tag:theconversation.com,2011:/africa/topics/westpac-2248/articles
Westpac – The Conversation
2021-04-06T00:17:59Z
tag:theconversation.com,2011:article/158224
2021-04-06T00:17:59Z
2021-04-06T00:17:59Z
Hostage 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>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1374573328896159745"}"></div></p>
<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>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<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>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<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>
<figure class="align-center ">
<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 University
Martien Lubberink, Associate Professor of Economics, Te Herenga Waka — Victoria University of Wellington
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/146842
2020-09-29T19:59:29Z
2020-09-29T19:59:29Z
A mea culpa, not a fix: Australia’s biggest corporate fine isn’t the end of it for Westpac
<p>Paying a record A$1.3 billion fine for breaches of the <a href="https://www.austrac.gov.au/news-and-media/media-release/austrac-and-westpac-agree-penalty">Anti-Money Laundering and Counter-Terrorism Financing Act</a> is one thing, making sure it couldn’t happen again is another.</p>
<p>The fine agreed to by Westpac and the Australian Transaction Reports and Analysis Centre (AUSTRAC) last week amounts to one-fifth of its 2019 full year net profit.</p>
<p>Although Westpac’s shareholders will suffer through lower dividends, financially it will be able to move on.</p>
<p>But not in other ways. It failed to properly report A$11 billion of international fund transfers and “failed to identify activity potentially indicative of child exploitation” in the words of the <a href="https://cdn.theconversation.com/static_files/files/1248/Westpac_my3kd4wbw7y7.pdf?1600907402">agreed statement</a>.</p>
<p>One of the reasons identified in the agreed statement is that its data management and technology systems weren’t up to scratch. They also did not keep enough trained people around to oversee it all. </p>
<p>In 2011 and 2012 fifteen members of the team that was meant to ensure it was happening left to join another bank. These people were not replaced because of resource constraints. </p>
<p>The other explanation is that the board “could have recognised earlier the systemic nature of some of the financial crime issues Westpac was facing,” in the diplomatic language of the <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/media/westpac-releases-findings-into-austrac-statement-of-claim-issues-media-release.pdf">panel of expert directors</a> Westpac commissioned to try to work out what went wrong.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
</strong>
</em>
</p>
<hr>
<p>Although the behaviour in question took place between 2013 and 2019 the expert director’s report draws a line between the work of the board’s risk and compliance sub-committee before and after 2017:</p>
<blockquote>
<p>our assessment is that, while not satisfactorily focussed before 2017 and
slow off the mark, the board’s response appears to have been appropriate after 2017, though reaction times remained slow.</p>
</blockquote>
<p>In 2017 the committee attended a financial crime workshop to provide it with a “greater awareness of the group’s approach to managing, and the current status, of its anti-money laundering and counter-terrorism financing obligations”.</p>
<h2>Training helped, but not enough</h2>
<p>However, even allowing for the changes from 2017, the report concludes the board </p>
<blockquote>
<p>let lagging improvement and risk mitigation efforts continue unchallenged for too long while overseeing risk across the Group probably could have picked these things up</p>
</blockquote>
<p>This is a damning finding, given that in 2017 the board’s committee had specific financial crime compliance training, there had been a significant uplift in resources deployed to financial crime across the bank and new executive and board appointments were made “with relevant international and domain expertise”. </p>
<p>In 2017 AUSTRAC commenced legal action against the <a href="https://www.austrac.gov.au/lists-enforcement-actions-taken">Commonwealth Bank</a> for anti-money laundering breaches that ultimately cost it A$700 million. <a href="https://www.acic.gov.au/publications/intelligence-products/serious-financial-crime-australia-2017">Financial crime issues</a> were everywhere in the media.</p>
<p>Despite this, Westpac’s board allowed the most-risky of its international transfer payment businesses to continue until 2019.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/westpacs-panicked-response-to-its-money-laundering-scandal-looks-ill-considered-127700">Westpac's panicked response to its money-laundering scandal looks ill-considered</a>
</strong>
</em>
</p>
<hr>
<p>That it could have shut it down is evidenced by the fact that it did so, in November 2019 in the week AUSTRAC commenced legal action against it and Westpac <a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">let go of its chief executive and chairman</a>.</p>
<p>Its board rightly has a reputation for not taking its anti-money laundering and counter-terrorism financing obligations as seriously as it was bound to. </p>
<p>A $1.3 billion fine, or a <a href="https://www.austrac.gov.au/news-and-media/media-release/austrac-and-westpac-agree-penalty">bigger one</a> should the federal court not approve the settlement, won’t make any of this go away.</p>
<h2>Boards can’t wish away duties</h2>
<p>The Australian Prudential Regulation Authority and Australian Securities and Investments Commission are <a href="https://www.apra.gov.au/news-and-publications/update-on-apra%E2%80%99s-westpac-investigation">separately investigating</a> whether Westpac’s directors and senior executives at times breached their duties as directors and accountable officers under the Banking Act and Corporations Act.</p>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<p>Care needs to be taken to ensure concern about how well the board did its job does not get lost in complaints about whether bank boards are being asked to do too much. </p>
<p>In June this year, John McFarlane, Westpac’s chairman, indicated a willingness to <a href="https://www.afr.com/companies/financial-services/westpac-s-john-mcfarlane-let-s-get-real-on-director-duties-20200604-p54zg3">push back</a> on some of AUSTRAC’s allegations, saying “if you bring everything to the board, the board stops focusing on what it really needs to focus on”.</p>
<p>He was speaking before Westpac agreed to pay the $1.3bn fine. </p>
<p>Ultimately, the responsibility for risk oversight of all forms rests with the board. Paying a great big fine won’t fix it.</p><img src="https://counter.theconversation.com/content/146842/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Its board has been found to “lack readiness to ask relevant questions”, a judgment it will have to wear.
Helen Bird, DIscipline Leader, Corporate Governance & Senior Lecturer, Swinburne Law School, Swinburne University of Technology
Natania Locke, Senior lecturer of corporate law and governance, Swinburne University of Technology
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/146915
2020-09-29T02:15:30Z
2020-09-29T02:15:30Z
Record corporate fines don’t deter: here’s a ‘frank’ fix to make penalties bite
<p>All things considered, Westpac’s record A$1.3 billion fine for breaching anti-money-laundering laws could have been worse. </p>
<p>Each of the alleged 23 million breaches of the <a href="https://www.legislation.gov.au/Details/C2019C00011">Anti-Money Laundering and Counter-Terrorism Act</a> between 2010 and 2018 carried a penalty of up to A$63,000. So the fine might have been more than A$1 trillion. </p>
<p>The A$1.3 billion equates to three months’ earnings for Westpac. It is A$400 million more than the A$900 million the bank set aside in its half-year results (in April). But that didn’t bother the market. </p>
<p><a href="https://www.asx.com.au/asx/share-price-research/company/WBC/statistics/shares">Westpac’s share price</a> ended the week 7% higher. </p>
<p>As Nathan Zaia, an analyst with investment research company Morningstar, <a href="https://www.smh.com.au/business/banking-and-finance/westpac-announces-record-breaking-1-3b-fine-20200924-p55yno.html">explained</a>: “It’s huge. It’s the largest fine in history. It’s an eye-watering number. But it’s already pretty much been expected by the market.”</p>
<p>With Westpac’s annual profit exceeding A$6 billion, and its market capitalisation more than A$60 billion, Zaia said a few hundred million dollars more didn’t “really have much of an impact with the valuation we put on the bank”.</p>
<p>If the biggest fine in Australian corporate history doesn’t make a difference to a company’s share price, it’s hard to see how that fine serves as a deterrent. It is the job of the board and senior management to serve the interests of shareholders. What doesn’t matter to investors won’t matter much to the board either.</p>
<p>There could be a way, though, to use the tax system to give corporate fines more bite, by making shareholders feel more of the pain.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
</strong>
</em>
</p>
<hr>
<h2>What franking credits do</h2>
<p>Franking credits – also known as <a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">dividend imputation payments</a> – are tax credits provided to shareholders with their dividend payments. </p>
<p>The credits are intended to ensure income from investment is not taxed twice – first by the company paying tax on its profit, then by the shareholder paying income tax on their share of that profit (their dividend).</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">Words that matter. What’s a franking credit? What’s dividend imputation? And what's 'retiree tax'?</a>
</strong>
</em>
</p>
<hr>
<p>Franking credits on dividends allow shareholders to cut their tax bills by the tax already paid on the dividend income they receive.</p>
<p>In some cases, thanks to a provision in Australia’s law, where the shareholder pays no overall tax, they can receive a tax refund from the government, a <a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">dividend imputation cheque</a>, of the kind Labor promised to wind back in the 2019 election campaign. </p>
<h2>Franking debits as penalty</h2>
<p>There already exists a mechanism to use the imputation system to penalise bad behaviour by companies.</p>
<p>Where a company has not followed the rules relating to franking credits, the tax office can debit the company’s franking account, leaving less to distribute to shareholders as tax credits. </p>
<p>A similar mechanism could be used to impose fines. Instead of the company writing a cheque, the government would debit the value of the fine from the bank’s franking account.</p>
<p>This would directly affect the bank’s capacity to “impute” tax it has paid on profits. </p>
<p>Though the same amount of money imposed as a fine might have little impact on a company’s operations or profits, the loss of franking credits is something shareholders are likely to notice. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/westpac-ticking-every-anti-money-laundering-box-wouldnt-make-much-difference-to-criminals-127988">Westpac ticking every anti-money-laundering box wouldn't make much difference to criminals</a>
</strong>
</em>
</p>
<hr>
<p>And if shareholders care, the directors might get the message louder and clearer.</p><img src="https://counter.theconversation.com/content/146915/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael William Blissenden 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>
Rather than imposing a straight fine, taking away franking credits would ensure shareholders feel more pain when companies misbehave.
Michael William Blissenden, Professor of Law, University of New England
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/146667
2020-09-24T02:49:13Z
2020-09-24T02:49:13Z
It’s not only Westpac. What’s behind the biggest fine in Australian corporate history
<figure><img src="https://images.theconversation.com/files/359712/original/file-20200924-18-1t47qvj.jpg?ixlib=rb-1.1.0&rect=60%2C160%2C3589%2C1545&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Marlon Trottmann/Shutterstock</span></span></figcaption></figure><p>Westpac is to pay A$1.3 billion, by far Australia’s biggest-ever corporate fine for breaches of the <a href="https://www.austrac.gov.au/news-and-media/media-release/austrac-and-westpac-agree-penalty">Anti-Money Laundering and Counter-Terrorism Financing Act</a>. </p>
<p>The 93-page <a href="https://cdn.theconversation.com/static_files/files/1248/Westpac_my3kd4wbw7y7.pdf?1600907402">statement of agreed facts and admissions</a> prepared by Westpac and the Australian Transaction Reports and Analysis Centre (AUSTRAC) says Westpac contravened the Act more than 23 million times exposing Australia’s financial system to criminal exploitation.</p>
<p>It failed to pass on information to authorities about the origin of international funds transfers, and failed to pass on information to other banks in the transfer chain who needed to manage their own money laundering and terrorism financing risks.</p>
<p>“Westpac failed to identify activity potentially indicative of child exploitation risks by failing to implement appropriate transaction monitoring detection scenarios,” the agreed statement says.</p>
<p>“Three of the customers the subject of these proceedings had prior convictions relating to child exploitation offences.”</p>
<p>“One of these customers has been arrested in relation to further child exploitation offences since the commencement of these proceedings.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/359707/original/file-20200924-14-1n0ospg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/359707/original/file-20200924-14-1n0ospg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/359707/original/file-20200924-14-1n0ospg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=210&fit=crop&dpr=1 600w, https://images.theconversation.com/files/359707/original/file-20200924-14-1n0ospg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=210&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/359707/original/file-20200924-14-1n0ospg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=210&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/359707/original/file-20200924-14-1n0ospg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=264&fit=crop&dpr=1 754w, https://images.theconversation.com/files/359707/original/file-20200924-14-1n0ospg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=264&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/359707/original/file-20200924-14-1n0ospg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=264&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://cdn.theconversation.com/static_files/files/1248/Westpac_my3kd4wbw7y7.pdf?1600907402">Westpac and AUSTRAC, Agreed Statement of Facts and Admissions</a></span>
</figcaption>
</figure>
<p>In reaching the agreement, Westpac also admitted to <a href="https://www.austrac.gov.au/news-and-media/media-release/austrac-and-westpac-agree-penalty">76,000 additional contraventions</a> relating to information that came to light after AUSTRAC launched proceedings last year, some which also relate to "failures to reasonably monitor customers for transactions related to possible child exploitation”.</p>
<p>The action triggered the departures of Westpac chief executive Brian Hartzer and chairman Lindsay Maxsted <a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">late last year</a>.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
</strong>
</em>
</p>
<hr>
<p>The A$1.3 billion fine dwarfs the Commonwealth Bank’s <a href="https://www.austrac.gov.au/austrac-and-cba-agree-700m-penalty">A$700 million</a> settlement with AUSTRAC for serious breaches of anti-money laundering and counter-terrorism financing laws in 2018.</p>
<p>The Westpac debacle is far from an isolated instance of international banks demonstrating indifference to their potential involvement in organised crime.</p>
<p>Documents released by the <a href="https://www.icij.org/investigations/fincen-files/">International Consortium of Investigative Journalists</a> on Monday show that major banks around the world conducted US$2 trillion of suspicious transactions in the eight years between 1999-2017.</p>
<h2>Australian banks on the international stage</h2>
<p>Of a limited sample of transactions assessed, Australian banks received US$3.8 million of suspicious funds and sent out $167.9 million.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/359493/original/file-20200923-18-1hb0krb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/359493/original/file-20200923-18-1hb0krb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/359493/original/file-20200923-18-1hb0krb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=240&fit=crop&dpr=1 600w, https://images.theconversation.com/files/359493/original/file-20200923-18-1hb0krb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=240&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/359493/original/file-20200923-18-1hb0krb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=240&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/359493/original/file-20200923-18-1hb0krb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=302&fit=crop&dpr=1 754w, https://images.theconversation.com/files/359493/original/file-20200923-18-1hb0krb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=302&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/359493/original/file-20200923-18-1hb0krb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=302&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.icij.org/investigations/fincen-files/explore-the-fincen-files-data/">International Consortium of Investigative Journalists interactive</a></span>
</figcaption>
</figure>
<p>The Macquarie Bank was responsible for <a href="https://www.icij.org/investigations/fincen-files/explore-the-fincen-files-data/">US$122.1 million</a> of the US$167.9 million, the Commonwealth Bank for <a href="https://www.icij.org/investigations/fincen-files/explore-the-fincen-files-data/">US$42.1 million</a>.</p>
<p>The reports relating to Australian banks were filed by the US banks which dealt with them.</p>
<p>The Australian banks themselves might have also filed their own reports.</p>
<p>There’s little to suggest much was done about the reports by US banks at the time, either by the banks themselves or by the regulators they filed them to.</p>
<p>Indeed, the long timespan suggests the banks not only didn’t close suspicious accounts (which might have alerted account holders to suspicions) but also continued to open new ones.</p>
<h2>The crime that makes other crimes possible</h2>
<p><a href="https://www.buzzfeednews.com/article/jasonleopold/fincen-files-financial-scandal-criminal-networks">BuzzFeed</a>, which obtained the documents, said money laundering was a crime that made other crimes possible, and had itself become an integral part of the financial system.</p>
<blockquote>
<p>The networks through which dirty money traverse the world have become vital arteries of the global economy. They enable a shadow financial system so wide-ranging and so unchecked that it has become inextricable from what is regarded as the legitimate economy. Banks with household names have helped to make it so.</p>
</blockquote>
<p>Certainly after the 2019 report of the <a href="https://financialservices.royalcommission.gov.au/Pages/default.html">banking royal commission</a> it is reasonable to expect Australian banks to do more.</p>
<p>Commissioner Hayne held banks to higher standard than merely abiding by the law. He referred to “the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them”.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/westpacs-scandal-highlights-a-system-failing-to-deter-corporate-wrongdoing-127619">Westpac's scandal highlights a system failing to deter corporate wrongdoing</a>
</strong>
</em>
</p>
<hr>
<p>This week’s shocking evidence suggests there’s work to do. </p>
<p>From the wreckage of the global financial crisis the <a href="https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-stability-board-fsb/">G20 Financial Stability Board</a> erected a new regulatory order requiring banks to have adequate capital. </p>
<p>To this was added a <a href="https://www.fsb-tcfd.org/">Task Force on Climate Related Financial Disclosures</a>. </p>
<p>It’s time for a third set of reforms, to ensure the financial system doesn’t serve as a <a href="https://cdn.theconversation.com/static_files/files/1248/Westpac_my3kd4wbw7y7.pdf?1600907402">conduit for serious crimes</a>.</p><img src="https://counter.theconversation.com/content/146667/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Clarke does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Westpac has admitted to more than 23 million breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act.
Thomas Clarke, Professor, UTS Business, University of Technology Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/137889
2020-05-06T19:50:21Z
2020-05-06T19:50:21Z
Bank dividends are bare. Here’s why some shareholders hate it more than they should
<p>In bad news for retirees and others who depend on dividend cheques (and dividend imputation rebate cheques from the Tax Office) bank dividends have largely evaporated. But it’s not as bad as many commentators suggest, and actually good for some investors.</p>
<p><a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2020_Interim_Media_Release.pdf">Westpac</a> won’t be paying a dividend this half year. Nor will the <a href="https://yourir.info/resources/4d216b570d08af30/announcements/anz.asx/3A540286/ANZ_News_Release_ANZ_NZ_2020_half-year_result.pdf">ANZ</a>, nor the <a href="https://wcsecure.weblink.com.au/pdf/BOQ/02224752.pdf">Bank of Queensland</a>.</p>
<p>The <a href="https://www.nab.com.au/about-us/shareholder-centre/dividend-information">National Australia Bank</a> will pay one, but only a third the usual size. The Commonwealth Bank’s different reporting dates mean it won’t have to make a decision <a href="https://www.commbank.com.au/about-us/investors/dividend-information.html">until August</a>.</p>
<p>The Financial Review believes the moves have taken <a href="https://www.afr.com/companies/financial-services/westpac-shareholders-have-long-wait-ahead-on-dividends-20200504-p54plj">A$9.8 billion</a> in expected dividends and <a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">franking credits</a> from bank shareholders to date. </p>
<p>The flip-side missed by many commentators and shareholders is that bank shares are worth more (maybe around $9.8 billion more) than if they had paid those dividends.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=840&fit=crop&dpr=1 600w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=840&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=840&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1056&fit=crop&dpr=1 754w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1056&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1056&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.apra.gov.au/sites/default/files/2020-04/Capital%20management.pdf">APRA letter to financial institutions, April 7, 2020</a></span>
</figcaption>
</figure>
<p>As it happens, the decisions follow pressure from the Prudential Regulation Authority which last month sent banks an <a href="https://www.apra.gov.au/capital-management">unprecedented letter</a> asking them to “seriously consider deferring decisions on the appropriate level of dividends”.</p>
<p>It isn’t what bank shareholders have come to expect. </p>
<p>The Commonwealth Bank’s <a href="https://www.commbank.com.au/about-us/investors/dividend-information.html">dividend policy</a> says it will aim to pay cash dividends at “strong and sustainable levels”, maximising dividend imputation cheques from the government by paying <a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">fully franked</a> dividends.</p>
<p>The dividend reductions come after sharp collapses in share prices brought about by hits to current and expected future earnings and increased economic uncertainty.</p>
<p>But, as hard as it is to look beyond dividends, imputation cheques and the price of shares, what’s most important for the owners of shares are the earnings prospects for the banks long term. And here, as hard as it might be for some shareholders to accept, the suspension of dividends is a sensible strategy for the banks.</p>
<h2>Cruel to be kind makes sense for banks</h2>
<p>In making decisions about dividends in the wake of bad news, each bank had two options. </p>
<p>One was to keep paying dividends at previous levels. </p>
<p>That would have pushed the share price down further, as evidenced by the typical drop in a company’s share price after dividends have been paid. </p>
<p>With the funds paid out as dividends, and no longer part of the bank’s shareholders funds, each share becomes correspondingly worth less. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-last-thing-companies-should-be-doing-right-now-is-paying-dividends-135928">The last thing companies should be doing right now is paying dividends</a>
</strong>
</em>
</p>
<hr>
<p>It also puts the bank in a weaker position to weather unexpected loan losses if the COVID-19 storm turns out to be even worse than expected. </p>
<p>The other option was to scrap (or reduce) its dividend and avoid the ex-dividend date drop in its share price. It bolsters its capital strength and gives shareholders higher expected capital gains (or lower capital losses).</p>
<p>Broadly, the loss of dividends should be offset to some degree by a higher share price and higher capital gains. </p>
<p>But try telling shareholders that the dividends they have lost can be replaced by selling shares.</p>
<h2>Tax makes retirees hate it</h2>
<p>That they care is in part psychological. Shareholders view a bird (dividend) in the hand as better than one (a capital gain) in the bush. </p>
<p>Selling shares is seen as “dipping into one’s capital”, even though it has the same effect on the shareholder’s capital (the value of shares held) as taking a dividend.</p>
<p>Another reason shareholders care more than you might think is tax. </p>
<p>Typically (based on historical evidence) a franked dividend of $1 leads to a share price fall of around $1. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">Deeming rates explained. What is deeming, how does it cut pensions, and why do we have it?</a>
</strong>
</em>
</p>
<hr>
<p>But for an investor on a zero tax rate (as many retirees are) that $1 dividend is actually worth around $1.43. </p>
<p>This is because the Tax Office rebates that investor <a href="https://www.marketindex.com.au/franking-credits">43 cents</a> of tax previously paid by the bank, a so-called dividend imputation payment. </p>
<p>Selling $1.43 of shares to compensate for the lost dividend cash flow leaves them worse off.</p>
<p>Super funds on a low 15% tax rate are also likely to prefer payment of franked dividends since they can use the imputation credits to reduce tax on other investment income.</p>
<h2>Tax makes other shareholders like it</h2>
<p>High tax rate investors and foreign shareholders think quite differently. </p>
<p>For high tax rate investors, Australia’s practice of taxing only <a href="https://www.realestate.com.au/advice/what-is-capital-gains-tax/">half</a> of each capital gain can make the higher capital gains associated with higher share prices more attractive than receiving dividends on which they have to pay extra tax.</p>
<p>Foreign shareholders also generally prefer capital gains to franked dividends, since they can’t use Australia’s imputation credits.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/heres-a-radical-reform-that-could-pay-every-retiree-the-full-pension-131289">Here's a radical reform that could pay every retiree the full pension</a>
</strong>
</em>
</p>
<hr>
<p>Under any tax system where dividends and capital gains are taxed differently, deferring dividends hurts some investors and benefits others. Australia’s imputation tax system magnifies that effect, with low tax rate investors being losers.</p>
<p>As it happens, these features of the tax system took centre stage in last year’s election, in which Labor proposals to change both the rules regarding dividend imputation and capital gains were <a href="https://theconversation.com/going-up-monday-showed-what-the-market-thinks-of-morrison-117396">rejected</a> by voters.</p>
<h2>Longer term, investors might thank banks</h2>
<p>The root cause of the hit to dividends is uncertainty about the future. </p>
<p>If economic conditions turn out worse than expected, banks will find themselves hesitant to make loans unless they have sufficient capital to absorb unexpected losses.</p>
<p>To the extent that they use that capital to help restore the health of the economy, all investors (including those reliant on future dividends) will be better off.</p><img src="https://counter.theconversation.com/content/137889/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Westpac and the ANZ have suspended dividends payments. The National Australia Bank has slashed them. The peculiarities of our tax system explain why retirees hate this more than they should.
Kevin Davis, Professor of Finance, The University of Melbourne
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/127232
2019-12-11T18:55:23Z
2019-12-11T18:55:23Z
What limits shareholder activism is the free-rider problem
<figure><img src="https://images.theconversation.com/files/306265/original/file-20191211-95159-b65v6f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Shareholder activism involves directly engaging with directors and executives of companies to effect change.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>The board of Australia’s second-biggest bank is in for some stick at its annual general meeting today, as Westpac shareholders vent their displeasure at the scandal involving breaches of anti-money-laundering rules.</p>
<p>But though it will be uncomfortable, with enough shareholders likely to vote against the remuneration report to trigger a vote to spill the entire board, a full-blown revolution is not on the cards.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
</strong>
</em>
</p>
<hr>
<p>The Australian Shareholders’ Association, with proxies <a href="https://www.theaustralian.com.au/business/financial-services/humbled-westpac-faces-shareholder-anger-at-gm/news-story/2e975d2c1cf38ce4fb6c77c597b3faeb">for more than 2,000 shareholders</a>, will not support a spill. Nor will <a href="https://www.bloomberg.com/news/articles/2019-12-10/westpac-braces-for-shareholder-anger-over-money-laundering-probe">major institutional shareholders</a> such as industry superannuation funds HostPlus and Unisuper. </p>
<p>With the number of shares held determining how many votes each shareholder gets, major investor support is enough to suppress most shareholder uprisings.</p>
<p>This, and a fundamental problem facing all collectives, currently limits the potential of shareholders to hold corporations to account, both through choosing to hold shares or not, as well as through voting power.</p>
<h2>Ethical divestment</h2>
<p>Decisions by shareholders to avoid profiting from business considered unethical arguably goes back centuries, with religious communities consciously avoiding investments in slavery, arms, alcohol, tobacco and gambling – so-called sin stocks. </p>
<p>Since the the 1980s secular funds have extended this idea to the more expansive agenda of social and environmental sustainability. One thread of this ethical investment trend has led to the divestment movement. </p>
<p>A notable example is the campaign targeting <a href="https://thegreenlist.com.au/listing/unsw-latest-australian-university-to-divest-from-fossil-fuels/">universities</a>, <a href="https://www.smh.com.au/business/companies/big-banks-facing-investor-heat-on-fossil-fuel-lending-20191009-p52z2c.html">banks</a> and other big <a href="https://www.forbes.com/sites/davidnikel/2019/06/12/norway-wealth-fund-to-dump-fossil-fuel-stocks-worth-billions-in-environmental-move/#3fc3517848a3">institutional investors</a> to dump their stocks in fossil fuel companies.</p>
<p>The movement’s rationale is that divestment increases the cost of capital. It’s effectiveness, however, is a matter of debate. Bill Gates is among the critics, calling divestment “<a href="https://www.theguardian.com/environment/2015/oct/14/bill-gates-calls-fossil-fuel-divestment-a-false-solution">a false solution</a>”. One argument is that it simply means companies end up being owned by shareholders only interested in profits. It has also been argued fossil fuel divestment might even <a href="https://theconversation.com/fossil-fuel-divestment-will-increase-carbon-emissions-not-lower-them-heres-why-126392">cause emissions to rise</a>. </p>
<h2>Shareholder activism</h2>
<p>Shareholder activism takes a different approach to divestment. It’s about immersion rather than aversion. It involves shareholders directly engaging with directors and executives of companies to effect change from within. </p>
<p>Unlike ethical investment, the roots of shareholder activism are not altruistic. Historically to be called an activist shareholder was no compliment. It probably meant you were a hedge fund focused solely on reaping bigger profits. This was typically done by pressuring boards and management to sell off under-performing assets and disburse the cash to shareholders. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-companies-should-fend-off-attacks-from-activist-investors-80855">How companies should fend off attacks from activist investors</a>
</strong>
</em>
</p>
<hr>
<p>To date, little activism has been motivated <a href="https://theconversation.com/shareholder-activism-might-sound-good-but-its-delusional-to-think-it-will-change-anything-much-125807">by altruistic purposes</a>. That’s partly to do with a fundamental problem that limits the ability of activism to influence corporate behaviour for non-financial reasons.</p>
<p>Economists call it the free-rider problem. In essence <a href="https://www.investopedia.com/terms/f/free_rider_problem.asp">it’s the problem</a> of individuals having little incentive to contribute to a collective resource when they can enjoy its benefits even if they don’t. </p>
<p>How this applies to shareholders was first outlined by Harvard academics Adolf Berle and Gardiner Means in their seminal 1932 book The Modern Corporation and Private Property. </p>
<p>Ownership of public corporations is generally diffused between a significant number of shareholders. Individual shareholders have little incentive to monitor senior management, because of the cost they bear while others reap benefits. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/giving-workers-a-voice-in-the-boardroom-is-a-compelling-corporate-governance-reform-115463">Giving workers a voice in the boardroom is a compelling corporate governance reform</a>
</strong>
</em>
</p>
<hr>
<p>Ironically, corporate boards are meant to mitigate this free-rider problem. Their job is monitor management on behalf of shareholders. But Westpac’s anti-money-laundering scandal adds to the evidence the system might be broken. The allegations suggest a board incapable or unwilling to effectively monitor senior management in complex and sprawling conglomerates. </p>
<p>Shareholder engagement and activism <em>should</em> play an increasingly important role in shaping corporate behaviour, improving the quality of board monitoring and addressing the free-rider problem. </p>
<p>Big institutional shareholders in particular could be more active in ensuring boards have skilled, competent directors. They could also foster a culture of openness by supporting directors to challenge senior management without fear of putting their tenure at risk.</p><img src="https://counter.theconversation.com/content/127232/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Salvatore Ferraro 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>
We want to to believe in the power of shareholder activism, but reality is another thing.
Salvatore Ferraro, PhD candidate, RMIT University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/127102
2019-12-09T01:18:57Z
2019-12-09T01:18:57Z
Litigation is the real reason financial reports are becoming harder to read
<p>Westpac can expect a bumper turnout of shareholders at its annual general meeting in Sydney on Thursday, many of them angry at its alleged role in <a href="https://www.austrac.gov.au/sites/default/files/2019-11/20191120%20Westpac%20Concise%20Statement%20FILED%2019008953.pdf">facilitating child exploitation</a> in the Philippines, its 23 million alleged breaches of anti-money-laundering laws, and its initial ritualistic response to the allegations. </p>
<p>This included donating <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/media_release_response_plan.pdf">A$18 million</a> to an anti sexual exploitation charity, followed by the <a href="https://www.asx.com.au/asxpdf/20191126/pdf/44by46ysjf6w06.pdf">departure of its chief executive</a> and the foreshadowed departure of its chairman later in the year.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
</strong>
</em>
</p>
<hr>
<p>Some of those shareholders will be clutching the bank’s <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2019_Westpac_Group_Full_Year_Financials.pdf">154-page financial statement</a>. They’ll need to understand it to ask questions about Westpac’s financial performance.</p>
<p>Back at the start of the 2000s, Westpac’s financial statement was only <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/res0900.pdf">35 pages</a></p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=852&fit=crop&dpr=1 600w, https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=852&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=852&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1071&fit=crop&dpr=1 754w, https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1071&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/305578/original/file-20191206-183400-xd8mu6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1071&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">‘Help when it matters’.</span>
<span class="attribution"><a class="source" href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2019_Westpac_Group_Full_Year_Financials.pdf">Westpac's 154 page statement of financial results.</a></span>
</figcaption>
</figure>
<p>Much of what’s been added to statements such as Westpac’s has been in response to the threat of litigation. Companies making false or misleading disclosures risk class actions. It’s safer to include more rather than less, even if it makes the total hard to navigate.</p>
<p>Australia has just had its <a href="https://theconversation.com/why-australias-first-securities-class-action-judgment-sort-of-cleared-myer-125925">first class action judgement</a>, after earlier cases that had been settled out of court. The United States has had many. </p>
<p>My own research with colleagues in the United States finds that caution in the face of the threat of litigation has made financial reports <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3478994">increasingly less readable</a> over time.</p>
<h2>How might litigation make reports harder to read?</h2>
<p>Firms can be sued for making misleading disclosures. This happens most often where shareholders allege that the firm failed to disclose all relevant information, or where it has failed to meet projections. </p>
<p>After such class actions, firms can face increasing difficulties with customers, suppliers and lenders, being seen as less credible. Managers face <a href="https://doi.org/10.1016/j.jfi.2011.09.001">pay cuts and termination</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-australias-first-securities-class-action-judgment-sort-of-cleared-myer-125925">Why Australia's first securities class action judgment (sort of) cleared Myer</a>
</strong>
</em>
</p>
<hr>
<p>One way to head off such class actions is to make disclosures more detailed. </p>
<p>Increasing detail enables firms to add caveats, footnotes and nuance, conveying uncertainty – the consequence of which is that their reports are less clear.</p>
<h2>How we teased out the link</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=903&fit=crop&dpr=1 600w, https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=903&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=903&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1135&fit=crop&dpr=1 754w, https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1135&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/305596/original/file-20191206-90609-eomrtx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1135&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://gunning-fog-index.com/">The Gunning Fog Index for this article</a></span>
</figcaption>
</figure>
<p>My coauthors and I examined 96,000 US annual reports issued between 1993 to 2013.</p>
<p>We also collected data on class actions in relation to reports for those years.</p>
<p>One of the best readability metrics is the so-called <a href="http://gunning-fog-index.com/">fog index</a>, which measures the number of syllables per word and words per sentence in order to provide a measure of the number of years of education needed to read a statement.</p>
<p>It says this article needs the best part of 15 years.</p>
<p>We also used other indexes including the so-called <a href="http://stylewriter-usa.com/stylewriter-editing-readability.php">bog index</a> which scores documents on word choice and sentence structure.</p>
<p>We captured firms’ tendency to avoid declarative statements by calculating the proportion of words that were “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3478994">uncertain</a>”, and measured their tendency to address specific legal threats by calculating the proportion of words that were legal in nature, both of which were subjective exercises.</p>
<h2>What we found</h2>
<p>We found litigation risk encouraged firms to take steps that reduced the readability of their financial reports. </p>
<p>After firms had experienced a class action, their readability metrics worsened significantly. This was even the case several years after that class action, suggesting a long-lasting change.</p>
<p>We found if a chief executive had experienced a class action at one job, their reports were likely to be less readable in subsequent jobs, strongly suggesting that litigation drove hard to read reports rather than the other way round.</p>
<p>We also found:</p>
<ul>
<li><p>litigation experience increased the size and volume of firms’ disclosures. While worsening readability, this at least had the virtue of increasing thoroughness</p></li>
<li><p>litigation experience was associated with using more complex words and more words per sentence. This implies firms add more detail and nuance to their disclosures, potentially increasing their accuracy</p></li>
<li><p>after litigation, firms used more uncertain words in their reports. This suggests they avoid declaratory statements in an attempt to better reflect the risk and uncertainty associated with projections</p></li>
<li><p>following litigation, firms use more legalistic terms. This implies they attempt to preempt legal action by specifically addressing potential legal issues.</p></li>
</ul>
<p>The Australian Securities and Investments Commission (ASIC) has expressed concern over what it calls “<a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-279mr-asic-calls-time-on-disclosure-reliance/">sludge</a>” in reports that covers bases but leaves readers uninformed. </p>
<p>It says over-reliance on disclosure “in some ways proved an enabler” of the poor conduct revealed by the banking royal commission. </p>
<p>Our work and the work of ASIC suggests much needs to happen to make reports both accurate and readable.</p><img src="https://counter.theconversation.com/content/127102/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner receives funding from the Australian Research Council</span></em></p>
Westpac’s 154 page financial statement will be a challenge for shareholders attending Thursday’s annual general meeting. In the early 2000s, it was only 35 pages.
Mark Humphery-Jenner, Associate Professor of Finance, UNSW Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/127988
2019-12-02T18:13:50Z
2019-12-02T18:13:50Z
Westpac ticking every anti-money-laundering box wouldn’t make much difference to criminals
<figure><img src="https://images.theconversation.com/files/304613/original/file-20191202-79489-1gp25sn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The trouble with looking for transactions 'consistent' with 'known' patterns 'indicative' of child exploitation payments to countries with 'known' risks is that countless legitimate payments exhibit similar features.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>The charges surrounding Westpac’s alleged <a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">23 million breaches</a> of anti-money laundering laws have been called “<a href="https://www.theguardian.com/australia-news/2019/nov/25/westpac-in-crisis-talks-with-largest-investors-amid-money-laundering-scandal">about as serious as it gets</a>”. They include, in the words of Home Affairs Minister Peter Dutton, giving “<a href="https://www.reuters.com/article/us-westpac-regulator/a-free-pass-to-pedophiles-australian-lawmaker-slams-westpac-idUSKBN1XZ0CA">a free pass to paedophiles</a>”.</p>
<p>But the Westpac case obscures another serious issue: the anti-money laundering system’s compliance focus has a <a href="https://theconversation.com/the-global-war-on-money-laundering-is-a-failed-experiment-125143">puny impact on crime</a>, including child sex trafficking.</p>
<h2>Compliance culture</h2>
<p>Symptomatic of a compliance culture <a href="http://dx.doi.org/10.1108/JMLC-07-2017-0029">measuring activity rather than results</a> is the sheer number of Westpac’s alleged breaches.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
</strong>
</em>
</p>
<hr>
<p>The 23 million figure really involves a handful of different types of breach. </p>
<p>About 19.5 million alleged breaches involve what are known as “international funds transfer instructions” (IFTIs). These are arrangements between Westpac and overseas banks (known as correspondent banks) to process each others’ customer transactions. These must be reported to AUSTRAC within ten days, with funds origin details included in data passed on to other banks for processing.</p>
<p>AUSTRAC’s <a href="https://www.austrac.gov.au/sites/default/files/2019-11/Westpac%20concise%20statement%20-%20November%202019.pdf">claim</a> says Westpac reported 19,489,427 incoming and 10,771 outgoing transfer instructions late (often very late). It says another 10,521 were given to correspondent banks without information about the money’s origin. </p>
<p>Westpac also allegedly didn’t report 2,314 outgoing transfer instructions sent through its “LitePay” international funds transfer system.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/westpacs-panicked-response-to-its-money-laundering-scandal-looks-ill-considered-127700">Westpac's panicked response to its money-laundering scandal looks ill-considered</a>
</strong>
</em>
</p>
<hr>
<p>A further 3,516,238 alleged breaches involved the bank’s data retention system deleting records of incoming transactions before the seven years required.</p>
<h2>Many reports, few arrests</h2>
<p>Westpac’s alleged “free pass to paedophiles” isn’t about these millions of transactions. It’s about 3,057 transactions with 12 customers. </p>
<p>AUSTRAC expects transactions matching patterns known to have been used by criminals to be reported as “suspicious” (not necessarily criminal). AUSTRAC says the relevant transfers were made to countries with known risks, consistent with known patterns indicative of child exploitation. Average payments for the 12 customers were between A$43 and A$333. One customer, with ten payments totalling A$2,612, had a prior conviction. </p>
<p>Westpac shirking its reporting responsibilities is bad, obviously. But the context is also important. Consider the sheer number of reports banks are expected to file automatically with the number of reports involving suspicious transactions, and the number leading to actual arrests and convictions.</p>
<p>In 2018, according to <a href="https://www.austrac.gov.au/sites/default/files/2019-10/AUSTRAC_AR1819_Web.pdf.pdf">AUSTRACs annual report</a>, 155 million transfer instructions and 246,458 suspicious matter reports were filed (the latter is a fraction of millions of alerts initially raised by banks’ systems and staff).</p>
<p>According to its <a href="https://medium.com/r/?url=https%3A%2F%2Fwww.austrac.gov.au%2Fsites%2Fdefault%2Ffiles%2F2019-10%2FAUSTRAC_AR1819_Web.pdf.pdf">annual report</a>, this led AUSTRAC’s joint taskforce with Australian law-enforcement agencies to arrest ten people over alleged criminal activities relating to 163 bank transactions. </p>
<p>AUSTRAC’s <a href="https://www.austrac.gov.au/about-us/fintel-alliance">Fintel Alliance</a> with public and private sector agencies (including Westpac) also contributed to 73 arrests, with 35 victims saved or protected from child exploitation.</p>
<p>This is not an exhaustive account of AUSTRAC’s successes, because it also helps investigations by other agencies in Australia and overseas, but it indicates the tiny proportion of reported transactions leading to arrests.</p>
<h2>Needles in haystacks</h2>
<p>Don’t get me wrong. The system catches some criminals. That’s a good thing. But very little of the vast amounts of data generated points to crime. Sure, it can be said that if Westpac reported on time, more crime might have been found. (And hindsight and a multi-million litigation budget makes it easier afterwards). But it’s a big ‘might’. If Westpac had filed everything on time, it would still have been like searching for a proverbial needle in a continent of haystacks.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-global-war-on-money-laundering-is-a-failed-experiment-125143">The global war on money laundering is a failed experiment</a>
</strong>
</em>
</p>
<hr>
<p>Overall, there’s almost no impact on crime. As <a href="https://theconversation.com/the-global-war-on-money-laundering-is-a-failed-experiment-125143">I’ve noted previously</a>, in 2011 the United Nations estimated just <a href="https://www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_flows_2011_web.pdf">0.2%</a> of the global proceeds of crime were seized by anti-money laundering efforts. My update of the UN’s estimate (not yet published) suggests the figure might be 0.1% or less. Other research, albeit with poor data, suggests Australia’s recovery rate might be <a href="https://doi.org/10.1108/JFC-08-2017-0071">0.38%</a>. </p>
<p>The bottom line is simple, if stark. The modern anti-money laundering experiment finds some criminals but is terrible at finding enough to have any real impact on crime. Banks are a much easier target for regulators.</p>
<h2>Knowing the unknowns</h2>
<p>The trouble with looking for transactions that can be ticked off against regulatory checklists is that countless legitimate payments exhibit similar features. </p>
<p>It also means banks have little incentive to figure out better ways to find the “needles”, because they still must deliver the whole field of haystacks or face serious consequences not reporting everything “consistent” with “known” patterns “indicative” of payment to “known” risk countries. </p>
<p>Law enforcement has always been focused on crime, but the overlay of modern anti-money laundering regulations rewards compliance, and punishes non-compliance. Catching criminals features more in well-meaning intent and rhetoric than system design.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/westpacs-scandal-highlights-a-system-failing-to-deter-corporate-wrongdoing-127619">Westpac's scandal highlights a system failing to deter corporate wrongdoing</a>
</strong>
</em>
</p>
<hr>
<p>My specialty is policy effectiveness and outcomes. This means not just asking if we have rules, or if firms comply. We need to ask if the rules work. When “success” is measured by compliance activity and notching up record penalties against banks, we’re stuck with lousy results. </p>
<p>We might see justice for some people and discomfit for banks, but the real tragedy is the harm we fail to stop: almost all of it.</p>
<p>Right now the system penalises banks for not ticking boxes that scarcely prevent crime. We need to stop mostly focusing on the “known” patterns of crime and think more about the 99.9% “unknown” zone where most criminals actually operate.</p><img src="https://counter.theconversation.com/content/127988/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ronald F Pol 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>
Anti-money laundering rules give the comfort of doing something, but prevent surprisingly little crime.
Ronald F Pol, Senior researcher NZ - views expressed are author’s and do not necessarily reflect those of, La Trobe University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/127913
2019-11-28T19:10:24Z
2019-11-28T19:10:24Z
Vital Signs: let’s not weep for Westpac’s board, but directors do need help
<p>There are many reactions one can have to the shocking revelations of Westpac’s failure to comply with <a href="https://www.austrac.gov.au/business/legislation/amlctf-act">Australia’s anti-money-laundering requirements</a>.</p>
<p>One reaction is it’s not that big a deal – along the lines of now-ousted chief executive Brian Hartzer <a href="https://www.theaustralian.com.au/business/financial-services/stay-calm-this-is-no-enron-says-westpacs-brian-hartzer/news-story/9850db52eab6c338f6389813d1a508b8">reportedly telling senior executives</a> “this is no Enron” and “for people in mainstream Australia going about their daily lives this is not a major issue, so we don’t need to overcook this”.</p>
<p>A second reaction is this is a massive failure of management that typifies a culture of arrogance and greed that requires wholesale change. Home Affairs Minister Peter Dutton encapsulated this sentiment when <a href="https://www.reuters.com/article/us-westpac-regulator/a-free-pass-to-pedophiles-australian-lawmaker-slams-westpac-idUSKBN1XZ0CA">he told parliament</a>: “Westpac banking bosses, through their negligence, have given a free pass to paedophiles and there is a price to pay for that and that price will be paid and we have been very clear about it.” </p>
<p>A third is to blame the board of directors for inadequate oversight of the bank’s management.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
</strong>
</em>
</p>
<hr>
<p>While there is little support for Hartzer’s <em>nothing to see here and sorry for cancelling the boozy Christmas party</em> view, there is probably some truth to the other two positions.</p>
<p>Indeed, two board members are on their way out – chairperson Lindsay Maxsted and Ewen Crouch, who has chaired the board’s <a href="https://www.westpac.com.au/news/authors/ewen-crouch/">risk & compliance committee</a> – along with Hartzer for his leadership failures. There are calls for <a href="https://www.smh.com.au/business/banking-and-finance/proxy-adviser-calls-for-more-westpac-director-scalps-20191127-p53em8.html">other directors to follow</a>.</p>
<p>But it is worth reflecting on how the board might have done better and what tools could have helped them do their jobs more effectively.</p>
<h2>It’s not easy being a director</h2>
<p>I don’t expect many readers to weep for the plight of directors <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2019_Westpac_Group_Annual_Report.pdf">who earn north of A$250,000</a> per board on which they sit. But let’s consider what the job entails.</p>
<p>A company like Westpac is large and complex. It has nearly a trillion dollars in assets, earns about A$10 billion a year in profit before tax, operates in complicated financial markets, and is subject to requirements from multiple regulators both in Australia and around the world.</p>
<p>The board papers – the reading directors are given to prepare themselves for each meeting of the board – often run to more than 900 pages. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/shareholder-activism-sounds-good-but-it-cant-change-much-125807">Shareholder activism sounds good, but it can't change much</a>
</strong>
</em>
</p>
<hr>
<p>Those 900 pages aren’t the intellectual equivalent of a romance novel. They’re not even Tolstoy. They’re about credit default swaps and the effect of US monetary policy on funding costs in the wholesale market. They’re about demographic shifts driving consumer preferences for multi-platform product offerings. And, yes, they’re about regulatory compliance to prevent facilitating paedophilia or terrorism.</p>
<p>We could simply expect more of these well-paid folks. But it might be more constructive to look for ways to help them do their jobs better.</p>
<h2>Analyst support for independent directors</h2>
<p>One old idea that should definitely be new again is to give independent directors their own analytic support.</p>
<p>Nearly 50 years ago (in 1972) one of America’s foremost corporate law professors, Arthur Goldberg, <a href="https://www.nytimes.com/1972/10/29/archives/debate-on-outside-directors-outside-directors.html">suggested precisely this in the New York Times</a>:</p>
<blockquote>
<p>It would be the counsel of wisdom and in the interest of shareholders and the public to provide outside directors with the means whereby they could discharge their fiduciary responsibilities in the conduct of corporate affairs.</p>
</blockquote>
<p>Goldberg’s terminology is a little out of date but the issue he identified is all too current.</p>
<p>Boards are supposed to oversee management on behalf of shareholders. The interests of managers aren’t always aligned with those of shareholders; they understandably care more than shareholders about their own remuneration and their career prospects. They may want to make big acquisitions or expand internationally because it gives them a larger and more impressive business to run, even if it is not in the interests of shareholders.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/giving-workers-a-voice-in-the-boardroom-is-a-compelling-corporate-governance-reform-115463">Giving workers a voice in the boardroom is a compelling corporate governance reform</a>
</strong>
</em>
</p>
<hr>
<p>Managers also have a big edge over directors. They are the ones running the business day to day, so have superior information. On top of that, they have a whole team of people to do analysis and run numbers for them.</p>
<p>A board member who wanted to challenge the financial analysis of an acquisition proposed by management would have to do their own valuation supported by swathes of analysis about market conditions, financing arrangements, synergies from combining the businesses, and so on.</p>
<p>That’s an impossible load for one person, no matter how smart or well-paid.</p>
<h2>Better boards</h2>
<p>There has been a lot of focus in recent times on diversity of company boards, and the <a href="https://faculty.chicagobooth.edu/marianne.bertrand/research/papers/Paper_and%20Tables_5_29_2014.pdf">pros and cons of quotas</a>. </p>
<p>These are very important issues. But so too is equipping board members, whoever they may be, with the tools and resources to be effective. </p>
<p>A pool of five well-qualified financial analysts for a large public company board (for instance in the ASX 100) might cost $750,000 a year.</p>
<p>That’s peanuts in the scheme of things.</p>
<p>The smallest of the <a href="https://www.asx100list.com/">ASX 100</a> companies has a market capitalisation of A$2.3 billion. Those in the top 10 are all more than A$45 billion. Fourth-placed Westpac’s market cap was about A$98 billion at the start of November.</p>
<p>That’s a lot of shareholder value to protect – and due to compulsory superannuation a lot of it is our money. </p>
<p>So, yes, we should expect much of the directors of our public companies. But we should also ensure they have tools they need to succeed.</p><img src="https://counter.theconversation.com/content/127913/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Board directors of our biggest companies simply aren’t equipped to take on management. An idea floated 50 years ago could help.
Richard Holden, Professor of Economics, UNSW Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/127700
2019-11-26T03:42:10Z
2019-11-26T03:42:10Z
Westpac’s panicked response to its money-laundering scandal looks ill-considered
<p>Westpac’s board has <a href="https://www.asx.com.au/asxpdf/20191126/pdf/44by46ysjf6w06.pdf">jettisoned its chief executive, Brian Hartzer</a>, just hours after he reportedly told his team mainstream Australia was not overly concerned about the bank’s <a href="https://www.austrac.gov.au/about-us/media-release/civil-penalty-orders-against-westpac">23 million alleged breaches</a> of anti-money-laundering laws, including handling transactions potentially involving child sex abuse.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/303604/original/file-20191125-84262-191li1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/303604/original/file-20191125-84262-191li1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/303604/original/file-20191125-84262-191li1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/303604/original/file-20191125-84262-191li1p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/303604/original/file-20191125-84262-191li1p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/303604/original/file-20191125-84262-191li1p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/303604/original/file-20191125-84262-191li1p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/303604/original/file-20191125-84262-191li1p.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>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.asx.com.au/asxpdf/20191126/pdf/44by46ysjf6w06.pdf">Westpac's announcement to the Australian Securities Exchange.</a></span>
</figcaption>
</figure>
<p>Harzter will receive a year’s salary in lieu of notice, worth A$2.68 million. Had he stayed on, he would have been eligible for share rights worth $20 million.</p>
<p>Westpac’s chairman, Lindsay Maxted, will bring forward his own retirement to the first half of 2020.</p>
<p>But far more customers have already been thrown overboard.</p>
<p>The <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/media_release_response_plan.pdf">emergency response</a> Westpac rushed out a few days ago abandoned thousands throughout the Pacific and other regions.</p>
<p>Westpac announced its “immediate fixes” included immediately shutting down “LitePay”, its low-cost system for customers to transfer money from one country to another.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.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">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://cdn.theconversation.com/static_files/files/791/FINAL_Media_Release_-_Response_Plan.pdf?1574568052">Extract from Westpac's weekend response.</a></span>
</figcaption>
</figure>
<p>Customers used LitePay to send “remittances” to family members outside Australia. </p>
<p>The bank’s response statement implicitly acknowledged the importance of these remittances. It noted LitePay was launched as part of a broader initiative with Australia’s Department of Foreign Affairs “to improve the livelihoods of men and women in the Pacific”.</p>
<p>Shutting down LitePay, without providing customers viable alternatives, is likely to do the opposite.</p>
<h2>Westpac has abandoned customers who need it</h2>
<p>The United Nations <a href="https://www.un.org/development/desa/en/news/population/remittances-matter.html">recognises</a> remittances as vital in helping millions out of poverty. It estimates about one in nine people around the world rely on remittances from family members working abroad. </p>
<p>Remittances are particularly important throughout the Pacific, from the Philippines to a small island nation like Tonga, where the money adults working abroad send home <a href="https://data.worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS">accounts</a> for more than 40% of their GDP. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/if-australia-cares-about-pacific-nations-we-should-also-invest-in-their-care-givers-102780">If Australia cares about Pacific nations, we should also invest in their care givers</a>
</strong>
</em>
</p>
<hr>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/303607/original/file-20191125-84217-t3iy8u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/303607/original/file-20191125-84217-t3iy8u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/303607/original/file-20191125-84217-t3iy8u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=970&fit=crop&dpr=1 600w, https://images.theconversation.com/files/303607/original/file-20191125-84217-t3iy8u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=970&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/303607/original/file-20191125-84217-t3iy8u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=970&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/303607/original/file-20191125-84217-t3iy8u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1219&fit=crop&dpr=1 754w, https://images.theconversation.com/files/303607/original/file-20191125-84217-t3iy8u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1219&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/303607/original/file-20191125-84217-t3iy8u.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>
<figcaption>
<span class="caption">A Western Union branch facade in Cebu City, Philippines.</span>
<span class="attribution"><span class="source">Shuttersock</span></span>
</figcaption>
</figure>
<p>Remittances can be sent via companies like Western Union and Moneygram, but these are relatively expensive and generally focused on urban customers. In Australia members of expatriate communities with connections to their home countries established lower-cost remittance services. These small businesses facilitated the transfer of small amounts – <a href="https://www.un.org/development/desa/en/news/population/remittances-matter.html">generally</a> less than A$500 a month – at an affordable price. They did so using accounts with banks like Westpac.</p>
<p>From 2011, remitters were required to register with the anti-money-laundering agency, AUSTRAC, and comply with anti-money-laundering laws. Compliance obligations include identifying customers and verifying their identities, generally known as “know your customer” or “KYC” measures.</p>
<p>Then, in 2013, Australian banks joined a global trend to “de-bank” small remitters, due to money-laundering and terrorist-financing risks. Over the next few years the accounts of more than <a href="http://www.austlii.edu.au/au/journals/UQLawJl/2017/6.pdf">700 small Australian remitters</a>, many of which were AUSTRAC-registered, were closed.</p>
<h2>Compliance obligations</h2>
<p>Westpac was the last of Australia’s big four banks to withdraw from servicing remitters. In November 2014 then chief executive <a href="https://www.smh.com.au/business/banking-and-finance/westpac-closes-door-on-money-transfer-operators-as-terror-laws-bite-20141118-11p75z.html">Gail Kelly said</a>:</p>
<blockquote>
<p>The regulatory requirements for anti-money laundering are you need to know your customer and, in the case of remitters, you need to know your customer’s customers. That’s quite a responsibility. You do millions of these transactions and if one goes wrong and is connected with terrorism financing, that’s a real problem.</p>
</blockquote>
<p>The need to “know your customer’s customers” was not, however, a clear regulatory obligation. In 2015 the global standard-setter for controls on money laundering and terrorist financing, the Financial Action Task Force (FATF),
<a href="http://www.fatf-gafi.org/documents/news/private-sector-forum-march-2015.html">stated</a> it did not require this. </p>
<p>The task force had also stated since 2014 that risks relating to remittances should be assessed on a <a href="http://www.fatf-gafi.org/publications/fatfgeneral/documents/rba-and-de-risking.html">case-by-case basis</a>. The low risk of criminals or terrorism financiers sending money through remittance providers from Australia to Pacific island countries has since been confirmed by <a href="https://www.austrac.gov.au/about-us/media-release/joint-media-release-keeping-pacific-remittances-affordable-and-safe-crime">a 2017 report</a> by AUSTRAC and the Department of Foreign Affairs and Trade.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/with-increased-anti-money-laundering-measures-banks-are-shutting-out-women-46869">With increased anti-money laundering measures, banks are shutting out women</a>
</strong>
</em>
</p>
<hr>
<p>Whatever the potential risk small remitters pose, the fact of de-banking created real risks. As <a href="https://theconversation.com/real-lives-real-risk-threats-to-small-money-remitters-hit-african-families-48315">research by myself and Supriya Singh</a> into the effect on African communities found:</p>
<blockquote>
<p>Some worry that if the money stops their parents will starve. Young people will join terrorist groups or decide to flee hunger by joining the boats. One Eritrean community leader said his cousin fled to the Mediterranean shores and died in the attempt to reach Europe.</p>
</blockquote>
<p>De-banking remitter accounts lessened the compliance obligations of Westpac and others. But it had the ironic effect of reducing the transparency of remittance flows for law enforcement. In many cases payments continued to flow using <a href="http://classic.austlii.edu.au/au/journals/UQLawJl/2017/6.html">unregulated channels and even cash</a>, giving rise to crime risks to users and to Australia.</p>
<h2>Leaving customers high and dry</h2>
<p>It is a further irony that having de-banked small remittances services due to compliance concerns, Westpac ran afoul of anti-money-laundering obligations with LitePay, which it <a href="https://www.reuters.com/article/westpac-remittances-idUSL3N1831BB">launched in 2016</a>.</p>
<p>AUSTRAC’s charges against Westpac outline 12 cases involving repeated suspicious payments to the Philippines using LitePay. The money transfers matched known child-exploitation transaction patterns. Westpac failed to identify and report these prior to 2018 because it lacked appropriate detection measures for those transaction patterns. </p>
<p>But AUSTRAC says Westpac fixed the problems with LitePay in June 2018. Instead, AUSTRAC alleges, it is in its non-LitePay channels where the bank has still not implemented such measures. It is therefore in those channels that it continued to fail “<a href="https://www.austrac.gov.au/sites/default/files/2019-11/Statement%20of%20Claim_Filed.pdf">to identify activity indicative of child exploitation risks</a>”.</p>
<p>So why shut down LitePay? Why leave high and dry all its honest customers and the families who depend on remittances?</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-states-rocked-by-conflict-could-harness-funds-from-their-diasporas-111270">How states rocked by conflict could harness funds from their diasporas</a>
</strong>
</em>
</p>
<hr>
<p>Westpac has options. It could improve its control measures further. It could launch a <a href="http://classic.austlii.edu.au/au/journals/UQLawJl/2017/6.html">collaborative</a>, risk-based program aimed at re-banking small registered community-based remitters, starting with those servicing low-risk regions in the Pacific. </p>
<p>These remitters know their communities and users well. Together with Westpac’s improved systems, they could deliver an even safer system.</p>
<p>Jettisoning LitePay looks like a classic case of throwing out the baby with the bathwater – and doing so with scant regard for Westpac’s corporate social responsibilities. </p>
<hr>
<p><em>Editor’s note: Subsequent to the publication of this article Westpac amended its response plan to <a href="https://www.westpac.com.au/about-westpac/media/media-releases/2019/26-november1/">remove its claim</a> that LitePay was launched as part of an initiative with Australia’s Department of Foreign Affairs. It acknowledged that its memorandum of understanding with the department does not include the LitePay product.</em></p><img src="https://counter.theconversation.com/content/127700/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Louis de Koker is affiliated with La Trobe University. Some of his research on remittances was associated with the Consultative Group to Assist the Poor (CGAP), an independent think-tank on financial inclusion housed at the World Bank. The views expressed in this article are his own and are not necessarily shared by La Trobe University or CGAP.</span></em></p>
Westpac’s decision to shut down its LitePay money transfer system will hurt people relying on remittances throughout the Pacific region.
Louis de Koker, Professor of Law, La Trobe University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/127518
2019-11-24T21:59:37Z
2019-11-24T21:59:37Z
How Westpac is alleged to have broken anti-money laundering laws 23 million times
<figure><img src="https://images.theconversation.com/files/303316/original/file-20191124-74567-1v5vru5.jpg?ixlib=rb-1.1.0&rect=0%2C227%2C2348%2C1449&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Westpac is "deeply sorry" and has pledged to spend $18 million over three years tackling the online sexual exploitation of children in the Philippines.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australia’s second-biggest bank, Westpac, is poised to overtake the biggest, the Commonwealth Bank. Not in terms of assets, earnings or market capitalisation, but in having to pay the heftiest fine in Australian corporate history.</p>
<p>Westpac is accused of breaching laws aimed at hindering criminal money laundering and the financing of terrorism. With some of those breaches involving supicious transactions in South-East Asia, it is alleged Westpac has potentially facilitated the most heinous of crimes – the commerce of child sex abuse. </p>
<p>Each breach carries a penalty of up to A$63,000. Westpac is accused of 23 million breaches.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/westpacs-scandal-highlights-a-system-failing-to-deter-corporate-wrongdoing-127619">Westpac's scandal highlights a system failing to deter corporate wrongdoing</a>
</strong>
</em>
</p>
<hr>
<p>That means it could potentially be fined more than A$1 trillion. The actual fine is likely to be bargained down, as Commonwealth Bank did in agreeing to pay <a href="https://www.abc.net.au/news/2018-06-04/commonwealth-bank-pay-$700-million-fine-money-laundering-breach/9831064">A$700 million</a> in 2018 for its own breaches of anti-money-laundering provisions. </p>
<p>Even so, Westpac is still likely to be up for more than A$1 billion. </p>
<p>So what exactly is it accused of doing wrong, and what should it have done? Here’s a quick guide to how Australia’s anti-money-laundering laws work.</p>
<h2>Know your customer</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/303305/original/file-20191124-74599-8meo8z.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/303305/original/file-20191124-74599-8meo8z.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/303305/original/file-20191124-74599-8meo8z.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=848&fit=crop&dpr=1 600w, https://images.theconversation.com/files/303305/original/file-20191124-74599-8meo8z.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=848&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/303305/original/file-20191124-74599-8meo8z.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=848&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/303305/original/file-20191124-74599-8meo8z.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1065&fit=crop&dpr=1 754w, https://images.theconversation.com/files/303305/original/file-20191124-74599-8meo8z.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1065&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/303305/original/file-20191124-74599-8meo8z.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1065&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Know your customer.</span>
<span class="attribution"><a class="source" href="https://www.austrac.gov.au/sites/default/files/2019-06/austrac-A3-poster-gambling_05.pdf">AUSTRAC poster</a></span>
</figcaption>
</figure>
<p>The Australian Transaction Reports and Analysis Centre (<a href="https://www.austrac.gov.au/">AUSTRAC</a>) requires organisations that handle big amounts of money, such as banks and casinos, to monitor transactions and report suspicious ones. </p>
<p>AUSTRAC assembles intelligence and passes it onto partner agencies such as the Australian Federal Police. </p>
<p>The requirements spring from Australian legislation and obligations under international agreements.</p>
<p>One of the better-known requirements is an obligation to report any cash transaction exceeding A$10,000. </p>
<p>Less well-known, but perhaps more onerous, is the obligation to “know your customer”.</p>
<p>“<a href="https://www.austrac.gov.au/business/how-comply-and-report-guidance-and-resources/customer-identification-and-verification/customer-identification-know-your-customer-kyc">Know your customer</a>” means banks and other financial services organisations must collect information about their customers and assess their legitimate business behaviours before entering into an agreement, such as the provision of international money transfer services.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/video-michelle-grattan-on-the-westpac-scandal-and-changes-to-robo-debt-127610">VIDEO: Michelle Grattan on the Westpac scandal - and changes to robo-debt</a>
</strong>
</em>
</p>
<hr>
<p>Banks must then monitor ongoing customer transactions. If, for example, a business makes a large number of small cash transactions remitted to one overseas address then the bank needs to understand the purpose of the transactions and the legitimacy of the receiver.</p>
<h2>What it’s alleged Westpac did</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=838&fit=crop&dpr=1 600w, https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=838&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=838&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1053&fit=crop&dpr=1 754w, https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1053&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1053&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.austrac.gov.au/sites/default/files/2019-11/20191120%20Westpac%20Concise%20Statement%20FILED%2019008953.pdf">Federal Court notice of filing</a></span>
</figcaption>
</figure>
<p>AUSTRAC expects each organisation to identify patterns of risky transactions, such as third parties undertaking transfers to and from accounts for no apparent reason, or regular international funds transfers to high-risk jurisdictions.</p>
<p>AUSTRAC claims Westpac <a href="https://www.austrac.gov.au/about-us/media-release/civil-penalty-orders-against-westpac">failed</a> to appropriately assess transactions to the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks.</p>
<p>Westpac is also accused of failing to understand and monitor transactions of money from its accounts to small intermediary banks located in countries where terrorist organisation are known to operate. </p>
<p>This does not necessarily mean money was transferred to terrorists. It does mean there was a risk, and AUSTRAC should have been informed.</p>
<h2>‘Fallen short’</h2>
<p>The senior management of banks and other cash-handling organisations is expected to fully support anti-money-laundering and counter-terrorism-financing efforts. Among other things, a compliance officer is expected report to the board and be given the authority and resources to ensure the organisation is meeting its obligations. </p>
<p>On Wednesday AUSTRAC accused Westpac’s senior management of indifference and failure to adequately invest in the technology and programs needed to monitor and report patterns of potentially suspicious transactions.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=856&fit=crop&dpr=1 600w, https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=856&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=856&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1075&fit=crop&dpr=1 754w, https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1075&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1075&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://cdn.theconversation.com/static_files/files/791/FINAL_Media_Release_-_Response_Plan.pdf?1574568052">Westpac's weekend response.</a></span>
</figcaption>
</figure>
<p>On Sunday Westpac’s chairman Lindsay Maxsted said based on its current understanding, the board did not believe that there has been any indifference by any member of the executive team, including its chief executive.</p>
<p>But he said Westpac had “fallen short”.</p>
<p>He understood “the gravity of the issues” and had “deep sorrow for failings by Westpac”.</p>
<p>The bank would withhold all or part of bonuses from its executive team subject to the outcome of an external investigation, which would be made public.</p>
<p>In the meantime Westpac announced a <a href="https://cdn.theconversation.com/static_files/files/791/FINAL_Media_Release_-_Response_Plan.pdf?1574568052">response plan</a> that includes closing one of the products used to facilitate transactions, lifting screening standards, and “protecting people” by, among other things, spending A$18 million over three years to tackle online sexual exploitation of children in the Philippines.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/303313/original/file-20191124-74588-15ry74a.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">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://cdn.theconversation.com/static_files/files/791/FINAL_Media_Release_-_Response_Plan.pdf?1574568052">Extract from Westpac's weekend response.</a></span>
</figcaption>
</figure>
<h2>Not alone</h2>
<p>Two years ago it was <a href="https://www.austrac.gov.au/austrac-seeks-civil-penalty-orders-against-cba">Commonwealth Bank</a> that fell foul of AUSTRAC for allowing money to go out of the country without checks.</p>
<p>Earlier this month the <a href="https://www.abc.net.au/news/2018-11-02/nab-working-with-austrac-on-money-laundering-counter-terrorism/10457136">National Australia Bank</a> confirmed that it too was also in discussions with AUSTRAC.</p>
<p>The banking royal commission exposed ways in which elements within financial institutions seemed to regard strict compliance with the law as optional. AUSTRAC has has made it clear it is not, when it comes to money laundering.</p><img src="https://counter.theconversation.com/content/127518/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian Fargher 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 number one commandment of the anti money laundering law is “Know your customer”. AUSTRAC is alleging Westpac didn’t, and didn’t seem to want to.
Ian Fargher, Lecturer in Accounting, University of Wollongong
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/127698
2019-11-24T08:52:31Z
2019-11-24T08:52:31Z
Josh Frydenberg turns up heat on Westpac chiefs as bank issues a ‘response plan’
<p>The government at the weekend piled on more pressure for Westpac heads to roll over the bank’s money laundering scandal, with Treasurer Josh Frydenberg saying the affair had a long way to play out.</p>
<p>“These issues develop a momentum of their own. They’ve got an AGM on December 12 – and, no doubt, there’ll be some very hard discussions between now and then,” Frydenberg said.</p>
<p>The treasurer also revealed the Australian Prudential Regulation Authority (APRA) had become involved. APRA supervises banks and other institutions in the financial sector.</p>
<p>“APRA has the ability, under the Banking Executive Accountability Regime, to disqualify boards and to disqualify executives where there’s a failure to appropriately enforce and uphold the duties under the legislation,” Frydenberg said.</p>
<p>“That legislation came into force in 2018. It’s not retrospective, and some of those alleged breaches date back to 2013. But … I know that APRA is looking at it”.</p>
<h2>23 million breaches</h2>
<p>Westpac last week was accused by AUSTRAC of 23 million breaches of the anti-money laundering and counter-terrorism financing law, with the alleged breaches include transfers of money to the Philippines for child sex exploitation. AUSTRAC has begun civil proceedings against Westpac.</p>
<p>AUSTRAC is an official agency that uses financial intelligence and regulation to disrupt money laundering, terrorism financing and other crimes. </p>
<p>Frydenberg’s comments came as Westpac on Sunday announced a “response plan” across three areas. These included</p>
<ul>
<li><p>“immediate fixes” – among them, closing the LitePay international funds transfer system, which facilitated low-value international payments</p></li>
<li><p>lifting standards – including priority screening and improving cross-industry data sharing</p></li>
<li><p>protecting people - with what the bank described as “investments to reduce the human impact of financial crime”. This will involve multi million dollar funding for programs to counter child sexual exploitation.</p></li>
</ul>
<p>In political terms, the latest bank scandal comes at an awkward time for the government, which has its ensuring integrity legislation, to crack down on rogue unions and union officials, before parliament on Monday.</p>
<p>After accepting amendments from both Centre Alliance and Pauline Hanson, the government said on Sunday it was confident the legislation, strongly opposed by Labor, will pass.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/westpacs-scandal-highlights-a-system-failing-to-deter-corporate-wrongdoing-127619">Westpac's scandal highlights a system failing to deter corporate wrongdoing</a>
</strong>
</em>
</p>
<hr>
<p>Asked on the ABC what form the Westpac board’s accountability should take, Frydenberg said: “There must be accountability, and that will obviously involve decisions that they take about the futures of senior management, as well as the board”.</p>
<p>So far, there has been no sign of Westpac taking heed of the hints and calls for resignations.</p>
<p>The government’s position had consistently been that membership of boards were matter for shareholders and boards determined executive teams, Frydenberg said.</p>
<p>“That being said, these are very serious issues. There must be accountability.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=838&fit=crop&dpr=1 600w, https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=838&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=838&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1053&fit=crop&dpr=1 754w, https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1053&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/303308/original/file-20191124-74542-dk6sre.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1053&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.austrac.gov.au/sites/default/files/2019-11/20191120%20Westpac%20Concise%20Statement%20FILED%2019008953.pdf">Federal Court notice of filing</a></span>
</figcaption>
</figure>
<p>"AUSTRAC have been highly critical in their statement. And now APRA is looking into it. </p>
<p>"So I don’t think there’s any doubt as to the seriousness of these issues and the government’s position,” he said.</p>
<p>“We’re talking about a failure to adequately assess customers with links to child trafficking and child pornography.</p>
<p>"And we’ve seen, from AUSTRAC, a statement that there has been indifference by the board, that there’s been a systematic failure by the bank and there’s been inadequate oversight”.</p>
<p>Frydenberg said the Westpac board and management were “all seized of this issue, and they’re now going through a process. But with APRA providing additional focus, as well as AUSTRAC, certainly the heat is on the company”.</p>
<p>He said he had spoken to the bank’s chairman, Lindsay Maxsted, and CEO, Brian Hartzer. </p>
<blockquote>
<p>Obviously I made very clear the seriousness of these issues. But they also made very clear to me that they have a process now underway where they’re bringing independent experts in, and they’re determined to provide a way forward. And, of course, this is before the courts too.</p>
</blockquote>
<h2>‘Truly sorry’</h2>
<p>Westpac’s board has issued an unreserved apology. Maxsted said after a board meeting on Friday: “The notion that any child has been hurt as a result of any failings by Westpac is deeply distressing and we are truly sorry”.</p>
<p>“Our board, CEO and management team are fully committed to fixing these issues and we are taking all steps necessary to urgently close any remaining gaps and fix our policies and procedures so that this can never happen again.”</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=856&fit=crop&dpr=1 600w, https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=856&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=856&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1075&fit=crop&dpr=1 754w, https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1075&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/303311/original/file-20191124-74557-1vvydfy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1075&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://cdn.theconversation.com/static_files/files/791/FINAL_Media_Release_-_Response_Plan.pdf?1574568052">Westpac's weekend response.</a></span>
</figcaption>
</figure>
<p>He said significant improvements had already been made “including reviewing and taking action on all of the individual customers mentioned by AUSTRAC and establishing a multi-layered review.”</p>
<p>In Westpac’s <a href="https://cdn.theconversation.com/static_files/files/791/FINAL_Media_Release_-_Response_Plan.pdf?1574568052">Sunday statement</a> Maxsted said, “We accept that we have fallen short of both our own and regulators’ standards and are determined to get all the facts and assess accountability”.</p>
<p>In the interim the board had decided that either all or part of the 2019 bonuses would be withheld for the full executive team and several of the general managers “subject to the assessment of accountability”.</p>
<p>Under its “protecting people” measures Westpac will</p>
<ul>
<li><p>match the International Justice Mission’s current funding, investing $18 million over three years to fight online sexual exploitation of children in the Philippines</p></li>
<li><p>match the federal government’s current funding for its SaferKidsPH partnership with various organisations, investing $6 million over six years to raise awareness of online sexual exploitation of children and support programs to protect children in the Philippines</p></li>
<li><p>convene an expert advisory roundtable to develop a program to support prevention of online child exploitation. The bank will provide up to $10 million a year for three years to implement these recommendations.</p></li>
</ul>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/127698/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan owns Westpac shares.</span></em></p>
The government at the weekend piled on more pressure for Westpac heads to roll over the bank’s money laundering scandal, with Treasurer Josh Frydenberg saying the affair had a long way to play out. “These…
Michelle Grattan, Professorial Fellow, University of Canberra
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/127619
2019-11-22T06:37:21Z
2019-11-22T06:37:21Z
Westpac’s scandal highlights a system failing to deter corporate wrongdoing
<p>The news that Australia’s anti money-laundering regulator has accused Westpac of breaching the law on <a href="https://www.abc.net.au/news/2019-11-20/westpac-to-face-fines-anti-money-laundering-terrorism-breaches/11720474">23 million occasions</a> points to the prospect that powerful members of corporate Australia are still behaving badly.</p>
<p>This despite the clear lessons offered by the <a href="https://treasury.gov.au/publication/p2019-fsrc-final-report">Banking Royal Commission</a>. </p>
<p>Regulators are still struggling to find the right balance between pursuing wrongdoers through the courts – an admittedly costly, time-consuming and highly risky business – and finding other means to punish and deter misconduct.</p>
<p>Australia’s anti money-laundering regulator, AUSTRAC, is seeking penalties against Westpac in the Federal Court. </p>
<p>Each of the bank’s alleged contraventions attracts a civil penalty of up to A$21 million. In theory, that could equate to a fine in the region of A$391 trillion.
In practice, it is likely to be a mere fraction of that sum. Commonwealth Bank breached <a href="https://www.abc.net.au/news/2018-06-04/commonwealth-bank-pay-$700-million-fine-money-laundering-breach/9831064">anti-money-laundering laws</a> and faced a theoretical maximum fine of nearly A$1 trillion, but settled for A$700 million. </p>
<p>No doubt the reality that companies can minimise penalties is a factor in why breaches continue.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
</strong>
</em>
</p>
<hr>
<p>This impression is reinforced by revelations last week that financial services company AMP continued to <a href="https://www.abc.net.au/news/2019-11-20/asic-chairman-takes-a-personal-interest-in-amp-charging-the-dead/11719124">charge fees to its dead clients</a> despite the shellacking it received at the hands of the royal commission.</p>
<p>Last month a Federal Court judge refused to approve a A$75 million fine agreed between the Australian Competition and Consumer Commission and Volkswagen to settle litigation over the car company’s conduct in cheating emissions tests for diesel vehicles. The judge was reported to be “<a href="https://www.caradvice.com.au/800731/volkswagen-accc-diesel-case-settled-australia">outraged</a>” by the settlement, which meant Volkswagen did not admit liability for its misconduct. </p>
<p>The A$75 million is a drop in the ocean of the likely profits obtained from this systemic wrongdoing and pales into insignificance next to fines imposed in other countries. </p>
<h2>Proposals for law reform</h2>
<p>So business as usual, right?</p>
<p>Maybe not for long. The Australian Law Reform Commission has just released a <a href="https://www.alrc.gov.au/wp-content/uploads/2019/11/Corp-Crime-DP-87.pdf">discussion paper</a> on corporate criminal responsibility. </p>
<p>It points out that effective punishment and deterrence of serious criminal and civil misconduct by corporations in Australia is undermined by a combination of factors. </p>
<p>These include a confusing and inconsistent web of laws governing the circumstances in which conduct is “attributed” to the company. Similar problems of inconsistency arguably also undermine other key areas, such as <a href="http://theconversation.com/fines-thatll-hurt-asics-powerful-if-ill-fitting-teeth-112298">efforts to give courts the power </a>to impose hefty fines based on the profits obtained by the wrongdoing</p>
<p>The repeated attempts to come up with new and more effective attribution rules arise because corporate wrongdoers are “artificial people”. For centuries, courts and parliaments have struggled with how to make them pay for what is done by their human managers, employees and (both human and corporate) agents. All too often a company’s directors disclaim all knowledge of the wrongdoing. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/three-simple-steps-to-fix-our-banks-103999">Three simple steps to fix our banks</a>
</strong>
</em>
</p>
<hr>
<p>To fix this, the ALRC recommends having one single method to attribute responsibility. It builds on the attribution rule first developed in the <a href="http://www5.austlii.edu.au/au/legis/cth/num_act/tpa1974149/s84.html">Trade Practices Act 1974 (Cth)</a> and now used, in various forms, across various statutes.</p>
<p>The ALRC proposes that the conduct and state of mind of any “associates” (whether natural individuals or other corporations) acting on behalf of the corporation should be attributable to the corporation. </p>
<p>This goes well beyond the traditional focus on directors and senior managers and would provide some welcome consistency in the law. </p>
<p>Importantly, serious criminal and civil breaches that require proof of a dishonest or highly culpable corporate “state of mind” can be satisfied either by proving the state of mind of the “associate” or that the company “authorised or permitted” the conduct. </p>
<p>A “due diligence” defence would protect the corporation from liability where the misconduct was truly attributable to rogue “bad apples” in an otherwise a well-run organisation. There would be no protection in the case of widespread “system errors” and “administrative failures” so pathetically admitted during the royal commission. </p>
<p>The ALRC also proposes that senior officers be liable for the conduct of corporations where they are in “a position to influence the relevant conduct and failed to take reasonable steps to prevent a contravention or offence”. </p>
<p>This would place the onus on those in a position to change egregious corporate practices to show they took reasonable steps to do so.</p>
<h2>Removing the penalty ceiling</h2>
<p>These recommendations, if adopted could prove a game-changer for regulators asking themselves “why not litigate?” and corporations used to managing the fall-out of their misconduct as simply a “cost of business”.</p>
<p>The ALRC’s recommendations that the criminal and civil penalties should be enough to ensure corporations don’t profit from wrongdoing will be welcomed by many. Some academics have gone further and argued that the law should be changed to make it clear that civil, not just criminal penalties, should be set at a level that is effective to punish serious wrongdoing.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-courts-and-costs-are-undermining-asic-and-the-acccs-efforts-to-police-misbehaving-banks-and-businesses-95528">How courts and costs are undermining ASIC and the ACCC's efforts to police misbehaving banks and businesses</a>
</strong>
</em>
</p>
<hr>
<p>The ALRC also raises the question whether current limits on penalties should be removed. The Westpac scenario might be just the kind of case to make that option attractive.</p><img src="https://counter.theconversation.com/content/127619/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elise Bant holds a Australian Research Council Discovery Project grant with Professor Jeannie Paterson (MLS) for DP180100932 'Developing a Rational Law of Misleading Conduct'. She is also the recipient of a Future Fellowship grant FT19010475 from 2020, entitled 'Unravelling Corporate Fraud: re-purposing ancient laws for modern times'.</span></em></p><p class="fine-print"><em><span>Jeannie Marie Paterson holds a Australian Research Council Discovery Project grant with Professor Elise Bant for DP180100932 'Developing a Rational Law of Misleading Conduct'.</span></em></p>
It’s no wonder corporate wrongdoing occurs when the profits from wrongdoing outweigh the costs of being caught and punished.
Elise Bant, Professor of Law, The University of Melbourne
Jeannie Marie Paterson, Professor of Law, The University of Melbourne
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/127610
2019-11-22T01:03:40Z
2019-11-22T01:03:40Z
VIDEO: Michelle Grattan on the Westpac scandal - and changes to robo-debt
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/8qj-EBgNUQk?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>University of Canberra Vice-Chancellor Deep Saini discusses the Westpac scandal with Michelle Grattan. They then delve into the government’s recent changes to the robo-debt program, and Scott Morrison’s announcement that the government will be bringing forward infrastructure projects. They also talk about what to expect in the last parliamentary sitting fortnight, which starts on Monday.</p><img src="https://counter.theconversation.com/content/127610/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan owns Westpac shares.</span></em></p>
University of Canberra VC Deep Saini and Michelle Grattan discuss this week in politics, and talk about what to expect in the last parliamentary sitting fortnight, which starts this Monday.
Michelle Grattan, Professorial Fellow, University of Canberra
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/107809
2018-12-05T02:58:38Z
2018-12-05T02:58:38Z
Who made Australia’s first ever bank deposit? Here’s our unsettling discovery
<figure><img src="https://images.theconversation.com/files/248919/original/file-20181205-100847-wtylxt.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The first kangaroo-leather bound ledgers of what became Westpac, photographed in the Westpac archives.</span> <span class="attribution"><span class="source">Westpac archives</span>, <span class="license">Author provided</span></span></figcaption></figure><p>One of Australia’s biggest banks, currently under scrutiny at the royal commission, has a long history. </p>
<p>The Bank of New South Wales, which later became Westpac, was established in 1817 under a charter of incorporation signed by Governor Lachlan Macquarie. It was Australia’s first bank and first public company.</p>
<p>But there’s something brushed over in the <a href="https://www.westpac.com.au/about-westpac/westpac-group/company-overview/our-history/">official history</a>. Its first depositor, Sergeant Jeremiah Murphy, put in an unusually large sum of money (far more than his official salary) three days <em>before</em> the bank opened.</p>
<p>Just as the banking royal commission has been using ledgers, transaction accounts, remuneration reports and meeting minutes to try to get inside the behaviour of today’s banks, I and my colleagues Jason L’Ecuyer, Tom Allinson and Tamson Pietsch examined kangaroo-leather-bound ledgers and microfilm of military paymaster reports to understand how the bank started and how some people were making money in early colonial Australia.</p>
<iframe width="100%" height="200" src="https://player.whooshkaa.com/player/episode/id/306949?visual=true&sharing=true" frameborder="0" style="width: 100%; height: 200px"></iframe>
<p>The results can be heard on the latest 2SER <a href="https://historylab.net/s2ep1-the-bank-2/">History Lab podcast</a>. To many listeners, the findings will be unsettling.</p>
<h2>Our investigation</h2>
<p>Just like Antarctic ice core samples or ancient tree rings, financial documents capture and preserve events over time. Through them, we can grasp glimpses of the period in which they were created.</p>
<p>The bank’s ledgers show the growing wealth of early entrepreneurs, such as Mary Reiby, the convict-turned-merchant who appears on the Australian $20 bill. </p>
<p>In colonial accounts, we can also see the sale of liquor licences to Sydney’s first establishments, and infrastructure spending on bridges, wharves and hospitals.</p>
<p>There is even a schedule of prices for Australia’s first toll road out to Parramatta.</p>
<hr>
<hr>
<p>But the records also contain sobering evidence of darker aspects of Australia’s past.</p>
<p>Disturbingly, we can see financial payments to settlers and the military for punitive expeditions against Aboriginal Australians.</p>
<h2>Why trust the accounts?</h2>
<p>Financial records can shed light on what happened because of the meticulous manner in which they were prepared. </p>
<p>Military payslips were cross-referenced against muster sheets. Colonial payments were reviewed by committees. </p>
<p>Customer withdrawals were matched against signatures. Ledgers were periodically balanced. The bank’s own clerks ran the risk of having their pay docked for errors or poor penmanship.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/248925/original/file-20181205-100859-1trda1m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/248925/original/file-20181205-100859-1trda1m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/248925/original/file-20181205-100859-1trda1m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/248925/original/file-20181205-100859-1trda1m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/248925/original/file-20181205-100859-1trda1m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/248925/original/file-20181205-100859-1trda1m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/248925/original/file-20181205-100859-1trda1m.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/248925/original/file-20181205-100859-1trda1m.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">One fo the first banknotes issued by the Bank of New South Wales. April 8, 1817.</span>
<span class="attribution"><a class="source" href="https://australianmuseum.net.au/blogpost/museullaneous/first-bank-note-1817-bank-of-new-south-wales-westpac">© Australian Museum</a></span>
</figcaption>
</figure>
<hr>
<p>These records also make for compelling sources because, ironically, most were never intended for outsider eyes. </p>
<p>They lack the vague, self-conscious or euphemistic language often found in public proclamations. </p>
<p>Instead, they were working documents. </p>
<p>They served particular functions, such as keeping track of a bank’s funds, maintaining fiscal control over regiments spread across an empire or managing the revenue and expenditure of an emerging colony. </p>
<p>To be effective they had to be accurate, comprehensive, and complete.</p>
<h2>Holding to account</h2>
<p>In the year before his mysterious deposit Sergeant Jeremiah Murphy was sent out by Governor Macquarie “in pursuit of natives”.</p>
<p>It is highly doubtful that Jeremiah Murphy ever anticipated that some 200 years later, a team of researchers and radio producers would pore over his financial dealings to piece together an account of his movements and decisions.</p>
<p>Yet since his time, there has been an enormous expansion in both the legal and regulatory compliance requirements to maintain and preserve internal records, as well as avenues for public scrutiny, media attention and inquiry.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/so-whats-a-secretary-to-do-banking-royal-commission-raises-questions-about-whats-in-minutes-107509">So what's a secretary to do? Banking Royal Commission raises questions about what's in minutes</a>
</strong>
</em>
</p>
<hr>
<p>Bankers, like all of those who work in organisations and colonial institutions, should be mindful of the traces their actions leave behind in mere administrative records. </p>
<p>Sooner or later someone might look at their books.</p>
<p><em><a href="https://historylab.net/s2ep1-the-bank-2/">The Bank, The Sargent and His Bonus</a> is a collaboration between 2SER 107.3, the Australian Centre for Public History and the UTS Business School. It is available for download through the <a href="https://player.whooshkaa.com/episode/?id=307008">Think Business Futures</a> and <a href="https://player.whooshkaa.com/episode/?id=306949">History Lab</a> podcasts.</em></p><img src="https://counter.theconversation.com/content/107809/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicole Sutton 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>
Examination of the first deposit in what became Westpac tells us much about 1817, not all of it pleasant.
Nicole Sutton, Lecturer in Accounting, University of Technology Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/106915
2018-11-14T03:58:20Z
2018-11-14T03:58:20Z
Behind the judgment. Why the Federal Court tore up a $35m settlement between ASIC and Westpac over lending standards
<figure><img src="https://images.theconversation.com/files/245471/original/file-20181114-194497-1kgyan7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Justice Perram has decided that some things are more important than quick settlements.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Very rarely does a judge tear up a multimillion-dollar penalty signed up to by both the regulator and the alleged perpetrator.</p>
<p>Yet that’s what Federal Court judge Nye Perram did on Tuesday, throwing out a A$35 million settlement between Westpac and the the Australian Securities and Investments Commission over its alleged <a href="https://www.smh.com.au/business/banking-and-finance/judge-tears-up-35m-settlement-between-asic-and-westpac-in-home-loan-case-20181113-p50fon.html">failure to properly assess whether borrowers could meet their repayments before signing them up to mortgages</a>.</p>
<h2>Agreed settlements are common</h2>
<p>In commercial litigation, as in most litigation, there is an emphasis on trying to settle matters early before they are heard in court. </p>
<p>In criminal law matters the prosecutions encourage early guilty pleas in exchange for lower penalties. </p>
<p>The Australian Securities and Investments Commission (<a href="https://asic.gov.au/">ASIC</a>) has been increasingly resorting to early settlements as a means of achieving cheaper and quicker outcomes.</p>
<p>The quick win for ASIC is an <a href="http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/asaica2001529/s93aa.html">enforceable undertaking</a> and a media release. The quick win for the other party is avoiding a drawn-out court case and being able to get on with its business.</p>
<h2>Courts usually rubber-stamp them</h2>
<p>Where the alleged breach of the law is serious, necessitating a large penalty, a judge has to formally approve the settlement, in a hearing until now regarded as something of a rubber-stamping exercise.</p>
<p>As the <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">Hayne Royal Commission into the Misconduct in Financial Services</a> has pointed out, the downside of such quick settlements can be that the facts aren’t established in court and the law isn’t tested. </p>
<p>Where they are established and the law is tested, as Justice Yates did earlier this year in <a href="http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2018/2018fca0930">Australian Transaction Reports and Analysis Centre versus Commonwealth Bank of Australia</a> very big penalties can be handed down - A$700 million for more than 50,000 breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/commonwealth-banks-700-million-fine-will-end-up-punishing-its-customers-97918">Commonwealth Bank's $700 million fine will end up punishing its customers</a>
</strong>
</em>
</p>
<hr>
<p>Along with it were landmark judgments that establish the scope of the law and tell firms what to avoid in the future.</p>
<h2>This time the court said no</h2>
<p>On Thursday Justice Perram in the Federal Court <a href="https://www.smh.com.au/business/banking-and-finance/judge-tears-up-35m-settlement-between-asic-and-westpac-in-home-loan-case-20181113-p50fon.html">sought the right to do the same</a>.</p>
<p>He rejected the joint application for settlement between ASIC and Westpac Banking Corporation for a penalty of A$35 million.</p>
<p>The problem, as he pointed out was that it was not clear from the agreed facts what actual contraventions of the <a href="http://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/nccpa2009377/">National Consumer Credit Protection Act 2009</a> Westpac had been accused of. </p>
<p>He asked ASIC and the Westpac to redraft the agreed settlement and return to court by 27 November 2018. </p>
<h2>To establish the law and what happened</h2>
<p>The case matters because the Financial Services Royal Commission has been examining the use of computer programs to determine the ability of borrowers to repay loans.</p>
<p>It is possible that many Westpac loans were approved to customers who would have been found to be unable to meet the repayments had their individual circumstances been examined, and it is possible that is in breach of the law.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/consumers-need-critical-thinking-to-fend-off-banks-bad-behaviour-93489">Consumers need critical thinking to fend off banks' bad behaviour</a>
</strong>
</em>
</p>
<hr>
<p>But without a clear judgment or a clear statement of facts for the court to examine, or a clear judgment from the court, it is impossible to tell.</p>
<p>That’s why Justice Perram said no, to establish what the law requires and what Westpac did.</p><img src="https://counter.theconversation.com/content/106915/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Adams receives funding from Australian research Council, but not in respect of this article. </span></em></p>
Negotiated deals between ASIC and alleged wrongdoers leave us in doubt as to the reach of the law.
Michael Adams, Professor of Corporate Law & Governance, School of Law, Western Sydney University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/88072
2018-08-23T01:55:27Z
2018-08-23T01:55:27Z
Companies keep slashing jobs, but new technologies won’t replace good management
<p>As technology improves, it’s tempting for company executives to <a href="http://www.abc.net.au/news/2018-08-22/telco-wrap-nbn-new-ceo-tpg-vodafone-talks-optus-cuts-jobs/10151410?section=business">slash jobs</a> that are “standard” and “routine”, <a href="https://www.pc.gov.au/research/completed/digital-disruption/digital-disruption-research-paper.pdf">making them easy to automate</a>. But research shows focusing on improving management practices will do more to improve companies’ bottom lines.</p>
<p>In a <a href="https://www.nber.org/papers/w23300">study</a> of 32,000 manufacturing firms, American researchers showed firms using certain management practices had 20% better productivity than firms that neglected to use them. </p>
<p>At the same time, integrating technology into business practices was found to only improve firm productivity by 10%. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-coaching-not-gadgets-is-key-to-getting-the-most-out-of-employees-87769">Why coaching, not gadgets, is key to getting the most out of employees</a>
</strong>
</em>
</p>
<hr>
<p>The firms <a href="https://www.nber.org/papers/w23300">studied</a> varied widely in how much they used structured management practices - targets, performance monitoring and incentives. Targets and monitoring make it clear what <a href="http://www.jstor.org/stable/pdf/977173.pdf">employees need to do and whether they are doing it</a>. The right incentives give them a reason to make the necessary effort.</p>
<p>This suggests organisations such as <a href="http://www.abc.net.au/news/2018-08-22/telco-wrap-nbn-new-ceo-tpg-vodafone-talks-optus-cuts-jobs/10151410?section=business">Optus</a>, <a href="http://www.abc.net.au/news/2017-06-14/telstra-confirms-1400-jobs-axed-in-australia/8617074">Telstra</a>, the <a href="https://www.businessinsider.com.au/the-big-banks-have-cut-4200-jobs-in-12-months-2016-5">big four banks</a>, <a href="https://cpsu-csiro.org.au/2017/09/15/job-cuts-set-to-rock-csiro-minerals-and-data-research/">CSIRO</a> and the <a href="http://about.abc.net.au/our-abc-our-future/">ABC</a>, who have all cut jobs citing the possibility of new technology, may be pursuing the least effective option. </p>
<h2>What’s good management in practice?</h2>
<p>To avoid over-relying on technology while keeping up with change, managers must have the <a href="https://iedunote.com/management-science-art">creativity and persuasiveness of an artist as well as the objectivity of a scientist</a>. </p>
<p>While standard, routine problems can be automated, others require managers to invent a range of options, choose among these alternatives, and then persuade other people to follow that choice. </p>
<p>In “<a href="http://classics.mit.edu/Aristotle/rhetoric.1.i.html">The Art of Rhetoric</a>” Aristotle described the skills necessary:</p>
<ul>
<li><em>ethos</em>: an understanding of human character and goodness. To change a situation, managers need credibility and authenticity</li>
<li> <em>logos</em>: the capacity to reason logically. Managers must put forward a rigorous case for converting a firm’s problems into ideas, then options, then actions</li>
<li> <em>pathos</em>: the ability to understand emotions. To persuade people, especially in large numbers, managers must understand their audience.</li>
</ul>
<p>Managers shedding staff in the interests of organisational survival face a severe test of all three persuasion skills. In terms of <em>ethos</em> (credibility and authenticity), managers need to admit they cannot offer loyalty to employees and so should not expect it. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/mass-layoffs-increase-teen-suicide-rates-30710">Mass layoffs increase teen suicide rates</a>
</strong>
</em>
</p>
<hr>
<p>Rather than <a href="http://www.abc.net.au/news/2018-08-22/telco-wrap-nbn-new-ceo-tpg-vodafone-talks-optus-cuts-jobs/10151410?section=business">shedding jobs in favour of technology</a>, and at a minimum, organisations should offer training to prepare people for the time they will no longer be needed. And, respecting <em>pathos</em> (emotional understanding), treat departing employees with care and respect.</p>
<p>A drop in share price is a sign shareholders lack confidence in the <em>logos</em> (reasoned logic) of an organisation’s strategy. But there are other, more subtle signals an organisation has over-played its digital capabilities. </p>
<p>An example is the reputational damage to organisations that use cybervetting - seeking information about job applicants from social media and search engines. <a href="http://onlinelibrary.wiley.com/doi/10.1002/9781118955567.wbieoc054/full">Studies of cybervetting</a> show some employers use technology to better their business at potentially the expense of good management. </p>
<p>Employers see cybervetting as a digital extension of background checking that increases organisational efficiency. Some even see it as the beginning of an employment relationship. But applicants disagree with this logic, perceiving the practice as unfair. </p>
<p>Cybervetting reduces applicants’ trust and identification with the organisation because they perceive it as lacking <em>ethos</em> (credibility and autheniticity). Its reputation is damaged in their eyes so they are less likely to accept a job offer.</p>
<h2>Framing a solution</h2>
<p>Applying technology to organisational processes is part of working smarter, not harder. Careful management is the other part. But as organisations’ technological capacities grow, managers need to ask themselves what is possible and desirable when using technology. </p>
<p><em>Logos</em> (reasoned logic) and <em>ethos</em> (credibility and authenticity) will be useful as they do this. Then, using <em>pathos</em> (emotional understanding), they must try to understand how others are likely to frame their answers to similar questions. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-the-end-of-auto-manufacturing-wont-be-as-apocalyptic-as-previous-mass-layoffs-85521">Why the end of auto manufacturing won't be as apocalyptic as previous mass layoffs</a>
</strong>
</em>
</p>
<hr>
<p>Applicants, unlike employers, don’t see cybervetting as a more efficient replacement for personal interaction during the early stages of an employment relationship. To use <a href="https://books.google.com.au/books?id=nz1RT-xskeoC&printsec=frontcover&dq=karl+e+weick&hl=en&sa=X&ved=0ahUKEwjHy7OH4Y3YAhUOObwKHRdSAaQQ6AEIKTAA#v=onepage&q=karl%20e%20weick&f=false">Karl Weick’s term</a>, job applicants and employers <a href="https://pdfs.semanticscholar.org/c5ef/1af1d6b68ed0d97b7aa19de748550a379fa7.pdf">make sense</a> of the same situation differently. </p>
<p><a href="http://classics.mit.edu/Aristotle/rhetoric.1.i.html">Aristotle’s ancient typology of management skills</a> promises to remain useful as digital solutions - and dilemmas - increase.</p><img src="https://counter.theconversation.com/content/88072/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mary Barrett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Management trumps technology in making companies productive, but that doesn’t mean firms can be complacent when it comes to keeping up with change.
Mary Barrett, Professor of Management, University of Wollongong
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/95772
2018-05-01T00:57:41Z
2018-05-01T00:57:41Z
APRA 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>
<hr>
<p>
<em>
<strong>
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>
</strong>
</em>
</p>
<hr>
<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>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australias-financial-regulators-need-policing-91396">Australia's financial regulators need policing</a>
</strong>
</em>
</p>
<hr>
<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 Australia
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/88156
2018-02-18T19:15:17Z
2018-02-18T19:15:17Z
FactCheck: do bank profits ‘belong to everyday Australians’?
<figure><img src="https://images.theconversation.com/files/196422/original/file-20171127-14028-1qzwq26.png?ixlib=rb-1.1.0&rect=3%2C0%2C1130%2C649&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bank branch employees featured in the Australian Bankers' Association national advertising campaign.</span> </figcaption></figure><blockquote>
<p>A lot of people don’t know that nearly 80% of all Australian bank profits go straight back to shareholders and the majority of those shareholders are everyday Australians who own bank shares through their super funds.</p>
<p><strong>– Excerpt from the Australian Bankers’ Association ‘<a href="https://www.banksbelongtoyou.com.au/">Australian Banks Belong To You’ campaign</a>, November 2017 – February 2018</strong></p>
</blockquote>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/0sCrQIatA0M?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Advertisement from the Australian Bankers’ Association, November 19, 2017.</span></figcaption>
</figure>
<p>Following <a href="https://theconversation.com/grattan-on-friday-nationals-force-reluctant-turnbull-to-dress-in-shortens-banking-clothes-88422">mounting pressure</a> from Labor and some National Party MPs, the Turnbull government in December <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">established</a> a Royal Commission into misconduct in the banking, superannuation and financial services industry. Public hearings are now underway.</p>
<p>At the same time, the Australian Bankers’ Association (ABA) has been running a national advertising campaign in which bank branch staff talk about who benefits from bank profits.</p>
<p>The advertisements – broadcast on national television, published in newspapers, shared on social media and displayed on ATMs – state that “nearly 80% of all bank profits go straight back to shareholders and the majority of those shareholders are everyday Australians who own bank shares through their super funds”.</p>
<p>The ABA says bank profits “don’t belong to the banks, they belong to everyday Australians like you”.</p>
<p>Is that right?</p>
<h2>Checking the source</h2>
<p>The Conversation contacted the Australian Bankers’ Association requesting sources and comment, but did not receive a response. </p>
<p>On the “Australian Banks Belong To You” <a href="https://www.banksbelongtoyou.com.au/">campaign website</a>, the association cites these references:</p>
<blockquote>
<p>The “nearly 80%” figure refers to the dividend payout ratio of the 8 key Australian retail banks averaged over 2016 and 2017. The data are sourced from bank annual reports. The dividend payout ratio is calculated as the sum of the dividends paid divided by the sum of cash earnings.</p>
<p>According to the ATO more than 14.8 million Australians have at least one superannuation fund account (around 40% have more than one). It’s safe to say that many super funds invest in Australian bank shares as part of their portfolio.</p>
<p>This means that millions of Australians own bank shares.</p>
</blockquote>
<h2>Verdict</h2>
<p>The Australian Bankers’ Association claimed that “nearly 80% of <em>all</em> Australian bank profits go straight back to shareholders”. While we can’t say whether that’s correct for <em>all</em> Australian banks, the statement is broadly correct for Australia’s eight largest retail ABA member banks over the last five years.</p>
<p>The association’s claim that “the <em>majority</em> of those shareholders are everyday Australians who own bank shares through their super funds” is reasonable.</p>
<p>But if you read those statements together as meaning 80% of profits go to <em>Australian</em> shareholders, that would be incorrect. That’s because a proportion of dividend payouts go to non-resident shareholders.</p>
<p>For example, if a dividend was paid on 31 December 2017 by Australia’s ‘Big Four’ banks, non-resident investors would have received between 21.21% and 26.5% of any dividends declared – meaning Australian investors would have received closer to 60% of profits.</p>
<hr>
<h2>Do ‘nearly 80% of bank profits go straight back to shareholders’?</h2>
<p>The Australian Bankers’ Association (ABA) is an advocacy group representing the interests of the Australian banking industry. The ABA has <a href="https://www.bankers.asn.au/about-us/members/">24 member banks</a>, but the claim about what percentage of profits are paid to shareholders doesn’t cover all of its 24 members.</p>
<p>On the “Australian Banks Belong To You” <a href="https://www.banksbelongtoyou.com.au/">campaign website</a>, the ABA said it based its “nearly 80%” claim on “the dividend payout ratio of the eight key Australian retail banks averaged over 2016 and 2017”, with the numbers sourced from bank annual reports.</p>
<p>Dividends are cash payments that listed companies make to their shareholders. The cash payments are often made regularly. The “dividend payout ratio” is the sum of the dividends paid to shareholders in a year, divided by the sum of the cash earnings the company made.</p>
<p>In other words, the dividend payout ratio is the portion of corporate profits that are paid directly back to shareholders. Companies retain the rest of profits, usually to finance future growth.</p>
<p>While the ABA didn’t name the banks it based its claim on, the eight largest retail banks in the ABA are the Commonwealth Bank, National Australia Bank, ANZ, Westpac, Bank of Queensland, Bendigo Bank, Suncorp and Macquarie Bank.</p>
<p>If we look at dividend payout ratios for those eight banks since 2013, we can see that the overall average payout has consistently hovered around 80% for the past five years. </p>
<p>The same is true of the average payout of the ‘Big Four’ Australian banks – Commonwealth Bank, Westpac, ANZ and National Australia Bank.</p>
<iframe src="https://datawrapper.dwcdn.net/s19mS/3/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<p>In 2012, an outlying dividend payout caused the average dividend payout to appear abnormally high. In the preceding five-year period from 2007 to 2011 payout ratios were lower, as you can see in the chart below. </p>
<iframe src="https://datawrapper.dwcdn.net/ZLkDS/1/" scrolling="no" frameborder="0" allowtransparency="true" width="100%" height="400"></iframe>
<h2>Do profits ‘belong to everyday Australians’?</h2>
<p>The ABA claimed that of those bank profit distributions, the “majority” go to Australians, including “millions of everyday Australians who own bank shares through their super funds”.</p>
<p>The ABA did not define what it meant by “everyday Australians”. In justifying its claim, the ABA correctly cited Australian Tax Office data that shows that as of June 30, 2016, <a href="https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/Super-accounts-data/Super-accounts-data-overview/">more than 14.8 million</a> Australians had at least one superannuation fund account. </p>
<p>On its website, the ABA stated it’s “safe to say that many super funds invest in Australian bank shares as part of their portfolio”. </p>
<p>Superannuation funds do typically hold a balanced portfolio that represents the major members of the Australian Stock Exchange (ASX). A typical superannuation portfolio might invest in bonds, and in a portfolio of the largest 200 stocks on the ASX, which would include the major banks. This can be subject to individuals’ investment preferences.</p>
<p>For example, say the fund invests in the largest 200 companies on the ASX, and invests in proportion to the companies’ size (that is – the largest companies get the largest investment). Then, the big four banks would be <a href="https://au.spindices.com/indices/equity/sp-asx-200">four of the five</a> largest investments.</p>
<p>Obviously, not all superannuation accounts invest in bank stocks, and portfolios can be structured in different ways. For example, some superannuation funds allow their members to invest only in bonds, and people with self managed superannuation funds choose their own investments. </p>
<p>Some wealthy shareholders, and overseas shareholders, also benefit from holding Australian bank shares. As with all companies, shareholders benefit in proportion to their shareholding. Listed banks have no say over whether wealthy Australians, or overseas buyers, purchase their shares.</p>
<p>But it is fair to say that “millions of everyday Australians who own bank shares through their super funds” benefit from dividend payouts. <strong>– Mark Humpherey-Jenner</strong></p>
<h2>Blind review</h2>
<p>The Australian Banking Association claimed that nearly 80% of all Australian bank profits go back to shareholders, and that the majority of those shareholders are everyday Australians who own bank shares through their super funds. </p>
<p>Those claims are valid when read independently, as set out above. But they should not be read together as indicating that nearly 80% of profits go to Australian shareholders.</p>
<p>The proportion of dividends that go back to Australians, either directly or through their investment portfolios, would be less than 80% of bank profits. </p>
<p>Reviewing the investor profiles of <a href="http://shareholder.anz.com/share-registry-profile">ANZ</a>, <a href="https://www.commbank.com.au/about-us/shareholders/shareholder-information/investor-breakdown-by-type-domicile.html">CBA</a>, <a href="https://www.nab.com.au/about-us/shareholder-centre/Share-register-profile">NAB</a> and <a href="https://www.westpac.com.au/about-westpac/investor-centre/westpac-share-information/share-registry-profile/">Westpac</a> shows that on December 31, 2017, Australian investment ranged from 73.5% to 78.79% across the big four banks, and institutional investment, which includes superannuation funds and other financial institutions, represented slightly under half of investors.</p>
<p>The high representation of domestic institutional holdings demonstrates the significance of bank shares in most investment portfolios, including superannuation funds.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=184&fit=crop&dpr=1 600w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=184&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=184&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=231&fit=crop&dpr=1 754w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=231&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/206110/original/file-20180213-44654-1p7azde.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=231&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Foreign ownership of Australian banks. NAB presents the data in a different way to the other banks.</span>
<span class="attribution"><span class="source">Author provided based on reports from ANZ, CBA, NAB, Westpac</span></span>
</figcaption>
</figure>
<p>So if a dividend had been paid on 31 December 2017 for Australia’s ‘Big Four’ banks, non-resident investors would have received between 21.21% and 26.5% of that dividend declared, meaning Australian investors would have received closer to 60% of profits. <strong>– Helen Hodgson</strong></p>
<hr>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
</figcaption>
</figure>
<p><em>The Conversation’s FactCheck unit is the first fact-checking team in Australia and one of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/88156/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner has investments in superannuation funds that hold a diversified portfolio of stocks, which includes banks.</span></em></p><p class="fine-print"><em><span>Helen Hodgson has investments in superannuation funds that have a diversified portfolio of shares, including banks. Helen Hodgson receives funding from AHURI and the ARC. Helen is a member of the Social Policy Committee and a Director of the National Foundation for Australian Women, and is on the Tax and Superannuation Advisory Panel of ACOSS. Helen was a Member of the WA Legislative Council in WA from 1997 to 2001, elected as an Australian Democrat. She is not a current member of any political party. </span></em></p>
The Australian Banking Association says ‘nearly 80% of bank profits go straight back to shareholders’, the majority of whom are ‘everyday Australians’. Is that right?
Mark Humphery-Jenner, Associate Professor of Finance, UNSW Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/88391
2017-11-30T19:06:55Z
2017-11-30T19:06:55Z
Broad 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/88387
2017-11-30T05:17:27Z
2017-11-30T05:17:27Z
Why the big four asked for a parliamentary inquiry into banking
<p>The major Australian banks are following familiar public relations tactics in <a href="http://www.asx.com.au/asxpdf/20171130/pdf/43pr4y07l7v0v6.pdf">requesting</a> a parliamentary commission of inquiry into banking and financial services. </p>
<p>When the public mood is against an industry, it will try to win the public over, while getting the politicians to ignore the public mood. If that fails, the industry gradually concedes ground until attention goes elsewhere.</p>
<p>For this reason, the banks went from being steadfastly against a commission, to offering the option of self-regulation, to proposing a new “<a href="http://www.smh.com.au/federal-politics/political-news/are-we-getting-a-royal-commission-a-commission-of-inquiry-or-a-banking-tribunal-20171127-gztf1u.html">banking tribunal</a>”, to eventually conceding, after the battle had <a href="http://www.abc.net.au/news/2017-11-30/analysis-malcolm-turnbull-hates-the-inquiry-but-it-had-to-happen/9210246">already been lost</a>, to a parliamentary inquiry.</p>
<p>The big problem for the banks, and a big part of the reason that their previous lobbying failed, is that their popularity with the Australian public <a href="https://www.theguardian.com/australia-news/2017/nov/27/most-australians-want-banking-royal-commission-guardian-essential-poll">is very low</a>. This allowed, or pressured, politicians to call for the commission, and presents significant problems for the banks going forward, especially if they wish to avoid tougher regulation. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/royal-commissions-how-do-they-work-10668">Royal commissions: how do they work?</a>
</strong>
</em>
</p>
<hr>
<p>The banks capitulated only once it became “<a href="http://www.theage.com.au/federal-politics/political-news/banking-inquiry-all-but-inevitable-after-another-nationals-mp-vows-to-cross-floor-20171127-gztm8l.html">all but inevitable</a>” that an inquiry of some sort would be held. </p>
<p>Due to the recent <a href="https://theconversation.com/the-dual-citizenship-saga-shows-our-constitution-must-be-changed-and-now-87330">citizenship saga</a>, it was <a href="https://theconversation.com/turnbull-backed-against-the-wall-by-rebel-nationals-on-bank-inquiry-88183">looking likely</a> that a coalition of crossbench, Labor, Greens and some Nationals MPs would pass a bill for a commission of inquiry into the banks and other financial institutions.</p>
<p>Labor had <a href="https://theconversation.com/labor-pledges-royal-commission-into-bank-behaviour-57490">already promised</a> to set up a royal commission into the banking and financial services industry if it won the next election. </p>
<h2>Concede ground only when it’s already lost</h2>
<p>A royal commission will almost certainly bring many <a href="https://theconversation.com/banking-royal-commission-will-expose-the-real-cost-of-bad-behaviour-88380">months of bad press for the banks</a>.</p>
<p>As the industry has repeatedly made clear, it never wanted a royal commission. The banks claimed they had corrected the mistakes of the past and that a commission was “<a href="http://www.asx.com.au/asxpdf/20171130/pdf/43pr4y07l7v0v6.pdf">unwarranted</a>”.</p>
<p>So the banking industry’s public and private lobbying efforts were geared towards convincing politicians to resist calls for the commission, while trying to boost public opinion by <a href="https://www.youtube.com/watch?v=_rtRi2b1Pxg&list=PLE017CFFB36B6CA94">highlighting</a> their corporate social responsibility. </p>
<p>This involved <a href="http://www.abc.net.au/news/2017-08-14/commonwealth-bank-ceo-ian-narev-to-retire-by-july/8803302">sacking executives</a> over this scandal or that, <a href="https://theconversation.com/atm-fees-may-be-gone-but-what-will-replace-them-84594">removing</a> certain ATM fees, and <a href="http://www.abc.net.au/news/2017-08-08/commonwealth-bank-to-cut-executive-bonuses-director-fees/8784030">cutting</a> bonuses and director pay.</p>
<p>The banks have also launched advertising campaigns, <a href="https://www.youtube.com/watch?v=GOMtRAPiJfI">such as one</a> highlighting that many Australians own bank shares through their superannuation. </p>
<p>Concurrently, the banks hoped that <a href="http://www.smh.com.au/federal-politics/political-news/it-would-cost-them-seats-banks-refuse-to-rule-out-mining-taxstyle-campaign-against-royal-commission-20160412-go4ay8.html">threatening</a> to launch a “mining tax”-style ad campaign might scare politicians away from calling for a commission. </p>
<p>These campaigns have become <a href="http://www.abc.net.au/radionational/programs/breakfast/farmers-and-small-business-threaten-mining-tax/8751512">a common threat</a> since the success of the <a href="https://www.youtube.com/watch?v=AounsLUEpc8">2010 mining tax campaign</a> opened corporate Australia’s eyes to the potential effectiveness of advocacy ads.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/banking-royal-commission-will-expose-the-real-cost-of-bad-behaviour-88380">Banking royal commission will expose the real cost of bad behaviour</a>
</strong>
</em>
</p>
<hr>
<p>Tactics similar to those the banks are employing now have been <a href="https://theconversation.com/how-big-tobacco-gifted-campaigns-of-misdirection-and-misinformation-to-the-gun-lobby-45108">used to varying degrees</a> of success in the United States by the tobacco industry and the gun, finance and healthcare lobbies. </p>
<p>In 1998 the American tobacco industry <a href="http://tobaccocontrol.bmj.com/content/8/4/437.full">agreed</a> to make payments of over US$200 billion to dozens of states. But this happened only after decades of public education and campaigning against smoking. </p>
<p>Similarly, the American healthcare lobby successfully fought off several <a href="https://www.ncbi.nlm.nih.gov/pubmed/7989016">attempts</a> to reform healthcare. Obamacare managed to pass in 2010 only after the industry got to <a href="http://www.nytimes.com/2013/09/18/us/politics/reaping-profit-after-assisting-on-health-law.html">substantively write it</a>.</p>
<h2>The public relations game</h2>
<p>Appearing to co-operate and atone is the best way to try to influence the terms of an inquiry. It also helps to mitigate the worst of any bad press to come. This reflects a wider, pragmatic strategy of lobbying and public relations employed by the banks and other industries.</p>
<p>The focus for the banks will now shift towards damage control, along with heavy promotion of the banks “doing the right thing” by Australia. </p>
<p>To that end, expect to see even more banners proclaiming a bank’s sponsorship of the local footy team, and ads promoting the good work done in your local community. </p>
<p>These, along with an insistence that the commission is a witch hunt, that its findings are “old news”, that the banks have already taken steps to deal with the issue, will underpin the industry’s public relations battle while the royal commission takes place.</p><img src="https://counter.theconversation.com/content/88387/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>George Rennie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Appearing to co-operate is the best way to try to influence the terms of an inquiry and manage the bad press.
George Rennie, Lecturer in American Politics and Lobbying Strategies, The University of Melbourne
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/86518
2017-11-08T02:32:24Z
2017-11-08T02:32:24Z
It’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 University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/86303
2017-10-26T04:00:18Z
2017-10-26T04:00:18Z
Did Westpac just mansplain gender diversity to its competitors?
<p>Australian banking giant Westpac proudly announced a milestone in its gender equality strategy this week, with half of its 6,000 management positions now filled by women. This marks the realisation of <a href="https://womensagenda.com.au/latest/westpac-announces-women-hold-50-of-leadership-positions/">a target set in 2014</a> by then CEO Gail Kelly. </p>
<p>Current CEO Brian Hartzer <a href="https://womensagenda.com.au/latest/westpac-announces-women-hold-50-of-leadership-positions/">was effusive</a>, claiming this was a historic moment not just for Westpac, but for Australia. This is a “signpost that our nation is making progress […] for unlocking the potential of women”, he proclaimed. </p>
<h2>Gender gerrymandering?</h2>
<p><a href="http://www.afr.com/brand/rear-window/westpacs-bogus-gender-equality-methodology-20171024-gz78hp">Questions have been raised</a> over whether the 50% women leaders is a bona fide achievement or a PR stunt. Although Westpac is publicly touting its gender parity, its reports to the Commonwealth’s Workplace Gender Equality Agency state that female gender representation in management has been steady (between 36.6 and 38.6%) since 2012. </p>
<p>In the <a href="https://www.wgea.gov.au/sites/default/files/public_reports/tempPublicReport_45e7vphom3.pdf">most recent report</a>, that number falls below 30% if only executives and above are included. Let’s be clear, while these statistics confirm entrenched inequality, they are actually at best-practice levels, and reflect the bank’s concerted efforts in diversity management. </p>
<p>But still, the bank’s public posturing belies how much more work really needs to be done before gender equality at work becomes ingrained in Australian business values on its own terms.</p>
<p>Westpac’s claim of 50% is calculated using an in-house approach which, according to <a href="http://www.afr.com/brand/rear-window/westpacs-bogus-gender-equality-methodology-20171024-gz78hp">one report</a>, has significantly overstated the improvements. This would mean that Westpac’s equality target was not achieved by having more women in senior positions, but by re-classifying the positions it identified as “management”.</p>
<h2>The business case for equality</h2>
<p>According to the <a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/Inclusion%20and%20Diversity/DeloitteAccessEconomics_WestpacDiversityDividendReport.pdf">Diversity Dividend Report</a> produced by Deloitte for Westpac, pursuing gender equity in leadership is worthwhile because there is an incontrovertible “association between gender diversity in senior leaderships and firm financial performance in Australia”.</p>
<p><a href="https://www.westpac.com.au/news/making-news/2017/10/female-leadership-parity-a-two-pc-return-payback/">Westpac claim that</a> increasing women in leadership roles to parity with men can boost corporate profitability by more than 2 percentage points “on the back of improved teamwork, culture and engagement with stakeholders”.</p>
<p>This type of unashamedly self-interested business case argument has <a href="http://journals.sagepub.com/doi/abs/10.1177/1350508409350344">come under significant scrutiny</a> by diversity researchers for decades. <a href="http://journals.sagepub.com/doi/abs/10.1177/0018726711413620">Research shows</a> that the rationale that businesses use to justify diversity programs is almost always based on the business benefits it will deliver. </p>
<p>The danger this brings is that a <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1468-2370.2012.00336.x/full">politics of change and a feminist social justice agenda is stripped out of equality</a> and replaced with corporate friendly strategic plans and key performance indicator (KPI) reports. </p>
<p>This is not without controversy. <a href="http://journals.sagepub.com/doi/abs/10.1177/1350508409350237">Researchers have questioned</a> whether equality should be pursued for the commercial returns that it promises, for the benefit of particular women, or because it is a central part of social justice.</p>
<h2>Diversity and corporate ‘greatness’</h2>
<p>When the business case is used it has even been shown that nominally ethical practices like gender diversity can be less about a genuine concern with justice, and more about a manipulative and narcissistic urge to look good.</p>
<p><a href="http://onlinelibrary.wiley.com/doi/10.1111/ijmr.12142/full">In our own work</a> we have surmised that the publicity surrounding corporate ethical initiatives often reduces them to being little more than the pursuit of an aura of corporate greatness – itself belonging to a long standing masculine tradition of competitive self-aggrandisement.</p>
<p>This may well be the case at Westpac, given that reaching the 50-50 target coincided with an extensive marketing campaign including <a href="http://www.afr.com/news/special-reports/women-in-leadership/committed-leadership-required-to-reach-gender-parity-20171022-gz63s6">sponsored news stories</a> and funding a <a href="http://www.vogue.com.au/vogue+codes/news/westpac+marks+gender+equality+milestone+with+an+exhibition+in+celebration+of+women,44681">free exhibition at the Sydney Opera House</a> entitled “200 Women: The Listening Ground”. </p>
<p>While this might achieve the goal of sharing the stories of real women, it also places Westpac at the centre of gender equality debates in Australia, enabling it to further leverage diversity for commercial purposes.</p>
<h2>Competing for diversity</h2>
<p>When <a href="https://www.westpac.com.au/about-westpac/inclusion-and-diversity/Inclusion-means-everyone-matters/gender-equality/">Westpac promotes its diversity credentials</a> it does so in competitive terms, saying how much better it is than its business rivals. Here ethical and political demands for equality are reduced to yet another form of market competition.</p>
<p>This kind of rational and self-interested competitive behaviour is no way to make real changes to the <a href="http://journals.sagepub.com/doi/abs/10.1177/1350508416668367">masculine cultures and structures that drive corporations</a> – characteristics of the very workplace environments that so many women turn their backs on. </p>
<p>To reach equality on women’s terms rather than its own, Westpac should foster institutional practices that support the diversity of women, rather than competitive diversity.</p>
<p>Equality is a political imperative, not a corporate one. While organisations like Westpac have in many ways led the way in putting diversity on the business Australia’s business agenda, we should not forget that equality is a basic right that continues to be denied to women. It is worth fighting for, irrespective of the bottom line and the business case.</p><img src="https://counter.theconversation.com/content/86303/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Westpac’s focus on the bottom line benefits of gender diversity overlook the fact that equality is a political imperative, not a corporate one.
Alison Pullen, Professor of Management and Organization Studies, Macquarie University
Carl Rhodes, Professor of Organization Studies, University of Technology Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/85591
2017-10-12T19:12:49Z
2017-10-12T19:12:49Z
Vital Signs: the spooky mortgage risk signs our bankers are ignoring
<figure><img src="https://images.theconversation.com/files/189912/original/file-20171012-9782-l9frs1.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There are signs our frothy housing market, combined with rising interest rates, could have serious consequences for our economy.</span> <span class="attribution"><span class="source">Nick Vidal-Hall/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p><em>Vital Signs is a weekly economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.</em></p>
<p><em>This week: the big banks front a parliamentary review but remain blinkered on the risks of the many interest-only loans they’ve funded.</em></p>
<hr>
<p>I’m not normally a fan of parliament hauling private sector executives before them and asking thorny questions. But when the Australian House of Representatives did so <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2Faf124b58-f8c9-4d0f-81ef-23504fcea693%2F0002%22">this week with the big banks</a> it was both useful and instructive.</p>
<p>And, to be perfectly frank, terrifying.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/four-ways-an-australian-housing-bubble-could-burst-76505">Four ways an Australian housing bubble could burst</a>
</strong>
</em>
</p>
<hr>
<p>Let’s start with Westpac CEO Brian Hartzer. First, he confirmed the little-known but startling fact that <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;db=COMMITTEES;id=committees%2Fcommrep%2Faf124b58-f8c9-4d0f-81ef-23504fcea693%2F0001;query=Id%3A%22committees%2Fcommrep%2Faf124b58-f8c9-4d0f-81ef-23504fcea693%2F0002%22">half</a> of his A$400 billion home loan book consists of interest-only mortgages.</p>
<p>Yep, half. Of A$400 billion. At one bank. Oh, and ANZ, CBA and NAB are all nearly at 40% interest-only.</p>
<p>Hartzer went on to make the banal statement: “we don’t lend to people who can’t pay it back. It doesn’t make sense for us to do so.”</p>
<p>So did it make sense for all those American mortgage lenders to lend to people on adjustable rates, teaser rates, low-doc loans, no-doc loans etc. before the global financial crisis?</p>
<p>Of course not. The point is that banks are not some benevolent, unitary actor taking care of their own money. There are top managers like Harzter acting on behalf of shareholders. Those top managers delegate authority to lower-level managers, who are given incentives to write lots of mortgages. And, as we know, the incentives of those who make the loans are not necessarily aligned with those of the shareholders. Those folks may well want to make loans to people who can’t pay them back as long as they get a big payday in the short term.</p>
<p>ANZ CEO Shayne Elliot repeated Hartzer’s mantra, saying: “It’s not in our interest to lend money to people who can’t afford to repay.” Recall, this is the man who <a href="http://www.abc.net.au/4corners/betting-on-the-house/8816724">on ABC’s Four Corners</a> said that home loans weren’t risky because they were all uncorrelated risks (the chances that one loan defaults does not affect the chances of others defaulting). That is a comment that is either staggeringly stupid or completely disingenuous.</p>
<p>Messers Harzter and Elliot must take us all for suckers. They have made a huge amount of interest-only loans, at historically low interest rates, to buyers in a frothy housing market, who spend a large chunk of their income on interest payments. This certainly looks troubling. It may not be US sub-prime, but it could be ugly. Very ugly.</p>
<p>To put it in context, there appears to be in the neighbourhood of A$1 trillion of interest-only loans on the books of Australian banks. I say “appears to be” because reporting requirements are so lax it’s hard to know for sure, except when CEOs cough up the ball, like this week.</p>
<p>The big lesson of the US mortgage meltdown is that the risks on these mortgages are all correlated. If a few people aren’t paying back an interest-only loan, that is a fair predictor that others won’t pay back their loans either. Yet it seems Australian banks are a decade behind the learning curve.</p>
<p>The Reserve Bank cautions that <a href="https://www.rba.gov.au/publications/fsr/2017/apr/pdf/financial-stability-review-2017-04.pdf">one-third of borrowers</a> don’t have a month’s repayment buffer. And where are interest rates going to go from here? Up. It is just a question of when. And when that does happen - or when the interest-only period on loans (typically five years) rolls off and principal payments start having to be made - watch out.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/banks-shouldnt-underestimate-the-risk-of-concentration-in-the-housing-market-82886">Banks shouldn't underestimate the risk of concentration in the housing market</a>
</strong>
</em>
</p>
<hr>
<p>We should all remember that the proximate cause of the US mortgage meltdown was borrowers with five-year adjustable-rate mortgages (ARMs) that had huge step-ups in repayments and needed to be refinanced to be serviceable. When the market couldn’t bear that refinancing, defaults went up. Then the collapse of US investment bank Bear Stearns, then <a href="http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp">Lehman</a>, then Armageddon.</p>
<p>Australia’s large proportion of five-year interest-only loans – turbocharged by an out-of-control negative-gearing regime – looks spookily similar.</p>
<p>It’s one thing for borrowers to do silly things. When it becomes dangerous is when lenders not only facilitate that stupidity, but encourage it. That seems to be what has happened in Australia.</p>
<p>And APRA’s “crackdown” and the Reserve Bank’s warning may be far too little, way too late.</p>
<p>We might stumble though this. I hope we do. But if so, it will be because of dumb luck, not good institutional and regulatory design. And definitely not because of good corporate governance.</p>
<p>Whatever happens, we should learn those lessons.</p><img src="https://counter.theconversation.com/content/85591/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an ARC Future Fellow.</span></em></p>
Fully half of Westpac’s loan book consists of interest-only loans, so why are the banks not more concerned about what could happen next?
Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/77475
2017-05-10T06:30:27Z
2017-05-10T06:30:27Z
Budget bank levy: too big to fail, not too big to take a hit
<p>The budget announcement of a 0.06% levy on a subset of bank liabilities looks arbitrary, and is certainly politically opportunistic. But it could be rationalised as a response, albeit probably not the best response, to offset a number of distortions in Australia’s banking market. </p>
<p>The levy will certainly have consequences for bank pricing, forms of funding and competition – and will interact in complex ways with other prudential regulatory changes in the pipeline. </p>
<p>The levy will affect the four major banks and Macquarie. It will apply to liabilities other than deposits protected by the Financial Claims Scheme (ie. under A$250,000) and additional Tier 1 capital instruments. </p>
<p>As a ballpark estimate, it will apply to around 50% of a bank’s total funding. This will raise the overall cost of funding for the affected banks by around 0.03%.</p>
<p>The large banks are perceived to receive a competitive benefit (lower borrowing costs) from an implicit government guarantee associated with being <a href="https://theconversation.com/au/topics/too-big-to-fail-3747">“too big to fail”</a>. On this basis, the levy could be seen as a charge for that benefit. </p>
<p>As it is in Europe, Australia could establish a “resolution fund” to enable the Australian Prudential Regulation Authority (APRA) to facilitate a smooth exit (i.e. by merger) of a failing bank. Although the government is going to set this levy aside for budget repair, rather than being set up in another separate fund, it could be argued that it strengthens the government to support APRA in regulating the banks. </p>
<p>The nature of the regulatory system (such as capital adequacy requirements) creates a competitive imbalance favouring the big four banks. The <a href="https://theconversation.com/apra-fiddles-on-bank-risk-while-rome-burns-72976">imposition of higher minimum capital requirements</a> for mortgage loans by banks (five banks were actually subject to this levy) was only a partial response to this imbalance.</p>
<p>It’s often argued Australian banks have relied too much on funding other than “core/stable” deposits and capital, with potential consequences for safety and systemic stability. Indeed, the large banks have funded their increased share of home mortgage lending since the global financial crisis to a significant degree from wholesale borrowings.</p>
<p>However, there are better ways of dealing with these perceived distortions than the government’s quick, politically opportunistic, measure. And, together with other bank accountability measures introduced in the budget, it may neutralise whatever support exists for a banking royal commission.</p>
<p>The levy is likely to have significant effects on financial markets and consumers of financial services. The levy will flow through the banks’ funds transfer pricing systems to affect loan pricing. </p>
<p>In this regard it is somewhat silly to suggest simultaneously that the big banks shouldn’t increase loan interest rates, as the treasurer has, but that the measure will improve the competitive position of smaller banks. The latter will happen only if the large banks do respond in that way!</p>
<p>The large banks will have incentives to fund loans differently. In particular, by originating and then securitising loans (pooling various types of contractual debt, to get them off-balance sheet and funded by the capital market) they will avoid the levy on that part of their activities.</p>
<p>However, that benefit won’t apply if they use “covered bond” securitisation. This is when a bank issues debt securities collateralised against a pool of assets, giving the investor a claim against both those assets and the bank in general. The levy is thus likely to give a kick to traditional securitisation over on-balance-sheet lending, but stymie the growth of covered bond funding.</p>
<p>The levy will also affect the structure of bank deposit interest rates. Because retail deposits are exempt from the levy, the large banks can be expected to bid for these deposits – pushing up the interest rates offered relative to the cost of borrowing in wholesale and large deposit markets. </p>
<p>That’s going to compound the already apparent effect on relative interest rates due to recent and forthcoming liquidity regulations that APRA is applying. But it will worsen the relative returns that superannuation funds can get on (their large) bank deposits and possibly induce them to look to invest more in securitised products. </p>
<p>It’s worth noting that the budget involves changes that will increase competition for retail deposits. One example is the measure allowing individuals to make limited, tax-advantaged contributions to superannuation which can be subsequently withdrawn for a house deposit.</p>
<p>A further likely effect is to encourage banks to make more use of equity capital and additional Tier 1 (AT1) capital funding (that preferences share structures listed on the ASX and held by many retail investors), relative to Tier 2 capital funding (provided by the wholesale and institutional markets), or other wholesale funding. While more capital funding is still required to meet the “unquestionably strong” criteria proposed <a href="http://fsi.gov.au/">by the Murray inquiry</a>, and accepted by the government, it’s far from clear that increased reliance on the complex AT1 is desirable. </p>
<p>The revenue to be raised is large in absolute dollar amount – but is relatively small as a percentage of current bank profits (in the order of 4-5%).</p>
<p>It could be expected that the banks will pass on some part of the levy to customers, or avoid it by shifting to other forms of funding that do not incur the levy, such that the short-run direct impact on after-tax profits and shareholders is somewhat less than that 4-5% figure. </p>
<p>But the big unknown is how the change, in conjunction with a plethora of other ongoing regulatory changes affecting the financial sector, affects the competitive balance between the big banks, smaller bank competitors and capital markets and their prospects in the long run. </p>
<hr>
<p><em>This piece was co-published with <a href="https://pursuit.unimelb.edu.au/live/budget2017-fairness-security-and-opportunity">Pursuit</a>.</em></p><img src="https://counter.theconversation.com/content/77475/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
The new levy on banks from the budget is a small hit to their profit but it could have unintended consequences.
Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies
Licensed as Creative Commons – attribution, no derivatives.