tag:theconversation.com,2011:/au/topics/cba-2249/articlesCBA – The Conversation2018-04-19T07:42:26Ztag:theconversation.com,2011:article/952102018-04-19T07:42:26Z2018-04-19T07:42:26ZHeavy penalties are on the table for banks caught lying and taking fees for no service<p>Another week of hearings of the Financial Services Royal Commission has seen financial services company AMP <a href="https://financialservices.royalcommission.gov.au/public-hearings/Documents/transcripts-2018/transcript-17-april-2018.pdf">admitting</a> it misled the Australian Securities and Investment Commission (ASIC) on 20 occasions. The commission also saw evidence of both AMP and the <a href="https://financialservices.royalcommission.gov.au/public-hearings/Documents/transcripts-2018/transcript-18-april-2018.pdf">Commonwealth Bank of Australia paying themselves</a> client money when there was no adviser allocated to provide services, or the client had passed away. </p>
<p>It seems ASIC and the Director of Public Prosecutions will have no lack of evidence to pursue civil penalties and criminal cases. The bigger issue is what charges to go with. </p>
<p>In deciding what to pursue, ASIC and the DPP will need to weigh up the costs, the charges individuals are willing to plead guilty to, and the outcomes that will best serve the public interest.</p>
<p>Convicting individuals clearly “sends a message”, but these employees are easily replaced with others just as willing to commit the offences, unless the organisation’s culture is changed. </p>
<p><a href="https://www.theaustralian.com.au/business/banking-royal-commission/treasurer-scott-morrison-warns-amp-executives-could-face-jail-over-deeply-disturbing-tactics/news-story/b74fa50041548e9d18891009fdce00a4">ASIC has confirmed</a> it has a broad-ranging investigation into AMP already under way, and the federal treasurer has suggested <a href="http://www.abc.net.au/news/2018-04-18/federal-treasurer-scott-morrison-warns-amp-executives-could-fac/9671652">the behaviour might attract jail time</a>. </p>
<p>Whether or not bankers get jail time will depend on the actual offences charged and a range of sentencing factors. However, the courts are increasingly emphasising the importance of substantial sentences for white-collar crime. </p>
<p>Offences with similar maximum penalties in the UK led to a UBS banker who manipulated the London Interbank Offered Rate being sentenced to 14 years’ jail in 2015. Another joined him in 2016 for two years and nine months and three others were also convicted. </p>
<h2>What AMP and CBA did</h2>
<p>AMP and CBA have admitted they failed to provide information and report breaches to ASIC as required <a href="http://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ca2001172/">by the Corporations Act</a>. Misleading Australian government agencies is a criminal offence under this act and <a href="http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/cca1995115/sch1.html">the Commonwealth Criminal Code</a>. </p>
<p>As well as dealing truthfully with ASIC, all entities licensed to offer financial <a href="http://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ca2001172/">services must act</a> “efficiently, honestly and fairly” and take reasonable steps to ensure their employees do likewise. </p>
<p>It is not hard to see how taking clients’ money without providing a service is not efficient, honest or fair. </p>
<h2>Civil penalties</h2>
<p>Civil sanctions could apply to conduct at AMP and CBA which could ultimately involve disqualification for up to 20 years from working as a corporate officer and/or a fine of up to A$200,000.</p>
<p>Officers of a corporation are very senior employees and usually immediately below board level. They have a duty to be careful and diligent and act in the best interests of the company under the Corporations Act. There is a range of lesser charges from general dishonesty to false documentation offences. </p>
<p>Officers of a corporation have duties that require them to be careful and diligent. The officers may have <a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2017/497.html">failed to follow up or failed to prevent conduct</a>) after finding out about what was going on. </p>
<p>If ASIC and the DPP can go further and prove that AMP and CBA officers have intentionally caused their company to break the law, it is virtually impossible that conduct could be <a href="http://classic.austlii.edu.au/cgi-bin/disp.pl/au/cases/nsw/NSWSC/2002/171.html">in the interests of the corporation</a>. AMP and CBA officers may have also breached criminal offences in the Corporations Act if the wrongdoing was reckless or intentionally dishonest. </p>
<h2>Criminal charges</h2>
<p>Turning to more general offences, here criminal penalties range from 12 months in jail for misleading ASIC, to significant penalties for conspiracy to defraud.</p>
<p>Any bank employee who was involved in the creation of misleading documentation might well be exposed to fraud charges. Under <a href="http://www7.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/cca1995115/sch1.html">Commonwealth</a> and state law, fraud can involve reckless deception of another (either ASIC or the clients) with an intention to gain a financial advantage for another (AMP or CBA). Those offences have maximum penalties of ten years’ jail. There is a range of lesser charges from general dishonesty to false documentation offences. </p>
<p>Those who assisted might well also be liable through accessorial liability. </p>
<p>Prosecutors could also turn to the conspiracy to defraud offence. The Commonwealth version of the offence involves an agreement to dishonestly influence a public official’s decisions. An agreement to provide false documents to ASIC would seem easily to fit this offence. Again, this has a maximum penalty of 10 years. </p>
<p>Similarly, common law conspiracy to defraud charges could be available for dishonestly misleading customers in a way that caused them financial loss. There are no prescribed maximum penalties for this version of the offence.</p>
<p>Multiple offences could mean sentences served concurrently, or partly cumulatively.</p>
<p>Although the wrongdoing may seem clear to the public, it is likely that complex matters of proof will emerge and ASIC will need to make a range of decisions about the best approach to ensuring cultural change occurs. While convictions might be deserved, the public interest is best served by ensuring that prosecutions are part of wider regulatory action leading to better banking practices.</p><img src="https://counter.theconversation.com/content/95210/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dimity Kingsford Smith was the NAB Independent Wealth Business Customer Advocate From 2015-October 2017.</span></em></p><p class="fine-print"><em><span>Alex Steel 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>It seems ASIC and the Director of Public Prosecutions will have no lack of evidence to pursue civil penalties and criminal cases. The bigger issue is what charges to go with.Dimity Kingsford Smith, Professor and Director, Centre for Law Markets and Regulation, UNSW Law, UNSW SydneyAlex Steel, Professor, UNSW Scientia Education 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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<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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<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/914852018-02-08T03:15:46Z2018-02-08T03:15:46ZCBA’s board needs to take ultimate responsibility for the bank’s failings<p>Something appears to be very wrong with risk management at the Commonwealth Bank (CBA), that cuts right across the bank. There have been risk management problems in the retail (<a href="https://www.sbs.com.au/news/commonwealth-bank-admits-to-breaches-of-money-laundering-terror-financing-laws">money laundering</a>), institutional banking (foreign exchange and <a href="http://www.afr.com/business/banking-and-finance/financial-services/asics-bbsw-case-to-focus-on-the-powerful-owl-20180131-h0reh5">bank bill swap rate benchmark manipulation</a>) and wealth management (<a href="https://www.insurancebusinessmag.com/au/news/breaking-news/cba-boss-talks-about-comminsure-scandal-in-parliamentary-inquiry-58033.aspx">Comminsure scandal</a>) arms of the bank. </p>
<p>This tsunami of scandals helped to trigger the <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">Financial Services Royal Commission</a> which will examine banking misconduct.</p>
<p>And the responsibility, the accountability for risk management stops, and starts, with the bank’s board.</p>
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Read more:
<a href="https://theconversation.com/theres-no-evidence-behind-the-strategies-banks-are-using-to-police-behaviour-and-pay-91064">There's no evidence behind the strategies banks are using to police behaviour and pay</a>
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<p>In presenting its 2018 half yearly profits, the CBA board <a href="https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/1h18/1h18-asx-announcement.pdf">announced</a> that the bank had set aside provisions of A$375 million in anticipation of a penalty resulting from failures to properly implement anti-money laundering controls.</p>
<p>In the <a href="https://www.commbank.com.au/guidance/newsroom/new-ceo-media-and-analyst-briefing-201801.html">media conference</a> following the appointment of Matt Comyn as the new CEO of CBA, the chair of the banks’ board Catherine Livingstone, admitted, while it was:</p>
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<p>…entirely appropriate to share a collective accountability for the issues that we have had… [that] the processes around operational risk management and compliance risk management…is where we have not performed as we should have. </p>
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<p>In his first media conference as CEO, Mr Comyn, not surprisingly, concurred with his new boss.</p>
<p>And it became unanimous, when a few days later the <a href="http://www.apra.gov.au/MediaReleases/Pages/18_01.aspx">progress report</a> of the Australian Prudential Regulation Authority’s Prudential Inquiry Panel into the culture at CBA, reported that investigations were being focused on “capabilities and accountabilities for risk management in the organisation, particularly for operational, compliance and reputational risk”.</p>
<h2>How the CBA manages risk</h2>
<p>CBA’s latest <a href="https://www.commbank.com.au/about-us/shareholders/shareholder-information/annual-reports.html">annual report</a> describes in some detail the risk management framework that is supposed to direct risk management across the bank. The framework, which incorporates the requirements of <a href="http://www.apra.gov.au/CrossIndustry/Documents/Prudential%20Standard%20CPS%20220%20Risk%20Management.pdf">APRA’s prudential standard for risk management</a>, comprises three main components: a risk appetite statement (which describes the types and maximum levels of risk that the board is willing to accept), a three year rolling group business plan and a risk management strategy. </p>
<p>The bank’s risk appetite is formulated by the Board Risk Committee, approved by the board, and dictates the levels of risk-taking in each business line.</p>
<p>In practise the bank actually follows what is called a Three Lines of Defence model. The so-called first line of defence is business management, which is responsible for the effective implementation of the board-approved risk management framework. </p>
<p>The second line is a separate group of staff with specific risk management skills to develop and monitor the risk management process. The third and last line is an independent group that acts as an internal audit function.</p>
<p>CBA is a large and complex organisation, and naturally there is a large, complex risk bureaucracy. This is detailed in the bank’s latest <a href="https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/fy17/cba-basel-III-pillar-3-disclosure-as-at-30-june-2017.pdf">risk report</a>. </p>
<p>However, APRA is clear that the board should take ultimate responsibility.</p>
<p>The lines of defence are clearly broken. If there had been one single, or maybe two, risk management failures at CBA, you could put it down to complexity, teething problems or just bad luck. But over the last decade, there has been a catalogue of bad risk decisions affecting the bank’s customers, shareholders and the Australian financial system.</p>
<p>After the first few times, surely the effectiveness of the risk framework and the three lines of defence should have been questioned and remedial action taken? But apparently it was not, and there is now frantic action by the people responsible – the CBA board - to do something (anything) about it.</p>
<p>In the media conference, Catherine Livingstone and the new CEO repeatedly talked about “collective accountability” and tried to diffuse the severity of the situation by talking about “organisation wide” and “culture” issues, as if even the staff in the bank’s branches were somehow to blame. </p>
<p>In fact, in the case of money laundering through ATMs that has drawn the ire of AUSTRAC, it was the first line business staff in the branches who raised the alarm. Their warnings were not taken seriously. To claim that the lower-level staff are somehow “collectively accountable” is bordering on the bizarre.</p>
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<p>The accountability for the risk management failures is indeed spread far and wide but by far and away it is the joint responsibility of the board and executive committee. The <a href="http://www.afr.com/business/banking-and-finance/cba-kills-shortterm-bonuses-for-ian-narev-top-executives-20170807-gxrd2d">knee-jerk reaction</a> to cut a few bonuses is insufficient. </p>
<p>Someone in the board of the bank has to resign or be fired. Where failures are detected, bonuses already paid out, for example to <a href="https://www.commbank.com.au/guidance/newsroom/CBA-announces-changes-to-board-of-directors-201709.html">recently retired</a> board members, should be retrieved. </p>
<p>And going forward, the three lines of defence must become a real protection for customers rather than a convenient pretence, and APRA must ensure, for customers’ sakes, that the three lines are operating effectively in all large financial institutions.</p><img src="https://counter.theconversation.com/content/91485/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>CBA’s risk management strategy clearly states that responsibility rests with the board of the bank for any wrongdoing.Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/910642018-02-01T06:02:05Z2018-02-01T06:02:05ZThere’s no evidence behind the strategies banks are using to police behaviour and pay<p>APRA’s <a href="http://www.apra.gov.au/AboutAPRA/Documents/Progress-Report-CBA-Prudential-Inquiry.pdf">investigation into the Commonwealth Bank’s culture</a> is starting to look at how it compensates employees, and whether that incentivises bad behaviour. In fact, <a href="https://theconversation.com/why-bankers-so-often-fail-to-comply-with-policies-and-regulations-82159">my research has shown</a> that cash bonuses are at least partly responsible for the scandals plaguing the financial services industry. </p>
<p>But there isn’t good evidence either to support the banks’ alternative – <a href="http://www.dummies.com/business/management/what-is-the-balanced-scorecard/">balanced scorecards</a>. This is a system organisations use to set and track their goals. Companies first set out a series of strategies to achieve their objectives, then create criteria (linked to individual team members) to track progress and give feedback. </p>
<p>If anything, <a href="http://www.emeraldinsight.com/doi/abs/10.1108/JAOC-03-2013-0024">research</a> suggests that balanced scorecards don’t work. Many of the criteria are subjective and therefore can be gamed. And the few objective metrics that are included in the scorecard often face the same issues as cash bonuses – incentivising employees to increase short-term profits. </p>
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<a href="https://theconversation.com/why-bankers-so-often-fail-to-comply-with-policies-and-regulations-82159">Why bankers so often fail to comply with policies and regulations</a>
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<p>Financial institutions previously gave employees incentives by linking their bonuses to profits and sales. <a href="https://theconversation.com/why-bankers-so-often-fail-to-comply-with-policies-and-regulations-82159">This created</a> an unhealthy fixation on short-term profits and a lack of concern for the longer-term consequences. </p>
<p>Under these schemes, an employee is incentivised to increase short-term profits, even if this may mean selling products that are unsuitable for customers. In the short term this leads to higher profits (and bonuses), but eventually customers figure out they’ve been mistreated. The result is often a loss of reputation and customers, legal costs, customer remediation programs and fines.</p>
<p>To counter this problem, <a href="https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/Basel_Pillar_III_disclosure_report_20161122_FINAL.PDF">many financial institutions</a> have introduced the balanced scorecard as a method for measuring staff performance and, ultimately, deciding who receives a bonus. </p>
<p>The idea is that by considering a range of performance criteria, not just profits and sales, employees will become less focused on these short-term financial measures. This will, in turn, reduce misconduct. </p>
<p>Implementing balanced scorecards was one of the key recommendations of last year’s <a href="https://www.betterbanking.net.au/wp-content/uploads/2018/01/FINAL_Rem-Review-Report.pdf">Sedgwick Report</a>. The Australian Bankers’ Association sponsored the report. </p>
<p>But even though the balanced scorecard is considered best practice by many in the industry, there is little research to support its adoption. </p>
<h2>The research on balanced scorecards</h2>
<p>A <a href="http://www.emeraldinsight.com/doi/abs/10.1108/JAOC-03-2013-0024">recent study</a> by Danish researchers reviewed 117 empirical papers on the balanced scorecard that were published in leading academic journals. They found that much of the research has been done on small and medium-sized firms, and that there were design problems in many of the other papers. Therefore, there is too little evidence to conclude whether the balanced scorecards are successful or not.</p>
<p>When balanced scorecards are implemented in financial institutions, they typically include subjective criteria. For example, one criterion could be that an employee’s “behaviour is consistent with organisational values”. A manager would be required to apply a rating to this criterion. </p>
<p>But there is a lot of doubt as to how credible and consistent these ratings really are. </p>
<p>There’s also nothing to definitely discourage bad behaviour (especially in the short term) when criteria include subjective ratings. Due to the large amount of discretion in applying them, managers may give a high rating to staff who are top performers in sales/profits despite poor behaviour.</p>
<p>When scorecards include both subjective and objective measures (which often include sales and profits), staff will tend to focus on the objective criteria. In other words, the balance in the balanced scorecard goes out the window.</p>
<p>The last thing to consider is that behaviour is influenced not just by bonuses, but also the possibility of promotion. If staff see that those who produce high profits are promoted, regardless of the short-term incentive structure applied, they will draw their own conclusions about how best to climb the corporate ladder. </p>
<p>That is why <a href="https://www.commbank.com.au/guidance/newsroom/matt-comyn-cba-ceo-201801.html">the promotion of Matt Comyn to CEO of the Commonwealth Bank</a> sends a dangerous message.</p><img src="https://counter.theconversation.com/content/91064/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elizabeth Sheedy has received funding from the Centre for International Finance and Regulation to investigate risk culture and governance in banks. She is a member of the Risk Management Association of Australia. </span></em></p>Research shows that cash bonuses are responsible for many recent financial scandals. The alternative isn’t that great either.Elizabeth Sheedy, Associate Professor - Financial Risk Management, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/891532017-12-15T04:14:30Z2017-12-15T04:14:30ZCBA admissions will make class action easier but shareholders still have a lot to prove<p>The Commonwealth Bank of Australia recently admitted it breached Australia’s anti-money laundering and counter-terrorism financing laws. The <a href="http://www.abc.net.au/news/2017-12-13/cba-breached-money-laundering,-counter-terrorism-laws/9257224">admissions</a> in its response to allegations from the Australian Transaction Reports and Analysis Centre (AUSTRAC) will make it easier for shareholders to prove their claims of misleading and deceptive conduct in a class action launched against the bank in October.</p>
<p>CBA’s willingness to admit what it has done also signals a possibility the bank might resolve the class action through a settlement. In the meantime shareholders still need to prove their claims, even if some are on stronger footing thanks to the CBA.</p>
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<p><strong><em>Read more: <a href="http://insurance.moray.com.au/publication/in-the-matter-of-hih-insurance-limited-in-liquidation-ors-2016-nswsc-482/">APRA could have investigated CBA years ago: experts</a></em></strong></p>
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<p><a href="http://www.austrac.gov.au/sites/default/files/20170803-concise-statement-cba-s.pdf">AUSTRAC’s first lot of allegations</a> noted CBA failed to comply with its obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 with respect to more than 778,000 accounts. The bank is obliged to assess the risk of, monitor and report suspicious deposit activity that was being conducted through intelligent deposit machines (IDMs). These machines are ATMs that accept cash deposits that are immediately available in the depositor’s account. </p>
<p>AUSTRAC then amended its complaint on December 14, 2017, to add a further 100 alleged contraventions.</p>
<p><a href="https://www.commbank.com.au/content/dam/caas/newsroom/docs/Concise%20Statement%20in%20Response%20-%2013%20December%202017_SIGNED_20171213_4.25pm.PDF">CBA’s response</a> to the original allegations admits that it did fail to comply with the Act in certain respects and accepts that these contraventions do subject it to a civil penalty. But the bank denies other alleged contraventions. </p>
<p><a href="https://www.mauriceblackburn.com.au/about/media-centre/media-statements/2017/cba-shareholders-to-file-federal-court-class-action-today/">Law firm Maurice Blackburn</a> filed a class action on behalf of shareholders with CBA shares between July 1, 2015 and August 3, 2017. The shareholders allege that CBA – and over a dozen of its officers and directors – knew or should have known about the non-compliance. They argue this failure to disclose or rectify the situation caused loss once the share price fell after AUSTRAC made CBA’s non-compliance public. </p>
<p>None of this is proved solely by the fact that CBA admitted committing some breaches of the Act. The additional claims brought by AUSTRAC this week do not alter the existing shareholder claims, but they may see the scope of the class action increased.</p>
<h2>What CBA admits and what shareholders need to prove</h2>
<p>CBA’s admissions may impact the efficiency and conduct of the class action, but they are unlikely to affect what shareholders need to prove. CBA’s response admits much of the conduct that contravenes the Act, but that’s not the same as an admission of liability in relation to the quite different legal claims made by the shareholders.</p>
<p>CBA admits that it did not conduct a proper risk assessment of its IDMs until more than three years after the machines had been put into operation. The bank also admits that it did not conduct adequate monitoring of IDM deposits, for example by introducing daily deposit limits. This is despite having assessed the risk of IDMs being used for money laundering or terrorism financing as high. </p>
<p>CBA further admits that in over 53,500 separate instances, it did not file reports whenever a deposit of more than A$10,000 was made, as required by the Act. It also failed to file either complete or timely reports of suspicious account activity in nearly 100 instances.</p>
<p>But the shareholders’ claims are based on something different: CBA’s non-compliance with securities disclosure rules and on misleading and deceptive conduct by CBA. </p>
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Read more:
<a href="https://theconversation.com/naming-and-shaming-bankers-may-be-satisfying-but-could-backfire-74307">Naming and shaming bankers may be satisfying, but could backfire</a>
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<p>In order to win in the class action, the shareholders will have to prove the elements of the claims they allege, including that the lack of AUSTRAC compliance was the cause of the drop in CBA share price and that the plaintiffs suffered loss as a result of that drop. </p>
<p>The test for the link between non-disclosure and loss, and the way to calculate the amount of that loss, has not been determined in the class action cases so far. However, courts have heard similar shareholder arguments to those raised by the CBA shareholders in other cases, so the issues raised aren’t new. </p>
<p>For example, in the case <a href="http://insurance.moray.com.au/publication/in-the-matter-of-hih-insurance-limited-in-liquidation-ors-2016-nswsc-482/">surrounding the liquidation of HIH Insurance Limited</a>, Justice Brereton of the Supreme Court of New South Wales held that shareholders rely on the share price as an accurate reflection of share value. Accordingly, when corporate misconduct inflates the share price, the corporation indirectly causes shareholders to suffer loss.</p>
<p>A key issue the CBA class action will be whether CBA’s non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act, and the subsequent AUSTRAC civil penalty proceedings, impacted the share price and to what extent.</p><img src="https://counter.theconversation.com/content/89153/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Legg receives research funding from IMF Bentham Ltd and the Law Society of New South Wales. He is a member of the Law Council of Australia's Class Actions Committee and a director of the Australian Pro Bono Centre. He consults to the law firm Jones Day. </span></em></p><p class="fine-print"><em><span>James D Metzger 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 CBA’s response to AUSTRAC’s claims means shareholders will be assisted in part of their class action claims, but a lot still needs to be proved.Michael Legg, Professor of Law, UNSW SydneyJames D Metzger, Scholarly Teaching Fellow in Civil Procedure, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/838092017-09-14T03:57:59Z2017-09-14T03:57:59ZWhere the accountability problems started at CBA<p>The heads or deputy heads of the three main banking regulators (the Australian Prudential Regulatory Authority, the Australian Securities and Investments Commission and the Reserve Bank of Australia) spoke at the <a href="http://www.bordermail.com.au/story/4912037/stop-drip-feed-of-bad-news-rbas-plea-to-banks/?cs=9">annual regulators’ lunch</a> last week. Guy Debelle, who is <a href="http://www.abc.net.au/news/2016-09-02/reserve-bank-guy-debelle-appointed-as-next-rba-deputy-gov/7808374">relatively new to his role</a> as deputy governor at the RBA, summarised the feelings of the regulators at the lunch in regards to the public’s lack of trust in banks:</p>
<blockquote>
<p>No one feels that anything particularly has changed, because even if the issue occurred a few years ago, it still generates the headlines today, and just reinforces the belief [that the banks cannot be trusted].</p>
</blockquote>
<p>Unfortunately that’s because <a href="https://theconversation.com/banking-inquiry-findings-ask-the-wrong-questions-get-the-wrong-answers-69421">these problems</a> were never actually resolved at the time, with regulators being palmed off with internal inquiries, until the scandal went off the front page. Of course the problems that have occurred recently at banks, especially CBA, are going to be dredged up again and again, because customers (unlike regulators) really suffered and no one was ever held to account.</p>
<p>On the same day, APRA chairman Wayne Byers also <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">announced</a> the <a href="http://mobile.abc.net.au/news/2017-09-11/cba-inquiry-john-laker-former-apra-chairman-on-panel/8891240?pfmredir=sm">makeup of the inquiry panel</a> to which it has <a href="https://theconversation.com/has-apra-just-outsourced-its-job-83411">outsourced its job</a>. The agency also released the <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">terms of reference</a> that will govern the conduct of the inquiry over the next six months.</p>
<p>Way way down the list of things to do is assessing the CBA’s “accountability framework” and whether it conflicts with “sound risk management and compliance outcomes”.</p>
<p>Note the terms of reference do not discuss “accountability”, per se, merely whether the framework (i.e. organisation charts and policies) is effective or not. Instead, the terms of reference discuss whether it conflicts with other policies and organisation charts. It is Olympic standard navel gazing, rather than action on the part of APRA, and a very minor part of the panel’s work. </p>
<p>But, accountability is not only about “what” but about the “who” and, as the French philosopher Molière <a href="https://www.forbes.com/quotes/6902/">wrote</a>, “it is not only what we do, but also what we do not do, for which we are accountable”. </p>
<p>Inquiry panel member, John Laker, is also chairman of the <a href="http://www.thebfo.org/About-us/Mission-and-objectives">Banking Finance Oath</a> initiative, which works to promote “moral and ethical standards in the banking and finance profession”. He will be well placed then to remind CBA directors and managers of one of the key tenets of that oath:</p>
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<p>I will accept responsibility for my actions [and] in these and all other matters; My word is my bond.</p>
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<p>Responsibility and accountability are personal not commercial constructs and, notwithstanding the <a href="https://www.commbank.com.au/guidance/newsroom/CBA-announces-changes-to-board-of-directors-201709.html">latest knee-jerk reaction</a> to the money laundering scandal, these values have been in very short supply in CBA, over the last decade. </p>
<p>In fact, while there have been belated apologies for some of the scandals, no one in a senior position at CBA has actually taken personal accountability for any of the sequence of scandals that have recently beset the bank. </p>
<p>A detailed description of the many failures of accountability at CBA would take many thousands of words, but one scandal stands out above all others, not least because it involved the <a href="https://theconversation.com/debunking-the-myth-of-our-well-regulated-banks-9333">largest fine ever</a> visited on CBA’s long-suffering shareholders. It set the scene for how the CBA board would handle future scandals, that is to obfuscate, prevaricate and litigate. </p>
<p>On December 23, 2009, the CBA board <a href="https://www.commbank.com.au/about-us/shareholders/pdfs/2009-asx/ASB_media_statement.pdf">announced</a> a payment of some NZ$264 million to one of New Zealand’s public service departments, New Zealand Inland Revenue.</p>
<p>The NZ High Court found that CBA had been using ASB Bank, its NZ subsidiary, as a laundromat through which it washed a number of dodgy transactions each year with the purpose of avoiding NZ taxes, which fed directly into CBA group profits. It was tax avoidance on an industrial scale.</p>
<p>It should be noted that three other major banks were also fined in a total settlement of NZ$2.2 billion (about A$1.7 billion at the time), the largest fines ever paid by Australian banks. </p>
<p>The banks had fought the NZ Commissioner of Inland Revenue for several years all the way to the High Court, until <a href="https://www.risk.net/journal-operational-risk/2207237/systemic-operational-risk-smoke-and-mirrors">Justice Harrison ruled</a> the transactions were “tax avoidance arrangement(s) entered into for a purpose of avoiding tax”. </p>
<p>Why such a small number of transactions? Because they were huge Interest Rate Swaps (IRS) transactions, created at the highest levels of the organisations with the purpose of turning expenses into income, a clever idea that some tax accountant had dreamed up around 1995. </p>
<p>During the extensive and expensive litigation, the CBA board kept maintaining that they had rock solid advice that their actions were legally watertight. But they were very wrong.</p>
<p>So, did anyone take responsibility for this embarrassing, unethical and expensive failure of management and corporate governance? </p>
<p>No board member or senior manager ever took responsibility for being found to have tried to avoid huge amounts of tax in one of the bank’s key markets. In fact the opposite, Sir Ralph Norris, who had been CEO of ASB during the wash and spin cycle, was made CEO of the CBA group in 2005.</p>
<p>What message does such disgraceful and ultimately unproductive behaviour send to staff? </p>
<p>First it says, don’t take responsibility for anything, bluff and dissemble and, if found out, never ever admit to anything. If board members refuse to be accountable for their mistakes, why should anyone else, especially if <a href="https://theconversation.com/apra-needs-to-protect-whistleblowers-in-the-cba-inquiry-83638">whistleblowers are treated appallingly</a>?</p>
<p>And the NZ scandal was only the first of many scandals. </p>
<p>While CEO, Ian Narev, has expressed “<a href="http://www.smh.com.au/business/commonwealth-bank-ceo-ian-narev-disappointed-by-handling-of-life-insurance-cases-20160305-gnbbgb.html">disappointment</a>” at customers being treated shabbily, no senior leader has been held directly accountable for the <a href="https://www.michaelwest.com.au/cba-under-fire-at-asic-inquiry/">financial planning scandal</a>, the <a href="https://theconversation.com/asics-comminsure-pass-shows-why-badly-behaving-bankers-will-never-fear-jail-time-75059">CommInsure</a> scandal, the <a href="https://theconversation.com/banking-excuses-wearing-a-bit-thin-59745">manipulation</a> of BBSW and <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-455mr-asic-accepts-enforceable-undertakings-from-nab-and-cba-to-address-inadequacies-within-their-wholesale-spot-fx-businesses/">Foreign Exchange </a>benchmarks, and now the money laundering action being taken by <a href="http://www.austrac.gov.au/media/media-releases/austrac-seeks-civil-penalty-orders-against-cba">AUSTRAC</a>. </p>
<p>Making <a href="http://www.theaustralian.com.au/national-affairs/cba-chief-ian-narevs-bid-to-cool-bank-fury/news-story/7ed4918dac968a63ea2c8059ad54ebbf">belated apologies</a> is not taking responsibility for misconduct unless corrective actions follow. But, in CBA the scandals keep coming, as the apologies appear to have changed nothing in the organisation.</p>
<p>Surely someone, somewhere in the huge CBA organisation has the ethical grounding to stand up and say - “yes, we did make mistakes and, yes, we should bear the consequences, and to start the ball rolling, I resign”. Actions speak much louder than mere words.</p>
<p>The APRA inquiry will undoubtedly find that the bank’s “accountability framework” was deficient but unless names are revealed, its conclusions will be suspect. </p>
<p>However, it is not up to the panel to name and shame, but to convince the senior management of CBA that only true accountability will restore trust in the bank and that someone has to step up and take responsibility for their actions and inaction, otherwise staff will never know the right thing to do.</p>
<p>The CBA inquiry panel is due to hand down an interim report by December but by then we should know if the inquiry has any teeth by any admissions of accountability coming from the CBA board and management. But don’t hold your breath!</p><img src="https://counter.theconversation.com/content/83809/count.gif" alt="The Conversation" width="1" height="1" />
One scandal at the CBA stands out above all others, It set the scene for how the CBA board would handle future scandals, that is to obfuscate, prevaricate and litigate.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/836382017-09-07T06:31:59Z2017-09-07T06:31:59ZAPRA needs to protect whistleblowers in the CBA inquiry<p>The Australian Prudential Regulation Authority (APRA) should ensure <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">its inquiry</a> into the governance of the Commonwealth Bank has all the unfettered powers of the prudential regulator to investigate any wrongdoing. This includes protecting whistleblowers.</p>
<p>The terms of reference of this inquiry and the panel of experts are yet to be disclosed.</p>
<p>As part of its responsibilities for considering corporate governance under the <a href="http://www.bis.org/bcbs/publ/d328.htm">Basel rules</a> (international rules regulating banking), APRA should have mostly unrestricted access to banks’ staff, to conduct its investigations:</p>
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<p>Supervisors should have processes in place to fully evaluate a bank’s corporate governance. Such evaluations may be conducted through regular reviews of written materials and reports, interviews with board members and bank personnel, examinations, self-assessments by the bank, and other types of on- and off-site monitoring.</p>
</blockquote>
<p>So, APRA must ensure that the members of the inquiry team can <em>at least</em> interview not only board members but also, because “culture” is involved, bank staff.</p>
<p>Groundbreaking <a href="https://theconversation.com/why-bankers-so-often-fail-to-comply-with-policies-and-regulations-82159">research</a> by Professors Elizabeth Sheedy and Barbara Griffin from Macquarie University, shows there is often a disjoint between the perceptions of senior management and front line staff on issues of risk and culture. They found senior managers have a much rosier view of how things are actually operating. </p>
<p>This also shows the APRA inquiry team need recognise that just talking to senior management is not enough to see what is actually going wrong in a firm.</p>
<p>Obviously, such wide powers must be exercised with care by the regulator. In particular, APRA must protect the confidentiality of all written and verbal material gathered during an investigation, and importantly, the sources of that information. This implies whistleblowers also need protection as part of APRA’s prudential role.</p>
<p>APRA needs to set out explicitly within the terms of reference of the inquiry that whistleblowers will be protected. Unless CBA staff are actively encouraged to provide information that is relevant not only to the money-laundering scandal but to other <a href="https://theconversation.com/banking-inquiry-findings-ask-the-wrong-questions-get-the-wrong-answers-69421">governance failures</a> at CBA, the inquiry’s conclusions will lack credibility.</p>
<h2>Why is whistleblowing an issue?</h2>
<p>Despite their <a href="https://www.commbank.com.au/about-us/opportunity-initiatives/opportunity-from-good-business-practice/sustainable-business-practices/speaking-up.html">internal policies</a>, CBA does not treat whistleblowers kindly. Like other organisations that exhibit a <a href="https://theconversation.com/au/topics/groupthink-36585">“groupthink mentality”</a>, the worst crime is not doing something wrong but rather washing the firm’s dirty linen in public.</p>
<p>The treatment of <a href="https://theconversation.com/troublemakers-and-traitors-its-no-fun-being-a-whistleblower-50755">Geoff Morris</a>, who blew the whistle on the <a href="http://www.smh.com.au/business/death-threats-and-smear-campaigns-the-lot-of-a-whistleblower-20170331-gvax60.html">CBA financial planning scandal</a>, was meant as a clear message to other CBA staff that dobbing in your mates was not to be tolerated. </p>
<p>And appalling treatment of people was not only restricted to the <a href="http://www.smh.com.au/business/banking-and-finance/cbas-insurance-arm-comminsure-told-to-reassess-rejected-heart-attack-claims-to-2012-20170322-gv4dif.html">sick and dying</a> in the case of <a href="http://www.abc.net.au/4corners/stories/2016/03/07/4417757.htm#transcript">CommInsure</a>. It also extended to the treatment of the Chief Medical Officer, Benjamin Koh, which seemed designed to send a message to other bank staff – keep your head down, or else! </p>
<p>In the CommInsure case, CBA commissioned <a href="https://www.commbank.com.au/guidance/newsroom/comminsure-releases-deloitte-report-into-claims-handling-201702.html">an “independent” inquiry</a> by Deloitte into the insurer’s claims processes which “did not identify any systemic issues relating to historically declined claims”. In an object lesson on how to write terms of reference to get the answers you want, the Deloitte inquiry has been <a href="http://thenewdaily.com.au/money/superannuation/2017/03/01/deloittes-comminsure-review-selective-and-inadequate-say-lawyers/">criticised by lawyers</a> as being <a href="http://www.smh.com.au/business/banking-and-finance/deloittes-findings-on-comminsure-dont-go-far-enough-20170228-gungnv.html">too narrowly defined</a>. This is because that particular inquiry looked only at policies selected by CommInsure and did not talk to any customers affected. Hear no evidence, see no evil. </p>
<p>A <a href="http://www.theaustralian.com.au/business/financial-services/cbas-comminsure-cleared-of-allegations-it-pressured-doctors-to-deny-claims/news-story/571e47c9841e295cb9eeae8076ce8c93">later investigation</a> by the conduct regulator, the Australian Securities & Investment Commission (ASIC) “found no evidence to support allegations that CommInsure claims managers applied undue pressure on doctors to change or alter their medical opinions”. But, interestingly, their search for evidence did not consider whistleblowing complaints. </p>
<p>APRA should ensure the terms of reference for the CBA inquiry explicitly state that the inquiry panel will have unrestricted access to all internal complaints to the bank’s Speak-Up whistleblower hotline. They should also have access to the results of any whistleblowing complaints. </p>
<p>In addition, the bank should be required to set up an additional confidential channel for reporting staff concerns on culture and governance to the independent inquiry and APRA.</p>
<p>Without clear support for whistleblowers in the terms of reference for the inquiry into CBA’s (lack of good) corporate governance, the conclusions will inevitably be tainted. APRA needs to do its job itself and head off such <a href="https://theconversation.com/apra-inquiry-into-cba-is-the-new-comedy-in-town-83105">criticisms</a>.</p><img src="https://counter.theconversation.com/content/83638/count.gif" alt="The Conversation" width="1" height="1" />
Without clear support for whistleblowers in the terms of reference for the inquiry into CBA’s corporate governance, the conclusions will inevitably be tainted.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/825052017-08-15T20:14:20Z2017-08-15T20:14:20ZClimate change is a financial risk, according to a lawsuit against the CBA<p>The Commonwealth Bank of Australia has been in the headlines lately for all the wrong reasons. Beyond <a href="https://theconversation.com/allegations-against-the-cba-show-the-need-for-a-royal-commission-into-the-banks-82063">money-laundering allegations</a> and the announcement that <a href="http://www.abc.net.au/news/2017-08-14/commonwealth-bank-ceo-ian-narev-to-retire-by-july/8803302">CEO Ian Narev will retire early</a>, the CBA is now also being sued in the Australian Federal Court for misleading shareholders over the <a href="https://www.theguardian.com/australia-news/2017/aug/08/commonwealth-bank-shareholders-sue-over-inadequate-disclosure-of-climate-change-risks">risks climate change poses to their business interests</a>.</p>
<p>This case is the first in the world to pursue a bank over failing to report climate change risks. However, it’s building on a trend of similar actions against energy companies in the <a href="http://www.nytimes.com/2015/11/06/science/exxon-mobil-under-investigation-in-new-york-over-climate-statements.html">United States</a> and <a href="http://www.documents.clientearth.org/library/download-category/climate-governance/">United Kingdom</a>. </p>
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<p>
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<strong>
Read more:
<a href="https://theconversation.com/asics-comminsure-pass-shows-why-badly-behaving-bankers-will-never-fear-jail-time-75059">ASIC's CommInsure pass shows why badly behaving bankers will never fear jail time</a>
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<p><a href="https://envirojustice.org.au/sites/default/files/files/170807%20Concise%20Statement%20(as%20filed).pdf">The CBA case was filed on August 8, 2017</a> by advocacy group Environmental Justice Australia on behalf of two longstanding Commonwealth Bank shareholders. The case argues that climate change creates material financial risks to the bank, its business and customers, and they failed in their duty to disclose those risks to investors. </p>
<p>This represents an important shift. Conventionally, climate change has been treated by reporting companies merely as a matter of <a href="http://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp">corporate social responsibility</a>; now it’s affecting the financial bottom line.</p>
<h2>What do banks need to disclose?</h2>
<p>When banks invest in projects or lend money to businesses, they have an obligation to investigate and report to shareholders potential problems that may prevent financial success. (Opening a resort in a war zone, for example, is not an attractive proposition.) </p>
<p>However, banks may now have to take into account the risks posed by climate change. Australia’s <a href="http://www.accr.org.au/big_bank">top four banks</a> are heavily involved in fossil-fuel intensive projects, but as the world moves towards renewable energy those projects may begin to look dubious. </p>
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<p>
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<strong>
Read more:
<a href="https://theconversation.com/risky-business-how-companies-are-getting-smart-about-climate-change-65221">Risky business: how companies are getting smart about climate change</a>
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<p>As the G20’s <a href="https://www.fsb-tcfd.org/">Taskforce on Climate-Related Financial Disclosures</a> recently reported, climate risks can be <em>physical</em> (for instance, when extreme weather events affect property or business operations) or <em>transition</em> risks (the effect of new laws and policies designed to mitigate climate change, or market changes as economies transition to renewable and low-emission technology). </p>
<p>For example, restrictions on coal mining may result in these assets being “stranded,” meaning they become liabilities rather than assets on company balance sheets. Similarly, the rise of renewable energy may reduce the life span, and consequently the value, of conventional power generation assets.</p>
<p>Companies who rely on the exploitation of fossil fuels face increasing transition risks. So too do the banks that lend money to, and invest in, these projects. It is these types of risks that are at issue in the case against CBA.</p>
<h2>What did the CBA know about climate risk?</h2>
<p>The claim filed by the CBA shareholders alleges the bank has contravened two central provisions of the <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/">Corporations Act 2001</a>:</p>
<ul>
<li><p>companies must include a financial report within the annual report which gives a “true and fair” view of its financial position and performance, and</p></li>
<li><p>companies must include a director’s report that allows shareholders to make an “informed assessment” of the company’s operations, financial position, business strategies and prospects.</p></li>
</ul>
<p>The shareholders argue that the CBA knew – or ought to have known – that climate-related risks could seriously disrupt the bank’s performance. Therefore, investors should have been told the CBA’s strategies for managing those risks so they could make an informed decision about their investment.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/allegations-against-the-cba-show-the-need-for-a-royal-commission-into-the-banks-82063">Allegations against the CBA show the need for a Royal Commission into the banks</a>
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<p>The claim also zeros in on the <a href="http://www.news.com.au/finance/business/green-groups-to-target-commonwealth-bank-over-potential-adani-financing/news-story/94d9701fe05b3801612015bd33bfb9ae">lengthy speculation over whether the CBA would finance the controversial Adani Carmichael coal mine</a> in Queensland. (The bank has since <a href="http://www.smh.com.au/environment/climate-change/desperate-commbank-rules-out-lending-to-adanis-carmichael-coal-mine-20170811-gxughp.html">ruled out financing the mine</a>.) The shareholders assert that the resulting “controversy and concern” was a major risk to the CBA’s business.</p>
<h2>Global litigation trends</h2>
<p>While the CBA case represents the first time worldwide that a financial institution has been sued for misleading disclosure of climate risk, the litigation builds on a broader global trend. There have been a number of recent legal actions in the United States, seeking to enforce corporate risk disclosure obligations in relation to climate change:</p>
<p>Energy giant Exxon Mobile is <a href="http://www.nytimes.com/2015/11/06/science/exxon-mobil-under-investigation-in-new-york-over-climate-statements.html">currently under investigation</a> by the Attorneys General of New York and California over the company’s disclosure practices. At the same time, an <a href="http://www.rgrdlaw.com/cases/exxon/">ongoing shareholder class action</a> alleges that Exxon Mobile failed to disclose internal reports about the risks climate change posed to their oil and gas reserves, and valued those assets artificially high.</p>
<p>Similar pathways are being pursued in the UK, where <a href="http://www.documents.clientearth.org/library/download-category/climate-governance/">regulatory complaints</a> have been made about the failure of major oil and gas companies SOCO International and Cairn Energy to disclose climate-related risks, as required by law.</p>
<p>In this context, the CBA case represents a widening of litigation options to include banks, as well as energy companies. It is also the first attempt in Australia to use the courts to clarify how public listed companies should disclose climate risks in their annual reports.</p>
<h2>Potential for more litigation</h2>
<p>This global trend suggests more companies are likely to face these kinds of lawsuits in the future. Eminent barrister Noel Hutley <a href="https://cpd.org.au/2016/10/directorsduties/">noted in October 2016</a> that many prominent Australian companies, including banks that lend to major fossil fuel businesses, are not adequately disclosing climate change risks. </p>
<p>Hutley predicted that it’s likely only a matter of time before we see a company director sued for failing to perceive or react to a forseeable climate-related risk. The CBA case is the first step towards such litigation.</p><img src="https://counter.theconversation.com/content/82505/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anita Foerster receives support from Australian Research Council Discovery Project – DP 160100225, ‘Developing a Legal Blueprint for Corporate Energy Transition’.</span></em></p><p class="fine-print"><em><span>Jacqueline Peel receives support from Australian Research Council Discovery Project – DP 160100225, ‘Developing a Legal Blueprint for Corporate Energy Transition’.</span></em></p>A new lawsuit against the CBA puts climate change in a new legal light: a financial hazard. The case opens up fresh lines of attack on institutions that contribute to climate change.Anita Foerster, Senior Research Fellow, The University of MelbourneJacqueline Peel, Professor of Environmental and Climate Law, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/820632017-08-05T08:52:05Z2017-08-05T08:52:05ZAllegations against the CBA show the need for a Royal Commission into the banks<p>The Commonwealth Bank is facing another scandal as the Australian Transactions Reports and Analysis Centre (AUSTRAC) launches civil proceedings accusing the bank of being complicit in money laundering. </p>
<p>This exposes a deeply worrying prospect, that the Australian public are vulnerable to crime and terrorism directly funded through the Australian banking system.</p>
<p>AUSTRAC <a href="http://austrac.gov.au/media/media-releases/austrac-seeks-civil-penalty-orders-against-cba">alleges CBA breached</a> the Anti-Money Laundering and Counter-Terrorism Financing Act (2006) 53,700 times since 2012, where transactions were not reported by the bank, or reported too late. The bank faces a potential penalty of A$18 million per breach, which could amount to billions of dollars.</p>
<p>According to AUSTRAC, criminals deposited cash, amounting to tens of millions of dollars, over a period of two years in intelligent deposit machines where it was automatically counted and credited instantly to the nominated recipient account. The funds were then available for immediate transfer to other accounts both domestically and internationally.</p>
<p>In their evidence AUSTRAC details how four identified criminal syndicates were able to readily use CBA ATMs to breach the A$10,000 transaction threshold on 1640 occasions amounting to A$17.3 million. A total of A$625 million of suspicious transactions flowed through these CBA ATMs.</p>
<p><a href="http://austrac.gov.au/sites/default/files/20170803-concise-statement-cba-s.pdf">CBA’s response</a> to these serious allegations is that it reports 4 million transactions to AUSTRAC per year contributing to the effort to “combat any suspicious activity as quickly and efficiently as we can.” The bank insists all key personnel have been trained in compliance with the Money-Laundering Act. The CBA acknowledges there was a software fault with a number of their ATMs which allowed these transactions to take place, but apparently this took several years to fix. </p>
<p>Unfortunately this response in the circumstances only provokes further questions.</p>
<h2>Regulators asleep at the wheel</h2>
<p>What this really shows up is the government’s “light touch” regulatory approach which translates into soft touch regulation. It seems regulators in Australia are too frightened to take action even when there is mounting evidence of illegality.</p>
<p>AUSTRAC itself did not launch any proceedings under the Anti-Money Laundering and Counter-Terrorism Financing Act until 2015. This followed a lengthy report of the <a href="https://www.hsgac.senate.gov/subcommittees/investigations/hearings/us-vulnerabilities-to-money-laundering-drugs-and-terrorist-financing-hsbc-case-history">Financial Action Task Force</a> which concluded:</p>
<blockquote>
<p>[AUSTRAC’s] graduated approach does not seem to be adequate to ensure compliance.</p>
</blockquote>
<p>Since then AUSTRAC has taken action against Tabcorp on a money-laundering case which reached a A$45 million settlement in February 2017. This contrasts with far larger fines imposed on international banks for money laundering including a <a href="https://www.int-comp.com/ict-views/posts/2016/07/22/top-5-money-laundering-cases-of-the-last-30-years/">US$1.2 billion fine for HSBC</a> and a US$262 million fine for Standard Chartered in 2012 from the US Justice Department. </p>
<p>At a US Senate hearings in 2012, a HSBC chief compliance officer famously quit his post on the spot in answering money laundering allegations, implying he could not defend the indefensible.</p>
<p>The Australian banking industry has faced minimal pressure to reform compared to other countries, where the restructuring of the banks is progressing. Australia has seen a succession of inquiries however each has focused on particular aspects of the banks functioning and proposed specific reforms.</p>
<p>It will <a href="https://theconversation.com/a-history-of-failed-reform-why-australia-needs-a-banking-royal-commission-64803">require a Royal Commission</a> into the Australian banks to examine the structural and systemic failures of the banks. The banks have become the main providers of not only retail but investment banking, insurance, superannuation and financial advice, and this deserves critical scrutiny.</p>
<p>If the AUSTRAC allegations against the CBA are proven in the Federal Court, this matter is of a different order of magnitude to earlier problems. It suggests a degree of irresponsibility which is unacceptable in major financial institutions.</p>
<p>It also suggests it’s deeply embedded in the banks cultural and operating processes, which undermines the security of Australian citizens. This would demand a substantive inquiry into the management, integrity and culture of the banks that only a Royal Commission could provide.</p>
<p>In the meantime, the CBA needs to provide firm evidence to the Australian public that none of its ATM machines can continue to be used for money laundering. It also needs to prove there are procedures in place for ensuring all suspicious banking activity by potential criminals or terrorists is fully reported to the Australian authorities as soon as the CBA has any knowledge of such activity.</p><img src="https://counter.theconversation.com/content/82063/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Clarke does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Australian public may be vulnerable to crime and terrorism directly funded through the Australian banking system.Thomas Clarke, Professor, UTS Business, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/774752017-05-10T06:30:27Z2017-05-10T06:30:27ZBudget bank levy: too big to fail, not too big to take a hit<p>The budget announcement of a 0.06% levy on a subset of bank liabilities looks arbitrary, and is certainly politically opportunistic. But it could be rationalised as a response, albeit probably not the best response, to offset a number of distortions in Australia’s banking market. </p>
<p>The levy will certainly have consequences for bank pricing, forms of funding and competition – and will interact in complex ways with other prudential regulatory changes in the pipeline. </p>
<p>The levy will affect the four major banks and Macquarie. It will apply to liabilities other than deposits protected by the Financial Claims Scheme (ie. under A$250,000) and additional Tier 1 capital instruments. </p>
<p>As a ballpark estimate, it will apply to around 50% of a bank’s total funding. This will raise the overall cost of funding for the affected banks by around 0.03%.</p>
<p>The large banks are perceived to receive a competitive benefit (lower borrowing costs) from an implicit government guarantee associated with being <a href="https://theconversation.com/au/topics/too-big-to-fail-3747">“too big to fail”</a>. On this basis, the levy could be seen as a charge for that benefit. </p>
<p>As it is in Europe, Australia could establish a “resolution fund” to enable the Australian Prudential Regulation Authority (APRA) to facilitate a smooth exit (i.e. by merger) of a failing bank. Although the government is going to set this levy aside for budget repair, rather than being set up in another separate fund, it could be argued that it strengthens the government to support APRA in regulating the banks. </p>
<p>The nature of the regulatory system (such as capital adequacy requirements) creates a competitive imbalance favouring the big four banks. The <a href="https://theconversation.com/apra-fiddles-on-bank-risk-while-rome-burns-72976">imposition of higher minimum capital requirements</a> for mortgage loans by banks (five banks were actually subject to this levy) was only a partial response to this imbalance.</p>
<p>It’s often argued Australian banks have relied too much on funding other than “core/stable” deposits and capital, with potential consequences for safety and systemic stability. Indeed, the large banks have funded their increased share of home mortgage lending since the global financial crisis to a significant degree from wholesale borrowings.</p>
<p>However, there are better ways of dealing with these perceived distortions than the government’s quick, politically opportunistic, measure. And, together with other bank accountability measures introduced in the budget, it may neutralise whatever support exists for a banking royal commission.</p>
<p>The levy is likely to have significant effects on financial markets and consumers of financial services. The levy will flow through the banks’ funds transfer pricing systems to affect loan pricing. </p>
<p>In this regard it is somewhat silly to suggest simultaneously that the big banks shouldn’t increase loan interest rates, as the treasurer has, but that the measure will improve the competitive position of smaller banks. The latter will happen only if the large banks do respond in that way!</p>
<p>The large banks will have incentives to fund loans differently. In particular, by originating and then securitising loans (pooling various types of contractual debt, to get them off-balance sheet and funded by the capital market) they will avoid the levy on that part of their activities.</p>
<p>However, that benefit won’t apply if they use “covered bond” securitisation. This is when a bank issues debt securities collateralised against a pool of assets, giving the investor a claim against both those assets and the bank in general. The levy is thus likely to give a kick to traditional securitisation over on-balance-sheet lending, but stymie the growth of covered bond funding.</p>
<p>The levy will also affect the structure of bank deposit interest rates. Because retail deposits are exempt from the levy, the large banks can be expected to bid for these deposits – pushing up the interest rates offered relative to the cost of borrowing in wholesale and large deposit markets. </p>
<p>That’s going to compound the already apparent effect on relative interest rates due to recent and forthcoming liquidity regulations that APRA is applying. But it will worsen the relative returns that superannuation funds can get on (their large) bank deposits and possibly induce them to look to invest more in securitised products. </p>
<p>It’s worth noting that the budget involves changes that will increase competition for retail deposits. One example is the measure allowing individuals to make limited, tax-advantaged contributions to superannuation which can be subsequently withdrawn for a house deposit.</p>
<p>A further likely effect is to encourage banks to make more use of equity capital and additional Tier 1 (AT1) capital funding (that preferences share structures listed on the ASX and held by many retail investors), relative to Tier 2 capital funding (provided by the wholesale and institutional markets), or other wholesale funding. While more capital funding is still required to meet the “unquestionably strong” criteria proposed <a href="http://fsi.gov.au/">by the Murray inquiry</a>, and accepted by the government, it’s far from clear that increased reliance on the complex AT1 is desirable. </p>
<p>The revenue to be raised is large in absolute dollar amount – but is relatively small as a percentage of current bank profits (in the order of 4-5%).</p>
<p>It could be expected that the banks will pass on some part of the levy to customers, or avoid it by shifting to other forms of funding that do not incur the levy, such that the short-run direct impact on after-tax profits and shareholders is somewhat less than that 4-5% figure. </p>
<p>But the big unknown is how the change, in conjunction with a plethora of other ongoing regulatory changes affecting the financial sector, affects the competitive balance between the big banks, smaller bank competitors and capital markets and their prospects in the long run. </p>
<hr>
<p><em>This piece was co-published with <a href="https://pursuit.unimelb.edu.au/live/budget2017-fairness-security-and-opportunity">Pursuit</a>.</em></p><img src="https://counter.theconversation.com/content/77475/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The new levy on banks from the budget is a small hit to their profit but it could have unintended consequences.Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/743072017-03-15T19:15:05Z2017-03-15T19:15:05ZNaming and shaming bankers may be satisfying, but could backfire<p>It’s a tempting prospect - to name and shame badly behaving banking executives into doing the right thing by their customers, but when it comes to the evidence for its effectiveness, research is divided. </p>
<p>This idea was brought up again at parliamentary hearings with the CEOs of Australian big four banks. The standing committee on economics’<a href="http://www.aph.gov.au/%7E/media/02%20Parliamentary%20Business/24%20Committees/243%20Reps%20Committees/Economics/45p/Four%20Major%20Banks%202016%20-%20First%20Report/3%20Make%20Executives%20Accountable.pdf?la=en">proposed policy</a> would require banks to “publicly report on any significant breaches of [the Australian Securities and Investments Commission - ASIC’s] license obligations within five business days”. </p>
<p>The report would include a description of the breach and how it occurred, steps that will be taken to ensure that it does not occur again, the names of the senior executives responsible for the division where the breach occurred, and the consequences for those executives. </p>
<p>There are various examples of naming and shaming practices in economic policy, for example ASIC’s public listing of wayward and banned financial advisers and <a href="https://www.cfainstitute.org/about/Pages/index.aspx">the CFA Institute’s</a> listing of accountants who violate the organisation’s standards. However, the effectiveness of these policies has been simply <a href="http://www.afr.com/brand/chanticleer/breach-reporting-a-step-toward-lifting-banking-accountability-20170306-gus651">asserted as effective without providing any support</a>. </p>
<p>To our knowledge, no studies exist that credibly establish a causal relationship between these particular policies and a reduction in the offences they were designed for.</p>
<h2>Shame and human behaviour</h2>
<p>Shame is a self-conscious emotion (as are guilt, pride, and embarrassment). It’s characterised by a sense of <a href="https://books.google.com.au/books/about/Shame.html?id=svN9AAAAMAAJ&redir_esc=y">exposure of personal inadequacy</a> to a devaluing, condemning, even disgusted audience. </p>
<p>Social approval and appreciation are key drivers of human behaviour; therefore, we naturally try to avoid the unpleasant experience and lasting stigma of shame. This makes shaming appear to be a potent instrument for social control, especially for public figures (for example executives and politicians) who depend on their reputation.</p>
<p>There are some policy contexts in which naming and shaming practices targeted at individuals have been evaluated for effectiveness. For example for <a href="https://www.smart.gov/SOMAPI/sec1/ch8_strategies.html">sexual offenses</a> studies have found little to no positive effects, but a high level of public support and public belief in its effectiveness. Likewise for human rights violations research found some <a href="http://www.tandfonline.com/doi/abs/10.1080/03050629.2012.726180">positive effects</a>, but also <a href="http://iojournal.org/sticks-and-stones-naming-and-shaming-the-human-rights-enforcement-problem/">counter-effective side-effects</a>. </p>
<p>The mixed findings can be explained by research on the behavioural effects of shame. There is <a href="https://www.ncbi.nlm.nih.gov/pubmed/18808269">empirical evidence</a> that shame can motivate sharing and helping behaviour.</p>
<p>Some <a href="https://global.oup.com/academic/product/in-defense-of-shame-9780199793532?cc=au&lang=en&">academics</a> contend that shame is a constructive experience, that motivates those who experience it to better themselves, and raises their desire to comply with socially sanctioned standards of behaviour. However, this stands in contrast with decades of findings that shame causes <a href="journals.sagepub.com/doi/abs/10.1177/0002764295038008008">withdrawal and reduced motivation</a>, and can lead to <a href="https://www.ncbi.nlm.nih.gov/pubmed/1583590">hostility and vengeful urges</a>. </p>
<p>These findings substantiate concerns tentatively articulated by NAB’s and ANZ’s CEOs about naming and shaming acting as a disincentive to executives for reporting breaches or taking steps to avoid their re-occurence. </p>
<p>Then there’s <a href="https://books.google.com.au/books?hl=en&lr=&id=iU0kWlBwyhwC&oi=fnd&pg=PR7&dq=%E2%80%9Creintegrative+shaming%E2%80%9D+Australian+National+University%E2%80%99s+John+Braithwaite&ots=j24I_1gal7&sig=-FqyODR4yGIbHSX2lt3Vw2VNYZU#v=onepage&q=%E2%80%9Creintegrative%20shaming%E2%80%9D%20Australian%20National%20University%E2%80%99s%20John%20Braithwaite&f=false">the idea of “reintegrative shaming”</a>, a restorative justice intervention advocated by the Australian National University’s John Braithwaite as an alternative. It combines public disapproval of an offence with respect for the offender and rituals of forgiveness. It seeks to avoid lasting stigmatisation and to restore relationships between the offender and the community. </p>
<p>The empirical record for reintegrative shaming’s effect on recidivism is <a href="http://johnbraithwaite.com/wp-content/uploads/2016/10/SSRN_2016_BraithwaiteJ-revised-51.pdf">mixed in criminology studies</a> (in part due to flawed implementation). It’s also unfortunately too thin in findings on white collar crime specifically, to allow confident predictions about its regulatory effectiveness in the financial services industry. </p>
<p>Ideally politicians, regulators, and industry stakeholders would assess this evidence on shaming in the context of other relevant initiatives (such as the Code of Banking Practice, ASIC enforcement actions) and other policy options (whistleblower protection and reporting of governance effectiveness). Ultimately what needs to be balanced out is the satiating of the popular appetite for humiliating executives and a true commitment to effective regulation for ethical practice.</p><img src="https://counter.theconversation.com/content/74307/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Franz Wohlgezogen has received funding from United States Environmental Protection Agency for his research. He has engaged in consulting, coaching, and teaching for public and private sector organisations. </span></em></p><p class="fine-print"><em><span>The Centre for Ethical Leadership receives funding from several partner organisations, in the private and public sector, including from the Victorian Government for work on the Recruit Smarter initiative. Melissa Wheeler has also engaged in paid and pro-bono consulting and research relating to issues of social justice and gender equality (e.g., Our Watch, Queen Victoria Women’s Centre, National Association of Women in Operations).</span></em></p>Studies have shown that shame can motivate people to be both helpful but also vengeful, so the verdict is still out on whether it curbs bad behaviour.Franz Wohlgezogen, Senior Lecturer of Management and Leadership, The University of MelbourneMelissa A. Wheeler, Postdoctoral Research Fellow, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/719872017-01-30T02:37:12Z2017-01-30T02:37:12ZCBA’s test of government bond using the blockchain, is just that<figure><img src="https://images.theconversation.com/files/154662/original/image-20170130-29621-1ozsu6v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It's too soon to say what advantages there are to issuing government bonds using blockchain technology.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>Despite a <a href="https://www.commbank.com.au/guidance/newsroom/CBA-and-QTC-create-first-government-bond-using-blockchain-201701.html">media statement</a> announcing that Commonwealth Bank of Australia (CBA) and Queensland Treasury Corporation (QTC) have created the first government bond using the blockchain (dubbed the “cryptobond”), no QTC bond had actually been issued.</p>
<p>As reported by Mr. George Confos, executive general manager of business & corporate finance at CBA, this was (yet another) “proof of concept” – a test by the bank’s Innovation Lab.</p>
<blockquote>
<p>The bond is a working prototype, is not tradable and does not carry any debt obligation.</p>
</blockquote>
<p>In other words, whatever it is, it’s not a bond. </p>
<p>Blockchain has generated an <a href="https://theconversation.com/bitcoin-might-not-change-the-world-but-the-blockchain-that-makes-it-work-might-52516">enormous amount of excitement</a> in a short time. But despite the hype, actual use of blockchain in finance has been slight, beyond its current use in digital currencies, such as <a href="https://www.blockchain.com/">Bitcoin</a> and <a href="https://www.ethereum.org/">Ethereum</a>, and possibly in situations such as equity issuance and loan syndication.</p>
<p>To recap, blockchain is a technology that allows one participant to transfer something of value to another participant by recording the transaction in an immutable “block” on a transparent “chain”. No central authority is involved as blocks are written to a blockchain by consensus among participants. </p>
<p>Consensus is arrived at by each participant holding a complete copy of the chain and agreeing that the next block can be written, because it passes a test of so-called “proof of work”, in <a href="https://www.blockchain.com/">Bitcoin</a>, or “proof of stake” in <a href="https://www.ethereum.org/">Ethereum</a>. </p>
<p>Technologies such as <a href="https://coincenter.org/entry/what-is-the-lightning-network">Lightning</a> can be used to circumvent some of the limitations of these blockchain implementations by requiring only two-party consensus before writing a block. Other implementations, such as CBA’s “cryptobond” use the concept of ‘permissioning’ which restricts access to a small number of participants who trust each other and can impose penalties outside of blockchain, like stopping short term credit.</p>
<p>What has any of this technology have to do with government bonds?</p>
<p>The way that government bonds are issued in Australia is <a href="https://www.treasurydirect.gov/instit/statreg/Auction_Information_Handling_Guidelines_Final.pdf">similar to overseas</a>. It usually happens, but not always, by a <a href="http://aofm.gov.au/files/2016/07/Treasury-Bond-Information-Memo-July-2016.pdf">tender process</a>.</p>
<p>First a government body, such as the QTC, formally publishes a highly technical legal notice to issue (or sometimes buy back) bonds, which is broadcast to the markets. This is important information that affects the flow of debt in the economy, so it’s of interest not only to bond buyers but the whole market. Here is an <a href="http://aofm.gov.au/outright-tender/tender-940/">example</a> of a recent tender issue for the federal government.</p>
<p>Bidding for a chunk of the debt to be issued is restricted to authorised traders, listed as “registered bidders”. These are the usual suspects - the big financial institutions. </p>
<p>Bidders will enter their bids for a piece of the action into the official tender system, based on how they believe rates will move up or down in future. The current access to the official tender system for government bonds is via <a href="https://www.yieldbroker.com/">Yieldbroker</a>. </p>
<p>Obviously, bids are kept confidential, otherwise bidders would try to game the system. The Yieldbroker computer system uses the <a href="https://www.yieldbroker.com/technology/strong-security/">latest cryptographic tools</a> for ensuring security of bidding and employs some of the latest <a href="https://www.yieldbroker.com/technology/fix-specs/">standards for exchanging information</a>.</p>
<p>Almost everything in a bond tender can be changed, bids can be altered or revoked until the official closing time. An issuer, such as the official Australian Office of Financial Management (AOFM) can also do this on behalf of a registered bidder. An issuer can also postpone or cancel a tender for any reason and also may accept or reject bids if the issue is under-subscribed.</p>
<p>At the close of bidding, bonds are allotted according the highest price bid (like a “best offer” for a house) then to the next highest until the issue amount is exhausted. The successful bidders are then informed of their allotment (which may not be the same as the maximum amount specified in their bid) and then they must pay the issuer (the state or federal government) the amount due.</p>
<p>The bond issuance process is smooth and has worked well for many years. It’s because it’s not small beer, for example, the latest issue by the AOFM is some A$700 million, so the technology had better work.</p>
<p>Now CBA is proposing replacing a system that works exceedingly well by one based on blockchain that has only been shown to work in the lab under very controlled circumstances. CBA has not disclosed details of the process and technology used in the test but sprinkles jargon, such as “<a href="https://theconversation.com/smart-contracts-smart-or-dumb-70786">smart contract</a>” liberally around.</p>
<p>What are the advantage of the system proposed by CBA? Well, it uses blockchain, so it gets some kudos from those interested in <a href="https://theconversation.com/more-lessons-on-fintech-to-come-for-scott-morrison-71715">innovation</a>. But it doesn’t use blockchain in the way it was intended.</p>
<p>Blockchain is good at storing immutable blocks. But almost everything about the bid process can be changed, so immutability is not a requirement. </p>
<p>Blockchain abhors the concept of central authority. But in this case, there is no choice, as the issuer is often the federal or state government, which are the most central of all central authorities. The central authority can also change the rules of the game after bidding has started.</p>
<p>Blockchain does not require participants to “trust” one another. In this situation, the bidders may not trust each other but they certainly do trust the issuer, if only because they hold all of their money with the Reserve Bank of Australia. In this case, they can and must trust a central authority.</p>
<p>Blockchain then is not exactly a good match for a system that actually works well, so why change?</p>
<p>The CBA media release on this “crytobond” test says the prototype has “the ability to automatically pay coupons to the current holder when due”. This conveniently ignores the fact that, once issued, the bonds are sold onto a secondary market, such as the <a href="http://www.asx.com.au/products/bonds/exchange-traded-agbs.htm">ASX</a>, where they are purchased and traded by small and large investors and superfunds. It’s these investors, who are owed the interest coupons from the bond, according to records held in the official bond registry, which is not yet on blockchain.</p>
<p>The blockchain world is full of overblown hype, but that’s no excuse for a respected financial institution to issue a media release that is at best misleading and would lead some to consider the institution to be able to deliver something it cannot, or cannot in the foreseeable future.</p>
<p>Until it provides some verification that its blockchain proposal is indeed “capable of delivering efficiency to issuers, investors and other market participants”, CBA should remove or, at least reword, its over-hyped media release. </p>
<p>It should be noted that the latest AOFM tender process had only 33 bids (the big financial institutions) of which six were successful, and the latest QTC tender was hardly a stampede at <a href="http://queenslandtreasurycorporation.createsend.com/t/ViewEmailArchive/j/D8825350BB53B1EA/C67FD2F38AC4859C/">44 bids</a>. Since the actual recording of a bid is only a minuscule part of a highly quantitative bidding process, it would be a stretch to see how the proposed solution could make this process any more efficient - there appears to be no cost-benefit analysis. </p>
<p>And regulators should begin to think about they might clamp down on what amounts to misleading information. But of course the ASX is also <a href="https://theconversation.com/what-next-for-the-asx-and-blockchain-in-2017-71472">caught up in this bubble</a>.</p><img src="https://counter.theconversation.com/content/71987/count.gif" alt="The Conversation" width="1" height="1" />
Despite a media statement announcing that Commonwealth Bank of Australia (CBA) and Queensland Treasury Corporation (QTC) have created the first government bond using the blockchain (dubbed the “cryptobond…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/695542016-11-29T09:32:37Z2016-11-29T09:32:37ZACCC rejects the banks colluding to bargain on Apple Pay<p>The Australian Competition and Consumer Commission (ACCC) <a href="http://www.accc.gov.au/media-release/accc-proposes-to-deny-authorisation-for-banks-to-collectively-bargain-with-and-boycott-apple-on-apple-pay">is planning to deny</a> the Commonwealth Bank of Australia (CBA), Westpac, National Australia Bank (NAB) and Bendigo and Adelaide Bank (the banks), petition to collectively bargain with and boycott Apple on Apple Pay.</p>
<p>Justifying the decision, ACCC chairman Rod Sims said that the likely benefits of allowing the banks to collectively bargain does not outweigh the potential negative affects.</p>
<p>The banks are desperate to get access to Apple phones, not least as ANZ <a href="http://www.smh.com.au/business/banking-and-finance/apple-payled-surge-in-anz-card-customers-drives-rival-banks-to-renegotiate-20160509-goppf0.html">recently claimed a surge</a> in applications for their credit and debit cards after striking a deal with Apple. This shift in consumer behaviour could potentially reduce the customer base of the other banks, simultaneously increasing both ANZ’s customer base and the use of its payments services. </p>
<p>But Apple imposes fees and restrictions that the banks currently find prohibitive.</p>
<p>The banks wanted to bargain with Apple over two key issues. The first is access to the Near-Field Communication (NFC) controller in iPhones, which would enable them to offer their own digital wallets to iPhone customers (in direct competition with Apple’s digital wallet), bypassing Apple Pay. The second is to remove the the restriction Apple imposes on banks, preventing them from passing on fees that Apple charges for the use of its digital wallet.</p>
<h2>It’s all about negotiating power</h2>
<p>At the moment only consumers with certain cards issued by ANZ, American Express and card issuers using Cuscal Ltd as their collective negotiator, are able to use Apple Pay. It’s been <a href="http://www.smh.com.au/business/banking-and-finance/apple-payled-surge-in-anz-card-customers-drives-rival-banks-to-renegotiate-20160509-goppf0.html">reported that ANZ agreed to share with Apple some of the fee</a> it charges to process payments in exchange for access to Apple Pay</p>
<p>If the ACCC had decided in favour of the banks they could have, in theory, used their combined negotiating power to strike an even better deal with Apple. Not only would they have been bargaining from a stronger position, they could also have threatened to boycott Apple Pay for up to three years. </p>
<p>The ACCC argued this have would reduced the competitive tension between the banks in their individual negotiations with Apple, which could also reduce the competition to supply mobile payment services for iPhones. The threat of a boycott could also mean a significant period of uncertainty and would result in decreased choice for the consumers whose banks are involved. The other digital wallet options for the banks are Android Pay and Samsung Pay, both of which are available in Australia, but the iPhone popularity with consumers makes Apple Pay very attractive to both consumers and banks. </p>
<p>The ACCC may have decided against allowing the banks to bargain collectively, as this would also have set a precedent for any future disputes between the banks and their service providers. The banks may have over played their hand by also threatening a boycott against Apple.</p>
<h2>Reduced competition could have knock-on effects</h2>
<p>Another deciding factor in the ACCC’s decision was that digital wallets/mobile payments are still in their infancy in Australia and consumers are already using their contactless cards to do “tap and go” payments. A rash decision now to allow collective bargaining with Apple could distort the mobile payment market and further delay the adoption of this technology.</p>
<p>The use of tap and go payments has risen greatly in recent years, <a href="http://www.smh.com.au/business/retail/110bn-australias-contactless-boom-20160805-gqmg7j.html">accounting for up to 75% of all Visa transactions</a>. This has caused many consumers to question, exactly what the advantages are of digital wallets over contactless cards. The absence of an obvious advantage over other payment methods like contactless cards has slowed the adoption of mobile payments in Australia. Any reduction in competition could stall this even longer.</p>
<h2>What next for Apple pay</h2>
<p>The ACCC’s decision is just a draft at this stage and there’ll be further public consultations. It plans to release its final decision on March 2017, but in the meantime there will be further uncertainty about the adoption and use of digital wallets in Australia.</p>
<p>The banks now have two distinct choices. They can either continue to act collectively and seek to persuade the ACCC that the draft decision is not the correct one, or they can independently approach Apple to see if they can negotiate a better or at least an equivalent deal to that already struck by ANZ.</p><img src="https://counter.theconversation.com/content/69554/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Worthington does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The banks could have used their collective bargaining power not only against Apple for Apple Pay but also stall the adoption of mobile payments in Australia.Steve Worthington, Adjunct Professor, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/678342016-10-28T05:23:26Z2016-10-28T05:23:26ZASIC report highlights a deep culture problem in Australia’s banks<p><a href="http://asic.gov.au/regulatory-resources/find-a-document/reports/rep-499-financial-advice-fees-for-no-service/">In it’s latest report</a>, the Australian Securities & Investments Commission (ASIC) found the big four banks sold products to some customers through their adviser network, with a fee for ongoing advice, but the advice was never given. </p>
<p>None of this came to light until the banks were asked by ASIC to look at adviser compensation, following the <a href="http://futureofadvice.treasury.gov.au/Content/Content.aspx?doc=home.htm">introduction</a> of the Future of Financial Advice (FOFA) legislation in 2013. </p>
<p>No wonder the banks were wary of their practices being investigated. Not only has it come to light that many customers (176,000 at the last count) were being charged for services they were not receiving but, in many cases, the banks didn’t have the data they needed to find out whether customers had been dudded or not. </p>
<p>And ASIC is pretty sure why such systemic issues emerge at regular intervals, stating:</p>
<blockquote>
<p>Cultural factors in the banking and financial services institutions covered by this report may have contributed to the systemic failures we observed. </p>
</blockquote>
<p>The ASIC report details the reason for the cultural failings it observed in the wealth management businesses of the major banks:</p>
<blockquote>
<p>Some advice licensees prioritised advice revenue and fee generation over ensuring that they delivered the required services.</p>
</blockquote>
<p>ASIC found that the IT systems in wealth management in the major banks were stone-aged at best. The banks appear to have no idea what they don’t know, but are all working to identify how many more customers need to be compensated. </p>
<p>ASIC also found that some banks failed to keep complete or accurate records to enable compliance to be analysed. And in some cases, authorised representatives had taken customers’ files with them when they left the firms, making it impossible to check whether or not advice was given.</p>
<p>It appears that every time a question is asked of the big banks, another example of bad behaviour is unearthed.</p>
<p>In the recent questioning of bank CEOs by the House Economics Committee, questions were raised with all CEOs about systemic issues. The answers were generally evasive and short on specifics. </p>
<p>For example, when talking about a different but related, <a href="http://www.smh.com.au/business/banking-and-finance/whistleblowers-nab-leak-reveals-persistent-bad-behaviour-in-financial-planning-fuels-royal-commission-calls-20150217-13hv1f.html">financial planning scandal</a>, Andrew Thorburn, NAB CEO, <a href="http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22committees%2Fcommrep%2F16ed0d6d-13d2-47f1-bade-baa7403a4ebf%2F0000%22">said</a>:</p>
<blockquote>
<p>“We did a review and we had an independent party come and do that review with us, and we concluded and we stand by that, that it was not a systemic issue.”</p>
</blockquote>
<p>What Mr Thorburn and other CEOs neglected to mention was that the banks had, as revealed in ASIC’s report, all already been in the middle of deep discussions about so-called “fee-for-services failures” . The regulator wrote:</p>
<blockquote>
<p>Of particular concern is that many of the banking and financial services institutions covered by this review publicly state that their core values include being customer focused, “doing what is right” for customers, and acting with integrity. We encourage the institutions reviewed in this report to consider how their culture may have supported these systemic failures, and why their stated commitment to providing excellent service to customers is not translating into good outcomes for customers in the many instances we identified in this report.</p>
</blockquote>
<p>At long last, ASIC has highlighted cultural issues across the industry that the boards and management of the largest banks have long refused to acknowledge. </p>
<p>The regulator has done its job and found compelling evidence that <a href="https://theconversation.com/war-on-bankings-rotten-culture-must-include-regulators-42767">the culture of the banks is rotten</a>. </p>
<p>It’s over to the politicians now.</p><img src="https://counter.theconversation.com/content/67834/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An ASIC report detailing how financial advice was paid for but not given by Australia’s big four banks exposes a culture problem that the government needs to deal with.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/664862016-10-04T19:11:59Z2016-10-04T19:11:59ZBanks make millions in delaying interest rate cuts<p>When Australia’s central bank moves interest rates as part of its monetary policy, it’s not just <a href="http://www.abc.net.au/news/2013-07-31/jericho-australias-absurd-interest-rates-debate/4854044">politicians who stand to lose</a> if banks don’t follow suit. </p>
<p>Retail lending markets form an integral part of the monetary policy transmission mechanism. If interest rate rises are passed on at a different rate to cuts it can adversely affect the efficacy of expansionary versus contractionary <a href="http://www.rba.gov.au/monetary-policy/">monetary policy.</a></p>
<p>In August 2016, <a href="http://www.apra.gov.au/adi/Publications/Pages/monthly-banking-statistics.aspx">APRA data</a> showed the big four Australian banks held 83% of the home loan market (including both the owner occupier and investment categories). </p>
<p>At an individual level, the ability and willingness of lenders to pass on the official interest rate cuts to borrowers depends on many factors. These include exposure to overseas funding sources, market power, the funding mix, reserves and the extent of securitisation. But it’s also clear delaying interest rate cuts can significantly impact their bottom line.</p>
<hr>
<p><iframe id="tc-infographic-182" class="tc-infographic" height="700" src="https://cdn.theconversation.com/infographics/182/80becb6fdcdd48e78c96eaef6678482563927a65/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>According to my analysis, the big four banks can make approximately $A8.6 million per day as a group if they do not fully pass onto borrowers a hypothetical 0.25% cut in the RBA’s cash rate. </p>
<p>More specifically, if ANZ, CBA, NAB and Westpac manage to postpone lowering their mortgage interest rates say by 10 days, they can potentially make an extra A$16, A$28, A$16 and $A26 million dollars in profits, respectively.</p>
<p>Previous studies on <a href="http://www.sciencedirect.com/science/article/pii/S1042443114000559">mortgages</a>, <a href="http://link.springer.com/article/10.1007/s11187-014-9579-z">small business loans</a> and <a href="http://www.tandfonline.com/doi/abs/10.1080/13547860.2013.803846">credit card interest rates</a> have found significant evidence for the “rockets and feathers” hypothesis. That is, when the cash rate increases, various lending rates shoot up like rockets but when the opposite occurs they go down like feathers.</p>
<p>In my research I used monthly data (2000-2012) for 39 bank and non-bank financial institutions including 7 building societies, 15 Australian-owned banks, 3 foreign subsidiary banks, 13 credit unions, and 1 major mortgage broker. The research found the mortgage interest rate spread of all lenders rose after the 2008 global financial crisis, albeit to varying degrees. </p>
<p>In general, <a href="http://www.sciencedirect.com/science/article/pii/S1042443114000559">the research shows</a> most building societies and some credit unions can offer more competitive home loans than banks.</p>
<p>There is no significant relationship between lenders’ markups and the level of over the counter customer service since the 2008 financial crisis. This is an important observation as the mortgage spreads of larger lenders are typically higher than those of their smaller non-bank counterparts. This puts lie to the view that the relatively higher mortgage interest rates of the larger banks in Australia are justified by higher overhead costs associated with the running of their large branch networks.</p><img src="https://counter.theconversation.com/content/66486/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Abbas Valadkhani 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>When the cash rate increases, lending rates shoot up like rockets, but when the opposite occurs they go down like feathers.Abbas Valadkhani, Professor of Economics, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/662642016-10-03T19:16:47Z2016-10-03T19:16:47ZSimpler account switching would help keep our banks honest<p>When the chiefs of Australia’s largest banks appear before the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/Four_Major_Banks_Review">Standing Committee on Economics</a> this week it’s likely they’ll be asked about the current level of competition in retail banking.</p>
<p>One of the objectives of competition law in Australia “is to enhance the welfare of Australians through the <a href="http://www.australiancompetitionlaw.org/law/economics/competition.html">promotion of competition</a>”. Promoting competition means making sure there is vibrant competition. This means ensuring that competitiveness is enhanced once competition is established.</p>
<h2>Reluctance to change</h2>
<p>Existing market players generally resist the changes needed to make a sector more competitive. This resistance is driven by the rational fear that a more competitive sector will lead to lower margins and loss of market share. </p>
<p>It seems odd, but in the early days of text messaging it was only possible to send texts to people on the same network. Interconnection of networks was driven partly by commercial opportunity, but mainly by the prospect of regulatory intervention. In mobile telecommunications, mobile number portability was introduced in Australia and elsewhere as a result of similar pressures. </p>
<p>Competition regulators know that competitiveness is higher when it’s easier for a consumer to switch providers. Of course, that does not mean there will be mass switching. Consumers switch when there is a prompt. This might be the end of a contract, or poor (uncompetitive) service from a provider.</p>
<h2>Switching banks</h2>
<p>In Australia, in common with other parts of the world, switching between retail banks presents hurdles. It’s just a difficult process, even with the help of the <a href="https://theconversation.com/how-changing-our-bank-account-numbering-system-will-be-a-win-for-customers-40236">bank to which you are switching</a>. A mixture of direct credits, direct debits, mortgage or rent payments and links to credit cards means that <a href="https://www.businessthink.unsw.edu.au/pages/why-switching-banks-to-get-a-better-deal-is-essential-for-the-economy.aspx/">switching banks is complex and hard</a>. </p>
<p>One solution to this problem is bank account number portability. The idea is that you can switch your bank without changing your bank account number – just like switching mobile providers. </p>
<p>This could be implemented by having a single independent bank account number database (iBAND), which links account numbers with people. Each bank would then check the iBAND when making a payment as depicted below.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=515&fit=crop&dpr=1 600w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=515&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=515&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=647&fit=crop&dpr=1 754w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=647&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/139848/original/image-20160930-31424-12qm55v.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=647&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">iBAND.</span>
<span class="attribution"><span class="source">Rob Nicholls</span></span>
</figcaption>
</figure>
<h2>The UK experience</h2>
<p>Even this might be a bit more complicated than is needed. The Australian Payment Clearing Association’s <a href="http://www.apca.com.au/about-payments/future-of-payments/new-payments-platform-phases-1-2">“New Payments Platform”</a> offers a range of identifiers for people in addition to bank account numbers. This could also form the basis for portability and switching.</p>
<p>In the UK, the <a href="http://www.paymentsuk.org.uk/projects/current-account-switch-service">Current Account Switch Service (CASS)</a> is a free-to-use service for consumers to simplify switching current accounts. This service is designed to increase competition, competitive entry and consumer choice. </p>
<p>There is a Current Account Switch Guarantee to enable switching to occur within seven days. Since the scheme started in 2013, there have been <a href="https://www.bacs.co.uk/resources/pages/factsandfigures.aspx">3 million switches and 99% of these occurred within seven days</a>. </p>
<p>The consumer education process that accompanied the introduction of CASS in the UK means more than three-quarters of all current account holders are aware of the service.</p>
<h2>Data can help</h2>
<p>The other issue with switching is knowing whether the deal you will get with the new bank is better. What would be ideal is to have a way of comparing your existing bank or banks and credit card providers with other financial institutions. One way of doing this is by having a standardised form of metadata. </p>
<p>If you wanted to do a comparison, you could download a set of anonymised metadata that described your banking needs. This could then be compared on a platform with other providers. </p>
<p>The UK’s Competition and Markets Authority (CMA), in its <a href="https://www.gov.uk/cma-cases/review-of-banking-for-small-and-medium-sized-businesses-smes-in-the-uk#final-report">final report</a> into the UK retail banking system, suggests that the provision of open banking applications programming interfaces (API) would facilitate such an exchange of data. The broad approach is set out below.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=348&fit=crop&dpr=1 600w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=348&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=348&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=437&fit=crop&dpr=1 754w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=437&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/139850/original/image-20160930-31413-y3j8ya.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=437&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">CMA approach.</span>
<span class="attribution"><span class="source">Rob Nicholls derived from CMA report</span></span>
</figcaption>
</figure>
<p>The idea is that each bank would present a common interface to external systems through the API. This would allow the banks to create and use apps to enhance the consumer experience. However, it would also allow third parties to be intermediaries or to compare the banks’ offerings.</p>
<h2>Switching, innovation and productivity</h2>
<p>In its <a href="http://competitionpolicyreview.gov.au/files/2014/06/CHOICE.pdf">submissions to the Harper review</a> of competition law and policy, CHOICE argued that such a scheme would encourage innovation. The ACCC put the case that “initiatives to allow consumers to effectively use their information … have the potential to assist consumers to make better choices and drive competition”. </p>
<p>The UK government has put consumer switching at the heart of its approach to increasing productivity. It regards this step as critical to open and competitive markets with the minimum of regulation.</p>
<p>Both the Harper review and the Murray inquiry into the financial system found that competition should be at the forefront of regulatory consideration. One way to improve competitiveness in banking is to facilitate both switching and consumer information. </p>
<p>But perhaps the best way to determine whether there is a need to promote competitiveness would be for the ACCC to commence a market inquiry on retail banking. This could have the aim of developing initiatives to stimulate additional competition.</p><img src="https://counter.theconversation.com/content/66264/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rob Nicholls is a member of the Australian Labor Party.</span></em></p>To boost competition in banking we should give consumers better access to data and account number portability.Rob Nicholls, Lecturer, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/648032016-09-11T20:10:03Z2016-09-11T20:10:03ZA history of failed reform: why Australia needs a banking royal commission<p>The move for an <a href="http://www.smh.com.au/small-business/finance/small-business-ombudsman-kate-carnell-to-run-bank-inquiry-20160831-gr62cq.html">inquiry into how banks treat small business customers</a> should not overshadow the ongoing call for a broader royal commission on banks. </p>
<p>Several financial inquries (outlined below) have failed to tackle the growing concentration in the Australian finance sector, or the need to separate general banking from investment banking as the reform process in the United States, UK and Europe is contemplating.</p>
<p>Calls for a royal commission are also underpinned by ongoing reports of misconduct within the banks, summarised in a timeline of bad behaviour below.</p>
<p>Every other major industrial country is at an advanced stage in bank reform, and Australia would be isolated if it did not engage in a similar substantial and structural reform process.</p>
<hr>
<h2>Financial reform in Australia</h2>
<p><strong>1997 Wallis Inquiry</strong> </p>
<p><a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP9697/97rp16">This inquiry</a> has been associated with the “four pillars” policy towards bank mergers (though the inquiry itself did not propose this), and the opposition to any merger between ANZ, CBA, NAB and Westpac. The unwritten policy originated in Paul Keating’s reservations on concentration in the industry. It also led to the CLERP financial reforms announced on fund raising, disclosure, financial reporting and takeovers. </p>
<p><strong>2009 Future of Financial Advice Inquiry</strong> </p>
<p>This inquiry stemmed from industry failures, such as Storm Financial and Opes Prime, and explored the role of financial advisers and the general regulatory environment for these products and services. It resulted in the <a href="https://www.cpaaustralia.com.au/professional-resources/financial-planning/policy-and-research/future-of-financial-advice-reforms">Corporations Amendment (Future of Financial Advice) Act 2012</a> by the Labor government to tackle conflicts of interest within the financial planning industry. This was subsequently amended by the Liberal government in the <a href="http://www.charteredaccountants.com.au/Industry-Topics/Financial-advisory-services/FoFA">Corporations Amendment (Financial Advice Measures) Act March 2016</a> which softened some of the reforms.</p>
<p><strong>2012 Cooper Inquiry</strong> </p>
<p>This was <a href="http://strongersuper.treasury.gov.au/content/publications/government_response/downloads/Stronger_Super.pdf">a review</a> into the governance, efficiency, structure and operation of Australia’s superannuation system. It examined measures to remove unnecessary costs and better safeguard retirement savings, claimed fees in superannuation were too high, and that choice of fund in superannuation had failed to deliver a competitive market that reduced costs.</p>
<p><strong>2014 Parliamentary Joint Committee on Corporations and Financial Services
Inquiry</strong> </p>
<p><a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Financial_Adviser_Qualifications/Report">This inquiry</a> included proposals to lift the professional, ethical and education standards in the financial services industry. It aimed to clarify who could provide financial advice and to improve the qualifications and competence of financial advisers; including enhancing professional standards and ethics.</p>
<p><strong>2015 Murray Inquiry</strong> </p>
<p><a href="http://fsi.gov.au/">This inquiry</a> was intended to provide “a ‘blueprint’ for the financial system over the next decade,” but fell somewhat short of this in not critically addressing the concentration or restructuring of the main banks. While acknowledging the high concentration and vertical integration of Australia’s banking industry the inquiry’s approach to encouraging competition was to seek to remove impediments to its development. The inquiry aimed to increase the resilience to failure with high bank capital ratios, and to reduce the costs of failure, including by ensuring authorised deposit-taking institutions maintained sufficient loss absorbing and recapitalisation capacity to allow effective resolution with limited risk to taxpayer funds.</p>
<hr>
<p>In contrast to the limitations of the Australian reform process, more ambitious reform of the banking sector is being actively considered in the rest of the advanced economies. This is because of widespread international concerns regarding bank monitoring and standards, and the continuing threat of systemic risk and failure.</p>
<p>The objective is to create more effective competition, greater choice, improved governance, more balanced incentives, and responsible behaviour and performance. Central to international reform proposals is the intention of:</p>
<ul>
<li><p>shielding commercial banks from losses incurred by speculative investment banking</p></li>
<li><p>preventing the use of public subsidies (eg central bank lending facilities and deposit guarantee schemes) from supporting risk taking</p></li>
<li><p>reducing the complexity and scale of banking organisations</p></li>
<li><p>making banks easier to manage and more transparent</p></li>
<li><p>preventing aggressive investment bank risk cultures from infecting traditional banking;</p></li>
<li><p>reducing the scope for conflicts of interest within banks</p></li>
<li><p>reducing the risk of regulatory capture and taxpayers exposure to bank losses.</p></li>
</ul>
<p>Among the ongoing international initiatives to reform the banks are the <a href="https://www.gov.uk/government/news/banking-reform-act-becomes-law">UK Banking Reform Act</a>, which includes ring fencing retail utility banking from investment banking, due for implementation in 2019.</p>
<p>In the US, the <a href="http://www.warren.senate.gov/files/documents/Fact%20Sheet%20-%2021st%20Century%20Glass-Steagall.pdf">21st Century Glass Steagall Act</a>, proposed by Elizabeth Warren and supported by Democratic nominee Hillary Clinton, involves separating traditional banks that offer savings and checking accounts from riskier financial services such as investment banking and insurance. </p>
<p>In Europe, <a href="http://europeanmemoranda.cabinetoffice.gov.uk/files/2014/03/6860-13_.pdf">the Liikanen Plan</a>, announced in 2012, proposes investment banking activities of universal banks be placed in separate entities from the rest of the group. This has already been taken up widely throughout the European banking sector. </p>
<h2>A licence to operate?</h2>
<p>The banks have experienced continuous systemic risk (partly of their own making), erosion of their integrity, and a loss of public trust.</p>
<p>The Australian banks are on notice that they need to renew their licence to operate, to reconnect with their sense of duty and the Australian people, and to reconfirm their responsibilities to the Australian economy. This will occur, even if it takes a royal commission to achieve it.</p>
<hr>
<h2>A timeline of banks behaving badly</h2>
<iframe src="https://cdn.knightlab.com/libs/timeline3/latest/embed/index.html?source=16t5cJvvQqZqnJPl1M9C1t8fNOveF64OxTxKoPDZHJLc&font=Default&lang=en&initial_zoom=2&height=650" width="100%" height="650" frameborder="0"></iframe>
<p><strong>January 2004: NAB foreign currency options trading</strong></p>
<p>NAB announces losses of A$360 million due to unauthorised foreign currency trading activities by four employees who concealed the losses. <a href="http://www.apra.gov.au/MediaReleases/Pages/04_09.aspx">Bank risk policies</a> and trading desk supervision prove ineffective. NAB sacks or forces the resignation of eight senior staff, disciplines or moves 17 others and restructures its board of directors. Four traders, including the head of the foreign currency options desk, are subsequently prosecuted and jailed.</p>
<p><strong>2008: global financial crisis takes down Opes Prime, Storm Financial, Allco and Babcock and Brown</strong></p>
<p>The market capitalisation of the stock markets of the world peaks at US$62 trillion at the end of 2007. By October 2008 the market is in free fall, having lost US$33 trillion dollars, over half of its value in 12 months of unrelenting financial and corporate failure. Originating in the toxic sub-prime securities of the New York investment banks, the <a href="http://cpe.oxfordjournals.org/content/early/2010/04/27/cpe.bzq002.abstract">financial crisis</a> threatens to engulf the economies of the world. </p>
<p>The mythology today is that Australia miraculously escaped the global financial crisis due to the resilience of its regulatory system and the governance and risk management of its banks. The reality is that more than a dozen significant Australian companies went under during the crises (amounting to losses in excess of $60 billion in total). In almost every case at least one of the big four banks were involved in supporting the business models and extending credit to very doubtful enterprises.</p>
<p><strong>July 2012: HSBC money laundering</strong></p>
<p>A US Senate Inquiry discovers that <a href="https://www.icij.org/project/swiss-leaks/banking-giant-hsbc-sheltered-murky-cash-linked-dictators-and-arms-dealers">HSBC</a> allowed Latin American drug cartels to launder hundreds of millions of ill-gotten dollars through its US operations, rendering the dirty money usable. The HSBC Swiss private banking arm profited from doing business with arms dealers and bag men for third world dictators and other criminals. </p>
<p>HSBC agrees to pay a fine in excess of US$2 billion to settle US civil and criminal actions. In 2016 it is revealed that UK Chancellor George Osborne intervened to prevent criminal charges against HSBC as this might have undermined financial markets.</p>
<p><strong>2013: Libor rigging</strong></p>
<p><a href="https://books.google.com.au/books?id=3ZDqAwAAQBAJ&pg=PT165&lpg=PT165&dq=Libor+Justin+O%27Brien&source=bl&ots=cSYzB8ljps&sig=KYP1D9d_xxpEx3owc7EpKBEPlKs&hl=en&sa=X&ved=0ahUKEwjZ06yM0P7OAhWCHpQKHaMJAkYQ6AEIOjAG#v=onepage&q=Libor%20Justin%20O'Brien&f=false">Libor</a> is the international vehicle for settling inter-bank interest rates, and covers markets worth US$350 trillion. </p>
<p>In 2012 it’s revealed that wholesale fraudulent manipulation of the rates has been occurring for years, and throughout the reform process following the global financial crisis. The crisis engulfs many international banks including Barclays, Citigroup, Deutsche Bank and JP Morgan. The irony of the scandal is that Libor was intended as a measure of the state of health of the banking system. </p>
<p>The US Commodity Futures Trading Commission and US Department of Justice impose fines totalling hundreds of millions of dollars on the international banks. In Australia ASIC investigates the role of ANZ, BNP, UBS, and RBS and imposes fines. In 2014 the administration of Libor is transferred to the Euronext NYSE.</p>
<p><strong>2014: Commonwealth Bank financial planning scandal</strong></p>
<p>An <a href="http://www.abc.net.au/4corners/stories/2014/05/05/3995954.htm">ABC Four Corners report</a> reveals CBA customers have lost hundreds of millions of dollars after the bank’s financial advisers recommend speculative investments. </p>
<p>The report describes the sales-driven culture inside the Commonwealth Bank’s financial planning division, with a focus on profit at all cost and a culture that has been built on commissions. The bank is found to have misled potentially thousands of clients. </p>
<p>The bank sets up an internal inquiry and compensation (though is subsequently accused of dragging its feet on compensation). A Senate inquiry into the performance of ASIC during the affair recommends establishing a Royal Commission to examine the banks.</p>
<p><strong>May 2015: Forex manipulation</strong></p>
<p>Following the Libor scandal, it is discovered that traders have been deliberately orchestrating trades in the $US5.3 trillion-per-day global foreign exchange market to their own advantage.</p>
<p>“They acted as partners - rather than competitors - in an effort to push the exchange rate in directions favourable to their banks but detrimental to many others,” says US Attorney-General Loretta Lynch. “And their actions inflated the banks’ profits while harming countless consumers, investors and institutions around the globe.”</p>
<p>US and British regulators <a href="http://www.abc.net.au/news/2015-05-21/us-britain-fine-top-banks-nearly-6-bn-for-forex-libor-abuses/6485510">fine Barclays, Citigroup, JP Morgan, RBS, UBS, and Bank of America more than US$6 billion</a> in recognition of the scale and duration of the fraud.</p>
<p><strong>March 2016: ASIC targets ANZ for rigging the bank bill swap rate (BBSW)</strong></p>
<p><a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-060mr-asic-commences-civil-penalty-proceedings-against-anz-for-bbsw-conduct/">ASIC commences legal proceedings against ANZ</a> for unconscionable conduct and market manipulation in relation to the bank’s involvement in setting the bank bill swap reference rate (BBSW) in the period March 2010 to May 2012. It foloows up with actions against NAB and Westpac.</p>
<p>The BBSW is the primary interest rate benchmark used in Australian financial markets, administered by the Australian Financial Markets Association (AFMA). It is alleged the banks traded in a manner intended to create an artificial price for bank bills.</p>
<p><strong>March 2016: CommInsure payments scandal</strong></p>
<p>The insurance arm of the Commonwealth Bank c<a href="http://www.abc.net.au/4corners/stories/2016/03/07/4417757.htm">omes under media scrutiny</a> for operating along similar lines to the earlier financial planning business. </p>
<p>A company whistleblower reveals the measures the bank is taking to avoid making insurance payouts to policyholders, many of whom are sick or dying.</p><img src="https://counter.theconversation.com/content/64803/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Clarke does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The universal reform of the banking system will take more than another inquiry.Thomas Clarke, Professor, UTS Business, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/633962016-09-09T03:31:44Z2016-09-09T03:31:44ZCompany results wrap: weighing up the risks behind the profits of Australia’s big four banks<p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play</em></p>
<hr>
<p>The biggest Australian banks are fairing well in a year of increased pressure to reform from politicians, international events like the Britain’s exit from the European Union and more regulation from the Australian Prudential Regulation Authority (APRA).</p>
<p>A number of interrelated factors have contributed to the relatively strong performance of the Australian banks. For instance, the banks have limited exposure to the types of securities which led to massive losses for their counterparts in other countries. The banks also heavily rely on domestic loans, particularly the low risk household sector, so better lending standards and a proactive approach to prudential supervision by APRA may have contributed.</p>
<p>The <a href="http://www.bis.org/bcbs/basel3.htm">Basel III regulatory requirements</a>, brought in after the 2008 financial crisis, emphasise holding an increased amount of subordinated debt, as a measure of market discipline. However all the big four banks are holding less and less subordinated borrowings. More specifically, it declined by more than 50% from 2007 to 2014, according to our calculations. </p>
<p>APRA limits banks’ holdings of higher risk securitised assets, these are loans packaged into securities, to a maximum of 25% of the banks’ loan portfolio. These are high risk if not properly understood or defined, as happened with United States home loans, blamed for the start of the global financial crisis.</p>
<p>When Australian banks calculate bank capital requirements, they need to fully account for securitised assets. This is a rule from APRA that goes beyond international standards, to reflect the risk inherent in these products. </p>
<p>Inter-bank liquidity tightened significantly with all banks increasing their holdings of <a href="http://www.rba.gov.au/media-releases/1999/mr-99-02-role.html">Exchange Settlements Accounts at the Reserve Bank</a>, this a form of low risk liquidity. Australian banks have lower interbank deposits compared to their Europe and USA counterparts and are also heavily involved in long term wholesale funding and are required to hold more liquid assets including government debt to deal with liquidity. All of this makes Australian banks less risky in times of crisis because spillover effects from other banks are less likely.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1251&fit=crop&dpr=1 600w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1251&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1251&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1573&fit=crop&dpr=1 754w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1573&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/137164/original/image-20160909-13342-1815sas.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1573&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">The big four.</span>
<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>There has been a significant increase in concentration in the Australian banking industry since the global financial crisis. For example with Westpac and the Commonwealth Bank of Australia taking over St. George Bank and Bank West, respectively.</p>
<p>Following mergers, the big four account for 88% of the Australian banking system assets. This reinforces the idea that the banks are <a href="http://www.afr.com/business/banking-and-finance/financial-services/too-big-to-fail-is-alive-and-well-20151025-gkhvpq">“too big to fail”</a>. </p>
<p>The banks have also moved to more fee generating activities, which increases risk, but to a lesser extent in Australian banks. Data shows between 1998 and 2014, on average, 1.2% greater interest income was generated relative to non-interest income for Australian banks, according to our analysis. However, there is also similar evidence for the top eight publicly-listed Canadian banks. They exhibit on an average, a 2.5% increase in net interest revenue relative to non-interest income over the same time period. </p>
<p>This reinforces that Australian and Canadian banks demonstrated extra ordinary resilience during the credit turmoil in the global financial crisis. The World Economic Forum in 2008 reported that Australia and Canada were among <a href="http://www.reuters.com/article/us-financial-soundest-banks-idUSTRE4981X220081009">the top four safest banking systems in the world</a>. </p>
<p>Large banks in Australia are active in international markets through direct ownership of foreign based banks and having offshore operations as a source of capital. Deregulation of banking in countries such as the USA, Canada, Australia and many developing countries has opened up new markets for foreign banks. Australian banks’ largest international exposure is to New Zealand, where all big four banks retain sizeable operations. </p>
<p>Although the growing interdependence among international economies and financial markets is certain to continue, the impact of Brexit on Australian banks remains minimal. It remains to be seen in the long-run how Australian banks will weather the international banking/economic developments.</p>
<p>As a last measure of the bank health, we can measure the domestic systemic risk with <a href="http://onlinelibrary.wiley.com.ezproxy.library.uq.edu.au/doi/10.1111/j.1467-8462.2013.12008.x/abstract">a methodology</a> based on <a href="http://www.bis.org/publ/bcbs255.htm">one used by the official Basel Committee on Banking Supervision</a>. Based on July 2016 monthly data, the big four banks account for 80.38% of the systemic risk in the financial system and the riskiest, from highest to lowest, are the National Australia Bank, the Commonwealth Bank of Australia, Westpac and ANZ.</p><img src="https://counter.theconversation.com/content/63396/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mamiza Haq receives funding from Australian Research Council. </span></em></p><p class="fine-print"><em><span>Necmi K Avkiran does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Australia’s big four banks are managing risk well, this could be contributing to their strong performance.Mamiza Haq, Lecturer in Finance, The University of QueenslandNecmi K Avkiran, Associate Professor in Banking and Finance, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/578192016-04-14T10:00:49Z2016-04-14T10:00:49ZAllan Fels: 7Eleven franchisees ‘waging campaign’ to block workers’ compo (audio)<p>Former ACCC chairman Professor Allan Fels says a “concerted campaign” has been waged by franchisees of 7Eleven against underpaid workers to prevent them seeking compensation.</p>
<p>And he has spoken of the need for Australia’s banks to follow the example of the United Kingdom and structurally separate commercial activities from its lending and deposit taking operations, as calls for a royal commission into the sector continues.</p>
<p>Professor Fels was speaking at the Melbourne Press Club with Fairfax Media investigative journalist Adele Ferguson - whose reporting helped reveal systematic underpayment by 7Eleven and misconduct in the financial planning arm of the Commonwealth Bank - and CBA whistleblower Jeff Morris.</p>
<p>Prof Fels, a Professorial Fellow for the University of Melbourne, headed an independent panel that examined the underpayment of 7Eleven workers after a joint Fairfax/ABC investigation. He said 2000 claims were actively being processed, with 343 claims being paid $12 million, an average of $35,000 per claim. </p>
<p>He said there was a “very strong campaign by franchisees to deter them” and that there needs to be shared liability forcompensation between franchisers and franchisees: </p>
<p><audio preload="metadata" controls="controls" data-duration="127" data-image="" data-title="Professor Allan Fels speaks about 7eleven" data-size="3073969" data-source="The Conversation" data-source-url="" data-license="CC BY" data-license-url="http://creativecommons.org/licenses/by/4.0/">
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Professor Allan Fels speaks about 7eleven.
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<p>Prof Fels says in the banking sector there are some “deep conflicts of interests” that have been exacerbated by the need to prop up “too big to fail” banks. Conflicts had been intensified by banks expanding into funds management, an area which the <a href="http://www.theguardian.com/business/2011/sep/12/vickers-report-key-points">Vickers Report in the UK</a> recommended be separate from the traditional deposit taking activities of banks:</p>
<p><audio preload="metadata" controls="controls" data-duration="110" data-image="" data-title="Professor Fels comments on banking culture" data-size="2656299" data-source="The Conversation" data-source-url="" data-license="CC BY" data-license-url="http://creativecommons.org/licenses/by/4.0/">
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Professor Fels comments on banking culture.
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<p>“My message to the bank would be get a lot more serious about compliance, ethics and a pro-consumer culture or basic questions will come up”.</p>
</blockquote>
<p>The event focused on the role of whistleblowers in exposing corporate corruption and also heard from consumer advocate Michael Fraser.</p><img src="https://counter.theconversation.com/content/57819/count.gif" alt="The Conversation" width="1" height="1" />
Former ACCC head comments on calls for a royal commission into the banking sector.Jenni Henderson, Section Editor: Business + EconomyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/575552016-04-13T01:09:10Z2016-04-13T01:09:10ZRoyal commission into banking debate reveals the sell-off of Australian democracy<figure><img src="https://images.theconversation.com/files/118443/original/image-20160412-15858-1i73go8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Malcolm Turnbull has downplayed calls for a royal commission into the banks, arguing that their operations are already well governed.</span> <span class="attribution"><span class="source">AAP/Richard Wainwright</span></span></figcaption></figure><p>Debates over the call for a royal commission into the banking industry have brought to the fore the real battle in Australian politics – and it’s not about partisan rivalry. </p>
<p>At stake is whether Australia is committed to being a democracy ruled by the people as represented by government, or a <a href="https://independentaustralia.net/politics/politics-display/coming-the-age-of-australian-corporatocracy,7953">corporatocracy</a> where government is the political arm of big business. </p>
<p>When Tony <a href="http://www.theaustralian.com.au/national-affairs/election-2013/abbott-claims-victory-and-says-australia-is-open-for-business/story-fn9qr68y-1226714414009">“open for business”</a> Abbott was running the show it was about the state kowtowing to the market. Remarkably, his successor as prime minister, Malcolm Turnbull, has moved to a whole new level. Businesses and political interests are now being treated as one and the same. Democracy is at stake.</p>
<h2>Smoke and fire</h2>
<p>Australia has suffered a raft of scandals at the hands of its major banks. Headline news is dominated by stories of blatant <a href="http://www.abc.net.au/news/2016-03-07/comminsure-scandal-whos-who-four-corners/7226576">insurance fraud</a>, high-level <a href="http://www.abc.net.au/news/2016-03-04/asic-takes-action-against-anz-for-alleged-rate-fixing/7221306">rate fixing</a>, and dodgy <a href="http://www.abc.net.au/news/2015-10-28/cba-denying-compensation-to-victims-of-financial-planning/6892624">financial planning</a>. When it’s not downright criminal it is conscience-free profiteering</p>
<p>ANZ boss Shayne Elliot fears that a royal commission will spook international investors; that they will think that <a href="http://www.abc.net.au/news/2016-04-09/nab-anz-bosses-say-banking-royal-commission-a-distraction/7313030">“where there is smoke there is fire”</a>. Given the overwhelming evidence that fires have been raging out of control in the banking sector, such a response beggars belief. </p>
<p>Westpac chimed in with its view that a royal commission could <a href="http://www.abc.net.au/news/2016-04-09/nab-anz-bosses-say-banking-royal-commission-a-distraction/7313030">“impact confidence in the economy”</a>. There is a warped logic at play. Why should we avoid holding corporations to account for clear evidence of wrongdoing? Because it’s bad for business. </p>
<h2>Banking on culture</h2>
<p>The scandals reflect a culture in banking and finance that runs on greed and is backed up by blatant disregard for any form of public responsibility. </p>
<p>Commonwealth Bank chief executive Ian Narev <a href="http://www.smh.com.au/business/intelligent-investor/comminsure-is-cba-an-unethical-stock-20160308-gndfje.html">promises</a> that all will be well because he and his managers are determined to build a culture:</p>
<blockquote>
<p>… with the customer at the centre of what we do.</p>
</blockquote>
<p>ANZ sings from the same songsheet with its explicit commitment to <a href="http://www.afr.com/business/banking-and-finance/inside-anzs-toxic-culture-the-highoctane-world-of-dealing-rooms-20160114-gm5mk6">“culture, ethics and fairness”</a>.</p>
<p>The scandals that have prompted calls for a royal commission tell us something completely different. Despite the fairytale corporate cultures claimed by the banks, the real cultures are ones that value transferring as much wealth as possible from the customer’s pockets into their own.</p>
<p>While Opposition Leader Bill Shorten may have committed to a royal commission if his party is elected, this debate is not driven by left-wing bank-bashing. The call has been backed by <a href="http://www.moneymanagement.com.au/news/financial-planning/isa-backs-royal-commission-banks">Industry Super Australia</a> and by MPs <a href="http://www.skynews.com.au/news/top-stories/2016/04/11/support-within-coalition-for-bank-commission.html">across the political spectrum</a>. Shorten’s announcement was also preceded by the <a href="http://www.smh.com.au/business/banking-and-finance/asa-calls-for-royal-commission-in-wake-of-comminsure-scandal-20160310-gnfbtn.html">Australian Shareholders’ Association’s</a> demands for the insurance industry to be put under the same scrutiny. </p>
<h2>Turnbull and the bankers</h2>
<p>When it comes to the mooted royal commission, Turnbull – a former banker himself – downplays the problem. For him the scandals do not amount to a fundamental crisis in the system, just a few <a href="http://www.abc.net.au/news/2016-04-07/backbencher-joins-calls-for-banking-royal-commission/7308036">“troubling incidents”</a> that can be tackled in the existing order. </p>
<p>This echoes the banks’ own responses. They adamantly claim that a business-as-usual approach is the best and that additional scrutiny is unnecessary. NAB boss Andrew Thorburn has condemned the debate as a <a href="http://www.smh.com.au/business/banking-and-finance/nabs-andrew-thorburn-says-royal-commission-would-be-a-serious-distraction-20160408-go1rwd.html">“serious distraction”</a> from his bank’s commitment to “help their customers”.</p>
<p>What unites Turnbull and the bankers is not just about side-stepping public scrutiny. It is about the fundamental political role of the Australian people. Narev might claim a deep commitment to Commonwealth Bank <a href="https://www.commbank.com.au/about-us/news/media-releases/2016/ian-narev-ceo-statement-on-life-insurance.html">“being an ethical business”</a>, but he only does so <a href="http://www.theage.com.au/comment/the-age-editorial/comminsure-pitches--people-against-profit-20160308-gndmz9.html">because</a>:</p>
<blockquote>
<p>… satisfied customers are good for shareholders as well.</p>
</blockquote>
<p>Some may say Turnbull gave the banks a <a href="https://theconversation.com/banks-get-a-bollocking-from-turnbull-on-ethics-57350">dressing down</a> when he spoke at Westpac’s 199th birthday lunch recently, but only because they didn’t “put their customers’ interests first”. Ultimately he put his faith in the bank bosses’ ability to instil the ethical standards required. </p>
<h2>Customers or citizens?</h2>
<p>The politics that Turnbull and the bank chiefs support is one where people are robbed of citizenship. We are reduced to being economic functionaries in a world ruled by corporations. This is a world where vacuous corporate claims to self-governance through ethics and culture replace public accountability. </p>
<p>Turnbull <a href="http://www.businessinsider.com.au/malcolm-turnbull-election-transitioning-economy-2016-4">has committed</a> to fighting the upcoming election on what he defines as a single issue:</p>
<blockquote>
<p>… whether we complete our transition to the new economy or we allow Labor to kill off that opportunity.</p>
</blockquote>
<p>In pursuing this, Turnbull joins the banks in championing a politics that is entirely subservient to economic imperatives.</p>
<p>No talk here of justice, freedom, equality, participation or representation for the nation’s citizens. The only thing <a href="http://www.businessinsider.com.au/malcolm-turnbull-election-transitioning-economy-2016-4">we are told</a> to care about is delivering “our children and grandchildren the great jobs they deserve”. </p>
<p>No-one can deny that jobs are important. But rendering them as the only serious political issue defies democracy. </p>
<h2>Beyond the royal commission</h2>
<p>Turnbull’s political imagination is limited in that it construes people only as being defined in terms of markets. No more citizens, just customers in a consumer market, workers in a labour market, and investors in a financial market. The ultimate beneficiaries? The corporations who want to rule the world.</p>
<p>Time will tell if a royal commission into banking eventuates. Regardless, if the current trend continues we will keep suffering scandal after scandal. But the debate raging over the past week speaks to a much more significant challenge for Australian politics. </p>
<p>The question we need to ask is not just whether we need a royal commission, but whether or not it is too late to turn the tide of corporate rule.</p><img src="https://counter.theconversation.com/content/57555/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carl Rhodes 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 politics that Malcolm Turnbull and the big banks support is one in which people are robbed of their citizenship and reduced to economic functionaries.Carl Rhodes, Professor of Organization Studies, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/562692016-03-17T22:25:31Z2016-03-17T22:25:31ZTrashing the brand: ANZ and CBA could pay a high price for choosing profit over people<p>The recent <a href="https://theconversation.com/comminsure-case-shows-its-time-to-target-reckless-misconduct-in-banking-55748">CBA</a> and <a href="https://theconversation.com/why-rigging-of-the-bank-bill-swap-rate-hurts-everyone-55826">ANZ</a> scandals show that the big banks fail to understand the long-term pay off from investing in their relationships with people over short-term profit. </p>
<p>ANZ stands accused of unconscionable conduct and manipulating the <a href="https://theconversation.com/why-rigging-of-the-bank-bill-swap-rate-hurts-everyone-55826">bank bill swap rate</a> (known as the BBSW) in its favour, short changing its customers and generating illicit profits. In the same vein, it has been reported that employees of CommInsure, CBA’s insurance arm, have deliberately, and in some cases illegally, removed medical details or taken action to avoid or delay the payment of claims. </p>
<p>If these allegations are true, these practices will prove damaging for CBA and ANZ stakeholders and undermine the credibility of both brands and the sector.</p>
<h2>Brands as a promise</h2>
<p>Annually, companies invest dizzying amounts to sculpt their corporate brands. The investment is made in the hope of creating positive and unique associations that collectively reflect the firm’s values and communicate who they are and what they stand for. For the past two decades, it has been increasingly understood that <a href="https://hbr.org/2001/02/are-the-strategic-stars-aligned-for-your-corporate-brand">brands act as a promise</a> – one that extends beyond customers to employees, investors, communities, partners and other stakeholders. Like any promise, evidence of a contravention can seriously damage relations with those relying on it in good faith.</p>
<p>The association that stakeholders - including customers and employees - have with a brand takes significant time and investment to cultivate, but may be eroded rapidly. The CBA <a href="https://www.commbank.com.au/about-us/who-we-are/customer-commitment.html%3Fei=mv_customer-commitment#https://www.commbank.com.au/about-us/who-we-are/customer-commitment.html?ei=mv_customer-commitment">website</a> claims they have a “range of conduct codes to ensure we provide a high level of service to our customers”. Similarly, <a href="http://www.shareholder.anz.com/our-company/profile">ANZ</a> champion a “deep understanding of customer needs”. </p>
<p>Any disconnect between the carefully crafted formal messages and the less-than-upstanding action creates a dissonance in the minds of stakeholders. Last year’s <a href="https://theconversation.com/vw-needs-massive-marketing-campaign-to-regain-consumer-trust-and-survive-48147">Volkswagen scandal</a> is a prime example of how quickly, once trust is betrayed, a much-loved brand can fall from grace. As a consequence of untoward behaviour, the shared values and beliefs are undermined destroying employer brand equity.</p>
<h2>When actions drown out a positive brand promise</h2>
<p>The employer brand promise is created both formally and informally. Typically, employers promise working conditions and remuneration contractually, but also make more tacit promises through the values espoused internally through practice and culture. Consequently, the employer brand of any organisation is not a static, immovable concept, it is continually being created through the interaction of both the firm and the employees. </p>
<p>The employer brand directly impacts on an employees’ employment experience, which has consequences for performance and overall job satisfaction. There are particular conditions that will corrode employer brand success. Both the CBA and ANZ scandals touch on at least two of these conditions; disconnect between the promised and actual employment experience and divergence between the espoused and actual values. By wearing down employee trust, these firms have actively undermined the investments they have made in attracting and retaining talent.</p>
<p>Recent research conducted at <a href="http://www.nytimes.com/2016/02/28/magazine/what-google-learned-from-its-quest-to-build-the-perfect-team.html?smid=pl-share&_r=0">Google</a> shows how trust, employee performance and engagement are related. In their long-term quest to understanding the secret of successful teams, Google found that teams who feel “psychologically safe” perform better. </p>
<p>That is, a feeling of stability and safety combined with clear goals and a culture of dependability were the essential ingredients for a team’s superior performance. For now, it’s unlikely that the day-to-day employment experience of most employees at ANZ or CBA has changed significantly, however the psychological feeling of safety is likely to be marred by the recent scandals, detracting from optimal performance, job satisfaction and productivity. </p>
<p>Their ability to attract and retain staff who can best deliver on a superior customer brand experience has also been diminished.</p>
<h2>Making amends – intention and timing is critical</h2>
<p>ANZ and CBA have approached restitution with their stakeholders differently. CBA has apologised, chief executive Ian Narev issued a <a href="https://www.commbank.com.au/about-us/news/media-releases/2016/ian-narev-ceo-statement-on-life-insurance.html">statement</a> in the wake of the controversy, taking ownership and pledging direct contact with victims. </p>
<p>In contrast, ANZ intends to defend against the <a href="https://theconversation.com/asic-v-anz-rate-rigging-case-will-be-one-of-epic-proportions-55932">claims</a>. How these opposing strategies will play out for each institution remains to be seen. </p>
<p>The Volkswagen debacle involved years of public deception; however once the irrefutable truth of its actions was exposed, the CEO resigned and <a href="http://money.cnn.com/2015/09/22/news/vw-recall-diesel/">6.5 billion euros</a> were allocated to cover the amends. The Volkswagen scandal is perhaps still too fresh for us to be able to determine the consequences for the brand, however it has been over five years since BP’s Gulf of Mexico disaster in April 2010. It was found that the disaster was <a href="http://www.theguardian.com/environment/2011/jan/06/bp-oil-spill-deepwater-horizon">preventable</a> and similar to Volkswagen, the CEO <a href="http://www.nytimes.com/2014/01/25/business/energy-environment/bp-still-struggling-to-put-gulf-spill-behind-it.html">resigned and significant funds</a> have been allocated to restitution. BP has continued to produce “corporate responsibility” reports and <a href="http://www.sustainablebrands.com/news_and_views/marketing_comms/leon_kaye/five_years_after_deepwater_horizon_can_bp_repair_its_reputa">herald</a> its position on sustainability. </p>
<p>However, a <a href="http://www.theguardian.com/world/2015/jun/14/tate-modern-climate-activists-bp-protest">protest in 2014</a> by climate activists against BP’s contributions to the Tate Modern show that the public has not forgiven or forgotten the Gulf of Mexico disaster.</p>
<h2>Brands are an important investment in social and cultural value</h2>
<p>An important question is: what can business, irrespective of industry, learn from this? Cautionary tales like this urge leadership to think beyond the bottom line: to value and cultivate a culture of trust, psychological safety and dependability to enable their employees to thrive in optimal environments. Economic value from profitable business units keeps the lights on, but social and cultural value from staff and customers keep the growth engine firing.</p><img src="https://counter.theconversation.com/content/56269/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>Dissonance by the banks - saying one thing but acting in another way - will cause brand damage that will be very difficult to repair.Lara Moroko, Lecturer in Management, CEO Place Lab, Macquarie Graduate School of ManagementSarah Duffy, Lecturer, School of Business, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/562892016-03-17T19:20:24Z2016-03-17T19:20:24Z‘Command and control’ banks have got ethics and culture all wrong<figure><img src="https://images.theconversation.com/files/115365/original/image-20160316-30211-1plxyj0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Banks must accept they can't control the values, beliefs and behaviours of their employees.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>The <a href="https://theconversation.com/comminsure-case-shows-its-time-to-target-reckless-misconduct-in-banking-55748">latest scandal</a> engulfing Australia’s biggest bank has reverberated through the industry with NAB and the ANZ Bank instigating <a href="http://www.smh.com.au/business/banking-and-finance/asic-orders-independent-review-of-anzs-insurance-and-super-arm-onepath-20160315-gnj7hd.html">reviews of their life insurance businesses</a>. </p>
<p>Earlier this year ANZ was charged with <a href="http://www.smh.com.au/business/banking-and-finance/asic-sues-anz-for-rate-rigging-20160303-gna7gg.html">fixing its bank bill swap rate</a>. <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/15-060mr-asic-commences-civil-penalty-proceedings-against-anz-for-bbsw-conduct/">ASIC</a> called it “unconscionable conduct and market manipulation”. </p>
<p>Westpac has been implicated as well. It is understood ASIC has identified <a href="http://www.businessspectator.com.au/news/2016/3/8/industries/westpac-execs-rate-rig-probe">120 of its employees as “persons on interest”</a> in its investigations of rate rigging. </p>
<p>Things are getting so bad that Senator <a href="http://peter-whish-wilson.greensmps.org.au/">Peter Whish-Wilson</a> quipped that the banks “should be handing out a scandal of the month award”.</p>
<h2>A cultural solution?</h2>
<p>Bank bosses have responded by repeating an old and tired refrain about corporate culture and ethics. </p>
<p>Soon after Shayne Elliot took on the job as ANZ’s CEO last October he announced that the “core purpose” and culture of the bank were his priorities. </p>
<p>This year ANZ has been accused of having a “<a href="http://www.afr.com/business/banking-and-finance/anz-boss-shayne-elliott-draws-up-plan-to-fix-toxic-culture-20160116-gm7953">toxic culture</a>”, especially amongst its traders, alleged to have enjoyed a life of <a href="http://www.afr.com/business/banking-and-finance/inside-anzs-toxic-culture-the-highoctane-world-of-dealing-rooms-20160114-gm5mk6">lap-dancing, drugs, booze, and enormous bonuses</a>. </p>
<p>ANZ’s response? “We want to be known as a bank with a strong focus on culture, ethics and fairness,” said chief risk officer <a href="http://www.afr.com/business/banking-and-finance/inside-anzs-toxic-culture-the-highoctane-world-of-dealing-rooms-20160114-gm5mk6">Nigel Williams</a>.</p>
<p>CBA is no different. Chairman David Turner promised last year that his <a href="http://www.smh.com.au/business/banking-and-finance/cba-wants-to-be-the-ethical-bank-20151117-gl11rc.html">“will be the ethical bank, the bank others look up to for honesty, transparency, decency, good management, openness”.</a></p>
<p>With the CommInsure debacle CBA’s CEO <a href="http://www.smh.com.au/business/intelligent-investor/comminsure-is-cba-an-unethical-stock-20160308-gndfje.html">Ian Narev defended his organisation</a> saying “the culture that we’re building throughout the Commonwealth Bank […] is one with the customer at the centre of what we do”. </p>
<h2>Getting ethics wrong</h2>
<p>Bosses respond to scandals by saying they can make everything right by increasing their levels of control. Control, that is, over the values, beliefs and behaviours of their employees.</p>
<p>The basic mistake is to assume that ethics is about one group of people (managers) dictating ethics to another group of people (employees). This is not about individual employees making choices for which they are responsible. It is about them doing what they are told.</p>
<p>This completely fails to acknowledge that the reason debates over ethics in banking are occurring is because of people who have criticised dominant corporate norms, not done what the corporation expected of them, and had the courage to bring them to public attention. </p>
<p>The ethical breaches at CommInsure would not have come to light if it wasn’t for its former chief medical officer, <a href="http://www.abc.net.au/news/2016-03-09/comminsure-whistleblower-suing-for-wrongful-dismissal/7234064">Dr. Benjamin Koh</a>, being prepared to defy the corporation’s culture by blowing the whistle. </p>
<p>Was ANZ being held to account for rate fixing as result of it own cultural commitment to ethics? No, it came out of an investigation by the regulator ASIC. </p>
<h2>No room for criticism</h2>
<p>While the banks claim to want ethical cultures, in practice they are in the business of curtailing the very forms of critical questioning that allow ethical issues to be surfaced in the first place. </p>
<p>One might well wonder whether the banks are serious about taking ethical responsibility for their actions, or whether this talk of culture is just trying to minimise damage after the event?</p>
<p>How did CBA respond when, last October, former employee <a href="http://parlinfo.aph.gov.au/parlInfo/download/committees/commsen/bfbb3815-8ae8-4bf9-b983-5c1aae87054d/toc_pdf/Economics%20References%20Committee_2015_10_28_3952.pdf;fileType=application%2Fpdf#search=%22committees/commsen/bfbb3815-8ae8-4bf9-b983-5c1aae87054d/0000%22">Russell Phillips</a> described how the bank was actively working to minimise compensation paid to victims of its financial planning scam? </p>
<p><a href="http://www.ifa.com.au/news/15320-cba-makes-second-defence-against-comp-scheme-scandal">Annabel Spring</a>, group executive of wealth management, mounted something of a character assassination of the whistle blower. She asserted that his testimony was misleading, implying he was an unreliable witness. </p>
<p>When it came to the rate fixing investigation, ASIC referred to the ANZ’s behaviour as “<a href="http://www.afr.com/business/banking-and-finance/anz-named-as-one-of-the-appalling-banks-in-ratefixing-probe-20150603-ghg0sz">absolutely appalling</a>”. The bank was said to have been highly defensive and “obstructionist” as it sought to frustrate inquiries. </p>
<h2>Holding the banks to account</h2>
<p>The litany of scandals that have plagued the Australian financial services sector exemplify how corporations have been publicly held to account for their actions, and pressured to accept responsibility. </p>
<p>This is not an ethical responsibility the banks have taken on voluntarily through their “ethical cultures”. Responsibility was thrust upon them as a result of the actions of citizens, employees, regulators, and journalists. </p>
<p>If it wasn’t for them, the scandals would remain covered up. This shows that if we want corporations to be ethically accountable, then their conduct and behaviour needs to be open to scrutiny. Forced open where necessary. </p>
<p>Recent events show that the last place such scrutiny is likely to arise is within the banks themselves. Cultural control, as the proposed highroad to ethics, is an ivory tower fantasy that bears no correlation to how ethics is, in practice, brought to bear on corporate activity. </p>
<p>If the banks want to contribute to ethical practice they need to let go of this control, and be open to criticism, welcoming of debate, and vulnerable to dissent. </p>
<p>At present there is no sign that they are willing or able to do this.</p><img src="https://counter.theconversation.com/content/56289/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carl Rhodes 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>Banks may pay lip service to ethical cultures but often curtail the critical questioning that allows ethical issues to be surfaced in the first place.Carl Rhodes, Professor of Organization Studies, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/458842015-08-11T02:32:59Z2015-08-11T02:32:59ZExplainer: banks are raising capital, but should we be worried?<figure><img src="https://images.theconversation.com/files/91367/original/image-20150811-11088-13mrxs5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Large Australian banks are being required to significantly increase their levels of equity capital.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Last week’s A$3 billion capital raising by ANZ Bank <a href="http://www.smh.com.au/business/markets/asx-dragged-down-by-banks-as-anz-starts-3b-capital-raise-20150806-git3nq.html">was seen as bad news</a> by equity investors, even though there has been no significant information released which might suggest poorer future performance of Australian banks. Any such concerns would also be somewhat offset by <a href="http://www.asx.com.au/asxpdf/20150810/pdf/430d81r228vdpk.pdf">robust quarterly figures</a> from NAB. <a href="http://www.theaustralian.com.au/business/financial-services/investors-brace-for-5bn-cba-equity-raising/story-fn91wd6x-1227476548037">Media reports</a> have suggested the Commonwealth Bank will follow with a capital raising of its own when it presents its annual results this week. </p>
<p>The straightforward answer to why ANZ (and other banks) would undertake such a large capital raising, and risk adverse market reaction, is that regulatory developments mean they have little choice.</p>
<p>The prudential regulator, APRA, has stated a need for large Australian banks to have significantly higher levels of equity capital, and has indicated an increase in capital ratios of 200 basis points as an indicative amount. </p>
<p>The regulatory timetable involved rules out the possibility of generating all those funds internally by retention of earnings (although banks are likely to try to lure more investors into dividend reinvestment schemes rather than taking cash, by increasing the share discounts offered to them under such schemes. (Dividend reinvestment schemes are a popular way for some companies to retain capital, but have a relative low take up rate (20%) among investors.)</p>
<p>The regulator is seeking higher capital as part of its objective of ensuring Australian banks are seen to be well capitalised and thus not at risk of failure. This was recommended by the <a href="http://fsi.gov.au">Murray Inquiry</a>, and higher capital requirements is a common theme globally – with even some bankers acknowledging capital levels had got too low for comfort prior to the financial crisis.</p>
<p>Minimum capital required is linked to a concept known as risk weighted assets (RWA) – more capital is required for higher risk assets and weights are applied to various asset categories to reflect risk in the calculation of RWA. For the ANZ, RWA are around A$400 billion compared to total assets of around A$900 billion.</p>
<p>For the Australian banks there are two forces prompting higher capital amounts. One is increases in the minimum expected capital/RWA ratio. APRA has signalled it agrees with the Murray Inquiry recommendation that Australian banks should be, but are not currently, <a href="https://theconversation.com/australian-banks-are-strong-should-we-pay-for-them-to-be-stronger-44712">in the top quartile internationally.</a> The second is the increase in risk weights to be applied to mortgage loans of the major banks, which will increase measured RWA.</p>
<p>Why should the market react so negatively? Higher capital will, after all, make banks safer. The answer lies in the potential effect of a higher capital ratio on bank return on equity. If there is no change in return on assets and bank total profit, earnings will be spread over a larger number of shares, implying a reduced return on equity. A reduction in bank share prices can be seen as reflecting a downgrading of market expectations of the future yield on bank shares. </p>
<p>But here there can be much debate about the eventual outcome. With lower leverage, bank shares have less risk. The required rate of return of investors could thus be expected to decline – although whether sufficient to offset the projected decline in the actual return on equity, is contentious. </p>
<p>There is also another offsetting factor. With reduced leverage, bank issued debt and deposits have less default risk, and (together with less such funding needed to support their balance sheet) this should reduce interest funding costs and improve bank profits. </p>
<p>But given perceptions of “too big to fail” and explicit and implicit government guarantees, the magnitude of this effect can be questioned. So, some negative share price effect is to be expected, but whether investors over-reacted remains to be seen.</p>
<p>Why $3 billion? Some back-of-the-envelope calculations provide insight. An increase of 200 basis points (2 percentage points) in the capital ratio as suggested by APRA would mean an extra amount of capital required of around $8 billion (given by 2% of $400 billion RWA). Over the course of a year, ANZ could expect to retain (or obtain via reinvested dividends) around half of annual profits of around $7-8 billion, giving another, say, $4 billion capital. </p>
<p>So, together, these give around $7 billion of the required $8 billion within a one year horizon, with the possibility of raising further regulatory capital via issue of hybrid preference shares (and earnings retention) over a longer time frame.
Of course, these informal calculations do not take into account the effect of the increase in mortgage risk weights, or general growth in business, which will increase RWA and thus create a need for yet further capital. </p>
<p>In this environment, it is not surprising to see banks like ANZ and NAB looking to sell off non-core businesses to reduce RWA and achieving increased regulatory capital from the proceeds.</p><img src="https://counter.theconversation.com/content/45884/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis was a member of the Australian Financial System (Murray) Inquiry whose recommendations on bank capital are reflected in the APRA decisions referred to in this article</span></em></p>Investors may not like it but Australian banks have been given little choice by the prudential regulator other than to undertake capital raisings.Kevin Davis, Research Director, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/405612015-04-22T02:55:20Z2015-04-22T02:55:20ZBanks chastened by Senate, but UK experience serves real lesson<p>The full extent of the arrogance of the Four (and a half) Pillars was on full display at the Senate Hearing into the financial product misselling scandal this week in <a href="http://www.canberratimes.com.au/business/banking-and-finance/banks-senate-hearing-we-need-to-lift-our-game-on-financial-advice-20150421-1mpzxm.html">Canberra</a>. </p>
<p>The only long-standing CEO who was in the position at the time of these scandals was Macquarie Bank’s Nicholas Moore (ANZ did send the deputy CEO Graeme Hodges, Westpac had better things to do). Moore admitted that, after being belatedly prompted by the Securities and Investment Commission (ASIC), 195 cases of possible misselling had been reviewed, of which 108 had been found eligible for compensation totalling A$9.5 million. Moore noted that some 189,000 letters had been sent out but give no idea of how many cases remain to be reviewed.</p>
<p>Relative newcomers, the National Australia Bank’s Andrew Thorburn and the Commonwealth Bank of Australia’s Ian Narev were thrown into the fray, fresh-faced and suitably contrite. “At the outset, I apologise once again unreservedly to the customers who received poor advice from us,” Narev told senators. But Narev has only been CEO for three years; where were the directors who were at CBA throughout the scandal? </p>
<p>Thorburn, (appointed as CEO in August 2014) admitted that NAB had also “let some clients down” but promised that “trust and transparency” would be the watchword for its customers over the next decade.</p>
<p>But a look at how such scandals are handled overseas might give a different perspective. Each quarter, the Financial Conduct Authority (the UK equivalent of ASIC) publishes a <a href="https://www.fca.org.uk/consumers/financial-services-products/insurance/payment-protection-insurance/ppi-compensation-refunds">report</a> on how customers are being compensated for Payment Protection Insurance (PPI) products that were mis-sold to them. </p>
<p>In January 2015, a total of £424.5 million was paid out to customers whose complaints were upheld by the UK’s major banks, bringing the total paid out on the PPI redress scheme since January 2011 to £18.5 billion (around A$35 billion).</p>
<p>And in another <a href="http://www.fca.org.uk/consumers/financial-services-products/banking/interest-rate-hedging-products">scandal</a> involving the misselling of complex Interest Rate Hedging Products (IRHP) to small businesses, current compensation paid by the major banks is running at some £1.8 billion but could grow <a href="http://www.euromoney.com/Article/3445742/Mis-selling-The-importance-of-Crestsign-v-RBS.html">much bigger soon</a>. </p>
<p>A <a href="http://www.researchonline.mq.edu.au/vital/access/manager/Repository/mq:20489?f0=sm_creator%3A%22McConnell%2C+Patrick%22">reading</a> of the PPI scandal might cause the boards of Australian banks to have a rethink as they chat convivially after their next board meeting. The PPI scandal emerged over a decade with customers’ complaints being arrogantly ignored by banks, until competition inquiries pointed out case after case of mis-sold PPI products. At this point it should be noted that the PPI cases involved quite small sums of money, often less than £100, not the hundreds of thousands of dollars lost by customers in the Opes Prime or Storm Financial scandals.</p>
<p>The UK banks stonewalled until a court case was decided against them and they were forced by the regulator to set up a comprehensive redress and compensation program. Note Andrew Thorburn of NAB is already well aware of the angst of PPI as the FCA recently <a href="http://www.theage.com.au/breaking-news-business/nab-staff-sacked-over-uk-scandal-20150415-3u34w.html?skin=text-only">fined</a> the troubled Clydesdale Bank (which NAB has owned since 1987) more than $40 million for continuing “serious failings” in handling customers’ complaints.</p>
<p>Now one could argue that UK banks are bad and that Australian banks are boy scouts. But is the alternative perspective that UK regulators are better than Australian ones? </p>
<p>As information trickles out about back-door payments and strong arm gagging of customers, the probability of the latter being accurate increases. </p>
<p>It is little wonder that the major banks back an industry compensation scheme for cases of misselling, not least because it will be the customer who ultimately pays for it. After all, an industry scheme was <em>sort of</em> endorsed by the Murray <a href="http://fsi.gov.au/">Financial System Inquiry</a>. But David Murray (CBA chief executive from 1992 to 2005) also pointed out that “government provision can avoid conflicted incentives, but it can come at a cost to taxpayers and involve moral hazard”. In the end, the taxpayer rather than the banks’ shareholders will pay up under such a scheme.</p>
<p>As the Australian financial products scandal drags on over years, the call for a Royal Commission will grow; after all the government has set up a Royal Commission to address issues raised by the <a href="http://www.tradeunionroyalcommission.gov.au/Pages/default.aspx">big end of town</a> into trade unions. If such a Commission is forced on this government - or the next - the banks will only have themselves to blame. They should get on the front foot now.</p><img src="https://counter.theconversation.com/content/40561/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Major banks including the ANZ, NAB, the CBA and Macquarie have faced a public humbling, but professed contrition must become real action.Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/97612012-09-24T20:20:44Z2012-09-24T20:20:44ZToo late for Storm, but bank liability the lesson from Wingecarribee<figure><img src="https://images.theconversation.com/files/15784/original/vffj5yz3-1348452666.jpg?ixlib=rb-1.1.0&rect=20%2C35%2C1958%2C1260&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A rare win for investors: Litigation funder IMF (Australia) helped fund a class action case against Grange Securities, which was found to have misled unsophisticated investors.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Justice Steven J. Rares was blunt when he handed down <a href="http://www.austlii.edu.au/au/cases/cth/FCA/2012/1028.html">his judgement</a> in the long-running class action, Wingecarribee Shire Council vs. Lehman Brothers Australia, last week.</p>
<p>Grange Securities, a subsidiary of Lehman Brothers, had engaged in “misleading and deceptive behaviour” in promoting sub-prime derivatives known as Synthetic Collateralized Debt Obligations to three local authorities in NSW and WA, Justice Rares said. </p>
<p>Led by Wingecarribee Council, a regional council in Bowral in NSW’s Southern Highlands, 72 plaintiffs including councils, charities and churches were found to be entitled to millions of dollars after having been misled into buying toxic investments.</p>
<p>Much already has been, and will be, <a href="http://www.theaustralian.com.au/business/legal-affairs/lehman-found-to-be-liable-for-losses/story-e6frg97x-1226479146991">written</a> about the Wingecarribee case and the judgement. </p>
<p>But of interest here is the fact that the matter went through the full legal process with a hearing in open court and a final judgement made by a senior judge (although there may still be an appeal to a higher court). After considering the evidence, the judge ruled that Lehman was “liable to compensate the councils for [ALL of] their losses incurred as a result of their investments”.</p>
<p>Compare this with the latest settlement in the Storm Financial case. On 14 September, Commonwealth Bank <a href="http://www.abc.net.au/news/2012-09-14/cba-settles-storm-case-with-asic/4262298">agreed</a> to provide $136 million (on top of an earlier payment of $132 million) in compensation to customers who lost money when Storm Financial collapsed in March 2009. The case, brought by the Australian Securities and Investments Commission (ASIC), continues against other banks and Storm itself. Other class actions related to Storm also continue for Commbank.</p>
<p>The timing of the settlement is interesting. On 20 August, CBA released its 2012 annual report, which contained a section on Storm Financial in which the bank noted that it was “close to finalising its resolution scheme for clients of Storm Financial who borrowed money from the Group”. Less than four weeks later, the case with ASIC was wrapped up “without any admission of liability by the Group”.</p>
<p>This is yet another example of banks successfully burying bad news. Doubtless at some time in the future, an enterprising journalist will publish a book on the Storm Financial fiasco when names will be named. But for now, no one has fallen on their sword or been sacked at Commbank over payments totalling some $270 million (not including legal costs) underwritten by the bank’s shareholders. In fact, the Annual Report shows that all Board members received a nice pay rise.</p>
<p>Overseas, it is very different. Earlier this year, the UK banking regulator, the FSA, undertook a “thematic review” of complaints from numerous small companies concerning mis-selling of interest rate hedging products by banks. </p>
<p>When the review was completed, the UK regulator <a href="http://www.fsa.gov.uk/library/communication/pr/2012/071.shtml">ordered</a> the major UK banks to provide redress to any companies affected by mis-selling. The banks complied immediately and apologised. Now that’s regulation.</p>
<p>Thematic review is the new buzzword in regulatory circles. It means looking across the financial system at abuses that may be occurring in more than one institution and is a tool of so-called macro-prudential regulation. In a long overdue <a href="http://www.apra.gov.au/AboutAPRA/Publications/Documents/2012-09-map-aus-fsf.pdf">report</a> into macro-prudential regulation in Australia, jointly published by RBA and APRA, the banking regulator has jumped on the bandwagon and announced its commitment to such cross-industry reviews. </p>
<p>However, APRA has not yet provided details of any areas in which such a review will be undertaken. But the many complaints aired in the recent <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=economics_ctte/post_gfc_banking/hearings/index.htm">Senate Inquiry</a> on the banking system after the GFC might provide a useful starting point.</p>
<p>The form of words “without admission of liability” has become a cliché whenever cases of bank wrongdoing around the world are settled, usually with a large payment by the banks concerned. So much so that last November, Judge Jed Rakoff of the US District Court in Manhattan had had enough, <a href="http://www.huffingtonpost.com/2012/08/14/jed-rakoff-sec_n_1776300.html">throwing out</a> a settlement between Citigroup and its regulator, the SEC.</p>
<p>Judge Rakoff said that the regulator’s policy of settling cases by allowing a company to neither admit nor deny allegations “did not satisfy the law”. He added that the settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest” because it does not provide the court with sufficient evidence on which to judge the settlement.</p>
<p>The judge’s point is that the regulator is not only the prosecutor, but also the judge and the jury in these settlements. Nor is there independent oversight or appeal. And, as with the Storm case, it is the shareholders, not the wrongdoers, who pick up the tab.</p>
<p>One can sympathise with regulators, especially the SEC, which is inundated with a huge number of cases of bank wrongdoing resulting from the GFC. Banks (correction: shareholders) have deep pockets and can keep litigation going for a long time. On the other hand, regulators must consider the public purse when pursuing cases.</p>
<p>But a case that is judged in court creates case law and legal precedent. For example, as a result of Justice Rares’ judgement, we now know that some of the practices used by Grange were illegal and any banks involved in the same practices, now and in future, can be held to account without a long and expensive trial. Hopefully, regulators will make this point to any banks that may be tempted to follow Grange’s example.</p>
<p>One of the embarrassing facts that emerged from the Lehman trial was that Grange Securities sold these complex and, as it turned out, very risky products to councils and charities with misleading marketing material that praised local banking regulators whose “regulatory requirements make the Australian banking system amongst the safest in the world”. This implied that government would somehow protect the investments sold by Grange. The “safest banking system in the world” is a very powerful meme.</p>
<p>Following the GFC and other scandals, such as the <a href="http://www.guardian.co.uk/money/2012/sep/11/ppi-complaints-1500-a-day-fos">mis-selling of Payment Protection Insurance (PPI)</a> in the UK, governments around the world have beefed up their regulatory environments. One of the key areas that governments have focused on is “financial conduct” especially as regards ordinary consumers.</p>
<p>In the UK, the Financial Conduct Authority (FCA) has been carved out of the banking regulator, the FSA, to focus specifically on the “conduct” of financial services firms not only as regards retail customers but also commercial firms. </p>
<p>In the USA, the Consumer Financial Protection Bureau (CFPB) has been created with a similar mandate, to protect <a href="http://www.consumerfinance.gov/the-bureau/">consumers</a> from “unfair, deceptive, or abusive acts or practices”.</p>
<p>The lesson from these regulatory innovations is that a large single regulator may be too stretched to handle the myriad of issues that can arise in a modern financial system and that smaller and more focussed regulators would do a better job. [This, of course, is a hypothesis that remains to be proven or otherwise]</p>
<p>The new financial conduct regulators in the US and UK have also been given a mandate to improve financial literacy to help protect against financial fraud. In Australia, financial literacy is just one of the regulatory roles assigned to ASIC, along with regulation of financial markets and company registrations.</p>
<p>The ASIC <a href="https://www.moneysmart.gov.au/">Moneysmart</a> web site is primarily aimed at ordinary consumers, giving advice on investing, superannuation and retail credit, such as credit cards. However, as the Lehman case shows, with complex modern investments even finance professionals can have the wool pulled over their eyes.</p>
<p>If one believes that mis-selling of complex financial products could not happen in Australia, there is little need to consider changes to regulatory structures here. However, evidence to the Senate Inquiry would suggest that financial mis-selling was not limited to local councils but was widespread during the property boom of the early 2000s. If so, government should consider whether and how regulatory structures should be changed to meet such challenges.</p>
<p>There is also a need for case law to be clarified surrounding the practices of selling complex financial products. If necessary, the government should, where the law is unclear, be prepared to underwrite legal action by regulators against financial institutions, all the way through the courts until the matter is adjudicated. With the legal certainty of case law, both financial institutions and regulators will be able to move forward on firmer ground. And taxpayers will sleep happier at night.</p>
<p>In those cases where a settlement is agreed, it should be standard practice as part of, and paid for by, the settlement for an independent inquiry to be automatically set up. Since the actions of both regulated and regulator would be considered, such inquiries would be best administered by a truly independent body such as the Australian National Audit Office. To address any open legal concerns, the terms of reference of a particular inquiry would include recommendations from the judge in the settlement.</p>
<p>Wingecarribee shone a light onto dubious financial practices in the Australian marketplace. Such shoddy practices can only be tackled by strong and intrusive regulation, funded and supported by government. There is a need for government to learn all of the lessons from this case.</p><img src="https://counter.theconversation.com/content/9761/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pat McConnell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Justice Steven J. Rares was blunt when he handed down his judgement in the long-running class action, Wingecarribee Shire Council vs. Lehman Brothers Australia, last week. Grange Securities, a subsidiary…Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.