tag:theconversation.com,2011:/au/topics/apra-3755/articlesAPRA – The Conversation2023-11-07T19:35:03Ztag:theconversation.com,2011:article/2140632023-11-07T19:35:03Z2023-11-07T19:35:03ZMaking money green: Australia takes its first steps towards a net zero finance strategy<p>Just north of Jamestown in South Australia, 70 kilometres east of the Spencer Gulf and next to a wind farm of nearly 100 turbines, stands the world’s <a href="https://www.cefc.com.au/where-we-invest/case-studies/sa-big-battery-a-game-changer/">first big battery</a>. </p>
<p>Built in partnership with <a href="https://www.tesla.com/videos/powerpack-hornsdale">Tesla</a> and financed and operated by <a href="https://www.energy-storage.news/upgrade-at-tesla-battery-project-demonstrates-feasibility-of-once-in-a-century-energy-transformation-for-australia/">Neoen</a>, a French multinational renewable energy developer, the <a href="https://en.wikipedia.org/wiki/Hornsdale_Power_Reserve">Hornsdale Power Reserve</a> and other big battery projects could stimulate a homegrown battery industry, contributing many <a href="https://fbicrc.com.au/wp-content/uploads/2023/03/Charging-Ahead_Final-Report_Full-17-March-2023-1.pdf">billions of dollars and thousands of jobs</a> to the Australian economy. But for that industry to rise, it will need money.</p>
<p>Australia aspires not only to transition its economy to net zero emissions, but to become a green energy superpower. That means building a host of solar and wind farms, batteries, electric vehicle charging stations, upgrades to the grid and to all kinds of buildings, as well as investments in new technology. </p>
<p>These investments and big infrastructure projects don’t come cheap. Getting to net zero emissions by 2050 requires investment in renewable energy of A$754 billion in power generation alone, according to <a href="https://www.uts.edu.au/sites/default/files/2022-06/Supercharging%20transition%202021%20Update%20-%20Oct%2022%20update.docx.pdf">research</a> by the <a href="https://www.uts.edu.au/isf">UTS Institute for Sustainable Futures</a> and funded by Future Super.</p>
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<h2>The size of the green finance challenge</h2>
<p>By 2030, the world will have to invest <a href="https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-a-decade-of-data/">an estimated US$4.3 trillion</a> a year – roughly <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?most_recent_value_desc=true">the GDP of Japan</a>, the world’s third-largest economy – in climate finance. These financial flows need to grow by 21% a year, on average. Without this enormous increase, the economic transition will not happen in time to avoid the worst impacts of climate change. </p>
<p>The scale of financing means that superannuation funds and other big institutional investors <a href="https://www.theaustralian.com.au/business/financial-services/super-funds-voice-concerns-over-reaching-2030-green-targets/news-story/43aed4b3d27a80c1f8cc349390acc4a8">must be involved</a>. They need to know where their money is going, and whether investments are genuine or a case of “greenwashing”. They need certainty that companies in which they invest have solid plans to reduce their climate risk, and the ability to ask the companies questions when they don’t.</p>
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Read more:
<a href="https://theconversation.com/australias-new-dawn-becoming-a-green-superpower-with-a-big-role-in-cutting-global-emissions-216373">Australia's new dawn: becoming a green superpower with a big role in cutting global emissions</a>
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<p>But current financial regulation is not set up to support such best practice. To give just one example, default superannuation funds lack the <a href="https://www.apra.gov.au/sites/default/files/2022-12/Methodology%20paper%20-%20MySuper%20Heatmap.pdf">benchmarks</a> – measures of performance assessed by the Australian Prudential Regulation Authority – they need to invest in start-up businesses that are developing clean energy technologies. </p>
<p>Successive Australian governments have been slow to grasp this reality, and we are now playing catch-up with many other countries. </p>
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<h2>Australia releases its strategy</h2>
<p>The <a href="https://treasury.gov.au/consultation/c2023-456756#:%7E:text=The%20strategy's%20policy%20priorities%20are,Australian%20Government%20leadership%20and%20engagement.">Australian government’s Sustainable Finance Strategy</a>, <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/new-steps-albanese-governments-sustainable-finance">released by Treasurer Jim Chalmers</a> last Thursday, lays solid foundations for this recovery. Yet more needs to be done if Australia is to achieve the strategy’s stated ambition to be a global sustainability finance leader.</p>
<p>The strategy is arranged around <a href="https://treasury.gov.au/consultation/c2023-456756#:%7E:text=The%20strategy's%20policy%20priorities%20are,Australian%20Government%20leadership%20and%20engagement.">three core pillars</a>. The first focuses on creating access to information that is credible, accurate and of practical value. It seeks to ensure markets operate efficiently and money flows to where it is most needed.</p>
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Read more:
<a href="https://theconversation.com/beyond-juukan-gorge-how-first-nations-people-are-taking-charge-of-clean-energy-projects-on-their-land-213864">Beyond Juukan Gorge: how First Nations people are taking charge of clean energy projects on their land</a>
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<p>From July 1 2024, large Australian companies and financial institutions will have to <a href="https://www.climateworkscentre.org/news/mandatory-climate-related-financial-disclosures-for-australian-companies-explained/#:%7E:text=Under%20Treasury's%20proposal%2C%20companies%20will,requiring%20substantial%20forward%2Dlooking%20information.">disclose information</a> about the impacts of climate on their business, the risks climate change poses to their operations, and how they plan to decarbonise. </p>
<p>The disclosure requirements will be based on <a href="https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s2-climate-related-disclosures/#:%7E:text=IFRS%20S2%20requires%20an%20entity,related%20risks%20and%20opportunities%20that">internationally accepted standards</a>, to ensure Australian and overseas investors can compare data across companies and countries. </p>
<p>The government is also supporting the development of an <a href="https://www.asfi.org.au/taxonomy">Australian sustainable finance taxonomy</a> – a set of criteria that enables investors to evaluate whether and to what extent an investment supports sustainability goals. </p>
<p>A taxonomy spells out which investments result in real decarbonisation, and reduces the likelihood of false claims about the sustainability of projects and investments. A government agency will manage the taxonomy, which will start as a voluntary code but may eventually become mandatory. </p>
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Read more:
<a href="https://theconversation.com/how-to-beat-rollout-rage-the-environment-versus-climate-battle-dividing-regional-australia-213863">How to beat 'rollout rage': the environment-versus-climate battle dividing regional Australia</a>
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<p>Large companies will also be required to disclose their net zero transition plan, if they have one. With companies representing <a href="https://acsi.org.au/wp-content/uploads/2023/08/Promises-Pathways-Performance-Climate-reporting-in-the-ASX200-August-2023.pdf">80% of the market capitalisation</a> of ASX 200 companies pledging to achieve net zero emissions, the government wants to ensure their plans are credible. It wants the corporate regulator, the <a href="https://asic.gov.au/">Australian Securities and Investment Commission</a> (ASIC), to set out its expectations of the plans – a welcome step.</p>
<p>The second pillar focuses on building the capabilities of Australia’s financial system regulators to manage risk and to clamp down on greenwashing – the practice of making misleading or deceptive claims about the environmental benefits of activities or assets. </p>
<h2>Fighting greenwashing</h2>
<p>ASIC Deputy Chair Karen Chester believes the economic cost and loss of investor confidence caused by greenwashing “<a href="https://asic.gov.au/about-asic/news-centre/speeches/climate-change-urgency-integrity-ambition/">cannot be overstated</a>”. Her organisation has set out guidelines to help financial institutions identify it. This year ASIC launched its <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-043mr-asic-launches-first-court-proceedings-alleging-greenwashing/">first three legal actions</a>, including one against the local arm of US investment giant <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-196mr-asic-commences-greenwashing-case-against-vanguard-investments-australia/">Vanguard</a>, and another against <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2023-releases/23-215mr-asic-commences-greenwashing-case-against-active-super/">Active Super</a>, which allegedly falsely claimed it had eliminated investments, such as coal mining, that posed too great a risk to the environment and the community. </p>
<p>The third pillar concerns government leadership and engagement. Such a large and rapid increase in the scale of private sector finance requires growth in a range of financial assets, including shares, bonds and other kinds of debt. </p>
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Read more:
<a href="https://theconversation.com/why-australia-urgently-needs-a-climate-plan-and-a-net-zero-national-cabinet-committee-to-implement-it-213866">Why Australia urgently needs a climate plan and a Net Zero National Cabinet Committee to implement it</a>
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<p>The government is supporting the development of a <a href="https://www.rba.gov.au/publications/bulletin/2023/sep/green-and-sustainable-finance-in-australia.html">green bond market</a> by issuing <a href="https://www.moneymanagement.com.au/features/all-eyes-australias-inaugural-sovereign-green-bonds">Australia’s first green sovereign bond</a> in June. These bonds are designed to establish standards for lending and borrowing for all green finance; they will also help the government to fund projects such as electric vehicle charging infrastructure. </p>
<p>Finally, the strategy recognises the importance of <a href="https://www.adb.org/what-we-do/funds/australian-climate-finance-partnership">collaboration across the Asia-Pacific</a>. If Australia achieves its goal of becoming a regional sustainable finance hub it would not only benefit our national interest but help Pacific Island nations to raise the finance to decarbonise. </p>
<h2>What’s missing from the strategy?</h2>
<p>The strategy does not focus on <a href="https://www.uts.edu.au/sites/default/files/2022-10/Advancing%20climate%20skills%20in%20the%20Australian%20financial%20system%20FINAL_0.pdf">green finance skills</a> and competencies. Yet these capabilities, ranging from a basic understanding of what business activities are unsustainable to specialist expertise in the use of scenario analysis to assess climate risk, are essential to the net zero transition. </p>
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Read more:
<a href="https://theconversation.com/the-original-and-still-the-best-why-its-time-to-renew-australias-renewable-energy-policy-213879">The original and still the best: why it's time to renew Australia's renewable energy policy</a>
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<p>LinkedIn’s recent <a href="https://economicgraph.linkedin.com/research/global-green-skills-report">Green Skills Report</a> shows that, globally, the finance sector is lagging behind other sectors in building green skills. And Australia ranks only 30th in a list of countries on its share of talent for green finance.</p>
<p>Australia’s financial system must urgently transform itself to meet the climate challenge. If the financing of the transition were a bicycle race, Australia has now caught up to the global peloton. The next step is to take the lead.</p><img src="https://counter.theconversation.com/content/214063/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alison Atherton is a member of the Australian Sustainable Finance Institute's Capability Reference Group</span></em></p><p class="fine-print"><em><span>Gordon Noble does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If big money is going to invest in clean energy and technology, the rules have to be clear. Australia’s launch of a green finance strategy last week was a good start but there is further to go.Alison Atherton, Program Lead, Business, Economy and Governance at the Institute for Sustainable Futures., University of Technology SydneyGordon Noble, Research Director, Institute for Sustainable Futures, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1693462021-10-06T06:06:03Z2021-10-06T06:06:03ZThanks to APRA, it’s about to become harder to get a mortgage. Here’s why<p>On Wednesday the Australian Prudential Regulation Authority wrote to each of Australia’s home lenders asking them to make it just a little bit harder for Australians to get mortgage.</p>
<p>The letter, addressed to so-called authorised deposit-taking institutions, asked them to adopt a serviceability buffer “at least 3.0 percentage points over the loan interest rate”.</p>
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<span class="attribution"><a class="source" href="https://www.apra.gov.au/sites/default/files/2021-10/Letter%20to%20ADIs_Strengthening%20residential%20mortgage%20lending%20assessment.pdf">Australian Prudential Regulation Authority</a></span>
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<p>What that means is they’ll have to grant loans only where they believe the borrowers can afford to keep making payments should their mortgage rates climb three percentage points.</p>
<p>At the moment new variable loans are typically offered something close to 2.8%. The new requirement will prevent lenders from offering such a loan unless the borrower can cope with an increase to 5.8%.</p>
<p>The previous buffer, in place for some years, was 2.5%.</p>
<p>APRA believes the change will cut the maximum amount available to a typical borrower by about 5%. </p>
<p>But it says given that many borrowers borrow much less than the maximum, the overall impact on housing credit growth should be “<a href="https://www.apra.gov.au/news-and-publications/apra-increases-banks%E2%80%99-loan-serviceability-expectations-to-counter-rising">fairly modest</a>”.</p>
<h2>Aimed at debt rather than home prices</h2>
<p>APRA says it is not trying to target the level of housing prices, and it looks as if it isn’t (yet) concerned that lending standards are lax, but it wants to ensure “borrowers are well-equipped to service their debts under a range of scenarios”. </p>
<p>Its announcement says increases in the share of heavily indebted borrowers mean “medium-term risks to financial stability are building”. </p>
<p>More than one in five new loans approved in the June quarter were at more than six times the borrowers’ income. As prices have surged, borrowers have pushed themselves deeper into debt in order to get a foothold in the market.</p>
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<a href="https://theconversation.com/reserve-bank-not-for-turning-no-rate-hike-until-unemployment-near-4-5-154560">Reserve Bank not for turning. No rate hike until unemployment near 4.5%</a>
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<p>The reasonable benchmark for lending was once considered to be between three and four times the borrower’s income. But as interest rates have fallen and prices have climbed, borrowers have been increasingly prepared to extend themselves.</p>
<p>APRA says with the economy expected to bounce back as lockdowns end, the balance of risks meant “stronger serviceability standards are warranted”.</p>
<p>The boosted serviceability requirement will also increase the resilience of borrowers to higher interest rates, should they come. Not that the Reserve Bank says they will come for some years; as it tells it, most probably not until <a href="https://theconversation.com/reserve-bank-governor-not-for-turning-no-rate-hike-until-unemployment-near-4-5-154560">2024</a>.</p>
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<span class="caption">Reserve Bank Governor Philip Lowe has indicated rates shouldn’t need to rise until 2024.</span>
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<p>APRA is taking out insurance.</p>
<p>With global inflation pressures building, there is a risk not only that rates climb go earlier than the Reserve Bank is signalling, but that the increases will be substantial, given how far rates are below normal.</p>
<p>The small adjustment to serviceability buffers has been described as a <a href="https://www.afr.com/chanticleer/apra-s-first-go-at-cooling-housing-may-not-be-its-last-20211006-p58xoe">tap on the brakes of the housing market</a>. </p>
<p>While this might be part of the impact, APRA’s objective is to reduce the vulnerability of individual borrowers and banks themselves to an increase in interest rates down the track.</p>
<p>The biggest impact on the most leveraged borrowers. </p>
<p>The most leveraged borrowers tend to be first home buyers and investors. APRA believes investors will be affected the most because first home buyers tend to be “more constrained by the size of their deposit”. </p>
<p>Investors are more leveraged and often have multiple loans to which the new requirement will be applied.</p>
<h2>Insurance, for 2022</h2>
<p>So far, investors have been less prominent than usual in the market upturn.</p>
<p>APRA seems to think this is about to change. Investors stayed away when home prices began climbing late last year, but returned to the market this year and have been increasingly active. </p>
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Read more:
<a href="https://theconversation.com/home-prices-are-climbing-alright-but-not-for-the-reason-you-might-think-158776">Home prices are climbing alright, but not for the reason you might think</a>
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<p>Unchecked, low interest rates combined with Australia’s favourable taxation treatment of property investment could drive a new wave of investor-driven demand well into 2022. </p>
<p>Low interest rates are making low-yielding real estate extremely attractive.</p>
<p>APRA may be preparing itself for twin threats it sees around the corner – a new wave of investor-driven home price inflation, and the first increase in official interest rates in more than a decade.</p><img src="https://counter.theconversation.com/content/169346/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warren Hogan 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 rules limiting what banks can lend are aimed at real estate investors. APRA believes they’ll have little impact on first home buyers.Warren Hogan, Industry Professor, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1669562021-08-31T05:38:40Z2021-08-31T05:38:40ZMy super fund just failed the APRA performance test. What’s next?<figure><img src="https://images.theconversation.com/files/418390/original/file-20210830-14-1jm6ffx.jpg?ixlib=rb-1.1.0&rect=233%2C531%2C1659%2C1183&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">iQonceptShutterstock</span></span></figcaption></figure><p>Failure is only the beginning. </p>
<p>Thirteen of Australia’s 80 closely-regulated MySuper superannuation funds have failed the <a href="https://www.apra.gov.au/news-and-publications/apra-releases-inaugural-your-future-your-super-performance-test-results">APRA performance test</a>.</p>
<p>There’s a fair chance you are among the one million people in them.</p>
<p>The results were made public on Tuesday and handed to the funds on Monday. From here on — for the people who run those funds — it’s about to get worse.</p>
<p>APRA is the Australian Prudential Regulation Authority. Landmark reforms introduced in response to a devastating Productivity Commission report into the “<a href="https://www.smh.com.au/politics/federal/the-fix-for-australia-s-multibillion-dollar-superannuation-mess-20180528-p4zi05.html">mess</a>” that is much of Australia’s super industry require APRA to rate each MySuper fund (and from next year most other funds) with a pass or a fail according to how they have managed their members’ money.</p>
<p>To fail — as one in six funds have — would require the fund to have for seven or eight years managed its members’ funds so badly that when judged by its own <em>stated investment strategy</em>, those members would have been better off investing in the broad categories of assets themselves and paying the managers to stay away.</p>
<p>Under the rules, which go by the name <a href="https://www.apra.gov.au/your-future-your-super-frequently-asked-questions">Your Future, Your Super</a>, funds can only be given a “pass” or a “fail”. Those that fail are required to write to their members.</p>
<h2>Letters humbling</h2>
<p>The letters, which have to be delivered within 28 days, and which APRA will check, are <a href="https://www.legislation.gov.au/Details/F2021L01077">humiliating</a>.</p>
<p>“Hello [fund member],” they begin. “Your superannuation product has performed poorly under an annual performance test”.</p>
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<p>As a result, we are required to write to you and suggest that you consider moving your money into a different superannuation product.</p>
<p>By switching into a better performing product, you can potentially save thousands of dollars more for retirement. For example, by earning 1% higher net return over a 30‑year period, you could be 20% better off at retirement.</p>
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<p>At the bottom of each letter is a QR code members can use to go to <a href="https://www.ato.gov.au/Calculators-and-tools/YourSuper-comparison-tool/">ato.gov.au/yoursuper</a> to compare funds’ performance. If members log in with their MyGov account they will be told exactly what super they have and where it is (I’ve tried it and it works) and get a comparison tailored to their circumstances.</p>
<p>The 13 funds forced to send out these letters will be lucky to see out the year. Once a fund suffers withdrawals and has to pay out members it performs even worse. Within months, many will be taken over. </p>
<h2>Killing season</h2>
<p>Those that remain are unlikely to last a second year. Once a product fails for two consecutive years (<a href="https://www.smh.com.au/money/super-and-retirement/regulator-s-verdict-on-super-funds-to-spark-major-shake-up-20210826-p58m35.html">most</a> that fail in the first year are expected to fail in the second) it will be prohibited from accepting new members, which means it’ll be killed.</p>
<p>It may or may not be relevant, but the driving forces behind the revolution are women. Women typically do <a href="https://theconversation.com/yes-women-retire-with-less-than-men-but-boosting-compulsory-super-wont-help-157412">much worse</a> out of super than men. </p>
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<a href="https://images.theconversation.com/files/418586/original/file-20210831-23-1b7piya.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/418586/original/file-20210831-23-1b7piya.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/418586/original/file-20210831-23-1b7piya.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=970&fit=crop&dpr=1 600w, https://images.theconversation.com/files/418586/original/file-20210831-23-1b7piya.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=970&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/418586/original/file-20210831-23-1b7piya.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=970&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/418586/original/file-20210831-23-1b7piya.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/418586/original/file-20210831-23-1b7piya.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/418586/original/file-20210831-23-1b7piya.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Karen Chester: first draft.</span>
<span class="attribution"><span class="source">Lukas Coch/AAP</span></span>
</figcaption>
</figure>
<p><a href="https://www.smh.com.au/politics/federal/the-appalling-truth-about-our-world-class-super-system-20180529-p4zi94.html">Karen Chester</a> chaired the Productivity Commission inquiry that quantified the hundreds of thousands of dollars lost in retirement by each worker who stays in a dud fund, and came up with the first draft of the performance test. </p>
<p>Kelly O'Dwyer, as financial services minister championed it, as did her successor Jane Hume. </p>
<p>In charge of policing the rules is APRA executive board member <a href="https://www.apra.gov.au/news-and-publications/apra-executive-board-member-margaret-cole-speech-to-women-banking-and-finance">Margaret Cole</a>, who was known as the “<a href="https://www.thetimes.co.uk/article/price-is-right-for-the-enforcer-who-brought-city-to-book-nqh679xr9v8">enforcer</a>” during her time as director of enforcement and financial crime at the UK Financial Services Authority.</p>
<p>On <a href="https://www.apra.gov.au/news-and-publications/apra-executive-board-member-margaret-cole-speech-to-women-banking-and-finance">Friday</a> she declared bluntly that Australia had too many funds, too many persistently underperforming funds and too many with fees that remain too high.</p>
<h2>Industry funds among those failed</h2>
<p>Among the chronic underperformers now facing a death spiral are five industry funds — two of them run by members of <a href="https://web.archive.org/web/20210815145414/https://www.industrysuper.com/choose-a-fund">Industry Super Australia</a>, the organisation that represents funds set up “only to benefit members”.</p>
<p>Rather, they were members. Maritime Super left just <a href="https://www.afr.com/politics/federal/maritime-super-dumps-industry-funds-lobby-group-20210827-p58mfe">ahead of the results</a>. LUCRF, originally set up by what is now the United Workers Union, was terminated on the release of the results. Industry Super <a href="https://web.archive.org/web/20210815145414/https://www.industrysuper.com/choose-a-fund">scrubbed it from its website</a>.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/418562/original/file-20210831-15-keorln.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/418562/original/file-20210831-15-keorln.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/418562/original/file-20210831-15-keorln.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=404&fit=crop&dpr=1 600w, https://images.theconversation.com/files/418562/original/file-20210831-15-keorln.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=404&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/418562/original/file-20210831-15-keorln.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=404&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/418562/original/file-20210831-15-keorln.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=508&fit=crop&dpr=1 754w, https://images.theconversation.com/files/418562/original/file-20210831-15-keorln.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=508&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/418562/original/file-20210831-15-keorln.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=508&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/your-future-your-super-performance-test">Australian Prudential Regulation Authority</a></span>
</figcaption>
</figure>
<hr>
<p>The other industry funds that failed the performance test are run by the Australian Catholic Superannuation and Retirement Fund, Christian Super and the Victorian Independent Schools Super Fund.</p>
<p>Among the for-profit failures are funds run by Westpac (BT Super) and the Commonwealth Bank (Colonial First State). </p>
<p>The banking royal commission found that funds run by banks often pay money to <a href="https://www.smh.com.au/entertainment/books/how-the-banks-went-bad-and-what-can-be-done-about-it-20190819-p52igw.html">other parts of the bank</a> for services such as <a href="https://www.theklaxon.com.au/home/westpacgouge">buying and selling bonds</a>, rather than doing it themselves or through brokers who would get better prices.</p>
<h2>In the dark, until now</h2>
<p>Super customers needn’t know what happens. They don’t get bills.</p>
<p>Whereas electricity bills hurt when they are delivered and have to be paid, the bills for super fees (and hidden fees in the form of relentless underperformance) aren’t seen, and don’t have to be paid — the fees come out of the funds.</p>
<p>And the funds grow every year, even where they are squandered. Compulsory super throws in a fresh 10% of salary each year.</p>
<p>The aim of what’s happened this week is to make visible what is normally invisible, and to prod people into action.</p>
<h2>An act of faith… in competition</h2>
<p>The government could have gone down a different track. </p>
<p>Peter Costello, the long-serving Coalition Treasurer who now heads the Future Fund which manages government investments, wanted his successor to create a <a href="https://www.afr.com/wealth/superannuation/future-fund-chairman-peter-costello-wants-government-default-super-fund-20190211-h1b3e7">government super fund</a> (run by his Future Fund) which it would default new workers into.</p>
<p>The Future Fund would have protected workers, but to do it, would have played safe. As it became dominant it would have stifled competition and the promise of better returns. Or that was the thinking.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/super-funds-have-been-working-for-themselves-when-they-should-have-been-working-for-us-thats-about-to-change-157580">Super funds have been working for themselves when they should have been working for us. That's about to change</a>
</strong>
</em>
</p>
<hr>
<p>Chester, O'Dwyer, Hume and Treasurer Josh Frydneberg decided instead to supercharge competition — to make crystal clear which are the funds to run from and the funds to run to. They are making running as easy as two clicks.</p>
<p>One in every 11 dollars we earn is funnelled into superannuation. Legislated increases mean it will soon be one in nine. </p>
<p>It’s important it’s looked after.</p><img src="https://counter.theconversation.com/content/166956/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>One in every six MySuper funds failed the test. One million members will be invited to leave, and it’ll be made easy.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1575802021-03-23T01:56:34Z2021-03-23T01:56:34ZSuper funds have been working for themselves when they should have been working for us. That’s about to change<figure><img src="https://images.theconversation.com/files/391018/original/file-20210322-13-iv3p8j.jpg?ixlib=rb-1.1.0&rect=1705%2C384%2C1386%2C769&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">PhotoMavenStock/Shutterstock</span></span></figcaption></figure><p>Have you ever wondered why your super fund rarely sends you mail?</p>
<p>It could be because it is one of the 36 funds that perform badly, or one of the six funds that perform <a href="https://www.apra.gov.au/news-and-publications/apra-deputy-chair-helen-rowell-speech-to-asfa-briefing-apra-heatmap">extraordinarily badly</a>. As of mid last year those <a href="https://www.apra.gov.au/mysuper-product-heatmap">six funds</a> managed the retirement savings of 900,000 Australians.</p>
<p>Not that you would know it from their communications. The wonder of a system that pours a fresh 9.5% of your salary into super each year is that your fund is able to show an upward graph of the amount you’ve got saved even if it is managing those savings badly. You might think it was performing well.</p>
<p>Or your fund might have a more straightforward reason for avoiding mail. </p>
<p>The head of Australia’s biggest super fund, Australian Super with 2.4 million members, spelled it out in an appearance before the banking royal commission.</p>
<p>He said “a direct mail-out – a one-off direct mail-out to Australian Super’s members – costs <a href="https://financialservices.royalcommission.gov.au/public-hearings/Documents/transcripts-2018/transcript-9-august-2018.pdf">$2.3 million</a>”. </p>
<h2>A million here, two million there…</h2>
<p>Chief executive Ian Silk was trying to put into context the $2 million Australian Super threw at the startup news site <a href="https://thenewdaily.com.au/">New Daily</a> throughout 2012 and 2013. He said the $2 million (long gone) wasn’t an investment in the financial sense of the term, but an investment in communications, “a tool to enhance the fund’s engagement with members”. </p>
<p>It’s an investment that will be illegal from July under the government’s proposed <a href="https://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4/upload_pdf/JC001267.pdf;fileType=application%2Fpdf#search=%22legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4%22">Your Future, Your Super</a> law, along with those rather odd TV advertisements implying improbably that unless the government lifts compulsory super contributions, people might <a href="https://www.youtube.com/watch?v=0C-DQ7eZF0A">lose their houses</a>.</p>
<p>It will be illegal for funds to spend money on these things even if they route the payments through a <a href="https://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4/upload_pdf/JC001267.pdf;fileType=application%2Fpdf#search=%22legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4%22">third party</a> such as the super-fund-owned Industry Super Australia, as they now are.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/that-extra-youre-about-to-get-in-super-most-of-it-will-come-from-you-but-dont-expect-the-ads-to-tell-you-that-154723">That extra you're about to get in super, most of it will come from you, but don't expect the ads to tell you that</a>
</strong>
</em>
</p>
<hr>
<p>The new laws, which flow from the royal commission and a Productivity Commission inquiry, will require every cent of super fund spending (without “any materiality threshold”) to be directed to the <a href="https://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4/upload_pdf/JC001267.pdf;fileType=application%2Fpdf#search=%22legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4%22">best financial interests</a> of members.</p>
<p>What’s different is the addition of the word “financial”. Previously funds were only required to act in the “best interests” of the members.</p>
<p>Until now (and this is an example used in the <a href="https://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4/upload_pdf/JC001267.pdf;fileType=application%2Fpdf#search=%22legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4%22">explanatory memorandum</a>) it might have been OK for a fund to spend member contributions on “well-being and counselling services, due to its preference for providing beneficiaries with a holistic retirement experience”. </p>
<h2>Services, seats at the Australian Open</h2>
<p>It won’t be legal after July. Spending will have to be in the best “financial” interests of members. </p>
<p>And the <a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F14059f01-aa4f-4143-a7dc-fa5f407d6e45%2F0009%22">onus of proof</a> will be reversed. If challenged, funds will have to demonstrate that their decisions were indeed in the best financial interests of their members, rather than regulators demonstrating that they were not. </p>
<p>Which it should be. It’s our (mainly conscripted) money that they are spending. If they can’t make out a case for the way they are spending it, they might be acting as if it’s their own. </p>
<p>Shockingly, when in 2017 the Productivity Commission inquiry into super asked all 208 funds regulated by the Prudential Regulation Authority for <a href="https://www.pc.gov.au/inquiries/completed/superannuation/assessment/surveys/superannuation-assessment-survey-funds.pdf">information</a> about their spending and net returns and fees by asset class, <a href="https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report/superannuation-assessment.pdf">94 didn’t respond</a>. </p>
<h2>A cavalier approach to finances</h2>
<p>Of the 114 funds that did respond, 26 left blank all of the bits of the form that asked about assets, net returns and investment management costs.</p>
<p>When the commission tried again the following year, 13 of the 136 funds that responded provided <a href="https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report/superannuation-assessment.pdf">no information about expenses at all</a>. It was as if they either didn’t know about their expenses, or felt it was their business and no one else’s.</p>
<p>Time and time again the commission heard about bank-operated funds buying products from other parts of the bank at high prices. </p>
<p>The banking royal commission heard of hundreds of thousands of dollars spent by just one (industry) fund on corporate hospitality at the <a href="https://www.afr.com/wealth/superannuation/banking-royal-commission-hostplus-cops-a-serve-over-tennis-junket-20180814-h13ydz">Australian Open</a>.</p>
<p>It heard of directors of a retail fund who decided against putting their members into lower-priced products when they became available, overruling a lone director who <a href="https://scribepublications.com.au/books-authors/books/a-wunch-of-bankers">protested</a>, using capital letters</p>
<blockquote>
<p>in what circumstances would it NOT be in a client’s best interest to transfer to the new pricing if it was lower than their existing pricing?</p>
</blockquote>
<p>Spending on advertising would still be permitted under the draft legislation, but only where it was in the best financial interests of members. If it was aimed at grabbing members from other funds it probably would pass the test, because when funds get bigger the costs per member can shrink.</p>
<p>But the guidance note makes it clear that the costs per member would need to <a href="https://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4/upload_pdf/JC001267.pdf;fileType=application%2Fpdf#search=%22legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4%22">actually shrink,</a> along with the charges to members, or there would need to be a documented case prepared as to why they should have shrunk.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/yes-women-retire-with-less-but-boosting-compulsory-super-wont-help-157412">Yes, women retire with less, but boosting compulsory super won't help</a>
</strong>
</em>
</p>
<hr>
<p>Vanity advertising, or advertising for <a href="https://www.industrysuper.com/choose-a-fund/">a group</a> of funds, or advertising aimed at influencing <a href="https://theconversation.com/that-extra-youre-about-to-get-in-super-most-of-it-will-come-from-you-but-dont-expect-the-ads-to-tell-you-that-154723">public opinion</a> won’t cut it.</p>
<p>And nor will indifferent performance. The law will require the Prudential Regulation Authority to annually test the performance of funds against objective,
consistently-applied <a href="https://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4/upload_pdf/JC001267.pdf;fileType=application%2Fpdf#search=%22legislation/ems/r6672_ems_55ca2b32-39d1-4534-93a1-b99763fbcef4%22">benchmarks</a>, different benchmarks for different stated investment strategies.</p>
<hr>
<p><strong>Early MySuper test results</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/391028/original/file-20210323-21-16arbqm.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/391028/original/file-20210323-21-16arbqm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/391028/original/file-20210323-21-16arbqm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=283&fit=crop&dpr=1 600w, https://images.theconversation.com/files/391028/original/file-20210323-21-16arbqm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=283&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/391028/original/file-20210323-21-16arbqm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=283&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/391028/original/file-20210323-21-16arbqm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=355&fit=crop&dpr=1 754w, https://images.theconversation.com/files/391028/original/file-20210323-21-16arbqm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=355&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/391028/original/file-20210323-21-16arbqm.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=355&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Five-year performance as at June 30 2020, the darkest coloured funds are the poorest performers.</span>
<span class="attribution"><a class="source" href="https://www.apra.gov.au/news-and-publications/apra-deputy-chair-helen-rowell-speech-to-asfa-briefing-apra-heatmap">APRA</a></span>
</figcaption>
</figure>
<hr>
<p>Funds that fail the test will be required to notify their members in writing. Funds that fail two years in a row will be closed to new members.</p>
<p>Most of us probably have no idea that we spend more on super investment and administration fees each year than we do on <a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22chamber%2Fhansardr%2F14059f01-aa4f-4143-a7dc-fa5f407d6e45%2F0009%22">gas and electricity</a> combined.</p>
<p>And when the performance is lousy (the difference between a good and bad fund can be <a href="https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report/superannuation-assessment-overview.pdf">$660,000</a> in retirement) we often don’t find out until it’s too late.</p>
<p>Our funds are about to have to work for us first, and no-one else.</p><img src="https://counter.theconversation.com/content/157580/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Nothing, not even advertising will be permitted unless it is in the ‘best financial interests’ of members.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1559522021-03-14T22:49:48Z2021-03-14T22:49:48ZThere’s a bill before the Senate that would make it easier for banks to lend irresponsibly<figure><img src="https://images.theconversation.com/files/389221/original/file-20210312-22-498v81.jpg?ixlib=rb-1.1.0&rect=5%2C0%2C3644%2C1756&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source"> Neale Cousland/Shutterstock</span></span></figcaption></figure><p>The Hayne royal commission into misconduct in the banking, superannuation and financial services industry found Australia’s responsible lending requirements were correctly calibrated.</p>
<p>They are set out in the National Consumer Credit Protection Act, which requires lenders to offer credit that is “not unsuitable” for the borrower.</p>
<p>Hayne’s first recommendation (Recommendation 1.1) was that the National Consumer Credit Protection Act “<a href="https://www.royalcommission.gov.au/sites/default/files/2019-02/fsrc-volume-1-final-report.pdf">not be amended</a> to alter the obligation to assess unsuitability”.</p>
<p>He saw “<a href="https://www.royalcommission.gov.au/sites/default/files/2019-02/fsrc-volume-1-final-report.pdf">no reason to alter</a>” the relevant provision of the banking code.</p>
<p>On releasing the royal commissioner’s report in 2019 Treasurer Josh Frydenberg said he was “<a href="https://treasury.gov.au/sites/default/files/2019-03/FSRC-Government-Response-1.pdf">taking action on all 76 recommendations</a>” and “going further”. </p>
<p>Until COVID. </p>
<h2>COVID the pretext for weakening rules</h2>
<p>In <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/simplifying-access-credit-consumers-and-small">September</a>, in the midst of the COVID recession, Frydenberg said he was “reducing the cost and time it takes consumers and businesses to access credit”. </p>
<p>Credit was “the lifeblood of the Australian economy”.</p>
<p>He put forward a plan to remove responsible lending obligations from the Act, with the exception of small amount credit contracts and consumer leases where he would impose heightened obligations.</p>
<p>Allowing lenders to rely on the information provided by borrowers would replace the current practice of “lender beware” with “borrower responsibility”.</p>
<h2>‘Borrower responsibility’</h2>
<p>Frydenberg introduced the legislation in <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/simplifying-access-credit-consumers-and-small-0">December</a>. On <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/NCCPEcoRocovery/Report">Friday</a> a Senate committee recommended approving it, finding the current consumer protection framework “potentially overly prescriptive”.</p>
<p>Labor and Greens Senators dissented. The bill faces a Senate vote <a href="https://parlwork.aph.gov.au/Senate/DynamicRed#5b8e0587-ea76-eb11-b861-005056b55c61">this week</a>.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/none-of-the-justifications-for-weakening-bank-lending-standards-quite-makes-sense-147843">None of the justifications for weakening bank lending standards quite makes sense</a>
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<p>We are members of a consortium of 12 academics who conducted an in-depth <a href="https://cdn.theconversation.com/static_files/files/1514/Submission_91_-_Consumer_Law_Academics.pdf?1615515679">analysis</a> of the proposed changes and found they should be rejected. This is why.</p>
<p>Even after Hayne, banks are continuing to <a href="http://eresources.hcourt.gov.au/downloadPdf/2021/HCA/3">fight their obligations</a> and have yet to show they have changed their ways.</p>
<p>The drop in lending since COVID was not caused by overly strict lending laws. Indeed, after a win by Westpac in a <a href="https://www.abc.net.au/news/2020-06-26/asic-appeal-on-westpac-wagyu-shiraz-home-lending-dismissed/12396646">court case</a> brought by the Securities and Investments Commission the banks said the laws were <a href="https://cdn.theconversation.com/static_files/files/1515/Comments_from_Big_4_Banks_in_recent_appearances_%284_and_11_September_2020%29_before_the_HoR.pdf?1615522687">set appropriately</a>.</p>
<h2>Lending standards protect against crises</h2>
<p>Consumer protection in the field of finance is important — it contributes to strengthening financial stability. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/389224/original/file-20210312-23-zy4pz5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/389224/original/file-20210312-23-zy4pz5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/389224/original/file-20210312-23-zy4pz5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=969&fit=crop&dpr=1 600w, https://images.theconversation.com/files/389224/original/file-20210312-23-zy4pz5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=969&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/389224/original/file-20210312-23-zy4pz5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=969&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/389224/original/file-20210312-23-zy4pz5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/389224/original/file-20210312-23-zy4pz5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/389224/original/file-20210312-23-zy4pz5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Not everyone knows what they are signing.</span>
<span class="attribution"><span class="source">Jacob Lund/Shutterstock</span></span>
</figcaption>
</figure>
<p>The abusive, predatory and irresponsible lending practices that led to the US subprime mortgage crisis make this clear.</p>
<p>The government’s suggestion that it is fair for borrowers to take responsibility for their own circumstances doesn’t hold water.</p>
<p>No matter how diligent their inquiries, consumers frequently lack the expertise to understand their circumstances and what financial products will be best for them.</p>
<p>For many, almost all of the expertise lies with the banks. </p>
<p>Since COVID, their need for this expertise has become greater, not less. </p>
<p>The government says <a href="https://www.abc.net.au/news/2017-09-11/500b-dollars-of-liar-loans-in-australia-ubs/8892030">mortgage brokers</a> will fill this gap under a change proposed by Hayne that will require brokers to act in the “best interests” of their clients.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-its-one-thing-to-back-down-on-haynes-recommendation-about-mortgage-brokers-its-another-to-offer-nothing-in-its-place-113544">Vital signs. It's one thing to back down on Hayne's recommendation about mortgage brokers, it's another to offer nothing in its place</a>
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<p>But Hayne’s recommendations were based on the responsible lending requirements being in place. </p>
<p>And Hayne wanted mortgage brokers banned from taking conflicted remuneration, under which they get paid by the banks they steer customers to, a recommendation Frydenberg at first <a href="https://treasury.gov.au/sites/default/files/2019-03/FSRC-Government-Response-1.pdf">accepted</a>, then <a href="https://joshfrydenberg.com.au/latest-news/mortgage-broking-sector-to-be-stronger-under-a-coalition-government/">backed away</a> from. </p>
<p>Brokers continue to be paid by the banks whose products they recommend.</p>
<h2>APRA has no history of consumer protection</h2>
<p>Hayne also recommended (<a href="https://www.royalcommission.gov.au/sites/default/files/2019-02/fsrc-volume-1-final-report.pdf">Recommendation 6.1</a>) that Australia’s “twin peaks” system of regulation continue.</p>
<p>Under twin peaks, the Prudential Regulation Authority (APRA) regulates in order to ensure financial system stability, and the Securities and Investments Commission (ASIC) regulates to protect consumers.</p>
<p>While in his final report Hayne found that ASIC’s appetite for law enforcement had been limited, he found APRA’s had been non-existent.</p>
<p>The upshot is that, not only are the responsible lending requirements to be relaxed, but what’s left of them is to be handed to an agency (APRA) with no track record in the field, at the expense of ASIC.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/389227/original/file-20210312-18-d7as97.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/389227/original/file-20210312-18-d7as97.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/389227/original/file-20210312-18-d7as97.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=339&fit=crop&dpr=1 600w, https://images.theconversation.com/files/389227/original/file-20210312-18-d7as97.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=339&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/389227/original/file-20210312-18-d7as97.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=339&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/389227/original/file-20210312-18-d7as97.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/389227/original/file-20210312-18-d7as97.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/389227/original/file-20210312-18-d7as97.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Until now, APRA hasn’t done consumer regulation.</span>
<span class="attribution"><span class="source">APRA</span></span>
</figcaption>
</figure>
<p>The government has argued that the <a href="https://joshfrydenberg.com.au/latest-news/taking-action-on-the-banking-superannuation-financial-services-royal-commission-going-further-by-requiring-afca-to-extend-its-remit/">Australian Financial Complaints Authority (AFCA)</a> will step up to protect consumers. </p>
<p>But AFCA has to be guided by the law. Without responsible lending laws and regulations, it is unclear what laws AFCA could apply. Thus far, APRA’s standards have been aimed at protecting financial stability rather than consumers. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/389229/original/file-20210312-16-1skxwu7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/389229/original/file-20210312-16-1skxwu7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/389229/original/file-20210312-16-1skxwu7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/389229/original/file-20210312-16-1skxwu7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/389229/original/file-20210312-16-1skxwu7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/389229/original/file-20210312-16-1skxwu7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/389229/original/file-20210312-16-1skxwu7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The Financial Complaints Authority would rely on APRA for guidance.</span>
<span class="attribution"><span class="source">Tashatuvango/Shutterstock</span></span>
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</figure>
<p>In our assessment the proposed changes fail in every respect. </p>
<p>They ignore the key lesson of the global financial crisis: that it was caused by reckless and predatory lending. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/its-about-to-become-easier-to-lend-irresponsibly-to-help-the-recovery-146916">It's about to become easier to lend irresponsibly, to help the recovery</a>
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<p>They ignore the findings of the Hayne Commission and <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Credit_Card_Interest/Report/c05">other inquiries</a> dating back at least a <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Completed_inquiries/2010-13/postGFCbanking/report/c06%20para%206.31">decade</a>.</p>
<p>They will neither properly protect consumers nor create the confidence in the financial industry the post-COVID recovery will need.</p>
<p>The government has named its legislation the National Consumer Credit Protection Amendment (<a href="https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6656">Supporting Economic Recovery</a>) Bill. </p>
<p>A more apt title might have been the “Reducing Consumer Protection Bill”.</p><img src="https://counter.theconversation.com/content/155952/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow consults to DB & Associates. He receives funding from the World Bank; Banking Association South Africa; and Bryte Insurance. He is affiliated with the All Party Parliamentary Group for Personal Banking and Fairer Financial Services, House of Commons House of Lords. </span></em></p><p class="fine-print"><em><span>Elise Bant receives funding from the Australian Research Council for Discovery Project DP180100932 'Developing a Rational Law of Misleading Conduct' with Professor Jeannie Marie Paterson of Melbourne Law School and for ARC Future Fellowship project FT190100475 'Unravelling Corporate Fraud'.</span></em></p><p class="fine-print"><em><span>Nicola Howell has previously received funding through the Australian Government's Research Training Program and Endeavour Program, the Australian Securities and Investments Commission and the Queensland Department of Justice and Attorney-General. Nicola is a member of the Consumers' Federation of Australia (CFA), and has previously been a member of the CFA Executive.</span></em></p><p class="fine-print"><em><span>Therese Wilson has previously received funding from Consumer Affairs Victoria and National Australia Bank for research related to consumer credit and financial exclusion. Therese Wilson has previously served as Chair of the Board of Foresters Community Finance Limited and the Australian Financial Inclusion Network. She is currently the Dean of Law and Head of School at Griffith Law School, Griffith University.</span></em></p>The National Consumer Credit Protection Amendment bill goes against two explicit recommendations of the banking royal commission.Andrew Schmulow, Senior Lecturer, Faculty of Law, University of WollongongElise Bant, Professor of Law, The University of Western AustraliaNicola Howell, Senior lecturer, Queensland University of TechnologyTherese Wilson, Senior Lecturer, Griffith Law School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1478432020-10-12T18:45:27Z2020-10-12T18:45:27ZNone of the justifications for weakening bank lending standards quite makes sense<p>The budget plan to scrap Australia’s decade-old responsible lending obligations warrants detailed examination. </p>
<p>It is hard to see how the stated reasons for easing what’s asked of banks and other lenders make much sense, and the timing is strange.</p>
<p>Introduced in 2009, the <a href="https://ministers.treasury.gov.au/ministers/nick-sherry-2007/media-releases/new-national-responsible-lending-laws">responsible lending obligations</a> made it illegal to offer credit that was unsuitable for a consumer based on their needs and capacity to make payments.</p>
<p>In the leadup to last week’s budget Treasurer Josh Frydenberg announced plans to <a href="https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2020-09/Consumer-credit-reforms-fact-sheet.pdf">dismantle</a> a regime he said had become “<a href="https://ministers.treasury.gov.au/ministers/michael-sukkar-2019/media-releases/simplifying-access-credit-consumers-and-small-business">overly prescriptive, complex and unnecessarily onerous on consumers</a>”.</p>
<p>“Now more than ever,” he said, it had become important there were “no unnecessary barriers” to the flow of credit to households and business.</p>
<p>But, if well designed, responsible lending obligations ought to be largely irrelevant to responsible lenders. They take account of needs and capacity to repay anyway.</p>
<h2>The standards don’t hurt responsible lending</h2>
<p>Their merit lies in restraining “bad apples” and preventing the good ones from letting loan standards slip and permitting lax management to allow bad practices.</p>
<p>The <a href="https://financialservices.royalcommission.gov.au/Pages/reports.html#final">Hayne Royal Commission</a> into the financial services industry chastised banks and others for misconduct when it came to lending. The banks say they have listened and implemented better practices. </p>
<p>They probably have, which should mean the minimum standards embodied in responsible lending obligations make little difference to them.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/its-about-to-become-easier-to-lend-irresponsibly-to-help-the-recovery-146916">It's about to become easier to lend irresponsibly, to help the recovery</a>
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<p>Another of Hayne’s recommendations, that would have outlawed conflicted remuneration for mortgage brokers, was <a href="https://www.afr.com/politics/coalition-backs-down-on-ending-trail-commissions-for-mortgage-brokers-20190312-h1caoj">rejected</a> by the government in favour of a <a href="https://www.afr.com/politics/federal/frydenberg-moves-on-royal-commission-mortgage-broker-recommendations-20190825-p52kke">best interests</a> obligation along the lines of the responsible lending obligations for lenders that it wants to remove.</p>
<h2>The timing is odd</h2>
<p>The timing of the responsible lending obligations decision is hard to justify. </p>
<p>The Australian Securities and Investments Commission spent much of 2019 consulting on a review of its responsible lending guidelines and released a new version <a href="https://download.asic.gov.au/media/5403117/rg209-published-9-december-2019.pdf">in December</a>.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/362869/original/file-20201012-18-ttt2h2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/362869/original/file-20201012-18-ttt2h2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/362869/original/file-20201012-18-ttt2h2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/362869/original/file-20201012-18-ttt2h2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/362869/original/file-20201012-18-ttt2h2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/362869/original/file-20201012-18-ttt2h2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/362869/original/file-20201012-18-ttt2h2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/362869/original/file-20201012-18-ttt2h2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Wagyu and Shiraz needn’t rule out a loan.</span>
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<p>Then in June it lost an appeal in the long-running “<a href="https://www.abc.net.au/news/2020-06-26/asic-appeal-on-westpac-wagyu-shiraz-home-lending-dismissed/12396646">Wagyu and Shiraz</a>” case in which it attempted to prosecute Westpac for relying on general borrower expense benchmarks.</p>
<p>If anything, that should have somewhat settled bank concerns that the responsible lending obligations required too much of them. </p>
<p>Banks such as Westpac are no longer required to rely on detailed examination of an applicant’s past expenditure levels when assessing whether payments can be met.</p>
<p>In the words of Justice Perram of the Federal Court, “I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare”.</p>
<p>Instead banks will be able to focus on whether applicants are willing to forgo discretionary spending (on things such as school fees) in order to obtain the loan size required for buying an otherwise unaffordable house. </p>
<p>The change will put some of the onus of assessing loan suitability back on the borrower, which is what the Treasurer <a href="https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2020-09/Consumer-credit-reforms-fact-sheet.pdf">says he wants</a>.</p>
<h2>They ought to be becoming less burdensome</h2>
<p>It might be that the responsible lending obligations impose excessive assessment costs on the banks. And the extra work for applicants to provide the required information might dissuade them from applying.</p>
<p>But with the recent introduction of <a href="https://www.commbank.com.au/banking/open-banking.html">open banking</a> allowing banks to access applicants’ data with their permission, and “fintechs” developing products to cost-effectively mine that data, it seems likely that loan assessment costs (including meeting responsible lending obligations) are likely to decline.</p>
<p>If costs are the issue, why change the rules in the midst of a cost-reducing revolution?</p>
<h2>And they ought to have stopped bad loans</h2>
<p>Another argument has been that abolishing responsible lending obligations will facilitate growth in lending. </p>
<p>Maybe – but not permanently without increasing unsuitable lending. Responsible lending obligations may slow the approval process but could only have reduced the level of loans on issue if one or both of two conditions apply:</p>
<ul>
<li><p>the information-supply requirements (gathering of which should help applicants understand their borrowing capacity) have dissuaded potential applicants, meaning removing them would allow more poorly-informed borrowers to take out loans</p></li>
<li><p>the obligations have led to banks lending less to unsuitable borrowers, meaning removing them will encourage more lending to unsuitable borrowers</p></li>
</ul>
<p>Another argument, that the Australian Prudential Regulation Authority can police and enforce good lending behaviour ignores the fact that APRA’s remit relates to credit risk and safety of the banks. </p>
<p>It has no mandate for (nor expertise in) considering whether borrowers will be put into financial hardship by loan obligations.</p><img src="https://counter.theconversation.com/content/147843/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis was a member of the government's 2014 financial system inquiry.</span></em></p>If anything, the standards are becoming easier, rather than harder, to apply.Kevin Davis, Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1469162020-09-28T19:58:31Z2020-09-28T19:58:31ZIt’s about to become easier to lend irresponsibly, to help the recovery<figure><img src="https://images.theconversation.com/files/360226/original/file-20200928-24-11yjrvp.jpg?ixlib=rb-1.1.0&rect=0%2C613%2C4309%2C1991&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Kittisak Jirasittichai/Shutterstock</span></span></figcaption></figure><p>What used to be known as a requirement to lend responsibly is now regarded as red tape.</p>
<p>The National Consumer Credit Protection Act introduced by the Rudd government after the global financial crisis introduced responsible lending obligations that required lenders to ensure the loans they were offering were “<a href="https://www.asic.gov.au/regulatory-resources/credit/responsible-lending/">not unsuitable</a>” for borrowers.</p>
<p>No longer. If passed into law, changes announced by treasurer Josh Frydenberg last week in the leadup to the budget will remove the obligation for most lenders, allowing them to rely instead on the <a href="https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2020-09/Consumer-credit-reforms-fact-sheet.pdf">information presented to them by borrowers</a>.</p>
<p>In the treasurer’s words, it will replace the current principle of “lender beware” with “<a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/simplifying-access-credit-consumers-and-small">borrower responsibility</a>”.</p>
<p>He says it will make it easier for consumers to borrow, which would have been a disquieting prospect during the borrowing and house price boom that peaked three years ago <a href="https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release">under the old rules</a> and was only slowed by intervention from the <a href="https://www.apra.gov.au/news-and-publications/apra-announces-further-measures-to-reinforce-sound-residential-mortgage">Australian Prudential Regulation Authority</a> (APRA). </p>
<h2>Safeguards offered…</h2>
<p>Frydenberg says there will be safeguards. Lenders will have to comply with APRA lending standards. The special restrictions on “small amount credit contracts” (a discrete category that covers payday loans) will remain in place. Debt management firms will be required to hold licences.</p>
<p>But the provisions will not require lenders to assess the crucial question of whether a particular product is suitable for an individual borrower. </p>
<p>For the first time in a decade, that will be up to the borrower.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/government-proposes-changes-to-smooth-the-path-for-borrowers-146877">Government proposes changes to smooth the path for borrowers</a>
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<p>Lenders might decide to do that, but they won’t have to. What the treasurer calls “borrower responsibility” will become “buyer beware”.</p>
<p>Lenders will be obliged to be members of the Australian Financial Complaints Authority and have to act efficiently, honestly and fairly. </p>
<p>And members of the Banking Association will be subject to a <a href="https://theconversation.com/lunch-with-bankers-even-theyre-unimpressed-with-their-new-banking-code-of-conduct-122036">code of practice</a> that requires them to exercise the care and skill of a diligent and prudent banker.</p>
<p>But the duty of a banker is to the bank. That means a banker’s job is to ensure that a loan can be recovered, perhaps by selling property, rather than that the borrower can afford to make the payments. </p>
<h2>…but bankers work for banks</h2>
<p>When the financial crisis struck, <a href="https://www.legislation.gov.au/Details/C2009B00148/Explanatory%20Memorandum/Text">equity was stripped</a> from family homes by lenders looking after themselves. The new proposed changes would allow it to happen again.</p>
<p>The government says lenders have had to devote substantial resources to checking incorrect and misleading information provided by borrowers. </p>
<p>But much of it would have come from <a href="https://www.abc.net.au/news/2017-09-11/500b-dollars-of-liar-loans-in-australia-ubs/8892030">mortgage brokers</a> acting on behalf of borrowers but being paid as if they were lenders, receiving a commission related to the size of the loan.</p>
<h2>And brokers work for banks</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/360218/original/file-20200928-16-s70v2h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/360218/original/file-20200928-16-s70v2h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/360218/original/file-20200928-16-s70v2h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/360218/original/file-20200928-16-s70v2h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/360218/original/file-20200928-16-s70v2h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/360218/original/file-20200928-16-s70v2h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/360218/original/file-20200928-16-s70v2h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/360218/original/file-20200928-16-s70v2h.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">Mortgage brokers till get paid by banks, despite a recommendation of the royal commission.</span>
</figcaption>
</figure>
<p>The Royal Commission recommended that brokers be subject to a new “best interest” requirement, which is due to come in <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-040mr-asic-consults-on-draft-guidance-on-the-new-best-interests-duty-for-mortgage-brokers/">in January</a>, untested, just before the responsible lending requirement is withdrawn in April.</p>
<p>Commissioner Kenneth Hayne also recommended <a href="https://www.canstar.com.au/home-loans/banking-royal-commission-recommendations/">banning brokers’ commissions</a> and having them accept payment instead in the form of an upfront fee paid by the borrower not the lender. The government at first accepted and then <a href="https://www.abc.net.au/news/2019-03-12/government-backs-away-from-mortgage-commission-ban/10894228">rejected</a> the recommendation.</p>
<p>Even where they are not encouraged to over-borrow, consumers are often making decisions under stress or blinded by <a href="https://thedecisionlab.com/biases/optimism-bias/">optimism bias</a>.</p>
<p>Even where entirely honest they can be unable to make reliable predictions about the level of credit they can bear. </p>
<p>If the responsible lending rules we have are considered <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/simplifying-access-credit-consumers-and-small">too prescriptive, complex and onerous</a> as the treasurer says, a reasonable approach would be to make them simpler and principles-based rather than prescriptive as <a href="https://theconversation.com/understanding-hayne-why-less-is-more-110509">recommended by Commissioner Hayne</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-its-one-thing-to-back-down-on-haynes-recommendation-about-mortgage-brokers-its-another-to-offer-nothing-in-its-place-113544">Vital signs. It's one thing to back down on Hayne's recommendation about mortgage brokers, it's another to offer nothing in its place</a>
</strong>
</em>
</p>
<hr>
<p>The Australian Law Reform Commission has just commenced an inquiry into <a href="https://www.alrc.gov.au/inquiry/review-of-the-legislative-framework-for-corporations-and-financial-services-regulation/">how to simplify Australia’s complex financial services regime</a>. </p>
<p>The government might have asked it for a heads up or kept the responsible lending obligations in place until it saw what it had to say.</p><img src="https://counter.theconversation.com/content/146916/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeannie Marie Paterson receives funding from the Australian Research Council for project DP180100932 (with Professor Elise Bant) on ‘Developing a rational law of misleading conduct’. </span></em></p><p class="fine-print"><em><span>Elise Bant receives funding from the Australian Research Council for project DP180100932 (with Professor Jeannie Paterson) on ‘Developing a rational law of misleading conduct’ and for Future Fellowship project FT190100475 on ‘Unravelling Corporate Fraud’. </span></em></p><p class="fine-print"><em><span>Nicola Howell receives funding through the Australian Government's Research Training Program Scholarship (PhD scholarship) and has previously received funding from the Australian Securities and Investments Commission and Queensland Department of Justice and Attorney-General. Nicola is a member of the Consumers' Federation of Australia. </span></em></p>It’ll be up to the borrower, not the lender to determine whether what’s offered is suitable under changes to be detailed in the budget.Jeannie Marie Paterson, Professor of Law, The University of MelbourneElise Bant, Professor of Law, The University of Western AustraliaNicola Howell, Senior lecturer, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1378892020-05-06T19:50:21Z2020-05-06T19:50:21ZBank dividends are bare. Here’s why some shareholders hate it more than they should<p>In bad news for retirees and others who depend on dividend cheques (and dividend imputation rebate cheques from the Tax Office) bank dividends have largely evaporated. But it’s not as bad as many commentators suggest, and actually good for some investors.</p>
<p><a href="https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/ic/2020_Interim_Media_Release.pdf">Westpac</a> won’t be paying a dividend this half year. Nor will the <a href="https://yourir.info/resources/4d216b570d08af30/announcements/anz.asx/3A540286/ANZ_News_Release_ANZ_NZ_2020_half-year_result.pdf">ANZ</a>, nor the <a href="https://wcsecure.weblink.com.au/pdf/BOQ/02224752.pdf">Bank of Queensland</a>.</p>
<p>The <a href="https://www.nab.com.au/about-us/shareholder-centre/dividend-information">National Australia Bank</a> will pay one, but only a third the usual size. The Commonwealth Bank’s different reporting dates mean it won’t have to make a decision <a href="https://www.commbank.com.au/about-us/investors/dividend-information.html">until August</a>.</p>
<p>The Financial Review believes the moves have taken <a href="https://www.afr.com/companies/financial-services/westpac-shareholders-have-long-wait-ahead-on-dividends-20200504-p54plj">A$9.8 billion</a> in expected dividends and <a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">franking credits</a> from bank shareholders to date. </p>
<p>The flip-side missed by many commentators and shareholders is that bank shares are worth more (maybe around $9.8 billion more) than if they had paid those dividends.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=840&fit=crop&dpr=1 600w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=840&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=840&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1056&fit=crop&dpr=1 754w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1056&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/326728/original/file-20200409-188923-1pxiqkj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1056&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.apra.gov.au/sites/default/files/2020-04/Capital%20management.pdf">APRA letter to financial institutions, April 7, 2020</a></span>
</figcaption>
</figure>
<p>As it happens, the decisions follow pressure from the Prudential Regulation Authority which last month sent banks an <a href="https://www.apra.gov.au/capital-management">unprecedented letter</a> asking them to “seriously consider deferring decisions on the appropriate level of dividends”.</p>
<p>It isn’t what bank shareholders have come to expect. </p>
<p>The Commonwealth Bank’s <a href="https://www.commbank.com.au/about-us/investors/dividend-information.html">dividend policy</a> says it will aim to pay cash dividends at “strong and sustainable levels”, maximising dividend imputation cheques from the government by paying <a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">fully franked</a> dividends.</p>
<p>The dividend reductions come after sharp collapses in share prices brought about by hits to current and expected future earnings and increased economic uncertainty.</p>
<p>But, as hard as it is to look beyond dividends, imputation cheques and the price of shares, what’s most important for the owners of shares are the earnings prospects for the banks long term. And here, as hard as it might be for some shareholders to accept, the suspension of dividends is a sensible strategy for the banks.</p>
<h2>Cruel to be kind makes sense for banks</h2>
<p>In making decisions about dividends in the wake of bad news, each bank had two options. </p>
<p>One was to keep paying dividends at previous levels. </p>
<p>That would have pushed the share price down further, as evidenced by the typical drop in a company’s share price after dividends have been paid. </p>
<p>With the funds paid out as dividends, and no longer part of the bank’s shareholders funds, each share becomes correspondingly worth less. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-last-thing-companies-should-be-doing-right-now-is-paying-dividends-135928">The last thing companies should be doing right now is paying dividends</a>
</strong>
</em>
</p>
<hr>
<p>It also puts the bank in a weaker position to weather unexpected loan losses if the COVID-19 storm turns out to be even worse than expected. </p>
<p>The other option was to scrap (or reduce) its dividend and avoid the ex-dividend date drop in its share price. It bolsters its capital strength and gives shareholders higher expected capital gains (or lower capital losses).</p>
<p>Broadly, the loss of dividends should be offset to some degree by a higher share price and higher capital gains. </p>
<p>But try telling shareholders that the dividends they have lost can be replaced by selling shares.</p>
<h2>Tax makes retirees hate it</h2>
<p>That they care is in part psychological. Shareholders view a bird (dividend) in the hand as better than one (a capital gain) in the bush. </p>
<p>Selling shares is seen as “dipping into one’s capital”, even though it has the same effect on the shareholder’s capital (the value of shares held) as taking a dividend.</p>
<p>Another reason shareholders care more than you might think is tax. </p>
<p>Typically (based on historical evidence) a franked dividend of $1 leads to a share price fall of around $1. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">Deeming rates explained. What is deeming, how does it cut pensions, and why do we have it?</a>
</strong>
</em>
</p>
<hr>
<p>But for an investor on a zero tax rate (as many retirees are) that $1 dividend is actually worth around $1.43. </p>
<p>This is because the Tax Office rebates that investor <a href="https://www.marketindex.com.au/franking-credits">43 cents</a> of tax previously paid by the bank, a so-called dividend imputation payment. </p>
<p>Selling $1.43 of shares to compensate for the lost dividend cash flow leaves them worse off.</p>
<p>Super funds on a low 15% tax rate are also likely to prefer payment of franked dividends since they can use the imputation credits to reduce tax on other investment income.</p>
<h2>Tax makes other shareholders like it</h2>
<p>High tax rate investors and foreign shareholders think quite differently. </p>
<p>For high tax rate investors, Australia’s practice of taxing only <a href="https://www.realestate.com.au/advice/what-is-capital-gains-tax/">half</a> of each capital gain can make the higher capital gains associated with higher share prices more attractive than receiving dividends on which they have to pay extra tax.</p>
<p>Foreign shareholders also generally prefer capital gains to franked dividends, since they can’t use Australia’s imputation credits.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/heres-a-radical-reform-that-could-pay-every-retiree-the-full-pension-131289">Here's a radical reform that could pay every retiree the full pension</a>
</strong>
</em>
</p>
<hr>
<p>Under any tax system where dividends and capital gains are taxed differently, deferring dividends hurts some investors and benefits others. Australia’s imputation tax system magnifies that effect, with low tax rate investors being losers.</p>
<p>As it happens, these features of the tax system took centre stage in last year’s election, in which Labor proposals to change both the rules regarding dividend imputation and capital gains were <a href="https://theconversation.com/going-up-monday-showed-what-the-market-thinks-of-morrison-117396">rejected</a> by voters.</p>
<h2>Longer term, investors might thank banks</h2>
<p>The root cause of the hit to dividends is uncertainty about the future. </p>
<p>If economic conditions turn out worse than expected, banks will find themselves hesitant to make loans unless they have sufficient capital to absorb unexpected losses.</p>
<p>To the extent that they use that capital to help restore the health of the economy, all investors (including those reliant on future dividends) will be better off.</p><img src="https://counter.theconversation.com/content/137889/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Westpac and the ANZ have suspended dividends payments. The National Australia Bank has slashed them. The peculiarities of our tax system explain why retirees hate this more than they should.Kevin Davis, Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1364072020-04-16T19:36:08Z2020-04-16T19:36:08ZVital Signs: APRA’s extraordinary gift to banks under pressure to pay dividends<figure><img src="https://images.theconversation.com/files/328313/original/file-20200416-192715-tkuwie.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Last week the Australian Prudential Regulation Authority (APRA) sent an <a href="https://www.apra.gov.au/capital-management">extraordinary letter</a> to Australia’s banks and insurers, essentially telling them to cut their dividend payments to shareholders in light of the coronavirus crisis.</p>
<p>It said it expected banks and insurers to “seriously consider deferring decisions on the appropriate level of 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>Where a board was confident that it could approve a dividend on the basis of robust stress testing that had been discussed with APRA, it should “nevertheless be at a materially reduced level”. </p>
<p>Where dividends were paid those payments should be “offset to the extent possible through the use of dividend reinvestment plans and other capital management initiatives”. </p>
<p>With Australia’s big four banks potentially suffering big losses due to mortgage defaults among other things, their capital bases are at risk.</p>
<p>Equity research analysts at <a href="https://www.nytimes.com/reuters/2020/04/08/world/asia/08reuters-health-coronavirus-australia-banks.html">Macquarie</a> outline a scenario under which bank losses</p>
<blockquote>
<p>reach A$25-27 billion per bank, and their capacity to pay dividends (without raising equity) materially diminishes</p>
</blockquote>
<h2>Why did APRA do it?</h2>
<p>The letter isn’t a “ban” on dividends, and APRA wasn’t telling the banks anything they don’t already know. So why did it bother?</p>
<p>The answer lies in the economics of how investors react to firms that don’t pay the dividends expected.</p>
<p>Seen through that lens, APRA was very clever indeed.</p>
<p>In a classic 1985 paper <a href="https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1540-6261.1985.tb02362.x">Merton Miller and Kevin Rock</a> provided a theoretical answer to the puzzle of why paying dividends seems to signal good news to investors, and why cutting dividends seems to signal bad news, and cuts the share price.</p>
<p>In the Miller-Rock model, the managers of a firm have better information about its future prospects than outside investors. </p>
<p>To keep it simple, imagine there are two “types” of firms: good and bad. </p>
<p>Good firms have high future cashflows, bad ones have low ones.</p>
<p>Only the managers know which is which.</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>Because both types of firm can earn something from investing in the business, it is in the interest of both (more so the good firm) to invest rather than pay out dividends.</p>
<p>Miller and Rock wondered whether what each type of firm did provided clues to investors about whether the managers thought it was good or bad.</p>
<p>Surprisingly, they found that usually good firms will pay high dividend and bad firms no dividends. </p>
<p>It is surprising because good firms are sacrificing more by paying dividends.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australias-appetite-for-dividends-could-cannibalise-economic-growth-46403">Australia's appetite for dividends could cannibalise economic growth</a>
</strong>
</em>
</p>
<hr>
<p>Their logic was that the bad firms were the least able to afford good dividends and that good firms knew this and paid high dividends to signal they could afford to. </p>
<p>It has a striking implication with <a href="https://www.nber.org/papers/w4244">strong empirical support</a>. </p>
<p>If a firm gets a temporary negative shock to its cashflow or investment prospects it won’t want to cut its dividend lest investors think it has turned “bad”.</p>
<p>It will borrow or even do short-term damage to its prospects in order to maintain investor confidence and hence a high stock price.</p>
<h2>Get out of jail free</h2>
<p>Notice that the signalling theory of dividends implies that the managers of firms would like to cut dividends in tough financial times, and probably should, but they worry about sending a bad signal to investors.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/328304/original/file-20200416-192698-pj1hzp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/328304/original/file-20200416-192698-pj1hzp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/328304/original/file-20200416-192698-pj1hzp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/328304/original/file-20200416-192698-pj1hzp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/328304/original/file-20200416-192698-pj1hzp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/328304/original/file-20200416-192698-pj1hzp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/328304/original/file-20200416-192698-pj1hzp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/328304/original/file-20200416-192698-pj1hzp.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">APRA’s letter is a get-out-of-jail card.</span>
</figcaption>
</figure>
<p>An announcement like APRA’s provides them with cover – an excuse.</p>
<p>And it does more. It is what economists refer to as a “coordination device”.</p>
<p>If the big four banks got together and agreed cut their dividends by the same amount, say in half (which would be illegal) investors would get no differential signal and no new information about which bank was “good” and which was “bad”.</p>
<p>APRA’s message opens up the possibility of all four coordinating without talking – merely by following advice.</p>
<p>As 2005 Nobel laureate Thomas Schelling put it in his book, <a href="https://www.hup.harvard.edu/catalog.php?isbn=9780674840317&content=reviews">The Strategy of Conflict</a>, </p>
<blockquote>
<p>people can often concert their intentions or expectations with others if each knows that the other is trying to do the same</p>
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<p>And they’ve an interest in coordinating. If one bank falls over during this crisis and needs to be bailed out that’s bad for all of them. All of their stock prices will tank, it will be hard for them to raise the capital they need to fund their operations.</p>
<p>Australia’s banks compete, but they are “frenemies”, right now more friends than enemies.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-bank-shares-are-climbing-despite-the-royal-commission-111175">Why bank shares are climbing despite the royal commission</a>
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<p>We will have to wait and see if they pick up the get-out-of-jail card APRA has handed them and cut dividends together.</p>
<p>APRA could have taken a tougher stance. It could have banned dividends. But that would have sent a bad signal to domestic and international capital markets about the solvency of our banks.</p>
<p>I have been critical of some of APRA’s moves in recent years. But this one is brilliant. Let’s hope the banks can see a life raft when they’re offered one.</p><img src="https://counter.theconversation.com/content/136407/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>APRA is allowing the big four banks to coordinate in a way that might otherwise be illegal.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1337802020-03-16T07:49:47Z2020-03-16T07:49:47ZReserve Bank and government prepare fresh emergency measures as markets tumble<figure><img src="https://images.theconversation.com/files/320882/original/file-20200316-27627-1dilqv0.jpg?ixlib=rb-1.1.0&rect=71%2C320%2C2484%2C1397&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">STEVEN SAPHORE/AAP</span></span></figcaption></figure><p>The government is planning to deliver a second coronavirus economic support package within days, and the Reserve Bank will announce “<a href="https://www.rba.gov.au/media-releases/2020/mr-20-07.html">further policy measures</a>” to support the economy on Thursday.</p>
<p>The bank sometimes uses the phrase “policy measures” to describe adjustments to its “policy rate”, the so-called cash rate from which most other rates are priced.</p>
<p>Two weeks ago it cut the cash rate to 0.50%, a record low that is only 0.25 points above what Governor Philip Lowe has described as the <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-11-26.html">effective lower bound</a> of 0.25%, beneath which the bank would need to engage in “<a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-11-26.html">unconventional monetary policy</a>” which would involve buying government bonds, residential mortgage bonds and perhaps corporate bonds to force a suite of longer-term interest rates lower.</p>
<p>At Thursday’s announcement Governor Lowe is also likely to take the opportunity to set out in detail how unconventional measures would be applied.</p>
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<p><strong>Reserve Bank cash rate</strong></p>
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<a href="https://images.theconversation.com/files/318234/original/file-20200303-18270-1bjl5b0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/318234/original/file-20200303-18270-1bjl5b0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/318234/original/file-20200303-18270-1bjl5b0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=172&fit=crop&dpr=1 600w, https://images.theconversation.com/files/318234/original/file-20200303-18270-1bjl5b0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=172&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/318234/original/file-20200303-18270-1bjl5b0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=172&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/318234/original/file-20200303-18270-1bjl5b0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=217&fit=crop&dpr=1 754w, https://images.theconversation.com/files/318234/original/file-20200303-18270-1bjl5b0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=217&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/318234/original/file-20200303-18270-1bjl5b0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=217&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>The Australian share market crashed 9.7% on Monday in its worst one-day sell-off since 1987. </p>
<p>In an emergency meeting earlier on Monday New Zealand’s Reserve Bank slashed its cash rate by 0.75 points from 1.00% to 0.25% and said it will remain at that level for <a href="https://www.rbnz.govt.nz/news/2020/03/ocr-reduced-to-025-percent-for-next-12-months">at least the next 12 months</a>. </p>
<p>Should it need to do more, it would turn to unconventional measures along the lines of those being planned for in Australia and implemented in the United States and Europe.</p>
<p>On Sunday, the US Federal Reserve cut its benchmark interest rate <a href="https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-to-zero-and-launches-massive-700-billion-quantitative-easing-program.html">to zero</a> and launched a new round of unconventional measures saying it would buy US$700 billion of government, corporate and mortgage-backed securities.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/now-we-know-the-reserve-bank-has-spelled-out-what-it-will-do-when-rates-approach-zero-127697">Now we know. The Reserve Bank has spelled out what it will do when rates approach zero</a>
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<p>Mid-Monday Australia’s Reserve Bank and the <a href="https://www.cfr.gov.au/news/2020/mr-20-01.html">Council of Financial Regulators</a> which is made up of the bank, the Prudential Regulation Authority, the Securities and Investments Commission and the Commonwealth Treasury, announced a series of measures to keep financial markets working after investors turned away from both shares and government bonds.</p>
<p>Normally when investors desert shares they buy government bonds, forcing down the interest rates quoted on the bonds.</p>
<h2>Reserve Bank to buy bonds as needed</h2>
<p>But in both the US and Australia, investors have sold bonds as well, pushing up the rate (almost doubling the yield on a 10 year Australian government bond from 0.6% last Monday to 1.1%) and starving the market of buyers at any price, a phenomenon the council of regulators describes as a <a href="https://www.cfr.gov.au/news/2020/mr-20-01.html">deterioration in liquidity</a>.</p>
<p>The Reserve Bank has acted to inject liquidity by promising to buy unlimited amounts of one-month and three-month securities until further notice. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/were-staring-down-the-barrel-of-a-technical-recession-as-the-coronavirus-enters-a-new-and-dangerous-phase-132752">We're staring down the barrel of a technical recession as the coronavirus enters a new and dangerous phase</a>
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<p>The Australian Prudential Regulation Authority said it would ensure banks take advantage of the injection of liquidity to support their customers.</p>
<p>Both the Authority and the Securities and Investments Commission will be flexible in applying rules where those would cause hardship to businesses and customers.</p>
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<p>In particular, each agency will, where warranted, provide relief or waivers from regulatory requirements. This includes requirements on listed companies associated with secondary capital raisings, annual general meetings and audits.</p>
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<p>The <a href="https://www.ato.gov.au/Media-centre/Media-releases/Support-measures-to-assist-those-affected-by-COVID-19/">Tax Office</a> earlier announced a series of administrative measures to assist people and businesses in difficulty as a result of the coronavirus including deferring the payment date of amounts due through the business activity statement and income tax assessments by up to four months.</p>
<p>The government’s second coronavirus support package follows a package of A$17.6 announced on last Thursday.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/this-coronavirus-share-market-crash-is-unlike-those-that-have-gone-before-it-133691">This coronavirus share market crash is unlike those that have gone before it</a>
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</em>
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<p>It will be aimed at shoring up business and households affected by new travel and isolation rules <a href="https://theconversation.com/view-from-the-hill-scott-morrison-announces-mandatory-self-isolation-for-all-overseas-arrivals-and-gives-up-shaking-hands-133715">announced on Sunday</a>.</p>
<p>A skeleton parliament will meet for a few hours next week to approve measures announced in the first and possibly the second stimulus package. Members will be paired to ensure that only those needed for quorums will be present.</p><img src="https://counter.theconversation.com/content/133780/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Reserve Bank has scheduled an announcement for Thursday. The government will unveil a second coronavirus stimulus package within days.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1208992019-08-01T00:50:58Z2019-08-01T00:50:58ZHow not to police financial services. Balanced scorecards don’t work for bankers<figure><img src="https://images.theconversation.com/files/286350/original/file-20190731-186805-1bagrkz.jpg?ixlib=rb-1.1.0&rect=80%2C284%2C3457%2C1163&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What can be best measured gets best done, even if the scorecard is "balanced".</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/286339/original/file-20190731-186801-1iv1js6.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/286339/original/file-20190731-186801-1iv1js6.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/286339/original/file-20190731-186801-1iv1js6.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=841&fit=crop&dpr=1 600w, https://images.theconversation.com/files/286339/original/file-20190731-186801-1iv1js6.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=841&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/286339/original/file-20190731-186801-1iv1js6.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=841&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/286339/original/file-20190731-186801-1iv1js6.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1057&fit=crop&dpr=1 754w, https://images.theconversation.com/files/286339/original/file-20190731-186801-1iv1js6.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1057&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/286339/original/file-20190731-186801-1iv1js6.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1057&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.apra.gov.au/file/29576">Australian Prudential Regulation Authority</a></span>
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<p>Casual observers of the <a href="https://theconversation.com/banking-royal-commission-no-commissions-no-exemptions-no-fees-without-permission-hayne-gets-the-government-to-do-a-u-turn-110974">financial services royal commission</a> might be forgiven for thinking the days of sales-based commissions being paid to bank and insurance staff were over.</p>
<p>Apparently not.</p>
<p>The Australian Prudential Regulation Authority’s discussion paper on <a href="https://www.apra.gov.au/sites/default/files/discussion_paper_strengthening_prudential_requirements_for_remuneration.pdf">Strengthening Prudential Requirements for Remuneration</a>, released last week, condones the ongoing use of “balanced scorecards” for determining bonuses.</p>
<p>While possibly not as bad as the old bonus systems based only on sales or profits, a “balanced scorecard” – which also includes less tangible outcomes such as “customer satisfaction” – is not a good solution.</p>
<p>In a study presented at the 2019 Financial Markets & Corporate Governance Conference, I and my colleagues Le Zhang from Macquarie University and Dominik Steffan from the Technical University of Munich find that balanced scorecards produce significantly worse outcomes than no bonuses at all, and create environments in which <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3317344">bad behaviour is more easily tolerated</a>.</p>
<h2>Take 318 bankers…</h2>
<p>We asked 318 finance professionals to take part in 20-minute trading sessions in which they could transact up to 60 times, making decisions that in our simplified balanced scorecard approach were rewarded on the basis of both profit and following risk rules. In the other scenario, the reward was a flat payment, unrelated to performance. </p>
<p>We found that the proportion of people who chose to consistently apply the rules dropped 16% under the balanced scorecard approach. </p>
<p>For those who sometimes violated the rules, compliance <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3317344">dropped 24%</a> when paid under the balanced scorecard approach.</p>
<p>One reason might be that financial criteria such as sales and profits are easy to measure, and are audited, whereas other criteria such as following rules and providing good service are difficult to measure, at least in the short-term. </p>
<h2>‘Balanced’ is unbalanced</h2>
<p>Customer outcomes are often measured with customer surveys such as the infamous <a href="https://www.netpromoter.com/know/">net promoter score</a> that asks whether they would keep using the service or recommend it to others.</p>
<p>It works well for services such as <a href="http://www.netpromotersystemblog.com/2015/10/29/restaurant-chains-discover-the-special-sauce-of-net-promoter-feedback/">restaurant meals</a>, where customers can quickly form valid judgements. But when it comes to financial services, the quality of what they have been offered might not become apparent for years. When customers are disengaged or have low levels of financial literacy, or when products are complex, the quality may never be apparent!</p>
<p>Complaints data bring other problems. One is that often customers don’t bother to complain. Another is that firms sometimes “pay off” disgruntled customers, leaving them satisfied but the underlying problems unresolved. The customers who never complain are left to suffer from poor practices and the complaints data give no meaningful information. </p>
<p>Another popular solution is to rely on manager ratings in the performance assessments that determine bonuses. Manager ratings are often not credible. Academic researchers find that they are as much influenced by the managers <a href="https://www.aaajournals.org/doi/abs/10.2308/accr-10099">own incentives and preferences</a> as they are by performance.</p>
<h2>Managers need not tell the truth</h2>
<p>Managers keen to retain top performers in sales and profits can give them high ratings <a href="https://www.abc.net.au/radionational/programs/backgroundbriefing/the-scandal-inside-anz/11141466">despite poor behaviour</a>. Even more worrying, subjective performance ratings can be prone to <a href="https://www.sciencedirect.com/science/article/pii/S1048984317306410">favouritism, collusion and extortion</a>.</p>
<p>Nobel prizewinner Bengt Holmstrom predicted years ago that the balanced scorecard wouldn’t work, in his landmark paper on <a href="https://heinonline.org/HOL/Page?handle=hein.journals/jleo7&div=31&g_sent=1&casa_token=&collection=journals">multitask principal-agent</a> analysis. </p>
<p>He found that when some criteria are easy to measure and others aren’t, employees will put most of their energy into the criteria that are easy to measure, in this case sales and profits. Balanced scorecards are inherently unbalanced.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/theres-no-evidence-behind-the-strategies-banks-are-using-to-police-behaviour-and-pay-91064">There's no evidence behind the strategies banks are using to police behaviour and pay</a>
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<p>What’s the solution? One might be deferrals – bonuses based on financial performance that are <a href="https://theconversation.com/confiscate-their-super-if-it-works-for-sports-stars-it-could-work-for-bankers-105833">held back for multiple years</a>. </p>
<p>Over time, and with active regulation, it would become obvious whether profits have been generated by fair means or foul. If foul, the bankers would not be eligible to receive what they thought they had earned.</p>
<p>A better idea might be to revert to a system of fixed salaries with no bonuses. It works for most Australians, and it used to work for bankers.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/confiscate-their-super-if-it-works-for-sports-stars-it-could-work-for-bankers-105833">Confiscate their super. If it works for sports stars, it could work for bankers</a>
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<img src="https://counter.theconversation.com/content/120899/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>This research was financially supported by Deloitte Australia and the Insurance Council of Australia. In-kind support was also received from the Australian and New Zealand Institute for Insurance and Finance and the Financial Services Institute. Elizabeth Sheedy has also received funding in the past from the Centre for International Finance and Regulation, from the Australian Prudential Regulation Authority and 17 individual financial institutions. She is a member of Risk Managers' Association of Australia. </span></em></p>“Balanced scorecards”, of the kind countenanced by the Australian Prudential Regulation Authority, are inherently unbalanced.Elizabeth Sheedy, Professor - Risk governance, culture, remuneration, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1179672019-05-31T04:01:05Z2019-05-31T04:01:05ZVital Signs: APRA is going to make it easier to borrow. It could be another one of its bad calls<figure><img src="https://images.theconversation.com/files/277134/original/file-20190530-69063-bs2kc2.jpg?ixlib=rb-1.1.0&rect=147%2C213%2C935%2C503&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The prudential regulator has a history of doing too much, too late.</span> </figcaption></figure><p>Who’d make a decision that would give a household with an income of A$150,000 an extra $100,000 to $120,000 of borrowing power? APRA, that’s who. APRA is the <a href="https://www.apra.gov.au/">Australian Prudential Regulation Authority</a>. It was hived off from the Reserve Bank and insurance and superannuation regulators in the late 1990s in order to set rules for institutions whose size meant they could threaten the stability of the financial system.</p>
<p>Often it does the right things too late, and often not enough of them, or too much.</p>
<p>Although it is increasingly seeming like a like a distant memory, there was a time not long ago where Sydney and Melbourne home prices were soaring.</p>
<p>APRA got worried, about people borrowing too much and defaulting, and also about banks getting stuck with bad loans.</p>
<p>So, after prodding by the Reserve Bank, it imposed a bunch of what are known as “macroprudential regulations” – those are regulations that have an effect on the economy, achieving the same sort of thing the Reserve Bank does by moving interest rates, but by different means.</p>
<h2>APRA made lending harder</h2>
<p>In late 2014 it introduced a rule that required lenders to assess an intending borrowers ability to repay not against the actual interest rate they would be charged, but against the actual interest rate plus two percentage points, or a rate 7%, whichever was higher.</p>
<p>It told the banks “good practice would be to maintain a buffer and floor rate <a href="https://www.apra.gov.au/sites/default/files/141209-Letter-to-ADIs-reinforcing-sound-residential-mortgage-lending-practices.pdf">comfortably above these levels</a>,” meaning that in practice they were required to refuse to lend to anyone who couldn’t handle an interest rate of 7.25%.</p>
<p>Ten days ago it wrote to lenders saying it was considering removing the rule and replacing it one that <a href="https://www.apra.gov.au/media-centre/media-releases/apra-proposes-amending-guidance-mortgage-lending">merely required a buffer of 2.5 percentage points</a>, meaning that when mortgage rates fall below 4%, banks will only be required to assess a borrower’s ability to handle 6.5%.</p>
<h2>Now, it wants to make it easier…</h2>
<p>It’ll mean households with incomes of $150,000 could have their ability to repay assessed against a 0.75% lower rate, enough to give them the capacity to borrow an extra $70,000 or so.</p>
<p>It’s not the only extra borrowing power about to be bestowed on households.</p>
<p>It is all but certain that Reserve Bank will cut interest rates by at least 0.25 points next week, and perhaps more at coming meetings. Assuming the major banks pass this through – and in the wake of the Royal Commission they would be crazy brave not to – that will give prospective buyers even more borrowing power.</p>
<p>It’s not implausible, then, to think that a household with an income of $150,000 might have an extra $100,000 to $120,000 of borrowing power in the next few months.</p>
<p>Measured against median home price even in Australia’s most expensive city, Sydney, of $1 million, it’s significant.</p>
<h2>…which could reignite home prices</h2>
<p>Home prices have fallen from their peaks of around 18 months ago, at least in Sydney and Melbourne by double digits. One explanation has been a credit crunch by the banks brought on by the royal commission.</p>
<p>The actions of APRA and the Reserve Bank could offset that crunch, perhaps more than fully.</p>
<p>Given that pre-crunch it looked like we were in the midst of a housing bubble it is quite possible that APRA and the Bank combined will reignite the bubble.</p>
<p>Suppose this is right. What should we conclude about APRA and the Reserve Bank?</p>
<p>First the Bank. If/when it do cut rates it will <em>not</em>, repeat <em>not</em>, be because it wants home prices and household debt to gallop away again. It’ll be because it is worried about continuing to miss its inflation target and sluggish wage growth.</p>
<p>Pumping up household borrowing will be collateral damage.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/cutting-interest-rates-is-just-the-start-its-about-to-become-much-much-easier-to-borrow-117500">Cutting interest rates is just the start. It's about to become much, much easier to borrow</a>
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<p>But I’m not willing to give APRA a pass. </p>
<p>It instituted its macroprudential rule in late 2014 – well into the unprecedented run-up in home prices. It was asleep at the switch about the magnitude and danger of interest-only loans, acting on it <a href="https://www.apra.gov.au/sites/default/files/Pages/insight-issue4-2017.html">way too late</a>.</p>
<p>Now, just as the housing market is correcting, it wants to pull out the economic version of a cattle prod.</p>
<p>As the cool kids say: “What’s up with that?”</p>
<h2>It might be too much too late</h2>
<p>Macroprudential regulation is a profoundly important tool for ensuring against large financial risks. It is particularly important in property-obsessed Australia.</p>
<p>But it is important to get it right. Risks have to be seen early and action needs to be decisive. Being late can be the same as being wrong. Wild swings, with rules coming on and coming off seemingly out of nowhere, are dangerous.</p>
<p>And they can themselves lead to significant financial instability – precisely the opposite of the goal.</p>
<p>Or to put it another way: what APRA does is great, except when it’s not.</p><img src="https://counter.theconversation.com/content/117967/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>Combined, APRA and the Reserve Bank are about to give households on $150,000 up to $120,000 more borrowing power.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1175002019-05-21T22:43:12Z2019-05-21T22:43:12ZCutting interest rates is just the start. It’s about to become much, much easier to borrow<figure><img src="https://images.theconversation.com/files/275781/original/file-20190521-23814-1lyng94.jpg?ixlib=rb-1.1.0&rect=269%2C808%2C3568%2C1568&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">APRA's move will make the Reserve Bank rate cuts more potent.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australia’s lowest ever Reserve Bank cash rate – 1.5% – is about to be consigned to history.</p>
<p>On Tuesday Governor Philip Lowe made it clear he plans to cut it in two weeks’ time. The money market cash rate (from which all other rates derive) will then fall to 1.25%. </p>
<p>After that, if betting in the market is right, he will cut the cash rate to just 1% by Christmas. </p>
<p>Speaking in Brisbane, Lowe said the Reserve Bank board <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-05-21.html">was of the view that</a>: </p>
<blockquote>
<p>inflation was likely to remain low relative to the target, and that a decrease in the cash rate would likely be appropriate. </p>
<p>A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at its meeting in two weeks’ time the board would consider the case for lower interest rates.</p>
</blockquote>
<p>The bank is forecasting a tick up in economic growth from the present 2.3% to 2.75% by the end of the year and a fairly steady unemployment rate.</p>
<p>But here’s the thing. He was keen to emphasise that those forecasts only applied if he cut rates twice this year – that’s twice, before the end of the year.</p>
<hr>
<p><strong>Reserve Bank cash rate since 1990</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/275782/original/file-20190521-23832-y56vnk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/275782/original/file-20190521-23832-y56vnk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/275782/original/file-20190521-23832-y56vnk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=131&fit=crop&dpr=1 600w, https://images.theconversation.com/files/275782/original/file-20190521-23832-y56vnk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=131&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/275782/original/file-20190521-23832-y56vnk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=131&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/275782/original/file-20190521-23832-y56vnk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=165&fit=crop&dpr=1 754w, https://images.theconversation.com/files/275782/original/file-20190521-23832-y56vnk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=165&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/275782/original/file-20190521-23832-y56vnk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=165&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.rba.gov.au/statistics/cash-rate/">Reserve Bank of Australia</a></span>
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</figure>
<hr>
<p>He is planning to do it because the economy is weak, much weaker than his political masters suggested during the election campaign. Consumer spending is “unusually soft”.</p>
<blockquote>
<p>Over the past three years, household disposable income has increased at an average rate of just 2¾ per cent. This compares with an average of 6 per cent over the preceding decade. </p>
<p>As this period of weak income growth has persisted, it has become harder for households to dismiss it as just a temporary development – as something that will pass quickly. The lower rate of income growth has also made it harder for households to pay down debt. The end result has been that many people have decided to adjust their spending plans. </p>
</blockquote>
<h2>The cuts are just the start</h2>
<p>It isn’t much good cutting interest rates if mortgage rates don’t follow. That will be up to the banks. But until this week, even if they had passed it on, there would have been so many would-be borrowers it wouldn’t have helped.</p>
<p>That’s because, whatever the interest rate and whatever a would-be borrower’s ability to make payments, banks have generally refused to lend to anyone who couldn’t cope with a rate of 7.25%. </p>
<p>It’s been the doing of the Australian Prudential Regulation Authority – one of the Reserve Bank’s sister organisations. It regulates banks and super funds and other institutions in order to keep the financial system stable.</p>
<p>In December 2014 it directed the institutions it supervises to impose serviceability assessments that incorporated a buffer of at least two percentage points above the loan product rate they were offering and a minimum floor rate of <a href="https://www.apra.gov.au/sites/default/files/141209-Letter-to-ADIs-reinforcing-sound-residential-mortgage-lending-practices.pdf">at least 7%</a>.</p>
<p>That meant that if new mortgage rates were 5%, as they were at the time, the lenders had to satisfy themselves that the borrower could cope with 7%. As new mortgage rates fell to 4.5% they still had to satisfy themselves that the borrower could cope with 7%.</p>
<h2>Banks have needed unreasonably high buffers</h2>
<p>APRA’s directive stated that “prudent practice would be to maintain a buffer and floor rate comfortably above these levels”, meaning that in practice most lenders wouldn’t lend to anyone who wasn’t able to cope with the mortgage rate climbing to 7.25%, no matter how unlikely that was becoming.</p>
<p>On Tuesday this week, a few hours before Governor Lowe delivered his speech, it wrote to the institutions again, <a href="https://www.apra.gov.au/sites/default/files/letter_consultation_on_revisions_to_prudential_practice_guide_apg_223_residential_mortgage_lending.pdf">telling them that</a> </p>
<blockquote>
<p>the low interest rate environment is now expected to persist for longer than originally envisaged. This may mean that the gap between actual rates paid and the floor rate may become unnecessarily wide.</p>
</blockquote>
<p>It was proposing to remove “reference to a specific 7% floor”.</p>
<p>The required serviceability buffer would climb from 2% to 2.5%, and it would no longer expect lenders to use a rate “comfortably above” that buffer.</p>
<h2>Soon, they’ll be able to lend more…</h2>
<p>While strictly speaking the letter notified lenders of a one-month consultation period, what it really did was notify them that the changes were about to be implemented.</p>
<p>In recent months most new mortgage rates have been below 4.5%, with some high-quality borrowers able to get rates as low as 3.6%.</p>
<p>The new arrangements will allow banks to assess them on their ability to make payments on a 6% to 7% loan instead of a 7.25% loan.</p>
<p>Should the next two cash rate cuts be passed on, it would allow them to assess lenders on their ability to repay a 5.5% to 6.5% loan. </p>
<p>It would represent a substantial easing of credit standards for new borrowers.</p>
<h2>..up to 10% more</h2>
<p>My calculations suggest it would increase the borrowing capacity of home buyers by as much as 10%, enough to have a material positive impact on the housing market.</p>
<p>APRA’s move (almost certainly taken in consultation with the Reserve Bank) both makes a cut in the Reserve Banks’s cash rate less imperative and more potent.</p>
<p>As interest rates get lower, further cuts seem to have been losing their ability to get people and businesses spending and borrowing, something the Governor would have been thinking of when he referred in his speech to the “limitations” of relying on just one instrument to boost the economy.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/their-biggest-challenge-avoiding-a-recession-117381">Their biggest challenge? Avoiding a recession</a>
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</em>
</p>
<hr>
<p>It would also be up to the government to provide “additional fiscal support” (which means extra spending or tax cuts) including through spending on infrastructure and “policies that support firms expanding, investing and employing people”.</p>
<p>The first of his rate cuts, due in a fortnight, will have more impact than it would have had APRA not acted.</p>
<p>Or perhaps not as much as he would have hoped if the banks, carrying big costs as a result of the misdeeds uncovered in the royal commission, don’t pass it all on.</p><img src="https://counter.theconversation.com/content/117500/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warren Hogan 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>Under cover of a speech from the Reserve Bank governor, the Prudential Regulation Authority has moved to make it 10% easier to borrow.Warren Hogan, Industry Professor, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1114282019-04-17T19:46:00Z2019-04-17T19:46:00ZConstructively tough? Neither side has committed to fully adopting perhaps the most important recommendation of the banking royal commission<p>Among the many recommendations of the banking Royal Commission was a <a href="https://financialservices.royalcommission.gov.au/Pages/reports.aspx#final">Board of Oversight</a> for the two regulators in charge of financial institutions; the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority: ASIC and APRA. </p>
<p>Since then APRA’s own internal review conducted by deputy chairman John Lonsdale and NSW Supreme Court Judge Robert Austin, Australian Competition and Consumer Commission commissioner Sarah Court and UNSW professor Dimity Kingsford-Smith has found APRA to be soft on enforcement and <a href="https://www.apra.gov.au/sites/default/files/apra_enforcement_strategy_review_-_final_report_web.pdf">timid by comparison to its international peers</a>. </p>
<p>Nonetheless, and to demonstrate that APRA still doesn’t get what it doesn’t get, its chairman used Tuesday’s <a href="https://www.apra.gov.au/enforcement">release of the review</a> to announce a new mantra. From now on, APRA is to be: “<a href="https://www.financialstandard.com.au/news/apra-to-up-the-ante-135451581">constructively tough</a>”. </p>
<h2>‘Constructively tough’?</h2>
<p>It sounds like “tough but flexible”, a contradiction in terms if ever there was one. Despite its Royal Commission hammering, APRA still seems not to have internalised the message: fraud and theft are not up for negotiated settlement.</p>
<p>This is why a board of oversight is so necessary. </p>
<p>I have frequently argued in favour of such a reform: a <a href="https://theconversation.com/australias-financial-regulators-need-policing-91396;%20https://theconversation.com/to-clean-up-the-financial-system-we-need-to-watch-the-watchers-38359">regulator to regulate the regulators</a>. Along with colleagues Karen Fairweather and John Tarrant, I was invited to make a submission to the Royal Commission detailing egregious examples of regulator inefficacy, and capture by, and subornation to, the industries they are meant to regulate. Included was a body of theoretical and empirical international scholarship suggesting that financial sector regulators are more susceptible to capture than regulators of other industries. </p>
<p>We argued that the gravity of the potential harm from crises, superimposed with the frailties – both observable and theoretical – of regulators, required enhanced safety in the form of an overseer to police the corporate police.</p>
<p>So it was encouraging to see our submission reflected in the commission’s recommendation for a board of oversight:</p>
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<a href="https://images.theconversation.com/files/269730/original/file-20190417-139084-e0dozd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/269730/original/file-20190417-139084-e0dozd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/269730/original/file-20190417-139084-e0dozd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=167&fit=crop&dpr=1 600w, https://images.theconversation.com/files/269730/original/file-20190417-139084-e0dozd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=167&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/269730/original/file-20190417-139084-e0dozd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=167&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/269730/original/file-20190417-139084-e0dozd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=210&fit=crop&dpr=1 754w, https://images.theconversation.com/files/269730/original/file-20190417-139084-e0dozd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=210&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/269730/original/file-20190417-139084-e0dozd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=210&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://financialservices.royalcommission.gov.au/Pages/reports.aspx#final">Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, February 2019</a></span>
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</figure>
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<p>Of concern, however, is that the commissioner elected to leave the details of how the board would work to parliament. It is here that the process faces its greatest risk: the risk of clumsy albeit well-intentioned implementation, all the way to purposefully bad implementation, fully intended to undermine the fundamental goals of the whole endeavour, and facilitated by equally captured and suborned politicians. </p>
<h2>Politicians have a history of backing down</h2>
<p>It has happened before. The 1991 report of the The House of Representatives Standing Committee on Finance and Public Administration entitled “<a href="https://www.aph.gov.au/Parliamentary_Business/Committees/House_of_representatives_Committees?url=reports/1991/1991_pp290report.htm">Pocket Full of Change</a>” recommended a banking code of practice, which was ditched at the last minute to be replaced by a different code written by the Australian Bankers’ Association. The result was a code that protected banks against their customers, while allowing them to virtue signal.</p>
<p>So far Treasurer Frydenberg has refused to commit to one of the single most necessary powers that such a board can possess: the power of public opprobrium. As far back as the late 1860s Charles Francis Adams Jr wrote of the need to subject captured and corrupted railroad commissions to the disinfecting power of sunlight; what Thomas McCraw, writing in the mid-1980s referred to as a <a href="https://military.wikia.org/wiki/Charles_Francis_Adams,_Jr.">Sunshine Commission</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/defence-mechanisms-why-nab-chairman-ken-henry-lost-his-job-111182">Defence mechanisms. Why NAB chairman Ken Henry lost his job</a>
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<p>The anti-viral power of public exposure has been amply demonstrated by the banking royal commission already. Heads have rolled: the chair, chief executive and group counsel at AMP. The chair and chief executive of the National Australian Bank (albeit after significant procrastination). Some entities have self-selected out of their business model. Others have self-selected out of the market entirely. Retail Super funds have haemorrhaged well in excess of one million members, and over <a href="https://www.afr.com/personal-finance/superannuation-and-smsfs/industry-super-funds-win-11b-from-retail-funds-after-hayne-scandals-20190226-h1bqiq">$11 billion in funds</a>. </p>
<p>But none of this fallout, none of it, is due to post-royal commission enforcement measures. It is all thanks to public opprobrium: sunshine.</p>
<h2>Few things are as powerful as the power to shame</h2>
<p>So it is of concern that the treasurer hasn’t yet made an unequivocal commitment to make public the board of oversight’s reports into the performance of our regulators, performance which to date has been weak enough, feckless enough, and incompetent enough to more than justify the royal commission.</p>
<p>Speaking to the ABC on February 4 in what might be some sort of Orwellian <em>newspeak</em>, Frydenberg would only say: </p>
<blockquote>
<p>this new oversight board will be reporting to government and governments don’t operate in secret.</p>
</blockquote>
<p>Sometimes they do, and especially when dealing with banks. APRA reports are routinely withheld form the public, making use of the secrecy provisions of the <em>Banking Act</em>.</p>
<p>Frydenberg should instead be mindful of the extensive protection his government has provided to the banking and retail super industry over the past five years, shielding them from the threat of inquiry by a royal commission up until the point when it was impossible to resist. It will serve no purpose to replace one protection racket with another. And that applies to both banks and super, something Labor’s Chris Bowen should keep in mind should he become treasurer.</p>
<p>Put simply, as we emerge from this dark, decade-long night of the most appalling dishonesty and wickedness in our financial sector, more than anything else, now we must ensure the sun shines.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/banking-royal-commission-no-commissions-no-exemptions-no-fees-without-permission-hayne-gets-the-government-to-do-a-u-turn-110974">Banking Royal Commission: no commissions, no exemptions, no fees without permission. Hayne gets the government to do a U-turn</a>
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<img src="https://counter.theconversation.com/content/111428/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow consults to Datta Burton and Associates and the Australian Institute of Superannuation Trustees. He has previously received funding from the South African Human Sciences Research Council, the Ernst and Ethel Eriksen Trust, the Harvard Law School, the University of the Witwatersrand, the University of Pretoria, and various universities in Australia. He is affiliated with Australian Citizens Against Corruption and the American Council on Consumer Interests. </span></em></p>The government has agreed to create an independently-chaired body to report on the performance of ASIC and APRA, but it hasn’t said its reports will be made public.Andrew Schmulow, Senior Lecturer, Faculty of Law, University of WollongongLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1039992018-10-01T04:35:27Z2018-10-01T04:35:27ZThree simple steps to fix our banks<figure><img src="https://images.theconversation.com/files/238596/original/file-20181001-19009-107cbbr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It isn't brain surgery.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/">Shutterstock</a></span></figcaption></figure><p>Here are three simple steps to address the widespread misconduct revealed in the interim report of the banking royal commission, arising out of <a href="https://law.unimelb.edu.au/about/staff/jeannie-paterson">research I have undertaken with my colleague Associate Professor Jeannie Paterson</a>.</p>
<p>While not exhaustive, they are good places to start:</p>
<h2>Step 1: back to basics</h2>
<p>Commissioner Hayne is spot on when he says that simply adding more regulation is not going to do the job. </p>
<p>In fact, more regulation can be more damaging than helpful. </p>
<p>There are literally dozens of overlapping state and federal statutes that prohibit misleading or deceptive conduct, and they often use subtly but significantly different language and impose different penalties. </p>
<p>This “legislative porridge” splits the regulation of financial services and products in ways that defy rational justification.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/banking-royal-commissions-damning-report-things-are-so-bad-that-new-laws-might-not-help-104058">Banking Royal Commission's damning report: 'Things are so bad that new laws might not help'</a>
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<p>The result is protracted and cripplingly expensive litigation to determine who is covered by what prohibition. </p>
<p>This plays perfectly into the hands of well-funded corporations who know that delaying tactics and the limited resources of regulators and commercial and consumer are likely to produce soft settlements, “agreed penalties” and no real pressure to change behaviour – all while profits continue to flow in.</p>
<p>So we need to get back to basics. Simple, overarching prohibitions contained in one or two pieces of key legislation, which apply to every trader and corporation who engages in trade or commerce. No exceptions. No carve outs. No special treatment. The same penalties and remedies. Simple, powerful and unavoidable.</p>
<h2>Step 2: calling out deceptive conduct</h2>
<p>For many years, the Australian Securities and Investments Commission has concentrated its relatively meagre litigation efforts on proving “misleading” conduct by corporations. This is probably because it is notoriously difficult to prove the personal dishonesty traditionally required to prove fraud (the “deceptive” part of the prohibition on “misleading or deceptive” conduct). </p>
<p>Part of the problem has been that corporations are artificial persons and so need to operate through directors, managers, employees and agents. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/fees-for-no-service-how-asic-is-trying-to-make-corporate-misconduct-hurt-103089">Fees for no service: how ASIC is trying to make corporate misconduct hurt</a>
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<p>Nailing down instances of individual personal dishonesty, intention and responsibility is often impossible. </p>
<p>Misleading conduct, by contract, is relatively easy to prove, because it focuses on the objective meaning of conduct, does not require proof of fault – and does not require ASIC to identify the personal intentions of individuals behind the conduct. </p>
<p>But, focusing on misleading conduct comes at the cost to effective regulation. </p>
<p>The reputational damage flowing from a finding of misleading conduct is very low.</p>
<p>As Commissioner Hayne has noted, corporations are quick to characterise this sort of conduct as involving “mistakes”, <a href="https://financialservices.royalcommission.gov.au/Documents/interim-report/interim-report-volume-1.pdf#page=296&zoom=auto,40,364">to apologise and to promise reform</a>.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/hayne-holds-fire-but-the-banks-day-of-reckoning-is-coming-104055">Hayne holds fire, but the banks' day of reckoning is coming</a>
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<p>It is time to face the reality that what matters is the behaviour of corporations rather than what is in their (artificial) minds.</p>
<p>It isn’t brain surgery. </p>
<p>As the commissioner himself as noted, you don’t need legal advice to know that “charging for doing what you do not do is dishonest”. Much of the reported conduct “<a href="https://financialservices.royalcommission.gov.au/Documents/interim-report/interim-report-volume-1.pdf#page=149&zoom=auto,83,341">ignores basic standards of honesty</a>”.</p>
<p>A change in focus from personal intention to objective standards of honest conduct is needed to address what the commissioner identifies as “the root causes of conduct, which often lie <a href="https://financialservices.royalcommission.gov.au/Documents/interim-report/interim-report-volume-1.pdf#page=114&zoom=auto,40,598">within the systems, processes and culture</a> cultivated by an entity”. </p>
<h2>Step 3: genuine punishment</h2>
<p>The final piece of the puzzle (missing from the otherwise incisive discussion in the interim report) is to bring courts on board.</p>
<p>Australian courts have been very cautious in awarding penalties for misleading conduct, and give substantial weight to mitigating factors such as expressions of remorse and cooperation with regulators. </p>
<p>They have said repeatedly that the focus of penalties should be on deterrence rather than punishment. </p>
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<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>
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<p>Their approach may be entirely appropriate in cases where courts are dealing with human defendants facing personal ruin. But when applied to corporations, it can undermine the legitimate role of punishment in changing repeated and longstanding corporate misbehaviour. </p>
<p>Again, there are some simple changes to the law that could address this problem. </p>
<p>One is to clarify that punishment is an important aim of the civil penalties regime, required for “<a href="https://www.documentcloud.org/documents/4951274-Banking-royal-commission-interim-report.html#document/p1">public denunciation</a>” of bad behaviour and to provide effective deterrence.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/the-problem-with-australias-banks-is-one-of-too-much-law-and-too-little-enforcement-103996">The problem with Australia's banks is one of too much law and too little enforcement</a>
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<p>Another is for courts to frame penalties with a strong eye to the profits amassed as a result of the breach. Often the profit earned <a href="https://financialservices.royalcommission.gov.au/Documents/interim-report/interim-report-volume-1.pdf#page=324&zoom=auto,40,463">will be larger than the damage to consumers</a>. Misconduct cannot be allowed to make good financial sense.</p>
<p>Yet another (also not yet on the commission’s radar) is to seriously consider expanding private rights of redress to include additional, punitive damages in cases of serious misconduct. </p>
<p>Not only would this make private claims more feasible for commercial victims. The recent <a href="https://www.smh.com.au/business/companies/banks-set-to-face-massive-class-action-over-rip-offs-20180911-p502yo.html">launch of group proceedings by Slater & Gordon</a> shows that, when brought together, private litigants are capable of sharing the regulatory burden of keeping banks on the straight and narrow: it needn’t all be done by the Australian Securities and Investments Commission.</p>
<p>There are important issues to consider about the strengths and dangers of group litigation, currently <a href="https://www.alrc.gov.au/inquiry-categories/class-action-proceedings-and-third-party-litigation-funders">the subject of review by the Australian Law Reform Commission</a>. </p>
<p>But if it can be done properly, the deep pockets of banks might well meet their match in well organised teams of lawyers and litigation funders, aggressively seeking justice both in the interests of their clients and for their own financial reward.</p><img src="https://counter.theconversation.com/content/103999/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elise Bant receives funding from the Australian Research Council for the Discovery Grant 180100932 (with Associate Professor JM Paterson) for ‘Developing a rational law of misleading conduct’ (2018-2020) and ARC Discovery Grant DP140100767 (with Associate Professor JM Paterson) for ‘Remedies under the Australian Consumer Law and the Common Law: Evolution and Revolution’ (2014-2018).</span></em></p>Getting better behaved banks isn’t difficult. Here are three places to start.Elise Bant, Professor of Law, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1039132018-09-26T20:20:27Z2018-09-26T20:20:27ZABC Board Chair over-reaches in a bid to appease hostile government<p><em><strong>Update</strong>: Justin Milne has now <a href="https://theconversation.com/justin-milne-quits-as-abc-chairman-after-furore-over-attack-on-political-editor-103995">resigned as chair of the ABC board</a>.</em></p>
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<p>Reports of the contents of <a href="https://www.smh.com.au/politics/federal/they-hate-her-emails-show-abc-chairman-told-michelle-guthrie-to-fire-emma-alberici-20180925-p505z4.html">leaked emails</a> written by ABC Board Chair Justin Milne provide a powerful insight into how governments of the day can exert influence over what parliament had intended to be an independent agency. </p>
<p>The emails have emerged in the wake of the <a href="https://theconversation.com/abc-board-sacks-managing-director-michelle-guthrie-103756">ABC board’s termination</a> of ABC managing director, Michelle Guthrie.</p>
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<a href="https://theconversation.com/government-sets-up-inquiry-into-embattled-abc-chairmans-email-103930">Government sets up inquiry into embattled ABC chairman's email</a>
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<p>Milne is correct in asserting that the ABC Act <a href="http://about.abc.net.au/statements/statement-from-the-chairman/">requires the board</a> “to independently govern the Corporation, protect its best interests, ensure that it is well funded, well managed and that our content is of the highest standards”.</p>
<p>But it doesn’t operate in exactly the same way as other corporate boards.</p>
<h2>The ABC board is different</h2>
<p>For example in most corporations, commercial or otherwise, boards exercise control over management by using specific delegations and determining corporate policy. </p>
<p>Boards also appoint the chief executive and in some instances other members of the management group.</p>
<p>However that’s not the case for the ABC. </p>
<p>The ABC Act provides that on advice of the prime minister and communications minister the governor general appoints the chair and other directors with the exception of the managing director and the staff elected director. </p>
<h2>Partly non-political</h2>
<p>The Act bars former members of parliament and senior political staffers (for a time) from being appointed as the chair or as non-executive directors.</p>
<p>Appointments to all other ABC board positions, including the chair, must follow <a href="https://www.communications.gov.au/what-we-do/television/abc-and-sbs">a merit-based process</a> with candidates interviewed in a process that the government does not control. </p>
<p>But that requirement does not apply to the managing director. This gives the board greater latitude to appointment a candidate that may draw less criticism from the Government of the day. </p>
<h2>And partly political</h2>
<p>This is highly problematic because of real (but usually latent) potential that a managing director might arrive with an agenda to undermine the board’s statutory role and parliamentary-determined Charter to be an independent public broadcaster. </p>
<p>The potential conflict is more acute because at the ABC the managing director is designated in the Act as the editor-in-chief.</p>
<p>Because the managing director is responsible for content, the reported instances of the Chair pressuring the managing director to remove individual journalists and approaching ABC editorial staff are inappropriate. </p>
<h2>Setting the scene for conflict</h2>
<p>The Act sets up a potential conflict between most of the ABC directors (who essentially have a trustee role) and the managing director who might be a non-merit based appointee.</p>
<p>The ABC board used to avoid this conflict by sticking to the public service tradition of appointing technocrats to the managing director role.</p>
<p>But over time perceptions about the appointment have become increasingly politicised.</p>
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<p>As Marco Bass, ex head of ABC news and current affairs Victoria <a href="https://www.smh.com.au/national/michelle-guthrie-was-staggeringly-unqualified-for-abc-role-20180925-p505vm.html?utm_medium=Social&utm_source=Facebook#Echobox=1537848894">has written</a>, the temptation to control the news is becoming harder to resist:</p>
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<p>What [Guthrie and Shier] shared was an implicit brief to disrupt the ABC, dismantle internal fiefdoms and, importantly, bring the news and current affairs division under control. </p>
<p>Make no mistake, federal governments, regardless of political complexion, don’t care about Peppa Pig. They care about political coverage by the ABC’s journalists and broadcasters.</p>
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<p>These idiosyrantic governance rules amplify flaws in the design of boards on which both executives and non executives sit. </p>
<h2>Other boards have similar problems</h2>
<p>As I and colleagues <a href="https://theconversation.com/solving-deep-problems-with-corporate-governance-requires-more-than-rearranging-deck-chairs-99297">have written previously</a>, mixing executive and non-executive directors on a single board creates governance problems.</p>
<p>On corporate boards managers who are also directors can (and usually do) position themselves as very powerful gate keepers and dominate both other directors and senior executives.</p>
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Read more:
<a href="https://theconversation.com/solving-deep-problems-with-corporate-governance-requires-more-than-rearranging-deck-chairs-99297">Solving deep problems with corporate governance requires more than rearranging deck chairs</a>
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<p>This was a problem at the Commonwealth Bank and from some reports was becoming a problem at the ABC.</p>
<p>If a government can use the idiosyncrasies of the the ABC Act to cower a much-loved and very public institution like the ABC, imagine how pliable agencies like APRA, ASIC and ACCC might be in accommodating the views of a government who might not want to deal with the political fallout of, for example, tough but necessary decisions such as <a href="https://financialservices.royalcommission.gov.au/public-hearings/Documents/exhibits-2018/17-august/EXHIBIT-5.307.pdf">cancelling banking or superannuation licences</a>.</p>
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<p><em>This piece has been edited to remove an earlier incorrect statement that under the ABC Act the managing director is appointed by the governor general on the advice of government ministers. The managing director is appointed by the board, but without the constraints imposed on the government in appointing other board members.</em></p><img src="https://counter.theconversation.com/content/103913/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Linden received funding from RMITs EU Centre to conduct his doctoral research. The Centre is funded by the European Union.</span></em></p>Flaws in the ABC Act set up conflict and allow the government to pressure it.Andrew Linden, Sessional Lecturer, PhD (Management) Candidate, School of Management, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/989392018-06-27T19:56:53Z2018-06-27T19:56:53ZThe government’s bank reforms wouldn’t have saved us a royal commission<figure><img src="https://images.theconversation.com/files/225070/original/file-20180627-112644-1tegf1v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">APRA chairman Wayne Byres addresses parliament. </span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>In a bid to fend off the Financial Services Royal Commission, the government introduced the <a href="https://www.legislation.gov.au/Details/C2018A00005">Banking Executives Accountability and Related Measures Act</a> (BEAR) last October. This legislation comes into effect next week. </p>
<p>But it is questionable whether it would have prevented many of the excesses and scandals that the royal commission has unearthed. In choosing not to impose restrictions on variable remuneration (bonuses, commissions etc.), BEAR effectively left untouched the incentives for inappropriate financial advice and lending decisions.</p>
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Read more:
<a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">Why the new banking laws won’t be the slam dunk the government is expecting</a>
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<p>BEAR is <a href="https://www.legislation.gov.au/Details/C2017B00229/Explanatory%20Memorandum/Text">explicitly intended</a> “to improve the operating culture of [Authorised Deposit-Taking Institutions] and increase transparency and accountability across the banking sector”. To do this, the act imposes a range of obligations on ADIs (our banks, building societies and credit unions) and their subsidiaries.</p>
<p>There is a requirement to conduct business “with honesty and integrity, and with due skill, care and diligence”. There is also a requirement to cooperate with the regulator. This includes identifying the specific accountability of senior executives. </p>
<p>Perhaps the most interesting obligations under BEAR are those pertaining to remuneration. These mandate a minimum deferral of 40% of variable pay for four years and clawback provisions in cases of bad behaviour. In other words, executives can lose their bonuses for poor behaviour even years after the fact. </p>
<p>The BEAR Act represents the first major step towards regulation of executive remuneration in Australia. </p>
<p>Other countries, particularly the UK and in Europe, have substantially more expansive regulatory regimes. There are no rules in Australia capping bonuses as a ratio of salary (as there are in the Netherlands, UK and Germany, based on EU rules). </p>
<h2>Does remuneration regulation work?</h2>
<p>BEAR adds momentum to a growing current of banker surveillance, and its symbolic and rhetoric value should not be dismissed. However, there is little empirical evidence to suggest these rules will impact behaviours. </p>
<p>Research into white-collar crime suggests that in many cases offenders pay limited regard to potential sanctions in decision-making, let alone malus or clawback provisions for poor performance (which are nothing new for bankers). Short-term outcomes and incentives tend to be more salient than long-term risks, particularly in an environment not characterised by strong enforcement. </p>
<p>Moreover, by opting not to impose a cap on variable pay, BEAR is unlikely to impact misconduct fuelled by a heavy use of bonuses to reward financial outcomes. </p>
<p>Examples of this misconduct include the CBA <a href="https://www.smh.com.au/business/banking-and-finance/dollarmites-bites-the-scandal-behind-the-commonwealth-bank-s-junior-savings-program-20180517-p4zfyr.html">Dollarmites scandal</a>, inappropriate fee structures at <a href="https://www.smh.com.au/business/banking-and-finance/banking-royal-commission-turns-its-gaze-to-dodgy-planners-fees-20180413-p4z9jh.html">AMP</a> and even the <a href="https://www.afr.com/business/banking-and-finance/financial-services/hayne-royal-commission-nab-staff-took-cash-bribes-to-smash-targets-20180312-h0xdfx">payment of bribes at NAB</a>. </p>
<p><a href="https://theconversation.com/theres-no-evidence-behind-the-strategies-banks-are-using-to-police-behaviour-and-pay-91064">Research shows</a> that variable pay incentives are instrumental in the creation of a sales culture at the banks that privileges financial profits over customer welfare.</p>
<p>Deferral of these incentives, without acting on the scale and ratio of incentives to base salary, is unlikely to have a substantial impact. </p>
<p>More is required to ensure that remuneration policies actually address behaviours. A more fundamental question must also be considered: in light of the culture of misconduct exposed by the royal commission, is it even possible to regulate culture?</p><img src="https://counter.theconversation.com/content/98939/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>In choosing not to impose restrictions on bonuses and commissions, the government left untouched the incentives for inappropriate financial advice and lending decisions.Clinton Free, Professor, UNSW SydneyHannah Harris, Lecturer, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/986242018-06-21T18:48:38Z2018-06-21T18:48:38ZVital Signs: we are witnessing a slowly deflating property bubble, for now<figure><img src="https://images.theconversation.com/files/224161/original/file-20180621-137714-1uhm4wl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The air may fizzle out of the Australian balloon, or it may burst violently.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>Vital Signs is a regular 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>
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<p>In a week that was fairly light on data releases, let’s return to Australia’s perennial favourite topic – house prices. Painful though it may be for existing property owners who are selling, we are witnessing what a bubble slowly deflating back to reality looks like.</p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0">Data released Tuesday</a> showed that across Australia’s eight capital cities prices fell 0.7% in the first quarter of 2017. Sydney was hardest hit, with prices down 1.2%. Melbourne and Brisbane experienced 0.6% declines and Perth prices were down 0.9%.</p>
<p>Price declines were more subdued over the previous 12 months, or were even still up over the period. Sydney prices were down 0.5% on the year, but Melbourne prices were still up strongly (6.2%) and Brisbane showed 1.6% annual growth. Perth, where prices have been under pressure for some time, registered a 1.5% fall over the last year.</p>
<p>This downward price pressure is consistent with a reduction in <a href="https://www.corelogic.com.au/auction-results">auction clearance rates documented by CoreLogic</a>. Last week, clearance rates averaged 56.9% across the country and just 55.8% in Sydney and 58.7% in Melbourne. Compare this to a year ago when the capital city average was 66.7%, Sydney was at 68.0% and Melbourne at 71.0%. And this doesn’t even factor in that auction volumes have dropped this year.</p>
<p>So here’s the deal. Fewer people are trying to sell their residential properties. Those that try are having less success in doing so. Those that do succeed are getting lower prices.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">Vital Signs: the spooky mortgage risk signs our bankers are ignoring</a>
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<p>Yet it pays to take a longer-term view. As <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2018/2018-06-05.html">the minutes of the last RBA board meeting noted</a>:</p>
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<p>… housing prices were still 40% higher in Sydney and Melbourne than at the beginning of 2014, while housing prices in Perth had fallen by around 10% over the same period.</p>
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<p>The big question is whether the housing market will continue to deflate slowly, or whether there is going to be an abrupt “pop”.</p>
<p>A big correction to property prices would require a major trigger. The most likely candidate for that trigger is interest-only loans. </p>
<p><a href="http://www.abc.net.au/7.30/concerns-as-interest-only-loans-roll-over-to/9887938">More and more attention is finally being paid</a> to dangers caused by Australia’s profligate use of such loans. <a href="https://theconversation.com/vital-signs-the-spooky-mortgage-risk-signs-our-bankers-are-ignoring-85591">As I wrote last year</a>, at the peak a staggering 40% of residential mortgages in Australia were interest only.</p>
<p>The Australian Prudential Regulation Authority (APRA) <a href="https://theconversation.com/vital-signs-interest-only-loans-are-an-economic-debacle-that-could-bust-the-property-market-95518">stepped in</a> last year, capping new interest-only loans at 30% of new loans. That, along with a tightening of underwriting standards by banks, has led to a sharp drop in such loans. </p>
<p>The latest figures put the proportion of interest-only loans at <a href="https://www.businessinsider.com.au/australia-interest-only-mortgage-restrictions-apra-rba-2018-3">15.2% of new issuances</a>.</p>
<p>The RBA has been <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html">pushing an upbeat story</a> about how this shakes out. As they tell it, the A$120 billion a year of interest-only loans coming due will be smoothly transitioned to principal-and-interest loans for most people.</p>
<p>Well, perhaps. I certainly hope so. </p>
<p>But for many people this transition will involve increases in monthly repayments of 30-40%. At a time when wages growth has been persistently sluggish, many people don’t have much wiggle room.</p>
<p>Interest-only loans typically have a five-year term and then need to be refinanced or become principal-and-interest loans. For a whole lot of folks, an interest-only rollover ain’t going to happen. Worse, the largest volumes of interest-only loans were written in 2013-2016. </p>
<p>So we are about to see a three-year wave of shifts to principal-and-interest loans. </p>
<p>Worse still, the loans originated in those years were heavily mediated by mortgage brokers whose incentives were all about moving volume, not quality. <a href="http://www.abc.net.au/news/2017-09-11/500b-dollars-of-liar-loans-in-australia-ubs/8892030">Widely cited research</a> from investment bank UBS about the prevalence of so-called “liar loans” gives one every reason to be really worried about the ability of these borrowers to make a mortgage payment that has increased by a third or more per month.</p>
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Read more:
<a href="https://theconversation.com/vital-signs-poor-wage-growth-means-interest-rates-could-be-low-for-a-long-time-98240">Vital Signs: poor wage growth means interest rates could be low for a long time</a>
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<p>And the rosy scenario the RBA keeps pushing involves look at the <em>average</em> buffer and embedded equity that households have. But that misses the economics 101 point that it is the marginal borrower that determines equilibrium prices, not the average. </p>
<p>If I’m selling hot dogs I don’t care what the average person is willing to pay for a hot dog, I care what the last person I might sell to is willing to pay, for she determines the price.</p>
<p>And, in a moment of gaping honesty eight weeks ago, the RBA’s Chris Kent <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html">highlighted the difference between the average and marginal borrower</a>, saying:</p>
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<p>… about half of owner-occupier loans have prepayment balances of more than six months of scheduled payments. While that leaves half with only modest balances, some of those borrowers have relatively new loans.</p>
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<p>It doesn’t matter than some of them are new borrowers – other than that they bought at the height of the bubble, making them more susceptible to financial stress than other borrowers. The fact is that a whole bunch of folks are on the wire. If their payments go up they are going to struggle to make them. And if a lot need to sell at once then, as they say at NASA, “Houston, we have a problem.”</p>
<p>The air may fizzle out of the Australian balloon, or it may burst violently. Either way we should be asking hard questions about why APRA waited so late to act on interest-only loans, liar loans and underwriting standards in general. Very hard, very public questions.</p><img src="https://counter.theconversation.com/content/98624/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>A whole bunch of folks are on the wire, and if their housing payments go up they are going to struggle.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/960062018-05-03T20:23:34Z2018-05-03T20:23:34ZVital Signs: fallout from banking crackdown could be worse than interest rate rises<p><em>Vital Signs is a regular 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: both the RBA and US Fed leave interest rates on hold as all eyes turn to potential new banking regulations and their likely impact on the economy.</em></p>
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<p>This week was all about interest rates – even though the RBA and the US Fed kept both of their official rates unchanged at their most recent meetings.</p>
<p>But as usual, what’s likely to happen in the future is the interesting question.</p>
<p>In Australia, all eyes will be on how ASIC and APRA respond to the findings of the banking royal commission. Will they be defensive about past mistakes, or move forward with tighter regulations on banks and financial planning? What will the RBA do in this context?</p>
<p>On interest rates the answer is probably “nothing soon”.</p>
<p><a href="https://www.rba.gov.au/media-releases/2018/mr-18-11.html">The official statement</a> by RBA Governor Philip Lowe makes one almost physically feel the contortions.</p>
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<p>“The Bank’s central forecast for the Australian economy remains for growth to pick up, to average a bit above 3 per cent in 2018 and 2019. This should see some reduction in spare capacity in the economy.” </p>
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<p>OK, growth is about to move up strongly.</p>
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<p>“Household income has been growing slowly and debt levels are high.” </p>
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<p>Well, that sounds concerning, since <a href="https://tradingeconomics.com/australia/household-final-consumption-expenditure-etc-percent-of-gdp-wb-data.html">household consumption accounts for nearly 60% of GDP</a>.</p>
<p>Unemployment was getting better, but that’s stopped happening. </p>
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<p>“Inflation remains low…with both CPI and underlying inflation running marginally below 2 per cent. Inflation is likely to remain low for some time…A gradual pick-up in inflation is, however, expected as the economy strengthens.” </p>
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<p>So inflation has been outside the target band of 2-3% for a very long time, but if that courageous GDP growth forecast pans out then we might end up back in the band.</p>
<p>And on, and on. No wonder US President Harry Truman once lamented “Give me a one-handed economist. All my economists say ‘on one hand…’, then ‘but on the other…’”</p>
<p>In any case, for the foreseeable future it is not what the RBA does, but what the big four banks do that will have the biggest impact on the interest rates Australian borrowers face.</p>
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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>
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<p>Wholesale funding costs have been ticking up, cutting net interest spreads for the banks. And the wash-up of the Royal Commission is likely to lead to a further tightening of underwriting standards. As ANZ CEO Shayne Elliot put it:</p>
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<p>“People are still going to buy a home, so it doesn’t change fundamental demand, but it will change the process and will probably make it harder for people to be successful in their applications.”</p>
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<p>Those two factors taken together could easily see a 15-20 basis point increase in rates for home loan borrowers. That might be tempered by potential outrage from the public – banks behave badly and then put their prices up – but the banks have a lot of market power, as history has shown in these matters.</p>
<p>Across the pond, the US Federal Reserve left official rates unchanged from March at 1.5% to 1.75%. That ended, for now, a string of six rate hikes since December 2015.</p>
<p>In a <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20180502a.htm">relatively brief statement</a> the Fed noted; </p>
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<p>“the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent.”</p>
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<p>The leading interpretation of this is that the Fed thinks inflation is ticking up and will likely raise rates another 25 basis points at the next meeting if nothing material changes in the economy.</p>
<p>All this is a reminder that monetary policy is as much art as it is science.</p>
<p>It is also worth remembering that the other key function of central banks is prudential regulation. That is where the real changes could be interesting. Fed Chair Jay Powell is known to be much more amenable to deregulation of the financial sector than his predecessor Janet Yellen. It may not be too long before we see those instincts put into action.</p>
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Read more:
<a href="https://theconversation.com/debunking-the-myth-of-our-well-regulated-banks-9333">Debunking the myth of our 'well-regulated' banks</a>
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<p>Perhaps the regulatory front will be more interesting than interest rates for the remainder of 2018.</p><img src="https://counter.theconversation.com/content/96006/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>All eyes will be on how ASIC and APRA respond to the findings of the banking royal commission. Will they be defensive about past mistakes, or move forward with tighter regulations?Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/958622018-05-02T03:03:43Z2018-05-02T03:03:43ZAfter damning the Commonwealth Bank’s management, regulators want the bank to fix itself<p>A <a href="http://www.apra.gov.au/AboutAPRA/Documents/CBA-Prudential-Inquiry_Final-Report_30042018.pdf">report</a> on the Commonwealth Bank’s governance, culture and accountability has stripped away <a href="https://www.commbank.com.au/about-us/shareholders/corporate-profile/corporate-governance.html">the bank’s delusion</a> that it is well run and a model of good governance. </p>
<p>The report by the Australian Prudential Regulation Authority (APRA) is a damning indictment of every aspect of CBA management, from the board of directors to executive management and even the lower levels of the bank. However, APRA has done little more than rap CBA on the knuckles. </p>
<p>Responsibility for fixing up CBA has been turned over to the bank itself. More could have been done, including placing conditions on CBA’s banking licence and removing board members and executives. </p>
<p>APRA <a href="http://www.apra.gov.au/MediaReleases/Pages/18_17.aspx">has applied</a> a A$1 billion add-on to CBA’s minimum capital requirement. These are the financial assets that the Commonwealth Bank is required to hold to ensure a stable banking system. </p>
<p>APRA has also accepted an <a href="http://www.apra.gov.au/CrossIndustry/Documents/20180430-CBA-EU-Executed.pdf">enforceable undertaking from the CBA</a>. This is essentially an agreement under which CBA accepts the report’s findings (but does not expressly agree with them) and promises to prepare a plan to respond to its recommendations. </p>
<p>There are indications in the APRA report that there will be further investigations of the conduct of bank employees. </p>
<h2>What penalties?</h2>
<p>The A$1 billion add-on to CBA’s capital requirements is not a penalty, despite <a href="http://www.afr.com/business/banking-and-finance/financial-services/commonwealth-bank-hit-with-1b-capital-charge-afsecter-scathing-apra-report-20180430-h0zg14">commentary to that effect</a>. APRA can and does require top-ups of this kind from time to time under the <a href="https://www.legislation.gov.au/Details/C2018C00067">Banking Act</a> to ensure security and confidence in the banking sector. </p>
<p>Given the Commonwealth Bank’s size and leading role in the sector, the additional capital requirement is prudent but hardly controversial. The funds will be returned to CBA when it completes the actions proposed by the enforceable undertaking. </p>
<p>At best, the capital requirement is a temporary but not significant inconvenience for CBA. It represents a <a href="https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf">mere 0.103% of its total assets as of the last financial year</a> </p>
<p>That leaves the CBA enforceable undertaking as the principal outcome from the APRA report. </p>
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Read more:
<a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">Why the new banking laws won’t be the slam dunk the government is expecting</a>
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<p>The <a href="http://www.apra.gov.au/CrossIndustry/Documents/20180430-CBA-EU-Executed.pdf">enforceable undertaking</a> is mostly a procedural document. For instance, CBA must submit its remedial action plan by June 30 2018. </p>
<p>It must have a clear and measurable set of responses and a timetable for each response, and must nominate a person responsible from the CBA executive team. CBA must also appoint an independent reviewer, approved by APRA, to report to APRA on compliance with the enforceable undertaking and the completion of items in the plan. CBA must report separately on executive pay issues. </p>
<p>In essence APRA has handed over the responsibility for cleaning up the management mess found at the CBA to the bank itself, despite finding that it is culturally unfit to properly manage itself. </p>
<p>Why should anyone take comfort from that arrangement? </p>
<p>APRA’s report also makes clear that the problems at the Commonwealth Bank do not stem from one specific issue. The problems affect the whole organisation of more than 45,000 employees with A$967 billion in assets. </p>
<p>An independent reviewer will vet what is being done and report on its success or otherwise to APRA. But that report will be made to APRA, not to the general public. We may never know what measures the bank implements as APRA has no obligation to disclose anything. </p>
<h2>What else could have been done?</h2>
<p>An <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2846853">enforceable undertaking</a> can save the regulator the time, cost and uncertainty of taking legal action, as well as enable it to craft specific remedial actions to fit the circumstances. </p>
<p>But there is very little tailoring in the Commonwealth Bank’s enforceable undertaking. APRA has opted to wait and see what remedial action the bank comes up with. The regulatory touch is so light that even describing it as featherweight would be an exaggeration. </p>
<p>APRA could have done much more than it did. Banks require a licence and APRA is <a href="https://www.legislation.gov.au/Details/C2018C00067">empowered by Banking Act</a> to place conditions on these licences that restrict or limit how banks can operate.</p>
<p>APRA could have used this power to place immediate restrictions on CBA’s business practices, including on the size and calculation of executive compensation. One of the major findings of APRA’s report is that CBA executive compensation schemes did not provide sufficient incentives for senior executives to account for risk in their decision-making. Certainly, the criticisms of CBA management in the APRA report are sufficient to warrant this kind of action. </p>
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Read more:
<a href="https://theconversation.com/apra-and-asic-have-the-legal-power-to-sack-bank-heads-but-they-need-willpower-95772">APRA and ASIC have the legal power to sack bank heads, but they need willpower</a>
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<p>APRA has the <a href="https://theconversation.com/apra-and-asic-have-the-legal-power-to-sack-bank-heads-but-they-need-willpower-95772">power to remove a bank director or senior manager</a> if the person does not meet one or more of the <a href="http://www.apra.gov.au/CrossIndustry/Documents/Prudential%20Standard%20CPS%20520%20Fit%20and%20proper.pdf">criteria for fitness and propriety</a>. That APRA did not do this may be because there have already been resignations and new directors at the Commonwealth Bank.</p>
<p>APRA should have queried whether these changes were sufficient. Perhaps this is part of the wait-and-see approach implied in the enforceable undertaking.</p>
<p>The APRA report highlights systemic problems in Australia’s leading company and premier bank, including a culture of complacency, defensiveness, insularity and overconfidence. But for all of that, and despite the financial and emotional costs borne by the Australia community, APRA’s response appears to be no more than “wait and see”.</p><img src="https://counter.theconversation.com/content/95862/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Bird does not own shares in CBA. </span></em></p>The Commonwealth Bank has been given responsibility to fix its own management mess. Regulators could have done a lot more.Helen Bird, Course Director, Master of Corporate Governance & Research Fellow, Swinburne Law School, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/958892018-05-01T11:21:40Z2018-05-01T11:21:40ZView from The Hill: The waves of “reputational damage” spread far and wide<p>The Liberals are always urging the business community to get onto the political battlefield and argue for what it believes, rather than leaving the space to the ACTU, GetUp! and others on the left.</p>
<p>The Business Council of Australia in particular has felt the heat. In 2016 Victorian Liberal president Michael Kroger said of the BCA, “these people have got no idea how to influence public opinion” and called for its chief executive, Jennifer Westacott, to be sacked.</p>
<p>Now the BCA has taken up the challenge to join the fray, a decision that might be described as “courageous”, in the <em>Yes Minister</em> use of the word. Westacott is on the frontline in what has become the toughest of gigs, given the shocking disclosures, and subsequent fallout, in the financial sector.</p>
<p>Just this week, on Monday AMP’s chairman Catherine Brenner quit, while a day later the Australian Prudential Regulation Authority (APRA) released a scathing report on Commonwealth Bank wrongdoing after an inquiry into allegations that it facilitated money laundering.</p>
<p>With the BCA conducting an “<a href="https://www.australia-at-work.com.au/">Australia at Work</a>” advertising campaign to counter anti-business sentiment and running local forums around the country in conjunction with Sky, Westacott was on <a href="https://www.6pr.com.au/podcast/dont-allow-anti-business-agenda-to-feed-off-banking-rc/">Perth radio</a> on Tuesday prosecuting the message.</p>
<p>The BCA represents some 130 of the biggest companies – among them, all four major banks and AMP.</p>
<p>Questioned about corporate bad behaviour including that perpetrated by other major companies as well as the financial institutions, Westacott admitted “we’ve got huge issues in the business community to fix, and my advice to boards and to CEOs is to fix them and fix them fast”.</p>
<p>“Business has got to get back to its purpose of providing excellent service to its customers, treating its employees properly, treating its suppliers properly,” she said. She pointed to the BCA having pushed its companies to pay small businesses in 30 days – a good move, but surely a very modest one, in the wider scheme of things.</p>
<p>But Westacott’s warning was: “If we allow [the bad behaviour] as an opportunity for this anti-business movement that has been there … for a long time, to get a stranglehold on the policy agenda of our country, we will be poorer for it”.</p>
<p>Earlier, in Tuesday’s Australian, Westacott <a href="https://www.theaustralian.com.au/opinion/engine-of-australias-prosperity-in-need-of-support/news-story/40cdf5994786401c1b892c6098229ce2">wrote</a> that indefensible behaviour “has handed anti-business campaigners a fresh excuse to seek to punish the engine of Australia’s prosperity.”</p>
<p>Just as, anyone into scoring tit-for-tat points could say, the bad behaviour of some unions – the most notable being the Construction, Forestry, Maritime, Mining and Energy Union – has handed the anti-union campaigners very useful weaponry.</p>
<p>That’s what happens with reputational damage. Its impact can be both deep and broad. This is one reason why some companies are very concerned, for example in their climate change and environmental policies, with living up to what they understand to be the “social licence” they have.</p>
<p>Very obviously, reputational damage is a hazard for governments. We see this as Treasurer Scott Morrison (who incidentally, unlike his predecessor Joe Hockey, is not personally close to the big end of town) struggles in responding to the serial revelations about the financial sector.</p>
<p>In this case, the reputational damage has two dimensions.</p>
<p>Firstly, the fact the government resisted the royal commission until it could do so no longer means people apply a discount to the various measures it did take - for example the provision in the 2017 budget that before appointing senior executives and directors, banks need to register them with APRA.</p>
<p>On Tuesday Morrison was out with strong language saying that the APRA report condemning the CBA “should be a wake-up call for every board member in the country”. He’s quite right. But Labor was quick to counter by claiming that Morrison – as shown by his opposition to the banking royal commission – “gets the big calls wrong”.</p>
<p>Secondly, the banks’ bad name has boosted the case of those arguing that they should not receive a company tax cut, via the package the government is trying to get through the Senate. The economic argument that there are separate issues involved finds it hard to compete with the more emotive one.</p>
<p>Late last week there was a notable example of a minister trying to repair personal reputational damage she’d suffered.</p>
<p>In an excruciating TV interview Minister for Financial Services Kelly O'Dwyer, following the government talking points, had refused to acknowledge the government should have called the royal commission earlier. She was pilloried. A few days later, off her own bat after Malcolm Turnbull had admitted prompter action would have left the government better off politically, she said, “With the benefit of hindsight we should have called it earlier. I am sorry we didn’t, and I regret not saying this when asked earlier this week.”</p>
<p>In talking about the campaigning it will undertake as the election approaches Westacott says the BCA will “take on issues across the political spectrum”. In practice, however, the BCA will be seeking to reinforce the case of one side.</p>
<p>“Some will claim this is yet another anti-GetUp! campaign,” Westacott wrote.</p>
<p>GetUp! certainly sees it that way. On Tuesday the activist group was appealing for funds to help it “double down on our organising efforts for the next election, and leverage the latest in technology and tactics, to start winning the fight against destructive corporate power.”</p><img src="https://counter.theconversation.com/content/95889/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan owns bank shares.</span></em></p>Westacott is on the frontline in what has become the toughest of gigs, given the shocking disclosures, and subsequent fallout, in the financial sector.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/957722018-05-01T00:57:41Z2018-05-01T00:57:41ZAPRA and ASIC have the legal power to sack bank heads, but they need willpower<p>The <a href="http://www.abc.net.au/news/2018-04-30/amp-chairperson-catherine-brenner-steps-down/9709874">chairwoman</a> and <a href="http://www.abc.net.au/news/2018-04-20/amp-ceo-craig-meller-steps-down-banking-royal-commission/9679138">CEO</a> of AMP have resigned after the company <a href="http://www.abc.net.au/news/2018-04-16/banking-royal-commission-financial-planners/9662166">admitted to charging for advice never provided</a> and lying to clients and regulators. But no banking CEOs have been toppled despite the Financial Services Royal Commission unearthing instances of fraud, bribery, impersonating customers, failures to report misconduct to regulators and other poor behaviour. </p>
<p><a href="https://www.nytimes.com/2017/08/31/business/dealbook/wells-fargo-accounts.html">Similar conduct</a> in the United States has resulted in bank executives and directors being forced to resign. That this is not happening in Australia shows how the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) aren’t using their full powers to take action on the banks’ bad behaviour.</p>
<p>APRA already has the power under the <a href="http://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ba195972/">Banking Act</a> to remove someone from a bank board and install its own nominee. The recently enacted <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">Banking Executive Accountability Regime</a> has given APRA more power to remove directors and install new ones. </p>
<p>So ASIC and APRA are not bedevilled by a lack of power, but by a lack of willpower. </p>
<p>In 1998 the <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP9697/97rp16">Wallis Inquiry</a> hived off the consumer protection and market conduct functions from the Australian Competition and Consumer Commission (ACCC) and gave these to ASIC. Professor Ian Harper, a member of the inquiry, <a href="https://www.fsca.co.za/Customers/Pages/Complaints-Compliments-Feedback.aspx">now concedes</a> that may have been an error. </p>
<p>The ACCC is an excellent regulator, with a long history of being a tough cop. Handing the consumer protection and market conduct function back to the ACCC is a step that federal Treasurer Scott Morrison should take now.</p>
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Read more:
<a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">Why the new banking laws won’t be the slam dunk the government is expecting</a>
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<p>The royal commission heard that a Commonwealth Bank subsidiary was <a href="http://www.abc.net.au/news/2018-04-19/cba-charged-fees-to-customers-who-had-died-commission-hears/9675922">billing customers for ongoing service after their deaths</a>. But no executives have been sacked for this. </p>
<p>Indeed, Matt Comyn, who was <a href="https://www.commbank.com.au/about-us/our-company/management/matt-comyn.html">responsible for this division from 2012 onwards</a>, has been promoted to Commonwealth Bank CEO. Former CEO Ian Narev has been permitted to sail off into the sunset with bonuses intact. </p>
<p>This shows ASIC is the same, or worse, than what it was in 2014: a timid, hesitant regulator, <a href="http://fsi.gov.au/publications/final-report/">too quick to accept the assurances of regulated entities</a>.</p>
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<a href="https://theconversation.com/australias-financial-regulators-need-policing-91396">Australia's financial regulators need policing</a>
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<p>Despite United States authorities being <a href="http://scholarship.law.uc.edu/cgi/viewcontent.cgi?article=1154&context=uclr">widely regarded</a> as weak in standing up to their banks, American CEOs are being held accountable.</p>
<p>Take the example of John Stumpf, chairman and CEO of Wells Fargo, the biggest retail bank in the US. Under his direction Wells Fargo <a href="https://www.nytimes.com/2017/08/31/business/dealbook/wells-fargo-accounts.html">staff had been opening multiple accounts for clients</a>, with neither their knowledge nor their consent, and then charged account-keeping fees.</p>
<p>When the scandal hit, Stumpf was <a href="http://www.abc.net.au/news/2016-09-23/head-of-wells-fargo-described-as-gutless/7868278">hauled before the US Senate</a>. He performed <a href="https://youtu.be/iCLIyXpV5K0">so disastrously</a> that the board told him he <a href="https://youtu.be/wm0Koz2zvXk">needed to go straight away</a>. </p>
<p>No one is suggesting Stumpf knew about the fraud, or that Comyn knew that CBA was charging fees for advice to dead people. But Stumpf’s misstep caused his departure. Why is no one suggesting Comyn must go? </p>
<p>This is the true state of the Australian financial sector: bank executives and CEOs who <a href="https://theconversation.com/heavy-penalties-are-on-the-table-for-banks-caught-lying-and-taking-fees-for-no-service-95210">could be facing criminal charges</a>, and should have resigned, don’t even acknowledge the buck stops with them.</p>
<h2>Regulatory failure</h2>
<p>And if there is any doubt about the need to get cracking, here is the knockout blow: <a href="https://www.businessinsider.com.au/westpac-ubs-downgrade-2018-4">UBS has downgraded Westpac shares</a> because the royal commission revealed that the percentage of “liar loans” in the bank’s A$400 billion loan book may be much higher than stated, or even than Westpac itself is aware of. </p>
<p>This is the culmination of ten years of cowboy behaviour in a financial system that now resembles the Wild West. </p>
<p>This is what happens when compliance culture breaks down, which in turn is a function of regulatory oversight and enforcement. Put differently, our regulators have failed to act for so long that the problem is assuming systemic proportions. </p>
<p>What will be interesting to see is whether the <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">APRA inquiry</a> is another whitewash. I half suspect that if it failed to excoriate CBA it would look pretty silly. </p>
<p>Let’s hope the panellists understand that. But if they don’t, then they must be called out.</p><img src="https://counter.theconversation.com/content/95772/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Andy Schmulow consults to Datta Burton and Associates. He is affiliated with Australian Citizens Against Corruption (ACAC), is an Executive Member of the Board of the Australian Law and Economics Association, and a committee member of the Banking and Finance Law and Studies Association (BFSLA) and the American Council on Consumer Interests (ACCI). He provides on-going ad hoc advice to members of the Australian Federal Parliament, principally in the Labor Party. He is currently a member of an expert panel of advisors convened to provide South Africa's National Treasury with advice on the drafting of the Conduct of Financial Institutions Bill, and made a series of submissions during the drafting of the Financial Sector Regulation Act.</span></em></p>ASIC and APRA don’t lack power to sack bank directors. They the lack the willpower to do so.Andrew Schmulow, Senior Lecturer, Faculty of Law, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/955182018-04-26T20:17:09Z2018-04-26T20:17:09ZVital Signs: Interest only loans are an economic debacle that could bust the property market<p><em>Vital Signs is a regular 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: This risks of interest only loans that the RBA is ignoring and more revenue for the government ahead of the budget.</em></p>
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<p>Australian taxpayers won’t face a rise in taxes now that <a href="https://theconversation.com/turnbull-government-abandons-8-2-billion-medicare-levy-increase-95606">Treasurer Scott Morrison announced</a> the government will not increase the Medicare Levy by 0.5% as planned. This was to originally fully fund the National Disability Insurance Scheme (NDIS). </p>
<p>This is on the back of strong company tax receipts stemming from companies using up carry-forward losses accumulated in the wake of the financial crisis.</p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5506.0?OpenDocument">Australian Bureau of Statistics data for 2016/17</a>, released this week, showed tax revenue for the federal government (including taxes received from other levels of government and public corporations) increased A$19.4 billion (5.2%).</p>
<p>The averted tax rise will be welcome news for Australian taxpayers. It also wedges the Labor opposition. </p>
<p>They have said that the NDIS was fully funded on their watch. So now they are proposing a 0.5% tax rise on all incomes over A$87,000. That’s pretty close to full-time male average weekly earnings and comes close to capturing half of Australian households.</p>
<p>The federal budget on May 8 will no doubt have further goodies for voters in the run-up to the net election, which will be either this year or relatively early next year. As usual, we will be reporting directly from the budget lockup. </p>
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Read more:
<a href="https://theconversation.com/greenspans-uncertainty-principle-and-the-evolution-of-fedspeak-29784">Greenspan’s 'uncertainty principle' and the evolution of Fedspeak</a>
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<p>One of the central economic puzzles of the last several years has been persistently low inflation in all advanced economies, despite general economic recovery and falling unemployment.</p>
<p>This week’s Australian <a href="http://www.abs.gov.au/ausstats/abs@.nsf/0/938DA570A34A8EDACA2568A900139350?Opendocument">consumer price inflation figures</a> revealed a 0.4% increase for the March quarter, and 1.9% for the last 12 months. The March quarter figure was below market expectations of 0.5%, and also the previous (December quarter) figure of 0.6%. Education prices were up 2.6% on the quarter, and health prices up 2.2% (or 4.2% for the year to March 2018).</p>
<p>This puts inflation still below the <a href="https://www.rba.gov.au/inflation/inflation-target.html">Reserve Bank of Australia’s (RBA) target band of 2-3%</a>. That band, of course, has been in place since the early 1990s – beginning with this speech by <a href="https://www.rba.gov.au/speeches/1992/sp-gov-170892.html">then governor Bernie Fraser</a>.</p>
<p>Numerous central banks around the world have a similar approach. The basic idea is that a central bank can build a reputation over time to commit to monetary policy such that inflation lies in the band. </p>
<p>Now there are pros and cons to this approach to monetary policy, and it has its critics. But that is another tale for another day. </p>
<p>Just assuming that inflation targeting is the correct objective, how is the RBA doing? Well, one small hitch in the plan is that inflation has been outside the band for a long time now (basically since 2014), <a href="https://www.rba.gov.au/inflation/measures-cpi.html">as the RBA’s own figures show.</a></p>
<p>Given the level of unemployment in Australia, low wages growth, and stubbornly low inflation, the RBA probably should have cut rates further a fair while back. But they seem, probably rightly, terrified of further fuelling a potential housing bubble. </p>
<p>Meanwhile, the credibility of their commitment to the inflation target withers. If only the regulation of our banking and finance sector had been better for the last, say, decade or two.</p>
<p>Speaking of such regulation, RBA assistant governor Chris Kent <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html">gave a speech Tuesday</a> about the important issue of interest-only loans. Kent’s speech was significant because it followed up on remarks in the RBA minutes about the same issue that <a href="https://theconversation.com/vital-signs-the-calm-before-the-storm-in-us-china-trade-95149">I discussed in this column last week</a>.</p>
<p>It seems that the RBA “house view” on interest only loans is as follows. There could be a problem but the Australian Prudential Regulation Authority (APRA) stepped in and the banks have voluntarily tightened lending standards recently. Also because the <em>average</em> household with an interest only loan has a buffer of savings, everything will be fine. Nothing to see here.</p>
<p>I hope the RBA’s conclusion is right, but I know for sure that the reasoning is not. It’s actually the <em>marginal</em> household’s financial position and behaviour that matters, not the average household. </p>
<p>The average United States borrower with an adjustable-rate mortgage did not default in 2007, 2008 or 2009. But these mortgages were a huge contributor to the financial crisis, along with subprime mortgages.</p>
<p>Kent dutifully laid out the risks from interest only loans, saying: </p>
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<p>Because there’s no need to pay down principal initially, the required payments are lower during the interest-only period. But when that ends, there is a significant step-up in required payments (unless the interest-only loans are rolled over).</p>
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<p>Indeed, unless they can be rolled over. Which they can’t now because of APRA and the banks finally doing something. </p>
<p>Now, prices (interest rates) on interest only loans have gone up as part of the bank response. This has led a bunch of folks to shift to amortising loans, where the principal of the loan is paid down over the life of the loan. So those borrowers who haven’t shifted to these loans already, really don’t want to. </p>
<p>Maybe they can’t afford to because of the increased repayments, that can jump 30% or more per month.</p>
<p>So what does happen? First Kent says many borrowers save ahead of time, expecting a rise in repayments. Yes, the prudent ones. </p>
<p>But how many non-prudent borrowers have there been in the Australian property market in recent years? Hint: a lot.</p>
<p>Kent also points to borrowers who seek to refinance their interest only loan. But banks don’t really want to, and APRA doesn’t want to let them. And who is going to be able to? The safer borrowers who did save and so don’t really need to avoid amortisation. The risky borrowers can’t refinance.</p>
<p>Kent says some borrowers will have to cut their spending. Chuckle, chuckle. And the final option is to sell their house. </p>
<p>Sure, no problem, unless lots of folks want to do that all at once. Then it’s a fire sale that detonates the housing market.</p>
<p>I really do hope we escape the interest only debacle unscathed. But if we do it will be pure, dumb luck, not a consequence of good design or sound regulation.</p>
<p>It definitely doesn’t justify the RBA’s house view in Kent’s concluding remarks that:</p>
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<p>The substantial transition away from interest-only loans over the past year has been relatively smooth overall, and is likely to remain so. Nevertheless, it is something that we will continue to monitor closely.</p>
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<p>Perhaps a there should have been a little more monitoring before interest only loans got to be 40% of all loans and more than half of the loan book of one of our biggest banks.</p><img src="https://counter.theconversation.com/content/95518/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>If we do escape the interest only debacle unscathed it will be pure, dumb luck, not a consequence of good design or sound regulation.Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/932832018-03-14T00:10:48Z2018-03-14T00:10:48ZWhat the Royal Commission can do if the banks don’t play ball on evidence<p>At the <a href="https://financialservices.royalcommission.gov.au/public-hearings/Pages/round-1-hearings.aspx">first round of hearings</a> of the Financial Services Royal Commission, the counsel assisting, Rowena Orr QC, was unimpressed with the material some of the banks have provided. The Commonwealth Bank provided two submissions, the first of which, according to Orr:</p>
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<p>…adopted a high level and general approach, which meant that it did not disclose the totality of the conduct that it has engaged in…</p>
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<p>The CBA’s second submission was no more helpful: it consisted primarily of a large number of spreadsheets. Orr said these were “not in a form which made it possible to easily understand the type and the scale”, of CBA’s conduct.</p>
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<a href="https://theconversation.com/broad-mandate-for-financial-services-royal-commission-takes-the-heat-off-banks-88391">Broad mandate for financial services royal commission takes the heat off banks</a>
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<p>CBA wasn’t alone; the National Australia Bank also won a mention from Orr for “failing to grapple with the task” set by the commissioner.</p>
<p>Can the Royal Commission do anything to get more useful information out of the banks? There are two issues here: what the Royal Commission can make the banks do, and what it has to ask the banks to do.</p>
<h2>What can the Royal Commission make the banks do?</h2>
<p>The Royal Commission has several powers under the <a href="https://www.legislation.gov.au/Details/C2018C00049">Royal Commissions Act 1902</a> that might be used here. Failure to comply with the Royal Commission’s requirements under these powers is punishable by up to two years’ imprisonment.</p>
<p>The Royal Commission can require the banks to produce documents. But this is not a power to make the banks create new documents to help the Royal Commission.</p>
<p>The Royal Commission can require witnesses to give evidence. Using this power, the Royal Commission could make key personnel within the banks attend the Royal Commission and answer questions about the bank’s conduct.</p>
<p>It can also require a person to provide information, or a statement, in writing. This is probably limited to matters the person already knows about; it’s not a power to order a person to conduct investigations to provide a full picture of a bank’s conduct.</p>
<h2>What the commission can ask for</h2>
<p>Quite apart from its coercive powers, the Royal Commission can ask the banks to provide the material it wants, in the form it wants. In fact, the commissioner wrote to the banks the day after the commission was established, inviting them to make submissions. It was in response to this invitation that CBA and NAB provided the documents Rowena Orr QC referred to on the first round of hearings.</p>
<p>The Royal Commission could ask the banks, for example, to provide as much or as little detail as the commission needs; to create summaries or chronologies of events; to explain how to interpret technical documents; to provide a full account of a specified event. </p>
<p>It would then be up to the banks as to whether (and when) they comply with the requests.</p>
<p>The banks have <a href="https://www.westpac.com.au/about-westpac/media/media-releases/2017/30-november/">announced</a> their intention to cooperate with the Royal Commission. Given this, it would be surprising to see the banks defying any reasonable requests for additional documents or information without giving a good reason.</p>
<p>But it’s not quite as simple as “ask and it shall be given you”. Banks hold millions of documents.</p>
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Read more:
<a href="https://theconversation.com/banks-and-financial-providers-one-step-ahead-of-consumers-who-struggle-with-personal-bias-91228">Banks and financial providers one step ahead of consumers who struggle with personal bias</a>
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<p>Each bank stores its documents in a system that suits the bank’s operational needs, and is unlikely to align with the Royal Commission’s priorities. A request to collate all documents on a given topic might take the bank many hours of searching and analysis across multiple databases. The banks then may have to return to the Royal Commission to clarify what is required.</p>
<p>There’s nothing to stop the Royal Commission using both coercive and cooperative techniques. It may, for example, ask banks to provide an overview of the handling of certain complaints, and then require the banks to produce certain documents mentioned in that summary. </p>
<p>But a combination of asking and demanding may be needed to get the information the Royal Commission needs.</p><img src="https://counter.theconversation.com/content/93283/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anna Olijnyk's superannuation fund has shares in several banks.</span></em></p>The Financial Services Royal Commission can ask the banks for the material it wants, in the form it wants.Anna Olijnyk, Lecturer, Adelaide Law School, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/913962018-02-08T02:15:16Z2018-02-08T02:15:16ZAustralia’s financial regulators need policing<p>A <a href="http://www.pc.gov.au/inquiries/current/financial-system/draft/financial-system-draft-overview.pdf">Productivity Commission</a> report analysing competition in the financial sector has pointed out that our finance regulators have become enablers of an industry that is an impediment to our economic competitiveness and exploitative of their most loyal customers. </p>
<p>It proves the need for a board to oversee the conduct of our financial regulators, policing the bodies that are supposed to be keeping our financial system in check.</p>
<p>It could not have come at a worse time for our big four banks. Perennially pilloried for their rampant market misconduct (fraudulently manipulating benchmark interest rates) and their equally rampant abuse of upwards of hundreds of thousands of consumers across every one of their retail operations at one stage or another – financial advice, life insurance and credit card insurance, just to name a few.</p>
<p>The Australian Securities and Investments Commission (ASIC) most recently launched a bank-bill swap rate manipulation case against the Commonwealth Bank, but only across a very narrow range of infringements. The bulk of the infringements can’t be prosecuted because ASIC has dithered for so long, the statute of limitations has run out, and the alleged crimes have proscribed. </p>
<p>And what of our other financial regulator - the Australian Prudential Regulation Authority (APRA)? The Productivity Commission reckons that APRA’s ham-fisted use of macro-prudential tools, usually used to reduce risk in our financial system, has benefited the big four banks to the tune of A$1 billion.</p>
<p>APRA has been criticised for pursuing stability in a manner that has killed competition, hurt consumers, and starved small businesses of life-giving capital. The dominance by a few banks, whose profits are based on runaway property prices, is its own systemic threat. </p>
<p>The result is that small banks are squeezed out, big banks raking in higher rates, and investors offsetting higher rates against their taxes and so costing the Australian Taxation Office an estimated <a href="http://www.afr.com/business/banking-and-finance/financial-services/apra-delivers-banks-1b-windfall-productivity-commission-20180206-h0ulfe?login_token=t5OaZkgGqQAq1Tr69ZC9eucH2aXeO6iCBSEhhdKfjYoGdRDB3IbogZO9_ToWF-HwHjiFI_SNUNyuwSuQR8EECg&expiry=1517934080&single_use_token=B1cmp7cvDUoQrUAy0QJRAWYLvrkaoQBfdyhPz0DmFDqcIcXD_R7M4TvmiCLaGeKWaKvrIQfoWJwt-Mh-VjEEAw">A$500 million in deductions</a>. As the old saying goes, when your only tool is a hammer, every problem looks like a nail.</p>
<h2>Who will regulate the regulators?</h2>
<p>So what to do about ASIC and APRA? Back in <a href="http://fsi.gov.au/publications/final-report/">2014, the Financial System Inquiry recommended</a> a board of oversight – a regulator for the regulators – to ensure that the regulators discharge their mandates. </p>
<p>So, for example, to ensure that ASIC acts like a cop, not a co-op; that APRA acts with foresight and finesse, as opposed to damaging competition. APRA and ASIC <a href="http://www.apra.gov.au/Submissions/Pages/14_01.aspx">pushed back at the time</a>, and the Abbott government rejected the recommendation.</p>
<p>Now to add impetus to the Financial System Inquiry recommendation, the Productivity Commission says there is a lack of transparency and accountability exhibited by our regulators. Add to that the implications regarding regulator’s efficacy that comes with the establishment of <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">the Financial Services Royal Commission</a>. The public deserves better than this.</p>
<p>A regulator for the regulators – a Financial Regulator Assessment Board – would conduct ex post analyses of how regulators had discharged their mandates, evaluate their policies and the efficacy of their policy tools. It would be a sober second thought, and a crucial mechanism of double redundancy – to pick up on crucial elements that the regulator may have overlooked.</p>
<p>The idea has form. The British have created something similar, called a <a href="https://www.bankofengland.co.uk/about/people/financial-policy-committee">Financial Policy Committee</a>, this body’s aim is to review the British regulators, while keeping a look-out for where the next “bombshell” may come from. </p>
<p>That development in turn builds on the <a href="https://mitpress.mit.edu/books/guardians-finance">work of James Barth, Gerard Caprio and Ross Levine</a> whose research indicates that regulators simply cannot be trusted to perform these crucial functions as the guardians of finance, without oversight. The researchers call their proposed board of oversight the “Sentinel”, and point out that no industry is more adept and more practised at suborning the guardians of finance than banks and insurers. Sound familiar?</p>
<p>Australia’s financial system is increasingly governed by a lawless financial sector, presided over by regulators that are at best misguided, and at worst captured. A board of oversight is the least we can do.</p><img src="https://counter.theconversation.com/content/91396/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow is affiliated with Australian Citizens Against Corruption (ACAC). </span></em></p>Our financial regulators ASIC and APRA need a board of oversight, similar to what the UK has, to keep them in check.Andrew Schmulow, Senior Lecturer, Faculty of Law, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.