tag:theconversation.com,2011:/fr/topics/anz-2251/articlesANZ – The Conversation2023-09-05T05:12:29Ztag:theconversation.com,2011:article/2127802023-09-05T05:12:29Z2023-09-05T05:12:29ZWhat’s to stop Philip Lowe moving to a private bank after he leaves the RBA? It’s what his predecessors did<p>Surely Reserve Bank Governor Philip Lowe won’t move to a private bank after his term as governor ends next week.</p>
<p>After having chaired his last <a href="https://www.rba.gov.au/">board meeting</a> on Tuesday, there’s nothing to stop him, and – as shabby as it seems – he wouldn’t be the first.</p>
<p>There are three reasons why he shouldn’t join the board of or become chair of a private bank, all alluded to in the <a href="https://www.apsc.gov.au/publication/aps-values-and-code-conduct-practice/section-5-conflict-interest">public service code of conduct</a>.</p>
<p>One is concern that the former employee would reveal confidential Commonwealth information (which would be unlikely for someone as cluey as Lowe) or “provide other information that would give the new employer an advantage in its business dealings”, which would be more likely, even if unintentional.</p>
<p>Banks don’t seek out former Reserve Bank chiefs unless they think there’s something in it for them.</p>
<p>Another concern set out in the code of conduct is that the former employee would exploit their knowledge of the Commonwealth to lobby, or otherwise seek advantage for their new employer in dealing with the Commonwealth.</p>
<p>Banks such as Westpac, NAB, the ANZ and Macquarie Bank deal with the Reserve Bank all the time. It runs the payments system, it is responsible for the financial system, and it sets interest rates.</p>
<p>Every one of the four banks I just mentioned has employed either a former Reserve Bank Governor or Treasury Secretary.</p>
<h2>Perceptions matter when a Governor moves on</h2>
<p>Even where these high-profile hires don’t help the banks in their relations with the regulator, the public service code of conduct points to the “perception” that they will have a greater ability to influence regulators than other hires.</p>
<p>The third concern identified in the code of conduct – in my view the most important – has been labelled “<a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-8500.12466">ingratiation</a>” by a public service specialist at the Australian National University, Richard Mulligan. </p>
<p>It’s the possibility that <em>while still in the public service</em>, the employee will use their position to go soft on an organisation (or type of organisation) they see as a potential future employer.</p>
<p>The Reserve Bank’s own <a href="https://www.rba.gov.au/about-rba/our-policies/code-conduct-rba-staff.html">code of conduct</a> is silent on the question of taking up employment with the banks it regulates, although it does say that where there is a perception of conflict of interest, the employee has to discuss it with the relevant department head or governor.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-rba-has-kept-interest-rates-on-hold-itll-be-cautious-from-here-on-208917">The RBA has kept interest rates on hold. It'll be cautious from here on</a>
</strong>
</em>
</p>
<hr>
<p>The government’s <a href="https://www.ag.gov.au/integrity/publications/lobbying-code-conduct">lobbying code of conduct</a> in place since 2008 purports to ban heads of department from engaging in lobbying activities relating to any matter with which they have had official dealings for 12 months after they have left office.</p>
<p>But former governors needn’t lobby, and 12 months isn’t long to wait.</p>
<p>Philip Lowe’s predecessor, the man to whom he was deputy, <a href="https://www.macquarie.com/au/en/about/news/2021/glenn-stevens-appointed-next-chair-of-macquarie-group-and-macquarie-bank-following-peter-warne-retirement,-diane-grady-announces-her-intention-to-retire.html">Glenn Stevens</a>, finished up as Reserve Bank Governor in September 2016 and joined the board of the Macquarie Bank and Macquarie Group in December 2017. He has been chair of Macquarie Bank and Macquarie Group since 2022.</p>
<p>Stevens’ predecessor as governor, <a href="https://www.anz.com/content/dam/anzcom/shareholder/2007-Annual-Report.pdf">Ian Macfarlane</a>, finished as head of the Reserve Bank in September 2006 and joined the board of the ANZ bank in February 2007.</p>
<p>The governor he replaced, <a href="https://www.anz.com/content/dam/anzcom/shareholder/2007-Annual-Report.pdf">Bernie Fraser</a>, finished at the Reserve Bank in September 1996 and joined the board of the industry funds that became Australian Super in the same year, becoming chair of the super-fund-owned <a href="https://www.industrymoves.com/moves/fraser-steps-down-as-me-bank-chair">ME Bank</a> in 2000.</p>
<p><a href="https://web.archive.org/web/20151103062911/https://www.nab.com.au/about-us/our-business-at-a-glance/board-of-directors/kenneth-r-henry-ac">Ken Henry</a> stepped down as head of the Australian Treasury (and a member of the Reserve Bank board) in April 2011 and in November that year joined the board of the National Australia Bank. In 2015 he was made its chair.</p>
<p>The man Henry replaced at the Treasury, <a href="https://www.moneymanagement.com.au/news/financial-planning/westpacs-evans-retire">Ted Evans</a>, stepped down in April 2001 and joined the board of Westpac that year, becoming its chair in 2007.</p>
<p>I’ve dealt with each of these people while they were governors or treasury secretaries and I’ve never seen anything that made me doubt their integrity.</p>
<p>And yet in my view, none of them should have gone on to work for the type of organisations they used to regulate.</p>
<p>All of them were paid extraordinarily well. In 2021–22 Philip Lowe was on a package of <a href="https://www.rba.gov.au/publications/annual-reports/rba/2022/pdf/our-people.pdf">$1.037 million</a> including superannuation and a salary of $890,252.</p>
<p>None needed another high-paying job straight away, and (because of public service super) all had a generous income to look forward to in retirement.</p>
<p>I understand their need to continue to do interesting things, but I don’t think it’s too big a sacrifice to ask former regulators to do those things away from the types of organisations they had the privilege of regulating.</p>
<p>On retiring from the Reserve Bank in 1968, its first governor <a href="https://www.science.org.au/fellowship/fellows/biographical-memoirs/herbert-cole-coombs-1906-1997#anu">HC Coombs</a>, chaired the Council for the Arts and the Council for Aboriginal Affairs. He made an ever-greater contribution to Australia without doing what the Japanese call <a href="https://www.investopedia.com/terms/a/amakudari.asp">amakudari</a>, or “descending from heaven” to work for the organisations he once regulated. </p>
<p>A profile of the practice includes the admonition “<a href="https://thediplomat.com/2011/05/the-problem-with-amakudari/">don’t snicker</a>”.</p>
<p>When Lowe took the governor’s job in 2016 I wrote a <a href="https://www.smh.com.au/business/the-economy/meet-guy-debelle-and-philip-lowe-the-odd-couple-wholl-be-running-the-reserve-bank-20160916-grho4t.html">profile of him</a> for The Age and the Sydney Morning Herald, speaking to former teachers and colleagues off the record. Repeatedly, unprompted, they mentioned his moral compass.</p>
<p>Lowe is about to turn 62. He has years of useful work ahead of him. I don’t expect him to descend from heaven to do it.</p><img src="https://counter.theconversation.com/content/212780/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin 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>Former Reserve Bank and Treasury chiefs have gone on to run Westpac, the National Australia Bank, the ANZ, and Macquarie Bank. It makes regulating those banks hard.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1378892020-05-06T19:50:21Z2020-05-06T19:50:21ZBank dividends are bare. Here’s why some shareholders hate it more than they should<p>In bad news for retirees and others who depend on dividend cheques (and dividend imputation rebate cheques from the Tax Office) bank dividends have largely evaporated. But it’s not as bad as many commentators suggest, and actually good for some investors.</p>
<p><a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2020_Interim_Media_Release.pdf">Westpac</a> won’t be paying a dividend this half year. Nor will the <a href="https://yourir.info/resources/4d216b570d08af30/announcements/anz.asx/3A540286/ANZ_News_Release_ANZ_NZ_2020_half-year_result.pdf">ANZ</a>, nor the <a href="https://wcsecure.weblink.com.au/pdf/BOQ/02224752.pdf">Bank of Queensland</a>.</p>
<p>The <a href="https://www.nab.com.au/about-us/shareholder-centre/dividend-information">National Australia Bank</a> will pay one, but only a third the usual size. The Commonwealth Bank’s different reporting dates mean it won’t have to make a decision <a href="https://www.commbank.com.au/about-us/investors/dividend-information.html">until August</a>.</p>
<p>The Financial Review believes the moves have taken <a href="https://www.afr.com/companies/financial-services/westpac-shareholders-have-long-wait-ahead-on-dividends-20200504-p54plj">A$9.8 billion</a> in expected dividends and <a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">franking credits</a> from bank shareholders to date. </p>
<p>The flip-side missed by many commentators and shareholders is that bank shares are worth more (maybe around $9.8 billion more) than if they had paid those dividends.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=840&fit=crop&dpr=1 600w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=840&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=840&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1056&fit=crop&dpr=1 754w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1056&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1056&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"><a class="source" href="https://www.apra.gov.au/sites/default/files/2020-04/Capital%20management.pdf">APRA letter to financial institutions, April 7, 2020</a></span>
</figcaption>
</figure>
<p>As it happens, the decisions follow pressure from the Prudential Regulation Authority which last month sent banks an <a href="https://www.apra.gov.au/capital-management">unprecedented letter</a> asking them to “seriously consider deferring decisions on the appropriate level of dividends”.</p>
<p>It isn’t what bank shareholders have come to expect. </p>
<p>The Commonwealth Bank’s <a href="https://www.commbank.com.au/about-us/investors/dividend-information.html">dividend policy</a> says it will aim to pay cash dividends at “strong and sustainable levels”, maximising dividend imputation cheques from the government by paying <a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">fully franked</a> dividends.</p>
<p>The dividend reductions come after sharp collapses in share prices brought about by hits to current and expected future earnings and increased economic uncertainty.</p>
<p>But, as hard as it is to look beyond dividends, imputation cheques and the price of shares, what’s most important for the owners of shares are the earnings prospects for the banks long term. And here, as hard as it might be for some shareholders to accept, the suspension of dividends is a sensible strategy for the banks.</p>
<h2>Cruel to be kind makes sense for banks</h2>
<p>In making decisions about dividends in the wake of bad news, each bank had two options. </p>
<p>One was to keep paying dividends at previous levels. </p>
<p>That would have pushed the share price down further, as evidenced by the typical drop in a company’s share price after dividends have been paid. </p>
<p>With the funds paid out as dividends, and no longer part of the bank’s shareholders funds, each share becomes correspondingly worth less. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-last-thing-companies-should-be-doing-right-now-is-paying-dividends-135928">The last thing companies should be doing right now is paying dividends</a>
</strong>
</em>
</p>
<hr>
<p>It also puts the bank in a weaker position to weather unexpected loan losses if the COVID-19 storm turns out to be even worse than expected. </p>
<p>The other option was to scrap (or reduce) its dividend and avoid the ex-dividend date drop in its share price. It bolsters its capital strength and gives shareholders higher expected capital gains (or lower capital losses).</p>
<p>Broadly, the loss of dividends should be offset to some degree by a higher share price and higher capital gains. </p>
<p>But try telling shareholders that the dividends they have lost can be replaced by selling shares.</p>
<h2>Tax makes retirees hate it</h2>
<p>That they care is in part psychological. Shareholders view a bird (dividend) in the hand as better than one (a capital gain) in the bush. </p>
<p>Selling shares is seen as “dipping into one’s capital”, even though it has the same effect on the shareholder’s capital (the value of shares held) as taking a dividend.</p>
<p>Another reason shareholders care more than you might think is tax. </p>
<p>Typically (based on historical evidence) a franked dividend of $1 leads to a share price fall of around $1. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">Deeming rates explained. What is deeming, how does it cut pensions, and why do we have it?</a>
</strong>
</em>
</p>
<hr>
<p>But for an investor on a zero tax rate (as many retirees are) that $1 dividend is actually worth around $1.43. </p>
<p>This is because the Tax Office rebates that investor <a href="https://www.marketindex.com.au/franking-credits">43 cents</a> of tax previously paid by the bank, a so-called dividend imputation payment. </p>
<p>Selling $1.43 of shares to compensate for the lost dividend cash flow leaves them worse off.</p>
<p>Super funds on a low 15% tax rate are also likely to prefer payment of franked dividends since they can use the imputation credits to reduce tax on other investment income.</p>
<h2>Tax makes other shareholders like it</h2>
<p>High tax rate investors and foreign shareholders think quite differently. </p>
<p>For high tax rate investors, Australia’s practice of taxing only <a href="https://www.realestate.com.au/advice/what-is-capital-gains-tax/">half</a> of each capital gain can make the higher capital gains associated with higher share prices more attractive than receiving dividends on which they have to pay extra tax.</p>
<p>Foreign shareholders also generally prefer capital gains to franked dividends, since they can’t use Australia’s imputation credits.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/heres-a-radical-reform-that-could-pay-every-retiree-the-full-pension-131289">Here's a radical reform that could pay every retiree the full pension</a>
</strong>
</em>
</p>
<hr>
<p>Under any tax system where dividends and capital gains are taxed differently, deferring dividends hurts some investors and benefits others. Australia’s imputation tax system magnifies that effect, with low tax rate investors being losers.</p>
<p>As it happens, these features of the tax system took centre stage in last year’s election, in which Labor proposals to change both the rules regarding dividend imputation and capital gains were <a href="https://theconversation.com/going-up-monday-showed-what-the-market-thinks-of-morrison-117396">rejected</a> by voters.</p>
<h2>Longer term, investors might thank banks</h2>
<p>The root cause of the hit to dividends is uncertainty about the future. </p>
<p>If economic conditions turn out worse than expected, banks will find themselves hesitant to make loans unless they have sufficient capital to absorb unexpected losses.</p>
<p>To the extent that they use that capital to help restore the health of the economy, all investors (including those reliant on future dividends) will be better off.</p><img src="https://counter.theconversation.com/content/137889/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>Westpac and the ANZ have suspended dividends payments. The National Australia Bank has slashed them. The peculiarities of our tax system explain why retirees hate this more than they should.Kevin Davis, Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/880722018-08-23T01:55:27Z2018-08-23T01:55:27ZCompanies keep slashing jobs, but new technologies won’t replace good management<p>As technology improves, it’s tempting for company executives to <a href="http://www.abc.net.au/news/2018-08-22/telco-wrap-nbn-new-ceo-tpg-vodafone-talks-optus-cuts-jobs/10151410?section=business">slash jobs</a> that are “standard” and “routine”, <a href="https://www.pc.gov.au/research/completed/digital-disruption/digital-disruption-research-paper.pdf">making them easy to automate</a>. But research shows focusing on improving management practices will do more to improve companies’ bottom lines.</p>
<p>In a <a href="https://www.nber.org/papers/w23300">study</a> of 32,000 manufacturing firms, American researchers showed firms using certain management practices had 20% better productivity than firms that neglected to use them. </p>
<p>At the same time, integrating technology into business practices was found to only improve firm productivity by 10%. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-coaching-not-gadgets-is-key-to-getting-the-most-out-of-employees-87769">Why coaching, not gadgets, is key to getting the most out of employees</a>
</strong>
</em>
</p>
<hr>
<p>The firms <a href="https://www.nber.org/papers/w23300">studied</a> varied widely in how much they used structured management practices - targets, performance monitoring and incentives. Targets and monitoring make it clear what <a href="http://www.jstor.org/stable/pdf/977173.pdf">employees need to do and whether they are doing it</a>. The right incentives give them a reason to make the necessary effort.</p>
<p>This suggests organisations such as <a href="http://www.abc.net.au/news/2018-08-22/telco-wrap-nbn-new-ceo-tpg-vodafone-talks-optus-cuts-jobs/10151410?section=business">Optus</a>, <a href="http://www.abc.net.au/news/2017-06-14/telstra-confirms-1400-jobs-axed-in-australia/8617074">Telstra</a>, the <a href="https://www.businessinsider.com.au/the-big-banks-have-cut-4200-jobs-in-12-months-2016-5">big four banks</a>, <a href="https://cpsu-csiro.org.au/2017/09/15/job-cuts-set-to-rock-csiro-minerals-and-data-research/">CSIRO</a> and the <a href="http://about.abc.net.au/our-abc-our-future/">ABC</a>, who have all cut jobs citing the possibility of new technology, may be pursuing the least effective option. </p>
<h2>What’s good management in practice?</h2>
<p>To avoid over-relying on technology while keeping up with change, managers must have the <a href="https://iedunote.com/management-science-art">creativity and persuasiveness of an artist as well as the objectivity of a scientist</a>. </p>
<p>While standard, routine problems can be automated, others require managers to invent a range of options, choose among these alternatives, and then persuade other people to follow that choice. </p>
<p>In “<a href="http://classics.mit.edu/Aristotle/rhetoric.1.i.html">The Art of Rhetoric</a>” Aristotle described the skills necessary:</p>
<ul>
<li><em>ethos</em>: an understanding of human character and goodness. To change a situation, managers need credibility and authenticity</li>
<li> <em>logos</em>: the capacity to reason logically. Managers must put forward a rigorous case for converting a firm’s problems into ideas, then options, then actions</li>
<li> <em>pathos</em>: the ability to understand emotions. To persuade people, especially in large numbers, managers must understand their audience.</li>
</ul>
<p>Managers shedding staff in the interests of organisational survival face a severe test of all three persuasion skills. In terms of <em>ethos</em> (credibility and authenticity), managers need to admit they cannot offer loyalty to employees and so should not expect it. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/mass-layoffs-increase-teen-suicide-rates-30710">Mass layoffs increase teen suicide rates</a>
</strong>
</em>
</p>
<hr>
<p>Rather than <a href="http://www.abc.net.au/news/2018-08-22/telco-wrap-nbn-new-ceo-tpg-vodafone-talks-optus-cuts-jobs/10151410?section=business">shedding jobs in favour of technology</a>, and at a minimum, organisations should offer training to prepare people for the time they will no longer be needed. And, respecting <em>pathos</em> (emotional understanding), treat departing employees with care and respect.</p>
<p>A drop in share price is a sign shareholders lack confidence in the <em>logos</em> (reasoned logic) of an organisation’s strategy. But there are other, more subtle signals an organisation has over-played its digital capabilities. </p>
<p>An example is the reputational damage to organisations that use cybervetting - seeking information about job applicants from social media and search engines. <a href="http://onlinelibrary.wiley.com/doi/10.1002/9781118955567.wbieoc054/full">Studies of cybervetting</a> show some employers use technology to better their business at potentially the expense of good management. </p>
<p>Employers see cybervetting as a digital extension of background checking that increases organisational efficiency. Some even see it as the beginning of an employment relationship. But applicants disagree with this logic, perceiving the practice as unfair. </p>
<p>Cybervetting reduces applicants’ trust and identification with the organisation because they perceive it as lacking <em>ethos</em> (credibility and autheniticity). Its reputation is damaged in their eyes so they are less likely to accept a job offer.</p>
<h2>Framing a solution</h2>
<p>Applying technology to organisational processes is part of working smarter, not harder. Careful management is the other part. But as organisations’ technological capacities grow, managers need to ask themselves what is possible and desirable when using technology. </p>
<p><em>Logos</em> (reasoned logic) and <em>ethos</em> (credibility and authenticity) will be useful as they do this. Then, using <em>pathos</em> (emotional understanding), they must try to understand how others are likely to frame their answers to similar questions. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-the-end-of-auto-manufacturing-wont-be-as-apocalyptic-as-previous-mass-layoffs-85521">Why the end of auto manufacturing won't be as apocalyptic as previous mass layoffs</a>
</strong>
</em>
</p>
<hr>
<p>Applicants, unlike employers, don’t see cybervetting as a more efficient replacement for personal interaction during the early stages of an employment relationship. To use <a href="https://books.google.com.au/books?id=nz1RT-xskeoC&printsec=frontcover&dq=karl+e+weick&hl=en&sa=X&ved=0ahUKEwjHy7OH4Y3YAhUOObwKHRdSAaQQ6AEIKTAA#v=onepage&q=karl%20e%20weick&f=false">Karl Weick’s term</a>, job applicants and employers <a href="https://pdfs.semanticscholar.org/c5ef/1af1d6b68ed0d97b7aa19de748550a379fa7.pdf">make sense</a> of the same situation differently. </p>
<p><a href="http://classics.mit.edu/Aristotle/rhetoric.1.i.html">Aristotle’s ancient typology of management skills</a> promises to remain useful as digital solutions - and dilemmas - increase.</p><img src="https://counter.theconversation.com/content/88072/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mary Barrett 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>Management trumps technology in making companies productive, but that doesn’t mean firms can be complacent when it comes to keeping up with change.Mary Barrett, Professor of Management, University of WollongongLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/978552018-06-07T20:26:39Z2018-06-07T20:26:39ZCriminal charges against banking ‘cartels’ show Australia is getting tough on competition law<p>A two-year probe by Australia’s consumer watchdog has resulted in <a href="https://theconversation.com/cartel-case-shows-not-all-corporate-misbehaviour-goes-unpunished-82149">criminal charges</a> against ANZ, Citigroup and Deutsche Bank, as well as six of their senior executives, over alleged “cartel-like” behaviour.</p>
<p>The case, brought by the Commonwealth Director of Public Prosecutions (CDPP) after an investigation by the Australian Competition and Consumer Commission (ACCC), is the second prosecution of its kind to be brought in Australia since competition laws were tightened almost a decade ago.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/cartel-case-shows-not-all-corporate-misbehaviour-goes-unpunished-82149">Cartel case shows not all corporate misbehaviour goes unpunished</a>
</strong>
</em>
</p>
<hr>
<p>The banks and six investment bankers are charged with cartel conduct related to the sale of A$2.5 billion worth of unsold ANZ shares to investors in August 2015. The ACCC <a href="https://www.accc.gov.au/media-release/criminal-cartel-charges-laid-against-anz-citigroup-and-deutsche-bank">alleges</a> that senior executives from the three banks colluded in the way they dealt with these shares. </p>
<p>The exact details of the alleged criminal conduct will only become clear at a Sydney court hearing on July 3, 2018. </p>
<h2>What is cartel behaviour?</h2>
<p>Cartels are forms of anti-competitive conduct where cartel participants decide to stop competing and start colluding. Australian civil law has banned cartels for decades. But the practice only became a <a href="https://www.legislation.gov.au/Details/C2009A000590">criminal offence in 2010</a>. Only its serious forms are subject to criminal law; civil law still governs the rest.</p>
<p>Cartels can take different forms. In the most common instance, participants collude by setting their prices. Other forms include: output restrictions; dividing markets among cartel participants on mutually agreed terms; and bid-rigging, in which a commercial contract is decided in advance but other operators put in sham bids to give the appearance of competition.</p>
<p>There is one primary reason why businesses or executives would stop competing and start colluding: profit. In short, cartel participants cheat to get more money, creating higher prices and lower output in the process. This disadvantages consumers, the economy and society at large. </p>
<p>But proving criminal collusion in a court is harder than it might seem.</p>
<h2>Beyond reasonable doubt</h2>
<p>Although we need to wait for the case to unfold to find out more, what we can tell at this stage is that the ACCC and the CDPP perceive the alleged conduct as serious enough for it to constitute a criminal case. Criminal cases are harder to prove than civil cases. Cartel collusion must be proved beyond reasonable doubt, and the evidence has to show that the individuals involved knew (or believed) that they were colluding. </p>
<p>What these charges also show is that the ACCC and the CDPP are prepared to go after the most powerful corporations and their executives for alleged cartel-like conduct. This is an enormously important step for deterrence, because criminal charges are naturally more attention-grabbing than civil lawsuits. </p>
<p>Charging high-ranking bank executives will potentially make the deterrent more effective still, because high-ranking executives set the cultural tone for their organisations.</p>
<p>Research has shown that significant prison time – or the threat of it – for individuals is a more effective deterrent than civil penalties; especially if the penalties are not high enough, as was argued in the <a href="http://www.oecd.org/competition/pecuniary-penalties-competition-law-infringements-australia-2018.htm">recent OECD report on corporate penalties for cartels in Australia</a>. The report showed that the penalties applied in Australia were low in comparison with competition law regimes in the European Union and the United States. </p>
<h2>Just the beginning?</h2>
<p>This is the second Australian criminal case of cartel conduct – the first involved a <a href="https://theconversation.com/cartel-case-shows-not-all-corporate-misbehaviour-goes-unpunished-82149">Japanese company shipping cars to Australia</a>. We can reasonably expect more of these kinds of charges in the future, given that the laws are only eight years old and investigations of this type typically take years to reach fruition. (The alleged cartel conduct in the latest case took place in August 2015, almost three years ago.)</p>
<p>There are differences in investigation procedures between criminal and civil cases, to ensure that collected pieces of evidence are admissible in a criminal proceeding. It is ultimately the CDPP’s (and not the ACCC’s) decision whether or not to prosecute. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/cartels-caught-ripping-off-consumers-should-be-hit-with-bigger-fines-78750">Cartels caught ripping off consumers should be hit with bigger fines</a>
</strong>
</em>
</p>
<hr>
<p>The final step is for criminal proceedings to be prosecuted. The first cartel criminal case, which concerned the shipping industry, can be perceived as successful, with two global shipping companies pleading guilty. </p>
<p>It is still early days for Australia in terms of tracking down and punishing examples of cartel behaviour via criminal prosecutions. But the latest developments suggest that Australia is prepared to follow the example of the world leader in successful cartel-related criminal prosecutions: the United States.</p>
<p>The US criminal regime is one of the oldest in the world, having existed since 1890. The US boom of cartel-related criminal cases began in the late 1990s with the lysine cartel and the vitamin cartel and with the first foreign national being sentenced to imprisonment in July 1999. One of the first criminal cartel investigations inspired the production of the 2009 movie <a href="https://www.imdb.com/title/tt1130080/">The Informant!</a>. </p>
<p>The numbers further illustrate the success of the US criminal prosecutions. For instance, <a href="https://www.justice.gov/atr/criminal-enforcement-fine-and-jail-charts">27 corporations and 82 individuals were charged in the fiscal year 2011</a>. Australia has a long way to go before it can match those numbers.</p><img src="https://counter.theconversation.com/content/97855/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Barbora Jedlickova has received two Ian Potter Foundation grants which are unrelated to this article.</span></em></p>The charges laid against ANZ and other banks over alleged cartel-like behaviour suggests that Australia is following the United States in cracking down on anti-competitive behaviour.Barbora Jedlickova, Lecturer, School of Law, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/932832018-03-14T00:10:48Z2018-03-14T00:10:48ZWhat the Royal Commission can do if the banks don’t play ball on evidence<p>At the <a href="https://financialservices.royalcommission.gov.au/public-hearings/Pages/round-1-hearings.aspx">first round of hearings</a> of the Financial Services Royal Commission, the counsel assisting, Rowena Orr QC, was unimpressed with the material some of the banks have provided. The Commonwealth Bank provided two submissions, the first of which, according to Orr:</p>
<blockquote>
<p>…adopted a high level and general approach, which meant that it did not disclose the totality of the conduct that it has engaged in…</p>
</blockquote>
<p>The CBA’s second submission was no more helpful: it consisted primarily of a large number of spreadsheets. Orr said these were “not in a form which made it possible to easily understand the type and the scale”, of CBA’s conduct.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/broad-mandate-for-financial-services-royal-commission-takes-the-heat-off-banks-88391">Broad mandate for financial services royal commission takes the heat off banks</a>
</strong>
</em>
</p>
<hr>
<p>CBA wasn’t alone; the National Australia Bank also won a mention from Orr for “failing to grapple with the task” set by the commissioner.</p>
<p>Can the Royal Commission do anything to get more useful information out of the banks? There are two issues here: what the Royal Commission can make the banks do, and what it has to ask the banks to do.</p>
<h2>What can the Royal Commission make the banks do?</h2>
<p>The Royal Commission has several powers under the <a href="https://www.legislation.gov.au/Details/C2018C00049">Royal Commissions Act 1902</a> that might be used here. Failure to comply with the Royal Commission’s requirements under these powers is punishable by up to two years’ imprisonment.</p>
<p>The Royal Commission can require the banks to produce documents. But this is not a power to make the banks create new documents to help the Royal Commission.</p>
<p>The Royal Commission can require witnesses to give evidence. Using this power, the Royal Commission could make key personnel within the banks attend the Royal Commission and answer questions about the bank’s conduct.</p>
<p>It can also require a person to provide information, or a statement, in writing. This is probably limited to matters the person already knows about; it’s not a power to order a person to conduct investigations to provide a full picture of a bank’s conduct.</p>
<h2>What the commission can ask for</h2>
<p>Quite apart from its coercive powers, the Royal Commission can ask the banks to provide the material it wants, in the form it wants. In fact, the commissioner wrote to the banks the day after the commission was established, inviting them to make submissions. It was in response to this invitation that CBA and NAB provided the documents Rowena Orr QC referred to on the first round of hearings.</p>
<p>The Royal Commission could ask the banks, for example, to provide as much or as little detail as the commission needs; to create summaries or chronologies of events; to explain how to interpret technical documents; to provide a full account of a specified event. </p>
<p>It would then be up to the banks as to whether (and when) they comply with the requests.</p>
<p>The banks have <a href="https://www.westpac.com.au/about-westpac/media/media-releases/2017/30-november/">announced</a> their intention to cooperate with the Royal Commission. Given this, it would be surprising to see the banks defying any reasonable requests for additional documents or information without giving a good reason.</p>
<p>But it’s not quite as simple as “ask and it shall be given you”. Banks hold millions of documents.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/banks-and-financial-providers-one-step-ahead-of-consumers-who-struggle-with-personal-bias-91228">Banks and financial providers one step ahead of consumers who struggle with personal bias</a>
</strong>
</em>
</p>
<hr>
<p>Each bank stores its documents in a system that suits the bank’s operational needs, and is unlikely to align with the Royal Commission’s priorities. A request to collate all documents on a given topic might take the bank many hours of searching and analysis across multiple databases. The banks then may have to return to the Royal Commission to clarify what is required.</p>
<p>There’s nothing to stop the Royal Commission using both coercive and cooperative techniques. It may, for example, ask banks to provide an overview of the handling of certain complaints, and then require the banks to produce certain documents mentioned in that summary. </p>
<p>But a combination of asking and demanding may be needed to get the information the Royal Commission needs.</p><img src="https://counter.theconversation.com/content/93283/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anna Olijnyk's superannuation fund has shares in several banks.</span></em></p>The Financial Services Royal Commission can ask the banks for the material it wants, in the form it wants.Anna Olijnyk, Lecturer, Adelaide Law School, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/881562018-02-18T19:15:17Z2018-02-18T19:15:17ZFactCheck: do bank profits ‘belong to everyday Australians’?<figure><img src="https://images.theconversation.com/files/196422/original/file-20171127-14028-1qzwq26.png?ixlib=rb-1.1.0&rect=3%2C0%2C1130%2C649&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bank branch employees featured in the Australian Bankers' Association national advertising campaign.</span> </figcaption></figure><blockquote>
<p>A lot of people don’t know that nearly 80% of all Australian bank profits go straight back to shareholders and the majority of those shareholders are everyday Australians who own bank shares through their super funds.</p>
<p><strong>– Excerpt from the Australian Bankers’ Association ‘<a href="https://www.banksbelongtoyou.com.au/">Australian Banks Belong To You’ campaign</a>, November 2017 – February 2018</strong></p>
</blockquote>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/0sCrQIatA0M?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Advertisement from the Australian Bankers’ Association, November 19, 2017.</span></figcaption>
</figure>
<p>Following <a href="https://theconversation.com/grattan-on-friday-nationals-force-reluctant-turnbull-to-dress-in-shortens-banking-clothes-88422">mounting pressure</a> from Labor and some National Party MPs, the Turnbull government in December <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">established</a> a Royal Commission into misconduct in the banking, superannuation and financial services industry. Public hearings are now underway.</p>
<p>At the same time, the Australian Bankers’ Association (ABA) has been running a national advertising campaign in which bank branch staff talk about who benefits from bank profits.</p>
<p>The advertisements – broadcast on national television, published in newspapers, shared on social media and displayed on ATMs – state that “nearly 80% of all bank profits go straight back to shareholders and the majority of those shareholders are everyday Australians who own bank shares through their super funds”.</p>
<p>The ABA says bank profits “don’t belong to the banks, they belong to everyday Australians like you”.</p>
<p>Is that right?</p>
<h2>Checking the source</h2>
<p>The Conversation contacted the Australian Bankers’ Association requesting sources and comment, but did not receive a response. </p>
<p>On the “Australian Banks Belong To You” <a href="https://www.banksbelongtoyou.com.au/">campaign website</a>, the association cites these references:</p>
<blockquote>
<p>The “nearly 80%” figure refers to the dividend payout ratio of the 8 key Australian retail banks averaged over 2016 and 2017. The data are sourced from bank annual reports. The dividend payout ratio is calculated as the sum of the dividends paid divided by the sum of cash earnings.</p>
<p>According to the ATO more than 14.8 million Australians have at least one superannuation fund account (around 40% have more than one). It’s safe to say that many super funds invest in Australian bank shares as part of their portfolio.</p>
<p>This means that millions of Australians own bank shares.</p>
</blockquote>
<h2>Verdict</h2>
<p>The Australian Bankers’ Association claimed that “nearly 80% of <em>all</em> Australian bank profits go straight back to shareholders”. While we can’t say whether that’s correct for <em>all</em> Australian banks, the statement is broadly correct for Australia’s eight largest retail ABA member banks over the last five years.</p>
<p>The association’s claim that “the <em>majority</em> of those shareholders are everyday Australians who own bank shares through their super funds” is reasonable.</p>
<p>But if you read those statements together as meaning 80% of profits go to <em>Australian</em> shareholders, that would be incorrect. That’s because a proportion of dividend payouts go to non-resident shareholders.</p>
<p>For example, if a dividend was paid on 31 December 2017 by Australia’s ‘Big Four’ banks, non-resident investors would have received between 21.21% and 26.5% of any dividends declared – meaning Australian investors would have received closer to 60% of profits.</p>
<hr>
<h2>Do ‘nearly 80% of bank profits go straight back to shareholders’?</h2>
<p>The Australian Bankers’ Association (ABA) is an advocacy group representing the interests of the Australian banking industry. The ABA has <a href="https://www.bankers.asn.au/about-us/members/">24 member banks</a>, but the claim about what percentage of profits are paid to shareholders doesn’t cover all of its 24 members.</p>
<p>On the “Australian Banks Belong To You” <a href="https://www.banksbelongtoyou.com.au/">campaign website</a>, the ABA said it based its “nearly 80%” claim on “the dividend payout ratio of the eight key Australian retail banks averaged over 2016 and 2017”, with the numbers sourced from bank annual reports.</p>
<p>Dividends are cash payments that listed companies make to their shareholders. The cash payments are often made regularly. The “dividend payout ratio” is the sum of the dividends paid to shareholders in a year, divided by the sum of the cash earnings the company made.</p>
<p>In other words, the dividend payout ratio is the portion of corporate profits that are paid directly back to shareholders. Companies retain the rest of profits, usually to finance future growth.</p>
<p>While the ABA didn’t name the banks it based its claim on, the eight largest retail banks in the ABA are the Commonwealth Bank, National Australia Bank, ANZ, Westpac, Bank of Queensland, Bendigo Bank, Suncorp and Macquarie Bank.</p>
<p>If we look at dividend payout ratios for those eight banks since 2013, we can see that the overall average payout has consistently hovered around 80% for the past five years. </p>
<p>The same is true of the average payout of the ‘Big Four’ Australian banks – Commonwealth Bank, Westpac, ANZ and National Australia Bank.</p>
<iframe src="https://datawrapper.dwcdn.net/s19mS/3/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<p>In 2012, an outlying dividend payout caused the average dividend payout to appear abnormally high. In the preceding five-year period from 2007 to 2011 payout ratios were lower, as you can see in the chart below. </p>
<iframe src="https://datawrapper.dwcdn.net/ZLkDS/1/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<h2>Do profits ‘belong to everyday Australians’?</h2>
<p>The ABA claimed that of those bank profit distributions, the “majority” go to Australians, including “millions of everyday Australians who own bank shares through their super funds”.</p>
<p>The ABA did not define what it meant by “everyday Australians”. In justifying its claim, the ABA correctly cited Australian Tax Office data that shows that as of June 30, 2016, <a href="https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/Super-accounts-data/Super-accounts-data-overview/">more than 14.8 million</a> Australians had at least one superannuation fund account. </p>
<p>On its website, the ABA stated it’s “safe to say that many super funds invest in Australian bank shares as part of their portfolio”. </p>
<p>Superannuation funds do typically hold a balanced portfolio that represents the major members of the Australian Stock Exchange (ASX). A typical superannuation portfolio might invest in bonds, and in a portfolio of the largest 200 stocks on the ASX, which would include the major banks. This can be subject to individuals’ investment preferences.</p>
<p>For example, say the fund invests in the largest 200 companies on the ASX, and invests in proportion to the companies’ size (that is – the largest companies get the largest investment). Then, the big four banks would be <a href="https://au.spindices.com/indices/equity/sp-asx-200">four of the five</a> largest investments.</p>
<p>Obviously, not all superannuation accounts invest in bank stocks, and portfolios can be structured in different ways. For example, some superannuation funds allow their members to invest only in bonds, and people with self managed superannuation funds choose their own investments. </p>
<p>Some wealthy shareholders, and overseas shareholders, also benefit from holding Australian bank shares. As with all companies, shareholders benefit in proportion to their shareholding. Listed banks have no say over whether wealthy Australians, or overseas buyers, purchase their shares.</p>
<p>But it is fair to say that “millions of everyday Australians who own bank shares through their super funds” benefit from dividend payouts. <strong>– Mark Humpherey-Jenner</strong></p>
<h2>Blind review</h2>
<p>The Australian Banking Association claimed that nearly 80% of all Australian bank profits go back to shareholders, and that the majority of those shareholders are everyday Australians who own bank shares through their super funds. </p>
<p>Those claims are valid when read independently, as set out above. But they should not be read together as indicating that nearly 80% of profits go to Australian shareholders.</p>
<p>The proportion of dividends that go back to Australians, either directly or through their investment portfolios, would be less than 80% of bank profits. </p>
<p>Reviewing the investor profiles of <a href="http://shareholder.anz.com/share-registry-profile">ANZ</a>, <a href="https://www.commbank.com.au/about-us/shareholders/shareholder-information/investor-breakdown-by-type-domicile.html">CBA</a>, <a href="https://www.nab.com.au/about-us/shareholder-centre/Share-register-profile">NAB</a> and <a href="https://www.westpac.com.au/about-westpac/investor-centre/westpac-share-information/share-registry-profile/">Westpac</a> shows that on December 31, 2017, Australian investment ranged from 73.5% to 78.79% across the big four banks, and institutional investment, which includes superannuation funds and other financial institutions, represented slightly under half of investors.</p>
<p>The high representation of domestic institutional holdings demonstrates the significance of bank shares in most investment portfolios, including superannuation funds.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=184&fit=crop&dpr=1 600w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=184&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=184&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=231&fit=crop&dpr=1 754w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=231&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=231&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Foreign ownership of Australian banks. NAB presents the data in a different way to the other banks.</span>
<span class="attribution"><span class="source">Author provided based on reports from ANZ, CBA, NAB, Westpac</span></span>
</figcaption>
</figure>
<p>So if a dividend had been paid on 31 December 2017 for Australia’s ‘Big Four’ banks, non-resident investors would have received between 21.21% and 26.5% of that dividend declared, meaning Australian investors would have received closer to 60% of profits. <strong>– Helen Hodgson</strong></p>
<hr>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&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 Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
</figcaption>
</figure>
<p><em>The Conversation’s FactCheck unit is the first fact-checking team in Australia and one of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/88156/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner has investments in superannuation funds that hold a diversified portfolio of stocks, which includes banks.</span></em></p><p class="fine-print"><em><span>Helen Hodgson has investments in superannuation funds that have a diversified portfolio of shares, including banks. Helen Hodgson receives funding from AHURI and the ARC. Helen is a member of the Social Policy Committee and a Director of the National Foundation for Australian Women, and is on the Tax and Superannuation Advisory Panel of ACOSS. Helen was a Member of the WA Legislative Council in WA from 1997 to 2001, elected as an Australian Democrat. She is not a current member of any political party. </span></em></p>The Australian Banking Association says ‘nearly 80% of bank profits go straight back to shareholders’, the majority of whom are ‘everyday Australians’. Is that right?Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/883912017-11-30T19:06:55Z2017-11-30T19:06:55ZBroad mandate for financial services royal commission takes the heat off banks<p>It does seem anomalous that the major banks have now become supporters of the royal commission into financial services, given they have been the principal targets. But the alternatives are probably less palatable, particularly if the banks think that all past major issues of misconduct and immoral behaviour have already been brought to light. And the broadening of the terms of reference beyond banking may dilute the focus on the banks themselves.</p>
<p>The banks <a href="http://www.asx.com.au/asxpdf/20171130/pdf/43pr4y07l7v0v6.pdf">argue that ongoing speculation</a> and uncertainty are creating unnecessary costs and distractions for them, and that is most likely the case. Even if the major banks were to spend A$100 million in dealing with the royal commission that is less than 0.3% of the annual profits of the majors – so it has little impact on shareholder returns. </p>
<p>And with annual interest expenses in the order of <a href="http://www.apra.gov.au/adi/Publications/Documents/2908-QADIPS-Jun-2017-PDF.pdf">A$65 billion</a>, a cost of A$100 million or so could be quickly offset by improvements in bank borrowing costs from resolution of uncertainty. Whether the government spending a similar sum of taxpayer money on a royal commission is worthwhile is another matter.</p>
<h2>Terms of reference too broad</h2>
<p>The <a href="https://cdn.tspace.gov.au/uploads/sites/72/2017/11/DRAFT-TERMS-OF-REFERENCE.pdf">draft terms of reference</a> of the royal commission ask it to focus primarily on three issues involving financial service entities. One is the essentially legal issue of identifying past cases of misconduct in violation of regulations and laws, as well as what might be termed “misbehaviour” (legal but immoral or unethical or unfair activities). </p>
<p>One apparent omission in the draft terms of reference relates to credit – and lending has been a <a href="https://theconversation.com/mortgage-brokers-asic-goes-fishing-60040">major problem area in the past</a>. While bank lending is covered, the definition of financial services entities to be considered does not appear to include those (such as mortgage brokers and some lenders) who only require an Australian Credit Licence and not an Australian Financial Services Licence (AFSL). Likewise, some financial services entities are exempt from the AFSL requirement and that may prove problematic if the draft terms of reference are not amended.</p>
<p>The boards and senior management of the banks (and other entities) no doubt hope there are no hidden skeletons in the closets which may be uncovered to shock them, and that revisiting the known past problems will be a case of yesterday’s news.</p>
<p>Although the term “misbehaviour” strays into grey areas of defining consistency with “community standards and expectations”, identifying past misconduct is a task suitable for a royal commission. But it shouldn’t be needed. ASIC and other regulators have adequate powers (if not adequate resources) to identify and prosecute misconduct. The adequacy of those powers is also a topic for the commission.</p>
<p>The second major task of the royal commission is to identify whether misconduct and misbehaviour can be attributed to poor culture and governance practices. This is particularly problematic.</p>
<p>What evidence is to be used to show, beyond reasonable doubt, that there is a causal relationship from the amorphous, non-quantifiable, concepts of culture and governance to specific instances of, or general proclivity towards, misconduct? There’s also undoubtedly many positive behaviours and outcomes occurring within these institutions they could point to, which may imply that, on balance, the arrangements are not bad. </p>
<p>So, the third question the commission then faces, is what changes might be made to reduce these problems. Here, the danger is that it involves a step into the unknown – what would be the likely outcomes under any proposed changes. </p>
<p>In its task of making recommendations, the commission faces a number of other difficulties. There is a raft of <a href="https://theconversation.com/budget-2017-lack-of-competition-is-why-government-is-moving-so-hard-against-the-banks-77397">regulatory changes in progress</a> following on from the <a href="http://fsi.gov.au/publications/final-report/">2014 Financial Services Inquiry</a> and other government <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">policy initiatives</a>. </p>
<p>Also relevant is the financial technology or “fintech” revolution creating new business models, products and services, and methods of customer interaction with financial services entities. These create potential for new types of misconduct and misbehaviour. How relevant lessons the royal commission draws from history will be for this new world is unclear.</p>
<p>The banks will no doubt be pleased that the scope of the royal commission encompasses most of the financial services sector rather than focusing primarily upon them. In particular, the <a href="https://cdn.tspace.gov.au/uploads/sites/72/2017/11/DRAFT-TERMS-OF-REFERENCE.pdf">reference to superannuation fund trustees</a> and use of member funds would seem to bring the controversial issue of fund governance right to the fore and will partly distract attention from the banks.</p><img src="https://counter.theconversation.com/content/88391/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>Broadening the royal commission beyond banking may dilute the focus on the banks themselves.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/883872017-11-30T05:17:27Z2017-11-30T05:17:27ZWhy the big four asked for a parliamentary inquiry into banking<p>The major Australian banks are following familiar public relations tactics in <a href="http://www.asx.com.au/asxpdf/20171130/pdf/43pr4y07l7v0v6.pdf">requesting</a> a parliamentary commission of inquiry into banking and financial services. </p>
<p>When the public mood is against an industry, it will try to win the public over, while getting the politicians to ignore the public mood. If that fails, the industry gradually concedes ground until attention goes elsewhere.</p>
<p>For this reason, the banks went from being steadfastly against a commission, to offering the option of self-regulation, to proposing a new “<a href="http://www.smh.com.au/federal-politics/political-news/are-we-getting-a-royal-commission-a-commission-of-inquiry-or-a-banking-tribunal-20171127-gztf1u.html">banking tribunal</a>”, to eventually conceding, after the battle had <a href="http://www.abc.net.au/news/2017-11-30/analysis-malcolm-turnbull-hates-the-inquiry-but-it-had-to-happen/9210246">already been lost</a>, to a parliamentary inquiry.</p>
<p>The big problem for the banks, and a big part of the reason that their previous lobbying failed, is that their popularity with the Australian public <a href="https://www.theguardian.com/australia-news/2017/nov/27/most-australians-want-banking-royal-commission-guardian-essential-poll">is very low</a>. This allowed, or pressured, politicians to call for the commission, and presents significant problems for the banks going forward, especially if they wish to avoid tougher regulation. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/royal-commissions-how-do-they-work-10668">Royal commissions: how do they work?</a>
</strong>
</em>
</p>
<hr>
<p>The banks capitulated only once it became “<a href="http://www.theage.com.au/federal-politics/political-news/banking-inquiry-all-but-inevitable-after-another-nationals-mp-vows-to-cross-floor-20171127-gztm8l.html">all but inevitable</a>” that an inquiry of some sort would be held. </p>
<p>Due to the recent <a href="https://theconversation.com/the-dual-citizenship-saga-shows-our-constitution-must-be-changed-and-now-87330">citizenship saga</a>, it was <a href="https://theconversation.com/turnbull-backed-against-the-wall-by-rebel-nationals-on-bank-inquiry-88183">looking likely</a> that a coalition of crossbench, Labor, Greens and some Nationals MPs would pass a bill for a commission of inquiry into the banks and other financial institutions.</p>
<p>Labor had <a href="https://theconversation.com/labor-pledges-royal-commission-into-bank-behaviour-57490">already promised</a> to set up a royal commission into the banking and financial services industry if it won the next election. </p>
<h2>Concede ground only when it’s already lost</h2>
<p>A royal commission will almost certainly bring many <a href="https://theconversation.com/banking-royal-commission-will-expose-the-real-cost-of-bad-behaviour-88380">months of bad press for the banks</a>.</p>
<p>As the industry has repeatedly made clear, it never wanted a royal commission. The banks claimed they had corrected the mistakes of the past and that a commission was “<a href="http://www.asx.com.au/asxpdf/20171130/pdf/43pr4y07l7v0v6.pdf">unwarranted</a>”.</p>
<p>So the banking industry’s public and private lobbying efforts were geared towards convincing politicians to resist calls for the commission, while trying to boost public opinion by <a href="https://www.youtube.com/watch?v=_rtRi2b1Pxg&list=PLE017CFFB36B6CA94">highlighting</a> their corporate social responsibility. </p>
<p>This involved <a href="http://www.abc.net.au/news/2017-08-14/commonwealth-bank-ceo-ian-narev-to-retire-by-july/8803302">sacking executives</a> over this scandal or that, <a href="https://theconversation.com/atm-fees-may-be-gone-but-what-will-replace-them-84594">removing</a> certain ATM fees, and <a href="http://www.abc.net.au/news/2017-08-08/commonwealth-bank-to-cut-executive-bonuses-director-fees/8784030">cutting</a> bonuses and director pay.</p>
<p>The banks have also launched advertising campaigns, <a href="https://www.youtube.com/watch?v=GOMtRAPiJfI">such as one</a> highlighting that many Australians own bank shares through their superannuation. </p>
<p>Concurrently, the banks hoped that <a href="http://www.smh.com.au/federal-politics/political-news/it-would-cost-them-seats-banks-refuse-to-rule-out-mining-taxstyle-campaign-against-royal-commission-20160412-go4ay8.html">threatening</a> to launch a “mining tax”-style ad campaign might scare politicians away from calling for a commission. </p>
<p>These campaigns have become <a href="http://www.abc.net.au/radionational/programs/breakfast/farmers-and-small-business-threaten-mining-tax/8751512">a common threat</a> since the success of the <a href="https://www.youtube.com/watch?v=AounsLUEpc8">2010 mining tax campaign</a> opened corporate Australia’s eyes to the potential effectiveness of advocacy ads.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/banking-royal-commission-will-expose-the-real-cost-of-bad-behaviour-88380">Banking royal commission will expose the real cost of bad behaviour</a>
</strong>
</em>
</p>
<hr>
<p>Tactics similar to those the banks are employing now have been <a href="https://theconversation.com/how-big-tobacco-gifted-campaigns-of-misdirection-and-misinformation-to-the-gun-lobby-45108">used to varying degrees</a> of success in the United States by the tobacco industry and the gun, finance and healthcare lobbies. </p>
<p>In 1998 the American tobacco industry <a href="http://tobaccocontrol.bmj.com/content/8/4/437.full">agreed</a> to make payments of over US$200 billion to dozens of states. But this happened only after decades of public education and campaigning against smoking. </p>
<p>Similarly, the American healthcare lobby successfully fought off several <a href="https://www.ncbi.nlm.nih.gov/pubmed/7989016">attempts</a> to reform healthcare. Obamacare managed to pass in 2010 only after the industry got to <a href="http://www.nytimes.com/2013/09/18/us/politics/reaping-profit-after-assisting-on-health-law.html">substantively write it</a>.</p>
<h2>The public relations game</h2>
<p>Appearing to co-operate and atone is the best way to try to influence the terms of an inquiry. It also helps to mitigate the worst of any bad press to come. This reflects a wider, pragmatic strategy of lobbying and public relations employed by the banks and other industries.</p>
<p>The focus for the banks will now shift towards damage control, along with heavy promotion of the banks “doing the right thing” by Australia. </p>
<p>To that end, expect to see even more banners proclaiming a bank’s sponsorship of the local footy team, and ads promoting the good work done in your local community. </p>
<p>These, along with an insistence that the commission is a witch hunt, that its findings are “old news”, that the banks have already taken steps to deal with the issue, will underpin the industry’s public relations battle while the royal commission takes place.</p><img src="https://counter.theconversation.com/content/88387/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>George Rennie 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>Appearing to co-operate is the best way to try to influence the terms of an inquiry and manage the bad press.George Rennie, Lecturer in American Politics and Lobbying Strategies, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/873192017-11-15T21:28:09Z2017-11-15T21:28:09ZThe public should be ‘shocked, dismayed and disgusted’ at the major banks<figure><img src="https://images.theconversation.com/files/194740/original/file-20171115-11234-330fag.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">ANZ and NAB have settled with ASIC over manipulation of the Bank Bill Swap Rate.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The Australian public should be dismayed and disgusted that the major banks are still attempting to cover up the <a href="https://theconversation.com/asic-finally-pulls-the-bbsw-trigger-on-anz-55766">extent of their complicity</a> in manipulating the Bank Bill Swap Rate (BBSW), a key interest rate benchmark. </p>
<p>For years, the banks covered up the involvement of their traders in manipulating not only interest rate but also foreign exchange benchmarks, by attempting to outspend the corporate regulator, ASIC, in the courts, using shareholders’ money. </p>
<p>Faced with publication of the evidence they <a href="http://www.smh.com.au/business/banking-and-finance/public-should-be-shocked-judge-clears-nab-anz-100m-raterigging-settlements-20171110-gziufh.html">caved in at the very last minute</a> to settle with ASIC, paying even more shareholders’ funds, for fines and legal costs. </p>
<p>Has any director or senior manager taken personal responsibility, <em>or even apologised</em>, for either the rampant misconduct or the failure to monitor it – No! </p>
<h2>Little contrition</h2>
<p>In a <a href="http://www.media.anz.com/phoenix.zhtml?c=248677&p=irol-news&nyo=0">short media release</a>, ANZ acknowledged, with little contrition, that </p>
<blockquote>
<p>in the course of trading on the BBSW market, a small number of traders attempted to engage in unconscionable conduct on ten dates between September 2010 and February 2012. ANZ also did not have in place adequate policies and systems to monitor trading and communications of its BBSW traders.</p>
</blockquote>
<p>But we should not be fooled by the references to the “small number of traders”, or “ten dates”. </p>
<p>Last year, CBA and NAB <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/">agreed</a> to enforceable undertakings with ASIC in relation to manipulating the foreign exchange benchmark, which was <a href="https://theconversation.com/explainer-how-bankers-fixed-forex-trades-and-why-its-criminal-37525">arguably much more egregious</a> than the BBSW manipulation, as it involved <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/">sharing of information</a> with other market participants, in particular sensitive information about clients’ trades. </p>
<p>Not one of the directors or senior managers of these banks took personal responsibility for the actions of their staff or their collective failure to monitor such obvious misconduct. </p>
<p>The <a href="http://www.heraldsun.com.au/business/judge-slams-banks-for-trying-to-rig-lending-rate/news-story/8432927f62e431916f2cb8c9e099e6f8">agreement between ASIC, NAB and ANZ stipulates</a> that </p>
<blockquote>
<p>Traders involved in the breaches will have to be retrained before they are allowed back on their banks’ trading floors</p>
</blockquote>
<p>Trading on nonpublic confidential information, which is what “manipulating the bank bill swap rate to their advantage and the disadvantage of others” was, is often punished by <a href="http://www.abc.net.au/news/2017-04-28/businessman-jailed-over-insider-trading/8481724">custodial sentences</a> not some short court-ordered training course. This would just reiterate the rules that the traders <a href="https://afma.com.au/afmawr/_assets/main/LIB90010/Code%20of%20Conduct%20-%20GUIDELINES.pdf">should have been following anyway</a> and which diligent management should have been enforcing.</p>
<p>The failure to monitor staff seems not to have slowed the progress of some senior managers. For example, ANZ CEO <a href="http://shareholder.anz.com/personnel/shayne-elliott-management">Shayne Elliot</a>, was head of ANZ’s Institutional Bank (i.e. trading operations) during most of the period in which the unconscionable conduct took place.</p>
<h2>Why did they pursue the court cases?</h2>
<p>So what were the boards of directors of some of Australia’s largest companies doing while this failure to monitor unconscionable conduct was going on? </p>
<p>While neither superstar chairmen Ken Henry (NAB) nor David Gonski (ANZ) were in place during the original misconduct, they have been in place since 2014 and have had ample opportunity to inquire into the details of the scandal. </p>
<p>Having read the same evidence as Justice Jagot, directors chose to proceed with the case before caving in on the day it was due to be heard in court. Investors should be tearing their hair out at such colossal waste of money on high-priced (and in the end useless) lawyers.</p>
<p>The <a href="https://theconversation.com/dont-believe-the-hype-our-own-libor-scandal-could-be-in-the-wings-12652">LIBOR</a> and <a href="http://www.reuters.com/article/us-eu-commission/eu-commission-fines-banks-2-3-billion-for-benchmark-rigging-idUSBRE9B309Q20131204">foreign exchange</a> scandals cost overseas banks billions of dollars in fines. </p>
<p>Did they really <a href="https://theconversation.com/bbsw-too-dumb-to-understand-57425">believe this time was different</a>, given that other banks had <a href="http://www.abc.net.au/news/2013-03-05/ubs-cheats-target-key-australian-interest-rate/4553564">already pleaded guilty</a> to manipulating BBSW? Even if they were not in place at the time, the non-executive directors of both banks are certainly responsible for continuing this expensive charade.</p>
<p>Such lack of oversight should surely trigger the first investigation when the new Banking Executive Accountability Regime (BEAR) legislation <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">comes into force</a>, as it covers directors and senior managers.</p>
<h2>Pulling no punches</h2>
<p>Federal Court Justice Jayne Jagot certainly pulled no punches in her statutory approval of the settlement between ASIC and the ANZ and NAB banks, saying that the Australian public should be “<a href="http://www.smh.com.au/business/banking-and-finance/public-should-be-shocked-judge-clears-nab-anz-100m-raterigging-settlements-20171110-gziufh.html">shocked, dismayed and disgusted</a>” by the behaviour of the two banks.</p>
<p>The Australian public is right to be perplexed as to why no one considers themselves personally accountable for such a fiasco. And investors must be afraid that in pursuing the failed litigation so far, without apologising, that further harm is not done by <a href="http://www.abc.net.au/news/2016-08-18/anz-nab-bbsw-us-class-action/7763178">possible class action litigation</a> in the United States. </p>
<p>The Australian taxpayer would be justifiably annoyed to learn that the offences admitted by the banks took place between 2010 and 2012, when the very same banks were given the free handout of a <a href="https://www.guaranteescheme.gov.au/qa/deposits.html">government guarantee</a> following the global financial crisis (GFC) - that really is biting the hand that feeds you.</p>
<p>So, should Australian investors, taxpayers and the public be “shocked, dismayed and disgusted” as the judge suggested? Yes.</p>
<p>But recent history suggests that the largest banks will just try to tough it out before returning to their previous modus operandi. Only a <a href="https://theconversation.com/its-time-for-a-royal-commission-into-banking-regulation-86518">royal commission into banking regulation</a> will break this vicious circle.</p><img src="https://counter.theconversation.com/content/87319/count.gif" alt="The Conversation" width="1" height="1" />
The major banks have tried to downplay their role in manipulating the BBSW interest rate benchmark. But this is not the first instance of bad behaviour.Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/865182017-11-08T02:32:24Z2017-11-08T02:32:24ZIt’s time for a royal commission into banking regulation<p>The handling of recent financial scandals show that regulators are confused about what they do, or <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">should do</a>. And as a result the regulation of the financial system, which is vital to a strong functioning economy, is just not working effectively. </p>
<p>We can see the problem in the recent <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F61c9ed97-7db3-4a67-a14e-a5114c0258b8%2F0000%22">testimony to the House Economics Committee</a>. Recounting the sequence of events that led the Commonwealth Bank to inform regulators of the <a href="http://www.austrac.gov.au/media/media-releases/austrac-seeks-civil-penalty-orders-against-cba">alleged breaches of money-laundering legislation</a>, CBA Chair Catherine Livingstone said:</p>
<blockquote>
<p>We were having board meetings at the time I was being called to Canberra by the Treasurer. When the board meeting, which went over multiple days, finished, which was lunchtime on the Wednesday, I immediately phoned the other two regulators, ASIC and APRA.</p>
</blockquote>
<p>This raises a raft of questions. Having known about the allegations of money laundering since 2015, why did CBA not inform the regulators until August 2017? Why did the treasurer warn CBA before CBA talked to the two regulators? When did the Treasurer first hear of the money-laundering breaches? And why did the treasurer not instruct AUSTRAC (an agency of the <a href="https://www.ag.gov.au/CrimeAndCorruption/AntiLaunderingCounterTerrorismFinancing/Pages/AUSTRAC.aspx">Attorney General’s department</a>) to inform <a href="http://asic.gov.au/about-asic/what-we-do/our-role/statements-of-expectations-and-intent/statement-of-expectations-april-2014/">ASIC</a> and <a href="http://www.apra.gov.au/AboutAPRA/Documents/140417-SOE-APRA-Statement-of-Expectations.pdf">APRA</a>? </p>
<p>In a previous parliamentary hearing, Greg Medcraft, Chairman of ASIC, had <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F61c9ed97-7db3-4a67-a14e-a5114c0258b8%2F0000%22">said</a>:</p>
<blockquote>
<p>I met two days before with the chairman of the Commonwealth Bank, the chair of risk and the chair of the audit committee… There was no mention of what happened. Then I saw the announcement and, about a week later, the chair called me in to apologise. Timeliness and transparency are big issues in this one</p>
</blockquote>
<p>So, either ASIC and/or APRA were aware of the allegations of money laundering at CBA and took no action <a href="http://www.abc.net.au/news/2017-08-28/commonwealth-bank-to-face-independent-inquiry-apra/8848004">until prompted</a> by the treasurer, or the communications between the various agencies of government are not working as planned. Either way, this is no way to regulate a modern financial system.</p>
<h2>Even more regulatory confusion</h2>
<p>Just as he is due to <a href="http://www.abc.net.au/news/2017-10-17/asic-james-shipton-to-replace-greg-medcraft/9057190">leave his role as head of ASIC</a>, Greg Medcraft managed to end two high profile cases with modest wins. </p>
<p>Both <a href="http://www.afr.com/business/banking-and-finance/why-anz-and-nab-settled-asics-bbsw-case-20171026-gz9d90">ANZ Bank</a> and <a href="http://www.smh.com.au/business/banking-and-finance/nab-admits-staff-wrongdoing-as-it-settles-bbsw-20171027-gz9zva.html">NAB</a> have settled with ASIC for their parts in <a href="https://theconversation.com/years-on-asic-still-grappling-with-swap-rate-fixing-scandal-35851">manipulating the BBSW intereset rate benchmark</a>. Although the settlement remains to be approved by the Federal Court. </p>
<p><a href="http://www.abc.net.au/news/2017-10-25/rate-rigging-trial-adjourned-anz-nab-finalise-settlement/9083894">Westpac</a> remains the hold out, and the <a href="http://www.smh.com.au/business/banking-and-finance/westpac-traders-talked-openly-about-rigging-interest-rate-asic-alleges-20171030-gzbgx6.html">prosecution’s case has opened</a> in the Federal Court.</p>
<p>But in the euphoria at ASIC, a niggling question remains – what about the Commonwealth Bank?</p>
<p>For some time, Medcraft has <a href="http://www.theaustralian.com.au/business/opinion/john-durie/asic-and-cba-hold-their-ground-on-bank-bill-swap-rate-case/news-story/9b50dc7f7628ac630ac37c11e0e2ce33">warned</a> that action against CBA had not been ruled out and that <a href="http://www.smh.com.au/business/banking-and-finance/cba-braced-for-fourth-rate-rigging-case-20160608-gpecc4.html">information was being gathered</a>. Recently Medcraft confirmed that the regulator had “plenty of time” to <a href="http://www.financialservicescareer.com.au/news/regulator-circling-cba">take action against CBA</a>.</p>
<p>This also raises a number of questions. Not least why ASIC has not filed claims against CBA or announced that there would be no action taken against the bank. If CBA has no case to answer then ASIC should come out and exonerate the bank and relieve its long-suffering shareholders. </p>
<p>But if CBA has even a minor case to answer, and the regulator has held off hoping that the bank would settle without going to court, then ASIC may have been much too clever for their own good.</p>
<p>As a result of a <a href="http://www.abc.net.au/news/2017-08-23/commonwealth-bank-faces-shareholder-class-action/8833860">shareholder action</a> following the alleged money-laundering scandal, ASIC is <a href="http://www.abc.net.au/news/2017-08-11/asic-to-investigate-cba/8796542">now looking at</a> whether the CBA board “complied with continuous disclosure laws when it decided not to alert investors to the suspicious behaviour”.</p>
<p>This leaves ASIC in an extremely difficult position - looking at a possible failure to disclose the money-laundering scandal at CBA, while at the same time hinting that CBA may have done the same thing with BBSW.</p>
<p>But ASIC is not the only regulator to be operating in the dark. The latest Banking Executive Accountability Regime (BEAR) legislation only adds to the <a href="https://theconversation.com/bankings-new-bear-is-a-teddy-bear-not-a-grizzly-85687">confusion</a> on how best to regulate financial services.</p>
<p>When questioned in recent <a href="http://parlinfo.aph.gov.au/parlInfo/download/committees/estimate/c419b06c-d059-4ecb-b033-6d08bd9b7c6d/toc_pdf/Economics%20Legislation%20Committee_2017_10_26_5679.pdf;fileType=application%2Fpdf#search=%22rowell%22">Senate Estimates</a> about the regulatory impact statements that have been done for <a href="https://www.legislation.gov.au/Details/C2017B00229/Explanatory%20Memorandum/Text">new BEAR legislation</a>, Helen Rowell, deputy Chair of APRA, replied that she personally had “not seen them; I couldn’t say whether anyone else within APRA has seen them”. </p>
<p>This is despite the fact that APRA has been given an extra A$40 million over four year to handle the new legislation - for what, and where did this figure come from? </p>
<p>Again, this is no way to regulate a banking system. The confusion around what regulators do and how they do it, must be sorted out. </p>
<h2>Where next?</h2>
<p>The most obvious answer to clearing up this mess is to initiate a royal commission that looks specifically at banking regulation. In particular, what form a modern banking regulation system should take; which regulators should do what; what the responsibilities of parliament, ministers and regulators should be; and how regulators should share information and tackle common problems (such as <a href="https://theconversation.com/why-bankers-so-often-fail-to-comply-with-policies-and-regulations-82159">banking culture</a>).</p>
<p>Such a royal commission should concentrate on clearing up issues of regulatory philosophy, structure, legal requirements and administration. Whether or not there is an <a href="http://www.abc.net.au/news/2017-10-30/coalition-mps-may-cross-floor-for-banking-royal-commission/9100838">all-purpose banking royal commission</a>, the failures in the current system have to be remedied.</p>
<p>Of course, the government has only got itself to blame for getting in this mess. </p>
<p>The government’s own <a href="http://fsi.gov.au/">Murray Inquiry into the Financial System</a> made a recommendation that could have helped. The inquiry recommended the establishment of a new <a href="https://theconversation.com/to-clean-up-the-financial-system-we-need-to-watch-the-watchers-38359">Financial Regulator Assessment Board</a> (FRAB), which would:</p>
<blockquote>
<p>advise government annually on how financial regulators have implemented their mandates. Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.</p>
</blockquote>
<p>Sounds sensible? Not to the government, as it chose to accept all of the major recommendations of David Murray’s inquiry <a href="https://treasury.gov.au/publication/government-response-to-the-financial-system-inquiry/attachment-government-response-to-financial-system-inquiry-recommendations/">except for this one</a>. </p>
<p>And, instead of having one professional body that looks at the performance of regulators, there has been a nonstop procession of “independent” inquiries, by <a href="https://www.commbank.com.au/guidance/newsroom/comminsure-releases-deloitte-report-into-claims-handling-201702.html">banks themselves</a>, the <a href="https://www.bankers.asn.au/media/media-releases/media-release-2016/review-into-retail-banking-remuneration-begins">banking industry </a>and even <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">regulators</a>. No big picture, just a patchwork of unconnected recommendations. And undoubtedly <a href="http://www.heraldsun.com.au/business/bank-chiefs-deny-raterise-gouging-at-parliament-hearing/news-story/0cedbd4a36dc41a731780a8054ff8524">more to come</a>. </p>
<p>An opportunity missed.</p><img src="https://counter.theconversation.com/content/86518/count.gif" alt="The Conversation" width="1" height="1" />
Parliamentary hearings reveal a lot of confusion between government, regulators and industry around banking regulation. This needs to be fixed.Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/855912017-10-12T19:12:49Z2017-10-12T19:12:49ZVital Signs: the spooky mortgage risk signs our bankers are ignoring<figure><img src="https://images.theconversation.com/files/189912/original/file-20171012-9782-l9frs1.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There are signs our frothy housing market, combined with rising interest rates, could have serious consequences for our economy.</span> <span class="attribution"><span class="source">Nick Vidal-Hall/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: the big banks front a parliamentary review but remain blinkered on the risks of the many interest-only loans they’ve funded.</em></p>
<hr>
<p>I’m not normally a fan of parliament hauling private sector executives before them and asking thorny questions. But when the Australian House of Representatives did so <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2Faf124b58-f8c9-4d0f-81ef-23504fcea693%2F0002%22">this week with the big banks</a> it was both useful and instructive.</p>
<p>And, to be perfectly frank, terrifying.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/four-ways-an-australian-housing-bubble-could-burst-76505">Four ways an Australian housing bubble could burst</a>
</strong>
</em>
</p>
<hr>
<p>Let’s start with Westpac CEO Brian Hartzer. First, he confirmed the little-known but startling fact that <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;db=COMMITTEES;id=committees%2Fcommrep%2Faf124b58-f8c9-4d0f-81ef-23504fcea693%2F0001;query=Id%3A%22committees%2Fcommrep%2Faf124b58-f8c9-4d0f-81ef-23504fcea693%2F0002%22">half</a> of his A$400 billion home loan book consists of interest-only mortgages.</p>
<p>Yep, half. Of A$400 billion. At one bank. Oh, and ANZ, CBA and NAB are all nearly at 40% interest-only.</p>
<p>Hartzer went on to make the banal statement: “we don’t lend to people who can’t pay it back. It doesn’t make sense for us to do so.”</p>
<p>So did it make sense for all those American mortgage lenders to lend to people on adjustable rates, teaser rates, low-doc loans, no-doc loans etc. before the global financial crisis?</p>
<p>Of course not. The point is that banks are not some benevolent, unitary actor taking care of their own money. There are top managers like Harzter acting on behalf of shareholders. Those top managers delegate authority to lower-level managers, who are given incentives to write lots of mortgages. And, as we know, the incentives of those who make the loans are not necessarily aligned with those of the shareholders. Those folks may well want to make loans to people who can’t pay them back as long as they get a big payday in the short term.</p>
<p>ANZ CEO Shayne Elliot repeated Hartzer’s mantra, saying: “It’s not in our interest to lend money to people who can’t afford to repay.” Recall, this is the man who <a href="http://www.abc.net.au/4corners/betting-on-the-house/8816724">on ABC’s Four Corners</a> said that home loans weren’t risky because they were all uncorrelated risks (the chances that one loan defaults does not affect the chances of others defaulting). That is a comment that is either staggeringly stupid or completely disingenuous.</p>
<p>Messers Harzter and Elliot must take us all for suckers. They have made a huge amount of interest-only loans, at historically low interest rates, to buyers in a frothy housing market, who spend a large chunk of their income on interest payments. This certainly looks troubling. It may not be US sub-prime, but it could be ugly. Very ugly.</p>
<p>To put it in context, there appears to be in the neighbourhood of A$1 trillion of interest-only loans on the books of Australian banks. I say “appears to be” because reporting requirements are so lax it’s hard to know for sure, except when CEOs cough up the ball, like this week.</p>
<p>The big lesson of the US mortgage meltdown is that the risks on these mortgages are all correlated. If a few people aren’t paying back an interest-only loan, that is a fair predictor that others won’t pay back their loans either. Yet it seems Australian banks are a decade behind the learning curve.</p>
<p>The Reserve Bank cautions that <a href="https://www.rba.gov.au/publications/fsr/2017/apr/pdf/financial-stability-review-2017-04.pdf">one-third of borrowers</a> don’t have a month’s repayment buffer. And where are interest rates going to go from here? Up. It is just a question of when. And when that does happen - or when the interest-only period on loans (typically five years) rolls off and principal payments start having to be made - watch out.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/banks-shouldnt-underestimate-the-risk-of-concentration-in-the-housing-market-82886">Banks shouldn't underestimate the risk of concentration in the housing market</a>
</strong>
</em>
</p>
<hr>
<p>We should all remember that the proximate cause of the US mortgage meltdown was borrowers with five-year adjustable-rate mortgages (ARMs) that had huge step-ups in repayments and needed to be refinanced to be serviceable. When the market couldn’t bear that refinancing, defaults went up. Then the collapse of US investment bank Bear Stearns, then <a href="http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp">Lehman</a>, then Armageddon.</p>
<p>Australia’s large proportion of five-year interest-only loans – turbocharged by an out-of-control negative-gearing regime – looks spookily similar.</p>
<p>It’s one thing for borrowers to do silly things. When it becomes dangerous is when lenders not only facilitate that stupidity, but encourage it. That seems to be what has happened in Australia.</p>
<p>And APRA’s “crackdown” and the Reserve Bank’s warning may be far too little, way too late.</p>
<p>We might stumble though this. I hope we do. But if so, it will be because of dumb luck, not good institutional and regulatory design. And definitely not because of good corporate governance.</p>
<p>Whatever happens, we should learn those lessons.</p><img src="https://counter.theconversation.com/content/85591/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>Fully half of Westpac’s loan book consists of interest-only loans, so why are the banks not more concerned about what could happen next?Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW 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/771042017-05-07T05:33:20Z2017-05-07T05:33:20ZThe agile working style started in tech but it could work for banks<p>The purpose of the “agile” working style is to help businesses adapt to turbulent markets by adopting a fast and flexible approach to work. In one sense, it should come as no surprise that ANZ’s chief executive Shayne Elliot <a href="http://www.afr.com/business/banking-and-finance/anz-blows-up-bureaucracy-as-shayne-elliott-takes-the-bank-agile-20170428-gvumc2">recently announced</a> that ANZ will be shifting parts of its workforce to this style. </p>
<p>With the bank’s <a href="http://www.afr.com/business/banking-and-finance/financial-services/bank-analysts-take-knife-to-anz-earnings-forecasts-20170503-gvxvxk">recent withdrawal from Asia</a> and subsequent lower than expected revenues, this is part of ANZ refocus on its core business. In fact, each of Australia’s big four banks might be looking to become more efficient and responsive in the face of a tightly regulated market and slowly building retail banking competition from newer financial technology companies.</p>
<p>In another sense though, it’s surprising that one of Australia’s largest banks should signal such a profound change in work style. Finance is certainly not where agile got its start.</p>
<h2>The origins of agile</h2>
<p>The forerunners of agile stretch back as far as the <a href="https://hbr.org/2016/04/the-secret-history-of-agile-innovation">Plan-Do-Study-Act</a> method developed by Walter Shewart at Bell Labs in the 1930s and the <a href="http://www.computerworld.com.au/article/340360/it_toyota_way/">Toyota Production System</a>, based, in part, on the quality and systems thinking of Shewart’s student, William Edwards Deming.</p>
<p>However, agile as we understand it today is seen as emerging from software programming communities. It crystallised when 17 software developers gathered at the Snowbird ski resort in Utah in 2001 to share and refine their approaches to software development. </p>
<p>One of the participants had been reading a book on major companies coping with turbulent markets, called <a href="https://www.amazon.com/Agile-Competitors-Virtual-Organizations-Strategies/dp/0471286508">Agile Competitors and Virtual Organizations: Strategies for Enriching the Customer</a>. Drawn to the agile’s connotations of speed and responsiveness, the group eventually adopted it as the moniker for their movement. </p>
<p>They published their views in <a href="http://www.agilealliance.org/">The Manifesto for Agile Software Development</a>, intending to help accelerate developers’ efforts to reliably produce software of the highest quality. Agile has since spread beyond the confines of IT to the other types of work and other organisations.</p>
<h2>How to work in an agile style</h2>
<p>As academics <a href="https://hbr.org/2016/05/embracing-agile">Rigby, Sutherland, and Takeuchi</a> explain, agile now covers a broad range of methods, each varying according to their guiding principles and work rules. The three most well-known methods are scrum, lean, and kanban.</p>
<p><strong>Scrum</strong> focuses on structuring teams to work across functions in a business, using creative and adaptive teamwork, daily stand-up meetings, and project reviews to quickly invent solutions and improve team performance.</p>
<p><strong>Lean</strong> focuses on eliminating waste in systems and does not prescribe work rules to achieve this in the same way as scrum. </p>
<p><strong>Kanban</strong> aims to shorten the time between the initiation and completion of work by visualising workflows, restricting the work being done at each stage in development, and measuring work cycle times to detect improvement.</p>
<p>ANZ seems to be most interested in the scrum method. <a href="http://www.afr.com/business/banking-and-finance/anz-blows-up-bureaucracy-as-shayne-elliott-takes-the-bank-agile-20170428-gvumc2">ANZ’s Head of Product Katherine Bray stated</a>:</p>
<blockquote>
<p>There are vestiges of roles that we recognise, but with the underpinnings of hierarchy totally blown apart…[A scrum coach] is not your boss, that’s a coach, who is a peer. That product owner is not your boss, they’re a product owner who defines the how, and you galvanise around that.</p>
</blockquote>
<p>Going back to the origins of agile and system thinking, it seems clear the agile approach is most likely to succeed where the organisation adopting it possesses <a href="https://www.infoq.com/news/2014/11/agile-modularity">structural modularity</a>. Modularity proposes that organisations structure themselves in a way that allows teams to produce work that is layered, discrete, and testable. </p>
<p>This is what Bray is talking about - a radically new approach to roles and work styles at ANZ. </p>
<p>We might dismiss this whole reorganisation as marketing theatre, but intensifying competition and rapid change are all too real. This means many Australian businesses will have to come to terms with agile approaches if they are to remain responsive and competitive. </p>
<p>By taking up agile’s shift from top-down management to teams that organise themselves, and from a focus on compliance to a focus on innovation, ANZ is making its intent clear. It wants to achieve different results by doing things differently – surely a sane approach to change. </p>
<p>Yet this idea challenges the conventional structure and ethos of banks and similarly run businesses. These organisations are built to be secure and centralised in service of efficiency; modularity pushes them to be integrated and decentralised in service of innovation. </p>
<p>Modularity and agility are not easy to achieve. But they are fast becoming necessary if large companies, like ANZ, are to move with the times and adapt well to market turbulence.</p><img src="https://counter.theconversation.com/content/77104/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 agile working style was originally designed by tech companies for efficiency in software development but now one of Australia’s big four banks wants to implement this.Massimo Garbuio, Senior Lecturer, University of SydneyDreu Harrison, Research Assistant, University of 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/743072017-03-15T19:15:05Z2017-03-15T19:15:05ZNaming and shaming bankers may be satisfying, but could backfire<p>It’s a tempting prospect - to name and shame badly behaving banking executives into doing the right thing by their customers, but when it comes to the evidence for its effectiveness, research is divided. </p>
<p>This idea was brought up again at parliamentary hearings with the CEOs of Australian big four banks. The standing committee on economics’<a href="http://www.aph.gov.au/%7E/media/02%20Parliamentary%20Business/24%20Committees/243%20Reps%20Committees/Economics/45p/Four%20Major%20Banks%202016%20-%20First%20Report/3%20Make%20Executives%20Accountable.pdf?la=en">proposed policy</a> would require banks to “publicly report on any significant breaches of [the Australian Securities and Investments Commission - ASIC’s] license obligations within five business days”. </p>
<p>The report would include a description of the breach and how it occurred, steps that will be taken to ensure that it does not occur again, the names of the senior executives responsible for the division where the breach occurred, and the consequences for those executives. </p>
<p>There are various examples of naming and shaming practices in economic policy, for example ASIC’s public listing of wayward and banned financial advisers and <a href="https://www.cfainstitute.org/about/Pages/index.aspx">the CFA Institute’s</a> listing of accountants who violate the organisation’s standards. However, the effectiveness of these policies has been simply <a href="http://www.afr.com/brand/chanticleer/breach-reporting-a-step-toward-lifting-banking-accountability-20170306-gus651">asserted as effective without providing any support</a>. </p>
<p>To our knowledge, no studies exist that credibly establish a causal relationship between these particular policies and a reduction in the offences they were designed for.</p>
<h2>Shame and human behaviour</h2>
<p>Shame is a self-conscious emotion (as are guilt, pride, and embarrassment). It’s characterised by a sense of <a href="https://books.google.com.au/books/about/Shame.html?id=svN9AAAAMAAJ&redir_esc=y">exposure of personal inadequacy</a> to a devaluing, condemning, even disgusted audience. </p>
<p>Social approval and appreciation are key drivers of human behaviour; therefore, we naturally try to avoid the unpleasant experience and lasting stigma of shame. This makes shaming appear to be a potent instrument for social control, especially for public figures (for example executives and politicians) who depend on their reputation.</p>
<p>There are some policy contexts in which naming and shaming practices targeted at individuals have been evaluated for effectiveness. For example for <a href="https://www.smart.gov/SOMAPI/sec1/ch8_strategies.html">sexual offenses</a> studies have found little to no positive effects, but a high level of public support and public belief in its effectiveness. Likewise for human rights violations research found some <a href="http://www.tandfonline.com/doi/abs/10.1080/03050629.2012.726180">positive effects</a>, but also <a href="http://iojournal.org/sticks-and-stones-naming-and-shaming-the-human-rights-enforcement-problem/">counter-effective side-effects</a>. </p>
<p>The mixed findings can be explained by research on the behavioural effects of shame. There is <a href="https://www.ncbi.nlm.nih.gov/pubmed/18808269">empirical evidence</a> that shame can motivate sharing and helping behaviour.</p>
<p>Some <a href="https://global.oup.com/academic/product/in-defense-of-shame-9780199793532?cc=au&lang=en&">academics</a> contend that shame is a constructive experience, that motivates those who experience it to better themselves, and raises their desire to comply with socially sanctioned standards of behaviour. However, this stands in contrast with decades of findings that shame causes <a href="journals.sagepub.com/doi/abs/10.1177/0002764295038008008">withdrawal and reduced motivation</a>, and can lead to <a href="https://www.ncbi.nlm.nih.gov/pubmed/1583590">hostility and vengeful urges</a>. </p>
<p>These findings substantiate concerns tentatively articulated by NAB’s and ANZ’s CEOs about naming and shaming acting as a disincentive to executives for reporting breaches or taking steps to avoid their re-occurence. </p>
<p>Then there’s <a href="https://books.google.com.au/books?hl=en&lr=&id=iU0kWlBwyhwC&oi=fnd&pg=PR7&dq=%E2%80%9Creintegrative+shaming%E2%80%9D+Australian+National+University%E2%80%99s+John+Braithwaite&ots=j24I_1gal7&sig=-FqyODR4yGIbHSX2lt3Vw2VNYZU#v=onepage&q=%E2%80%9Creintegrative%20shaming%E2%80%9D%20Australian%20National%20University%E2%80%99s%20John%20Braithwaite&f=false">the idea of “reintegrative shaming”</a>, a restorative justice intervention advocated by the Australian National University’s John Braithwaite as an alternative. It combines public disapproval of an offence with respect for the offender and rituals of forgiveness. It seeks to avoid lasting stigmatisation and to restore relationships between the offender and the community. </p>
<p>The empirical record for reintegrative shaming’s effect on recidivism is <a href="http://johnbraithwaite.com/wp-content/uploads/2016/10/SSRN_2016_BraithwaiteJ-revised-51.pdf">mixed in criminology studies</a> (in part due to flawed implementation). It’s also unfortunately too thin in findings on white collar crime specifically, to allow confident predictions about its regulatory effectiveness in the financial services industry. </p>
<p>Ideally politicians, regulators, and industry stakeholders would assess this evidence on shaming in the context of other relevant initiatives (such as the Code of Banking Practice, ASIC enforcement actions) and other policy options (whistleblower protection and reporting of governance effectiveness). Ultimately what needs to be balanced out is the satiating of the popular appetite for humiliating executives and a true commitment to effective regulation for ethical practice.</p><img src="https://counter.theconversation.com/content/74307/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Franz Wohlgezogen has received funding from United States Environmental Protection Agency for his research. He has engaged in consulting, coaching, and teaching for public and private sector organisations. </span></em></p><p class="fine-print"><em><span>The Centre for Ethical Leadership receives funding from several partner organisations, in the private and public sector, including from the Victorian Government for work on the Recruit Smarter initiative. Melissa Wheeler has also engaged in paid and pro-bono consulting and research relating to issues of social justice and gender equality (e.g., Our Watch, Queen Victoria Women’s Centre, National Association of Women in Operations).</span></em></p>Studies have shown that shame can motivate people to be both helpful but also vengeful, so the verdict is still out on whether it curbs bad behaviour.Franz Wohlgezogen, Senior Lecturer of Management and Leadership, The University of MelbourneMelissa A. Wheeler, Postdoctoral Research Fellow, The University of MelbourneLicensed 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/694212016-11-25T06:13:26Z2016-11-25T06:13:26ZBanking inquiry findings – ask the wrong questions get the wrong answers<p>This week, Australia hit a new low point in the politicisation of banking regulation. </p>
<p>In a <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Four_Major_Banks_Review/Report">report</a> into the four major Australian banks, the members of the House Standing Committee on Economics were hopelessly divided along party lines about the answers given to them by the bank CEOs.</p>
<p>The <a href="https://theconversation.com/big-four-bank-chiefs-face-parliamentary-committee-experts-react-66400">grilling</a> of the Big Four CEOs was less Stalinist show trial, than an episode of Australia’s Got Talent. It was, as 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>”. If it wasn’t such an important topic, the whole episode would be farcical.</p>
<p>The members of the government committee tried their best and have produced a set of ten recommendations, some of which are sensible but others betray a naiveté.
For example, in Recommendation 2:</p>
<blockquote>
<p>The committee recommends that, by 1 July 2017, the Australian Securities and Investments Commission (ASIC) require Australian Financial Services license holders to publicly report on any significant breaches of their licence obligations within five business days of reporting the incident to ASIC, or within five business days of ASIC or another regulatory body identifying the breach. [In particular,] the consequences for those senior executives and, if the relevant senior executives were not terminated, why termination was not pursued.</p>
</blockquote>
<p>A significant breach in banking, if detected within five days, would almost certainly result in someone, somewhere getting fired pretty quickly. It’s the misconduct that is not detected for years (such as fraud in financial planning) that really causes the problems for bank customers.</p>
<p>The banks may not even be aware of these issues, even the committee acknowledged this:</p>
<blockquote>
<p><a href="CBA">The Commonwealth Bank of Australia</a> was unaware of serious misconduct – including fraud – in its financial planning division prior to a whistle-blower going public in 2013.</p>
</blockquote>
<p>But the problem goes much deeper than the committee members falling out over what to do - they weren’t even looking in the right place. The committee members were asking the wrong questions of the wrong people, and as a result, the got the wrong answers and made the wrong recommendations.</p>
<p>Section 198A of the Australian Corporations Act clearly <a href="http://www.companydirectors.com.au/membership/the-informed-director/what-are-the-general-duties-of-directors">states</a> that:</p>
<blockquote>
<p>The business of a company is to be managed by or under the direction of the directors.</p>
</blockquote>
<p>So, if the buck stops with the board, why did the committee not question the senior directors of the big banks, in particular the chairmen, <a href="http://aicd.companydirectors.com.au/%7E/media/cd2/resources/director-resources/director-tools/pdf/05446-3-13-mem-director-gr-role-of-the-chair_a4-web.ashx">senior independent directors</a> and chairs of risk committees? </p>
<p>This is precisely what parliamentary committees into various cases of misconduct in the UK banking system did, such as with <a href="https://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/inquiries1/parliament-2015/review-failure-hbos-15-16/">HBOS</a>, <a href="http://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news/treasury-committee-publishes-libor-report/">LIBOR</a> and <a href="http://www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/56/56i.pdf">Northern Rock</a> scandals. The <a href="https://www.oireachtas.ie/parliament/media/committees/inquiryintothebankingcrisis/02106-HOI-BE-Report-Volume1.pdf">Irish parliament</a> did the same for the directors of their largest banks. And, as a consequence of some very brutal questioning, several chairmen and CEOs of these banks fell on their swords.</p>
<p>The House Committee has been very insistent about “<a href="https://au.news.yahoo.com/thewest/a/33311538/banks-must-be-more-accountable-review/#page1">naming and shaming</a>” lower-level executives who commit misdemeanours, why not directors also?</p>
<p>For one thing, it is easy to name the directors of banks. As their roles, responsibilities, CVs and sometimes pictures appear every year in their company’s annual reports. We know how long directors have been in their various roles and, through commentaries in reports, what they are collectively thinking and what remuneration they are receiving.</p>
<p>Australian CEOs come and go, at <a href="http://www.gillianfox.com.au/why-does-australia-have-the-worlds-shortest-ceo-tenure/">increasingly shorter intervals</a>. But once appointed, directors tend to hang around for some time, often the only constants in a long-running scandal.</p>
<p>Perhaps an example might help.</p>
<p>Just this month David Turner, the chairman of the CBA, announced his retirement. In his last (and only) media interview Mr Turner decried the “Trumpism” that was causing “<a href="http://www.afr.com/business/banking-and-finance/cba-chairman-david-turner-on-remuneration-diversity-and-his-legacy-20161104-gsi9rq">bank bashing</a>” in Australia and in an echo of President-Elect Trump himself, blamed the victims:</p>
<blockquote>
<p>“And why don’t we like it? Because there’s some element of life that we feel is slightly unequal, that we’re not totally happy about, and here’s a part that, [banks are] a perfect target.”</p>
</blockquote>
<p>The only admission from Mr Turner was that “maybe” the bank had been slow to pick up the financial planning scandal in 2014. </p>
<p>A look at Mr Turner’s tenure as a director at CBA might give a clue as to why his testimony to a committee in parliament might give some insight into improving the regulation of banking. </p>
<p>David Turner, a chartered accountant by profession, was first appointed a director of CBA a decade ago. In that time, he has shared the boardroom with two CEOs, Sir Ralph Norris and now Ian Narev. In 2010, Mr Turner was appointed chairman and will pass that role onto Ms Catherine Livingstone, another chartered accountant, on New Year’s Day 2017. </p>
<p>Mr Turner’s elevation to chairman occurred at an interesting time. It was just two months after CBA, along with the other Big Four banks, settled a long-running case with the New Zealand Tax authorities for tax avoidance. It was <a href="https://theconversation.com/debunking-the-myth-of-our-well-regulated-banks-9333">collectively the biggest such fines</a> in Australian banking history, CBA <a href="http://www.asx.com.au/asxpdf/20091223/pdf/31my1km4ttyf7m.pdf">coughed up</a> some NZ$264 million as part of it.</p>
<p>In his role as chairman, Mr Turner could not be held to blame for this fine for misconduct, but as a director Mr Turner had signed off on annual reports that insisted that CBA had nothing to answer for in relation to court actions. This was despite that fact that the appeals by CBA and others had been knocked back by <a href="https://theconversation.com/debunking-the-myth-of-our-well-regulated-banks-9333">lower-level courts on several occassions</a> A capacity for not smelling the wind appears to be a necessary attribute for a CBA director.</p>
<p>Mr Turner may have been unlucky, but the New Zealand scandal was not the last that came up at CBA board meetings.</p>
<p>In 2008, CBA acquired Bankwest, a subsidiary of the failing Lloyds bank in the UK. Since then, the bank has been mired in fraud allegations, as customers alleged in a parliamentary inquiry that they were <a href="http://www.smh.com.au/business/comment-and-analysis/cba-threw-its-customers-under-the-bus-20151116-gl0411.html">thrown under the bus</a>. In an echo of the New Zealand case, the bank’s 2016 Annual report, stated the bank expected class actions to be discontinued.</p>
<p>In 2013, whistle blower Jeff Morris brought to the attention of the media the now-famous scandal at <a href="http://www.sbs.com.au/news/article/2014/07/04/explainer-what-commonwealth-bank-has-done-and-how-you-can-fix-it">Commonwealth Financial Planning</a>. In 2014, CBA instituted a compensation scheme, which today is still mired in controversy over CBA <a href="http://www.abc.net.au/news/2015-11-17/cba-flags-long-wait-for-compensation-over-poor-planning-advice/6949712?pfmredir=sm">dragging its feet</a> in paying out customers.</p>
<p>In 2008 a Queensland financial planning firm, Storm Financial, went into liquidation and it was discovered that CBA and most of the other big banks had been lending money to customers to invest with <a href="https://www.themonthly.com.au/issue/2011/february/1299634145/paul-barry/eye-storm">Storm</a>. In 2012, CBA agreed to pay <a href="http://www.smh.com.au/business/banking-and-finance/cba-to-fork-out-136m-in-storm-compensation-20120914-25xan.html">compensation</a> of A$136 million to customers over the Storm collapse. In 2016, the Storm scandal is still alive but <a href="http://www.financialstandard.com.au/news/view/86704577">running out of steam</a>.</p>
<p>In 2014, CBA fessed up to the fact that it had been charging customers for financial advice that had not been given, but as ASIC found this year, the bank has <a href="http://www.afr.com/opinion/columnists/the-banks-get-another-black-mark-20161027-gscdbj">not been very forthcoming</a> in providing customers with compensation. Of course, CBA can truthfully argue that <a href="http://www.afr.com/opinion/columnists/the-banks-get-another-black-mark-20161027-gscdbj">all the other major banks are also avoiding it</a>.</p>
<p>The start of 2016 brought an even bigger scandal at <a href="http://www.abc.net.au/4corners/stories/2016/03/07/4417757.htm">Comminsure</a>, CBA’s Insurance arm, in which sick and dying customers were refused payouts for their illnesses. This was despite the fact that Mr Turner had <a href="http://www.australianbankingfinance.com/banking/cba-saddened-and-disappointed-by-new-scandal/">told shareholders</a> at the previous AGM that “we learnt our lessons from the financial advice situation”.</p>
<p>The final indignity for Mr Turner before retirement was, after having handsomely rewarded CEO Ian Narev with an industry-leading pay packet of some A$12.3 million, the bank’s remuneration report <a href="http://www.smh.com.au/business/banking-and-finance/commbank-caves-in-to-pressure-pulls-plan-to-pay-ceo-ian-narev-a-culture-bonus-20161108-gsl2ly.html">was knocked back by its shareholders</a>. Last year Mr Turner earned considerably less than Mr Narev, but nonetheless <a href="https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/2016-asx/2016_Annual_Report_to_Shareholders_15_August_2016.pdf">took home</a> a not insubstantial A$800,000.</p>
<p>While there is no way that Mr Turner can be seen to be involved personally in these scandals, he has been a director and chairman throughout this period. And the questions he and other directors have to answer, is why did they not see these scandals coming and when the scandals erupted, why did the CBA board have to be dragged kicking and screaming into compensating their customers?</p>
<p>Nor is Mr Turner alone in presiding over disasters. The directors of all of the Big Four banks have, as the House Committee report shows, had their own scandals of tax avoidance, bad financial advice and accusations of market manipulation.</p>
<p>Unfortunately, there is no forum, other than a bank’s AGM, where such questions can be posed and answers demanded.</p>
<p>CEOs are only passing through but directors are there for the long-haul. A CEO, such as Ian Narev cannot reasonably be held responsible for the actions or non-actions of his predecessors but as their direct employers, directors can be questioned as to performance of executives and actions taken or not taken to control staff. </p>
<p>Next time, if there is a next time, the senior directors of the Big Four banks should be requested to attend the committee. Furthermore they should be questioned as a group over two days so that better use can be made of the time available and truly systemic issues can be investigated.</p>
<p>And if a Banking Royal Commission is instituted, the terms of reference should include questioning the key directors in every bank. That will make them sit up and think in the meantime.</p><img src="https://counter.theconversation.com/content/69421/count.gif" alt="The Conversation" width="1" height="1" />
Members of House Standing Committee on Economics should be asking the directors of Australia’s Big Four banks (not the CEOs) different questions, if they really want the right answers.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/692202016-11-22T19:27:02Z2016-11-22T19:27:02ZBusiness Briefing: fixing culture in banking and finance<p>Australian banks have been under intense scrutiny this year after <a href="https://theconversation.com/a-history-of-failed-reform-why-australia-needs-a-banking-royal-commission-64803">various scandals</a> called into question the culture of the industry. But it seems there’s no easy answer to improving culture.</p>
<p>Professor Paul Kofman from Melbourne University was a panellist at an event discussing this exact issue. He says the heart of the problem is the lack of evidence for what types of cultural interventions translate into good business outcomes.</p>
<p>Kofman says bank executives can’t ignore culture anymore because their jobs are on the line, but he also notes they aren’t trained sociologists, so they might not notice problems in culture when they occur.</p>
<p>Instead of looking at the conduct of employees when trying to improve culture, the focus should instead be on the customer and if they are being best served, most of the panellists at the event agreed.</p>
<p>In an industry that has changed a lot over time, Kofman isn’t convinced “big data” on its own will necessarily provide deeper insights into bank culture. He says as long as we’re not sure how to measure culture, having more observations won’t help. Kofman notes much of the exciting data analytics are in fact generated by new financial operators (for example in financial technology and offshore operators) that are currently outside the scope of our regulators.</p>
<hr>
<p><em>Also on the podcast this week, Richard Holden tackles a question about how low borrowing rates affect demand and investment for Ask an Economist.</em></p><img src="https://counter.theconversation.com/content/69220/count.gif" alt="The Conversation" width="1" height="1" />
"Banking culture" has drawn a lot of scrutiny this year, after several high-profile scandals. But Professor Paul Kofman says there isn't much evidence for how to intervene if there's a problem.Jenni Henderson, Section Editor: Business + EconomyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/666302016-10-06T00:15:08Z2016-10-06T00:15:08ZJust what else did ANZ uncover when looking at BBSW?<p>In his response <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;db=COMMITTEES;id=committees%2Fcommrep%2F597abaa7-b645-438e-8601-fb5bd6874ffe%2F0001;query=Id%3A%22committees%2Fcommrep%2F597abaa7-b645-438e-8601-fb5bd6874ffe%2F0000%22">to questioning by MPs</a> at the House Economics Committee hearings into the big four banks, Mr Shayne Elliott, CEO of ANZ, may have inadvertently let the cat out of the bag, </p>
<p>When questioned about the ongoing litigation regarding manipulation of the bank bill swap rate (BBSW) benchmark, which belatedly the government wishes to make a <a href="http://www.afr.com/news/politics/government-moves-on-banks--again-20161002-grtg2t">criminal offence</a>, Mr Elliot boasted that:</p>
<blockquote>
<p>“We went and looked at literally millions of chats and conversations. In doing so, in order to satisfy ourselves around the ASIC questions, we found other things, to do with poor behaviour and conduct. ASIC had not mentioned any of that. We went through those. We found those. They were wrong. We investigated and we acted. And, as a result of that, we have changed.”</p>
</blockquote>
<p>Under further questioning by Liberal MP Julia Banks, Mr Elliot admitted that, but for the ASIC investigation, he would not have identified the inappropriate conduct of those employees, because management would not have done that investigation of those chats.</p>
<p>Several questions are raised by this admission of doing-nothing until prompted, which go to the heart of the culture prevailing in ANZ at the time.</p>
<p>First, given that possible BBSW <a href="https://theconversation.com/dont-believe-the-hype-our-own-libor-scandal-could-be-in-the-wings-12652">manipulation was flagged several years ago</a>, why did ANZ management wait until prompted by ASIC to go look for wrongdoing in such a high-profile and profitable division? Such a lack of interest in publicised wrong-doing elsewhere in the industry demonstrates cultural failings not only at the level of trading desks but much higher up the management chain.</p>
<p>Secondly, Mr Elliott did not say, nor was he asked, what or how many these “other things” he mentioned were, nor, given the admission of wrongdoing, whether the activities were reported to ASIC.</p>
<p>If ASIC did receive this new information, how did they respond, <a href="https://theconversation.com/new-laws-on-bankers-behaving-badly-dont-matter-in-light-of-asic-inaction-66497">if at all</a>?</p>
<p>Thirdly, Mr Elliot did not report which, if any, external parties were involved such as customers, other banks, market participants and brokers. If bank customers were involved, were the “other things” examples of selling incorrectly and if so have customers been reimbursed? If other financial institutions were involved, was there misconduct not yet reported, such as manipulation of FX rates?</p>
<p>Lastly, what actions were taken and just exactly how has the organisation been changed?</p>
<p>If MPs do not get the opportunity until next year to quiz Mr Elliot, maybe they should ask the next cabs off the rank, the CEO’s of NAB and Westpac who are in the dock in the same scandal. In particular they should ask if they too had done additional investigations over and above that requested by ASIC. </p>
<p>Meanwhile, the questioning by MPs which often results in bland platitudes or promises to get back, actually reinforces rather than weakens the case for a Royal Commission. If answers to even simple queries raise basic questions of lack of good governance that CEOs do not answer, obviously more forensic questioning is needed.</p><img src="https://counter.theconversation.com/content/66630/count.gif" alt="The Conversation" width="1" height="1" />
In his response to questioning by MPs at the House Economics Committee hearings into the big four banks, Mr Shayne Elliott, CEO of ANZ, may have inadvertently let the cat out of the bag, When questioned…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/664972016-10-05T04:09:18Z2016-10-05T04:09:18ZNew laws on bankers behaving badly don’t matter in light of ASIC inaction<p>The <a href="http://sjm.ministers.treasury.gov.au/media-release/106-2016/">governmnent’s new laws</a> to tackle manipulation of the bank bill swap rate may seem like a crackdown on badly behaving bank employees but in reality the Australian Securities and Investments Commission (ASIC) hasn’t used the full force of the law in the past to prosecute. So perhaps it’s time Australia followed the lead of the US and UK who are really using law to hold banks to account.</p>
<p>The bank bill swap rate (BBSW) is used to set rates on hundreds of trillions of dollars worth of transactions, including interest rates on credit cards, student loans and mortgages. Banks also use the swap rate to determine the cost of borrowing from one another. </p>
<p><a href="http://www.smh.com.au/business/banking-and-finance/banks-scolded-in-bbsw-stoush-20160822-gqy16g.html">Three of Australia’s big four banks, ANZ, Westpac and NAB</a> were accused of manipulating this rate.
These latest measures, which include civil and criminal liability for bankers found guilty, come six years after <a href="https://theconversation.com/asic-finally-pulls-the-bbsw-trigger-on-anz-55766">the scandal first broke</a>. </p>
<h2>ASIC takes too long to prosecute</h2>
<p>ASIC has dragged its feet so spectacularly on prosecuting this rate rigging, misconduct affecting <a href="http://www.abc.net.au/news/2016-07-29/asic-20-trillion-worth-of-financial-products-bbsw/7673322">A$20 trillion worth of financial products</a>. In respect to some of the alleged wrongdoing, the clock has run out, and ASIC is now no longer able to prosecute. Added to that, it was not ASIC that uncovered the BBSW scandal in the first place. </p>
<p>The information was first volunteered by BNP Paribas. And while ASIC’s colleagues in the UK have brought down <a href="http://www.abc.net.au/news/2016-02-08/bagwell-this-could-be-australias-next-financial-scandal/7149270">fines in the billions of dollars against UBS, RBS and Barclays for similar offences,</a> ASIC is yet to dock a dime from our titans of finance. </p>
<p>There have been plenty of legal avenues where ASIC could have pursued the banks.
For example, under <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/cca1995115/sch1.html">section 12.2 of the Schedule to The Criminal Code Act, 1995</a> which allows a court to hold a corporation criminally liable for the criminal misdeeds of its employees. I know of no cases where ASIC has sought to prosecute under this provision. </p>
<p>Another is <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/ba195972/s11ca.html">section 11CA (2)(e) of the Banking Act, 1959</a>. This would allow APRA to remove members of the Board of a bank, and appoint their own nominee, if that bank has demonstrated corporate governance failures. Since 1998 when that provision was enacted, APRA has used it a total of zero times.</p>
<p>It seems the regulators are scared to take on the big banks. For one thing they fear that a misstep could precipitate panic in the market, resulting in a bank run leading to a financial crisis. And if our regulators are ever in any danger of forgetting that, <a href="https://theconversation.com/australian-banks-are-still-too-big-to-fail-44913">the Australian Bankers’ Association is quick to remind them.</a>.</p>
<h2>How this differs to the US and UK</h2>
<p>While Australian regulators have been taking their time, regulators in the UK have brought to trial and <a href="http://www.telegraph.co.uk/finance/financial-crime/11767437/Libor-trial-Tom-Hayes-found-guilty-of-rigging-rates.html">achieved convictions</a>.</p>
<p>Regulators <a href="http://www.euromoney.com/Article/3575486/Macaskill-on-markets-Front-running-and-the-death-of-fixed-income.html?utm_source=Global%2520banking%2520and%2520markets&utm_medium=email%2520editorial&utm_content=Editorial&utm_campaign=636070276563260190&utm_term=Macaskill%2520on%2520markets%253A%2520Front-running%2520and%2520the%2520death%2520of%2520fixed%2520income.%C2%A9rightInfo=true&copyrightInfo=true">in the US have arrested</a>, among others, British citizens, such as Mark Johnson, HSBC’s global head of foreign exchange and Stuart Scott, then head of FX trading in Europe, for manipulating rates while they were in transit in the US.</p>
<p>Deutsche Bank is staring down the barrel of a US$10 billion fine, in the US, for <a href="http://www.newyorker.com/magazine/2016/08/29/deutsche-banks-10-billion-scandal">malpractices it allowed to take place in Russia</a>. Banks in the UK and Switzerland have been fined billions of dollars by US authorities for rigging rates in countries other than the US. All that is required is for the US Department of Justice to detect a malpractice or a fraud that can be shown to have affected US investors. </p>
<p>Already there is legal action in the US in the form of a class action suit against <a href="http://www.abc.net.au/news/2016-08-18/anz-nab-bbsw-us-class-action/7763178">our banks for BBSW rigging.</a> This could garner unwanted attention from US authorities and that could be actual punishment for Australian bankers. </p>
<p>Add to that the possibility that Australian bankers may find themselves under arrest when they pass through the US at any stage in the next five years, and one starts to put into perspective just how badly our regulators have done their job. Ironically, it’s US, not Australian authorities that Australian banks need fear, because of allegations of dishonest rigging of an Australian market, all of which allegedly took place in Australia.</p><img src="https://counter.theconversation.com/content/66497/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow is affiliated with ACAC (Australian Citizens Against Corruption). </span></em></p>ASIC has been too slow to prosecute those accused of rigging the bank bill swap rate so it doesn’t matter if the government makes the penalties harsher for those found guilty.Andrew Schmulow, Senior Lecturer (1 July 2016 onwards), The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/664862016-10-04T19:11:59Z2016-10-04T19:11:59ZBanks make millions in delaying interest rate cuts<p>When Australia’s central bank moves interest rates as part of its monetary policy, it’s not just <a href="http://www.abc.net.au/news/2013-07-31/jericho-australias-absurd-interest-rates-debate/4854044">politicians who stand to lose</a> if banks don’t follow suit. </p>
<p>Retail lending markets form an integral part of the monetary policy transmission mechanism. If interest rate rises are passed on at a different rate to cuts it can adversely affect the efficacy of expansionary versus contractionary <a href="http://www.rba.gov.au/monetary-policy/">monetary policy.</a></p>
<p>In August 2016, <a href="http://www.apra.gov.au/adi/Publications/Pages/monthly-banking-statistics.aspx">APRA data</a> showed the big four Australian banks held 83% of the home loan market (including both the owner occupier and investment categories). </p>
<p>At an individual level, the ability and willingness of lenders to pass on the official interest rate cuts to borrowers depends on many factors. These include exposure to overseas funding sources, market power, the funding mix, reserves and the extent of securitisation. But it’s also clear delaying interest rate cuts can significantly impact their bottom line.</p>
<hr>
<p><iframe id="tc-infographic-182" class="tc-infographic" height="700" src="https://cdn.theconversation.com/infographics/182/80becb6fdcdd48e78c96eaef6678482563927a65/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>According to my analysis, the big four banks can make approximately $A8.6 million per day as a group if they do not fully pass onto borrowers a hypothetical 0.25% cut in the RBA’s cash rate. </p>
<p>More specifically, if ANZ, CBA, NAB and Westpac manage to postpone lowering their mortgage interest rates say by 10 days, they can potentially make an extra A$16, A$28, A$16 and $A26 million dollars in profits, respectively.</p>
<p>Previous studies on <a href="http://www.sciencedirect.com/science/article/pii/S1042443114000559">mortgages</a>, <a href="http://link.springer.com/article/10.1007/s11187-014-9579-z">small business loans</a> and <a href="http://www.tandfonline.com/doi/abs/10.1080/13547860.2013.803846">credit card interest rates</a> have found significant evidence for the “rockets and feathers” hypothesis. That is, when the cash rate increases, various lending rates shoot up like rockets but when the opposite occurs they go down like feathers.</p>
<p>In my research I used monthly data (2000-2012) for 39 bank and non-bank financial institutions including 7 building societies, 15 Australian-owned banks, 3 foreign subsidiary banks, 13 credit unions, and 1 major mortgage broker. The research found the mortgage interest rate spread of all lenders rose after the 2008 global financial crisis, albeit to varying degrees. </p>
<p>In general, <a href="http://www.sciencedirect.com/science/article/pii/S1042443114000559">the research shows</a> most building societies and some credit unions can offer more competitive home loans than banks.</p>
<p>There is no significant relationship between lenders’ markups and the level of over the counter customer service since the 2008 financial crisis. This is an important observation as the mortgage spreads of larger lenders are typically higher than those of their smaller non-bank counterparts. This puts lie to the view that the relatively higher mortgage interest rates of the larger banks in Australia are justified by higher overhead costs associated with the running of their large branch networks.</p><img src="https://counter.theconversation.com/content/66486/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Abbas Valadkhani 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>When the cash rate increases, lending rates shoot up like rockets, but when the opposite occurs they go down like feathers.Abbas Valadkhani, Professor of Economics, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/662642016-10-03T19:16:47Z2016-10-03T19:16:47ZSimpler account switching would help keep our banks honest<p>When the chiefs of Australia’s largest banks appear before the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Four_Major_Banks_Review">Standing Committee on Economics</a> this week it’s likely they’ll be asked about the current level of competition in retail banking.</p>
<p>One of the objectives of competition law in Australia “is to enhance the welfare of Australians through the <a href="http://www.australiancompetitionlaw.org/law/economics/competition.html">promotion of competition</a>”. Promoting competition means making sure there is vibrant competition. This means ensuring that competitiveness is enhanced once competition is established.</p>
<h2>Reluctance to change</h2>
<p>Existing market players generally resist the changes needed to make a sector more competitive. This resistance is driven by the rational fear that a more competitive sector will lead to lower margins and loss of market share. </p>
<p>It seems odd, but in the early days of text messaging it was only possible to send texts to people on the same network. Interconnection of networks was driven partly by commercial opportunity, but mainly by the prospect of regulatory intervention. In mobile telecommunications, mobile number portability was introduced in Australia and elsewhere as a result of similar pressures. </p>
<p>Competition regulators know that competitiveness is higher when it’s easier for a consumer to switch providers. Of course, that does not mean there will be mass switching. Consumers switch when there is a prompt. This might be the end of a contract, or poor (uncompetitive) service from a provider.</p>
<h2>Switching banks</h2>
<p>In Australia, in common with other parts of the world, switching between retail banks presents hurdles. It’s just a difficult process, even with the help of the <a href="https://theconversation.com/how-changing-our-bank-account-numbering-system-will-be-a-win-for-customers-40236">bank to which you are switching</a>. A mixture of direct credits, direct debits, mortgage or rent payments and links to credit cards means that <a href="https://www.businessthink.unsw.edu.au/pages/why-switching-banks-to-get-a-better-deal-is-essential-for-the-economy.aspx/">switching banks is complex and hard</a>. </p>
<p>One solution to this problem is bank account number portability. The idea is that you can switch your bank without changing your bank account number – just like switching mobile providers. </p>
<p>This could be implemented by having a single independent bank account number database (iBAND), which links account numbers with people. Each bank would then check the iBAND when making a payment as depicted below.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=515&fit=crop&dpr=1 600w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=515&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=515&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=647&fit=crop&dpr=1 754w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=647&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=647&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">iBAND.</span>
<span class="attribution"><span class="source">Rob Nicholls</span></span>
</figcaption>
</figure>
<h2>The UK experience</h2>
<p>Even this might be a bit more complicated than is needed. The Australian Payment Clearing Association’s <a href="http://www.apca.com.au/about-payments/future-of-payments/new-payments-platform-phases-1-2">“New Payments Platform”</a> offers a range of identifiers for people in addition to bank account numbers. This could also form the basis for portability and switching.</p>
<p>In the UK, the <a href="http://www.paymentsuk.org.uk/projects/current-account-switch-service">Current Account Switch Service (CASS)</a> is a free-to-use service for consumers to simplify switching current accounts. This service is designed to increase competition, competitive entry and consumer choice. </p>
<p>There is a Current Account Switch Guarantee to enable switching to occur within seven days. Since the scheme started in 2013, there have been <a href="https://www.bacs.co.uk/resources/pages/factsandfigures.aspx">3 million switches and 99% of these occurred within seven days</a>. </p>
<p>The consumer education process that accompanied the introduction of CASS in the UK means more than three-quarters of all current account holders are aware of the service.</p>
<h2>Data can help</h2>
<p>The other issue with switching is knowing whether the deal you will get with the new bank is better. What would be ideal is to have a way of comparing your existing bank or banks and credit card providers with other financial institutions. One way of doing this is by having a standardised form of metadata. </p>
<p>If you wanted to do a comparison, you could download a set of anonymised metadata that described your banking needs. This could then be compared on a platform with other providers. </p>
<p>The UK’s Competition and Markets Authority (CMA), in its <a href="https://www.gov.uk/cma-cases/review-of-banking-for-small-and-medium-sized-businesses-smes-in-the-uk#final-report">final report</a> into the UK retail banking system, suggests that the provision of open banking applications programming interfaces (API) would facilitate such an exchange of data. The broad approach is set out below.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=348&fit=crop&dpr=1 600w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=348&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=348&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=437&fit=crop&dpr=1 754w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=437&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=437&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">CMA approach.</span>
<span class="attribution"><span class="source">Rob Nicholls derived from CMA report</span></span>
</figcaption>
</figure>
<p>The idea is that each bank would present a common interface to external systems through the API. This would allow the banks to create and use apps to enhance the consumer experience. However, it would also allow third parties to be intermediaries or to compare the banks’ offerings.</p>
<h2>Switching, innovation and productivity</h2>
<p>In its <a href="http://competitionpolicyreview.gov.au/files/2014/06/CHOICE.pdf">submissions to the Harper review</a> of competition law and policy, CHOICE argued that such a scheme would encourage innovation. The ACCC put the case that “initiatives to allow consumers to effectively use their information … have the potential to assist consumers to make better choices and drive competition”. </p>
<p>The UK government has put consumer switching at the heart of its approach to increasing productivity. It regards this step as critical to open and competitive markets with the minimum of regulation.</p>
<p>Both the Harper review and the Murray inquiry into the financial system found that competition should be at the forefront of regulatory consideration. One way to improve competitiveness in banking is to facilitate both switching and consumer information. </p>
<p>But perhaps the best way to determine whether there is a need to promote competitiveness would be for the ACCC to commence a market inquiry on retail banking. This could have the aim of developing initiatives to stimulate additional competition.</p><img src="https://counter.theconversation.com/content/66264/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rob Nicholls is a member of the Australian Labor Party.</span></em></p>To boost competition in banking we should give consumers better access to data and account number portability.Rob Nicholls, Lecturer, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/648032016-09-11T20:10:03Z2016-09-11T20:10:03ZA history of failed reform: why Australia needs a banking royal commission<p>The move for an <a href="http://www.smh.com.au/small-business/finance/small-business-ombudsman-kate-carnell-to-run-bank-inquiry-20160831-gr62cq.html">inquiry into how banks treat small business customers</a> should not overshadow the ongoing call for a broader royal commission on banks. </p>
<p>Several financial inquries (outlined below) have failed to tackle the growing concentration in the Australian finance sector, or the need to separate general banking from investment banking as the reform process in the United States, UK and Europe is contemplating.</p>
<p>Calls for a royal commission are also underpinned by ongoing reports of misconduct within the banks, summarised in a timeline of bad behaviour below.</p>
<p>Every other major industrial country is at an advanced stage in bank reform, and Australia would be isolated if it did not engage in a similar substantial and structural reform process.</p>
<hr>
<h2>Financial reform in Australia</h2>
<p><strong>1997 Wallis Inquiry</strong> </p>
<p><a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP9697/97rp16">This inquiry</a> has been associated with the “four pillars” policy towards bank mergers (though the inquiry itself did not propose this), and the opposition to any merger between ANZ, CBA, NAB and Westpac. The unwritten policy originated in Paul Keating’s reservations on concentration in the industry. It also led to the CLERP financial reforms announced on fund raising, disclosure, financial reporting and takeovers. </p>
<p><strong>2009 Future of Financial Advice Inquiry</strong> </p>
<p>This inquiry stemmed from industry failures, such as Storm Financial and Opes Prime, and explored the role of financial advisers and the general regulatory environment for these products and services. It resulted in the <a href="https://www.cpaaustralia.com.au/professional-resources/financial-planning/policy-and-research/future-of-financial-advice-reforms">Corporations Amendment (Future of Financial Advice) Act 2012</a> by the Labor government to tackle conflicts of interest within the financial planning industry. This was subsequently amended by the Liberal government in the <a href="http://www.charteredaccountants.com.au/Industry-Topics/Financial-advisory-services/FoFA">Corporations Amendment (Financial Advice Measures) Act March 2016</a> which softened some of the reforms.</p>
<p><strong>2012 Cooper Inquiry</strong> </p>
<p>This was <a href="http://strongersuper.treasury.gov.au/content/publications/government_response/downloads/Stronger_Super.pdf">a review</a> into the governance, efficiency, structure and operation of Australia’s superannuation system. It examined measures to remove unnecessary costs and better safeguard retirement savings, claimed fees in superannuation were too high, and that choice of fund in superannuation had failed to deliver a competitive market that reduced costs.</p>
<p><strong>2014 Parliamentary Joint Committee on Corporations and Financial Services
Inquiry</strong> </p>
<p><a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Financial_Adviser_Qualifications/Report">This inquiry</a> included proposals to lift the professional, ethical and education standards in the financial services industry. It aimed to clarify who could provide financial advice and to improve the qualifications and competence of financial advisers; including enhancing professional standards and ethics.</p>
<p><strong>2015 Murray Inquiry</strong> </p>
<p><a href="http://fsi.gov.au/">This inquiry</a> was intended to provide “a ‘blueprint’ for the financial system over the next decade,” but fell somewhat short of this in not critically addressing the concentration or restructuring of the main banks. While acknowledging the high concentration and vertical integration of Australia’s banking industry the inquiry’s approach to encouraging competition was to seek to remove impediments to its development. The inquiry aimed to increase the resilience to failure with high bank capital ratios, and to reduce the costs of failure, including by ensuring authorised deposit-taking institutions maintained sufficient loss absorbing and recapitalisation capacity to allow effective resolution with limited risk to taxpayer funds.</p>
<hr>
<p>In contrast to the limitations of the Australian reform process, more ambitious reform of the banking sector is being actively considered in the rest of the advanced economies. This is because of widespread international concerns regarding bank monitoring and standards, and the continuing threat of systemic risk and failure.</p>
<p>The objective is to create more effective competition, greater choice, improved governance, more balanced incentives, and responsible behaviour and performance. Central to international reform proposals is the intention of:</p>
<ul>
<li><p>shielding commercial banks from losses incurred by speculative investment banking</p></li>
<li><p>preventing the use of public subsidies (eg central bank lending facilities and deposit guarantee schemes) from supporting risk taking</p></li>
<li><p>reducing the complexity and scale of banking organisations</p></li>
<li><p>making banks easier to manage and more transparent</p></li>
<li><p>preventing aggressive investment bank risk cultures from infecting traditional banking;</p></li>
<li><p>reducing the scope for conflicts of interest within banks</p></li>
<li><p>reducing the risk of regulatory capture and taxpayers exposure to bank losses.</p></li>
</ul>
<p>Among the ongoing international initiatives to reform the banks are the <a href="https://www.gov.uk/government/news/banking-reform-act-becomes-law">UK Banking Reform Act</a>, which includes ring fencing retail utility banking from investment banking, due for implementation in 2019.</p>
<p>In the US, the <a href="http://www.warren.senate.gov/files/documents/Fact%20Sheet%20-%2021st%20Century%20Glass-Steagall.pdf">21st Century Glass Steagall Act</a>, proposed by Elizabeth Warren and supported by Democratic nominee Hillary Clinton, involves separating traditional banks that offer savings and checking accounts from riskier financial services such as investment banking and insurance. </p>
<p>In Europe, <a href="http://europeanmemoranda.cabinetoffice.gov.uk/files/2014/03/6860-13_.pdf">the Liikanen Plan</a>, announced in 2012, proposes investment banking activities of universal banks be placed in separate entities from the rest of the group. This has already been taken up widely throughout the European banking sector. </p>
<h2>A licence to operate?</h2>
<p>The banks have experienced continuous systemic risk (partly of their own making), erosion of their integrity, and a loss of public trust.</p>
<p>The Australian banks are on notice that they need to renew their licence to operate, to reconnect with their sense of duty and the Australian people, and to reconfirm their responsibilities to the Australian economy. This will occur, even if it takes a royal commission to achieve it.</p>
<hr>
<h2>A timeline of banks behaving badly</h2>
<iframe src="https://cdn.knightlab.com/libs/timeline3/latest/embed/index.html?source=16t5cJvvQqZqnJPl1M9C1t8fNOveF64OxTxKoPDZHJLc&font=Default&lang=en&initial_zoom=2&height=650" width="100%" height="650" frameborder="0"></iframe>
<p><strong>January 2004: NAB foreign currency options trading</strong></p>
<p>NAB announces losses of A$360 million due to unauthorised foreign currency trading activities by four employees who concealed the losses. <a href="http://www.apra.gov.au/MediaReleases/Pages/04_09.aspx">Bank risk policies</a> and trading desk supervision prove ineffective. NAB sacks or forces the resignation of eight senior staff, disciplines or moves 17 others and restructures its board of directors. Four traders, including the head of the foreign currency options desk, are subsequently prosecuted and jailed.</p>
<p><strong>2008: global financial crisis takes down Opes Prime, Storm Financial, Allco and Babcock and Brown</strong></p>
<p>The market capitalisation of the stock markets of the world peaks at US$62 trillion at the end of 2007. By October 2008 the market is in free fall, having lost US$33 trillion dollars, over half of its value in 12 months of unrelenting financial and corporate failure. Originating in the toxic sub-prime securities of the New York investment banks, the <a href="http://cpe.oxfordjournals.org/content/early/2010/04/27/cpe.bzq002.abstract">financial crisis</a> threatens to engulf the economies of the world. </p>
<p>The mythology today is that Australia miraculously escaped the global financial crisis due to the resilience of its regulatory system and the governance and risk management of its banks. The reality is that more than a dozen significant Australian companies went under during the crises (amounting to losses in excess of $60 billion in total). In almost every case at least one of the big four banks were involved in supporting the business models and extending credit to very doubtful enterprises.</p>
<p><strong>July 2012: HSBC money laundering</strong></p>
<p>A US Senate Inquiry discovers that <a href="https://www.icij.org/project/swiss-leaks/banking-giant-hsbc-sheltered-murky-cash-linked-dictators-and-arms-dealers">HSBC</a> allowed Latin American drug cartels to launder hundreds of millions of ill-gotten dollars through its US operations, rendering the dirty money usable. The HSBC Swiss private banking arm profited from doing business with arms dealers and bag men for third world dictators and other criminals. </p>
<p>HSBC agrees to pay a fine in excess of US$2 billion to settle US civil and criminal actions. In 2016 it is revealed that UK Chancellor George Osborne intervened to prevent criminal charges against HSBC as this might have undermined financial markets.</p>
<p><strong>2013: Libor rigging</strong></p>
<p><a href="https://books.google.com.au/books?id=3ZDqAwAAQBAJ&pg=PT165&lpg=PT165&dq=Libor+Justin+O%27Brien&source=bl&ots=cSYzB8ljps&sig=KYP1D9d_xxpEx3owc7EpKBEPlKs&hl=en&sa=X&ved=0ahUKEwjZ06yM0P7OAhWCHpQKHaMJAkYQ6AEIOjAG#v=onepage&q=Libor%20Justin%20O'Brien&f=false">Libor</a> is the international vehicle for settling inter-bank interest rates, and covers markets worth US$350 trillion. </p>
<p>In 2012 it’s revealed that wholesale fraudulent manipulation of the rates has been occurring for years, and throughout the reform process following the global financial crisis. The crisis engulfs many international banks including Barclays, Citigroup, Deutsche Bank and JP Morgan. The irony of the scandal is that Libor was intended as a measure of the state of health of the banking system. </p>
<p>The US Commodity Futures Trading Commission and US Department of Justice impose fines totalling hundreds of millions of dollars on the international banks. In Australia ASIC investigates the role of ANZ, BNP, UBS, and RBS and imposes fines. In 2014 the administration of Libor is transferred to the Euronext NYSE.</p>
<p><strong>2014: Commonwealth Bank financial planning scandal</strong></p>
<p>An <a href="http://www.abc.net.au/4corners/stories/2014/05/05/3995954.htm">ABC Four Corners report</a> reveals CBA customers have lost hundreds of millions of dollars after the bank’s financial advisers recommend speculative investments. </p>
<p>The report describes the sales-driven culture inside the Commonwealth Bank’s financial planning division, with a focus on profit at all cost and a culture that has been built on commissions. The bank is found to have misled potentially thousands of clients. </p>
<p>The bank sets up an internal inquiry and compensation (though is subsequently accused of dragging its feet on compensation). A Senate inquiry into the performance of ASIC during the affair recommends establishing a Royal Commission to examine the banks.</p>
<p><strong>May 2015: Forex manipulation</strong></p>
<p>Following the Libor scandal, it is discovered that traders have been deliberately orchestrating trades in the $US5.3 trillion-per-day global foreign exchange market to their own advantage.</p>
<p>“They acted as partners - rather than competitors - in an effort to push the exchange rate in directions favourable to their banks but detrimental to many others,” says US Attorney-General Loretta Lynch. “And their actions inflated the banks’ profits while harming countless consumers, investors and institutions around the globe.”</p>
<p>US and British regulators <a href="http://www.abc.net.au/news/2015-05-21/us-britain-fine-top-banks-nearly-6-bn-for-forex-libor-abuses/6485510">fine Barclays, Citigroup, JP Morgan, RBS, UBS, and Bank of America more than US$6 billion</a> in recognition of the scale and duration of the fraud.</p>
<p><strong>March 2016: ASIC targets ANZ for rigging the bank bill swap rate (BBSW)</strong></p>
<p><a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-060mr-asic-commences-civil-penalty-proceedings-against-anz-for-bbsw-conduct/">ASIC commences legal proceedings against ANZ</a> for unconscionable conduct and market manipulation in relation to the bank’s involvement in setting the bank bill swap reference rate (BBSW) in the period March 2010 to May 2012. It foloows up with actions against NAB and Westpac.</p>
<p>The BBSW is the primary interest rate benchmark used in Australian financial markets, administered by the Australian Financial Markets Association (AFMA). It is alleged the banks traded in a manner intended to create an artificial price for bank bills.</p>
<p><strong>March 2016: CommInsure payments scandal</strong></p>
<p>The insurance arm of the Commonwealth Bank c<a href="http://www.abc.net.au/4corners/stories/2016/03/07/4417757.htm">omes under media scrutiny</a> for operating along similar lines to the earlier financial planning business. </p>
<p>A company whistleblower reveals the measures the bank is taking to avoid making insurance payouts to policyholders, many of whom are sick or dying.</p><img src="https://counter.theconversation.com/content/64803/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Clarke 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 universal reform of the banking system will take more than another inquiry.Thomas Clarke, Professor, UTS Business, University of Technology SydneyLicensed 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/631162016-07-27T18:10:39Z2016-07-27T18:10:39ZANZ wins class action on fees, but we still don’t know the real cost of late payments<p>A six year legal battle came to an end yesterday when the High Court ruled in favour of ANZ Bank, finding by a 4-1 majority that the bank
could enforce late payment fees on credit cards. </p>
<p>The lead plaintiff in the class action was Mr Paciocco, who opened two MasterCard accounts with the bank. One card had a credit limit of A$18,000 the other had a A$4,000 limit. </p>
<p>Mr Paciocco was late in meeting his monthly repayments on a number of occasions, and was required to pay late payment fees. The fee was initially $35, with the bank later reducing it to $20. Mr Paciocco was not the only ANZ customer who was late in repaying their credit card debts. During the financial year ended September 2009 the bank had around two million consumer credit card accounts. It charged late payment fees on around 2.4 million occasions, for which it received $75 million.</p>
<p>Mr Paciocco claimed the bank could not enforce the late payment fees because they were “penalties”. Australia’s common law will not allow a party to a contract to enforce a penalty amount under a contract. The question the High Court grappled with was what precisely did the common law understand a penalty to be. Rather annoyingly the Court has returned to the bad habit of each of the five judges hearing the case writing a separate decision. Each judge’s decision covers much of the same ground as the others, with subtle differences here and there. This makes it rather difficult to discern any coherent majority view on any particular issue.</p>
<p>In any event, the Court appeared to agree that a “fee” amounts to being a penalty if it is in the nature of a punishment for non-observance of the credit card contract. That is, it is a penalty if the fee is out of all proportion to the costs or loss caused to the bank by the customer’s late repayment. One view was that a fee becomes a penalty if it is extravagant, exorbitant or unconscionable. That definition sets a very high hurdle for bank customers to surmount when trying to prove a fee is a penalty.</p>
<p>Having decided what a penalty is, the judges were required to determine whether the fee/penalty charged was out of all proportion to the resulting losses caused to the bank. ANZ admitted the late payment fees were not a genuine pre-estimate of the losses it suffered as a result of the late repayment. The Court, however, found the mere fact there was no pre-estimate of the losses to the bank did not automatically mean it was a penalty.</p>
<h2>Experts differ</h2>
<p>Two expert witnesses gave evidence before the lower courts about the costs to the bank of a customer making a late repayment. One witness estimated the average cost to be $2.60. The other expert took into account a range of factors including the “loss provision costs, regulatory capital costs and collection costs” to the bank, and arrived at a much higher figure.</p>
<p>The Court then debated which of the experts had adopted the correct methodology. The majority found in favour of the second witness, the minority judge found the correct figure was closer to that calculated by the first witness, and therefore found the late repayment fee to be a penalty.</p>
<p>The majority also considered whether the bank had acted unconscionably or unjustly under the provisions of relevant legislation, and concluded that the bank had not breached the legislation.</p>
<p>The case confirms that a person alleging a requirement under a contract to make a certain payment amounts to a penalty must jump a very high bar. He or she must establish that the amount being imposed is extravagant, exorbitant or unconscionable.</p>
<p>The case also illustrates the difficulty in calculating the costs to the bank of customers making late repayments. The onus is on the customer to show the bank is acting extravagantly. It is somewhat disappointing for the many bank customers who are subjected to late payment fees that the Court favoured a costing methodology that itself was arguably extravagant and exorbitant.</p><img src="https://counter.theconversation.com/content/63116/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin Malbon 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 High Court found late credit card payment fees were not extravagant, but the experts disagreed on the actual cost to the bank.Justin Malbon, Professor of Law, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.