian banks must look to strategies other than Universal Banking.</p>
<p>Unfortunately, the subject of banking reform was <a href="https://theconversation.com/murray-inquiry-not-made-for-a-future-with-fewer-banks-35244">not addressed fully</a> by the Financial Systems Inquiry, headed as it was by the architect of CommBank’s vertical integration strategy, and the subject has since become a political football. </p>
<p>The Green’s policy would be seen as a minimum and meek in most other jurisdictions, while the industry’s response is shortsighted and defensive. The subject is too important to be trapped in this stalemate.</p><img src="https://counter.theconversation.com/content/60438/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The idea of separating out the retail arms of the Big Four banks, featured in the Greens election policy, has merit and has been done before.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/501242015-11-03T04:51:05Z2015-11-03T04:51:05ZRBA leaves cash rate unchanged at record low 2%: experts respond<p>The Reserve Bank of Australia has decided to leave the official cash rate unchanged at a record low of 2%, but said there was scope for a rate cut down the line.</p>
<p>In a <a href="http://www.rba.gov.au/media-releases/2015/mr-15-20.html">statement</a> on the RBA website, governor Glenn Stevens said:</p>
<blockquote>
<p>At today’s meeting the Board judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate at this meeting. Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.</p>
</blockquote>
<p>The US Federal Reserve is expected to start increasing its policy rate in the period ahead, the statement said. </p>
<p>Recent attention has focused on the widening gap between the official cash rate and the mortgage rates set by the major lenders. </p>
<p>All of the big four banks have <a href="https://theconversation.com/the-rba-should-cut-rates-but-not-because-the-banks-are-upping-them-49647">raised their variable home loan rates</a>, after the introduction of tougher new capital requirements designed to act as a buffer in case of financial crisis. The new prudential regulations followed the <a href="http://fsi.gov.au/">Murray report</a> into the financial system.</p>
<p>Australia’s estimated seasonally adjusted <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/mediareleasesbyReleaseDate/46DFE12FCDB783D9CA256B740082AA6C?OpenDocument">unemployment rate</a> for September 2015 sits at 6.2%. The RBA said today that there had been “stronger growth in employment and a steady rate of unemployment.”</p>
<p>The RBA said inflation is low and should remain so, forecasting it to be “consistent with the target over the next one to two years, but a little lower than earlier expected.”</p>
<p>We asked experts to respond to the RBA decision.</p>
<p><strong>Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National University:</strong></p>
<p>This is the right decision. There are signs of weakness in the economy and financial conditions have changed, with the four big banks raising their home loan rates and global financial markets remaining nervous, but there’s not enough there to lower rates further. They are already very low by historical standards. </p>
<p>Inflation is low, that’s true – but a number of the CAMA Shadow Board members are still concerned about easy money and the danger of fuelling asset prices bubbles. I think several Shadow board members would not be unhappy about the banks recently increasing the mortgage rate.</p>
<p>Moreover, this year has witnessed a dramatic fall in energy prices, which would have exerted downward pressure on prices, albeit only temporarily. At this stage it is not clear to what extent lower inflation is supply-side or demand-side driven.</p>
<p>Monetary policy has been expansionary for a long time and this is helping to rebalance the Australian economy, away from the resource sector to manufacturing and the service sector. Whatever slack is left in the system is probably best left to other policy measures, like fiscal and micro-economic policy. </p>
<p>Today’s decision will probably not affect the gap between the official cash rate and the big four rates. When the banks lifted their mortgage rates, they presumably did not do this in anticipation of the RBA changing policy. It would have been interesting had the RBA dropped rates – would the banks have reversed their recent rate increase? Probably not. I cannot judge whether the additional regulatory measures imposed on the banks exactly justify the increase in their home loan rates. No doubt these measures were also a welcome excuse for the banks to squeeze a little but of extra profit margin for their shareholders.</p>
<p>Recent events have confirmed that the RBA is not the only institution assigned with macroprudential objectives. There’s been a vigorous debate, both in policy and academic circles, about whether central banks should be concerned with asset price inflation and excessive credit growth and whether they should use interest rates to prevent asset price price bubbles from becoming too large. It is reassuring to see the <a href="http://www.apra.gov.au/Pages/default.aspx">Australian Prudential Regulation Authority</a> taking its role seriously and assuming responsibility. </p>
<p><strong>Guay Lim, Professorial Fellow, University of Melbourne</strong></p>
<p>I support and agree with the no-change, wait-and-see decision. I have concerns that further cuts will fuel asset prices with little effect on real spending. </p>
<p>In coming weeks, we will probably better understand what’s happening with fiscal policy and what’s happening with the US rate.</p>
<p><strong>Richard Holden, Professor of Economics, UNSW Australia</strong></p>
<p>The RBA’s announcement following their decision to keep the cash rate on hold at 2% had a fair bit of hedging language including:</p>
<blockquote>
<p>Members also observed that the outlook for inflation may afford scope for further easing of policy, should that be appropriate to lend support to demand.</p>
</blockquote>
<p>So, basically, the RBA will cut rates down the track if it decides to cut rates down the track. Got it!</p>
<p>The big four banks are unlikely to further change mortgage rates in response, having already hiked recently in response to heightened capital requirements, but a cut in the months ahead by the RBA still looks like a definite possibility.</p><img src="https://counter.theconversation.com/content/50124/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timo Henckel receives funding from the Centre for International Finance and Regulation (CIFR). </span></em></p><p class="fine-print"><em><span>Guay Lim has received funding from the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>The Reserve Bank of Australia has decided to leave the official cash rate unchanged at a record low of 2%, but said there was scope for a rate cut down the line.Timo Henckel, Research Associate, Centre for Applied Macroeconomic Analysis, Australian National UniversityGuay Lim, Professorial Fellow, The University of MelbourneRichard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/496472015-10-26T19:15:43Z2015-10-26T19:15:43ZThe RBA should cut rates, but not because the banks are upping them<p>When Australia’s Reserve Bank board meets on Melbourne Cup day next week, the question at hand is whether the RBA will seek to offset recent bank rate raises with a cut to the cash rate. With a cut, the hope is banks will then reverse their decision and get mortgage rates back to where we were before.</p>
<p>First Westpac, then Commonwealth Bank, now all of the big four have raised their variable home loan rates, purportedly in response to more stringent capital requirements being imposed upon them.</p>
<p>In the wake of the 2008 financial crisis regulators around the world concluded banks didn’t hold enough capital as a buffer against potential losses. </p>
<p>The <a href="http://fsi.gov.au">Murray report</a> wisely suggested banks should hold more capital, but it doesn’t come free. The investors who provide it need to get paid – which raises the question: “by whom?”</p>
<p>It could be bank shareholders who might accept a lower rate of return on their investment. Indeed, since the extra capital requirements make banks safer this might not be unreasonable: the risk-return tradeoff has changed.</p>
<p>But the big four have decided their customers should pay. Costs have gone up, and those costs (or perhaps a bit more) are being passed on to home loan customers. Kudos to Malcolm Turnbull for pointing this out last week.</p>
<h2>Time to cut</h2>
<p>I’m on record as suggesting the RBA should and probably will cut rates at least once in the coming months. That comes from my view that Australia is suffering from <a href="https://theconversation.com/have-australian-bankers-bought-the-secular-stagnation-theory-29765">“secular stagnation”</a> – the idea that the speed limit of the economy (or more technically, the equilibrium real interest rate) has changed because, globally, there are too many savings chasing too few productive investment opportunities. This is enough of a reason to cut rates in and of itself, but the big four rate hike makes it all the more likely, and important.</p>
<p>That’s all simple enough, but it raises two important questions: (i) what are the implications for the RBA; and (ii) what does this say about our banking system and the regulation of it. The common thread in the answer to those questions is the B-word: “bubble”.</p>
<p>For the RBA, cutting rates by 25 basis points would offset the big four’s recent hikes (not quite exactly, but close enough). But, of course, the big four’s variable mortgage rates are not the only things affected by the cash rate. A 25bp cut should flow into commercial lending and it should also allow cuts by other mortgage providers. That would stimulate the economy.</p>
<p>Still, the RBA is clearly balancing the desire to stimulate the economy through lower rates, and concerns about asset price bubbles – especially in residential property. In that regard, the big four move is good and bad. It should cool the potentially overheated property market, but it also forces the RBA’s hand. And it takes away the stimulatory effect a cut would have had, absent the big four’s preemptive move.</p>
<p>The second, and deeper question, is what all this says about the competitiveness of our banking system. The fact that customers, not shareholders, are on the receiving end of the cost of holding more buffer capital shows how much market power the big four have.</p>
<p>That’s not necessarily a terrible thing – spreads on home loans are a little, but not particularly high by international standards. It’s not easy to make the case that the Australian public is getting ripped off by the big four.</p>
<p>They have, however, been willing to lend people a great deal of money, relative to their incomes, to purchase residential property. Go to any of the big four’s online calculators and see how much you can borrow with your income, and then try the same thing at a large American bank (like Bank of America). Australian banks will lend you a lot.</p>
<p>And therein lies the rub. It’s one thing to raise prices a bit, and then have those offset by an RBA rate cut. That will have little or no effect on borrowing behaviour. It’s quite another to reform lending practices and stop letting people borrow staggering sums against frothy assets.</p>
<p>And it is the latter practice that we should be focused on.</p><img src="https://counter.theconversation.com/content/49647/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>Banks might be pushing rates up, but the Reserve Bank’s focus should be on who they’re lending to.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/402362015-04-30T04:30:13Z2015-04-30T04:30:13ZHow changing our bank account numbering system will be a win for customers<figure><img src="https://images.theconversation.com/files/79225/original/image-20150424-14571-pigpgw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Enabling consumers to keep their bank account numbers when switching institutions will encourage greater competition</span> <span class="attribution"><span class="source">AAP Image/Dan Peled</span></span></figcaption></figure><p>It’s a pain to change mobile providers, but at least keeping your number is easy. It’s much more of a pain to change banks and much of that pain is because we have to change bank account numbers. Why don’t we have bank account number portability in the same way that we have mobile number portability?</p>
<p>The answer is the big four banks would prefer to keep switching accounts difficult. This contrasts with the approach in the United Kingdom. </p>
<p>In March 2015, the UK <a href="http://www.fca.org.uk/">Financial Conduct Authority</a> (FCA) released <a href="https://www.fca.org.uk/static/documents/research/making-current-account-switching-easier.pdf">a report</a> highlighting the benefits of bank account number portability in encouraging consumers to switch banks. The result is increased competition in the financial system.</p>
<p>The FCA report revealed that 35% of consumers and 40% of businesses “would be much more likely or more likely to switch if they had portable account details”. The research signalled that customers view account number portability as reducing the risk of changing banks. This is because it makes the process quicker and smoother. The reasons are:</p>
<blockquote>
<ul>
<li><p>customers do not need to change details;</p></li>
<li><p>the risk of incoming and outgoing payments going astray diminishes; and</p></li>
<li><p>businesses do not need to inform customers of changes.</p></li>
</ul>
</blockquote>
<h2>How could portability be implemented?</h2>
<p>For bank account number portability to be effective, the customer’s details and payments need to be accessible by both the old and new bank. The FCA report states that one option is a “central utility model”. </p>
<p>This model could include features such as a “Know Your Customer” database to store customer details for identification and a “payment mandates database”. The idea is for providers to continue offering competing products and services to customers, whilst using a “shared banking platform”. The FCA does not provide specifics of how bank account number portability would be implemented. However, it provides a framework to be further examined.</p>
<p>A report by <a href="http://www.infosys.com/finacle/solutions/thought-papers/Documents/bank-account-number-portability.pdf">Jain and Kudidhi</a> provides a more detailed approach of how bank account number portability using a central database could be implemented. </p>
<p>It involves a local database for each institution to initiate switching requests working alongside a central database, accessible by all banks, with all customer account numbers. This approach is similar to that used for mobile number portability which has been working in Australia since September 2001.</p>
<h2>Additional factors for bank account number portability to properly function</h2>
<p>The Australian payment system is currently based on a series of bilateral networks between financial institutions. These networks facilitate the transactions of direct credits and direct debits. </p>
<p>For this to occur, each customer has an account number to identify the specific account, and a bank, state, branch (BSB) number. To switch banks, customers are required to change their BSB and customer account numbers and redirect incoming or outgoing transactions to the new account details. </p>
<p>The <a href="http://banking.treasury.gov.au/content/reports/switching/downloads/switchingarrangements_aug2011.pdf">Fraser Report</a> commissioned by the Australian government suggests an alternative numbering system to the existing BSB and account number system to allow account number portability. </p>
<p>A simpler alternative however, could be to merge the current BSB and account number to form a unique customer account number rather than having to develop a completely new one. This parallels the mobile numbering approach where the two digits after “04” previously indicated the network operator and now only do for non-ported numbers.</p>
<p>The FCA report also noted some payment details would have to be separately incorporated into the bank account number portability model such as the International Bank Account Number (IBAN) and continuous payment authorities. However, Australia does not use IBANs and changing banks will not create issues with continuous payment authorities as it also means changing credit card providers.</p>
<p>A centralised database system is also important and is sometimes regarded as a high cost item. However, a process may be established where one of the four big banks will manage the database, which is then checked by the remaining big banking institutions. This would avoid the costs of establishing a new institution. In the telecommunications sector, Telstra runs the equivalent data repository known as the <a href="http://www.telstra.com.au/consumer-advice/ipnd/">Integrated Public Number Database</a>.</p>
<h2>Encouraging greater competition</h2>
<p>If, as is the expectation of the <a href="http://fsi.gov.au/">Financial System Inquiry</a>, the <a href="http://theconversation.com/four-pillars-or-four-pillows-bankings-comfy-collective-23297">four pillars policy</a> is to remain then we need mechanisms to improve the vibrancy of competition in the retail banking sector. Account number portability will make switching quicker, easier and more likely. If mobile phone operators can put their competitive offerings on the line, why can’t the banks?</p><img src="https://counter.theconversation.com/content/40236/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rob Nicholls receives funding from the Australian Research Council and the Centre for International Finance and Regulation. He is a member of the Australian Labor Party.</span></em></p><p class="fine-print"><em><span>Charlotte Ann Penel receives funding from the Australian Research Council and the Centre for International Finance and Regulation. </span></em></p>It’s a pain to change mobile providers, but at least keeping your number is easy. It’s much more of a pain to change banks and much of that pain is because we have to change bank account numbers. Why don’t…Rob Nicholls, Postdoctoral research fellow, Swinburne University of TechnologyCharlotte Penel, Researcher on competition in the financial sector at the Centre for International Finance and Regulation and UNSW, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/286302014-06-30T16:43:59Z2014-06-30T16:43:59ZBig accountancy firms have a human rights problem
<p>Protest and dissent are the foundation stones of modern societies and have helped secure a measure of democracy and human rights. Against all the odds, ordinary people have struggled to secure universal suffrage, equal opportunities, rights for women, rights to education, healthcare, pensions, protection of minorities and much more. Eventually, these achievements paved the way for the <a href="http://www.un.org/en/documents/udhr/">Universal Declaration of Human Rights</a> which is adopted by every nation. These rights include the “right to freedom of opinion and expression”. </p>
<p>People in Hong Kong have recently chosen to exercise their human rights by <a href="http://www.bbc.co.uk/news/world-asia-china-28076566">organising an referendum</a> on democratic reform. China has said local residents will be able to select their leader in the 2017 elections. However, candidates will be chosen from a list approved by an autocratic politburo – campaigners instead want the public to directly elect the territory’s next leader.</p>
<p>The so-called “Big Four” accountancy firms aren’t pleased. In an unprecedented move KPMG, PricewaterhouseCoopers (PwC), Ernst & Young (EY) and Deloitte & Touche have jointly taken out press advertisements in Hong Kong newspapers to <a href="http://www.ft.com/cms/s/0/574791ee-fdc1-11e3-acf8-00144feab7de.html#axzz367hwOVPS">oppose the people’s referendum</a>. They claim the protests will persuade multinational companies to leave Hong Kong.</p>
<h2>Enemies of the people</h2>
<p>These adverts show the length to which big accountancy firms go to cultivate profitable relationship with authoritarian regimes. Big accountancy firms were among the foremost supporters of the <a href="http://www.sciencedirect.com/science/article/pii/S036136820800072X">apartheid regime</a> in South Africa and have been accused of <a href="http://www.sciencedirect.com/science/article/pii/S1045235498903173">appeasing Nazi Germany</a> just before the outbreak of World War II, sending a special delegation to cultivate a profitable opportunity.</p>
<p>Without tax revenues, no government can meet its human rights obligations. These include the citizens’ right to education, healthcare, housing, pension and security. Yet accountancy firms have developed a vast <a href="http://visar.csustan.edu/aaba/PINSTRIPEMAFIA.pdf">organisational infrastructure</a> designed to empty the public purse.</p>
<p>Last year the Big Four firms became the subject of a hearing by the UK <a href="http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/870/870.pdf">public accounts committee</a>. Just before the hearing the committee received evidence from a former senior PwC employee stating that within the firm the policy was that it would sell a tax avoidance scheme which had only a 25% chance of withstanding a legal challenge. As the committee chairperson put it “you are offering schemes to your clients – knowingly marketing these schemes – where you have judged there is a 75% risk of it then being deemed unlawful”. The other three firms happily admitted to “selling schemes that they consider only have a 50% chance of being upheld in court”.</p>
<p>Laws do not seem to deter the big firms. KPMG paid a <a href="http://www.justice.gov/opa/pr/2005/August/05_ag_433.html">fine of US$456m</a> after admitting criminal wrongdoing and fraud which generated phony tax losses for its clients. It also collaborated with Barclays Bank to mass market a tax avoidance scheme to several corporations, including AIG, Microsoft and several major financial institutions. Last year, the scheme was declared unlawful and the presiding judge said that the conduct of those involved in this and other transactions was “<a href="http://www.uscfc.uscourts.gov/sites/default/files/opinions/SALEM.pdf">nothing short of reprehensible</a>”.</p>
<p>In May 2012, a BBC Panorama documentary showed how <a href="http://www.bbc.co.uk/news/business-17993945">PwC devised schemes</a> to enable multinational corporations, such as GlaxoSmithKline and Northern & Shell, to move profits to offshore tax havens via Luxembourg and avoid corporate taxes. A PwC inspired mass marketed tax scheme was <a href="http://www.bailii.org/uk/cases/UKUT/TCC/2013/276.pdf">struck out</a> by the courts last year and <a href="https://www.gov.uk/government/news/hmrc-wins-in-court-have-protected-over-1-billion">HMRC said</a> the scheme had “43 followers, with £87.7m of tax at stake”. </p>
<p>Ernst & Young was reportedly once described by the <a href="http://www.theguardian.com/business/2009/feb/07/tax-gap-avoidance-schemes">UK’s senior tax collector</a> as “probably the most aggressive, creative, abusive provider” of tax avoidance schemes. In 2013, Ernst & Young paid a <a href="http://www.justice.gov/usao/nys/pressreleases/March13/EYNPAPR.php">fine of US$123m</a> to resolve tax fraud allegations by the US authorities. The firm admitted wrongful conduct by certain partners and employees. Google, a well known tax avoider, has been <a href="http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/716.pdf">advised by the firm</a>. When the Public Accounts Committee asked for details of the schemes, Ernst & Young <a href="http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/112/112.pdf">refused to co-operate</a> and hid behind its duty of confidentiality to the client.</p>
<p>Banks may have been bailed out by taxpayers, but bankers don’t like paying taxes. Deloitte & Touche designed a scheme to enable staff at the London office of Deutsche Bank to avoid income tax and National Insurance Contributions on bonuses adding up to £92m. The scheme was declared to be unlawful by courts and the <a href="http://www.bailii.org/uk/cases/UKFTT/TC/2011/TC00944.html">judge said</a> the scheme “as a whole, and each aspect of it, was created and coordinated purely for tax avoidance purposes”. </p>
<p>In 2013, Deloitte paid a fine of US$10m and was also <a href="http://www.dfs.ny.gov/about/press2013/pr1306181.htm">suspended for 12 months</a> by the New York regulators from undertaking consulting work at financial institutions. This arose out of <a href="http://online.wsj.com/public/resources/documents/SCBorder0806.pdf">regulatory action</a> against Standard Chartered Bank for violating US sanctions on Iran, Burma, Libya and Sudan. Deloitte was asked to oversee the implementation of an anti-money laundering programme, but leaked confidential information to the bank.</p>
<p>The above is a tiny glimpse of mounting evidence showing that major accountancy firms prevent million of people from enjoying their human rights. The intervention in Hong Kong simply represents a particularly obvious example of a wider trend.</p>
<p>In many other organisations such subversion of the human rights would be considered to be a badge of shame. At major accountancy firms it is increasingly considered to be a sign of business acumen.</p><img src="https://counter.theconversation.com/content/28630/count.gif" alt="The Conversation" width="1" height="1" />
Protest and dissent are the foundation stones of modern societies and have helped secure a measure of democracy and human rights. Against all the odds, ordinary people have struggled to secure universal…Prem Sikka, Professor of Accounting, Essex Business School, University of EssexLicensed as Creative Commons – attribution, no derivatives.