tag:theconversation.com,2011:/id/topics/greg-medcraft-4459/articlesGreg Medcraft – The Conversation2015-01-05T23:16:11Ztag:theconversation.com,2011:article/358512015-01-05T23:16:11Z2015-01-05T23:16:11ZYears on, ASIC still grappling with swap rate fixing scandal<p>The wheels of justice grind exceedingly slow and nowhere slower than in the Sydney headquarters of the Australian Securities and Investments Commission (ASIC). A recent <a href="http://www.smh.com.au/business/anz-traders-sidelined-during-asic-inves">report</a> appears to show that ASIC is still, just under two years after the events, following leads on possible manipulation of the Australian interest rate benchmark, the Bank Bill Swap Rate (BBSW). </p>
<p>We know the BBSW was manipulated as evidenced by an <a href="http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2014-releases/14-014mr-asic-accepts-enforceable-undertaking-from-bnp-paribas/">enforceable undertaking</a> by the French bank BNP-Paribas almost one year ago. What we don’t know yet is whether there was any evidence of involvement by Australian banks and, if so, to what extent? But it would not come as a complete surprise if <a href="https://theconversation.com/dont-believe-the-hype-our-own-libor-scandal-could-be-in-the-wings-12652">local banks had been involved</a>.</p>
<p>However, the question of whether Australian banks were involved or not in manipulation is irrelevant. There was indeed manipulation and it went unreported to ASIC until overseas regulators began to investigate manipulation of the widely used <a href="https://theconversation.com/watching-the-dominos-fall-in-the-libor-crisis-11358">LIBOR</a>benchmark. There are two scenarios. First, local bankers (as the major players in the BBSW market) knew there was manipulation and did nothing, benefiting from the outcomes. Alternatively, they did not know of the manipulation, in which case they come across as provincial dopes. Either way the Masters of Martin Place do not come out of the scandal very well.</p>
<p>After strenuously denying for years that the BBSW could possibly be manipulated, the Australian Financial Markets Association (AFMA) changed the BBSW <a href="http://www.afma.com.au/standards/market-conventions/Bank%20Bill%20Swap%20%28BBSW%29%20Benchmark%20Rate%20Conventions.pdf">calculation methodology</a> in July 2013 to one which collected live rates from the market, rather than expert opinion, to calculate the benchmark. Supposedly this would be <a href="https://theconversation.com/is-there-egg-on-the-rbas-face-13136">less prone</a> to manipulation. How wrong they were.</p>
<p>Just last November, in what was obviously a coordinated effort, regulators in three countries <a href="http://www.bloomberg.com/news/2014-11-12/banks-to-pay-3-3-billion-in-fx-manipulation-probe.html">announced fines</a> of more than US$4.3 billion on six banks found to have manipulated the most widely used benchmark in the global Foreign Exchange (FX) market. As with LIBOR, manipulation of the London “WMR 4 o’clock FIX” was long running, widespread and profitable. But unlike LIBOR, the “FIX” was calculated from live market rates, and supposedly manipulation-proof. But human ingenuity and greed finds ways around such trivial obstacles.</p>
<p>The regulators found that traders from the world’s largest banks colluded, through conversations in internet chat rooms, to “nudge” the FX market in a particular direction to benefit their own positions rather than their customers. Traders found that it was sufficient to manipulate the market for only about 60 seconds “around the FIX” to generate illicit profits. </p>
<p>In its <a href="http://www.bis.org/publ/rpfx13.htm">latest triennial survey</a> of activity in the FX market, the Bank for International Settlements (BIS) found that the Australian dollar was one of the top five most traded currencies accounting for some 8.6% of overall volume. Although the initial fines concentrated on manipulation of the major currencies (the US dollar, the Euro and the British Pound) it stretches credibility to believe that traders did not also manipulate the Aussie benchmark rate. In fact, because of the time at which the benchmark was calculated (4pm GMT), the local markets would have been closed and hence, because there was less competition, the benchmark would have been easier to fudge.</p>
<p>Why is such manipulation important? Australian superannuation funds that have an international component, such as US shares, are regularly revalued against the market, often on a daily basis. Any manipulation will then directly affect the value of the funds, sometimes up and sometimes down, but most often to the benefit of the banks rather than pensioners.</p>
<p>Under Chairman Greg Medcraft, ASIC has announced <a href="http://www.ft.com/intl/cms/s/0/51e79260-af26-11e3-bea5-00144feab7de.html#axzz3NusDo4TK">an investigation</a> into possible manipulation of FX benchmarks, which is due to complete sometime early this year. And in a recent chat with journalists, Medcraft declared that Australia was a “<a href="http://www.afr.com/videos/national/medcraft-australia-paradise-for-white-collar-criminals-4yadc5ctryjjokkc4gd3biiv2dka_a0q.html">paradise for white collar criminals”</a> a comment he <a href="http://www.abc.net.au/news/2014-10-23/asic-backtracks-on-corporate-crime-paradise-comments/5835194">then backed away from</a> after being contacted by the finance minister Mathias Cormann.</p>
<p>At this stage it would be customary to call for an in-depth inquiry into the banking industry and its ethics, but in the wake of the toothless tiger that was the <a href="http://fsi.gov.au/publications/final-report/">Murray Inquiry</a> which had only one reference to LIBOR (in relation to Withholding Tax), such a suggestion would fall on deaf ears. Medcraft has repeatedly made a strong push for additional funding for ASIC and heeding him, the Murray Report has recommended that an “industry funding model” be introduced - that is, “abuser pays”.</p>
<p>If the ASIC inquiry finds evidence of misconduct (and arguably even if it doesn’t in this particular case), the government should promptly allocate all of the funding that the corporate regulator needs. And, more controversially, ASIC, because it is too thinly spread, should be broken up to allow it to concentrate on preventing misconduct in the Australian financial system, if indeed it is such a paradise for white collar criminals.</p>
<p>Less controversially, AFMA is a trade association, governed by its members, the largest banks in Australia and the world. There is an obvious conflict of interest in also being the administrator of the BBSW benchmark. As in the UK, that responsibility should be delegated to <a href="https://www.theice.com/iba">an independent body</a>.</p>
<p>It is also a conflict of interest for any industry body to set the code of conduct for its members’ employees. Though AFMA’s <a href="http://www.afma.com.au/afmawr/_assets/main/lib90010/afma%20code%20of%20ethics%20code%20of%20conduct.pdf">code of conduct</a> specifically forbids market manipulation, the Board contains senior representatives of banks that have been fined for both FX and LIBOR manipulation. Furthermore, the AFMA code has not been updated since the revelations of wide-spread market manipulation; it is bland and ineffectual. ASIC should ensure that proper conduct including financial benchmarks is part of each firm’s corporate code of conduct and is strictly enforced by them.</p><img src="https://counter.theconversation.com/content/35851/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The wheels of justice grind exceedingly slow and nowhere slower than in the Sydney headquarters of the Australian Securities and Investments Commission (ASIC). A recent report appears to show that ASIC…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/335482014-10-29T19:12:47Z2014-10-29T19:12:47ZDo the crime, do the time? Not if you’re a banker in Australia<p>Recently, the head of the Australian Securities and Investments Commission, Greg Medcraft, called Australia a “paradise” for <a href="http://www.theage.com.au/business/australia-paradise-for-whitecollar-criminals-says-asic-chairman-greg-medcraft-20141021-119d99.html">white-collar criminals</a>. Soon after <a href="http://www.watoday.com.au/business/asic-backflips-on-criminals-paradise-comments-20141022-119v22.html">he recanted</a>, claiming he didn’t want the country to become a haven for financial fraudsters. This rephrasing likely followed when Finance Minister Mathias Cormann <a href="http://www.abc.net.au/news/2014-10-22/red-faced-over-white-collar-criminals/5834540">leaned on Medcraft</a>.</p>
<p>The mass media has done an admirable job bringing the CBA financial planner scandal to light, forcing ASIC to finally investigate, the Senate to inquire and the CBA to apologise and provide compensation. Despite this, frauds like these are <a href="http://www.abc.net.au/news/2014-10-24/cba-whistleblower-jeff-morris-discusses-financial/5840536">universally downplayed</a> as isolated events, perpetrated by “bad apples” in an otherwise trustworthy FIRE (finance, insurance and real estate) sector. </p>
<p>Australia’s economic history shows otherwise. Our past is littered with a surprisingly large number of control frauds, which government and regulators have done next to nothing to prevent and rarely prosecute. The mounting frauds appear emboldened by deregulation and liberalisation of banking and finance. </p>
<p>The following table provides an overview of the major frauds committed by the FIRE sector in recent decades.</p>
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<img alt="" src="https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63269/original/mxcmd5c6-1414639617.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>The term “control fraud” refers to the systematic, highly damaging, institution-driven and directed nature of the fraud, in contrast to common low-level frauds. The weapon of choice is accounting.</p>
<p>William K. Black’s book <a href="http://www.amazon.com/The-Best-Way-Rob-Bank/dp/0292754183/ref=dp_ob_title_bk">The Best Way to Rob a Bank Is to Own One</a> provides an excellent account of regulatory public executives who, during the United States Savings and Loan crisis in the 1980s, actively protected the worst fraudsters in the industry, while damning “mum and dad” investors. Black later developed the <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1590447">concept of control fraud</a>, whereby executives use the institution they manage as the mechanism to commit fraud.</p>
<p>Control frauds typically involve a four-part strategy: exponential loan growth, lending to uncreditworthy borrowers, extreme leverage and minimal loss reserves (plus obnoxious pay packets for bank CEOs). The obvious presence of these four elements in Australia’s banking system demonstrates the risk to stability which lies at the centre of finance.</p>
<h2>Why fraud goes undetected</h2>
<p>Australian economist Phillip J. Anderson documented in his book on <a href="http://www.amazon.com/Secret-Life-Real-Estate-Banking/dp/0856832634">US real estate cycles</a> from 1800 to 2008 that fraud is never detected by the mainstream for two reasons. The first is that FIRE sector executives and managers are extremely powerful politically, financially and legally, so few will tangle with them. Secondly, during economic booms, the public is typically too self-centred to care, as long as the predations don’t affect the majority.</p>
<p>ASIC refuses to investigate the control frauds, instead choosing to offer up a number of excuses: lack of funding, jurisdictional boundaries, ineffective laws and so on. Thankfully, 20-year veteran financial consumer activist <a href="http://www.bfcsa.com.au/index.php/about-bfcsa/about-denise-brailey">Denise Brailey</a> does what ASIC declines to do on a A$400 million dollar budget. Brailey, a criminologist, has helped unearth and sue control frauds and recalcitrant state governments over the years.</p>
<p>According to Brailey, Australia has two major control frauds rapidly growing without restraint: a <a href="http://www.smh.com.au/business/watchdog-asleep-on-australias-subprime-scandal-20131024-2w323.html">subprime mortgage scandal</a> and debenture-funded pyramid business scams. The former is similar to the US subprime mortgage scandal. Brailey estimates these control frauds could each cause over A$100 billion in losses. Brailey has warned ASIC about these control frauds for over a decade. </p>
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<img alt="" src="https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/63075/original/gsnghvkn-1414538217.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="source">Chris Daniel/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span>
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<h2>Paradise untouched</h2>
<p>It has never been a better time to be a criminal, as long as you’re a white-collar criminal in the FIRE sector. Bankers involved with the CBA financial planning scandal have <a href="http://www.smh.com.au/business/comment-and-analysis/the-response-to-the-commonwealth-financial-planning-scandal-shows-banks-really-are-above-the-law-20141026-11c13d.html">still managed to advance their careers</a> and win bonuses.</p>
<p>History enlightens us, which is why the history of control frauds isn’t taught anywhere. Political and economic elites want the public kept blind to the plague of theft they’ve been engaged in. In Australia, this history is left to individuals like <a href="http://www.bfcsa.com.au/">Denise Brailey</a> and <a href="http://www.bankvictims.com.au/dr-evan-jones">Evan Jones</a> to tell, whose work was used in my recently published <a href="http://www.worldeconomicsassociation.org/files/Bubble_Economics_Egan_Soos.pdf">book</a>, co-authored with Paul D. Egan.</p>
<p>The disparity between white and blue-collar criminals has never been larger. If I defraud my neighbour of $10,000, I’ll be charged, prosecuted and sent to jail for years. In contrast, a <a href="http://www.bfcsa.com.au/index.php/scams/hall-of-shame">banking executive</a> who robs borrowers and loots or destroys untold billions of dollars is praised by politicians, business groups, the mass media and the economics profession for “wealth creation”.</p>
<p>Australia’s credit-based banking system, liberated from responsibility by deregulation, self-regulation, de-supervision and de facto decriminalisation, has and will inevitably continue to generate toxic and recurring control frauds. The FIRE sector cannot be allowed to profit from control fraud. Government has a civic obligation to prosecute those who perform criminal acts on innocent parties. We know this as the rule of law.</p>
<p>Academia could offer an independent voice against these control frauds, but the legal and economics professions are mute before the FIRE sector, which employs many directly and indirectly. As Black documented, mainstream economists have intentionally ignored the dangers of control frauds, proclaiming that “private market discipline” and “rational agents” can prevent frauds from even occurring: “the market knows best” line of fallacious reasoning.</p>
<p>The full extent of these control frauds is yet to be revealed as the government, regulators and external dispute resolution organisations (RBA, ASIC, APRA, ATO, AFP, Treasury, FOS and COSL) resolutely refuse to investigate. Meantime, control frauds are free to weave a trail of forced bankruptcies, homelessness, poverty, desperation, depression and suicide.</p>
<p>History shows government only acts when the predations of control frauds break in the mass media. The two largest control frauds, the debenture-funded pyramid business scams and <a href="http://fsi.gov.au/files/2014/09/Banking_and_Finance_Consumer_Support_Association.pdf">subprime mortgage scandal</a>, are running rampant. Unfortunately, government will only grudgingly do something when the number of victims climbs far enough that they become too visible to openly ignore – but, by then, it will be too late. </p>
<p>Nevertheless, a Royal Commission is necessary to shine a light on the transgressions of the FIRE sector.</p><img src="https://counter.theconversation.com/content/33548/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Soos 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>Recently, the head of the Australian Securities and Investments Commission, Greg Medcraft, called Australia a “paradise” for white-collar criminals. Soon after he recanted, claiming he didn’t want the…Philip Soos, Researcher, School of International and Political Studies, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/334082014-10-26T19:07:34Z2014-10-26T19:07:34ZInfographic: insider trading in Australia<figure><img src="https://images.theconversation.com/files/62807/original/gkgyj32h-1414373889.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Screen shot at PM</span> </figcaption></figure><p>The typical insider trader is male, aged between 30 and 49, and holds a company director position, according to a new study from researchers at the University of Melbourne.</p>
<p>The <a href="http://newsroom.melbourne.edu/news/insider-trading-study-shows-stronger-enforcement">study</a> analysed all insider trading enforcement cases since legislation to prohibit insider trading was introduced in 1971.</p>
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<img alt="" src="https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=3059&fit=crop&dpr=1 600w, https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=3059&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=3059&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=3844&fit=crop&dpr=1 754w, https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=3844&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/62770/original/qhmg9p5v-1414325249.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=3844&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em>The authors of the study are Victor Lei and Ian Ramsay and the title of the study is “Insider Trading Enforcement in Australia” (2014) 8 Law and Financial Markets Review 214-226.</em></p><img src="https://counter.theconversation.com/content/33408/count.gif" alt="The Conversation" width="1" height="1" />
The typical insider trader is male, aged between 30 and 49, and holds a company director position, according to a new study from researchers at the University of Melbourne. The study analysed all insider…Charis Palmer, Deputy Editor/Chief of StaffEmil Jeyaratnam, Data + Interactives Editor, The ConversationLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/113442012-12-16T19:23:38Z2012-12-16T19:23:38ZTesting investor mettle and consumer protection<figure><img src="https://images.theconversation.com/files/18688/original/6wfpn8jr-1355458924.jpg?ixlib=rb-1.1.0&rect=44%2C61%2C3608%2C2240&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A suggestion from ASIC chief Greg Medcraft that investors should be tested on their knowledge of risky investments acknowledges standard product disclosure statements tend to be ignored.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>It seems that ASIC’s Christmas present to investors is to get them to undertake an exam to see if they really know what is in the product disclosure statements that they agree to. Well, not exactly, but ASIC chairman Greg Medcraft has [suggested](http://www.afr.com/p/national/want_to_invest_take_the_asic_test_Wgm3czf2mQ7V1u8QeZaA0M](http://www.afr.com/p/national/want_to_invest_take_the_asic_test_Wgm3czf2mQ7V1u8QeZaA0M) that disclosure, on its own, may not be enough to protect consumers from making poor (as opposed to risky) investments.</p>
<p>And to some degree, Medcraft’s suggestion that product disclosure documents are not working for some investors is correct. So, it is important to come up with alternative ways to ensure that investors know what they are getting in to.</p>
<p>If the goal of a product disclosure statement (PDS) is to help consumers make the most appropriate choices, we have to begin with the consumer, rather than the document. So, the best place to start would be to understand how people decide, and how they process complex information. As part of this, it is also probably the right time to reconsider how we approach consumer protection, and the disclosure of information.</p>
<p>We know, for example, that all people (even investors) will use a range of shortcuts when they are making a decision. We know that people are busy. We know that people take risks. We know that taking risks is not always a bad thing. And as Medcraft says, we know that most people don’t read the PDS, or terms and conditions, or the fine print.</p>
<p>So, the first step is to put the consumer back into consumer protection. But, I am not suggesting a revisiting or re-engineering of the PDS. That wouldn’t solve any problems. Because the focus is still on the document, not the consumer.</p>
<p>So how would this look?</p>
<p>Firstly, it is important to understand that there are always going to be mistakes, and there are always going to be people who make mistakes. And the reality is that we don’t want to completely remove the opportunities for people to make mistakes or take risks. If people don’t take risks, there won’t be innovation, nor will there be investment growth.</p>
<p>But somehow we have to find a balance between risk and disaster.</p>
<p>One way is to include experts outside of the law contributing to regulation and the setting of standards. Regulation needs alternative perspectives that consider the reality of human behaviour. This has to happen as legislation, policy, standards or regulation is being drafted, and as financial products are developed. What this might mean is that a regulator has to be more proactive, rather than reactive, one thing that Greg Medcraft has suggested in the <a href="http://www.moneymanagement.com.au/news/financial-services/2012/greg-medcraft-signals-a-more-proactive-asic">past</a>.</p>
<p>Perhaps regulation and standards should go through a due diligence or stress-testing process with behavioural specialists, so that we know that it is going to achieve what the lawyers are hoping it will achieve.</p>
<p>And on the supply side, products should also go through a due-diligence process or a product piloting. In the same way that a marketer would go through a piloting process to see if people would buy their product, maybe some financial products should go through a piloting process to see if they might cause harm.</p>
<p>And not just harm in the context of legal process – what I am suggesting is that harm has to be considered in the context of potential consumer behaviour. In the same way that we seek legal advice about consumer policy, we should also seek consumer behaviour advice. Maybe not all products, but perhaps products that have more potential for harm.</p>
<p>Perhaps we need to make sure that before people sign a PDS (or whatever we end up with), they undertake a knowledge test; not asking them what they think they learned, but actually seeing what they did learn from the PDS. This is the nub of Medcraft’s argument - his suggestion is not to get people to do an exam, but to test whether the person who read the PDS, actually understood the PDS.</p>
<p>Not to necessarily rule out risk, but simply to understand the risks.</p>
<p>And there are other ways we can get to a point where consumers are better placed to make appropriate decisions.</p>
<p>One way is related to how the PDS is framed. Some refer to it as “choice architecture”. If we already know that most people are unlikely to read all of the detail in a PDS, we can use language to get people to at least engage with some of the material provided to them, which is something that I suggested in my speech at the <a href="http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Summer-School-2011-report-1.pdf/$file/Summer-School-2011-report-1.pdf">ASIC Summer School</a> in 2011.</p>
<p>We know that polite and formal language signifies and creates psychological and personal distance. In other words, the use of normative, polite language - the language used in business and law - rather than colloquial, less polite language, leads participants to believe that the target of the communication (them) is spatially and temporarily distant. </p>
<p><a href="http://psycnet.apa.org/journals/psp/98/2/268/">Research</a> by Stephan, Liberman and Trope published in 2010 found when participants read or heard a formal statement such as “My brother is taking our family car, so the rest of us will stay at home” they believed that that the person who was being addressed was not them, in a more remote location, and the conversation referred to something that might happen in the future. A better way to put the same statement would be, “My brother is taking our family car, so the rest of us will be stuck at home”.</p>
<p>We also know that hypothetical language, such as “this may happen to you” affects the perception of distance, and concreteness, in that people don’t expect hypothetical events to occur, at least to them, and in the near future.</p>
<p>So, if we want people to take notice, language needs to be direct, immediate, and personal.</p>
<p>In the same vein, the layout and format of information should be more about comprehension, and less about formality. The most important information should be upfront, rather than following a more formal, traditional structure. The things that you want people to read should be early and in bold. </p>
<p>All of this requires a new way of thinking. Or what Medcraft suggests, which is that we “have to think more creatively to make sure that people actually know what they are buying.”</p>
<p>And, without oversimplifying the issue, we have to stop being so formal, and become more strategic about the realities of human behaviour.</p>
<p>In order to achieve this, <a href="http://www.soc.iastate.edu/sapp/soc401rationalchoice.pdf">Rational Choice Theory</a> - the <a href="http://www.investopedia.com/terms/h/homoeconomicus.asp">Homo economicus</a> concept - must be abandoned in favour of a more realistic view of the individual, as an agent endowed with imperfect knowledge of the factors and risks involved in a decision, and subjected to a myriad of potentially influential stimuli entering his or her decision making process.</p>
<p>In a nutshell, let’s start with the premise that we are all less rational than we think we are, and work from there.</p><img src="https://counter.theconversation.com/content/11344/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Harrison received funding from the Australian Securities and Investment Commission in 2009.</span></em></p>It seems that ASIC’s Christmas present to investors is to get them to undertake an exam to see if they really know what is in the product disclosure statements that they agree to. Well, not exactly, but…Paul Harrison, Senior lecturer, Graduate School of Business, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.