tag:theconversation.com,2011:/us/topics/banking-regulation-38615/articlesBanking regulation – The Conversation2024-03-08T05:51:37Ztag:theconversation.com,2011:article/2246322024-03-08T05:51:37Z2024-03-08T05:51:37ZInsurance is the latest weapon financial abusers use against their partners. Here’s how we fix it<figure><img src="https://images.theconversation.com/files/579740/original/file-20240305-22-zho482.jpg?ixlib=rb-1.1.0&rect=20%2C10%2C6689%2C4456&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
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<p>They knew we had separated. Why did they let him cancel the policy and refund him the money without giving me a call to let me know the house and contents were no longer insured, or not do it before speaking to me first?</p>
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<p>These are the words of Maddy (not her real name). Her experience of domestic and family violence was compounded by the acts of the insurance company she thought would give her financial protection.</p>
<p>Maddy’s former partner cancelled their home and contents insurance with a simple phone call. He received a refund of the premiums she had paid just a few months earlier. She didn’t know – not until well after he threatened to burn down the house with Maddy and the children in it. </p>
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<p>If he had followed through with his threat I would have been punished too and made to pay the mortgage for a house that we couldn’t live in and not be able to rebuild because insurance wouldn’t cover it.</p>
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<p>Maddy is one of the women who described how insurance is being misused as a weapon of financial abuse, for my second <a href="https://cwes.org.au/wp-content/uploads/2024/03/CWES_DTD-GI_Issue2_FINAL_Singles.pdf">Designed to Disrupt report</a>. Their personal accounts highlight the need for systemic change.</p>
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Read more:
<a href="https://theconversation.com/banks-put-family-violence-perpetrators-on-notice-stop-using-accounts-to-commit-abuse-or-risk-being-debanked-208575">Banks put family violence perpetrators on notice. Stop using accounts to commit abuse or risk being 'debanked'</a>
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<h2>Insurance as a weapon</h2>
<p>General insurance is designed to provide financial protection from unexpected events. It’s supposed to be an affordable way to repair or replace an asset that is lost, stolen, damaged or destroyed. </p>
<p>But too often, victim-survivors of domestic and family violence find they don’t have the coverage they thought. They may be left without a car, or a home, and with no or limited means to pay to restore their financial safety and economic security.</p>
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<a href="https://images.theconversation.com/files/580043/original/file-20240306-20-aplow4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A man pointing out terms in some paperwork to a woman" src="https://images.theconversation.com/files/580043/original/file-20240306-20-aplow4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/580043/original/file-20240306-20-aplow4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/580043/original/file-20240306-20-aplow4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/580043/original/file-20240306-20-aplow4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/580043/original/file-20240306-20-aplow4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/580043/original/file-20240306-20-aplow4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/580043/original/file-20240306-20-aplow4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Domestic violence victim-survivors can find they have less insurance coverage than they thought, or none at all.</span>
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<p>There is limited data about the extent of the problem. But through desktop research and consultation with those with who’ve experienced it, and with consumer advocates and industry, we found the biggest issue is with joint policies. </p>
<p>Financial abusers exploit general insurance policies and procedures to deny access to information, cancel policies, interfere with the claims process, and to steal, limit or withhold payouts to the victim-survivor. </p>
<p>They aim to exert control by leaving their partner with no money, damaged or irreparable property and assets, and the accompanying emotional toll. </p>
<h2>Differing policies and procedures</h2>
<p>While some insurers have specialist teams to deal with these sorts of cases, there is a lack of standardised practices across the industry. </p>
<p>Results of our survey reveal wild variations in data between companies, with the number of domestic violence and financial abuse cases reported ranging from 11 to more than 2,000 in the 2021–22 financial year.</p>
<p>This means some victim-survivors will receive support that is empathetic and understands the affects of trauma, with flexibility for individual solutions. Others continue to struggle with dismissive or judgemental staff, risks to their safety, or compounding financial hardship. </p>
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Read more:
<a href="https://theconversation.com/higher-unemployment-and-less-income-how-domestic-violence-costs-women-financially-204688">Higher unemployment and less income: how domestic violence costs women financially</a>
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<p>We asked whether any insurance company used modelling to estimate the risk or extent of property damage related to domestic and family violence. None did. </p>
<p>Yet it has been estimated that “consumption costs” (such as replacing damaged property, defaulting on bad debts, and the cost of moving) of partner violence against women and their children in 2021–22 could be $3.5 billion, including $202 million in damaged and destroyed property. <a href="https://www.dss.gov.au/sites/default/files/documents/05_2012/vawc_economic_report.pdf">Most</a> of these costs are borne by victim-survivors and family and friends.</p>
<h2>What needs to happen?</h2>
<p>To address these issues with joint policies, three changes are needed:</p>
<ul>
<li><p>close the loopholes that enable perpetrators to cancel insurance policies without the knowledge or consent of victim-survivors</p></li>
<li><p>introduce a “conduct of others” clause as a standard part of every insurance contract, enabling victim-survivors to make a claim when perpetrators deliberately damage property</p></li>
<li><p>modernise the law so insurance products can be redesigned with features that protect against financial abuse. </p></li>
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<span class="caption">Financial abuse through insurance can compound the negative affects of domestic and family violence.</span>
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<p>As a starting point, every general insurer should denounce financial abuse in their terms and conditions – following the lead of the Australian banking industry. So far, 14 banks have adopted this recommendation and are refusing to tolerate misuse of their products as a tactic of coercive control. </p>
<p>These changes would build on the significant progress the general insurance industry has made to support victim-survivors and drive greater consistency. The General Insurance Code of Practice sets a benchmark for self-regulation, and detailed guidance outlines better customer service practices for those experiencing domestic and family violence. All insurers are required to have a domestic and family violence policy, and some insurers have set up specialist teams and provided extra training. </p>
<p>The law also needs to be modernised because it’s stifling changes that would give victim-survivors better protection. </p>
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Read more:
<a href="https://theconversation.com/when-care-becomes-control-financial-abuse-cuts-across-cultures-70754">When care becomes control - financial abuse cuts across cultures</a>
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<p>The Insurance Contracts Act was written in 1984, just ten years after the first modern women’s refuge was established in Australia and well before domestic and family violence became an urgent national conversation. </p>
<p>Despite calls in <a href="https://treasury.gov.au/sites/default/files/2022-08/p2004-review-insurance-contracts-act-1984-final-report_1.pdf">2004</a> and <a href="https://financialrights.org.au/wp-content/uploads/2021/08/210823_FamilyViolenceResearch_FINAL.pdf">2021</a> for the law to address cases in which a victim-survivor was denied a claim because of a wilful act or other breach by the perpetrator, legislation remains unchanged. Yet this type of behaviour is one of the <a href="https://www.allianz.com.au/content/dam/onemarketing/aal/au_site/documents/about-us/understanding-family-violence-and-the-risks-of-insurance.pdf">most common</a> ways insurance is used in family violence. </p>
<p>Two insurers, <a href="https://www.aami.com.au/aami/documents/personal/home/aami-home-building-insurance-pds.pdf">AAMI</a> and <a href="https://www.suncorp.com.au/content/dam/suncorp/insurance/suncorp-insurance/documents/home-and-contents/home/suncorp-insurance-home-contents-insurance-product-disclosure-statement.pdf">Suncorp</a>, have introduced a “conduct of others” clause to provide flexibility to pay a claim in these cases, even where there is no legal requirement to do so. </p>
<p>While these are positive moves, it’s slow progress. It’s time Australian insurers and regulators addressed this gap.</p><img src="https://counter.theconversation.com/content/224632/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Catherine Fitzpatrick is Founder and Director of Flequity Ventures, a social enterprise which aims to disrupt financial abuse and gender bias through more flexible, safe and equitable product and service design. She received funding from the Centre for Women's Economic Safety to write the Designed to Disrupt report and continues to be affiliated. She is a former bank executive with roles managing customer complaints including those related to general insurance, domestic violence support and government relations. She has previously been engaged by the Insurance Council of Australia to provide guidance on safety by design in insurance.</span></em></p>Insurance is supposed to be a safety net, but it can be weaponised in domestic and family violence situations. There’s a lot we can do to better protect victim-survivors.Catherine Fitzpatrick, Adjunct Associate Professor, School of Social Sciences, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2196782024-02-13T15:39:24Z2024-02-13T15:39:24ZFinancial sanctions: banks’ reactions depend on their location, research reveals<p>Individual states and intergovernmental organisations increasingly use financial sanctions to punish or influence the behaviour of targeted entities. However, our <a href="https://academic.oup.com/rfs/article-abstract/36/11/4417/7160932">latest research</a> shows that even universally adopted sanctions can throw a spanner into the works of the global financial system for want of being enforced everywhere.</p>
<p>Since the invasion of Ukraine in 2022, much ink has been spilled over the sanctions on Russia. Such economic sanctions – including arms embargoes and travel and trade restrictions – have been regularly used since World War II and have become indispensable foreign policy tools. And since the late 1980s, there has been a shift toward imposing financial sanctions, which involve freezing assets and investments.</p>
<p>The idea behind financial sanctions is to target key entities – such as decision-makers and major industries – to discourage the sanctioned country from breaking international law or acting aggressively, while at the same time limiting negative consequences for civilians. As a result, these so-called smart sanctions only ban some transactions with the target country, and financial institutions must thus scrutinise business opportunities to ensure they undertake only those that remain legal. Failing to comply can result in sizable penalties. In 2015, for example, <a href="https://www.reuters.com/article/idUSKBN0NM41J/">BNP Paribas</a> was required to forfeit $8.83 billion and pay a $140 million fine after failing to comply with sanctions against Sudan, Cuba and Iran.</p>
<h2>How sanctions impact lending</h2>
<p>Sanctions will impose extra compliance costs on a bank, as it must fulfill reporting requirements and undertake due diligence checks to ensure its transactions are legal. The bank will also have to factor in the litigation costs and the reputational risk involved if its due diligence should fail. We wanted to understand how these costs and risks alter lending decisions. One possibility would be that the bank withdraws all business from the sanctioned country – but that would be an extreme position.</p>
<p>Instead, we assume that a bank’s decision to lend in sanctioned countries will depend on the trade-off between the expected profits and the costs of due diligence and possibly litigation. However, both the cost of compliance and the risks associated with non-compliance vary significantly across countries. In Germany, for example, labour costs are high, so hiring people to carry out due diligence is expensive. Strong data protection laws in Germany also increase the costs of carrying out checks. In some other countries, those costs may be lower, or the government may not have the resources to enforce compliance, making litigation less likely. Do those differences affect how banks respond to sanctions?</p>
<h2>Location, location, location</h2>
<p>Thanks to data provided by Germany’s central bank, the Deutsche Bundesbank, we were able to study the behaviour of German banks worldwide. The data show how much each bank in Germany was lending in foreign countries from 2002 to 2015. Importantly, German banks are also required to record how much their foreign affiliates (branches and subsidiaries outside Germany) are lending in each country.</p>
<p>Looking at this data, we see clear differences in how German banks in different countries responded to sanctions. Banks in Germany strongly reduced their positions in countries targeted by sanctions. But their foreign affiliates, on average, increased lending relative to their parent banks at home and, in some cases, also in absolute terms.</p>
<h2>The importance of the Financial Action Task Force</h2>
<p>There are variations in behaviour between affiliates in different countries, so we needed a way to categorise countries according to the sanctions-related costs they impose, which are related to the quality of the countries’ institutions and anti-crime policies.</p>
<p>Founded in 1989, the <a href="https://www.fatf-gafi.org/en/home.html">Financial Action Task Force</a> (FATF), also known by its French name, Groupe d’action financière (GAFI), is an intergovernmental organisation that sets international standards to allow national authorities to go after illicit funds linked to money laundering, terrorism and other related threats to the integrity of the international financial system. Our analysis showed that German bank affiliates located outside the FATF increased their positions in sanctioned countries by an average of 95% relative to German banks inside the FATF. That figure rises to 151% in countries blacklisted as noncompliant with FATF rules.</p>
<p>The fact that banks in Germany and within the FATF strongly <em>decreased</em> their lending in sanctioned countries, whereas banks outside the FATF <em>increased</em> their positions, suggests that lending decisions indeed depend on a trade-off between seizing profitable investment opportunities and the costs of due diligence and possibly litigation.</p>
<h2>Levelling the playing field</h2>
<p>One key takeaway from this is that, regardless of whether it is the litigation risks or compliance costs that ultimately drive the decision to lend in sanctioned countries (or not), you don’t have a level playing field. Banks in locations with weaker standards for the integrity of the financial system seem to find lending in sanctioned countries more attractive.</p>
<p>Regulators work together to harmonise rules and financial standards across countries, with a view to ironing out any regulatory irregularities for international banking competition. However, our analysis of financial sanctions and cross-border lending shows that this doesn’t go far enough. To guarantee a level playing field, it is also vital to make sure all countries effectively comply with these sanctions.</p>
<p>Such conclusions are probably valid beyond the realm of sanctions and may very well extend to other contexts of international regulation and globally integrated markets. Indeed policymakers typically won’t limit themselves to harmonising rules and standards in money laundering, sanctions, and terrorism financing (FATF) across countries, but also seek to harmonise the financial regulations of banks – such as in the area of leverage, for example.</p>
<p>This important finding applies as much to standards that regulate the litigation and compliance risk of banks (i.e., the FATF standards) as those that regulate financial risk-taking and <a href="https://www.investopedia.com/terms/b/basel_accord.asp">leverage</a>. Our work ultimately suggests that policymakers must pay equal attention that all countries enforce such financial regulations to the same degree.</p><img src="https://counter.theconversation.com/content/219678/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grant of EUR 5000 from the French National Research Agency (ANR), “Investissements d’Avenir” (LabEx
Ecodec/ANR-11-LABX-0047). Deutsche Bundesbank (German central bank) provided on-site access to the database External Position Report and free accommodation on the premises of the central bank during the author’s research visits.</span></em></p>German banks located outside of areas regulated by a key financial watchdog sharply increased business with sanctioned countries.Matthias Efing, Associate professor of finance, HEC Paris Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1582242021-04-06T00:17:59Z2021-04-06T00:17:59ZHostage to fortune: why Westpac could struggle to find the right buyer for its NZ subsidiary<figure><img src="https://images.theconversation.com/files/393353/original/file-20210405-21-o8msud.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C6006%2C4007&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>The recent announcement that Westpac is “<a href="https://www.interest.co.nz/banking/109676/australias-westpac-banking-corporation-reportedly-reviewing-its-ownership-westpac-new">reviewing</a>” ownership of its New Zealand business caused some speculation the decision might be due to the bank’s lower profitability. But this would be unlikely grounds for a sale, and was more a consequence of COVID-19’s impact than anything.</p>
<p>In fact, Westpac’s New Zealand profits should be considerably higher this year — close to NZ$1 billion, as opposed to the $550 million in the previous year (to September 30 2020). Based on past experience, a sale price of $10 billion (AU$9 billion) would not be unreasonable, <a href="https://www.rnz.co.nz/news/business/439127/westpac-sale-could-bring-large-new-entity-to-the-sharemarket-banking-expert">possibly even higher</a>.</p>
<p>More likely, the proposed sale is due to the complex and conflicting regulatory requirements of the Australian and New Zealand banking supervisors. We saw this in the decision of the New Zealand supervisor, the Reserve Bank of New Zealand (RBNZ), to require banks to be positioned for “open bank resolution” (<a href="https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution">OBR</a>).</p>
<p>OBR, as the RBNZ explains, is “a long-standing Reserve Bank policy aimed at allowing a distressed bank to be kept open for business, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors, rather than the taxpayer.” </p>
<p>In practice, this means a proportion of all the funds lodged with the failing bank would be frozen immediately. These could only be repaid to depositors after the bank was liquidated, if there were sufficient funds. </p>
<p>This could be a real problem for a bank owner, which would likely have substantial amounts outstanding.</p>
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<h2>Protecting NZ’s financial system</h2>
<p>A major reason for the Reserve Bank’s move was to protect the New Zealand financial system from possibly adverse decisions by Australian regulators (the Reserve Bank of Australia and the Australian Prudential Regulatory Authority) in case a major Australian bank got into difficulty. </p>
<p>The Reserve Bank further upset the Australian banks in late 2019 by introducing <a href="https://www.rbnz.govt.nz/news/2019/12/higher-bank-capital-means-safer-banking-system-for-all-new-zealanders">higher capital ratio requirements</a> for trading banks (to better position them in the rare case of extremely large losses).</p>
<p>Meanwhile, Australian <a href="https://www.apra.gov.au/news-and-publications/apra-strengthens-rules-to-combat-contagion-risk-within-banking-groups">regulatory action</a> has been aimed at countering some of the potential adverse consequences of New Zealand regulation. This included decreasing the amount relative to their own capital that Australian banks were allowed to provide to their offshore (principally New Zealand) subsidiaries.</p>
<p>This would reduce the exposure of Australian banks to their New Zealand subsidiaries in the event of an open bank resolution, protecting the Australian banking system from the risk of illiquidity.</p>
<p>The Reserve Bank’s capital proposals for New Zealand banks were higher for banks classed as systemically important — which happen to be the New Zealand subsidiaries of the major Australian major banks. The Australian banks were worried their exposure to their New Zealand subsidiaries might very easily exceed the <a href="https://www.legislation.gov.au/Details/F2020L01591">25% threshold</a> for exposure to their offshore subsdiaries.</p>
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Read more:
<a href="https://theconversation.com/its-not-only-westpac-whats-behind-the-biggest-fine-in-australian-corporate-history-146667">It's not only Westpac. What's behind the biggest fine in Australian corporate history</a>
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<h2>The cost of NZ subsidiaries</h2>
<p>Those concerns seem to have abated, due to the Reserve Bank agreeing to modify its capital requirements, a longer phasing-in period for the new rules, and continuing action by the Australian banks to increase their levels of equity capital (in response to encouragement from the Australian regulators).</p>
<p>Bank capital has also been increasing in both countries due to the pandemic preventing profits being paid out to shareholders in the form of dividends.</p>
<p>Recent proposals in Australia would, however, exacerbate the parent banks’ problems. Their investments in their New Zealand subsidiaries would be treated as very high risk. </p>
<p>Investment in subsidiaries exceeding 10% would need to be deducted from the parent bank’s capital to comply with <a href="https://www.apra.gov.au/news-and-publications/apra-proposes-new-measures-to-strengthen-capital-protection-for-bank">regulatory requirements</a>. This substantially increases the relative costs for Australian banks of having a large New Zealand subsidiary.</p>
<p>It may be that all these factors have ultimately led Westpac to conclude it will be better off by selling its New Zealand operation.</p>
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Read more:
<a href="https://theconversation.com/are-banks-gouging-by-not-passing-on-interest-rate-cut-4639">Are banks gouging by not passing on interest rate cut? </a>
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<h2>Where are the buyers?</h2>
<p>Given all this, who might be the prospective buyers for Westpac’s New Zealand division? It is unlikely to be any of the other three major banks, as the resulting merged bank would have an excessively strong position in the New Zealand market. We would expect New Zealand’s Commerce Commission (as the competition regulator) to prevent such a purchase.</p>
<p>Another possibility is a transaction backed by private equity. But because of the generally riskier conduct of private equity owners, the Reserve Bank (as the regulator whose approval would be required) might not be comfortable with this. </p>
<p>The Reserve Bank might also be concerned at a purchase by one of the other Australian majors, which would create a very large bank and expose the financial system to potential risk.</p>
<p>Another prospective buyer might be a large investor such as the New Zealand Superannuation Fund or Accident Compensation Corporation, which in 2016 together <a href="https://www.bloomberg.com/news/articles/2016-04-05/nz-post-to-sell-stake-in-kiwibank-to-two-government-investors?sref=WkakQb9h">bought a shareholding</a> in the formerly wholly government-owned Kiwibank.</p>
<p>Could these two entities combine to buy the bank, and then look to sell down their holding by listing it on the New Zealand Stock Exchange? Their investment in Kiwibank, although originally for less, would be worth around $500 million, whereas a purchase of Westpac might entail an outlay of $10 billion or more.</p>
<p>This would be large compared to those institutions’ balance sheets (with combined total assets of around $100 billion). There would also be concern about an aggregation of risk to the banking sector.</p>
<p>But the Reserve Bank would likely be comfortable with interest from international banks, given Westpac’s New Zealand business would be too big for acquisition by any of the remaining non-Australian, New Zealand-owned banks. </p>
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<img alt="Bank of China building" src="https://images.theconversation.com/files/393354/original/file-20210405-17-6clj8c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/393354/original/file-20210405-17-6clj8c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/393354/original/file-20210405-17-6clj8c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/393354/original/file-20210405-17-6clj8c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/393354/original/file-20210405-17-6clj8c.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/393354/original/file-20210405-17-6clj8c.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/393354/original/file-20210405-17-6clj8c.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Bank of China headquarters on Beijing: already in New Zealand and a possible Westpac buyer.</span>
</figcaption>
</figure>
<h2>Value for money</h2>
<p>Potentially the most plausible potential purchasers are the four largest formerly state-owned banks in China (also the largest banks in the world), three of which already have <a href="https://www.nzherald.co.nz/business/brian-gaynor-chinas-banks-building-their-nz-presence/BIHLDW7CASJOHN4AQHT7E76NEE/">operations in New Zealand</a>: Bank of China, China Construction Bank and the Industrial and Commercial Bank of China.</p>
<p>But because of the size of the prospective purchase, and because of the distance of New Zealand from other countries where suitable banks are based, the number of prospective buyers remains relatively small.</p>
<p>This brings us back to a challenge that arose when <a href="https://www.financialexpress.com/archive/anz-bank-to-buy-national-bank-of-nz-for-34-billion/93098/">ANZ bought the National Bank of New Zealand</a> in 2003, and which has persisted since: because of the limited pool of potential acceptable buyers, it will be difficult for any Australian bank to sell out of its New Zealand business for anything like the value reflected in the profitability of its ongoing operations. </p>
<p>It is almost as if the New Zealand subsidiaries of the Australian major banks are hostages, unable to be sold for a reasonable price and thus captives in the New Zealand market.</p>
<p>So it may be the New Zealand and Australian regulators will engage with each other to mitigate the difficulties faced by the Australian banks, or no sale proceeds at all, or Westpac is forced to sell its New Zealand business at a significantly discounted price.</p>
<p>We’re not sure how Westpac’s shareholders would respond to that last option!</p><img src="https://counter.theconversation.com/content/158224/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Tripe is a small shareholder in both Westpac Banking Corporation and the National Australia Bank. </span></em></p><p class="fine-print"><em><span>Martien Lubberink does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The New Zealand subsidiaries of major Australian banks might be highly profitable, but realising their true sale value can still be a challenge.David Tripe, Associate Professor in School of Economics and Finance, specialising in Banking, Massey UniversityMartien Lubberink, Associate Professor of Economics, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1493152020-11-08T03:11:28Z2020-11-08T03:11:28ZFrom coal to criticism, this isn’t the first time the Coalition has tried to heavy the ANZ<figure><img src="https://images.theconversation.com/files/367877/original/file-20201106-13-1x9pk2x.jpg?ixlib=rb-1.1.0&rect=445%2C286%2C2495%2C1209&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Sunflowerey/Shutterstock</span></span></figcaption></figure><p>Last week, the fifth most senior minister in the Morrison Government, Agriculture Minister and Deputy National Party Leader <a href="https://www.afr.com/politics/federal/bank-run-risk-from-anz-climate-lashing-20201029-p569qn">David Littleproud</a>, threatened the ANZ bank with “every lever at the federal government’s disposal - including the availability of deposit guarantees”.</p>
<p>His concern was an ANZ statement about climate change.</p>
<p>The bank had said that it supported the transition to a net zero emissions economy by 2050, and that as a consequence it would no longer provide banking services for new business customers with “<a href="https://bluenotes.anz.com/posts/2020/10/anz-carbon-policy-mark-whelan-paris-agreement-net-zero-emissions?adobe_mc=MCMID%3D27361199418806311364588398187284835818%7CMCORGID%3D67A216D751E567B20A490D4C%2540AdobeOrg%7CTS%3D160428930">material thermal coal exposures</a>”.</p>
<p>For me, it evoked 18-year old memories of when I was the ANZ bank’s chief economist in the early 2000s.</p>
<p>I had delivered a speech to a conference of accountants in which I’d been critical of the Howard government for its pretence that the goods and services tax wasn’t a federal tax and therefore didn’t need to be included in budget estimates of total tax collections.</p>
<p>After seeing media reports of that speech, the then treasurer Peter Costello phoned the then chief executive of the ANZ John McFarlane threatening (as McFarlane subsequently relayed his words to me) <a href="https://www.smh.com.au/business/anzs-eslake-highlights-focus-on-china-20090807-ecpa.html">regulatory action which ANZ would not like</a> if I said that sort of thing again.</p>
<h2>‘Regulatory action ANZ would not like’</h2>
<p>Costello also had his then press secretary fax (it was 2002) a press report of my remarks to the then Chairman of ANZ, Charles Goode, with the offending passage circled.</p>
<p>I was, frankly, astonished, that the third most important minister in the government at that time, someone who by his own account was single-handedly returning the budget to surplus, promoting wide-ranging tax reform and reversing a long-term decline in Australia’s birth rate, would have the time to ring the head of one of Australia’s big four banks to complain about something its chief economist had said on an arcane topic to an obscure conference.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/the-art-of-the-leak-how-the-budget-is-strategically-doled-out-for-maximum-effect-77157">The art of the leak: how the budget is strategically doled out for maximum effect</a>
</strong>
</em>
</p>
<hr>
<p>And I was appalled that any Australian treasurer would be willing to use the regulatory powers granted to him to help ensure the stability of the financial system to (at the very least) silence someone who’d had the temerity to question the accounting treatment of a tax measure.</p>
<p>To their very great credit, neither the chief executive John McFarlane nor the chairman Charles Goode sought to take any disciplinary actions against me.</p>
<h2>A delicate relationship</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/367864/original/file-20201105-17-1a6n617.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/367864/original/file-20201105-17-1a6n617.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/367864/original/file-20201105-17-1a6n617.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=970&fit=crop&dpr=1 600w, https://images.theconversation.com/files/367864/original/file-20201105-17-1a6n617.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=970&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/367864/original/file-20201105-17-1a6n617.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=970&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/367864/original/file-20201105-17-1a6n617.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1219&fit=crop&dpr=1 754w, https://images.theconversation.com/files/367864/original/file-20201105-17-1a6n617.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1219&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/367864/original/file-20201105-17-1a6n617.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1219&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Saul Eslake, ANZ Chief Economist 1995-2009.</span>
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</figure>
<p>Goode sought an assurance that there was nothing personal in what I’d said (there wasn’t) and reminded me that I should not create the impression that ANZ was aligned with any side of politics.</p>
<p>McFarlane indicated that it was important that the ANZ “got on well” with the man who was (in his words) “likely to be the next prime minister”, and asked me to ring Costello up and “smooth things over”, and to avoid commenting on that particular topic again. </p>
<p>In accordance with these instructions I rang the treasurer’s office, but he refused to take the call (so I was told).</p>
<p>I scrupulously avoided such comments from then on. </p>
<p>When I declined an invitation from a journalist to comment on a subsequent government decision to fiddle with the timing of the Reserve Bank dividend to improve the 2004-05 budget position at the expense of the 2003-04 one, I received a note from McFarlane thanking me “for taking the greater good of ANZ and an easier life for me into account”.</p>
<h2>A more ominous threat</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/367868/original/file-20201105-15-1bu3swf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/367868/original/file-20201105-15-1bu3swf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/367868/original/file-20201105-15-1bu3swf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/367868/original/file-20201105-15-1bu3swf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/367868/original/file-20201105-15-1bu3swf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/367868/original/file-20201105-15-1bu3swf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/367868/original/file-20201105-15-1bu3swf.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/367868/original/file-20201105-15-1bu3swf.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Agriculture Minister David Littleproud.</span>
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<p>Minister Littleproud’s threat to the ANZ’s current chief executive Shayne Elliott is more sinister. </p>
<p>Costello was trying to silence what could never have been more than a mere irritant.</p>
<p>Littleproud is seeking to prevent one of Australia’s leading banks from making a conscious, ethically-based decision to bring its lending practices into line with the goal of reducing Australia’s carbon emissions.</p>
<p>He is threatening to withdraw from its deposit customers the protection provided by Australia’s deposit insurance scheme – presumably in the hope that those customers would take their deposits to another financial institution.</p>
<p>It’s an odd approach for a member of a government that says it believes in a “<a href="https://www.pm.gov.au/media/address-melbourne-institute-2018-outlook-conference">vibrant, productive, free enterprise system</a>”.</p>
<p>Such a free enterprise system would, presumably, be one in which privately-owned enterprises were free to decide who they did business with.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/saving-for-retirement-gives-you-power-and-ethical-responsibilities-148349">Saving for retirement gives you power, and ethical responsibilities</a>
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</em>
</p>
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<p>Instead Littleproud seems to believe (as perhaps does the government of which he is a part, since no-one more senior has sought to “clarify” his remarks), that the government should decide who gets loan funds, and the circumstances under which they get them.</p>
<p>Free enterprise is only as free as the government allows it to be.</p><img src="https://counter.theconversation.com/content/149315/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Saul Eslake 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>Threats over the bank’s decisions about lending to coal miners call into question the government’s commitment to free enterprise.Saul Eslake, Vice-Chancellor’s Fellow, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1411412020-06-23T14:13:32Z2020-06-23T14:13:32ZElectronic banking fraud in Nigeria: how it’s done, and what can be done to stop it<figure><img src="https://images.theconversation.com/files/343219/original/file-20200622-54985-15pc17f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A warning sign advising users to be aware of their surroundings while playing a video game. </span> <span class="attribution"><span class="source">Stefan Heunis/AFP via Getty Images</span></span></figcaption></figure><p>Six years ago, a <a href="https://www.cbn.gov.ng/cashless/">cashless policy</a> became fully operational in Nigeria. The aim was to encourage electronic transactions with a view to reducing the amount of physical cash in the economy. The logic was that this would minimise the risk of cash-related crimes. </p>
<p>But a major downside of the policy has been <a href="https://nairametrics.com/2019/10/24/fraud-cases-hit-major-payment-channels-across-nigerian-banks/">pervasive</a> electronic banking fraud (e-fraud). Although the cashless banking system was designed to foster transparency, curb corruption and drive financial inclusion, it’s threatened by the growing perpetration of fraud. </p>
<p><a href="https://ndic.gov.ng/wp-content/uploads/2019/09/NDIC-2018-ANNUAL-REPORT.pdf">About N15.5 billion</a> was lost to bank fraud in 2018. About 60% of the fraud was perpetrated online owing to available internet-based and tech-rated banking services. </p>
<p>Our <a href="https://journals.sagepub.com/doi/full/10.1177/0306624X20928028">research</a> investigated dimensions of electronic fraud in Nigeria. We found three: internal fraud carried out by banking staff; external fraud carried out by ordinary Nigerians; and collaboration between fraudsters and banking staff. </p>
<p>We found that inefficient supervision, non-performance of oversight by regional heads of banks, and poor follow-up on customers’ addresses (Know Your Customer) accounted for the fraud that took place.</p>
<p>Our study provides the banking industry, banking public and investors with critical pointers on how to reduce fraud. </p>
<h2>Different types</h2>
<p>Our study involved collecting data as well as conducting interviews with 30 people. These included victims of bank fraud, bank customers who did not subscribe to the cashless policy and fraud detectives at the Economic and Financial Crimes Commission (EFCC). </p>
<p>These were the common patterns we uncovered.</p>
<p><strong>Insider fraud:</strong> By insider, we mean those working with banks or those in a relationship with account holders. Here, the fraud was exclusively executed by members of staff in the banking system who exploited the strategic position they held in the system and their grasp of how it works. Banking institutions and customers were their victims.</p>
<p>An example we came across during our research was the case of a N90 million (US$452,261) fraud perpetrated by an account officer of a major eatery in Lagos State. The job of this account officer was to collect the eatery’s takings and deposit them at the bank. A fraud detective told us that:</p>
<blockquote>
<p>As the account officer he would collect money on a daily basis and was expected to credit the company’s account. However, he would collect money on Monday and lodge it and collect on Tuesday and not lodge it. He was missing one day out. He did this continuously until he was able to rake in N90 million. At this time, when the eatery management raised the alarm on their account, he ran away and could not be found. We however used his sister to arrest him. We were only able to recover N8 million naira from him. He had used part of the money to organise his wedding, had a baby and almost completed a four-bedroom bungalow at another area in Lagos.</p>
</blockquote>
<p>Bank fraud is often successful because many Nigerians don’t subscribe to transaction alerts. The eatery management trusted their account officer but did not know that he was dishonest.</p>
<p><strong>Outsider fraud:</strong> These perpetrators were external to the banking system. They thrived on their internet skills and sometimes on their understanding of the victims’ routine and identity.</p>
<p>An example we came across was the fraudulent use of <a href="https://www.cbn.gov.ng/Out/2017/BPSD/Circular%20on%20the%20Regulatory%20Framework%20for%20BVN%20%20Watchlist%20for%20Nigerian%20Financial%20System.pdf">bank verification numbers</a> (BVN). These were made compulsory by the Central Bank of Nigeria in 2014. All bank account holders had to undertake biometric registration. The intention was to ensure security and check fraud. </p>
<p>But fraudsters have found a way to cheat the system by sending bank customers false emails asking for their bank verification details. As one victim explained to us:</p>
<blockquote>
<p>I needed to make some transactions and I headed for my bank. I had called my account officer ahead of time. On getting to the bank, I connected my computer and got a mail from a supposed same bank. I was asked to click on a link and supply my BVN details for update of my account or face service suspension on the account. I just clicked the link and supplied my details and behold, N1 million debit alert came on my phone within five minutes! I was shocked and devastated but before we could do anything they had withdrawn everything.</p>
</blockquote>
<p><strong>Collaborative fraud:</strong> This involved collaboration between bank staff and fraudsters outside the banking system. Banks and individual account holders were the victims. For example, bank staff could provide account details of customers to the collaborating fraudster.</p>
<h2>Governance gaps</h2>
<p>Despite this weak governance architecture, which is still not fraud proof, bank executives reported having in place mechanisms which had limited the incidence of fraud. One was sending out information to customers who subscribed to electronic alerts. Through this, banks contact and send anti-fraud messages to their customers. </p>
<p>Owing to reputational risk, banks try to refrain from public prosecution of erring staff. We found that banks adopted shaming as a mechanism for instilling discipline within their organisations while attempting to ease out “bad eggs” through flagging of their images on computers and across the banking industry.</p>
<p>There is a need to check fraud through customer awareness and financial literacy education. </p>
<p>While fraudsters continue to design new ways of working on customers’ vulnerabilities, Nigerian banks need to use the <a href="http://www.nigerianlawguru.com/legislations/STATUTES/CYBERCRIME%20ACT%202015.pdf">Cybercrime Act </a> to prosecute offenders as a way to boost confidence in the banking sector and deter fraud in the future.</p><img src="https://counter.theconversation.com/content/141141/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Oludayo Tade receives funding from the Regents of the University of California, Institute for Money, Technology and Financial Inclusion (IMTFI), Irvine, USA.</span></em></p>Nigeria’s cashless policy seeks to minimise cash-related crimes, but it seems to have replaced that risk with another: electronic fraud.Oludayo Tade, Researcher in criminology, victimology, electronic frauds and cybercrime, University of IbadanLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1059402019-01-22T11:49:27Z2019-01-22T11:49:27ZShutdown’s economic impact is a forceful reminder of why government matters<figure><img src="https://images.theconversation.com/files/254822/original/file-20190121-100285-1s9pfpj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">One of the more visible impacts of the shutdown is garbage piling up in parks.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Government-Shutdown-DC/1b040fe848534979b919b68da5081f06/67/0">AP Photo/Andrew Harnik</a></span></figcaption></figure><p>As the United States <a href="https://www.cnn.com/politics/live-news/longest-government-shutdown/index.html">endures the longest shutdown</a> in its history, Americans are getting a taste of life without government.</p>
<p>The absence of some services are clearly visible, such as a <a href="https://www.usatoday.com/story/news/nation/2019/01/01/free-all-national-parks-overrun-garbage-other-bad-behavior/2456757002/">buildup of trash at national parks</a> or <a href="https://www.washingtonpost.com/local/2019/01/21/tsa-checkpoint-worker-no-shows-peak-percent-workforce/?noredirect=on">longer lines at airport security checkpoints</a>. Others, like those felt primarily by businesses, are less noticeable but arguably more important, such as an inability to get a <a href="https://www.businessnewsdaily.com/5235-government-shutdown-hurting-small-businesses.html">small business loan</a> or limited service from the IRS, Securities and Exchange Commission and other key agencies.</p>
<p>Collectively they show that government matters. But once the shutdown ends and the memories of the pain and discomfort it caused begin to fade, the visceral reminder Americans got of this message may fade with it. </p>
<p>As scholars of <a href="https://scholar.google.com/citations?user=wGt9rX8AAAAJ&hl=en&oi=ao">business</a> and <a href="https://energy.umich.edu/leadership/profile/ellen-hughes-cromwick/">policy</a>, we believe it’s essential that Americans not forget. In fact, the shutdown provides a good opportunity to reflect on the government’s vital role in the free market and find a better balance between regulation and business. </p>
<h2>How the shutdown is affecting business</h2>
<p>The partial shutdown, in its fifth week, has left about 800,000 government employees either furloughed or working without pay, affecting more than <a href="https://www.reuters.com/article/us-usa-shutdown-departments-factbox/factbox-departments-hit-by-partial-u-s-government-shutdown-idUSKCN1OU11E">10 agencies</a>. </p>
<p>This has resulted in the slowing or halting of a great deal of activity, including <a href="https://www.msn.com/es-us/entretenimiento/famosos/fda-has-slowed-food-safety-inspections-due-to-government-shutdown-report/vp-BBS6WPf">food safety inspections</a>, <a href="https://www.cnbc.com/2019/01/15/this-government-shutdown-is-starting-to-get-the-ipo-market-nervous.html">initial public offerings</a> on the stock market and the approval of <a href="https://www.craftbeer.com/editors-picks/government-shutdown-frustrates-craft-breweries">new craft beers</a>. </p>
<p>And these costs are felt by citizens as the risks grow to their <a href="https://www.nbcnews.com/health/health-news/government-shutdown-stops-fda-food-safety-inspections-n956716">food</a>, the <a href="https://www.theguardian.com/environment/2019/jan/09/epa-government-shutdown-environmental-protection-agency-nightmare">environment</a> and other things. Economists warn that long-term impacts could also <a href="https://www.nytimes.com/2019/01/15/us/politics/government-shutdown-economy.html">undermine confidence</a> as businesses, consumers and investors lose faith in political leaders’ ability to make constructive policies. </p>
<p>The White House’s own economists estimate that every week of shutdown <a href="https://www.nytimes.com/2019/01/15/us/politics/government-shutdown-economy.html">reduces growth by 0.13 percentage point</a>, meaning the economy has already taken a hit of half a percent. If it goes for another week, total costs could <a href="https://www.cnbc.com/2019/01/11/shutdown-cou-mean-2-billion-less-consumer-spending-a-week-hitting-these-retailers-the-most.html">exceed US$6 billion</a>, which is more than what the president <a href="https://wqad.com/2019/01/19/trump-offers-the-nation-his-shutdown-deal/">is demanding</a> for his border wall. </p>
<p>And yet Americans won’t even know the actual impact because many of the government workers whose job it is to collect and measure economic activity have been sent home. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/254820/original/file-20190121-100295-degamm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/254820/original/file-20190121-100295-degamm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/254820/original/file-20190121-100295-degamm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/254820/original/file-20190121-100295-degamm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/254820/original/file-20190121-100295-degamm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/254820/original/file-20190121-100295-degamm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/254820/original/file-20190121-100295-degamm.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">
<figcaption>
<span class="caption">The shutdown has meant the Alcohol and Tobacco Tax and Trade Bureau can’t approve new beer labels.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Government-Shutdown-Breweries/770690df199045a3bdbce2fcce1fc315/26/0">AP Photo/Carrie Antlfinger</a></span>
</figcaption>
</figure>
<h2>Hamilton and public goods</h2>
<p>While the shutdown crystallizes what the absence of government feels like, the debate over its proper role in business is as old as the American Republic. </p>
<p>For example, Alexander Hamilton, the nation’s first Treasury secretary, <a href="https://books.google.ca/books?id=V4XzBQAAQBAJ&pg=PA196&lpg=PA196&dq=%22facilitates+and+extends+the+operations+of+commerce+among+individuals.+Industry+is+increased,+commodities+are+multiplied,+agriculture+and+manufacturers+flourish:+and+herein+consists+the+true+wealth+and+prosperity+of+a+state%22&source=bl&ots=34a1i3BSHy&sig=ACfU3U0nty_Oey-BJ2PZYQUGTj3mbUByLA&hl=en&sa=X&ved=2ahUKEwiuws_xyP_fAhUi_IMKHRW2DLEQ6AEwAXoECAgQAQ#v=onepage&q=%22facilitates%20and%20extends%20the%20operations%20of%20commerce%20among%20individuals.%20Industry%20is%20increased%2C%20commodities%20are%20multiplied%2C%20agriculture%20and%20manufacturers%20flourish%3A%20and%20herein%20consists%20the%20true%20wealth%20and%20prosperity%20of%20a%20state%22&f=false">wrote eloquently</a> about the need for the government to get involved in markets, specifically through the establishment of a national bank. He called it a key public institution that “facilitates and extends the operations of commerce among individuals. Industry is increased, commodities are multiplied, agriculture and manufacturers flourish: and herein consists the true wealth and prosperity of a state.”</p>
<p>Beyond a central bank, <a href="https://theconversation.com/public-goods-made-america-great-and-can-do-so-again-74421">“public goods”</a> often require the protection of a set of laws. Examples include the environment, national defense, national parks, consumer protection and advanced research that helps seed inventions and create the industries of our future. </p>
<p>Author Michael Lewis, in his <a href="https://www.npr.org/2018/10/02/652563904/the-fifth-risk-paints-a-portrait-of-a-government-led-by-the-uninterested">book</a> “<a href="http://books.wwnorton.com/books/The-Fifth-Risk/">The Fifth Risk</a>,” details many of the important yet little-noticed functions that government agencies handle better than private industry, such as the protection of food safety or the oversight of spent nuclear resources. Further, he shows how a functioning economy depends on civil servants using the best data and science available to provide vital services to all Americans.</p>
<p>To offer just one example of the federal government’s positive role in fostering innovation, its creation of the Defense Advanced Research Projects Agency in 1957 <a href="https://www.newscientist.com/article/dn13908-fifty-years-of-darpa-a-surprising-history/">gave us the internet</a>, GPS, stealth aircraft and countless other technologies used in non-defense sectors today.</p>
<p>On the flip side, the absence of proper regulation can lead to serious economic and personal damage, as we saw during the <a href="https://theconversation.com/us/topics/global-financial-crisis-447">global financial crisis</a> a decade ago. And only government – through regulatory agencies and smartly designed laws – is in a position to <a href="https://www.bloomberg.com/news/articles/2018-09-13/jpmorgan-sees-liquidity-wildcard-in-gauging-depth-of-next-crisis">prevent another crisis</a>. Indeed, <a href="https://www.vox.com/2018/9/18/17868074/financial-crisis-dodd-frank-lehman-brothers-recession">fears are growing</a> that another one may be on the horizon as a result of Wall Street excesses or <a href="https://www.cnbc.com/2018/07/12/the-housing-shortage-may-be-turning-warning-of-a-price-bubble.html">financial bubbles in housing or debt</a>.</p>
<p>The point is that in all these cases, the question is not about “no government” but about how much, what kind and which level (state or federal).</p>
<h2>Americans’ evolving views</h2>
<p>It’s good news in our opinion that Americans seem to be increasingly abandoning the view that government should stay out of business and the market. And more are embracing an expanded role. </p>
<p>In 2011, half of Americans polled by Gallup <a href="https://news.gallup.com/poll/243662/americans-worry-less-government-regulation.aspx">said there’s “too much” regulation</a>. The latest survey, taken in late 2018, found that just 39 percent felt that way – the lowest in a decade – with a growing share saying that the balance is “just right.” </p>
<p>This comes at a time when the Trump administration <a href="https://www.nytimes.com/2018/02/23/us/politics/trump-says-no-president-has-ever-cut-so-many-regulations-not-quite.html">is boasting</a> about the number of regulations it has eliminated. Yet these surveys suggest Americans don’t simply want fewer regulations, they want better ones. </p>
<p><a href="https://www.cato.org/survey-reports/wall-street-vs-regulators-public-attitudes-banks-financial-regulation-consumer">Even more encouraging in our view</a> is a Cato survey from 2017 that found that large majorities of Americans “believe regulations, at least in the past, have produced positive benefits” and that “regulations can help make businesses more responsive to people’s needs.”</p>
<p>One area where people see a value in government regulation is the financial sector, which <a href="https://www.cato.org/survey-reports/wall-street-vs-regulators-public-attitudes-banks-financial-regulation-consumer">is seen as rapacious</a> and in need of more monitoring. </p>
<p>And 1 in 4 Americans surveyed by Gallup said there’s “too little” regulation, a figure that hasn’t changed much in recent years. This suggests that a notable number of Americans don’t trust the private sector and think that government is necessary to curb market excess and other problems.</p>
<h2>Toward a better balance</h2>
<p>But instead of a debate over the right balance for government, American politicians and others have denigrated government as “<a href="https://www.americanrhetoric.com/speeches/ronaldreagandfirstinaugural.html">the problem</a>” or, more recently, “<a href="https://www.usatoday.com/story/news/politics/elections/2016/2016/10/18/donald-trump-rally-colorado-springs-ethics-lobbying-limitations/92377656/">the swamp</a>.” The terms are meant to say that government is alternatively inept, obstructive or corrupt.</p>
<p>They do this to take advantage of the still too widespread view that government has <a href="https://www.lp.org/platform/">no role in markets</a> and that regulation represents an <a href="https://books.google.com/books/about/Unwarranted_Intrusions.html?id=lC-pUjyN9vwC">unwarranted intrusion</a> on business. This is a misperception that dismays both of us, motivating the very article you are reading. </p>
<p>While there certainly are problems with special interest influence in government and bureaucratic inefficiency, the enterprise as a whole remains central to the operation of capitalism and the markets. After all, <a href="https://theconversation.com/capitalism-must-evolve-to-solve-the-climate-crisis-47338">capitalism is a set of institutions</a> designed by government in concert with business and civil society. </p>
<p>As National Affairs editor <a href="http://www.nationalaffairs.com/publications/detail/recovering-the-case-for-capitalism">Yuval Levin</a> points out, even Adam Smith, the Scottish economist who wrote the foundational texts on capitalism, argued that “the rules of the market are not self-legislating or naturally obvious.” Rather, Smith said, the market is a public institution that requires rules imposed on it. </p>
<p>So we believe it is time to return to the basics and launch a new effort at <a href="http://www.governing.com/topics/mgmt/gov-reinventing-government-book.html">reinventing government</a> to improve how the various branches and levels interact with each other and the market.</p>
<p>At the same time, it’s important to provide more public education on what government does, and why, and solicit feedback from citizens on how to do it better – including at the ballot box.</p><img src="https://counter.theconversation.com/content/105940/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ellen Hughes-Cromwick receives funding from Sloan Foundation to fund student scholarships to attend our Transportation, Energy, Economics, and the Environment Conference. Ellen is affiliated with American Economic Association, National Association for Business Economics, Board of Trustees of Clark University, NABE Foundation, WorkingNation, and a Senior Advisor for Macro Policy Perspectives, LLC.</span></em></p><p class="fine-print"><em><span>Andrew J. Hoffman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The shutdown is highlighting the crucial role government plays in the lives of citizens and businesses, offering a reminder of its fundamental value to the economy.Andrew J. Hoffman, Holcim (US) Professor at the Ross School of Business and School of Environment and Sustainability, University of MichiganEllen Hughes-Cromwick, Senior Economist and Associate Director of Social Science and Policy, University of Michigan Energy Institute, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1012382018-08-08T05:17:34Z2018-08-08T05:17:34ZEmbedding regulators in banks can help change cultures of wrongdoing, despite the risks<p>The federal government’s <a href="https://www.theguardian.com/australia-news/2018/aug/07/asic-to-embed-staff-in-big-banks-to-enforce-compliance">adoption</a> of ASIC chair James Shipton’s proposal to embed ASIC supervisors in the banks is an important initiative. The Global Financial Crisis and the procession of corporate and financial scandals since then have led to what Shipton calls a “<a href="https://asic.gov.au/about-asic/media-centre/speeches/the-trust-deficit-and-corporate-australia-acsi-conference-2018/">trust deficit</a>”. The move to embed regulators in banks aims to drive much-needed cultural change and rebuild <a href="https://www.edelman.com/post/apacmea-trust-becomes-polarized">lost trust</a>.</p>
<p>The scandals and further evidence of misconduct uncovered at the <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">Hayne Royal Commission</a> have turned the spotlight on the failures of senior executives, corporations and also regulators to combat white-collar crime. Increasingly, commentators <a href="https://asic.gov.au/about-asic/media-centre/speeches/corporate-culture-and-corporate-regulation/">identify “defective” culture as a prominent cause of corporate and financial misconduct</a>. Certainly, ASIC identifies corporate culture as being “<a href="https://asic.gov.au/about-asic/media-centre/speeches/outline-of-asic-s-approach-to-corporate-culture/">a key driver of conduct</a>”.</p>
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Read more:
<a href="https://theconversation.com/restructuring-alone-wont-clean-up-the-banks-act-99142">Restructuring alone won't clean up the banks' act</a>
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<p>That is the reasoning behind embedding ASIC supervisors in banks. But such action is not without its risks and problems.</p>
<h2>What are the risks?</h2>
<p>One such risk is “<a href="https://www.investordaily.com.au/regulation/43183-embedded-asic-agents-risk-capture-shipton">regulatory capture</a>”. Shipton has said he is “<a href="http://www.abc.net.au/news/2018-08-07/asic-to-be-given-powers-to-embed-staff-into-big-four-banks/10079630">attuned</a>” to this, but it remains a very real issue. </p>
<p><a href="https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=5262&context=faculty_scholarship">In the United States</a>, for example, “monitors” have been embedded under deferred prosecution agreements to ensure compliance with such agreements. Under these agreements, regulators suspend prosecution conditional upon specified terms, typically requiring the corporation to pay fines, compensate victims and reform their corporate governance. Indications are that monitors have become “too close” to those corporations and organisations. </p>
<p>The result is that the formal governance structures (often documented in codes of conduct and mission statements) may have improved, so that there is box-ticking of regulatory requirements, but <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674659919">substantive compliance remains wanting</a>. In other words, there is a disconnect between “stated” and “lived” values. </p>
<p>Many of the scandals that have engulfed Australian banks highlighted this problem even before the royal commission began. The Commonwealth Bank of Australia’s <a href="https://www.commbank.com.au/cs/newsroom/response-to-amended-AUSTRAC-and-class-action-claims-201802.html?ei=card=view">response</a> earlier this year to the criminal case brought against it by AUSTRAC is but one example. </p>
<p>Another problem is the difficulty of creating a consistent culture throughout an organisation. Shipton has made it clear that ASIC supervisors will start with the banks’ chief executive officers. That reflects the thinking that “tone from the top” sets the culture. </p>
<p>This is a positive step. While top management may not themselves perpetrate the wrongdoing, they have often been complicit in encouraging, condoning or, in some cases, concealing it.</p>
<p>However, there is a danger that the banks might see the embedding of ASIC specialists as just another imposition of bureaucratic burdens from outside. That’s how the banks have responded to previous attempts to scrutinise their operations. </p>
<p>In the first place, they, and the federal government, resisted calls for a banking royal commission until the pressure for one was overwhelming. Second, despite clear evidence, and some “acknowledgement”, that systemic failings have been at the heart of many, if not all, of the scandals that dog them, the banks overall remain in denial that systemic cultural issues are at play. </p>
<p>For example, Westpac’s attitude to the outcome of the case against it for the alleged rigging of the Bank Bill Swap Rate (BBSW) is telling. In April 2018, when the Federal Court found that Westpac employees acted unconscionably (albeit a less serious finding than market manipulation), the bank <a href="https://www.afr.com/business/banking-and-finance/westpac-wins-bbsw-interest-rate-rigging-case-20180523-h10gyn">claimed it as a victory</a>.</p>
<h2>A sign of more robust enforcement</h2>
<p>Nevertheless, the significance of embedding ASIC staff in the banks cannot be overstated. It signals a changed regulatory landscape – a more intrusive style of regulation – based on the conclusion that the banks cannot be left to regulate themselves. The hope is that ASIC has resolved to pursue more robust enforcement, including civil penalties and criminal proceedings against suspected wrongdoers. </p>
<p>In recent years ASIC has relied almost exclusively on enforceable undertakings in relation to wrongdoing by the banks. The only exception seems to be the BBSW rate-rigging case, in which ASIC launched civil penalty proceedings against Westpac, ANZ, NAB and CBA. All but Westpac reached settlements with ASIC. </p>
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Read more:
<a href="https://theconversation.com/apra-and-asic-have-the-legal-power-to-sack-bank-heads-but-they-need-willpower-95772">APRA and ASIC have the legal power to sack bank heads, but they need willpower</a>
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<p>It has been argued that enforceable undertakings avoid the uncertainty, time and expense associated with court action. They also arguably have the potential to work for prevention – by requiring corporations to change future behaviour, improve corporate governance and end wrongdoing cultures. But there is no reliable evidence to support such arguments. </p>
<p>In fact, the opposite seems to be the case. There is clear evidence of recidivism and other noncompliance by organisations that are subject to enforceable undertakings. </p>
<p>For example, in 2006 ASIC entered into an enforceable undertaking with AMP after it had been caught overcharging customers by switching them onto expensive and poorly performing products. This did not prevent AMP from engaging in further misconduct, notably the “fee for no service” scandal explored in the royal commission hearings.</p>
<p>ASIC, armed with <a href="https://www.smh.com.au/business/banking-and-finance/new-misconduct-laws-need-tough-regulator-experts-say-20180420-p4zaue.html">tougher jail terms and penalties</a> (both civil and criminal), should bring criminal proceedings in appropriate cases not just against corporations or organisations, but against their top executives as well. In this way, ASIC will show that it is not “<a href="http://www.abc.net.au/radio/perth/programs/worldtoday/new-powers-to-make-asic-the-top-cop-on-the-beat:-james-shipton/10082674">asleep at the wheel</a>” and is serious about tackling corporate crime. </p>
<p>The government, having <a href="http://www.abc.net.au/news/2018-08-07/asic-to-be-given-powers-to-embed-staff-into-big-four-banks/10079630">restored ASIC’s budget following previous cuts</a>, needs to ensure the regulator is properly resourced to do so. Only then will the fight against corporate wrongdoing be meaningful, because the most potent deterrent for white-collar criminals is jail.</p>
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Read more:
<a href="https://theconversation.com/heavy-penalties-are-on-the-table-for-banks-caught-lying-and-taking-fees-for-no-service-95210">Heavy penalties are on the table for banks caught lying and taking fees for no service</a>
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<img src="https://counter.theconversation.com/content/101238/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vicky Comino 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>Putting regulators inside corporations isn’t new, and the US experience highlights risks of regulatory capture, but the move could make a difference if ASIC is shifting to more robust enforcement.Vicky Comino, Lecturer in Corporations Law and Regulation of Corporate Misconduct, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/991422018-07-11T20:09:57Z2018-07-11T20:09:57ZRestructuring alone won’t clean up the banks’ act<p>Many entrenched motivations for misconduct in the banking sector have been uncovered by the ongoing <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">royal commission</a>. Not least are the conflicts of interest inherent in the major Australian banks providing financial, insurance and mortgage advice and selling related products. </p>
<p>The banks, most recently the <a href="https://www.smh.com.au/business/banking-and-finance/cba-to-spin-off-wealth-management-and-mortgage-broking-arm-20180625-p4zni4.html">Commonwealth Bank</a> (<a href="https://www.smh.com.au/money/super-and-retirement/spin-off-of-big-banks-wealth-arms-heralds-a-new-era-20180622-p4zn4m.html">following the lead of ANZ and NAB</a>), are already separating their wealth-management arms – services such as mortgage broking, insurance and financial planning and advice – in a bid to resolve these conflicts of interest.</p>
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Read more:
<a href="https://theconversation.com/theres-no-evidence-behind-the-strategies-banks-are-using-to-police-behaviour-and-pay-91064">There's no evidence behind the strategies banks are using to police behaviour and pay</a>
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<p>These restructures are a step in the right direction. But they are not enough to overcome the fundamental problem: the banks’ sales-driven culture. This goes much deeper and seemingly pervades all of their operations, as the royal commission has highlighted. </p>
<p>The nature of this problem lends weight to an Australian Securities and Investments Commission (ASIC) proposal to embed regulatory staff in the major banks to help change the culture.</p>
<h2>Bankers’ priorities laid bare</h2>
<p>The evidence made public by the forensic analysis of <a href="https://www.smh.com.au/business/banking-and-finance/the-woman-asking-the-hard-questions-at-the-banking-royal-commission-20180314-p4z4ay.html">Rowena Orr QC</a>, counsel assisting the commission, has revealed many instances of the banks’ “toxic” culture. It’s one that puts profits and growth – in particular their associated incentive systems – above customers’ interests. </p>
<p>This has been evident from the outset. The <a href="https://financialservices.royalcommission.gov.au/public-hearings/Pages/round-1-hearings.aspx">first round of hearings</a> in March 2018 <a href="https://www.afr.com/business/banking-and-finance/nabs-internal-power-struggle-over-the-dark-underbelly-of-16trn-home-loan-industry-20180315-h0xii0">revealed</a> <a href="http://www.abc.net.au/news/2018-03-13/banking-royal-commission-alleged-cash-for-loans-bribery-ring/9543280">significant cash bribes</a>, <a href="https://www.smh.com.au/business/banking-and-finance/forgery-and-fraud-now-it-s-nab-s-turn-20180423-p4zb9a.html">forged signatures</a> and manipulation of incentives within NAB’s “Introducer Program”. This generated billions of dollars in home loans for the bank, with introducers paid 0.4-0.6% of home loan totals. </p>
<p>We have had belated “apologies” to customers who were treated unfairly or, worse, fell victim to unscrupulous or wrongful behaviour; admissions that the banks breached their own codes of conduct; and assurances that changes in governance systems aimed at improving culture have been made or will be. Yet the banks are still in denial that systemic cultural issues have been at play or persist in their organisations.</p>
<p>A stark example is provided in the evidence of Rabobank executive Bradley James at the <a href="https://financialservices.royalcommission.gov.au/public-hearings/Pages/round-4-hearings.aspx">most recent hearings</a> that dealt with issues of farming finance. Orr questioned James about a A$3 million loan made on the advice of a manager of this rural lender to a Queensland grazing family, the Brauers. They had no ability to repay it. The motivation for the manager was to meet his lending KPIs to earn a bonus. </p>
<p>Asked whether he saw any difficulty with that from a customer perspective, James’s response was: “Absolutely not!” This shows a complete failure to understand the bank’s incentive structure – linking staff bonuses to the number of loans brought in – and the culture that goes with it as a potential source of misconduct. </p>
<p>James defended the bank’s system, saying it enabled the business to grow. This demonstrates that, in putting profits and growth ahead of customers’ needs, banking culture is out of touch with community expectations and societal values.</p>
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Read more:
<a href="https://theconversation.com/evidence-from-the-banking-royal-commission-looks-like-history-repeating-itself-97090">Evidence from the banking royal commission looks like history repeating itself</a>
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<h2>Regulators must step in</h2>
<p>Little wonder, then, that trust in the financial sector is at an all-time low. ASIC chair James Shipton speaks of a “trust deficit”. </p>
<p>Shipton is seeking government funding to embed specialist ASIC supervisors in the major banks to help drive cultural change and rebuild trust. This should be done, signalling as it does a new, more intrusive regulatory style. </p>
<p>However, ASIC should do more. It needs to take enforcement action. Most notably this would include prosecution in cases of criminal wrongdoing by the banks and their top executives. The latter have been conspicuously absent at the royal commission, raising important questions about bank accountability.</p>
<p>Another corporate regulator, the Australian Competition and Consumer Commission (ACCC), last month <a href="https://www.accc.gov.au/media-release/criminal-cartel-charges-laid-against-anz-citigroup-and-deutsche-bank">brought criminal proceedings</a> against ANZ and several other companies and individuals over an alleged cartel arrangement. Commentator Nathan Lynch <a href="https://www.quinlanandassociates.com/wp-content/uploads/2018/06/Regulatory-Intelligence-Cartel-test-case.pdf">observed</a> that, irrespective of the outcome, one message reverberates: senior management accountability: </p>
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<p>Governments and regulators have had enough of financial services firms that are still talking about improving culture and conduct. A decade on from the financial crisis … they now want to see a healthy dose of fear and respect in the market.</p>
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<p>Lynch <a href="https://www.quinlanandassociates.com/wp-content/uploads/2018/06/Regulatory-Intelligence-Cartel-test-case.pdf">quotes</a> strategic consultant Ben Quinlan:</p>
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<p>Regulators are now at the point where they’re saying, ‘It’s impossible for things of this magnitude to happen without the people right at the top knowing what was going on.’</p>
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<p>If ASIC also took such action, it would go a long way to overcoming concerns about an accountability deficit for the scandals and wrongdoing. This could be a catalyst for real cultural change in the industry to reduce misconduct in the future.</p>
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Read more:
<a href="https://theconversation.com/company-boards-are-stacked-with-friends-of-friends-so-how-can-we-expect-change-95790">Company boards are stacked with friends of friends so how can we expect change?</a>
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<h2>Why isn’t restructuring enough?</h2>
<p>As for the current bank restructures, certain aspects are problematic. </p>
<p>In the first place, not all will result in a full separation of their businesses. The CBA will split off its wealth management, mortgage broking and insurance businesses, but <a href="https://www.afr.com/business/banking-and-finance/financial-services/commonwealth-banks-cfs-planning-broking-arms-basically-up-for-sale-20180626-h11vkd">retain its financial advice business</a>. ANZ has <a href="https://www.afr.com/business/banking-and-finance/financial-services/ioofs-anz-purchase-gets-accc-greenlight-20180424-h0z67w">sold its wealth management business</a> to IOOF, but will not sell its life insurance business. </p>
<p>In addition, the banks remain keen to distribute products to retail customers. For example, ANZ’s sale to IOOF includes a 20-year deal to make IOOF super and investment products available to its retail customers.</p>
<p>These moves raise concerns that, despite these demergers, conflicts of interest and the banks’ failure to act in customers’ interests will continue.</p>
<p>At a minimum, Shipton’s plan to put ASIC agents in banks is more important than ever when the indications are that the banks cannot be left to self-regulate.</p>
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<strong>
Read more:
<a href="https://theconversation.com/solving-deep-problems-with-corporate-governance-requires-more-than-rearranging-deck-chairs-99297">Solving deep problems with corporate governance requires more than rearranging deck chairs</a>
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<img src="https://counter.theconversation.com/content/99142/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vicky Comino 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>Restructuring might help manage conflicts of interest between offering advice and selling products, but it doesn’t fix the culture that sacrifices customers’ interests to the pursuit of profits.Vicky Comino, Lecturer in Corporations Law and Regulation of Corporate Misconduct, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/957722018-05-01T00:57:41Z2018-05-01T00:57:41ZAPRA and ASIC have the legal power to sack bank heads, but they need willpower<p>The <a href="http://www.abc.net.au/news/2018-04-30/amp-chairperson-catherine-brenner-steps-down/9709874">chairwoman</a> and <a href="http://www.abc.net.au/news/2018-04-20/amp-ceo-craig-meller-steps-down-banking-royal-commission/9679138">CEO</a> of AMP have resigned after the company <a href="http://www.abc.net.au/news/2018-04-16/banking-royal-commission-financial-planners/9662166">admitted to charging for advice never provided</a> and lying to clients and regulators. But no banking CEOs have been toppled despite the Financial Services Royal Commission unearthing instances of fraud, bribery, impersonating customers, failures to report misconduct to regulators and other poor behaviour. </p>
<p><a href="https://www.nytimes.com/2017/08/31/business/dealbook/wells-fargo-accounts.html">Similar conduct</a> in the United States has resulted in bank executives and directors being forced to resign. That this is not happening in Australia shows how the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) aren’t using their full powers to take action on the banks’ bad behaviour.</p>
<p>APRA already has the power under the <a href="http://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ba195972/">Banking Act</a> to remove someone from a bank board and install its own nominee. The recently enacted <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">Banking Executive Accountability Regime</a> has given APRA more power to remove directors and install new ones. </p>
<p>So ASIC and APRA are not bedevilled by a lack of power, but by a lack of willpower. </p>
<p>In 1998 the <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP9697/97rp16">Wallis Inquiry</a> hived off the consumer protection and market conduct functions from the Australian Competition and Consumer Commission (ACCC) and gave these to ASIC. Professor Ian Harper, a member of the inquiry, <a href="https://www.fsca.co.za/Customers/Pages/Complaints-Compliments-Feedback.aspx">now concedes</a> that may have been an error. </p>
<p>The ACCC is an excellent regulator, with a long history of being a tough cop. Handing the consumer protection and market conduct function back to the ACCC is a step that federal Treasurer Scott Morrison should take now.</p>
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Read more:
<a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">Why the new banking laws won’t be the slam dunk the government is expecting</a>
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<p>The royal commission heard that a Commonwealth Bank subsidiary was <a href="http://www.abc.net.au/news/2018-04-19/cba-charged-fees-to-customers-who-had-died-commission-hears/9675922">billing customers for ongoing service after their deaths</a>. But no executives have been sacked for this. </p>
<p>Indeed, Matt Comyn, who was <a href="https://www.commbank.com.au/about-us/our-company/management/matt-comyn.html">responsible for this division from 2012 onwards</a>, has been promoted to Commonwealth Bank CEO. Former CEO Ian Narev has been permitted to sail off into the sunset with bonuses intact. </p>
<p>This shows ASIC is the same, or worse, than what it was in 2014: a timid, hesitant regulator, <a href="http://fsi.gov.au/publications/final-report/">too quick to accept the assurances of regulated entities</a>.</p>
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Read more:
<a href="https://theconversation.com/australias-financial-regulators-need-policing-91396">Australia's financial regulators need policing</a>
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<p>Despite United States authorities being <a href="http://scholarship.law.uc.edu/cgi/viewcontent.cgi?article=1154&context=uclr">widely regarded</a> as weak in standing up to their banks, American CEOs are being held accountable.</p>
<p>Take the example of John Stumpf, chairman and CEO of Wells Fargo, the biggest retail bank in the US. Under his direction Wells Fargo <a href="https://www.nytimes.com/2017/08/31/business/dealbook/wells-fargo-accounts.html">staff had been opening multiple accounts for clients</a>, with neither their knowledge nor their consent, and then charged account-keeping fees.</p>
<p>When the scandal hit, Stumpf was <a href="http://www.abc.net.au/news/2016-09-23/head-of-wells-fargo-described-as-gutless/7868278">hauled before the US Senate</a>. He performed <a href="https://youtu.be/iCLIyXpV5K0">so disastrously</a> that the board told him he <a href="https://youtu.be/wm0Koz2zvXk">needed to go straight away</a>. </p>
<p>No one is suggesting Stumpf knew about the fraud, or that Comyn knew that CBA was charging fees for advice to dead people. But Stumpf’s misstep caused his departure. Why is no one suggesting Comyn must go? </p>
<p>This is the true state of the Australian financial sector: bank executives and CEOs who <a href="https://theconversation.com/heavy-penalties-are-on-the-table-for-banks-caught-lying-and-taking-fees-for-no-service-95210">could be facing criminal charges</a>, and should have resigned, don’t even acknowledge the buck stops with them.</p>
<h2>Regulatory failure</h2>
<p>And if there is any doubt about the need to get cracking, here is the knockout blow: <a href="https://www.businessinsider.com.au/westpac-ubs-downgrade-2018-4">UBS has downgraded Westpac shares</a> because the royal commission revealed that the percentage of “liar loans” in the bank’s A$400 billion loan book may be much higher than stated, or even than Westpac itself is aware of. </p>
<p>This is the culmination of ten years of cowboy behaviour in a financial system that now resembles the Wild West. </p>
<p>This is what happens when compliance culture breaks down, which in turn is a function of regulatory oversight and enforcement. Put differently, our regulators have failed to act for so long that the problem is assuming systemic proportions. </p>
<p>What will be interesting to see is whether the <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">APRA inquiry</a> is another whitewash. I half suspect that if it failed to excoriate CBA it would look pretty silly. </p>
<p>Let’s hope the panellists understand that. But if they don’t, then they must be called out.</p><img src="https://counter.theconversation.com/content/95772/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Andy Schmulow consults to Datta Burton and Associates. He is affiliated with Australian Citizens Against Corruption (ACAC), is an Executive Member of the Board of the Australian Law and Economics Association, and a committee member of the Banking and Finance Law and Studies Association (BFSLA) and the American Council on Consumer Interests (ACCI). He provides on-going ad hoc advice to members of the Australian Federal Parliament, principally in the Labor Party. He is currently a member of an expert panel of advisors convened to provide South Africa's National Treasury with advice on the drafting of the Conduct of Financial Institutions Bill, and made a series of submissions during the drafting of the Financial Sector Regulation Act.</span></em></p>ASIC and APRA don’t lack power to sack bank directors. They the lack the willpower to do so.Andrew Schmulow, Senior Lecturer, Faculty of Law, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/955582018-04-29T09:00:02Z2018-04-29T09:00:02ZSouth Africa joins the club that regulates financial markets through ‘Twin Peaks’<figure><img src="https://images.theconversation.com/files/216457/original/file-20180426-175038-1jxpor4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> </figcaption></figure><p>South Africa is preparing the ground to migrate to a new way of regulating its banks and <a href="http://www.treasury.gov.za/twinpeaks/Press%20release%20Twin%20Peaks%20implementation%20March2018_FINAL.pdf">financial markets</a>. Known as the Twin Peaks model, the decision has sparked debate, even controversy. </p>
<p>So what is Twin Peaks? And what’s all the fuss about?</p>
<p>The name Twin Peaks was adopted in 1995 by <a href="https://hk.linkedin.com/in/michael-taylor-75682714">Dr Michael Taylor</a>, who at the time was an official with the Bank of England. The name was a riff on the popular US mystery horror television mini-series <a href="https://www.imdb.com/title/tt0098936/">created by David Lynch</a>. </p>
<p>In a seminal paper published that year, Taylor set about unpacking the failings of the way banks and the financial markets were regulated in the UK. Regulation was based on a sectoral model – that is on the assumption that banks should be regulated separately from other kinds of financial institutions such as insurers. This model was used in most countries in the world at the time. It was applied in South Africa until 1 April 2018.</p>
<p>Twenty three years ago Taylor argued that the sectoral model was no longer fit for purpose. It was an anachronism. A throw-back to the days when there were clear delineations between different types of firms in the financial sector – banks, insurers, securities issuers. But when those firms began to amalgamate, the new firms that were created presented a problem for regulators whose authority was divided along lines that mirrored the division between banks, insurers and other financial firms. Taylor referred to this as a</p>
<blockquote>
<p>blurring of the boundaries.</p>
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<p>His observations were prescient. Even though his suggestions were rejected at the time, the intervening years – particularly the impact of the financial crisis in 2008 – have underscored the need for a rethink of how financial institutions are regulated. South Africa is in the process of catching up with what has become a growing trend. </p>
<p>Instead of having a separate regulator just for banks, the new system creates two peaks: one is now responsible for regulating to prevent financial crises (the prudential regulation peak), the other to ensure good market conduct and consumer protection (the good conduct peak). </p>
<p>South Africa has gone a few steps further to lay the foundation for a four peak model. This is because it envisages a role for the Reserve Bank in preventing financial crises as well as a role for the National Credit Regulator which already exists to protect consumers of credit. </p>
<h2>The history</h2>
<p>Taylor’s proposal was initially rejected in the UK. Instead the country’s government adopted the mega-regulator model, which brought all firms in the financial services sector under one umbrella. The International Monetary Fund touted this as the superior solution. Then came the global financial crisis in 2008.</p>
<p>The UK’s mega-regulator was abandoned as a disaster in the aftermath of the crisis and the collapse of <a href="https://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11032772/The-rise-and-fall-of-Northern-Rock.html%3E%20and%20Halifax%20Bank%20of%20Scotland">Northern Rock</a>. A joint House of Lords, House of Commons <a href="http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/144/144.pdf">inquiry</a> identified catastrophic failures by the country’s then regulator, the Financial Services Authority. It painted a picture of a regulator that had poor crisis management, and which had prioritised regulating business conduct over prudential regulation - regulations that are designed to force banks to act prudently, chiefly through making sure they have a minimum capital buffer.</p>
<p>The crisis, and the events it set in motion, led to a much deeper understanding of the tension between trying to enforce prudential regulation on the one hand, and protecting consumers on the other. The two functions are frequently mutually incompatible. And the failings of the mega-regulator showed that one was invariably sacrificed in favour of the other. </p>
<p>More often than not, when faced with a choice between helping several thousand aggrieved consumers, or avoiding a financial crisis, most regulators will choose to avoid a financial crisis - systemic failure in the system. Consumers – especially the most vulnerable consumers – are left unprotected. From a policy perspective, that’s a poor outcome. </p>
<p>But after the global financial crisis, and the sub-prime disaster that initiated it, we understand also that market misconduct and consumer abuse, when practised at scale, can become their own source of financial crisis.</p>
<h2>How Twin Peaks helps</h2>
<p>Twin Peaks is the only model that separates oversight into two independent regulators – market conduct and consumer protection on the one hand, and prudential regulation on the other. It envisions two regulators created as equals, with clear and unambiguous remits: one ensuring a sound and robust financial system, the other ensuring that the financial system is not distorted through market misconduct, while also protecting consumers of financial services and goods. </p>
<p>Twin Peaks was also the first regulatory model to adopt the view that a range of financial institutions – not just banks but also insurers - should be subject to regulations that would ensure they were fit for purpose, and could withstand a crisis. After the near collapse of the large <a href="https://www.wsj.com/articles/SB122156561931242905">US insurer AIG</a> in 2008, and its <a href="https://www.thedailybeast.com/remember-the-dollar182-billion-aig-bailout-it-just-wasnt-generous-enough">US$ 182 billion bail-out</a>, we now understand that some insurers are systemically important – that means that their collapse can lead to a domino effect of collapsing firms, and ultimately the market imploding. Prior to AIG’s collapse the assumption had been that only banks carried this level of risk to the system.</p>
<p>In the post-2008 world there is general acceptance that countries need to draw up much more specific terms and conditions for firms in the financial sector. Those terms and conditions are the basis of regulations to protect big firms from financial distress, because if they fail, taxpayers will be forced to step in and save them. In return, taxpayers have a right to impose regulations that will discourage conduct likely to lead to firms failing.</p>
<p>It’s appropriate that South Africa’s highly-advanced and sophisticated financial services sector should be regulated under an architecture that is fit for the present and the future. </p>
<p>Enforcement will be key. Twin Peaks can facilitate better enforcement, but doesn’t guarantee it.</p>
<p><em>This is one article in a series on the implementation of Twin Peaks in South Africa as well as difficulties the model is facing in Australia.</em></p><img src="https://counter.theconversation.com/content/95558/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Andy Schmulow consults to Datta Burton and Associates. He is affiliated with Australian Citizens Against Corruption (ACAC), is an Executive Member of the Board of the Australian Law and Economics Association, and a committee member of the Banking and Finance Law and Studies Association (BFSLA) and the American Council on Consumer Interests (ACCI). He provides on-going ad hoc advice to members of the Australian Federal Parliament, principally in the Labor Party. He is currently a member of an expert panel of advisors convened to provide South Africa's National Treasury with advice on the drafting of the Conduct of Financial Institutions Bill, and made a series of submissions during the drafting of the Financial Sector Regulation Act.</span></em></p>Instead of having a separate regulator just for banks, the new system creates one to prevent financial crises, the other to ensure good market conduct and consumer protection.Andrew Schmulow, Senior Lecturer, Faculty of Law, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/934352018-03-18T11:06:47Z2018-03-18T11:06:47ZExplainer: what happens when a bank is put into curatorship<figure><img src="https://images.theconversation.com/files/210608/original/file-20180315-104671-keo237.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South African Reserve Bank Governor, Lesetja Kganyago.</span> <span class="attribution"><span class="source">GCIS</span></span></figcaption></figure><p><em>The South African Reserve Bank has placed a small bank – VBS Mutual Bank – under <a href="https://www.businesslive.co.za/bd/companies/financial-services/2018-03-11-vbs-mutual-bank-fails-amid-severe-liquidity-crisis/">curatorship</a>. The decision was based on concerns that the bank was facing a liquidity crisis and could collapse, devouring depositors’ funds. Some have <a href="https://www.iol.co.za/business-report/companies/black-business-council-tries-to-intervene-on-behalf-of-vbs-mutual-bank-13733799">criticised</a> the decision. Sibonelo Radebe from The Conversation Africa asked Jannie Rossouw to explain the process.</em></p>
<p><strong>What is curatorship?</strong></p>
<p>In simple terms curatorship of a bank means that its board and executive management are relieved of their duties. A curator is appointed by the South African Reserve Bank in consultation with the National Treasury and the Minister of Finance. The curator takes over the full management functions of the bank with the purpose of rehabilitating it.</p>
<p>Curatorship is triggered by concerns about the management or financial viability of the bank. For example, if the board or executive management are found guilty of fraud, the central bank can remove them and appoint a curator to manage the bank until new management is put in place. </p>
<p>Financial viability concerns can trigger curatorship if a bank faces liquidity or solvency problems. This is what happened at <a href="https://www.moneyweb.co.za/news/south-africa/sarb-to-hold-briefing-on-vbs-mutual-bank/">VBS</a>. The central bank’s view was that it faced a liquidity crisis – in other words it was running short of cash to meet its obligations, mainly repayment of deposits.</p>
<p>Liquidity problems happen when bank deposits are withdrawn at a faster rate than they can be replaced by new deposits. This is normally a temporary problem, as a well functioning bank can restore its liquidity levels by taking in new deposits or by reducing its lending activities.</p>
<p>Banks can also face solvency problems. This is different to a liquidity crunch: it’s when a bank goes bust because loans it has made can’t be repaid. In 2001 a South African bank, <a href="https://www.fin24.com/Companies/Bank-CEO-faces-court-action-20020228">Regal Treasury Bank</a> went insolvent. </p>
<p>Although the South African Reserve Bank can still appoint a curator when a bank experiences solvency problems, the chances of recovery are slim. This was the case with Regal Treasury Bank which was placed under curatorship but never recovered. It was subsequently liquidated.</p>
<p><strong>Is there an alternative to curatorship?</strong></p>
<p>The alternative to curatorship is liquidation which involves winding down the operations of a bank. </p>
<p>Whereas curatorship is primarily aimed at rehabilitating the operation, liquidation is all about closing it down.</p>
<p>If a bank can’t meet its commitments (and a curator isn’t appointed speedily to save the situation), it’s likely to go bust and head straight into liquidation.</p>
<p>A bank can re-emerge from curatorship, but not from liquidation. </p>
<p>An example of successful rehabilitation after when a curator was appointed is <a href="https://www.moneyweb.co.za/news/companies-and-deals/african-bank-curator-will-retire-end-june/">African Bank</a>. After <a href="https://www.fin24.com/Companies/Financial-Services/African-Bank-placed-under-curatorship-20140810">being placed under curatorship in 2014</a>, it developed into a healthy operation again. Curatorship in this case helped to restore confidence in the bank. </p>
<p>This is likely to apply in the case of VBS because it remains fully operational. At the same time its employees – but not the board members and the executive management – are protected as they still have their jobs. This would not be the case if the bank was forced to close. </p>
<p><strong>Was curatorship the right answer for VBS?</strong></p>
<p>Yes, without any doubt. VBS is a perfect example of a bank being saved from liquidation through curatorship. If the bank was not placed in curatorship, it would have had to be liquidated and forced to shut up shop. This would have meant job losses.</p>
<p>The reason VBS got into trouble was that it took deposits it shouldn’t have. As a mutual bank, registered under the Mutual Banks Act of 1993, it should not have accepted <a href="https://www.gov.za/sites/default/files/a56-03.pdf">deposits from municipalities</a> because the <a href="http://www.energy.gov.za/files/policies/act_municipalfinancemanagement_56of2003_2004.pdf">Municipal Finance Management Act</a> of 2003 prohibits it.</p>
<p>Only commercial banks registered in terms of the Banks Act of 1990 may accept deposits from municipalities. In taking deposits from municipalities, VBS contravened a law that protects the financing of local government authorities. The law doesn’t allow mutual banks to accept municipal deposits. The aim is to mitigate risks for both the bank and the municipalities.</p>
<p>Taking deposits from municipalities was also inviting liquidity problems for VBS. As the South African Reserve Bank governor <a href="https://www.iol.co.za/business-report/economy/south-africas-banking-system-is-safe-in-wake-of-vbs-sarb-13806810">put it</a>:</p>
<blockquote>
<p>It was highly risky for VBS to take sizeable municipal deposits that were short-term and lend them out long term. </p>
</blockquote>
<p>This meant that there was a mismatch between the bank’s deposits and its exposure to loans it was giving out.</p>
<p>Once it was established that VBS had broken the law, it was ordered to return the municipality deposits. This put it under even more pressure from a liquidity point of view.</p>
<p>The board and executive management of VBS are to blame for the problems at the bank and for its curatorship. They were in clear dereliction of their duties in accepting municipal deposits in the first instance. Accepting these deposits was in clear contravention of the law – something the board, the executive management and the compliance officer should never have agreed to. They should be taking the blame for the curatorship rather than to try and <a href="https://www.ujuh.co.za/our-sin-was-to-give-former-president-zuma-a-loan-running-a-successful-black-bank/">blame others</a>. They might even have to face charges.</p>
<p>Fortunately, VBS is a very small bank in the South African banking landscape and its impact is too small to have triggered a systemic banking crisis. It is also reassuring to note the continuation of employment of the staff members of VBS Bank.</p><img src="https://counter.theconversation.com/content/93435/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is an NRF C-rated reseacher and receives funding from the NRF. He previously worked for the SA Reserve Bank. </span></em></p>The South African Reserve Bank was justified in placing VBS Mutual Bank under curatorship.Jannie Rossouw, Head of School of Economic & Business Sciences, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/913962018-02-08T02:15:16Z2018-02-08T02:15:16ZAustralia’s financial regulators need policing<p>A <a href="http://www.pc.gov.au/inquiries/current/financial-system/draft/financial-system-draft-overview.pdf">Productivity Commission</a> report analysing competition in the financial sector has pointed out that our finance regulators have become enablers of an industry that is an impediment to our economic competitiveness and exploitative of their most loyal customers. </p>
<p>It proves the need for a board to oversee the conduct of our financial regulators, policing the bodies that are supposed to be keeping our financial system in check.</p>
<p>It could not have come at a worse time for our big four banks. Perennially pilloried for their rampant market misconduct (fraudulently manipulating benchmark interest rates) and their equally rampant abuse of upwards of hundreds of thousands of consumers across every one of their retail operations at one stage or another – financial advice, life insurance and credit card insurance, just to name a few.</p>
<p>The Australian Securities and Investments Commission (ASIC) most recently launched a bank-bill swap rate manipulation case against the Commonwealth Bank, but only across a very narrow range of infringements. The bulk of the infringements can’t be prosecuted because ASIC has dithered for so long, the statute of limitations has run out, and the alleged crimes have proscribed. </p>
<p>And what of our other financial regulator - the Australian Prudential Regulation Authority (APRA)? The Productivity Commission reckons that APRA’s ham-fisted use of macro-prudential tools, usually used to reduce risk in our financial system, has benefited the big four banks to the tune of A$1 billion.</p>
<p>APRA has been criticised for pursuing stability in a manner that has killed competition, hurt consumers, and starved small businesses of life-giving capital. The dominance by a few banks, whose profits are based on runaway property prices, is its own systemic threat. </p>
<p>The result is that small banks are squeezed out, big banks raking in higher rates, and investors offsetting higher rates against their taxes and so costing the Australian Taxation Office an estimated <a href="http://www.afr.com/business/banking-and-finance/financial-services/apra-delivers-banks-1b-windfall-productivity-commission-20180206-h0ulfe?login_token=t5OaZkgGqQAq1Tr69ZC9eucH2aXeO6iCBSEhhdKfjYoGdRDB3IbogZO9_ToWF-HwHjiFI_SNUNyuwSuQR8EECg&expiry=1517934080&single_use_token=B1cmp7cvDUoQrUAy0QJRAWYLvrkaoQBfdyhPz0DmFDqcIcXD_R7M4TvmiCLaGeKWaKvrIQfoWJwt-Mh-VjEEAw">A$500 million in deductions</a>. As the old saying goes, when your only tool is a hammer, every problem looks like a nail.</p>
<h2>Who will regulate the regulators?</h2>
<p>So what to do about ASIC and APRA? Back in <a href="http://fsi.gov.au/publications/final-report/">2014, the Financial System Inquiry recommended</a> a board of oversight – a regulator for the regulators – to ensure that the regulators discharge their mandates. </p>
<p>So, for example, to ensure that ASIC acts like a cop, not a co-op; that APRA acts with foresight and finesse, as opposed to damaging competition. APRA and ASIC <a href="http://www.apra.gov.au/Submissions/Pages/14_01.aspx">pushed back at the time</a>, and the Abbott government rejected the recommendation.</p>
<p>Now to add impetus to the Financial System Inquiry recommendation, the Productivity Commission says there is a lack of transparency and accountability exhibited by our regulators. Add to that the implications regarding regulator’s efficacy that comes with the establishment of <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">the Financial Services Royal Commission</a>. The public deserves better than this.</p>
<p>A regulator for the regulators – a Financial Regulator Assessment Board – would conduct ex post analyses of how regulators had discharged their mandates, evaluate their policies and the efficacy of their policy tools. It would be a sober second thought, and a crucial mechanism of double redundancy – to pick up on crucial elements that the regulator may have overlooked.</p>
<p>The idea has form. The British have created something similar, called a <a href="https://www.bankofengland.co.uk/about/people/financial-policy-committee">Financial Policy Committee</a>, this body’s aim is to review the British regulators, while keeping a look-out for where the next “bombshell” may come from. </p>
<p>That development in turn builds on the <a href="https://mitpress.mit.edu/books/guardians-finance">work of James Barth, Gerard Caprio and Ross Levine</a> whose research indicates that regulators simply cannot be trusted to perform these crucial functions as the guardians of finance, without oversight. The researchers call their proposed board of oversight the “Sentinel”, and point out that no industry is more adept and more practised at suborning the guardians of finance than banks and insurers. Sound familiar?</p>
<p>Australia’s financial system is increasingly governed by a lawless financial sector, presided over by regulators that are at best misguided, and at worst captured. A board of oversight is the least we can do.</p><img src="https://counter.theconversation.com/content/91396/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow is affiliated with Australian Citizens Against Corruption (ACAC). </span></em></p>Our financial regulators ASIC and APRA need a board of oversight, similar to what the UK has, to keep them in check.Andrew Schmulow, Senior Lecturer, Faculty of Law, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/883912017-11-30T19:06:55Z2017-11-30T19:06:55ZBroad mandate for financial services royal commission takes the heat off banks<p>It does seem anomalous that the major banks have now become supporters of the royal commission into financial services, given they have been the principal targets. But the alternatives are probably less palatable, particularly if the banks think that all past major issues of misconduct and immoral behaviour have already been brought to light. And the broadening of the terms of reference beyond banking may dilute the focus on the banks themselves.</p>
<p>The banks <a href="http://www.asx.com.au/asxpdf/20171130/pdf/43pr4y07l7v0v6.pdf">argue that ongoing speculation</a> and uncertainty are creating unnecessary costs and distractions for them, and that is most likely the case. Even if the major banks were to spend A$100 million in dealing with the royal commission that is less than 0.3% of the annual profits of the majors – so it has little impact on shareholder returns. </p>
<p>And with annual interest expenses in the order of <a href="http://www.apra.gov.au/adi/Publications/Documents/2908-QADIPS-Jun-2017-PDF.pdf">A$65 billion</a>, a cost of A$100 million or so could be quickly offset by improvements in bank borrowing costs from resolution of uncertainty. Whether the government spending a similar sum of taxpayer money on a royal commission is worthwhile is another matter.</p>
<h2>Terms of reference too broad</h2>
<p>The <a href="https://cdn.tspace.gov.au/uploads/sites/72/2017/11/DRAFT-TERMS-OF-REFERENCE.pdf">draft terms of reference</a> of the royal commission ask it to focus primarily on three issues involving financial service entities. One is the essentially legal issue of identifying past cases of misconduct in violation of regulations and laws, as well as what might be termed “misbehaviour” (legal but immoral or unethical or unfair activities). </p>
<p>One apparent omission in the draft terms of reference relates to credit – and lending has been a <a href="https://theconversation.com/mortgage-brokers-asic-goes-fishing-60040">major problem area in the past</a>. While bank lending is covered, the definition of financial services entities to be considered does not appear to include those (such as mortgage brokers and some lenders) who only require an Australian Credit Licence and not an Australian Financial Services Licence (AFSL). Likewise, some financial services entities are exempt from the AFSL requirement and that may prove problematic if the draft terms of reference are not amended.</p>
<p>The boards and senior management of the banks (and other entities) no doubt hope there are no hidden skeletons in the closets which may be uncovered to shock them, and that revisiting the known past problems will be a case of yesterday’s news.</p>
<p>Although the term “misbehaviour” strays into grey areas of defining consistency with “community standards and expectations”, identifying past misconduct is a task suitable for a royal commission. But it shouldn’t be needed. ASIC and other regulators have adequate powers (if not adequate resources) to identify and prosecute misconduct. The adequacy of those powers is also a topic for the commission.</p>
<p>The second major task of the royal commission is to identify whether misconduct and misbehaviour can be attributed to poor culture and governance practices. This is particularly problematic.</p>
<p>What evidence is to be used to show, beyond reasonable doubt, that there is a causal relationship from the amorphous, non-quantifiable, concepts of culture and governance to specific instances of, or general proclivity towards, misconduct? There’s also undoubtedly many positive behaviours and outcomes occurring within these institutions they could point to, which may imply that, on balance, the arrangements are not bad. </p>
<p>So, the third question the commission then faces, is what changes might be made to reduce these problems. Here, the danger is that it involves a step into the unknown – what would be the likely outcomes under any proposed changes. </p>
<p>In its task of making recommendations, the commission faces a number of other difficulties. There is a raft of <a href="https://theconversation.com/budget-2017-lack-of-competition-is-why-government-is-moving-so-hard-against-the-banks-77397">regulatory changes in progress</a> following on from the <a href="http://fsi.gov.au/publications/final-report/">2014 Financial Services Inquiry</a> and other government <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">policy initiatives</a>. </p>
<p>Also relevant is the financial technology or “fintech” revolution creating new business models, products and services, and methods of customer interaction with financial services entities. These create potential for new types of misconduct and misbehaviour. How relevant lessons the royal commission draws from history will be for this new world is unclear.</p>
<p>The banks will no doubt be pleased that the scope of the royal commission encompasses most of the financial services sector rather than focusing primarily upon them. In particular, the <a href="https://cdn.tspace.gov.au/uploads/sites/72/2017/11/DRAFT-TERMS-OF-REFERENCE.pdf">reference to superannuation fund trustees</a> and use of member funds would seem to bring the controversial issue of fund governance right to the fore and will partly distract attention from the banks.</p><img src="https://counter.theconversation.com/content/88391/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Broadening the royal commission beyond banking may dilute the focus on the banks themselves.Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/881832017-11-27T11:29:16Z2017-11-27T11:29:16ZTurnbull backed against the wall by rebel Nationals on bank inquiry<p>Prime Minister Malcolm Turnbull and Treasurer Scott Morrison appear to have become hostages to rebel Nationals determined at all costs to secure a commission of inquiry into the banks.</p>
<p>On Monday a second federal National, Llew O'Brien, from Queensland flagged he is likely to cross the floor in the House of Representatives to support the private member’s bill sponsored by Queensland Nationals senator Barry O'Sullivan to set up a commission of inquiry that would investigate a broad range of financial institutions.</p>
<p>O'Brien, who has inserted an extra term of reference to protect people with mental health issues from discrimination, said “I like what I see” in the proposed bill. But he added that he would respect his party’s process. The bill is due to go to the Nationals’ partyroom on Monday.</p>
<p>The bill, which has the numbers to get through the Senate, is supported in the lower house by Queensland MP George Christensen, who after Saturday’s Queensland election <a href="https://twitter.com/GChristensenMP/status/934570187822587904">apologised to One Nation voters</a> for “we in the LNP” letting them down.</p>
<p>Backed by Christensen and O'Brien, together with Labor and crossbenchers, the bill would have the required 76 votes to enable its consideration by the lower house – although when it can get to be debated there is not clear.</p>
<p>In a discussion last week – <a href="https://theconversation.com/grattan-on-friday-discovery-of-the-cabinet-leaker-would-present-bigger-problem-than-the-leak-88030">later leaked</a> – cabinet considered whether the government should adopt a pragmatic position and give in to calls for a royal commission. But Turnbull and Morrison have refused to do so.</p>
<p>Now the cabinet looks like it will have to decide whether to own the process of an inquiry or have it forced on it.</p>
<p>If Monday’s Nationals’ party meeting endorsed the bill, that would escalate the situation dangerously for the government, unless it had softened its opposition to an inquiry. It would amount to the minor Coalition partner formally rejecting a government position.</p>
<p>Cabinet would have to back down, or find some other way through.</p>
<p>As the crisis over the banking probe deepens for the government, there is currently no-one with the authority or availability within the Nationals to manage the situation.</p>
<p>Barnaby Joyce remains leader but he’s absorbed in Saturday’s New England byelection, which is his path back into parliament. Senator Nigel Scullion is parliamentary leader but has little clout to curb the determined rebels.</p>
<p>With the commission push gaining momentum there is also less desire from some senior Nationals to fight it. Joyce is said to be relaxed about having a banking inquiry, which would be popular among voters and could be chalked up as a win for the Nationals.</p>
<p>The <a href="https://theconversation.com/queensland-result-while-decided-on-state-issues-adds-to-turnbulls-burdens-88135">election loss in Queensland</a> has strengthened the federal Nationals’ determination to pursue brand differentiation.</p>
<p>O'Sullivan has repeatedly referenced the example of Liberal Dean Smith’s use of a private member’s bill to pursue the cause of same-sex marriage, arguing he is following Smith’s pathway.</p>
<p>But there are still divided opinions within the parliamentary party about the bank probe. Resources Minister Matt Canavan, a member of cabinet, on Monday reaffirmed his opposition to a royal commission.</p>
<p>Joyce is likely to attend Monday’s party meeting although he will not be formally back in parliament by then.</p>
<p>Nationals are not clear whether they will elect their new deputy on Monday to replace Fiona Nash, who was <a href="https://theconversation.com/joyce-will-be-safe-in-new-england-but-the-high-court-disrupts-the-government-86496">ruled ineligible by the High Court</a> because she had been a dual British citizen when she nominated. There is some speculation that this might be delayed to give aspirants time to lobby.</p>
<p>If there is no deputy leader chosen on Monday, it would mean that the minor party would be literally leaderless on the government frontbench in the House of Representatives. Infrastructure Minister Darren Chester would be the most senior National sitting behind Turnbull in Question Time.</p>
<p>Christensen on Monday <a href="https://www.bankinquiry.com.au/">launched a website</a> with a petition seeking signatures for a banking inquiry.</p>
<p>“Misconduct is not in the ‘past’,” he says on the site. “It is not being fixed by the industry to a standard acceptable to the community. Although positive steps are being made by government reforms, gaps still exist.</p>
<p>"Enough is enough … unless the government acts to establish a royal commission, I will be acting before the end of this year to vote for a commission of inquiry into the banks.” The site also invites people “bitten by the banks” to “tell your story”.</p>
<p>A commission of inquiry differs from a royal commission in being set up by and reporting to parliament, rather than being established by and reporting to the executive.</p>
<iframe src="https://www.podbean.com/media/player/nqtdd-7bf599?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0" height="100" width="100%" frameborder="0" scrolling="no" data-name="pb-iframe-player"></iframe><img src="https://counter.theconversation.com/content/88183/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan 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>Malcolm Turnbull and Scott Morrison appear to have become hostages to rebel Nationals determined at all costs to secure a commission of inquiry into the banks.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/865182017-11-08T02:32:24Z2017-11-08T02:32:24ZIt’s time for a royal commission into banking regulation<p>The handling of recent financial scandals show that regulators are confused about what they do, or <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">should do</a>. And as a result the regulation of the financial system, which is vital to a strong functioning economy, is just not working effectively. </p>
<p>We can see the problem in the recent <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F61c9ed97-7db3-4a67-a14e-a5114c0258b8%2F0000%22">testimony to the House Economics Committee</a>. Recounting the sequence of events that led the Commonwealth Bank to inform regulators of the <a href="http://www.austrac.gov.au/media/media-releases/austrac-seeks-civil-penalty-orders-against-cba">alleged breaches of money-laundering legislation</a>, CBA Chair Catherine Livingstone said:</p>
<blockquote>
<p>We were having board meetings at the time I was being called to Canberra by the Treasurer. When the board meeting, which went over multiple days, finished, which was lunchtime on the Wednesday, I immediately phoned the other two regulators, ASIC and APRA.</p>
</blockquote>
<p>This raises a raft of questions. Having known about the allegations of money laundering since 2015, why did CBA not inform the regulators until August 2017? Why did the treasurer warn CBA before CBA talked to the two regulators? When did the Treasurer first hear of the money-laundering breaches? And why did the treasurer not instruct AUSTRAC (an agency of the <a href="https://www.ag.gov.au/CrimeAndCorruption/AntiLaunderingCounterTerrorismFinancing/Pages/AUSTRAC.aspx">Attorney General’s department</a>) to inform <a href="http://asic.gov.au/about-asic/what-we-do/our-role/statements-of-expectations-and-intent/statement-of-expectations-april-2014/">ASIC</a> and <a href="http://www.apra.gov.au/AboutAPRA/Documents/140417-SOE-APRA-Statement-of-Expectations.pdf">APRA</a>? </p>
<p>In a previous parliamentary hearing, Greg Medcraft, Chairman of ASIC, had <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F61c9ed97-7db3-4a67-a14e-a5114c0258b8%2F0000%22">said</a>:</p>
<blockquote>
<p>I met two days before with the chairman of the Commonwealth Bank, the chair of risk and the chair of the audit committee… There was no mention of what happened. Then I saw the announcement and, about a week later, the chair called me in to apologise. Timeliness and transparency are big issues in this one</p>
</blockquote>
<p>So, either ASIC and/or APRA were aware of the allegations of money laundering at CBA and took no action <a href="http://www.abc.net.au/news/2017-08-28/commonwealth-bank-to-face-independent-inquiry-apra/8848004">until prompted</a> by the treasurer, or the communications between the various agencies of government are not working as planned. Either way, this is no way to regulate a modern financial system.</p>
<h2>Even more regulatory confusion</h2>
<p>Just as he is due to <a href="http://www.abc.net.au/news/2017-10-17/asic-james-shipton-to-replace-greg-medcraft/9057190">leave his role as head of ASIC</a>, Greg Medcraft managed to end two high profile cases with modest wins. </p>
<p>Both <a href="http://www.afr.com/business/banking-and-finance/why-anz-and-nab-settled-asics-bbsw-case-20171026-gz9d90">ANZ Bank</a> and <a href="http://www.smh.com.au/business/banking-and-finance/nab-admits-staff-wrongdoing-as-it-settles-bbsw-20171027-gz9zva.html">NAB</a> have settled with ASIC for their parts in <a href="https://theconversation.com/years-on-asic-still-grappling-with-swap-rate-fixing-scandal-35851">manipulating the BBSW intereset rate benchmark</a>. Although the settlement remains to be approved by the Federal Court. </p>
<p><a href="http://www.abc.net.au/news/2017-10-25/rate-rigging-trial-adjourned-anz-nab-finalise-settlement/9083894">Westpac</a> remains the hold out, and the <a href="http://www.smh.com.au/business/banking-and-finance/westpac-traders-talked-openly-about-rigging-interest-rate-asic-alleges-20171030-gzbgx6.html">prosecution’s case has opened</a> in the Federal Court.</p>
<p>But in the euphoria at ASIC, a niggling question remains – what about the Commonwealth Bank?</p>
<p>For some time, Medcraft has <a href="http://www.theaustralian.com.au/business/opinion/john-durie/asic-and-cba-hold-their-ground-on-bank-bill-swap-rate-case/news-story/9b50dc7f7628ac630ac37c11e0e2ce33">warned</a> that action against CBA had not been ruled out and that <a href="http://www.smh.com.au/business/banking-and-finance/cba-braced-for-fourth-rate-rigging-case-20160608-gpecc4.html">information was being gathered</a>. Recently Medcraft confirmed that the regulator had “plenty of time” to <a href="http://www.financialservicescareer.com.au/news/regulator-circling-cba">take action against CBA</a>.</p>
<p>This also raises a number of questions. Not least why ASIC has not filed claims against CBA or announced that there would be no action taken against the bank. If CBA has no case to answer then ASIC should come out and exonerate the bank and relieve its long-suffering shareholders. </p>
<p>But if CBA has even a minor case to answer, and the regulator has held off hoping that the bank would settle without going to court, then ASIC may have been much too clever for their own good.</p>
<p>As a result of a <a href="http://www.abc.net.au/news/2017-08-23/commonwealth-bank-faces-shareholder-class-action/8833860">shareholder action</a> following the alleged money-laundering scandal, ASIC is <a href="http://www.abc.net.au/news/2017-08-11/asic-to-investigate-cba/8796542">now looking at</a> whether the CBA board “complied with continuous disclosure laws when it decided not to alert investors to the suspicious behaviour”.</p>
<p>This leaves ASIC in an extremely difficult position - looking at a possible failure to disclose the money-laundering scandal at CBA, while at the same time hinting that CBA may have done the same thing with BBSW.</p>
<p>But ASIC is not the only regulator to be operating in the dark. The latest Banking Executive Accountability Regime (BEAR) legislation only adds to the <a href="https://theconversation.com/bankings-new-bear-is-a-teddy-bear-not-a-grizzly-85687">confusion</a> on how best to regulate financial services.</p>
<p>When questioned in recent <a href="http://parlinfo.aph.gov.au/parlInfo/download/committees/estimate/c419b06c-d059-4ecb-b033-6d08bd9b7c6d/toc_pdf/Economics%20Legislation%20Committee_2017_10_26_5679.pdf;fileType=application%2Fpdf#search=%22rowell%22">Senate Estimates</a> about the regulatory impact statements that have been done for <a href="https://www.legislation.gov.au/Details/C2017B00229/Explanatory%20Memorandum/Text">new BEAR legislation</a>, Helen Rowell, deputy Chair of APRA, replied that she personally had “not seen them; I couldn’t say whether anyone else within APRA has seen them”. </p>
<p>This is despite the fact that APRA has been given an extra A$40 million over four year to handle the new legislation - for what, and where did this figure come from? </p>
<p>Again, this is no way to regulate a banking system. The confusion around what regulators do and how they do it, must be sorted out. </p>
<h2>Where next?</h2>
<p>The most obvious answer to clearing up this mess is to initiate a royal commission that looks specifically at banking regulation. In particular, what form a modern banking regulation system should take; which regulators should do what; what the responsibilities of parliament, ministers and regulators should be; and how regulators should share information and tackle common problems (such as <a href="https://theconversation.com/why-bankers-so-often-fail-to-comply-with-policies-and-regulations-82159">banking culture</a>).</p>
<p>Such a royal commission should concentrate on clearing up issues of regulatory philosophy, structure, legal requirements and administration. Whether or not there is an <a href="http://www.abc.net.au/news/2017-10-30/coalition-mps-may-cross-floor-for-banking-royal-commission/9100838">all-purpose banking royal commission</a>, the failures in the current system have to be remedied.</p>
<p>Of course, the government has only got itself to blame for getting in this mess. </p>
<p>The government’s own <a href="http://fsi.gov.au/">Murray Inquiry into the Financial System</a> made a recommendation that could have helped. The inquiry recommended the establishment of a new <a href="https://theconversation.com/to-clean-up-the-financial-system-we-need-to-watch-the-watchers-38359">Financial Regulator Assessment Board</a> (FRAB), which would:</p>
<blockquote>
<p>advise government annually on how financial regulators have implemented their mandates. Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.</p>
</blockquote>
<p>Sounds sensible? Not to the government, as it chose to accept all of the major recommendations of David Murray’s inquiry <a href="https://treasury.gov.au/publication/government-response-to-the-financial-system-inquiry/attachment-government-response-to-financial-system-inquiry-recommendations/">except for this one</a>. </p>
<p>And, instead of having one professional body that looks at the performance of regulators, there has been a nonstop procession of “independent” inquiries, by <a href="https://www.commbank.com.au/guidance/newsroom/comminsure-releases-deloitte-report-into-claims-handling-201702.html">banks themselves</a>, the <a href="https://www.bankers.asn.au/media/media-releases/media-release-2016/review-into-retail-banking-remuneration-begins">banking industry </a>and even <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">regulators</a>. No big picture, just a patchwork of unconnected recommendations. And undoubtedly <a href="http://www.heraldsun.com.au/business/bank-chiefs-deny-raterise-gouging-at-parliament-hearing/news-story/0cedbd4a36dc41a731780a8054ff8524">more to come</a>. </p>
<p>An opportunity missed.</p><img src="https://counter.theconversation.com/content/86518/count.gif" alt="The Conversation" width="1" height="1" />
Parliamentary hearings reveal a lot of confusion between government, regulators and industry around banking regulation. This needs to be fixed.Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/834112017-09-05T02:08:52Z2017-09-05T02:08:52ZHas APRA just outsourced its job?<p>The Australian Prudential Regulation Authority APRA has <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">announced</a> an independent inquiry into the Commonwealth Bank of Australia, “focusing on governance, culture and accountability frameworks and practices within the group”.</p>
<p>Hold on a minute. Isn’t that what APRA should have been doing all along? According to the <a href="http://www.bis.org/bcbs/publ/d328.htm">principles of corporate governance for banks</a> (that APRA helped author), it has both the right and obligation to talk to anyone in the bank, at any time, to discuss corporate governance.</p>
<p>One of the key principles of <a href="http://www.bis.org/bcbs/publ/d328.htm">corporate governance for banks</a> relates specifically to the “role of supervisors” (regulatory speak for regulators):</p>
<blockquote>
<p>Supervisors should provide guidance for and <strong>supervise corporate governance</strong> at banks, including through comprehensive evaluations and <strong>regular interaction with boards and senior management</strong> </p>
</blockquote>
<p>This principle means that regulators are meant to be participants in, not merely spectators to, banking regulation. This requires, for example, “improvement and remedial action, as necessary”. </p>
<p>Among the relatively few things that regulators are required to provide is guidance into the internal organisations of bank boards.</p>
<p>In order to do that, APRA is required to have “processes in place to fully evaluate a bank’s corporate governance”. These evaluations are conducted “through regular reviews of written materials and reports [for example, board minutes], interviews with board members and bank personnel”. Importantly:</p>
<blockquote>
<p>the evaluations should also include regular communication with a bank’s board of directors, senior management, those responsible for the risk, compliance and internal audit functions, and external auditors</p>
</blockquote>
<p>So, assuming that APRA does have processes in place to evaluate a bank’s corporate governance, why does it feel the need to outsource its own job? Who knows (<em>or who should know</em>) CBA and its governance processes better than APRA? </p>
<h2>Corporate Governance and board size</h2>
<p>Corporate governance is not an easy concept, especially questions of how much is enough. In particular, how many directors are needed to oversee management and what skills should they bring to the board? The Basel principles require that:</p>
<blockquote>
<p>The board should be comprised of individuals with a balance of skills, diversity and expertise, who collectively possess the necessary qualifications commensurate with the <strong>size, complexity and risk profile of the bank</strong>.</p>
</blockquote>
<p>In short, APRA is required to ensure that there are sufficient and adequately skilled directors to oversee a bank as systemically important as CBA. </p>
<p>Until this week, there were eleven directors of CBA and its subsidiaries. Each of these subsidiaries, such as <a href="https://theconversation.com/comminsure-case-shows-its-time-to-target-reckless-misconduct-in-banking-55748">CommInsure</a>, is bigger than most Australian companies. </p>
<p>After the <a href="http://www.smh.com.au/business/banking-and-finance/commonwealth-bank-in-board-shakeup-20170904-gya3pe.html">recent board shakeup</a>, two CBA directors were dropped and one was brought on board. A future retirement was also announced. Altogether this is a reduction of almost 25% of the board’s experience. </p>
<p>But are nine board members enough? Who knows - presumably APRA does and has no problems with a board of this size. </p>
<p>In <a href="https://researchers.mq.edu.au/en/publications/strategic-risk-management-practice-in-systemically-important-bank">2010</a>, there were 11 directors of CBA, so APRA must have felt (despite <a href="https://theconversation.com/banking-inquiry-findings-ask-the-wrong-questions-get-the-wrong-answers-69421">numerous scandals</a>) that they could sanction the reduction in the board of Australia’s biggest company (at the time) by two directors (a drop of around 18%).</p>
<p>But it is not only CBA. In the same period APRA has (presumably) felt happy with the axe being taken to the boardrooms of the other three big banks. Aside from <a href="https://www.shareholder.anz.com/sites/default/files/anz_-_annual_report_2016.pdf">ANZ</a>, which has had eight directors since 2010, <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2016_Westpac_Annual_Report">Westpac</a> has dropped from ten to eight and <a href="https://www.nab.com.au/content/dam/nabrwd/About-Us/shareholder%20centre/documents/2016-annual-financial-report.pdf">NAB</a> from 13 to nine. </p>
<p>Overall, according to their own annual reports, the number of directors in the largest banks in Australia has dropped some 16% since 2010.</p>
<h2>Board experience and expertise</h2>
<p>But maybe it is not all about board size. What about quality?</p>
<p>Presumably APRA accepted that Catherine Livingstone, appointed Chairperson of CBA <a href="https://www.commbank.com.au/guidance/newsroom/CBA-announces-new-chairman-201610.html">last year</a>, is not a banker but an accountant from the medical industry. They must also have been happy that the CEO who was put in place after banker Ralph Norris left CBA in 2011, was a management consultant, <a href="https://www.linkedin.com/pulse/unwanted-advice-dead-man-walking-patrick-mcconnell">Ian Narev</a>. </p>
<p>And presumably APRA was not unhappy that the latest two CBA directors are a <a href="https://www.commbank.com.au/guidance/newsroom/cbas-new-non-executive-director-201606.html?ei=gsa_newsroom_board">lawyer</a> and a <a href="https://www.commbank.com.au/guidance/newsroom/changes-to-board-of-directors-201503.html?ei=gsa_newsroom_board">technology specialist</a>, not bankers. In fact today, bankers make up less than a third of CBA’s board directors. </p>
<p>That in itself would not be too much of a problem, except that the <a href="https://www.linkedin.com/pulse/cba-case-groupthink-patrick-mcconnell">executive management committee</a> of CBA is packed with management consultants and lawyers, with less than 40% having significant banking experience. </p>
<p>Having experience outside of banking is very important for bank directors. But a lack of in-depth experience can also lead to problems. In the UK, a damning <a href="http://www.bankofengland.co.uk/pra/Documents/publications/reports/hbossum.pdf">report</a> on the failure of the Halifax/Bank of Scotland (HBOS) found that: </p>
<blockquote>
<p>As a group, the non-executive directors (NEDs) on the [HBOS] Board lacked sufficient experience and knowledge of banking. […] The lack of experience and knowledge of banking amongst the NEDs was compounded by similar lack of banking experience within the executive management team.</p>
</blockquote>
<p>CBA is definitely not HBOS, although HBOS was a star performer until it became unstuck. Nonetheless APRA should pay heed to the warnings of its fellow regulators.</p>
<p>Since 2010, APRA has overseen a significant reduction in the size of boards across the banking sector and a dilution of seasoned bankers on the board of CBA. </p>
<p>When its senior staff had regular communication with the bank’s directors and senior management, APRA should have picked up on the risks and scandals that CBA has become embroiled in in the last decade. </p>
<p>They would have shared “information on corporate governance with other supervisors” such as <a href="http://www.austrac.gov.au/media/media-releases/austrac-seeks-civil-penalty-orders-against-cba">AUSTRAC</a> and ASIC. APRA would not have been surprised when the CBA board <a href="https://www.commbank.com.au/guidance/newsroom/CBA-ASX-update-on-AUSTRAC-matter-201708.html?ei=card-view">threatened</a> to fight the latest money-laundering allegations in court.</p>
<p>This is why it comes as a surprise that APRA, an independent regulator with unparalleled access to the inner workings of all major banks and bristling with internal expertise, should need to outsource its inquiry of corporate governance at CBA.</p>
<p>If APRA cannot evaluate a bank’s governance, who can?</p>
<p>Or maybe APRA is embarrassed that somewhere along the line it has dropped the ball and become far too cosy with the banks it is supposed to regulate.</p>
<p>Maybe an inquiry into APRA should be on the cards?</p>
<p>Quis custodiet ipsos custodes? Who regulates the regulators?</p><img src="https://counter.theconversation.com/content/83411/count.gif" alt="The Conversation" width="1" height="1" />
If APRA cannot evaluate a bank’s governance, who can?Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/770482017-05-16T00:13:11Z2017-05-16T00:13:11ZWhy businesses in Nigeria need to take sustainable finance seriously<figure><img src="https://images.theconversation.com/files/169001/original/file-20170511-32596-1euonuy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Stocks displayed at the Nigerian Stock Exchange in Lagos.</span> <span class="attribution"><span class="source">Reuters/Joe Penney</span></span></figcaption></figure><p>Many people will have heard of the UN <a href="http://www.un.org/sustainabledevelopment/sustainable-development-goals/">Sustainable Development Goals</a>. But less well known is the concept of sustainability at the root of these goals. Sustainability has recently become a mantra, a philosophy of sorts. </p>
<p>The contemporary interest in sustainability can be traced to the 1987 Brundtland Commission report, <a href="http://www.un-documents.net/our-common-future.pdf">Our Common Future</a>. The commission had been set up to find ways for countries to meet their present economic objectives with less negative impact on the physical environment, society, and the ability of future generations to meet their needs. It first gave rise to the <a href="http://www.unmillenniumproject.org/goals/">Millennium Development Goals</a>, which have now been replaced by the global sustainable goals. </p>
<p>The literary meaning of sustainability simply suggests longevity or the ability to survive under counteracting pressures. While longevity or resilience are integral, they tend to project a somewhat narrow and limited view of sustainability.</p>
<p>The broader view underlines the value of environmental, social, and economic considerations in decision making. It’s directly linked to a quest for development that doesn’t inhibit or harm future generations. It recognises the nested inter-dependency between the economy, society and the environment. </p>
<p>In other words, the success of the economy is dependent on the viability of society. The success of society on the other hand is also linked to the viability of the natural environment. As such, without the environment there will be no society, and without society, there will be no economy. The three are interwoven. </p>
<p><a href="http://reports.weforum.org/global-competitiveness-report-2014-2015/the-measurement-of-sustainable-competitiveness/">Evidence</a> suggests a positive relationship between sustainability practice and the global competitiveness of a country. This is very much at the heart of the sustainable goals.</p>
<h2>Why sustainability is good for business</h2>
<p>There’s significant evidence that sustainability is good for business. A <a href="http://pubsonline.informs.org/doi/abs/10.1287/mnsc.2014.1984">recent study</a> by Harvard and London business schools found that corporations that voluntarily adopt sustainability policies have better organisational processes. They thus perform better when compared to a matched sample of companies that adopted almost none of these policies. </p>
<p>It has also been <a href="https://www.somo.nl/wp-content/uploads/2011/03/Why-to-integrate-sustainability-criteria-in-financial-regulation.pdf">found </a>that if financial institutions </p>
<blockquote>
<p>“integrate sustainability criteria in their risk assessment and decision making procedures, they will strengthen their financial soundness” </p>
</blockquote>
<p>Such institutions also</p>
<blockquote>
<p>“improve systemic financial stability and contribute to a more ecologically sustainable, just and peaceful world” </p>
</blockquote>
<p>In sum, sustainability is a quest for effectiveness and efficiency. It’s first and foremost rooted in a commitment to reduce negative impacts and increase positive effects. Positive impacts include low carbon emission, fair employment practices, responsible product promotion and good corporate citizenship practices.</p>
<p>Corporate sustainability is therefore a form of <a href="http://annualreviews.org/doi/abs/10.1146/annurev.polisci.11.053106.141706">self-regulation</a> driven by the values and philosophy of a business.</p>
<p>But for a long time, Nigerian businesses have treated sustainability as a dispensable <a href="https://www.jstor.org/stable/jcorpciti.24.83?seq=1#page_scan_tab_contents">philanthropic</a> option. The focus of most businesses has been on <a href="https://ssir.org/articles/entry/a_new_economic_philosophy_for_africa">survival</a>. As such, the pursuit of sustainability is seen as not necessarily good for business.</p>
<h2>No longer an option for Nigeria</h2>
<p>Nigerian businesses need to go beyond the piece meal approach of corporate social responsibility. There’s at least one green shoot that suggests this process might be underway.</p>
<p>The Nigerian government is committed to implementing a national sustainability roadmap for the financial sector. Backed by the United Nations Environment Programme <a href="http://www.unepfi.org/about/">Finance Initiative</a>, it requires each member of Nigeria’s <a href="https://fsrcc.gov.ng/1/about-fsrcc/">Financial Services Regulation Coordinating Committee</a> to develop a sustainable development model. This model is for themselves - as organisations - and the industries they regulate. </p>
<p>The committee brings together all the regulatory agencies. These include banking, insurance, securities, pensions, commodities, taxation and fiscal policy sectors. These will be expected to address the integration of environmental and social risks in investment and lending decisions. </p>
<p>According to the UN programme, Nigeria is <a href="http://www.unepfi.org/events/regions-events/africa-middle-east-events/unep-fi-leads-the-way-on-sustainability-issues-among-nigeria-financial-sector/">arguably the first country</a> to adopt this approach to sustainable finance. </p>
<p>Nigeria, like most African countries, didn’t achieve many of the Millennium goals. This is due to <a href="https://theconversation.com/how-nigeria-can-achieve-growth-thats-more-equitable-and-eco-friendly-50728">poor governance and the inability of many governments</a> to stimulate sustainable development. The sustainable goals present a new lease of life, which the government of <a href="http://www.ibtimes.co.uk/nigerias-president-muhammadu-buhari-addresses-un-general-assembly-climate-change-full-speech-1521480">President Buhari has committed</a> to. </p>
<h2>What should businesses in Nigeria do?</h2>
<p>The full spectrum of the Nigerian financial regulatory community is on board. This means that all sources of finance in Nigeria – borrowings and investments – will soon be required to respect and reflect sustainability principles. </p>
<p>At the moment, the Central Bank of Nigeria expects <a href="https://www.cbn.gov.ng/out/2012/ccd/circular-nsbp.pdf">most large projects</a> to meet these requirements. Agriculture, power, and oil and gas are especially in focus. These projects will be required to demonstrate that they do not cause social and environmental harms, in addition to being profitable. </p>
<p>Banks have been mandated to develop robust social and environmental management systems to guide their lending and investment decisions. In practice, the banks are expected to adopt social and environmental management systems similar to those found in the <a href="http://www.greeninvestmentbank.com/green-impact/green-investment-handbook/">UK</a> and the <a href="http://www.gabv.org/about-us/our-principles">Global Alliance for Banking on Values</a>. </p>
<p>Very soon, the sustainable finance approach could be extended to all projects, no matter how small. Finance is the lifeblood of any business. There’s a global appetite to incorporate environmental, social and governance risks in <a href="http://www.equator-principles.com/">lending</a> and <a href="https://www.unpri.org/about">investment</a> decisions. </p>
<p>As long as Nigerian businesses want to thrive locally and globally, they cannot escape the current demands of sustainability. The earlier they understand and embrace it, the better for them.</p><img src="https://counter.theconversation.com/content/77048/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Professor Amaeshi is currently a Scholar in Residence at the National Pension Commission (PenCom), Nigeria</span></em></p>Evidence suggests a strong relationship between sustainability and the global competitiveness of a country. Nigerian businesses need to embrace it in order to thrive.Kenneth Amaeshi, Professor of Business and Sustainable Development, The University of EdinburghLicensed as Creative Commons – attribution, no derivatives.