tag:theconversation.com,2011:/fr/topics/david-murray-9742/articlesDavid Murray – The Conversation2020-08-27T20:09:50Ztag:theconversation.com,2011:article/1450212020-08-27T20:09:50Z2020-08-27T20:09:50ZVital Signs: No, we won’t change the corporate world with divestment and boycotts<figure><img src="https://images.theconversation.com/files/355018/original/file-20200827-24-gxqmhb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Jacques Brinon/AP</span></span></figcaption></figure><p>Boe Pahari’s short reign as boss of AMP’s lucrative investment management division and the resignations this week of AMP chairman David Murray and board member John Fraser have shown the power of major shareholders in public companies.</p>
<p>There was, you may recall, public outcry about Pahari’s elevation to chief executive of AMP Capital on July 1, after it was revealed he had been reprimanded for alleged sexual harassment in 2017 and docked 25% of his A$2 million bonus that year.</p>
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<a href="https://theconversation.com/amp-doesnt-just-have-a-women-problem-it-has-an-everyone-problem-144937">AMP doesn’t just have a women problem. It has an everyone problem</a>
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<p>In any era – but certainly in the #metoo era – handing out a traffic ticket for (alleged) sexual harassment and three years later promoting the (alleged) wrongdoer to boss of AMP’s most important business was never going to fly.</p>
<p>In the end it was the company’s largest shareholder, <a href="https://www.allangray.com.au/b/">Allan Gray Australia</a>, that delivered Murray and AMP’s chief executive, Francesco De Ferrari, an ultimatum: go now or we’ll call a special general meeting to make it happen.</p>
<p>The only surprising thing in all of this is how AMP’s board could have been so stupid. </p>
<p>But it does raise some interesting broader issues. In particular, about the merits of the strategy Allan Gray used compared to a broader movement proposing “exit” or “divestment” of shares in companies that don’t act in accordance with investors’ wishes.</p>
<h2>Exit versus voice</h2>
<p>Throughout this saga, as far as we know, Allan Gray never threatened to sell its AMP shares. Rather, it told the board what it expected, and apparently got what it wanted – three heads on spikes. It made its voice be heard.</p>
<p>Compare this with threatening “divestiture” of shares. Divestment strategies have gained popularity in recent years, including a global movement pushing universities to <a href="https://theconversation.com/do-the-maths-bill-mckibben-argues-for-divestment-14894">divest from</a> fossil fuel companies. Just this week three climate activists in pursuit of this goal <a href="https://www.nytimes.com/2020/08/21/climate/havard-board-climate-change.html">gained seats on the Harvard Board of Overseers</a>, responsible for its US$40 billion endowment.</p>
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Read more:
<a href="https://theconversation.com/do-the-maths-bill-mckibben-argues-for-divestment-14894">Do the Maths: Bill McKibben argues for divestment</a>
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<p>Divestment can be driven purely by ethical reasons – like the sustainability funds that avoid certain investments for environmental and social reasons – or it can come down to risk assessment. </p>
<p>This was highlighted by Larry Fink, head of BlackRock – the world’s largest fund manager with <a href="https://www.blackrock.com/sg/en/introduction-to-blackrock">US$6.84 trillion</a> in assets – in his annual January letter to the heads of major public companies.</p>
<p>Climate change, <a href="https://theconversation.com/vital-signs-a-3-point-plan-to-reach-net-zero-emissions-by-2050-132436">his letter said</a>, had become “a defining factor in companies’ long-term prospects”. BlackRock would stop investing in any company with “a high sustainability-related risk”.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-a-3-point-plan-to-reach-net-zero-emissions-by-2050-132436">Vital Signs: a 3-point plan to reach net-zero emissions by 2050</a>
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<h2>Which strategy is better?</h2>
<p>So which of the two strategies – exit or voice – is better for an investor wanting a company to change its ways?</p>
<p>This question was taken up in a <a href="http://papers.nber.org/tmp/37341-w27710.pdf">paper published this month</a> by the US National Bureau of Economic Research. </p>
<p>In the paper, authors Eleonora Broccardo, Oliver Hart and Luigi Zingales assume some investors and consumers are socially responsible, in the sense that they consider the well-being of others in making decisions. But other investors and consumers are purely selfish.</p>
<p>Their model applies to any type of business that can do harm, but the authors use environmental concerns as their working example. Consider a company that can choose to be clean or dirty. Suppose the environmental damage the dirty business produces could be avoided at a cost.</p>
<p>In this framework, divestment is meant to cause the market value of that company to fall, encouraging even “selfish” managers to invest in cleaner technology. </p>
<h2>Selfishness and social responsibility</h2>
<p>The problem, the authors note, is other players in the market weaken the effect.</p>
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<p>The reason is that purely selfish agents will partially offset the effects of divestment/boycotting by increasing their investment/purchases in companies shunned by socially responsible agents. </p>
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<p>The magnitude of that offsetting effect, the authors say, “is driven by agents’ risk tolerance for investors and by the utility of the good for consumers”. In other words, it depends on demand.</p>
<p>Furthermore the authors suggest, in line with <a href="https://academic.oup.com/qje/article-abstract/117/3/817/1933015?redirectedFrom=fulltext">evidence from experimental economics</a>, unless the pollution is extremely harmful, it is not in the interests of any shareholders to actually exit.</p>
<p>So most shareholders won’t exit – or at least not enough to get companies to “behave”.</p>
<h2>Getting to vote</h2>
<p>What about the “voice” strategy? Here the authors consider a scenario where shareholders get to vote on whether a company should be clean or dirty.</p>
<p>Basic economics says an individual shareholder’s vote only matters if it is pivotal (i.e. it affects the outcome). In such cases a vote will be based on weighing the net social benefit from the clean technology, and the importance of others’ well-being, against their individual financial loss resulting from choosing the cleaner, costlier technology. </p>
<p>But here’s the key thing. If shareholders have diversified investments, a vote about one company will make a minor difference to their overall returns. So as long as the shareholder cares at all about the welfare of others, they will likely vote for the socially optimal goal – in this case, clean technology.</p>
<h2>Corporate reforms</h2>
<p>All of this suggests that making sure shareholders get to express their voice is important to achieving socially optimal goals. </p>
<p>That might involve more pro-shareholder measures, such as the opportunity to vote on issues the board traditionally decides (a kind of Athenian corporate democracy). Their ultimate power is voting out directors who don’t listen to them.</p>
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Read more:
<a href="https://theconversation.com/social-licence-the-idea-amp-should-embrace-now-david-murray-has-left-the-building-145029">Social licence: the idea AMP should embrace now David Murray has left the building</a>
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<p>There is a catch to this in practice, though. Most shareholders in Australia are represented by their superannuation funds, which <a href="https://www.afr.com/opinion/its-members-money-not-greg-combet-and-big-supers-20190304-h1bz6y">don’t always do so</a>. </p>
<p>This issue is known in economics as the “principal-agent problem” – something one of the authors of this paper, Oliver Hart, wrote about in <a href="http://idv.sinica.edu.tw/kongpin/teaching/micro/GrossmanHart.pdf">a seminal 1983 paper</a> co-authored with economist Sanford Grossman.</p>
<p>Perhaps the next step in our understanding of voting in corporate settings is to probe the limits of corporate democracy when shareholders’ interests are represented by fund managers who may not fully share those interests.</p><img src="https://counter.theconversation.com/content/145021/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden 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 AMP saga, and new research, shows the power of ‘shareholder voice’.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1450292020-08-25T07:29:44Z2020-08-25T07:29:44ZSocial licence: the idea AMP should embrace now David Murray has left the building<figure><img src="https://images.theconversation.com/files/354534/original/file-20200825-20-1kxufcq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Heads have rolled at AMP, and rightly so. </p>
<p>Particularly the head of chairman David Murray, who this week resigned, somewhat unapologetically, over the sexual harassment scandal that has enveloped the embattled Australian financial services giant.</p>
<p>As chair, the buck stopped with Murray. </p>
<p>The board’s decision to promote executive Boe Pahari, an executive with a record of sexual harassment, to one of its most senior positions was bad enough.</p>
<p>Compounding the problem was the way the board defended its decision, downplaying the offence and dismissing staff concerns, until finally buckling under shareholder pressure.</p>
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<a href="https://theconversation.com/amp-doesnt-just-have-a-women-problem-it-has-an-everyone-problem-144937">AMP doesn’t just have a women problem. It has an everyone problem</a>
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<p>Appointed to replace Catherine Brenner in 2018 in the wake of the damning findings of the banking royal commission, the veteran banker was probably never the right man to salvage AMP’s tattered reputation.</p>
<p>Consider his <a href="https://www.theaustralian.com.au/business/financial-services/david-murray-quits-as-amp-chair-over-pahari-appointment/news-story/301e092c11a874db84a49f71febf5877">statement announcing his departure</a>. </p>
<p>In it he managed to avoid any apology or concede any mistake. He maintained the complaint against Pahari had been “dealt with appropriately” in 2017. He suggested putting Pahari in charge of the company’s investment management division had “considerable support” apart from “some shareholders”.</p>
<h2>Social licence to operate</h2>
<p>Under Murray’s leadership, AMP’s clear focus has been financial performance. His view of management responsibilities can be described as “traditional”. It emphasises the board’s prime responsibility is shareholder value. He has never been a fan of broader social and environmental responsibility agendas, or anything else he regards as a distraction. </p>
<p>He was one of the biggest critics, for example, of the Australian Stock Exchange’s 2018 proposal to include in its <a href="https://www.asx.com.au/documents/asx-compliance/cgc-communique-27-feb-2019.pdf">corporate governance principles</a> a reference to “a social licence to operate”. The proposal was ultimately dropped in early 2019.</p>
<p>The proposal would have added the following commentary to its principle of acting lawfully, ethically and responsibly:</p>
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<p>A listed entity’s social licence to operate is one of its most valuable assets. That can be lost or seriously damaged if the entity or its officers or employees are perceived to have acted unlawfully, unethically or in a socially irresponsible manner.</p>
<p>Preserving an entity’s social licence to operate requires the board and management of a listed entity to have regard to the views and interests of a broader range of stakeholders than just its security holders, including employees, customers, suppliers, creditors, regulators, consumers, taxpayers and the local communities in which it operates.</p>
<p>Long-term and sustainable value creation is founded on the trust a listed entity has earned from these different stakeholders. Security holders understand this and expect boards and management to engage with these stakeholders and to be, and be seen to be, ‘good corporate citizens’.</p>
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<p>Murray (and others) pushed back against the proposal hard. In his <a href="https://www.afr.com/companies/david-murrays-defiant-plan-for-amp-20180731-h13dc4">first major interview</a> after taking over as AMP chair he declared.: </p>
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<p>We will not be guided by the ASX corporate governance principles where they either weaken accountability or distract the company to less important issues.</p>
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<a href="https://theconversation.com/the-asx-abandons-push-to-require-companies-to-have-a-social-licence-to-operate-was-it-only-ever-politically-correct-nonsense-112840">The ASX abandons push to require companies to have a social licence to operate. Was it only ever 'politically correct nonsense'?</a>
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<h2>Narrow focus hasn’t worked</h2>
<p>More attention to social licence, though, might have helped Murray and AMP avoid its grievous recent history, which includes charging fees for no service and billing dead customers. </p>
<p>AMP’s business model has privileged shareholder value above community and employee consideration. Yet this narrow view has also failed to serve investors – a message that has been delivered by several of AMP’s biggest institutional shareholders.</p>
<p>A culture in which profit takes precedence over non-financial risks, ethical standards and legal constraints heightens the propensity for flawed business models, governance oversights, conflicts of interest and bad behaviour. </p>
<p>That pretty much sums up where AMP is still mired. </p>
<p>Murray departs with his promise to restore AMP’s battered reputation unfulfilled. But it will take more than his exit to change the company. </p>
<p>His replacement, Debra Hazelton, has said she is committed to regaining the “trust and confidence of clients, shareholders and employees”. </p>
<p>This will require a massive culture shift to win back customers and employees that have been treated so shabbily. </p>
<p>Companies that disregard social licence do so at their peril.</p><img src="https://counter.theconversation.com/content/145029/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hannah Piterman 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 Commonwealth Bank chief David Murray promised to restore AMP’s reputation. He was never the right executive for the job.Hannah Piterman, Adjunct Associate Professor, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1449372020-08-25T01:28:10Z2020-08-25T01:28:10ZAMP doesn’t just have a women problem. It has an everyone problem<figure><img src="https://images.theconversation.com/files/354305/original/file-20200824-22-11tl0g8.jpg?ixlib=rb-1.1.0&rect=0%2C200%2C5568%2C3500&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> </figcaption></figure><p>The sexual harassment scandal enveloping AMP is another graceless turn in what looks like the death spiral of one of Australia’s oldest and formerly most trusted companies. </p>
<p>Joining a long line of executives to walk the plank at the venerable financial services giant, AMP chairman <a href="https://www.abc.net.au/news/2020-08-24/amp-chair-david-murray-director-john-fraser-resign-boe-pahari/12588366">David Murray and board member John Fraser have quit</a> over the promotion of Boe Pahari (disciplined in 2018 for sexually harassing a female colleague) to head AMP’s capital business division. </p>
<p>Since the Australian Financial Review broke the story of the claims made against Pahari, sparking a <a href="https://www.afr.com/companies/financial-services/amp-women-stage-revolt-over-pahari-promotion-20200702-p558gq">revolt among AMP’s female employees</a>, the board had been under increasing external pressure to admit and correct its mistake.</p>
<p>Now it has – half-heartedly. </p>
<p>The exit of Murray and Fraser (and Pahari’s demotion to his previous job level) was, AMP said in its statement to the <a href="https://www.asx.com.au/asx/share-price-research/company/AMP">Australian Stock Exchange</a>, a response “to feedback expressed by some major shareholders”.</p>
<p>Murray’s <a href="https://www.afr.com/companies/financial-services/boe-pahari-david-murray-john-fraser-resign-from-amp-20200824-p55ol5">own statement</a> was even less apologetic: </p>
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<p>The board has made it clear that it has always treated the complaint against Mr Pahari seriously. My view remains that it was dealt with appropriately in 2017 and Mr Pahari was penalised accordingly.</p>
<p>However, it is clear to me that, although there is considerable support for our strategy, some shareholders did not consider Mr Pahari’s promotion to AMP Capital CEO to be appropriate.</p>
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<p>In other words: what’s all the fuss about? </p>
<p>Murray’s failure to appreciate why he and the board made a mistake is, arguably, symptomatic of AMP’s management for at least two decades. Its focus on money over trust is central to the failures and scandals that have trashed its reputation and share price. </p>
<h2>Vertically challenged</h2>
<p>Founded in 1849 as the Australian Mutual and Provident Society, AMP was a not-for-profit life insurer for almost 150 years before it <a href="https://www.rba.gov.au/publications/bulletin/1999/jan/1.html">demutualised</a> in 1998. Since then it has pursued profits with gusto, if not prudence. </p>
<p>Part of the push to privatise was to have funds to expand, with “vertical integration” all the rage in the financial services sector.</p>
<p>Vertical integration involves a bank or other financial services company providing products all along the financial supply chain. Once a bank might have offered you just banking services, for example. Now it will provide contents and life insurance, financial and retirement planning, and ways to invest in the stock market. </p>
<p>“From the perspective of banks,” noted the 2019 <a href="https://financialservices.royalcommission.gov.au/Pages/reports.html#final">final report</a> of the Hayne Royal Commission that uncovered systemic cheating of customers in the financial services industry, “vertical integration always promised the benefit of cross-selling opportunities.” But the internal efficiency of the “one-stop shop” did not necessarily produce efficiency for customers:</p>
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<p>The ‘one stop shop’ model creates a bias towards promoting the owner’s products above others, even where they may not be ideal for the consumer.</p>
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Read more:
<a href="https://theconversation.com/banking-royal-commission-the-real-problem-is-how-we-value-executives-and-workers-111094">Banking Royal Commission: the real problem is how we value executives and workers</a>
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<p>When what isn’t best for the customer becomes the business model, it’s a slippery slope to taking other liberties. AMP slipped to charging fees for no service and <a href="https://www.abc.net.au/news/2018-09-17/amp-charges-dead-customers-for-life-insurance/10255978">billing dead customers</a> for life insurance. </p>
<p>Following these and other revelations from the royal commission, AMP chair Catherine Brenner, chief executive <a href="https://www.abc.net.au/news/2018-04-20/amp-ceo-craig-meller-steps-down-banking-royal-commission/9679138">Craig Meller</a> and most of the board resigned. But interim chief executive Mike Wilkins made it clear AMP remained “committed to a vertically integrated business model”. </p>
<p>That commitment was buttressed by the appointment of Murray, a long-term <a href="https://www.afr.com/companies/financial-services/david-murrays-long-road-from-a-commonwealth-bank-branch-to-amp-chairman-20180506-h0zoxo">defender of vertical integration</a> in financial services, as AMP’s new chair <a href="https://corporate.amp.com.au/newsroom/2018/june/david-murray-to-commence-as-amp-chairman-">in June 2018</a>. </p>
<h2>Bad habits</h2>
<p>It’s not only vertical integration, though, to which AMP’s management appears rusted on. Money (not trust) is still number one. </p>
<p>It is plain the board’s primary concern in keeping, then promoting, Pahari was that he “<a href="https://www.afr.com/companies/financial-services/pahari-made-a-lot-of-money-for-amp-capital-20200706-p559i5">made a lot of money for the company</a>”. </p>
<p>In this case, despite Murray’s insistence that the board treated the complaint against Pahari seriously, the evidence suggests AMP downplayed Pahari’s behaviour as “low level” and “<a href="https://www.smh.com.au/business/companies/sexually-harassed-amp-executive-says-the-company-is-still-covering-up-20200816-p55m7n.html">about comments made</a>”. The former executive who made the complaint, Julia Szlakowski, has detailed a much more substantial pattern of inappropriate behaviour.</p>
<p>To cap it all off, the company is reportedly seeking to track down employees who might have leaked information to the media. Chief executive Franco de Ferrari and other executives have warned about the consequences of leaking, including “possible termination”.</p>
<p>“I think this is a battle for the heart and soul of AMP, in my view,” the Australian Financial Review <a href="https://www.afr.com/companies/financial-services/culture-of-fear-amp-threatens-to-sack-leakers-20200821-p55o4i">reported one employee saying</a>. “It’s moving from a culture of harassment to a culture of fear.”</p>
<h2>Breaking up</h2>
<p>On June 30, de Ferrari appeared before the House of Representatives economics committee. He <a href="https://www.afr.com/companies/financial-services/amp-ioof-admit-preferential-pricing-for-in-house-products-20200630-p557kk">enthused about the changes the company had made</a>, declaring:</p>
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<p>Virtually no aspect has been untouched, starting from the top, with complete board renewal and streamlining and strengthening of the management team.</p>
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<p>Within days the appointment of Paharai had kicked of a staff revolt. By <a href="https://www.afr.com/companies/financial-services/investigation-inside-alex-wade-s-final-month-at-amp-20200808-p55jul">August 6</a>, the chief executive of AMP’s Australia division, Alex Wade, was forced to resign after multiple women, reportedly emboldened by the response to Pahari’s promotion, complained about behaviour including allegedly sending explicit photos. </p>
<p>On August 13, <a href="https://www.moneymanagement.com.au/news/financial-planning/culture-top-10-priority-amp">de Ferrari declared</a> during a teleconference with journalists to discuss AMP’s first-half results: </p>
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<p>We know we have more to do in improving diversity and inclusion. The transformation of culture is now my top priority.</p>
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<p>Granted, AMP may well be “the most challenging corporate transformation in corporate Australia”, and he might have said “right from the beginning this does not happen overnight”. </p>
<p>But from someone two years into the job it was a startling remark.</p>
<p>Leaks, needless to say, should be the least of AMP’s concerns. It’s the lack of a moral compass that threatens to run this ship aground and ultimately break it up.</p><img src="https://counter.theconversation.com/content/144937/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow has received funding from numerous entities that have included universities, charitable trusts, government and NGOs such as the CGAP/World Bank and the Banking Association of South Africa. He is affiliated with Australian Citizens Against Corruption, and advises DB and Associates. </span></em></p>AMP’s handling of sexual harassment charges shows its culture is still rotten.Andrew Schmulow, Senior Lecturer, Faculty of Law, University of WollongongLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1009542018-08-03T06:21:55Z2018-08-03T06:21:55ZAMP’s Murray right to question the value of corporate governance rules<p>New AMP chair David Murray’s <a href="https://www.afr.com/business/david-murrays-defiant-plan-for-amp-20180731-h13dc4">recent comments</a> were a welcome intervention in the public debate on corporate governance. This was not necessarily because of his strong rebuke of ASX corporate governance principles but rather because of his willingness to start a conversation about the real value of adhering to these principles and recommendations.</p>
<p>According to Murray, following these principles “contributed” to what has taken place within AMP and the financial sector in recent history. It’s hard to argue that he is wrong. While good governance and corporate performance go hand in hand (with plenty of <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=278920##">evidence</a> to support this), we should never pretend, even for a moment, that adhering to best practice will prevent the next <a href="https://www.afr.com/business/media-and-marketing/big-uns-overdue-numbers-a-brilliant-case-study-for-new-accounting-standards-20180802-h13hkb">Big-Un</a>, <a href="https://www.afr.com/business/banking-and-finance/blue-sky-alternative-investments-comes-clean-on-asic-notice-shares-hit-20180702-h124kp">Blue Sky</a>, <a href="https://www.smh.com.au/business/companies/rfg-boss-seeks-redemption-with-a-franchisee-road-trip-20180704-p4zpcu.html">RFG</a>, <a href="https://www.afr.com/markets/equity-markets/asx-wards-off-dodgy-tech-listings-to-establish-long-term-reputation-20180731-h13dkc">Getswift</a> or <a href="http://www.abc.net.au/news/2018-07-27/dick-smith-foods-collapse-bound-to-happen-analyst-says/10042920">Dick Smith</a>.</p>
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Read more:
<a href="https://theconversation.com/treasury-admits-corporate-governance-is-broken-but-baulks-at-systemic-fixes-100882">Treasury admits corporate governance is broken but baulks at systemic fixes</a>
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<p>It should be noted, however, that the development of ASX corporate governance principles has been effective in raising standards of corporate behaviour, disclosure and accountability on average. Credit is due here.</p>
<p>But this is where it ends. Murray’s main criticism is that there is now significant regulatory overreach. He argues that to achieve better governance we must be prepared to depart from the things that stand in the way of better outcomes. </p>
<p>This will <a href="https://www.afr.com/brand/chanticleer/david-murrays-governance-blueprint-at-amp-risks-a-backlash-20180731-h13e1d">undoubtedly meet with resistance</a> from the <a href="https://www.asx.com.au/regulation/corporate-governance-council.htm">ASX Corporate Governance Council</a> and advocates in the form of proxy advisory firms. However, the rules and recommendations that are supposed to deliver better outcomes have produced woefully inadequate results.</p>
<h2>Box-ticking consumes boards’ time</h2>
<p>Principles and recommendations have become a significant distraction for boards. They have been forced to focus on compliance – and not of the type that is beneficial to shareholders (i.e. reviewing financial reports and ensuring they are meeting continuous disclosure obligations). This leaves little time to deal with strategic decisions associated with forward-looking factors.</p>
<p>A 2016 survey of directors by McKinsey and Company, <a href="https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-board-perspective">The Board Perspective</a>, revealed an important truth – there is a significant gap between days spent by board members on matters of strategy relative to what they would like to spend. Furthermore, 52% of the respondents wanted to increase the time spent on strategy based on its relative value to their companies.</p>
<p>With an already significant rise in <a href="https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-board-perspective">time commitments</a> for directors of publicly listed firms over the last decade, it is hard to imagine how these respondents will be able to realise this goal.</p>
<h2>Returning accountability to the board</h2>
<p>Murray’s <a href="https://www.smh.com.au/business/banking-and-finance/conformity-is-not-high-up-on-amp-chairman-murray-s-list-of-priorities-20180704-p4zpd5.html">radical (or common-sense) plan for AMP</a> involves <a href="http://www.abc.net.au/radio/melbourne/programs/worldtoday/amp-chair-david-murray-to-bolster-ceo-role-in-governance-shakeup/10061010">restoring accountability to the board</a>. </p>
<p>Perhaps his most salient and contentious point relates to the committees – risk, audit, remuneration, nomination, and governance – that ASX rules require. Murray argues that charging these committees with assisting the board to fulfil its corporate governance responsibilities undermines the CEO and the board itself. </p>
<p>Boards should feature significantly in discussions of critical business risks. Yet matters that are imperative to shareholders are being delegated to subcommittees. This means we are getting more process than product from our directors. </p>
<p>Having an audit committee and risk committee and adhering to the standard principles are used by firms to signal to their shareholders that potential risks have been appropriately addressed. But the fact of the matter is that good and bad companies alike adopt these practices with the same level of vigour. </p>
<p>Corporate governance should not be proscriptive and firms should not be denounced for choosing to follow alternative and more effective paths. Murray’s statement that “we will not be guided by ASX corporate governance principles where they either weaken accountability or distract the company to less important issues” should be celebrated.</p>
<p>AMP shares were up over 3% following Murray’s comments. It is perhaps time that the institutions that design and oversee governance frameworks paid closer attention to the market and its needs.</p><img src="https://counter.theconversation.com/content/100954/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Angelo Aspris 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 corporate sector owes David Murray a debt of gratitude for starting a debate about ASX governance rules that lead boards to delegate matters that are properly their responsibility.Angelo Aspris, Senior Lecturer in Finance, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/992972018-07-05T20:02:41Z2018-07-05T20:02:41ZSolving deep problems with corporate governance requires more than rearranging deck chairs<p>As the <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">Financial Services Royal Commission</a> rolls on, it’s increasingly likely commissioner Kenneth Hayne will make sweeping recommendations about banking regulation and the governance of Australia’s largest corporations. </p>
<p><a href="http://www.abc.net.au/news/2018-05-04/amp-appoints-former-cba-boss-david-murray-as-new-chairman/9728510">New AMP chairman David Murray</a> and the <a href="http://www.abc.net.au/radionational/programs/breakfast/apra-scathing-report-into-cba-a-wake-up-call/9718218">Australian Institute of Company directors</a> are <a href="https://www.smh.com.au/business/banking-and-finance/conformity-is-not-high-up-on-amp-chairman-murray-s-list-of-priorities-20180704-p4zpd5.html">calling for changes</a> to address the scandals, including loosening the ASX corporate governance code. </p>
<p>But this misses what is really required to fix Australian corporate governance, which is wholesale change in prudential regulation, corporate law, competition law, and electoral law.</p>
<p>In an attempt to stave off more thorough and permanent changes such as <a href="http://www.abc.net.au/news/2018-06-29/banking-royal-commission-asic-should-cancel-operating-licences/9921210">cancelling banking licences</a> and forced divestment, financial institutions have also been <a href="http://www.abc.net.au/news/2018-06-25/cba-demerges-wealth-management-and-mortgage-broking-business/9905622">selling subsidiaries</a>, and <a href="https://www.ausbanking.org.au/code/code-of-banking-practice/">issuing</a> <a href="http://www.abc.net.au/radionational/programs/drive/anz-ceo-shayne-elliott/9925434">statements</a> about future good conduct.</p>
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<p>David Murray <a href="https://www.afr.com/business/banking-and-finance/financial-services/murray-warns-hayne-on-dangers-of-overregulation-20180619-h11kww">is</a> <a href="https://www.theaustralian.com.au/...murray/.../%203bced2b949b46b2a0b2c56f0add3f416">arguing</a> for strengthening the existing customs and practices that distinguish between non-executive and executive directors (directors who are also managers), the loosening of prescriptive aspects of the <a href="https://www.asx.com.au/regulation/corporate-governance-council.htm">industry-written ASX corporate governance code</a>, and a reduced ability for shareholders to pursue class actions. </p>
<p>Murray also suggested boards <a href="https://www.smh.com.au/business/banking-and-finance/conformity-is-not-high-up-on-amp-chairman-murray-s-list-of-priorities-20180704-p4zpd5.html">should frame</a> a “set of beliefs that connect their organisation more closely with the community”.</p>
<p>But as the royal commission has shown, industry self-regulation has failed and corporate boards seem incapable of systemically improving corporate governance. </p>
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<a href="https://theconversation.com/the-cpa-saga-demonstrates-why-australias-corporate-governance-code-needs-replacing-79200">The CPA saga demonstrates why Australia's corporate governance code needs replacing</a>
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<p>Murray is half-right in criticising the role the ASX code plays in undermining the core legal duties of directors. But his solutions would take us in circles. </p>
<p>Leaving it up to shareholders to force better corporate governance ignores <a href="https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1467-8683.2012.00933.x">empirical evidence</a> that institutional investors rarely act in concert and tend to “exit” rather than address problems. </p>
<p>Research <a href="https://theconversation.com/company-boards-are-stacked-with-friends-of-friends-so-how-can-we-expect-change-95790">also shows directors select mates and friends</a> to join them on boards. This makes it hard for directors to fulfil their <a href="https://www.apra.gov.au/sites/default/files/APG-510-Governance.pdf">core legal responsibilities</a>. Unhelpfully the dominant theory in corporate governance works against these responsibilities by asserting that boards should only <a href="https://www.sciencedirect.com/science/article/pii/0304405X7690026X">represent shareholder interests</a>.</p>
<p>However a singular focus on profit and shareholders (widely and deeply held <a href="https://www.pc.gov.au/__data/assets/pdf_file/0003/228171/superannuation-assessment-draft.pdf">by directors, executives and some regulators</a>) is increasingly seen as economically, socially and politically <a href="https://www.theguardian.com/news/2017/aug/18/neoliberalism-the-idea-that-changed-the-world">unhealthy</a>. </p>
<p>Academics like <a href="https://journals.aom.org/doi/10.5465/AMLE.2005.16132558">Sumantra Ghoshal</a> and <a href="https://www.goodreads.com/book/show/699150.The_Moral_Basis_of_a_Backward_Society">Edward Banfield</a> long ago outlined the dark places a value system centred on extreme individual self and familial interest would take communities and countries.</p>
<h2>How to fix corporate governance</h2>
<p>To address the confusion created by mixing executive and non-executive directors on one board, Australia should mandate a two-tiered board structure for corporations and large companies. </p>
<p>This would separate non-executive from executive directors and create clear, legally separate roles for both groups. </p>
<p>On the upper, supervisory boards’ non-executive directors would be legally tasked with monitoring and control. This includes approving strategy and appointing auditors. </p>
<p>A lower, management board made up of executive directors would be responsible for implementing the approved strategy and day-to-day management.</p>
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<a href="https://theconversation.com/the-way-banks-are-organised-makes-it-hard-to-hold-directors-and-executives-criminally-responsible-93638">The way banks are organised makes it hard to hold directors and executives criminally responsible</a>
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<p>Research into European banks <a href="https://www.emeraldinsight.com/doi/abs/10.1108/S0885-333920150000016011">suggests</a> having employee and union representation on supervisory boards, combined with introduction of employee elected <a href="http://www.businessdictionary.com/definition/works-council.html">works councils</a> to deal with management over day-to-day issues, reduces <a href="https://openknowledge.worldbank.org/handle/10986/20343">systemic risk</a> and holds executives accountable. </p>
<p>This is important given the findings of an <a href="https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-inquiry-final-report-accepts-eu">Australian Prudential Regulatory Authority report into culture at the Commonwealth Bank</a>. It found a board in awe of the CEO and executive committees unwilling to challenge him. Not to mention their lack of detailed operational and regulatory knowledge. </p>
<p>It’s noteworthy it was operational-level employees who acted as whistleblowers and <a href="https://www.smh.com.au/business/banking-and-finance/cba-amputates-toxic-wealth-management-arm-before-poison-spreads-20180625-p4znmj.html">brought on the banking royal commission</a>. </p>
<p>Employee-elected directors would systemise this process. Employees often have a much better understanding of what is happening inside large corporations than any independent non-executive director could. </p>
<p>And by electing employee directors, boards become more democratic and better proxies of the public interest - not just those of shareholders.</p>
<p>The ASX code is <a href="http://theconversation.com/the-cpa-saga-demonstrates-why-australias-corporate-governance-code-needs-replacing-79200">bad and ineffective</a>. It’s written by corporate insiders for corporate insiders, under the aegis of a listed corporation (the Australian Stock Exchange). </p>
<p>This is why responsibility for writing and amplifying governance practice should fall to a regulatory (APRA, Australian Securities and Investments Commission and the Australian Competition and Consumer Commission) convened panel comprised of community and consumer advocates. </p>
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<a href="https://theconversation.com/the-way-banks-are-organised-makes-it-hard-to-hold-directors-and-executives-criminally-responsible-93638">The way banks are organised makes it hard to hold directors and executives criminally responsible</a>
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<p>These reforms are important but they’re just the start. They need to be complemented by wide-ranging initiatives in prudential regulation, corporate law, competition law, <a href="https://theconversation.com/votes-for-corporations-and-extra-votes-for-property-owners-why-local-council-elections-are-undemocratic-83791">electoral law</a> and <a href="https://www.emeraldinsight.com/doi/full/10.1108/01425450510612004">industrial relations</a>.
All of this is necessary to constrain inappropriate corporate influence over regulators, politicians and wider public discourse.</p>
<p>The laundry list of necessary reforms includes <a href="https://www.afr.com/business/accounting/pwc-deloitte-kpmg-ey-face-uk-breakup-call-amid-carillion-demise-20180515-h10455">breaking up</a> the big four accounting firms, <a href="https://theconversation.com/the-governments-bank-reforms-wouldnt-have-saved-us-a-royal-commission-98939">capping executive remuneration and banning variable incentives</a>, <a href="http://journals.sagepub.com/doi/abs/10.1177/0001839213486984">banning corporate political donations and heavily restricting lobbying</a>, better resourcing regulators and <a href="https://doi.org/10.1080/01900692.2014.903266">working to prevent regulatory capture</a>, and closing loopholes in the corporate law. </p>
<p>Finally, intensifying proactive surveillance would increase the number of <a href="https://www.afr.com/business/banking-and-finance/financial-services/anz-criminal-cartel-case-unsettles-financial-community-20180603-h10wq1">criminal prosecutions of directors and senior executives</a>.</p><img src="https://counter.theconversation.com/content/99297/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew received funding from RMITs EU Centre <a href="http://www.rmit.edu.au/about/our-education/global-outlook/european-union-eu-centre">http://www.rmit.edu.au/about/our-education/global-outlook/european-union-eu-centre</a> to conduct his doctoral research. The Centre is funded by the European Union</span></em></p><p class="fine-print"><em><span>Warren Staples has received funding from Australia China Council, Department of Foreign Affairs and Trade (DFAT), and the Victorian Managed Insurance Authority (VMIA). Warren is currently a member of the Institute of Public Administration Australia (IPAA) Victoria’s Sustainability Community of Practice (CoP) Advisory Committee.</span></em></p>Splitting company boards and allowing employees to elect board members are just the start of the reforms needed to fix corporate governance.Andrew Linden, Sessional/ PhD (Management) Candidate, School of Management, RMIT UniversityWarren Staples, Senior Lecturer in Management, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/476342015-09-18T00:39:50Z2015-09-18T00:39:50ZThe unfinished business facing Australia’s new treasurer<p>When Australia’s new treasurer walks into the office on Monday morning, a stack of unfinished business awaits. A quick scan of the Treasury website reveals four major inquiries begun in the past 18 months that are still in progress – the <a href="http://fsi.gov.au/">Financial System Inquiry</a>, the <a href="http://competitionpolicyreview.gov.au/">Competition Policy Review</a>, the <a href="http://www.treasury.gov.au/ConsultationsandReviews/Reviews/2015/Tax-White-Paper">Tax White Paper</a> and the <a href="http://www.treasury.gov.au/ConsultationsandReviews/Reviews/2015/NAIP-Taskforce/Interim-Report">Northern Australia Insurance Premiums Taskforce</a>.</p>
<p>The outcomes of these processes open up the possibility of bold decisions that would uplift the outlook for the nation’s economic growth and longer-term prosperity. It is worthwhile to delay a rush to judgement, and consider a framework and narrative that incorporates and informs all of these areas of inquiry.</p>
<p>The most obvious piece of pending business is the government response to the Financial System Inquiry led by David Murray over the course of 2014. The government response, which had been promised for a few months now, appeared ready to be issued this week. </p>
<p>Indeed, close observers have been left wondering whether there would be much “response” in the response, in light of pronouncements that have already been made. Banking regulator APRA has issued guidance on bank capital (with significant market impacts this year); the government has drafted new legislation on superannuation governance that has been released for public consultation; the decision has been made to not impose a deposit insurance scheme; ASIC’s capability and funding model are currently under review; and the RBA has conducted a payments review including interchange fees.</p>
<p>Off the back of these reviews, other mini-inquiries and consultations have emerged. The Assistant Treasurer Josh Frydenberg in August announced a regulatory review of the payday lending industry. The review of retirement income stream regulation that took place last year is still pending outcomes, and perhaps partly rolled into the Tax White Paper process. </p>
<p>The Northern Australia Insurance Taskforce is examining ways in which the government’s balance sheet can be used to reduce insurance premiums in specific regions of Australia – perhaps without the rest of the Australian community fully appreciating the knock-on impacts this could have for other policyholders. Also under-appreciated are other changes in the insurance industry, such as how the Medibank privatisation is redrawing the regulatory landscape on health insurance.</p>
<p>Yet, one wonders whether the two core positions in the FSI report have been lost in all of the noise: the need to enable efficient funding of the economy by removing distortions, and the ability to promote competition and innovation through appropriate policy settings. </p>
<p>Removing distortions and enabling competition including through innovation in the financial system are both absolutely critical; they are the engine of sustainable financial sector growth. And there is a lot of work to be done.</p>
<p>What does sustainable financial sector growth look like, and why is it important? What is the policy framework that surrounds it? The narrative that will explain this to the Australian community needs to be developed and communicated. Without it, the bold policy choices that are yet to be made are likely to come across as tedious, intangible and maybe just too hard.</p>
<p>The story is straightforward, but is not told often, or well. When we hear from politicians about our economic future, the focus is usually on the goods-producing sectors – mining, agriculture, food, specialised manufacturing. In services we focus on easily-understandable cross-border movement in people – tourism and higher education. We rarely hear boosterism applied to financial services.</p>
<p>Yet, financial services is the largest single industrial segment in the Australian economy by gross value added. It is the largest contributor of corporate tax to the Australian government. It is a major employer in most states, and dominant in NSW and Victoria. It is also probably the largest single services export from Australia to the rest of the world, as ACFS detailed in a recent report. Its above-average rate of productivity growth over the past decade suggests that Australia’s financial sector is innovative.</p>
<p>Of course, the financial services sector also plays an important role in intermediating funds that support growth and innovation through the rest of the economy. The financial services sector runs the payments system, the credit system and the capital markets system that both funds business activity and provides wealth management products for households. Financial services also manage risk through insurance.</p>
<p>What the government has done thus far with the FSI report is fine, but there is potential to go a lot further. The need for this can be seen in the gaps where the financial system has been found wanting: credit to small business, generation of venture capital, creation of a broader suite of retirement income products, the high cost of insurance in some sectors. </p>
<p>Creating supports for clusters for innovation in finance, writing legislation that would enable digital identities while protecting personal financial data, forcing greater access to and use of data so as to level the playing field for competition – these are proactive and forward looking recommendations that may not be easy but must be done. Push the financial sector into the digital age, and the rest of the economy will follow.</p>
<p>And then there is the infrastructure. The NBN may be on its way, but what about data storage in the cloud? This has become essential infrastructure that allows financial firms to store their data at lower cost. Enabling this functionality while protecting firms from cyber crime would be a whole-of-economy advance in Australia’s global competitive position.</p>
<p>A framework that removes distortions and enables competition and innovation – this speaks to the agile, innovative, creative future that Prime Minister Malcolm Turnbull articulated in his victory speech on Monday night. Build the narrative around the inquiries, and good outcomes are sure to follow.</p><img src="https://counter.theconversation.com/content/47634/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amy Auster 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>A bulging in-tray of reviews awaiting response awaits Malcolm Turnbull’s choice of treasurer in his new cabinet.Amy Auster, Deputy Director, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/461872015-08-17T04:54:42Z2015-08-17T04:54:42ZThe obvious and not-so-obvious problems with Hockey’s bank deposit tax<p>The federal government has given itself until the end of the year to respond to the many recommendations contained within last year’s <a href="http://fsi.gov.au/publications/final-report/">Financial System Inquiry report</a>, but in one area it has already decided to act against the Chair David Murray’s advice.</p>
<p>From January 1, 2016 the government will levy a bank deposit tax. In <a href="http://www.afr.com/news/politics/hockey-wants-to-exempt-small-banks-building-societies-from-deposit-tax-20150809-givb6u">all likelihood</a> this will be 0.05% of deposits up to $250,000. The scheme would be limited to the big four (ANZ, NAB, CBA and Westpac). The thinking is that the big four are big enough to absorb the tax, without passing it onto depositors. The small banks, credit unions and friendly societies would be exempt.</p>
<p>Under the proposal, if a bank fails and needs a bail-out, the money generated by the tax (one estimate puts it at A$500 million annually) would foot the bill. Whether that’s correct is debatable. A modest A$10 billion bailout would require the scheme to run for twenty years.</p>
<p>Murray says this “ex ante”, or upfront arrangement, is the incorrect approach. He argues the levy should be “ex post” - in other words, the scheme should seek to collect the funds <em>after</em> a bank becomes insolvent, from all of the banks that remain. This, he argues, would only be necessary in the event that the government was not able to recoup its costs through the liquidation of the failed bank’s assets. Pretty unfair to those banks that were well run, and, in effect, a free pass to the ones that fail.</p>
<p>Murray is very wrong indeed. The government will struggle to recoup its costs from an insolvent bank, because…it’s insolvent. In addition, bank rescue is usually aimed at re-capitalising the bank, which precludes liquidating its assets. But more important even than that, is that the conventional wisdom has come down firmly on the side of the “ex ante” argument, and Murray <a href="http://kevindavis.com.au/secondpages/workinprogress/2015-04-30-Depositor%20Preference%20and%20Deposit%20Insurance.pdf">should have been aware of that.</a> </p>
<h2>A flight to smaller banks?</h2>
<p>There are a raft of other issues this proposal throws up. First, it should be the big four plus one: Macquarie should not be exempt. Secondly, what happens to deposits in excess of $250,000? Will they attract a higher tax? In which case most depositors will simply split their deposits. Or will they attract a lower tax? In which case we will, in effect, be levying a poverty tax - that is to say, poorer, smaller depositors will be taxed more. Hardly fair.</p>
<p>Then there are the arguments put forward by the Australian Bankers’ Association (ABA) which highlight the disadvantage this scheme will have on larger banks: the scheme will encourage a flight of depositors to smaller banks.</p>
<p>There are two sides to this argument however. The first is it will level the playing field between the big and small banks. Small banks currently have to pay more for deposit funding because they are perceived as presenting a higher risk. The other side of the coin is that small banks currently have to pay more for deposit funding because they are - well - higher risk, and so should pay more.</p>
<p>In our rush to punish the big four we should be circumspect about distorting the market by distorting the cost of deposit funding. ABA Chairman Steve Munchenberg’s assertion that taxing the big four is unfair, because it is only the small banks that would need rescuing, is arguably nonsense. Where else would we get the concept “too big to fail”? Not from the dangers posed by the collapse of small banks. Furthermore, the <a href="http://www.theguardian.com/business/2008/dec/28/markets-credit-crunch-banking-2008">empirical evidence that emerged from the GFC</a> was that it was big banks that toppled more than small ones.</p>
<h2>The real problem with the tax</h2>
<p>There is a fundamental shortcoming with this proposal for a flat rate tax, and one which has not been discussed: protection of depositor’s funds is akin to an insurance contract. The insurance is against the risk of the bank collapsing. In return for which an insurance premium is charged. But the premium does not fluctuate. It is a flat rate (0.05%). A flat rate premium for a variable risk distorts the price of risk. The risk in question is a crucial one: insolvency. This represents a distortion of the risk which is the raison d'être for having the safeguard of depositor protection in the first place. Hardly optimal to have said raison d'être muddy the waters and encourage a critical point of failure.</p>
<p>In all probability, a risk-sensitive premium, able to fluctuate up and down as the risk of the bank not remaining solvent rises and falls, would be preferable. The <a href="http://www.imf.org/external/pubs/ft/scr/2013/cr1366.pdf">IMF has recommended this</a> for Europe, and there are several European countries where <a href="https://www.imf.org/external/pubs/ft/wp/2014/wp14118.pdf">such schemes</a> have been operating for some time.</p>
<p>There are differences in the risk-sensitive premium arrangements employed across those countries, and some have been more successful than others. One of them was Greece. So these types of arrangements need further study. But if operating optimally, a risk-sensitive deposit tax would almost certainly create a more effective deterrence against excessive risk taking by banks, than would the current proposal for a flat rate fee of 0.05%. For a government that is avowedly free-market, this should not be a tough sell.</p><img src="https://counter.theconversation.com/content/46187/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow 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>A flat rate bank deposit tax could be distorting, and not for the reasons the banks suggest.Andrew Schmulow, Principal, Clarity Prudential Regulatory Consulting Pty Ltd. Visiting Researcher, Oliver Schreiner School of Law, University of the Witwatersrand, Johannesburg., The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/433942015-06-23T20:09:18Z2015-06-23T20:09:18ZBBY failure shows why David Murray was right about regulation<p>No matter how much goes on behind the scenes by regulators in investigating and monitoring, they will be judged on how they protect markets and individuals from damaging collapses such as that of large Australian stockbroking company, BBY Ltd. </p>
<p>The company entered voluntary administration on 18 May 2015. The Australian Securities and Investment Commission (ASIC) has suspended its Australian Financial Services Licence and that of two other BBY Group companies (s 915B(3) Corporations Act) and on 22 June at the second creditors meeting the creditors voted to wind up several companies in the BBY group including BBY Ltd. </p>
<p>At the June 22 meeting, creditors also approved a Deed of Company Arrangement involving AIMS Financial Group and two other companies in the group, Smartrader and BBY Hometrader. A further meeting to deal with the remaining BBY companies is yet to take place.</p>
<p>Clients of BBY are understandably angry, with some forced to close positions and with no access to share portfolios. They blame BBY but they also take aim at ASX, and while investors and creditors may have been surprised by the appointment of an administrator, ASX perhaps should have been less so, as the problems with BBY had been obvious to ASX for some time.</p>
<h2>Disciplinary action</h2>
<p>In <a href="http://www.asx.com.au/communications/notices/2015/0040.15.01.a.pdf">disciplinary proceedings of June 2014</a> the Chief Compliance Officer of ASX Compliance Pty Ltd found that BBY did not comply with ASX Clear Operating Rules on a number of occasions between 11 and 16 June that year. A total fine of $180,000 was imposed. </p>
<p>In two instances during that period ASX had delayed making calls on BBY (one of $15 million and the other of $22 million) resulting from the relevant series of transactions, as “<a href="http://www.asx.com.au/communications/notices/2015/0040.15.01.a.pdf">the delay would prevent BBY from committing an event of default and a possible insolvency event</a>.” A Trust Account breach was also identified. </p>
<p>Now less than a year later BBY Ltd is in liquidation - and the question must be asked as to whether the regulators did enough to protect the market.</p>
<p>ASX Operating Rules give it significant powers where a breach occurs. In June 2014 ASX understood the precarious position of BBY. In a situation where a substantial amount was outstanding and, as ASX noted in its <a href="http://www.asx.com.au/communications/notices/2015/0040.15.01.a.pdf">Disciplinary Matter report</a>, BBY had confirmed that all funding lines were exhausted, and that it couldn’t pay its debts
as they were due, ASX waived compliance and BBY lived another day. This, even though ASX labelled the contraventions “serious”, “reckless”, and “without having appropriate systems and processes in place”.</p>
<p>The report noted there was “weaknesses in BBY’s risk management and compliance framework” and “management oversight” all of which could have had “a serious impact on the market, the clearing and settlement facilities, BBY and BBY’s clients and employees”.</p>
<p>ASX required a remediation plan and BBY engaged independent experts, Lazorne Group,
as to its risk management framework. According to the Administrators Report
the review raised several important issues including an existing inadequate governance and risk framework, inherent conflicts of interest, unclear project ownership, tight timeframes, need for staff training. </p>
<p>Together with the independent review, during the first part of 2015 the ASX investigated BBY’s management of client monies and found deficiencies. A raft of concerns were put by ASX to BBY in April 2015 (including potential breaches of the ASX Clear Operating Rules) and conditions imposed. In May 2015 an event of default was declared in regard to a failure to pay interim margins and the winding down of the options clearing business required.</p>
<h2>Red flags were there</h2>
<p>On 8th May BBY advised options clients that it was exiting the business. As soon as ASX were notified of the appointment of an administrator, <a href="http://www.asx.com.au/services/clearing/asx-clear.htm">ASX Clear</a> declared a default event and suspended BBY’s participation in the market prior to the market opening on 19 May. Many BBY investors expected a longer time frame and were reportedly caught by surprise. </p>
<p>What were the danger signs? Clear red flags were the ASX disciplinary matter in 2014 and the consistent failure of the BBY board to remedy the issues raised by the independent reviewer or by ASX during early 2015. </p>
<p>Further, the Administrators Report noted a lack of independence on the board (two of the three directors were siblings) and suggested that related party transactions will be investigated in relation to all directors in the liquidation. The records of the BBY companies were unreconciled and in a poor state, and there were numerous inconsistencies in the directors statements in the <a href="https://www.kpmg.com/AU/en/services/Advisory/Transactions-Restructuring/Restructuring/bby/Documents/bby-limited-439a-report-12-june-2015.pdf">Report as to Affairs</a>.</p>
<p>Now that BBY is in liquidation, the liquidators will consider matters of insolvent trading and the directors conduct more generally, as well as recovering property or compensation for creditors under Part 5.7B of the Corporations Act, including the possibility of unfair preferences and unreasonable director related transactions. </p>
<p>But this is after the fact, and is unlikely to help BBY clients or unsecured creditors who are owed around $8 million,and who, according to the Administrators Report can only look forward to an estimated return in the dollar of between 0 and 24%.</p>
<h2>Should regulators have acted earlier?</h2>
<p>Should ASIC have acted prior to the appointment of administrators? Certainly now, with the doubt cast on the company’s management by the administrators/liquidators, ASIC should initiate an inquiry. </p>
<p>BBY had come to ASIC’s attention on a number of occasions – in 2005 a warning was issued for failing to manage conflicts of interest; ASIC would have been aware of the ASX Disciplinary matter of June 2014 (there was also an earlier ASX Disciplinary matter in September 2011); in August 2014 ASIC’s Market’s Disciplinary Panel issued <a href="http://download.asic.gov.au/media/1783957/asic_mdp12_14.pdf">an infringement notice with a penalty of $90,000</a> for contravening ASIC Market Integrity Rules (s 798H Corporations Act) and <a href="http://www.abc.net.au/news/2015-06-22/creditors-out-of-pocket-after-bby-collapse/6565178">there were suggestions</a>
that BBY clients contacted ASIC in 2015. </p>
<p>Where the investing public are relying on competent management of their funds the risk of failure takes on wide significance. BYY’s failure is not about one or two clients and creditors left in the lurch. ASX had pointed out the serious impact on the market where BBY didn’t meet its obligations in its Disciplinary Notice in 2014. As an options clearing business BBY carried particular responsibility. A wait and see policy may not suffice.</p>
<h2>Appoint a Financial Regulator Assessment Board</h2>
<p>The BBY failure, the Commonwealth Bank financial scandal, and <a href="http://www.smh.com.au/business/ioof-shares-plunge-as-regulator-moves-20150622-ghum0j.html">the recent trouble at IOOF</a> suggest that a Financial Regulator Assessment Board, as proposed in David Murray’s Financial System Inquiry, could create a more pro-active, interventionist outlook and re-claim investor trust.</p>
<p>Specifically the Inquiry called for more clarity around the expectations of regulators, including addressing the market’s appetite for risk in the financial system and the need to develop better performance indicators. </p>
<p>It is possible that from a regulatory perspective punishing corporate failure has historically seemed more attractive in its certainty than preventing it. Regulators need to re-think this history as increasingly the widespread fallout and loss to individual investors and creditors from company failure outweighs the benefits of the deterrent message sent to directors by enforcement. </p>
<p>“Sudden” corporate failure is rarely sudden, and where regulator intervention succeeds and cuts investor and creditor losses, all the good work of regulators won’t end up being lost in the fallout of corporate failure.</p><img src="https://counter.theconversation.com/content/43394/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Quilter 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>As investors and unsecured creditors remain in limbo over the collapse of financial services group BBY, where were the regulators?Michael Quilter, Senior Lecturer, Department of Accounting and Corporate Governance, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/352512014-12-10T19:39:54Z2014-12-10T19:39:54ZMurray pinpoints inconsistency on financial advice and super trustees<figure><img src="https://images.theconversation.com/files/66800/original/image-20141210-13368-mme5tk.jpg?ixlib=rb-1.1.0&rect=54%2C182%2C4421%2C3053&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Big nest egg or small: shouldn't super fund trustees meet the same professional standards as individual financial planners?</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Finally, <a href="http://fsi.gov.au/publications/final-report/executive-summary/">Financial System Inquiry</a> chairman, David Murray, has brought some consistency into two hot debates running in finance.</p>
<p>Parliament, financial media commentators and a whole range of vested interests have argued at length over the last year about who can give financial advice, how they should be remunerated, how they should be trained and what qualifications they should have. </p>
<p>At the same time there has been an <a href="http://www.mercer.com.au/newsroom/2014-superannuation-governance-survey.html">ongoing debate</a> in the media, through speeches and submissions, about who is appropriately qualified to be trustees of large superannuation funds.</p>
<p>The same groups have made the opposite arguments in the two cases. </p>
<p>One group of institutions, mainly the industry super funds, has been arguing that we need to have greater independence of financial planners and advisers. Another group of institutions, mainly the retail super funds, have been arguing that advisers can be aligned but should be more closely controlled. Most importantly, they argue that they should be more professional. The recent political fight around the roll back of Labor’s Future of Financial Advice (FOFA) reforms has essentially been focused on these issues of independence and professionalism. </p>
<p>At the same time the retail super funds have been pushing to ensure that a majority of the directors of superannuation funds should be independent. They are pushing the case for greater professionalism of superannuation trustees. By contrast the industry super funds have been arguing that this is not necessary, and that trustees do not need special knowledge. Most particularly they have argued that trustees coming from particular employers and particular employee groups, without any particular qualification, are appropriate.</p>
<p>Murray has pointed out the inconsistency. If the person advising me on my $200,000 superannuation fund must be professional, then the trustee for a fund managing $2 billion for its members surely deserves the same respect.</p>
<p>Clearly both are important. An adviser who gives me bad advice can ruin my retirement and my life. Notably however, a superannuation fund which makes mistakes can cost thousands of people security in their retirement. There are three reasons to think that the latter is more important.</p>
<p>The 2010 <a href="http://www.supersystemreview.gov.au/content/content.aspx?doc=html/final_report.htm">Cooper report</a> into the superannuation system pointed out that by 2035 the <em>average</em> superannuation fund supervised by the Australian Prudential Regulation Authority (APRA) (that is, excluding the self-managed sector) will be managing $53 billion on behalf of superannuants. This is a very large amount of money, the lifetime savings of thousands of members. Putting to one side the politics and the vested interests, clearly it is extremely important that the directors of superannuation funds be appropriately qualified and highly skilled. </p>
<p>The second reason is that superannuation sector is not simply important to individuals, but to Australia’s economic future. Murray makes clear that the superannuation sector is well on the way to being one of the largest components of the Australian financial system, not far from the size of the banks. Where and how it invests will shape much of Australia’s growth and development. This alone is a key reason to demand a high degree of professionalism in the management of the sector.</p>
<p>The third argument Murray makes for independence of directors, is that since people can choose which fund they join, the superannuation funds will be increasingly de-linked from particular industries. If anyone can join a fund, there is little reason for the trustees of the fund to belong to a particular sector of the workforce (employers or employees). </p>
<p>One would actually hope that APRA would have a say in approving who could be a trustee of a major superannuation fund, and would set very high standards of training and experience.</p>
<p>There are lots of vested interests involved in these debates. Murray has however given us reasons to sit back and ask, what is the best structure for the future? This is important to Australia’s future.</p>
<p>So let’s have some honesty and consistency in the public debate. If professionalism is important at the level of the individual then we should expect high standards of professionalism from the trustees of superannuation funds. Arguably, trustees of major funds should be held to a higher standard.</p><img src="https://counter.theconversation.com/content/35251/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock is affiliated with the Australian Centre for Financial Studies.</span></em></p>Finally, Financial System Inquiry chairman, David Murray, has brought some consistency into two hot debates running in finance. Parliament, financial media commentators and a whole range of vested interests…Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/350152014-12-07T05:55:42Z2014-12-07T05:55:42ZA call for capital: Murray report pushes for higher banking standards<figure><img src="https://images.theconversation.com/files/66468/original/image-20141207-8664-ubbxdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">David Murray and Treasurer Joe Hockey have released the final report of the Financial System Inquiry.</span> <span class="attribution"><span class="source">AAP/Britta Campion</span></span></figcaption></figure><p>To increase the resilience of the Australian financial system the Big Four banks will be asked to carry larger capital buffers under recommendations made in the final report of the <a href="http://fsi.gov.au/">Financial System Inquiry</a>. The inquiry, led by former Commonwealth Bank chief executive David Murray, calls for change in Australia’s financial system to make it more resilient, efficient and equitable.</p>
<p>The report is a comprehensive and carefully written reflection of the large number of submissions the inquiry received over the past year. It also recognises Australia is not immune from future financial crises.</p>
<p>The report proposes major changes to the banking system likely to increase competition in the sector. These changes include narrowing the gap for mortgage lending requirements between institutions. The result will even the playing field between the Big Four banks and smaller financial institutions. </p>
<p>Borrowers in the small and medium business community, who have found it hard to secure finance, may also be pleased with the proposed revision of the relative treatment of home loans compared to corporate loans.</p>
<h2>A push to increase the capital buffers of banks</h2>
<p>The inquiry suggests increasing the level of capital all banks are required to hold to “unquestionably strong” levels. In particular, core Tier 1 capital should be increased. This may impact on profit margins and dividends for bank shareholders.</p>
<p>Most importantly, the inquiry distinguishes between buffers and hard minimums for capital. Capital buffers can be run down if needed and are important to ensure bank resilience during stress periods. Insufficient capital buffers trigger restrictions on dividends and bonus payments, whereas a breach of hard minimum capital levels triggers bank liquidation.</p>
<p>On the face of it, this is a proposal that would be hard to argue against. However, risks do exist. The implementation of such rules can be challenging and implementation will need to be handled carefully in Australia. That is because banks compete with non-bank financial institutions and with institutions outside Australia. </p>
<p>Capital increases for Australian banks may exceed the global Basel standards and trigger capital arbitrage, that is a “horse race” to transfer of risk to non-banks or overseas. However, the inquiry mitigates such concerns by emphasising that Australia should not deviate from these standards “unless there are specific domestic circumstances”.</p>
<p>To date, the costs and benefits of capital regulation have been unclear. Banks have many stakeholders, including financiers in the form of shareholders, bondholders and depositors. Through explicit and implicit governmental bank guarantees, Australian taxpayers are also stakeholders. </p>
<p>What needs to be understood is that financial resilience generally implies lower levels of risk, and lower risk generally means lower returns. The magnitude of this future risk return trade-off and impact on lending activity is unclear and further impact studies for Australia are needed. The inquiry recommends longer transition periods allowing such analysis.</p>
<h2>Measuring risk</h2>
<p>The inquiry notes the internal risk weighting models used by large banks often predict lower levels of risk – thus requiring lower capital levels – than the standardised approach used by small and medium banks. As a consequence, major financial institutions only have to <a href="http://www.abc.net.au/news/2014-12-07/financial-system-inquiry-murray-report-banks-hold-more-capital/5949404">set aside less than half the capital of regional banks, mutual banks and credit unions</a>.</p>
<p>Internal ratings-based models are calibrated to the low default experience in Australia. This is attributed to Australia’s extended period of economic growth since 1983, careful underwriting and regulation, as well as prudent monetary and fiscal policies. </p>
<p>In comparison, the standardised approach is based on average risk levels in a large number of leading economies. The approach reflects the economic downturns experienced globally in recent decades. </p>
<p>The inquiry suggests the gap between the risk weights for residential mortgages should be reduced. New Zealand has recently implemented such changes by increasing asset correlations, a measure for systematic risk, from 15% to 21% for high loan-to-value loans.</p>
<h2>Impact on bank concentration</h2>
<p>The implied increase in equity between small and large banks may increase long term competitiveness in the sector.</p>
<p>The following charts compare the market share of the Big Four, Medium Five (AMP, Bendigo & Adelaide Bank, Suncorp, Bank of Queensland and Macquarie Bank) and other banks.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/66274/original/image-20141204-3619-db25ko.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/66274/original/image-20141204-3619-db25ko.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/66274/original/image-20141204-3619-db25ko.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/66274/original/image-20141204-3619-db25ko.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/66274/original/image-20141204-3619-db25ko.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/66274/original/image-20141204-3619-db25ko.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/66274/original/image-20141204-3619-db25ko.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Total resident assets (absolute, in $ million), source: Australian Prudential Regulation Authority.</span>
</figcaption>
</figure>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/66275/original/image-20141204-3645-1rxiyjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/66275/original/image-20141204-3645-1rxiyjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/66275/original/image-20141204-3645-1rxiyjz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/66275/original/image-20141204-3645-1rxiyjz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/66275/original/image-20141204-3645-1rxiyjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/66275/original/image-20141204-3645-1rxiyjz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/66275/original/image-20141204-3645-1rxiyjz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Total resident assets (relative, in %), source: Australian Prudential Regulation Authority.</span>
</figcaption>
</figure>
<p>Basel II and the internal ratings-based approach were implemented in 2008, around the time of the global financial crisis. The charts show the Big Four have since increased their market share, while all other banks have lost market share. This may also be attributed to the ability of the Big Four to better access funding.</p>
<p><a href="http://www.afr.com/f/free/blogs/christopher_joye/why_banking_big_nine_would_be_win_dyeWmAUsMltyZYqnBhWBkN">The emergence of a “big nine” set of banks has been predicted</a> with these changes. A less concentrated banking system could decrease the systemic risk of individual banks and provide a more competitive banking system with lower fees for consumers. </p>
<h2>Mortgage concentration continues to be a concern</h2>
<p>Capital rules aim to protect banks from realised financial losses. It is also worth considering ways to avoid large bank losses in the first place. This may include prudent monetary policy to avoid asset bubbles and asset diversification.</p>
<p><a href="http://www.imf.org">According to the International Monetary Fund</a>, asset diversification is a major challenge for Australian banks where 62.7% of total loans relate to mortgages, 9.7% to commercial real estate loans and most of the remainder to small and medium sized company loans often secured by real estate. </p>
<p>Australian banks have a much higher exposure to mortgage loans to other developed economies. <a href="https://theconversation.com/australian-banks-are-too-exposed-to-mortgages-but-what-if-the-world-was-flat-31000">Hence, mortgage lending has been identified as systemic risk</a> to the industry and is addressed in detail in the report.</p>
<p>Much of the growth in total bank assets, shown above, has been in mortgage loans. Meanwhile small and medium-sized companies currently find it hard to secure finance. Increased internal ratings-based risk weights for residential mortgages may mean that more credit will be made available to businesses.</p>
<p>Beyond these proposals, <a href="https://theconversation.com/australian-banks-are-too-exposed-to-mortgages-but-what-if-the-world-was-flat-31000">other ways</a> to diversify asset portfolios exist. Securitised mortgages could be replaced with investments in other asset classes and geographies. For this to occur, transparency and global financial integration will be important.</p>
<h2>The legacy</h2>
<p>Previous inquiries, such as the Campbell Inquiry in 1981 and the Wallis Inquiry in 1997, laid the foundation for an internationally competitive financial industry. Those inquiries led to the deregulation of the industry and the creation of the Australian Prudential Regulation Authority.</p>
<p>It is early days yet, but this inquiry is also likely to have a major impact on the Australian financial system. The system is likely to become more efficient because of increased transparency and lower fees. It is likely to become more equitable from reduced discrimination among institutions and also more resilient.</p>
<p>However, Australia has not experienced real economic stress since 1983 and the current state of affairs is unlikely to persist. The resilience of the Australian financial system will need to be monitored, re-assessed and market parameters re-weighted as the economic environment changes over time.</p><img src="https://counter.theconversation.com/content/35015/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harry Scheule does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>To increase the resilience of the Australian financial system the Big Four banks will be asked to carry larger capital buffers under recommendations made in the final report of the Financial System Inquiry…Harry Scheule, Associate Professor, Finance, UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/300862014-08-07T05:22:44Z2014-08-07T05:22:44ZShould we follow the US and UK and separate our banks?<figure><img src="https://images.theconversation.com/files/55844/original/w24cvw6z-1407305746.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">David Murray has suggested splitting of investment and retail banking.</span> <span class="attribution"><span class="source">AAP/Lukas Coch</span></span></figcaption></figure><p>Australia’s Financial System Inquiry chairman David Murray dropped something of a bombshell in suggesting he may recommend the separation of Australian retail banking from investment banking.</p>
<p>The carefully cultivated mythology is that while such structural reforms need to concern regulators in the US, UK and Europe, since the Australian banks sailed through the financial crisis relatively unscathed (with the benefit of a government guarantee) they have proven their mettle. As they have never engaged in speculation in derivatives and other risky securities with quite the abandon of their overseas banking counterparts, there is no need for intervention.</p>
<p>Now one of their own, the former long-standing CEO of the Commonwealth Bank is thinking the supposedly unthinkable. At least Murray is being consistent, since he felt it was appropriate to separate retail and investment banking at the time of the 1997 Wallis Inquiry, telling the Australian Financial Review, “It was a good structure because it allowed clarity of regulation of the component parts of the group”. </p>
<h2>Glass-Steagall</h2>
<p>His statements intimate the famous US Banking Act of 1933 - known by the names of its two Southern democrat Congressional sponsors, Glass-Steagall - which responded to a huge wave of bank failures during the Wall Street Crash by separating commercial retail banking from investment banking.</p>
<p>As this graph shows, during the ensuing 50 years there were scarcely any bank failures in America.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/55931/original/hc4ksbzn-1407384891.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/55931/original/hc4ksbzn-1407384891.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=403&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55931/original/hc4ksbzn-1407384891.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=403&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55931/original/hc4ksbzn-1407384891.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=403&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55931/original/hc4ksbzn-1407384891.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=506&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55931/original/hc4ksbzn-1407384891.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=506&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55931/original/hc4ksbzn-1407384891.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=506&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Graph 1 Financial Institution Failure in the US (1864-2000)</span>
<span class="attribution"><span class="source">Sources: Historical statistics of the United States: colonial times to 1970 (Washington CD Government printing office, 1975). Series X-741 (p 1038); Failures and Assistance Transactions". Table BF02, FDIC website.</span></span>
</figcaption>
</figure>
<p>With Ronald Reagan administration’s enthusiasm for deregulation, the Glass-Steagall began to be dismantled (followed almost immediately by the Savings and Loans crashes of the Bush presidency). In the over-confidence of the Clinton years, Glass-Steagall was finally abolished, an invitation for super conglomerate banks to form combining retail, investment, private equity and hedge funds. Governments were convinced that lightening the burden of regulation was the means to promote more dynamic financial markets and business development.</p>
<p>The global financial crisis which ensued and its aftermath consisted of multiple and compounding failures in financial markets, institutions, regulation and governance. The “animal spirits” unleashed in unfettered securities markets, massive incentivisation of risk taking and leverage, and the abandonment of effective governance and ethical commitments occurred in a regulatory vacuum.</p>
<h2>Re-regulation</h2>
<p>Realising the consequences of unchecked systemic risks, national governments and international agencies have been prompted into a major series of regulatory reforms and interventions in financial markets and institutions, the effect of which remains to be discerned.</p>
<p>Famously, Sandy Weill, former Chairman and CEO of Citigroup who had built the first of the financial super-conglomerates, broke ranks in 2012 to <a href="http://www.cnbc.com/id/48315170">essentially call for a return of Glass-Steagall</a>: </p>
<blockquote>
<p>I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable, and the investment banks can do trading…</p>
</blockquote>
<p>In fact though the US conglomerate banks including Citibank, JP Morgan, Goldman Sachs and others (now known as strategically important financial institutions) have grown even larger since the financial crisis owing to further consolidation in the industry. </p>
<p>The enormous wave of regulation from the G20, Basel Bank of International Settlements and even the passage of Dodd-Frank in 2010 have not changed the banks in any substantial and meaningful way. The Wall Street banks are now larger and more remote than before, and continue business as usual, and have not fundamentally changed their behaviour.</p>
<p>The Dodd-Frank Wall Street Reform Act in the United States is still being implemented (828 pages in itself, with 398 rules running to 14,000 pages, every page wrestled over by the lobbyists of the big banks). Part of the Act, the 882 page Volcker Rule was intended to update the (27 page) Glass-Steagall by restricting banks from engaging in speculative investments using customers’ deposits and risking their funds, while providing no benefits.</p>
<p>Though passage was finally achieved in December 2013, the outcome of this legislative initiative remains in doubt. Meanwhile other countries are considering splitting up the banks.</p>
<h2>Volker, Vickers and the European stuff</h2>
<p>As Murray sagely remarked from Washington “Having Volcker, Vickers and the European stuff in response to the crisis, you would have to consider whether it should apply to Australia”. </p>
<p>John Vickers chaired the Independent Commission on Banking in the UK following the financial crisis, which reported in parallel with the UK Financial Services Banking Reform Act 2013. <a href="http://www.parliament.uk/briefing-papers/sn06171.pdf">He suggested</a> UK banks should ring-fence their retail banking divisions from their investment banking to safeguard depositors funds from the risks of speculative investment.</p>
<p>In France and other European countries, ring fencing has also been argued for and the <a href="http://ec.europa.eu/internal_market/bank/docs/high-level_expert_group/report_en.pdf">European Commission’s Liikanen Report</a> accepted that mandatory separation of high-risk trading activities, or the ring-fencing of proprietary and third-party trading activities, without breaking banks up was required.</p>
<blockquote>
<p>“The trading division will have to hold its own capital, meaning that it stands or falls by its own activities and cannot, in theory at least, knock over the bread-and-butter retail banking operations.” </p>
</blockquote>
<p>While the UK and Europe continue slowly their efforts to restructure the banks, in the US, as UNSW Professor Justin O'Brien recently commented, a clear reform mandate has become “informed by waves of exceptions that undercut legislative intent and undermine regulatory authority”. </p>
<p>Frustrated at the lack of progress in the US, the <a href="http://www.huffingtonpost.com/lisa-donner/600000-signatures-for-gla_b_5634767.html">unlikely combination</a> of the radical Elizabeth Warren and conservative John McCain have proposed a 21st Century Glass-Steagall Act, which received 600,000 signatures in support.</p>
<p>In Australia we need to dispel the notion we live in the best of all possible banking worlds, and begin the process of separating retail from investment banking, to prepare for the shocks of the future that the international financial system is no doubt gearing up to provide.</p><img src="https://counter.theconversation.com/content/30086/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>Australia’s Financial System Inquiry chairman David Murray dropped something of a bombshell in suggesting he may recommend the separation of Australian retail banking from investment banking. The carefully…Thomas Clarke, Professor, Centre for Corporate Governance , University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/295472014-07-24T20:29:31Z2014-07-24T20:29:31ZSuperannuation: make income the outcome<figure><img src="https://images.theconversation.com/files/54704/original/6w2wcg35-1406162533.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The emphasis on the lump sum in superannuation unfairly moves risk to individuals.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Having led the world in the 1990s in embracing defined contribution retirement plans, Australia now is rightly reviewing whether the design of its retirement income system is meeting the needs of Australians living in retirement.</p>
<p>David Murray’s interim report into Australia’s financial systems noted the particular strengths of this three-pillar system, which comprises the age pension, compulsory superannuation guarantee and voluntary private savings. With more than A$1.8 trillion of assets under management, Australia now has the fourth largest private pension pool in the world. The questions, as the Murray report identified, are around the complexity, efficiency and efficacy of the system. </p>
<p>The fact is Australians are not only living longer, they are seeking greater choice and control in managing their retirement arrangements and need cost-effective products that meet their income needs over many decades after stopping full-time work.</p>
<p>The problems with the current system, as I see it, are two-fold: One is around the lack of meaningful information given to consumers and the other is around the stated lump sum goal of most superannuation plans. Unlike the old employer-sponsored defined benefit plans, the defined contribution (DC) plans that dominate in Australia and in the US market transfer the investment and other risks from companies to employees. </p>
<p>My view is that putting relatively complex decisions in the hands of individuals with little or no financial expertise is problematic. While some say the answer is increased financial literacy, it is simply unrealistic to expect people to make decisions about strategies that challenge even seasoned investment professionals.
To use an analogy, when we service our cars, the mechanic does not expect us to be able to understand how the fuel injection system works. Most of us just want a vehicle that gets us safely and reliably to our desired destination.</p>
<p>It’s the same with our retirement plans. It really makes no sense to ask individuals to make complex choices about risk exposures and asset allocation, for instance.</p>
<p>The second problem is the goal itself. The language around DC investment is about asset value. People are trained to see the key metric as the size of their fund pool, when what really matters to them is whether they will have sufficient income in retirement to live the lives they want to live.</p>
<p>If an individual’s pension savings are invested to maximise capital value at time of retirement and her personal goal is to achieve a reasonable level of retirement income, there is a clear mismatch involved.</p>
<p>In the view of the superannuation fund, the relevant risk is portfolio value. But the risk for the individual is uncertainty around retirement income.
How do we solve this dilemma? The answer is to adopt a liability-driven investment strategy that is equivalent to how an insurer hedges an annuity contract or how pension funds hedge their liabilities for future retirement payments to members.
Nearly a quarter of a century since Australia moved to compulsory super, the financial technology now exists to invest individual super contributions this way.
Each fund member would still get a pot of money at retirement and would still have the same choice over their savings they have under current DC arrangements. The difference is the value of the pot would be obtained through a strategy meant to maximise the likelihood of achieving the desired income stream.</p>
<p>Moving to this income-focused strategy would require changes not only to the way super plans actually invest their members’ money but also to how they engage and communicate with savers.</p>
<p>Instead of being asked complex (and meaningless) questions about asset allocation, members would be asked three simple questions – their retirement income goal, how much they can contribute from current income and how long they plan to work. Of course, the asset allocation is important, but this only a factor for achieving success. It is not a meaningful input for the choices the consumer actually makes.
Once these variables are known, the fund need only regularly communicate to the member the probability of reaching her goal. To increase that probability, the fund member has only three choices – save more, work longer or take more risk. There are no other ways. </p>
<p>The gap between what exists and what Australians need was highlighted by the Murray inquiry interim report, which noted that the current focus on lump sum balances in the superannuation system is evident in the absence of retirement income projections from annual statements to members.</p>
<p>“For many people, income projections, while difficult to calculate, would be far more useful than total accrued balances,” Murray said.</p>
<p>As someone who has spent much of his professional life researching this issue, I can only agree. Ultimately, what Australia needs is an approach to superannuation that uses smarter products rather than trying to make consumers smarter about finance.</p><img src="https://counter.theconversation.com/content/29547/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alongside his academic positions at MIT and Harvard, Professor Merton holds the post of resident scientist with global asset management firm Dimensional Fund Advisors. This article is drawn partly from his recent essay in the Harvard Business Review on the retirement planning challenge.</span></em></p>Having led the world in the 1990s in embracing defined contribution retirement plans, Australia now is rightly reviewing whether the design of its retirement income system is meeting the needs of Australians…Robert C. Merton, Nobel Laureate, Professor of Finance, School of Management, Massachusetts Institute of Technology (MIT)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/271602014-06-27T02:17:56Z2014-06-27T02:17:56ZNo Royal Commission; but banks not too big to be held to account<p>The <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/ASIC">Senate inquiry</a> in the actions of the Commonwealth Bank and the Australian Securities and Investment Commission has drawn a line in the sand, holding the banks and financial advisers to account for their actions in advising clients. </p>
<p>The Senate Committee’s final report which describes a “reckless sales-based culture” at the Commonwealth Financial Planning Limited (CFPL), roundly condemns the apparent inability of ASIC to intervene.</p>
<p>But the government has effectively rejected its most controversial recommendation of a Royal Commission, with Finance Minister Mathias Cormann this morning noting the dissenting report by Liberal senator David Bushby. When asked if he supported a Royal Commission, Prime Minister Tony Abbott said:</p>
<blockquote>
<p>Obviously some terrible things happened and it’s good that the Parliamentary Committee enquiring into this has been able to expose some of the problems. We will carefully consider the recommendations of the Committee. We do obviously have an inquiry into financial governance going on now. We want to get to the bottom of these things and we want to ensure that investors are as safe as they can be in a market economy.</p>
</blockquote>
<p>All eyes will now turn onto former CBA chief executive David Murray, who is preparing his final report into the financial system, due on July 15. </p>
<p>Most immediately, Murray needs to come up with more than platitudes about the future integrity of Australia’s financial services, to address the blight revealed on Australia’s banks and financial services and assure Australians immediate action will be taken to resolve it.</p>
<p>In the United States, despite the passage of the voluminous Dodd-Frank Act, the consolidation of the big investment banks, and the apparent lack of any behavioural changes among the toxically incentivised finance executives, a sense has developed - in t<a href="http://www.thenation.com/blog/177140/elizabeth-warren-regulators-congress-end-too-big-fail#">he words of US Senator Elizabeth Warren</a> - that they are “too big to fail, too big to manage, too big to regulate, and too big to jail”. </p>
<p>The cross-party report in its robust attack on bad practices in the financial services industry, and its determination to pursue the perpetrators, insists this is not going to happen in Australia.</p>
<p>The “unethical and dishonest” treatment of “vulnerable trusting people” involved a “a callous disregard for their clients’ interests” by CFPL financial advisers, while the Commonwealth Bank “tolerated for so long conduct that included apparent criminal activity”, in the resounding words of the inquiry Chair, Senator Mark Bishop.</p>
<p>ASIC is excoriated for “complacency” and placing too much trust in an institution that “sought to patch over its problems”. Now “rogue advisers” need to be identified and any breaches of the law pursued. </p>
<p>A Royal Commission would mean there will be no early burying of this scandal and its implications for the whole banking sector : “Firms need to know that they cannot turn a blind eye to rogue employees who do whatever it takes to make profits at the expense of vulnerable investors.”</p>
<p>The demand for ASIC to become “a more proactive regulator” means that if the banks do not clean up their act, they will face further intervention.</p>
<h2>The timidity of ASIC</h2>
<p>The inquiry’s portrayal of ASIC as “a timid, hesitant regulator, too ready and
willing to accept uncritically the assurances of a large institution that there were no grounds for ASIC’s concerns or intervention”, will haunt ASIC in years to come, and hopefully spur it into action.</p>
<p>The catalogue of condemnation of ASIC and the CBA’s behaviour will not easily be erased from public memory. While defrauding innocent retirees of their assets is truly appalling, it is topped by the cynical indifference and meanness of the Commonwealth Bank’s response once the problem was unearthed. </p>
<p>The Inquiry reports CBA intimidated clients, obfuscated, was reluctant to provide files and provided no representation of clients interests when files were being checked and reconstructed. There were also numerous instances of missing documents, fabricated documents, forged signatures, and manifestly inadequate compensation.</p>
<p>The picture is one of an enormous and cruel “power asymmetry between unsophisticated, and in many cases older and vulnerable clients, and CFPL.”</p>
<p>This is far from the reassuring picture of a well-managed, well-regulated, and healthy banking and finance system in Australia that we have been encouraged to believe in as the best of all possible systems in recent decades.</p><img src="https://counter.theconversation.com/content/27160/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 Senate inquiry in the actions of the Commonwealth Bank and the Australian Securities and Investment Commission has drawn a line in the sand, holding the banks and financial advisers to account for…Thomas Clarke, Professor, Centre for Corporate Governance , University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/254372014-04-10T20:42:08Z2014-04-10T20:42:08ZIs Australia’s financial system a zero sum game?<p>Governments seem to be enamoured with financial markets, judging by the support they give them around the world to encourage their growth. The assumption seems to be that there’s always a positive relationship between the size of the financial system and its contribution to the economy.</p>
<p>This assumption that bigger is always better is one that Australia’s <a href="http://fsi.gov.au/">financial system inquiry</a> would do well to test as it considers “how the financial system could be positioned to best meet Australia’s evolving needs and support Australian economic growth”.</p>
<p>Among the questions that could be asked are whether the growth of the financial system has worked to the betterment of anybody other than those working in the industry – the answer to which is, perhaps not.</p>
<p>Therefore the starting point for the inquiry, led by former Commonwealth Bank of Australia chief David Murray, should be to evaluate the current state of Australia’s financial system and to focus on how it can be made “leaner and keener”.</p>
<h2>Unfettered growth</h2>
<p>Early analysis of a link between the growth of the financial system – something now referred to as “financialisation” – and economic growth was mixed, but by the mid-90s <a href="http://www.cedeplar.ufmg.br/economia/disciplinas/ecn933a/crocco/Teorias_neoclassicas_financia%20mento_desenvolvimento/LEVINE,%20R.%20Financial%20development%20and%20economic%20growth%20views%20and%20agenda.pdf">it was accepted</a> that there was a positive correlation between financial development and economic growth.</p>
<p>In the two decades since then, however, there has been unprecedented growth in the financial sector, both in terms of size and in the remuneration of those working within the industry and questions have begun to be asked about whether this financialisation has been to the betterment of anyone other than those working in the industry.</p>
<p>In the United States, the sector’s share of GDP <a href="http://www.people.hbs.edu/dscharfstein/Growth_of_Modern_Finance.pdf%20">grew from 4.9% in 1980 to 8.3% in 2006</a>, while its share of total corporate profits grew from 14% in 1980 to 40% by 2003.</p>
<p>As for the size of the finance sector in Australia, <a href="http://www.theaustralian.com.au/business/opinion/bis-warns-australias-finance-sector-is-too-big-for-our-economy/story-e6frg9qo-1226453650458">the Bank of International Settlements estimates</a> it now accounts for 11.5% of total “value add” in the national economy, a figure that has doubled since the mid-1980s. </p>
<p>This compares with the 2008 peak of 7.7% in the US and 10.4% in Ireland – and of course we all know what happened to those economies. The BIS researchers believe 6.5% may be the point where the financial system’s size <a href="http://www.bis.org/speeches/sp120625.pdf">“turns from good to bad”</a>.</p>
<p>This growth in size of the financial sector has been matched by the growth in remuneration of those working in the sector. Until the 1980s, salaries in the financial services industry <a href="http://people.virginia.edu/%7Ear7kf/papers/PR_JEP_publlished.pdf">were comparable to those in other industries</a>, but now the average salaries of those working in finance in the US are on average 70% more than those in other industries.</p>
<p>It was in 2005 that Raghuram Rajan – then chief economist at the International Monetary Fund but now Governor of the Reserve Bank of India – first publicly posed the question of whether economies were actually benefiting from financialisation. He suggested the development of the financial system was in reality causing economies to be more risky.</p>
<p>Rajan was dismissed at the time, but subsequent events suggest closer attention should have been paid to what he was saying.</p>
<p>A number of studies since then have added to the concerning picture he began to paint. Perhaps the most <a href="http://sirc.rbi.org.in/downloads/4Cecchetti.pdf">telling study</a>, published in 2012, found that the large and fast growing financial sectors in developed economies were having a clear, negative impact on productivity and economic growth. </p>
<p><a href="http://courses.umass.edu/econ711-%20rpollin/Orhangazi%20financialization%20in%20CJE.pdf">Other research has concluded</a> there is a negative relationship as “real” investment is crowded out by the increasing size and profitability of financial investment.</p>
<p>Even in Australia, Reserve Bank Governor Glenn Stevens has <a href="http://www.rba.gov.au/speeches/2010/sp-gov-170810.html">pondered</a> “whether all this growth (in finance) was actually a good idea; maybe finance had become too big (and too risky).” Similarly Andy Haldane from the Bank of England has questioned the financial sector’s economic contribution, pointing to “its ability to both invigorate and incapacitate large parts of the non-financial economy”.</p>
<h2>Efficient, or just big?</h2>
<p>What of the supposed benefits of the growth in financial markets? It could be expected that larger markets would mean lower unit costs for financial services, as happens with efficiencies of scale in other industries. Instead, it seems unit costs have actually increased over the last three decades <a href="http://pages.stern.nyu.edu/%7Etphilipp/papers/Finance_Efficiency.pdf">and are higher now than they were in 1900</a>.</p>
<p>Researchers such as Thomas Philippon of Stern Business School have also examined whether financialisation has resulted in “better” pricing and therefore more efficient allocation of capital. </p>
<p><a href="http://pages.stern.nyu.edu/%7Etphilipp/papers/BaiPhilipponSavov.pdf">They found</a> that despite a four-fold increase in spending on “price discovery” and a large decrease in the costs of information processing, there is absolutely no evidence that pricing in markets is more informed. Despite US funds management fees rising 141 times between 1980 and 2010, there is <a href="http://www.umass.edu/preferen/You%20Must%20Read%20This/MalkielJEP2013.pdf">no evidence</a> of an improvement in pricing in equity markets or of added value for clients.</p>
<p>The bulk of the submissions to Australia’s financial system inquiry, <a href="http://www.bankers.asn.au/Media/Media-Releases/Media-Release-2014/Financial-System-must-support-Australia-s-continued-economic-growth">like this one from the Australian Bankers’ Association</a>, will undoubtedly seek opportunities for further growth and greater subsidies for the financial sector.</p>
<p>Who is more likely to be heard? Economics writer Ross Gittins <a href="http://www.smh.com.au/business/less-fancy-financial-footwork-please-20140330-35rrg.html">fears the financial institutions will win out</a>, especially with the inquiry being chaired by someone who led an institution that benefited so greatly from the financialisation of the Australian economy, and who has a history of opposing what is not in the direct interests of these institutions (like removing the <a href="http://www.theaustralian.com.au/business/financial-services/inquiry-chair-david-murray-backs-four-pillars-policy/story-fn91wd6x-1226827686755">four pillars policy</a> and <a href="http://www.afr.com/p/business/financial_services/bank_levy_tax_on_whole_economy_says_Arbu3M9kVMRER0RnGKrl7K">a levy on banks</a>).</p>
<p>The fear is that the starting premise for the inquiry will be that everything is fine and more is better.</p><img src="https://counter.theconversation.com/content/25437/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>Governments seem to be enamoured with financial markets, judging by the support they give them around the world to encourage their growth. The assumption seems to be that there’s always a positive relationship…Ronald Bird, Professor of Finance, University of Technology SydneyJack Gray, Adjunct Professor of Economics, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/250802014-04-03T19:49:08Z2014-04-03T19:49:08ZBuilding a financial system for a cashless age<p>If the Financial System Inquiry is to achieve its aim of helping to promote growth and productivity in the Australian economy it will need to focus strongly on electronic payments. </p>
<p><a href="http://fsi.gov.au/consultation/">Submissions</a> to the inquiry will be officially released today, offering several pieces of advice for FSI chairman David Murray on how to promote competition in the system and how technology is affecting and changing it. </p>
<p>Electronic payments is one area where both increases in productivity and promotion of competition could be achieved via the FSI, but to do so Murray will need to guide the sector towards true competitive neutrality.</p>
<p>The increased use of electronic payments and consequent reduction in the use of cash facilitates economic growth, according to recent <a href="http://mastercardcenter.org/article/2014/03/E-payments-and-Economic-Activity-in-Australia.pdf">research</a> from Melbourne University. This is because electronic payments are less costly then non-electronic payments, and this applies for all participants in the payments value chain including consumers, businesses and government. </p>
<p>This Australian research is reinforced by similar studies conducted in Canada, Germany, South Africa and the US, which all underline the costs of cash in both developed and emerging economies and highlight the positive role that electronic payments play, in both increasing economic activity and heightening levels of consumer empowerment and choice. </p>
<p>Daniel Mminele, deputy governor of the South African Reserve Bank has <a href="http://www.gov.za/speeches/view.php?sid=43818">claimed</a> that every 1% increase in payment card use would increase consumption by 0.06% and GDP by 0.03%, as this would mobilise household savings and hence productive opportunities.</p>
<h2>The NBN of payments?</h2>
<p>In Australia the Reserve Bank has encouraged the development of a real-time payments infrastructure, which will be the banking equivalent of the National Broadband Network in that it will allow fast electronic payments for both consumers and business and hence more immediate availability of funds. </p>
<p>It has been described as the “rail tracks” which will provide the infrastructure upon which instant payments can be made. It is also designed to lower the network barriers to entry, opening up competition in payment services, particularly for new payment startups. These could include Apple and Google, who could use their brand recognition to potentially enter the retail banking market, without having to build a branch network.</p>
<p>The possible entry of new players into the financial services market has the industry debating the regulatory framework under which all participants, both new and existing, will have to operate. </p>
<p>The <a href="http://fundingaustraliasfuture.com/regulatingtheaustralianfinancialsystem">Funding Australia’s Future Project</a>, released in July 2013 by the Australian Centre for Financial Studies (ACFS), considered the appropriate balance between stability and efficiency within the Australian financial sector. It concluded that “regulation should not impede competition and the efficiency of markets”, that “the regulatory system should also have a brief for neutrality” and that “one sector is not favoured over another at the expense of competitive forces”.</p>
<h2>Differing agendas</h2>
<p>In their submissions to the FSI, Australia’s regional banks and non-bank lenders have called for a “level playing field”, to reduce the advantages that the big banks have gained from the regulators’ focus on stability in the system.</p>
<p>They also argue that consumers should be empowered to switch deposit accounts and mortgages more easily between providers. The Consumer Owned Banking Association (COBA), which represents credit unions and building societies in Australia, has also argued for “competitive neutrality” and has described regulation of the financial sector as being, “overly prescriptive and inconsistent”.</p>
<p>One example of this inconsistency is in the payments system market where the regulator, the Reserve Bank of Australia, has intervened extensively since 2002. These interventions have been largely focused on the payment card acceptance marques of MasterCard and Visa and they are described in detail in a paper, Regulatory Interventions and their Consequences in the Australian Payment Card System, released by the ACFS in October 2013. </p>
<p>Other payment card acceptance marques, such as American Express and Diners Club have received far less regulatory attention and this has led to distortions in the market, which it could be argued have driven up the costs of paying by payment cards for consumers. </p>
<p>An additional aspect of this absence of competitive neutrality is the lack of any meaningful regulation of new and emerging entrants into the payments market. As an example, PayPal now competes against the traditional payment card players and yet it is not regulated as regards the fees that it charges, nor does it have to bear the same compliance costs of regulation. </p>
<p>The FSI therefore represents a good opportunity to achieve competitive neutrality in all the financial services markets, and achieve the economic growth and productivity gains that are embedded in its terms of reference and which would benefit all sectors of Australian society.</p><img src="https://counter.theconversation.com/content/25080/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>If the Financial System Inquiry is to achieve its aim of helping to promote growth and productivity in the Australian economy it will need to focus strongly on electronic payments. Submissions to the inquiry…Steve Worthington, Adjunct Professor, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.