tag:theconversation.com,2011:/us/topics/australian-securities-and-investments-commission-49680/articlesAustralian Securities and Investments Commission – The Conversation2022-12-12T19:03:16Ztag:theconversation.com,2011:article/1963612022-12-12T19:03:16Z2022-12-12T19:03:16ZHow FTX Australia was able to claim it was ‘ASIC-licenced’<p>When cryptocurrency exchange <a href="https://www.abc.net.au/news/science/2022-11-12/cryptocurrency-ftx-exchange-collapse-australian-investors/101640914">FTX Group</a> collapsed in the Bahamas last month, its local subsidiaries <a href="https://kordamentha.com/insights/kordamentha-voluntary-administrators-ftx-express">FTX Australia</a> Pty Ltd and <a href="https://kordamentha.com/insights/kordamentha-voluntary-administrators-ftx-express">FTX Express</a> Pty Ltd fell over too. </p>
<p>The Australian companies were placed into administration on November 11 and within days the Australian Securities and Investments Commission (ASIC) had <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-316mr-asic-suspends-ftx-australia-s-afs-licence/">suspended</a> the Australian financial service licence FTX Australia had held since March 2022.</p>
<p>The fact that FTX Australia had an Australian financial service came as a surprise to some people, who had wrongly assumed everything crypto-related was beyond the reach of Australia’s regulators. </p>
<p>It also raised questions – including for <a href="https://www.afr.com/companies/financial-services/asic-had-extensive-powers-to-suspend-or-cancel-ftx-s-licence-20221206-p5c452">Assistant Treasurer Stephen Jones</a> – about how FTX Australia managed to acquire its Australian financial services licence, and how ASIC seemed to have missed the chance to intervene sooner.</p>
<p>And it draws wider attention to the 20-year-old licensing system and what an Australian financial service actually means for the firms that have them.</p>
<h2>Licensed to do what, precisely?</h2>
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<a href="https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1064&fit=crop&dpr=1 600w, https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1064&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1064&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1337&fit=crop&dpr=1 754w, https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1337&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/500217/original/file-20221211-90872-p3m533.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1337&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.prnewswire.com/news-releases/ftx-establishes-local-presence-in-australia-301506261.html">FTX Trading Limited</a></span>
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<p>When FTX commenced operations in Australia this year, its media release was headed: “<a href="https://www.prnewswire.com/news-releases/ftx-establishes-local-presence-in-australia-301506261.html">FTX launches fully registered and licensed Australian operations</a>”. </p>
<p>But what exactly was it licensed to do?</p>
<p>The Australian financial service (AFS) licensing regime in place since the late 1990s authorises each firm to do specified things, in relation to specified financial products, for specified clients.</p>
<p>Each firm’s licence is different, and what is required by ASIC is different depending on what the firm is authorised to do.</p>
<p>FTX Australia’s licence authorised it to deal in, make a market for, and provide general advice relating to derivatives and foreign exchange contracts to retail and wholesale clients. That’s it. </p>
<p>Note that crypto-assets are not specified, nor is running a crypto-asset exchange.</p>
<p>The <a href="https://www.ft.com/content/e8df6ea4-e9fb-4058-9a36-cef9c12f4726">jury is still out globally</a> on whether crypto-assets (as distinct from investments derived from crypto-assets) are financial products at all. </p>
<p>It is possible to think of them as like gold bullion or fine art – or <a href="https://www.afr.com/markets/currencies/jpmorgan-ceo-calls-crypto-tokens-pet-rocks-20221207-p5c496">pet rocks</a> – where the asset itself is not a financial product, but a financial product might be constructed from it. </p>
<p>If a cryptocurrency is not a financial product, then licensing laws can’t apply, which might explain why one of the two firms set up in Australia – FTX Express, which operated the crypto-exchange – was not AFS licensed.</p>
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Read more:
<a href="https://theconversation.com/i-thought-crypto-exchanges-were-safe-the-lesson-in-ftxs-collapse-195800">'I thought crypto exchanges were safe': the lesson in FTX's collapse</a>
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<p>The lesson is that knowing a firm has an AFS licence only takes you so far, and often not very far at all.</p>
<p>Unless you check the <a href="https://asic.gov.au/online-services/search-asic-s-registers/professional-registers/">specific authorisations</a>, there’s no way of knowing how little the firm you are dealing with is licensed to do.</p>
<p>And ASIC-regulation doesn’t involve <a href="https://www.apra.gov.au/what-prudential-regulation">prudential regulation</a>, which is directed at the stability of the company itself, ensuring among other things that it should be able to meet its financial commitments under reasonable circumstances. </p>
<p>Prudential regulation is the job of the Australian Prudential Regulation Authority, which regulated neither FTX Australia nor FTX Express.</p>
<h2>Licences for sale</h2>
<p>FTX Australia’s ASIC licence was originally granted to someone else entirely back in 2008. A series of takeovers meant it passed through a number of hands until it ended up with FTX in March this year.</p>
<p>While an original applicant has to satisfy rigorous checks, this hasn’t always been the case for subsequent purchasers.</p>
<p>ASIC has known for years that its ASF licences were ending up in new hands when companies were bought and sold. In 2017, it asked the government’s ASIC <a href="https://treasury.gov.au/review/asic-enforcement-review/r2018-282438">Enforcement Review Taskforce</a> to recommend changes to the law that would allow it to revisit an AFS licence when its owners changed.</p>
<p>The change that was eventually legislated in 2020 only required licensees to <a href="https://asic.gov.au/for-finance-professionals/afs-licensees/changing-details-and-lodging-afs-forms/change-in-control-of-afs-licensee/">notify</a> ASIC when a licence changed hands, within 30 days.</p>
<p>It did not require ASIC to approve the change in control.</p>
<h2>Limited ASIC powers</h2>
<p>ASIC is able to inquire further to determine whether there is reason to believe a new licensee was likely to contravene its statutory obligations or is “fit and proper” – but it is not required to do so.</p>
<p>If it finds either that the licensee is likely to contravene its obligations or that it is not fit and proper, it is able to suspend or cancel the licence after giving the new owners a fair hearing. </p>
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Read more:
<a href="https://theconversation.com/how-bad-credit-lender-cigno-has-dodged-asics-grasp-187887">How 'bad credit' lender Cigno has dodged ASIC's grasp</a>
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<p>But such inquiries have not become routine. Most of the (hundreds of) licensee purchases notified each year seem to go through to the keeper, as did FTX’s.</p>
<p>Even if ASIC had reviewed FTX’s purchase of the licence in March 2022, it might well have found no grounds to revoke it, given the very limited range of activities it authorised.</p>
<p>The FTX collapse may result in ASIC changing its attitude to change-of-control transactions involving AFS licensees, for which it might need more resources.</p>
<p>But even if that happens, clients would still be well advised to take care to understand exactly what “AFS licensed” really means.</p><img src="https://counter.theconversation.com/content/196361/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pamela Hanrahan 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 licence didn’t extend to trading in cryptocurrenices, and had been granted to a firm FTX took over, rather than FTX itself.Pamela Hanrahan, Professor of Commercial Law and Regulation, UNSW Business School, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1878872022-08-04T20:19:26Z2022-08-04T20:19:26ZHow ‘bad credit’ lender Cigno has dodged ASIC’s grasp<figure><img src="https://images.theconversation.com/files/477322/original/file-20220803-14-45o0e0.png?ixlib=rb-1.1.0&rect=11%2C437%2C2982%2C1580&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Cigno is exactly the sort of business the Australian Securities and Investments Commission had in mind when it asked for <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4174026">stronger powers to ban the sale of harmful financial products</a>.</p>
<p>Cigno offers short-term loans (commonly called payday loans) of as little as $50 to people with what it calls “<a href="https://cignoloans.com.au/products/bad-credit-loans/">bad credit</a>”. Its customers reportedly include <a href="https://www.abc.net.au/news/2018-12-01/mother-left-with-430-pc-loan-to-short-term-credit-agent-cigno/10571730">disability pensioners</a>, teenagers and people affected by mental illness or addiction. </p>
<p>It describes itself as an “<a href="https://cignoloans.com.au/explore/how-it-works/">emergency cash specialist</a>”, offering help to people who can’t get loans from any other source. Consumer advocates call it a <a href="https://consumeraction.org.au/predatory-lender-cigno-has-case-thrown-out-by-federal-court/">predatory lender</a>, targeting desperate and vulnerable consumers.</p>
<p>Critics say Cigno traps its customers in a “<a href="https://consumeraction.org.au/time-to-finally-end-the-harm-done-by-cigno-loans/">debt spiral</a>”, forcing them to take out new and higher loans to pay off their old ones.</p>
<h2>Payments straight out of bank accounts</h2>
<p>In most cases, Cigno takes payments straight out of customers’ bank accounts, along with any late fees or dishonour fees. Many customers find themselves <a href="https://www.financialcounsellingaustralia.org.au/consumer-groups-applaud-federal-court-ruling-to-uphold-asic-intervention-in-short-term-credit-market/">without enough money</a> left over for food or rent.</p>
<p>In a <a href="https://download.asic.gov.au/media/5197542/cp316-published-9-july-2019.pdf">2019 consultation paper</a>, ASIC found Cigno’s fees were much higher than those of other payday business models. </p>
<p>The paper included case studies of customers who ended up owing Cigno <a href="https://download.asic.gov.au/media/5197542/cp316-published-9-july-2019.pdf">almost 10 times</a> what they originally borrowed, due to fees and charges. </p>
<p>In one case, a disability pensioner who borrowed $350 ended up owing $2,630, including late fees and ongoing weekly “account-keeping” fees. In another, an unemployed woman who borrowed $120 ended up with a debt of $1,189. </p>
<h2>Operating outside the credit law</h2>
<p>Cigno can charge these extraordinary fees because it operates outside the scope of the consumer credit laws that apply to ordinary payday loans, making use of gaps in the National Credit Act. </p>
<p>In 2020 the corporate regulator took <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-158mr-asic-wins-appeal-on-cigno-and-bhf-solutions-federal-court-decision">legal action</a> against Cigno in the Federal Court, alleging its loans broke the law. </p>
<p>It lost the case, but then won on appeal to the full bench of the court. Now Cigno wants to challenge this outcome in the High Court.</p>
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<img alt="Cigno's website offers short-term cash loans Up to $1,000." src="https://images.theconversation.com/files/477563/original/file-20220804-24-m4tiqd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/477563/original/file-20220804-24-m4tiqd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=290&fit=crop&dpr=1 600w, https://images.theconversation.com/files/477563/original/file-20220804-24-m4tiqd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=290&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/477563/original/file-20220804-24-m4tiqd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=290&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/477563/original/file-20220804-24-m4tiqd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=365&fit=crop&dpr=1 754w, https://images.theconversation.com/files/477563/original/file-20220804-24-m4tiqd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=365&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/477563/original/file-20220804-24-m4tiqd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=365&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Cigno’s website offers short-term cash loans Up to $1,000.</span>
<span class="attribution"><span class="source">cigno.com.au</span></span>
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<p>The regulator asked the federal government for a new, wide-ranging <a href="https://treasury.gov.au/sites/default/files/2019-03/c2018-t312297-Australian-Securities-and-Investments-Commission.pdf">product intervention power</a>
to avert such costly and drawn-out legal battles. </p>
<p>In 2019 it was given the power to make a <a href="https://download.asic.gov.au/media/5633261/rg272-published-17-june-2020.pdf">product intervention order</a>, banning or limiting the sale of a financial product that causes “significant detriment” to consumers. </p>
<p>Such orders can remain in force for up to 18 months. Breaches can result in civil and criminal penalties. So far ASIC has made three product intervention orders aimed at Cigno’s lending practices.</p>
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Read more:
<a href="https://theconversation.com/what-1-100-australians-told-us-about-living-with-debt-they-cant-repay-105296">What 1,100 Australians told us about living with debt they can't repay</a>
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<p>The <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2019-releases/19-250mr-asic-makes-product-intervention-order-banning-short-term-lending-model-to-protect-consumers-from-predatory-lending/">first order</a>, in 2019, banned a Cigno lending model that took advantage of the National Credit Code’s “short term credit” exemption. </p>
<p>Under this exemption, the National Credit Act does not apply if a loan is offered for 62 days or less, the associated fees are no more than 5% of the amount lent, and the effective annual interest rate is no higher than 24%.</p>
<p>Before making the order, the corporate regulator was required by law to undertake a lengthy consultation process. </p>
<h2>New model for Cigno</h2>
<p>During this time Cigno launched a new lending model that took advantage of a separate, “<a href="https://asic.gov.au/regulatory-resources/find-a-document/consultation-papers/cp-330-using-the-product-intervention-power-continuing-credit-contracts/">continuing credit</a>” exemption under the Credit Code. This exemption applies to certain loans for which the only charge is a periodic or other fixed charge of up to $200.</p>
<p>The short term credit order came into effect on September 14 2019. Within two days, according to ASIC, Cigno was issuing loans <a href="https://download.asic.gov.au/media/tpfhiphy/cp355-published-9-december-2021.pdf">using the new model</a>.</p>
<p>Consumer advocates say the transition was so smooth some Cigno customers were unaware of the change, and Cigno’s business “<a href="https://consumeraction.org.au/wp-content/uploads/2020/08/200806_ASIC-PIP-continuing-credit-submission_FINAL.pdf">hardly skipped a beat</a>”. </p>
<h2>New order against Cigno</h2>
<p>In July 2020 the corporate regulator began consulting on a second order aimed at Cigno’s new lending model, which took advantage of the exemption for “continuing credit” contracts under the National Credit Code. </p>
<p>However, it didn’t issue this order until July 2022. This was partly because Cigno mounted a <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-151mr-full-federal-court-upholds-first-asic-product-intervention-order/">challenge</a> to the first order in the Federal Court. It lost this challenge in April 2020, and again on appeal in June 2021. </p>
<p>In the meantime, in March 2021, the regulator’s “short term credit” order lapsed.</p>
<h2>Another lending model</h2>
<p>ASIC says it <a href="https://download.asic.gov.au/media/tpfhiphy/cp355-published-9-december-2021.pdf">understands</a> that companies related to Cigno may have begun to issue new loans, using the original lending model. </p>
<p>The regulator issued the continuing credit order in July 2022. At the same time, it issued a <a href="https://asic.gov.au/about-asic/news-centre/find-a-media-release/2022-releases/22-182mr-asic-makes-product-intervention-orders-for-short-term-credit-and-continuing-credit-contracts/">third order</a>, closely based on the original short term credit order. </p>
<p>Yet Cigno continues to offer loans via its website. </p>
<p>This has <a href="https://www.abc.net.au/news/2022-07-26/cigno-bhf-asic-payday-lender-high-court/101262872">raised suspicions</a> that it has moved to yet another lending model, again dodging the regulator.</p>
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Read more:
<a href="https://theconversation.com/loan-shark-regulators-need-a-lesson-in-behavioural-economics-39045">Loan shark regulators need a lesson in behavioural economics</a>
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<p>It seems likely that the regulator’s product intervention orders will have limited success against persistent, well-resourced lenders like Cigno. </p>
<p>To address the harmful impacts of high-cost lending we need stronger consumer credit laws – including broad anti-avoidance clauses to prevent lenders from using gaps in the law to target vulnerable consumers.</p>
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<p><em>The Conversation contacted Cigno for a response but received no reply by publication deadline.</em></p><img src="https://counter.theconversation.com/content/187887/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lucinda O'Brien's current research at Melbourne Law School is funded by the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Ian Ramsay receives funding from the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Paul Ali receives funding from the Australian Research Council. </span></em></p>Payday lender Cigno has exposed the limitations of ASIC powers intended to protect consumers from harm.Lucinda O'Brien, Research Fellow, The University of MelbourneIan Ramsay, Emeritus Professor, Melbourne Law School, The University of MelbournePaul Ali, Associate professor, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1675322021-09-14T05:13:21Z2021-09-14T05:13:21ZASIC, now less a corporate watchdog, more a lapdog<figure><img src="https://images.theconversation.com/files/420675/original/file-20210913-26-s6ed4x.jpg?ixlib=rb-1.1.0&rect=0%2C1077%2C3979%2C1993&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The implosion of Australia’s corporate watchdog, the Australian Securities and Investments Commission, under the federal government’s new directions, has gone from tragedy to farce.</p>
<p>ASIC was described as “<a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/ASIC/Final_Report/index">weak, hesitant and timid</a>” in a 2014 Senate review of its performance. To be fair, that was before ASIC’s current leadership. Now any assessment could add “dazed and confused”. </p>
<p>Last week we got a dose of that in the doublespeak of ASIC’s new chair Joseph Longo and deputy chair Sarah Court in their “first significant media interview” — with the Australian Financial Review. </p>
<p>The pair were asked about ASIC’s commitment to the “why not litigate?” approach recommended in 2019 by the Hayne royal commission into misconduct in the financial services industry.</p>
<p>Following the litany of revelations where the corporate regulator had failed to take action against illegal behaviour, royal commissioner Kenneth Hayne made it clear that when ASIC saw a law broken, its obligation, in deciding on a response, was to first ask itself “why not litigate”?</p>
<p>“I love litigation,” <a href="https://www.afr.com/companies/financial-services/we-love-litigation-say-new-asic-chiefs-20210831">Longo told the AFR</a>. “It’s what I used to do and Sarah is an expert at it.” </p>
<p>But in the same interview Court — ASIC’s head of enforcement — <a href="https://www.afr.com/companies/financial-services/asic-enforcer-dishes-out-warning-to-banks-20210902">said</a> the why-not-litigate strategy “has had its day”.</p>
<h2>Regulatory doublespeak</h2>
<p>Confusion is to be expected when a regulator is told to both enforce and refrain from enforcing the law — which is effectively what the federal government <a href="https://theconversation.com/frydenbergs-directions-to-asic-throw-the-banking-royal-commission-under-a-bus-166813">did last month</a> in the “statement of expectations” it handed ASIC. </p>
<p>The previous statement, issued <a href="https://asic.gov.au/about-asic/what-we-do/how-we-operate/accountability-and-reporting/statements-of-expectations-and-intent/statement-of-expectations-australian-securities-and-investments-commission-april-2018/">in 2018</a>, began with acknowledging “the independence of ASIC and its responsibility for market conduct regulation”. </p>
<p>The <a href="https://asic.gov.au/about-asic/what-we-do/how-we-operate/accountability-and-reporting/statements-of-expectations-and-intent/statement-of-expectations-australian-securities-and-investments-commission-august-2021/">new statement</a> begins by saying ASIC is expected to “identify and pursue opportunities to contribute to the Government’s economic goals”.</p>
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Read more:
<a href="https://theconversation.com/frydenbergs-directions-to-asic-throw-the-banking-royal-commission-under-a-bus-166813">Frydenberg's directions to ASIC throw the banking royal commission under a bus</a>
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<p>ASIC accepted the banking royal commission’s <a href="https://asic.gov.au/about-asic/news-centre/speeches/asic-s-approach-to-enforcement-after-the-royal-commission/">why-not-litigate recommendation</a> in 2019. But the federal government’s view of this was underlined last Friday when Longo fronted the House of Representatives’ standing committee on economics. </p>
<p>The committee’s chair, Tim Wilson, slammed the “why not litigate” approach as <a href="https://parlview.aph.gov.au/mediaPlayer.php?videoID=554090&operation_mode=parlview">binary, wrong-headed and farcical</a>. He also disputed that ASIC was too close to regulated companies, despite the <a href="https://journals.sagepub.com/doi/full/10.1177/0067205X18816240">overwhelming evidence to the contrary</a>. </p>
<h2>Return to enforceable undertakings</h2>
<p>The answers Longo and Court gave the AFR also suggest ASIC is backing away from the Hayne royal commission’s recommendation on “enforceable undertakings” — by which transgressors negotiate a settlement without an admission of wrongdoing. </p>
<p>A regulator might think using enforceable undertakings was better than taking a company to court, Commissioner Hayne said <a href="https://www.royalcommission.gov.au/system/files/2020-09/fsrc-volume-1-final-report.pdf">in his final report</a>. </p>
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<p>But that view cannot be formed without having first given proper consideration to questions of deterrence, both general and specific. A regulatory response to a breach of law that does not deter, generally and specifically, will rarely be a more effective regulatory outcome.“</p>
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<p>Court, however, told the AFR:</p>
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<p>My own view is that an enforceable undertaking can be completely appropriate in the right circumstance. Infringement notices can be completely appropriate.</p>
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<h2>Royal commission’s fading influence</h2>
<p>The impression gained is of an attempt to pay some lip service to the royal commission but also demonstrate fealty to the federal government.</p>
<p>The federal government repeatedly resisted the royal commission, <a href="https://theconversation.com/ideology-triumphs-over-evidence-morrison-government-drops-the-ball-on-banking-reform-153529">then backed away</a> from its commitment to act on all the recommendations. What has changed since the royal commission? Not much. </p>
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<strong>
Read more:
<a href="https://theconversation.com/ideology-triumphs-over-evidence-morrison-government-drops-the-ball-on-banking-reform-153529">Ideology triumphs over evidence: Morrison government drops the ball on banking reform</a>
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<p>Last week the Federal Court <a href="https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2021/2021fca1008">fined Westpac</a> A$10.5 million for deceptive behaviour towards members of the Westpac-owned BT Superannuation Fund - a ruling stemming from litigation initiated by ASIC in 2016. This is the same BT ordered two weeks ago by the <a href="https://www.abc.net.au/news/2021-08-31/retirement-savings-investing-superannuation-funds-yoursuper-list/100419844">Australia Prudential Regulatory Authority</a> to advise about 500,000 members of its Retirement Wrap fund that they should leave the fund, <a href="https://theconversation.com/my-super-fund-just-failed-the-apra-performance-test-whats-next-166956">so bad have their returns been</a>.</p>
<p>In his judgement, Justice Michael O'Bryan criticised Westpac for failing to fix its compliance failures, tardiness in compensating customers and lack of apology: "Westpac has not expressed regret for the conduct, does not appear to have taken steps to remedy the compliance deficiencies and has been tardy in progressing a remediation plan.” </p>
<p>At least, though, ASIC litigated against Westpac — successfully pursuing an appeal when it lost its first case. What chance would there be of achieving a fair outcome for consumers from a “no-regrets Westpac” had it not gone to court? Not much.</p>
<p>Australia’s battered and bruised financial consumers have every right to say to the regulator, and the government: enforce the law, or get out of the way.</p><img src="https://counter.theconversation.com/content/167532/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow is the founder & CEO, Clarity Prudential Regulatory Consulting, Pty Ltd, he is an Associate Partner, Senior Advisor & Thought-Leader on Financial Services to DB & Associates, a joint Australian-South African Consultancy, he is a member of the Independent Committee of Experts convened by the South African National Treasury for the drafting of the Conduct of Financial Institutions Bill, a Secretariat member for the All Party Parliamentary Group for Personal Banking and Fairer Financial Services, House of Commons House of Lords, a member of the European Banking Institute (EBI) research work-stream on EU financial supervisory architecture, and an independent consultant to Luis Silva Morais/Sérgio Gonçalves do Cabo – Law Firm, for the jurisdictions of Australia and South Africa. He has received funding from various universities, associations and think tanks, most notably CGAP (a division of the World Bank) and the Banking Association, South Africa. He is affiliated with ACAC and the Accountability Round Table. He serves on the Boards of two charities.</span></em></p>The implosion of the Australian Securities and Investments Commission, has gone from tragedy to farce.Andrew Schmulow, Senior Lecturer, Faculty of Law, University of WollongongLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1619062021-06-03T20:12:08Z2021-06-03T20:12:08ZVital Signs: ASIC’s crusade against activist short sellers will be bad for regular folk<p>The Australian Securities & Investment Commission issued <a href="https://asic.gov.au/regulatory-resources/markets/short-selling/activist-short-selling-campaigns-in-australia/">an information sheet</a> this week regarding so-called “activist short selling”. </p>
<p>The document outlines a number of “better practices” it wants short sellers to adhere to, and some “actions that we may take” if they don’t. </p>
<p>Translation: “Hey hedge-fund folks, do this stuff or we’ll make life difficult for you.”</p>
<p>The problem is not that the corporate regulator can’t do so. It is that these “better practices” are likely to lead to less efficient markets. </p>
<p>In short (pun absolutely intended), this is bad idea.</p>
<h2>What is activist short selling?</h2>
<p>Short selling involves selling a security (like a share of stock in an exchange-listed company) you don’t own. The way this is typically done is to borrow that security from someone who does own it, with a promise to return it at a later date.</p>
<p>The idea is that when the security goes down in price, you can buy a replacement security for the person you borrowed from at a cheaper price than what you sold theirs, thus pocketing the difference.</p>
<p>Basically it’s a bet that the price of something is going to go down. For an alternative explanation see this scene from <a href="https://en.wikipedia.org/wiki/The_Big_Short_(film)">The Big Short</a>, the 2015 film about the housing bubble and subprime mortgage crisis that led to the Global Financial Crisis of 2007-2008.</p>
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<figcaption><span class="caption">Short selling explained by Margot Robbie in ‘The Big Short’.</span></figcaption>
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<p>Activist short selling involves taking a short position and then publicising it. This could be through media interviews, social media posts or otherwise providing detailed accounts of concerns with the target entity.</p>
<p>Perhaps the best example of this was investor George Soros’ <a href="https://www.forbes.com/sites/steveschaefer/2015/07/07/forbes-flashback-george-soros-british-pound-euro-ecb/?sh=11aa23b76131">1992 bet against the British Pound</a> (and other currencies) he rightly thought were overvalued against Germany’s Deutsche Mark and were being propped up by central banks like the Bank of England.</p>
<p>ASIC itself says its research indicates “activist short selling campaigns tend to target entities with complex and opaque corporate structures and accounting practices, or poor disclosure”.</p>
<p>So short selling can help discourage such practices. That’s a good thing. Yet ASIC wants to discourage shorting. What gives?</p>
<h2>Short selling improves market efficiency</h2>
<p>Why was there a housing bubble in the US in the early 2000s? </p>
<p>There were many causes, including absurdly lax lending standards and outright fraud by those issuing loans and the creation of complex financial products such as synthetic collateralised debt obligations (synthetic CDOs). </p>
<p>For an explanation of these see this, also from the Big Short, by Nobel prize-winning University of Chicago economist <a href="https://www.nobelprize.org/prizes/economic-sciences/2017/thaler/facts/">Richard Thaler</a> and the almost-as-famous actor and recording artist Selena Gomez.</p>
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<figcaption><span class="caption">Thaler and Gomez on synthetic CDOs.</span></figcaption>
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<p>But there was also little that those who believed the housing market was dangerously overvalued could do to “bet against” it. </p>
<p>Eventually, as Michael Lewis’ book <a href="https://wwnorton.com/books/9780393072235">The Big Short: Inside the Doomsday Machine</a> (on which the movie is based) recounts, a handful of unusual characters managed to get Wall Street to create a specialised instrument called a “credit default swap” to let them do so.</p>
<p>Had there been an easy way to short the housing market earlier, the bubble might never have gotten out of control. The horrific crash of 2008 that caused the greatest financial crisis since the Great Depression might have been avoided.</p>
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Read more:
<a href="https://theconversation.com/explainer-what-is-short-selling-9337">Explainer: what is short selling?</a>
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<h2>A check on ‘animal spirits’</h2>
<p>Why would short selling have helped?</p>
<p>Short selling punishes speculation by putting a check on out-of-control markets.
It motivates investors to keep an eye on fundamentals, not just get carried away with what John Maynard Keynes labelled “animal spirits” – the impulses that help drive speculative bubbles and busts.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/from-tulips-and-scrips-to-bitcoin-and-meme-stocks-how-the-act-of-speculating-became-a-financial-mania-158406">From tulips and scrips to bitcoin and meme stocks – how the act of speculating became a financial mania</a>
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<p>There’s only so much that can be done with the housing market, which is inherently difficult to bet against.</p>
<p>But Australia’s corporate regulator wants to restrict short selling in the stock market, in which it’s relatively easy to take a short position.</p>
<p>ASIC is obviously aware of the argument that short selling improves market efficiency, but has chosen to discount it. It has opted for rules that push Australia closer to European countries rather than the US – the largest, most liquid, and most important capital market in the world.</p>
<h2>Australian short sellers are being told to stop</h2>
<p>The corporate watchdog has outlined a number of “actions” it might take if short sellers don’t play ball:</p>
<ul>
<li>engaging with market operators (such as the Australian Stock Exchange) on the timing of trading halts</li>
<li>examining trading activity of short sellers, particularly “short and distort” campaigns</li>
<li>assessing if a short seller has conducted a financial service in Australia and holds the necessary licence</li>
<li>testing the veracity of claims and how conflicts of interest are disclosed</li>
<li>where an activist short seller is based abroad, engaging with their “home regulator”</li>
<li>taking action for breaches of the law.</li>
</ul>
<p>Many of these may sound mild but are in fact quite extraordinary. They constitute a (very) thinly veiled message that overseas hedge fund managers should knock it off with activist shorting in Australia.</p>
<p>This combines, to a remarkable degree, ugly nativism and regulatory capture – the phenomenon by which a regulator, even without malicious intent, comes to represent the interests of those it regulates, rather than the public good. (The theory of regulatory capture <a href="https://www.jstor.org/stable/3003160?casa_token=5wNw2MzeMCgAAAAA:LXphlOQWQ5nnt7DUjpK_gduPouVMEv1yie0_mONLBgCZghaAZKB0KraXdZi4G2Rng7jSmNJuR2dUFwkOnaggCQc-w406bzysj34IqdrmzWd459RI1uyrjA&seq=1">was pioneered by</a> another Chicago economist and Nobel winner, <a href="https://www.nobelprize.org/prizes/economic-sciences/1982/stigler/facts/">George Stigler</a>.) </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-when-watchdogs-become-pets-or-the-problem-of-regulatory-capture-111170">Vital Signs: when watchdogs become pets – or the problem of 'regulatory capture'</a>
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<h2>Bubbles are bad for regular investors</h2>
<p>Who will breathe easier as a result of ASIC’s new guidelines? Companies with opaque accounting practices, inadequate corporate disclosures and even those that may be acting unlawfully.</p>
<p>The losers are equally easy to identify. Some rich hedge fund folks in Greenwich, Connecticut, sure. But also the Australian public, whose superannuation funds are invested in Australian markets.</p>
<p>We all have a big interest in ensuring the informational efficiency and market transparency. Bubbles are bad for regular investors. Regulations and securities laws play a crucial role in achieving those goals. So do activist short sellers.</p>
<p>ASIC should reconsider its stance. It will only serve to damage the credibility of Australian securities markets, the Australian public, and their own reputation as a wise regulator.</p><img src="https://counter.theconversation.com/content/161906/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is president-elect of the Academy of the Social Sciences in Australia.</span></em></p>Activist short selling plays an important role in keeping financial markets accountable and efficient.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1614062021-05-25T06:13:41Z2021-05-25T06:13:41ZFinTok and ‘finfluencers’ are on the rise: 3 tips to assess if their advice has value<figure><img src="https://images.theconversation.com/files/402498/original/file-20210525-16-1pctkd2.jpg?ixlib=rb-1.1.0&rect=0%2C295%2C4592%2C2254&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wachiwit/Shutterstock</span></span></figcaption></figure><p>Queenie Tan is full of financial advice. Whether it is cheap date ideas, buying furniture, saving your first $100,000, doing your tax return or investing in Dogecoin, there is seemingly no topic the <a href="https://www.news.com.au/finance/money/budgeting/sydney-marketing-manager-queenie-tan-shares-how-she-built-350000-net-worth/news-story/ec2f98965c650ecd534ee5fc56fb593a">24-year-old Sydney woman</a> can’t confidently tackle. </p>
<p>Her posts and videos have gained her <a href="https://www.instagram.com/investwithqueenie/?hl=en">15,000 followers</a> on Instagram and <a href="https://www.tiktok.com/@investwithqueenie?lang=en">42,000 followers</a> on TikTok. Her explainer on Australian tax rules for cryptocurrency capital gains has been viewed more than 360,000 times. Her tips for first home buyers more than 400,000 times. Both videos last less than a minute.</p>
<p>Queenie’s qualifications as a financial expert are slim. She has worked as a marketing manager. She says she accumulated close to A$350,000 in assets in five years. That, along with being photogenic and vivacious, is more than enough to join the swelling ranks of “finfluencers” – social media content creators building an audience through dispensing financial advice. </p>
<p>Becoming a finfluencer can be highly lucrative. On TikTok the hashtag <a href="https://www.tiktok.com/tag/fintok?lang=en">#FinTok</a> has been viewed more than 340 million times. Among the top FinTok elite is Californian Stephen Chen, a former maths teacher turned “financial freedom coach” with close to <a href="https://www.tiktok.com/@calltoleap?">780,000 followers</a>. Another is Sara Rosalia, a Canadian teenager who as “<a href="https://www.tiktok.com/@sarafinance?lang=en&is_copy_url=1&is_from_webapp=v1">Sara Finance</a>” has attracted more than 670,000 followers. </p>
<p>Aspiring influencers are also finding financial content a successful formula on Youtube, Twitter and Reddit. </p>
<p>But as lucrative as this trend may be for those who make it to the top of the finfluencer money tree, the gains for followers are far less certain. It is the wild west for financial information, with few of the checks and balances that regulate other areas of financial advice.</p>
<h2>Driving trading frenzies</h2>
<p>Cryptocurrency trading platform Plaxful analysed <a href="https://paxful.com/insights/influencer-investors/">1,212 videos</a> from a sample of 50 popular finance-focused TikTok accounts in 2020. It rated 14% of them as misleading. This included, without disclosures or disclaimers, encouraging users to buy specific assets and implying an investment would guarantee a profit.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/402504/original/file-20210525-16-1vlnwmm.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Elon Musk's social media posts move markets." src="https://images.theconversation.com/files/402504/original/file-20210525-16-1vlnwmm.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/402504/original/file-20210525-16-1vlnwmm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=654&fit=crop&dpr=1 600w, https://images.theconversation.com/files/402504/original/file-20210525-16-1vlnwmm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=654&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/402504/original/file-20210525-16-1vlnwmm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=654&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/402504/original/file-20210525-16-1vlnwmm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=822&fit=crop&dpr=1 754w, https://images.theconversation.com/files/402504/original/file-20210525-16-1vlnwmm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=822&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/402504/original/file-20210525-16-1vlnwmm.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=822&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Elon Musk’s social media posts move markets.</span>
<span class="attribution"><a class="source" href="https://twitter.com/elonmusk/status/1382552587099062272">Twitter</a></span>
</figcaption>
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<p>In recent months we’ve seen just how influential social media can be in encouraging people to buy or sell particular stocks. </p>
<p>There was the Gamestop trading frenzy, in which stocks of a video game retailer surged from US$19 to US$347 in less than two weeks, driven by Redditors and helped along by tweets from Elon Musk. </p>
<p>Musk’s twittering has also been instrumental in boosting the price of Dogecoin and sending Bitcoin’s price both up <a href="https://edition.cnn.com/2021/05/22/investing/crypto-crash-bitcoin-regulation/index.html">and down</a>. </p>
<p>A social media influencer at their best will build an audience through solid financial advice. But they can also build an audience by making sensational claims about their advice, promising huge returns and even pushing dud products.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/gamestop-how-redditors-played-hedge-funds-for-billions-and-what-might-come-next-154076">GameStop: how Redditors played hedge funds for billions (and what might come next)</a>
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<h2>Other financial advice is regulated</h2>
<p>The Australian Securities and Investments Commission says complaints about unlicensed financial advice, including through social media, have been <a href="https://asic.gov.au/about-asic/news-centre/news-items/asic-cracks-down-on-unlicensed-advice/">escalating since March 2020</a> – the beginning of the COVID-19 pandemc. The corporate regulator has expressed its concern about such advice because consumers lack any legal protection.</p>
<p>In Australia (as elsewhere), there are laws regulating the conduct of those running financial advice businesses. Advisers must be licensed. Touting yourself as a financial adviser without a licence can lead to a fine up to A$133,200 and a <a href="https://asic.gov.au/about-asic/news-centre/news-items/asic-cracks-down-on-unlicensed-advice/">prison sentence</a> of up to five years. </p>
<p>Qualifying for a licence requires completing courses and passing exams, <a href="https://asic.gov.au/for-finance-professionals/afs-licensees/professional-standards-for-financial-advisers/qualification-exam-and-professional-development/#:%7E:text=Existing%20financial%20advisers%20must%20bring,AQF8%20level%20comprising%20eight%20subjects">including on ethics</a>. </p>
<p>To become a finfluencer, on the other hand, requires no specific expertise whatsoever. At most content creators are bound by general rules <a href="https://www.accc.gov.au/business/advertising-promoting-your-business/social-media">against false and misleading claims</a>, platform guidelines and marketing <a href="https://www.auditedmedia.org.au/aimco">codes of practice</a> requiring paid partnerships to be disclosed.</p>
<h2>Like the bloke at the pub?</h2>
<p>Despite this, the Austalian government has signalled it sees no need to do more to regulate finfluencers. The federal minister for financial services and the digital economy, Jane Hume, <a href="https://www.afr.com/companies/financial-services/free-rein-for-robinhoods-red-tape-for-seasoned-pros-20210520-p57trv">last week</a> described them as “an inevitable part of a financial ecosystem”. She explained:</p>
<blockquote>
<p>The TikTok influencer spruiking Nokia is not that different to the bloke down at the pub who wants to tell you all about the really great company he just invested in — but with a much louder voice.</p>
</blockquote>
<p>“Some of the information on online forums would be bad, she said, "but some of it will be good, and a lot of it will better engage younger generations in investment and financial markets.”</p>
<p>These are rather simplistic things for a minister in charge of the digital economy to say.</p>
<p>The bloke at the pub, for one thing, does not make money from his talk. </p>
<p>Social media influencers do. Take Youtube as an example. If they can attract a big enough audience, content creators can <a href="https://support.google.com/youtube/answer/94522?hl=en">earn money through</a> advertisements, affiliated links, sponsored content and selling branded merchandise. They can potentially profit by touting stocks they own, or be paid to promote some product.</p>
<h2>Three tips to assess finfluencers</h2>
<p>This is not to say all finfluencers are suspect. Their advice, such as Queenie Tan’s tips on saving money, may be very sensible. They wouldn’t be popular if there wasn’t a demand for accessible financial information that itself doesn’t cost a fortune.</p>
<p>So here are my free three tips, if you love #fintok, to assess the credibility of an influencer and their advice.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/from-tulips-and-scrips-to-bitcoin-and-meme-stocks-how-the-act-of-speculating-became-a-financial-mania-158406">From tulips and scrips to bitcoin and meme stocks – how the act of speculating became a financial mania</a>
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<p>First, don’t assume a large number of followers makes someone worth following. Popularity doesn’t equal credibility. Look at their background and educational qualifications. You don’t need a degree to get rich, but there should be some sort of evidence for their claims to be someone worth listening to.</p>
<p>Second, why are they sharing their secrets with you for free? The Chinese philosopher Lao-tzu is credited with saying: “Those who know do not tell”. This is as true now as in the 6th century. If an influencer really has some strategy to beat the market, why are they on social media telling everyone about it? Anyone touting a particular stock or product or strategy should be treated with suspicion.</p>
<p>Third, be wary of anyone promoting a get-rich-quick scheme. Yes, it is possible to make huge returns on an initial investment. But such windfall gains are the exception rather than the rule. </p>
<p>Any influencer telling you to emulate their <a href="https://www.tiktok.com/@surgeyyyy/video/6894454269391408385?lang=en&is_copy_url=0&is_from_webapp=v1&sender_device=pc&sender_web_id=6928896976319743490">secrets of success</a> probably isn’t telling you the full truth unless they are also advising you to try your luck as a finfluencer.</p><img src="https://counter.theconversation.com/content/161406/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Angel Zhong 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>There’s a fortune to made as a successful finfluencer. The gains for followers are far less certain.Angel Zhong, Senior Lecturer in Finance, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1535292021-01-19T19:08:16Z2021-01-19T19:08:16ZIdeology triumphs over evidence: Morrison government drops the ball on banking reform<p>Political pressure forced the federal government in 2017 – when Scott Morrison was treasurer – to call the royal commission into misconduct in the banking, superannuation and financial services sector.</p>
<p>Commissioner Kenneth Hayne <a href="https://financialservices.royalcommission.gov.au/Pages/reports.html#final">delivered 76 recommendations</a> to reform the industry in February 2019. Almost two years on, the government has yet to implement 44 of those <a href="https://www.theguardian.com/australia-news/2021/jan/19/banking-royal-commission-most-recommendations-have-been-abandoned-or-delayed">and turned its back on five key reforms</a> – including curbing irresponsible lending practices. </p>
<p>The COVID crisis can explain some part of its tardiness. It cannot explain the decision to weaken protections for the financial health and welfare of Australian consumers.</p>
<p>The axing of <a href="https://joshfrydenberg.com.au/latest-news/simpler-credit-will-help-kickstart-economy/">responsible lending obligations</a> (RLOs) under the <a href="https://www.legislation.gov.au/Details/C2017C00196">National Consumer Credit Protection Act 2009</a> is particularly egregious. The government has also rejected Hayne’s recommendations on commission payments for mortgage brokers.</p>
<p>Instead, it appears to be banking on market forces and voluntary codes of conduct to protect financially unsophisticated borrowers. This is the triumph of ideology and vested interests over logic and evidence. </p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-its-one-thing-to-back-down-on-haynes-recommendation-about-mortgage-brokers-its-another-to-offer-nothing-in-its-place-113544">Vital signs. It's one thing to back down on Hayne's recommendation about mortgage brokers, it's another to offer nothing in its place</a>
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<h2>Plenty of credit</h2>
<p>The case for removing responsible lending obligations rests on a number of unsupported assertions.</p>
<p>First, Treasurer Josh Frydenberg has argued lending <a href="https://joshfrydenberg.com.au/latest-news/simpler-credit-will-help-kickstart-economy/">needs be made easier</a> to “kickstart” economic growth in these troubled times. The responsible lending obligations, he has said, increase the cost and time involved in making lending decisions. </p>
<p>But it is difficult to discern evidence in public statistics that responsible lending obligations have adversely affected loan growth or the cost of household-sector borrowing. </p>
<p>It is true lending for investment properties has plummeted, but that reflects changes in banks’ risk assessment and pricing of such loans. Owner-occupied lending has remained relatively strong and appears poised for further growth, likely raising existing house prices as much as stimulating new construction.</p>
<p>Personal lending has been declining for some years. But alternative ways to access personal credit, such as mortgage offset and redraw accounts, have grown. </p>
<p>New forms of “personal credit” such as Buy Now Pay Later and payday lending also appear to be growing strongly. These have generally skirted responsible lending requirements and arguably call for strengthening, not winding back, consumer protection laws.</p>
<h2>Confusing regulatory roles</h2>
<p>The second invalid assertion is that oversight of bank lending by the Australian Prudential Regulation Authority can substitute for explicit responsible lending laws enforced by the Australian Securities and Investments Commission. </p>
<p>This misconstrues APRA’s mandate and expertise, which is focused on institutional safety, not on consumer protection. APRA should be interested in the specifics of a very large loan that may affect the lender’s financial strength. It cannot be expected to examine thousands of smaller loans.</p>
<h2>Fears no longer relevant</h2>
<p>The third assertion is that responsible lending regulations have made lenders “increasingly risk averse and overly conservative”, out of fear of incurring onerous penalties. </p>
<p>That might have had some relevance in the past. But not so much since ASIC’s failed “Wagyu and Shiraz” case against Westpac in the Federal Court in 2020. The regulator accused the bank of breaching its responsible lending obligations by approving home loans using an automated estimate of applicants’ annual living expenses (known as the Household Expenditure Measure) rather than examining actual expenditure. </p>
<p>The Federal Court rejected ASIC’s argument – with the case acquiring its name due to the colourful analogy Justice Nye Perram used in his judgement: </p>
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<p>I may eat Wagyu beef everyday washed down with the finest Shiraz but, if I really want my new home, I can make do on much more modest fare.</p>
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</blockquote>
<p>ASIC <a href="https://www.asic.gov.au/media/5403117/rg209-published-9-december-2019.pdf">issued revised lending regulations</a> in December 2019. It would have been more seemly for the government to have allowed more time to see how these changed regulations were working before abolishing them.</p>
<h2>Loan processing costs should be falling</h2>
<p>A fourth assertion is the excessive cost of gathering and processing borrower information. But the development of “<a href="https://www.ausbanking.org.au/policy/the-future/open-banking/">open banking</a>” is enabling fintechs to harvest data of consenting borrowers and provide information at lower cost than ever before.</p>
<h2>Relying on codes of conduct is an act of faith</h2>
<p>Finally, it is claimed that reforming industry codes of conduct, incorporating responsible lending objectives and making them legally enforceable, removes the need for separate lending laws. </p>
<p>But past experience with “self-regulation” does not promote confidence this approach will work.</p>
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Read more:
<a href="https://theconversation.com/lunch-with-bankers-even-theyre-unimpressed-with-their-new-banking-code-of-conduct-122036">Lunch with bankers. Even they're unimpressed with their new Banking Code of Conduct</a>
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<h2>Review preferable to removal</h2>
<p>A case might be made that the consumer protection regulatory regime has become unduly complex over time and warrants a full-scale review with simplification an objective. </p>
<p>But simplification is not the same as abandonment. There was a reason the government found itself under so much pressure to call the royal commission; and a reason Commissioner Hayne made those 76 recommendations. </p>
<p>This is a bad look for the federal government. It has the hallmarks of political opportunism, using the COVID crisis to be a friend of business at the expense of consumers.</p><img src="https://counter.theconversation.com/content/153529/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>Economic circumstances do not justify the federal government’s rejection of the banking royal commission’s recommendations.Kevin Davis, Emeritus Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1490022020-10-29T05:13:27Z2020-10-29T05:13:27ZWe put forward a way to govern ASIC better. The government said no<p>The current governance/management crisis at the Australian Securities and Investments Commission (ASIC) has seen a deputy chairman <a href="https://www.theguardian.com/australia-news/2020/oct/26/asic-deputy-chairman-resigns-after-70000-rental-payment-revealed">resign</a> and the chairman <a href="https://theconversation.com/asic-chair-james-shipton-steps-aside-after-adverse-finding-by-auditor-general-148728">step aside under a cloud</a>.</p>
<p>It might have arisen simply because of lax internal accounting, compliance, and reporting procedures regarding payments (larger than those approved) benefiting the chairman and deputy chairman (a bad look for a regulator). </p>
<p>Or it might reflect something more substantive about whether the way ASIC is set up is consistent with good governance.</p>
<p>The <a href="https://treasury.gov.au/publication/c2014-fsi-final-report">financial system inquiry</a> set up by the Coalition after taking office examined the governance structure of ASIC in 2014. I was one of members of the inquiry.</p>
<p>ASIC’s governance (and also that of Australian Prudential Regulation Authority, the Australian Competition and Consumer Commission and other statutory authorities) is built around a “commission” structure. </p>
<p>A small group of full-time executives (appointed by the government as “commissioners” and one designated as the “chairman” or chief executive) are responsible for both the governance and management of the organisation.</p>
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Read more:
<a href="https://theconversation.com/asic-chair-james-shipton-steps-aside-after-adverse-finding-by-auditor-general-148728">ASIC chair James Shipton steps aside after adverse finding by Auditor-General</a>
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<p>This contrasts with the conventional corporate structure found in the private sector where a board (in theory appointed by the shareholder owners, but often a self-perpetuating “<a href="https://www.ownershipmatters.com.au/research-news/2020/10/25/many-are-called-few-are-chosen/">mates club</a>”) is separate from the day-to-day management of the business which is undertaken by the chief executive and other full-time employees. </p>
<p>The board is responsible for monitoring company performance, determining strategy (including approving funding plans), and hiring and firing the chief executive.</p>
<h2>We considered carefully the best way to run ASIC</h2>
<p>In considering the governance structure we noted that a board structure involving part-time external directors was put in place when the Australian Prudential Regulation Authority was established in 1998 but discarded after a few years. </p>
<p>This reflected the recommendation of the <a href="https://parlinfo.aph.gov.au/parlInfo/download/library/prspub/XZ896/upload_binary/xz8964.pdf;fileType=application%2Fpdf#search=%22library/prspub/XZ896%22">royal commission into the collapse of HIH insurance</a>, which concluded that the board structure had blurred accountability between management and the board.</p>
<p>Our inquiry (<a href="https://treasury.gov.au/publication/c2014-fsi-final-report">the Murray financial system inquiry</a>) also decided that a board structure was not appropriate.</p>
<h2>What was needed was oversight</h2>
<p>Why not? Well, it is very hard to imagine the federal treasurer giving up the powers to appoint (and sack) the chief executive, determine the funding level, and set mandates and performance objectives. In practice the board would have little to do.</p>
<p>In fact all that would really be left would be monitoring the performance of the regulator. </p>
<p>While the regulators are required to report to the minister and are monitored in other ways (including by the audit office) we came to the view that a separate overarching Financial Regulator Assessment Board (FRAB) would be the best way to oversee the performance of all of the regulators.</p>
<p>Although the treasurer could do this, we came to the view that in practice things would slip under that treasurer’s radar. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/366334/original/file-20201029-19-1kfqc4o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/366334/original/file-20201029-19-1kfqc4o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/366334/original/file-20201029-19-1kfqc4o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=288&fit=crop&dpr=1 600w, https://images.theconversation.com/files/366334/original/file-20201029-19-1kfqc4o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=288&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/366334/original/file-20201029-19-1kfqc4o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=288&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/366334/original/file-20201029-19-1kfqc4o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=362&fit=crop&dpr=1 754w, https://images.theconversation.com/files/366334/original/file-20201029-19-1kfqc4o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=362&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/366334/original/file-20201029-19-1kfqc4o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=362&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://treasury.gov.au/publication/c2014-fsi-final-report">Financial System Inquiry final report, November 2014</a></span>
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</figure>
<p>It was one of the only two (out of 44!) recommendations rejected by the government. </p>
<p>But it has resurfaced as a recommendation of the <a href="https://financialservices.royalcommission.gov.au/Pages/default.html">Hayne royal commission</a> into misconduct in the banking, superannuation and financial services industries.</p>
<p>Recommendation 6-14 is for the establishment of a new oversight authority, differing in some details from our recommendation, but otherwise similar.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/366336/original/file-20201029-15-1a1jkfq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/366336/original/file-20201029-15-1a1jkfq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/366336/original/file-20201029-15-1a1jkfq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=276&fit=crop&dpr=1 600w, https://images.theconversation.com/files/366336/original/file-20201029-15-1a1jkfq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=276&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/366336/original/file-20201029-15-1a1jkfq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=276&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/366336/original/file-20201029-15-1a1jkfq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=347&fit=crop&dpr=1 754w, https://images.theconversation.com/files/366336/original/file-20201029-15-1a1jkfq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=347&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/366336/original/file-20201029-15-1a1jkfq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=347&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://financialservices.royalcommission.gov.au/Pages/reports.html#final">Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry final report , February 2019</a></span>
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</figure>
<p>In its response to the Hayne report the government <a href="https://treasury.gov.au/publication/p2019-fsrc-response">accepted</a> this recommendation, despite having earlier rejected ours. </p>
<p>Consultation on draft legislation to set up such a body took place in early 2020, but the bill has not yet been brought to parliament.</p>
<p>Whether having such an oversight authority will help resolve ASIC’s internal management and governance failings is an open question.</p>
<h2>The current structure isn’t helping</h2>
<p>In the <a href="https://treasury.gov.au/publication/fit-for-the-future-a-capability-review-of-the-australian-securities-and-investments-commission">2015 ASIC Capability Review</a> (led by Karen Chester – subsequently appointed as an ASIC Commissioner), a significant recommendation was to “realign its internal governance structure to achieve a clear separation of the non-executive (governance) and executive line management roles”.</p>
<p>The primary focus of the commissioners would become “setting the strategy of the organisation and supervising overall delivery and performance against the strategy, along with making, and taking ultimate responsibility, for key regulatory decisions”.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/its-about-to-become-easier-to-lend-irresponsibly-to-help-the-recovery-146916">It's about to become easier to lend irresponsibly, to help the recovery</a>
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<p>Commissioners would no longer be in charge of individual divisions, a change ASIC later adopted in 2018.</p>
<p>Has it worked? If <a href="https://www.afr.com/companies/financial-services/why-frydenberg-needs-to-take-the-axe-to-asic-20201025-p568af">reports on internal ASIC conflicts</a> in the media are to be believed, not really.</p>
<p>The proposed assessment authority wouldn’t help with uncovering compliance failings such as those prompting the current crisis – they remain the responsibility of the auditor. </p>
<h2>Our idea could help put it right</h2>
<p>But it would help with the broader goal of ensuring ASIC is working well. </p>
<p>Its remit would include how ASIC’s governance and management arrangements enable it to achieve the mandate and performance expectations set for it by the government.</p>
<p>Whether the government will go beyond a knee-jerk reaction to the current scandal and actually adopt such a more considered approach is anyone’s guess!</p><img src="https://counter.theconversation.com/content/149002/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>It was one of only two recommendations the government rejected.Kevin Davis, Professor of Finance, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1432482020-07-27T19:55:59Z2020-07-27T19:55:59ZGambling on the stock market: are retail investors even playing to win?<figure><img src="https://images.theconversation.com/files/349499/original/file-20200727-23-19hrk7y.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5000%2C3323&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The COVID-19 pandemic has led to a dramatic <a href="https://www.finder.com.au/record-numbers-of-new-investors-open-share-trading-accounts">surge</a> in “mum and dad” retail investors playing stock exchanges across the world. </p>
<p>In Australia, retail investors were net buyers of A$9 billion of Australian stocks between late February and mid-May, according to <a href="https://www.afr.com/markets/equity-markets/retail-investors-pile-in-as-professionals-exit-20200710-p55ayi">corporate advisory firm Vesparum Capital</a>. In contrast, the professional institutional investors – superannuation funds and the like – were net sellers of A$11 billion of stock. </p>
<p>The amateurs are therefore likely responsible for most of the market’s rebound since its March 23 low.</p>
<p>An Australian Securities and Investments Commission <a href="https://download.asic.gov.au/media/5584799/retail-investor-trading-during-covid-19-volatility-published-6-may-2020.pdf">analysis of retail investor trading</a> shows from February 24 (the day after the market peaked) to April 3, retail investors’ daily buying and selling of stocks was double that of the months before (A$3.3 billion to A$1.6 billion). More than 20% of that activity was from new or reactivated accounts. </p>
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<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/349507/original/file-20200727-29-1ctplnf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">bsyJS australian stocks holding up.</span>
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<p>The securities regulator has expressed concern this rush of amateurs into the stock market is a train wreck waiting to happen. Its report notes retail investors are, on average, “not proficient” at predicting short-term market movements. </p>
<blockquote>
<p>While markets generally recover over the long run and tend to grow with economic fundamentals, short-term trading and poor market timing can be a major risk for investors in volatile markets. Therefore, retail investors should be wary of trying to “play the market” for short-term price movements by day trading.</p>
</blockquote>
<h2>COVID and risky behaviour</h2>
<p>There are several possible explanations for why people are taking a risk on the stock market. </p>
<p>Some might see this as an opportunity to get into the market at a low point, with a view to long-term gains. Others might be out of work and looking to
“day trade” - buying and selling shares on short time frames – as a source of income. Yet others may be taking the opportunity of working from home to watch the market through the day. </p>
<p>But another explanation is also worth considering. This is an alternative to gambling. So while it’s risky, it’s arguably no riskier than sports betting, casinos or poker machines.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-stocks-are-soaring-even-as-coronavirus-cases-surge-at-least-20-million-remain-unemployed-and-the-us-sinks-into-recession-140395">Why stocks are soaring even as coronavirus cases surge, at least 20 million remain unemployed and the US sinks into recession</a>
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<h2>Risk tolerance</h2>
<p>This theory (that this is gambling by another means) explains why the appetite for risk among retail investors has ballooned when the natural response to severe economic uncertainty would be to reduce trading.</p>
<p>The financial risk individuals are happy to tolerate – known as financial risk tolerance – is mostly determined by personality. A person’s risk appetite is unlikely to change substantially over their life, even with changing economic conditions.</p>
<p>Most people, however, are adept at making different risk decisions with money allocated to different “accounts”. In behavioural finance this is known as “mental accounting”. </p>
<p>How they think about and use their different accounts isn’t necessarily “rational”. For example, someone might be very prudent with money from their regular budget account while spending frivolously from a discretionary account. </p>
<p>So extreme risk-taking can occur when opportunities arise despite a person generally being risk-averse. </p>
<h2>Gambling trends</h2>
<p>In the first three months of the year, pollster <a href="http://www.roymorgan.com/findings/8413-online-gambling-may-2020-202005220420">Roy Morgan</a> estimates about half of all Australians gambled in some form.</p>
<p>Its figures indicated 8.4 million adults spent about A$625 million on lottery tickets, 2.4 million spent about A$2.2 billion on poker machines, and 2.1 million spent about A$1 billion on betting – horses, sports etc. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/with-pokies-shut-down-coronavirus-stress-could-drive-more-people-to-reckless-online-gambling-134397">With pokies shut down, coronavirus stress could drive more people to reckless online gambling</a>
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<p>In Australia, the closure of pubs, clubs and casinos during periods of lockdown has severely curbed these forms of gambling. Between late March and late April, for example, the Alliance for Gambling Reform estimates gamblers saved <a href="https://www.abc.net.au/news/2020-04-26/pokies-addicts-kick-habit-during-coronavirus-venues-shutdown/12183018?nw=0">more than $1 billion</a> on poker machines. The cessation of many sporting events has also reduced betting opportunities.</p>
<h2>Pros and cons for society</h2>
<p>Does this imply people see the financial markets as just another form of <a href="https://www.tandfonline.com/doi/abs/10.1080/15427560.2010.481978">gambling</a>? If so, is this necessarily a bad thing?</p>
<p>If a significant number of people are seriously looking to “day trading” as a way to make money in the short term, the securities regulator’s concerns are valid. There is a good chance most will lose money.</p>
<p>But if these new investors are driven by their interest in gambling, substituting financial markets for poker machines and sports betting, then surely most must be prepared for losses. Very few gamblers are consistent winners from betting on games of chance or sports. </p>
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<strong>
Read more:
<a href="https://theconversation.com/theres-another-health-crisis-looming-what-happens-when-the-pokies-switch-back-on-137995">There's another health crisis looming – what happens when the pokies switch back on?</a>
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<p>In this context there may not be so much to worry about – albeit acknowledging a small percentage will be “problem investors”, losing more than they can afford. </p>
<p>Compared to the almost certain likelihood of losses on gambling, those rushing into the stock market might just find it more rewarding than casinos, sports betting or pokies.</p><img src="https://counter.theconversation.com/content/143248/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>The rush of ‘amateur’ investors into the stock market has regulators worried. Maybe they shouldn’t.Warren Hogan, Industry Professor, University of Technology SydneyDavid Michayluk, Professor of Finance, University of Technology SydneyGerhard Van de Venter, Associate Professor in Finance, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1111702019-02-14T19:07:18Z2019-02-14T19:07:18ZVital Signs: when watchdogs become pets – or the problem of ‘regulatory capture’<figure><img src="https://images.theconversation.com/files/259382/original/file-20190217-56226-889l8b.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia's two financial watchdogs have been criticised for their cuddly relationship with banks.</span> </figcaption></figure><p>Markets require regulators. As Adam Smith, the champion of the invisible hand, notes in <a href="https://eet.pixel-online.org/files/etranslation/original/The%20Wealth%20of%20Nations.pdf">The Wealth of Nations</a>, when individual interests are left unregulated they work to turn competitive markets into monopolies.</p>
<p>But what happens when regulators meant to check individual interests fail to promote the public interest? </p>
<p>Consider Australia’s banking sector. The banking royal commission has found plenty of fault in the ways the corporate and prudential regulatory agencies performed their vital roles – due not to lack of power but an unwillingness to use that power. </p>
<p>University of Chicago economist and 1982 Nobel laureate George Stigler was the first to outline how regulators can become “captured” by the very firms and industries they are meant to be regulating, beginning with <a href="https://www.jstor.org/stable/pdf/3003160?casa_token=5wNw2MzeMCgAAAAA:LXphlOQWQ5nnt7DUjpK_gduPouVMEv1yie0_mONLBgCZghaAZKB0KraXdZi4G2Rng7jSmNJuR2dUFwkOnaggCQc-w406bzysj34IqdrmzWd459RI1uyrjA">an article in 1971</a>.</p>
<p>Stigler’s idea has come to be known as “regulatory capture theory”, and it causes us to confront the uncomfortable question of how to ensure regulators act in the public interest, not in the interest of the firms they regulate.</p>
<h2>Supply and demand</h2>
<p>Stigler thought about regulation through the lens of supply and demand. Self-interested politicians supply regulation. Firms demand it – usually because they want a competitor regulated. </p>
<p>His classic example concerned regulations on the weight of trucks that could travel on state roads in the United States in the 1930s. He found empirical evidence that where trucks were more of a threat to traditional train transport (like on short-haul routes where railroads were less competitive) more stringent weight limits were enacted.</p>
<p>Rather than the regulator being a beneficent protector of the general public interest, it had become a self-interested actor responding to political pressure from the railroad owners.</p>
<p>This may strike you as rather cynical, but there is <a href="http://faculty.haas.berkeley.edu/Dalbo/Regulatory_Capture_Published.pdf">a swathe of evidence</a> that across industries and time, regulators often act more in the interests of industries than the public.</p>
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Read more:
<a href="https://theconversation.com/to-clean-up-the-financial-system-we-need-to-watch-the-watchers-38359">To clean up the financial system we need to watch the watchers</a>
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<p>These regulations usually have a plausible rationale behind them. Consider licensing of doctors. Nobody wants a poorly trained doctor let loose on them, so some form of certification makes sense. But does the medical profession limit the number of doctors and exclude foreign-trained doctors to push up their incomes? You be the judge.</p>
<p>It’s easy to think of other examples: “tickets” in the construction industry, certification of train and truck drivers in mining, licensing of plumbers, and on and on.</p>
<p>There are lots of ways this can arise. Politicians often depend on support and campaign contributions. And there is all too often a revolving door between regulators and the regulated.</p>
<h2>Financial regulators</h2>
<p>This brings us to the regulation of Australia’s banks. </p>
<p>The corporate and prudential regulatory agencies may have been unwilling to use their power, but the the big four banks were not.</p>
<p>And the banks have plenty of power – financial and political. They are utterly vital to the operation of the entire economy. They are among the very largest companies in the country (so a lot of retirement savings are invested in them). And they employ a lot of people.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/with-a-billion-reasons-not-to-trust-super-trustees-we-need-regulators-to-act-in-the-public-interest-102441">With a billion reasons not to trust super trustees, we need regulators to act in the public interest</a>
</strong>
</em>
</p>
<hr>
<p>We should stop assuming the Australian Securities and Investments Commission and the Australia Prudential Regulatory Authority, among others, are unquestionably acting in the public interest and start asking a bunch of questions.</p>
<p>What are the backgrounds of the people who head up these organisations and what perspective does that lead them to bring to the job? What jobs do they get after they leave the regulator, and how might that affect their motivations while acting as regulator? What would be the social sanction imposed on them if they decided to get really tough with financial industry players?</p>
<p>What about the politicians who make the laws in the first place? Are they really acting for all Australians with a thoughtful and balanced perspective? Or do they represent tribal interests?</p>
<p>Regulators typically aren’t bad people. But sometimes they have bad implicit incentives. And the laws they are tasked with enforcing often favour a particular group – quite frequently those being regulated.</p>
<p>We need to close revolving doors, provide more resources to regulators and scrutinise what they do much more. Let’s not be naive about regulation.</p><img src="https://counter.theconversation.com/content/111170/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Do regulators act in the public interest, or in the interest of those they are meant to regulate?Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/913282018-02-14T00:43:23Z2018-02-14T00:43:23ZFactCheck Q&A: are ‘almost 60%’ of small business owners paid ‘$50,000 or less’?<figure><img src="https://images.theconversation.com/files/205202/original/file-20180207-58152-ekn5aa.JPG?ixlib=rb-1.1.0&rect=0%2C1%2C1003%2C562&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australian Chamber of Commerce and Industry chief executive James Pearson, speaking on Q&A.</span> <span class="attribution"><span class="source">ABC Q&A</span></span></figcaption></figure><p><strong>The Conversation fact-checks claims made on Q&A, broadcast Mondays on the ABC at 9.35pm. Thank you to everyone who sent us quotes for checking via <a href="http://www.twitter.com/conversationEDU">Twitter</a> using hashtags #FactCheck and #QandA, on <a href="http://www.facebook.com/conversationEDU">Facebook</a> or by <a href="mailto:checkit@theconversation.edu.au">email</a>.</strong></p>
<hr>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/Ok3uy-QL0z4?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Excerpt from Q&A, February 5, 2018.</span></figcaption>
</figure>
<blockquote>
<p>Almost 60% of small business owners in this country are paid $50,000 or less.</p>
<p><strong>– Australian Chamber of Commerce and Industry chief executive James Pearson, <a href="https://www.youtube.com/watch?v=Ok3uy-QL0z4&feature=youtu.be">speaking on Q&A</a>, February 5, 2018</strong></p>
</blockquote>
<p>The Turnbull government is seeking parliamentary support to cut the company tax rate to 25% over the coming decade, arguing that cutting the rate will <a href="https://www.malcolmturnbull.com.au/media/keynote-address-toowoomba-queensland-thursday-1-february-2018">increase business investment, drive jobs growth</a> and <a href="http://www.smh.com.au/federal-politics/political-news/malcolm-turnbull-commits-to-keeping-company-tax-cuts-in-the-budget-until-next-election-20180209-p4yzto.html">lift wages</a> in Australia.</p>
<p>During an <a href="http://www.abc.net.au/tv/qanda/txt/s4758627.htm">episode of Q&A</a>, Australian Chamber of Commerce and Industry chief executive James Pearson said small business owners would benefit from a company tax cut in Australia. He said it would “help them be profitable”, allowing them to grow their businesses, employ more people and pay those workers more. </p>
<p>Pearson said “almost 60% of small business owners in this country are paid $50,000 or less”.</p>
<p>Is that right?</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=230&fit=crop&dpr=1 600w, https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=230&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=230&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=289&fit=crop&dpr=1 754w, https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=289&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/206319/original/file-20180214-174966-11w98qe.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=289&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<h2>Checking the source</h2>
<p>When asked for sources and comment to support James Pearson’s statement, a spokesperson for the Australian Chamber of Commerce and Industry provided The Conversation with the following graph.</p>
<p>It draws on unpublished Australian Taxation Office data and relates to the 2014-15 income year:</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=428&fit=crop&dpr=1 600w, https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=428&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=428&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=538&fit=crop&dpr=1 754w, https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=538&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/205637/original/file-20180209-180826-ikf8da.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=538&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Chart from the Australian Small Business and Family Enterprise Ombudsman using unpublished Australia Taxation Office data for the 2014-15 financial year. The data relate to individuals with a non-zero amount at any of the following labels on their 2014-15 tax return: distribution from a partnership or trusts (primary production or non-primary production) and/or net income or loss from business (primary production or non-primary production). The figures were produced to approximate the distribution of small business owners.</span>
</figcaption>
</figure>
<p>The spokesperson said:</p>
<blockquote>
<p>We combined the data for those earning less than $25,000 and those earning $25,000 to $50,000, to come up with the under $50,000 assessment of 58.1% earning less than $50,000.</p>
</blockquote>
<p>The spokesperson added “we understand the percentages we raised publicly are percentages of all business owners” – as opposed to small business owners. However: </p>
<blockquote>
<p>We don’t think it makes much of a difference. The overwhelming majority of Australian businesses are clearly small and medium-sized enterprises, and the majority of business owners are small business owners.</p>
</blockquote>
<hr>
<h2>Verdict</h2>
<p>James Pearson’s statement that “almost 60% of small business owners in this country are paid $50,000 or less” is in the ballpark. </p>
<p>Based on Australia Taxation Office data from the 2014-15 financial year and Census 2016 data, it’s reasonable to say that between 50% to 60% of small business owners or managers earned less than $50,000 in those years.</p>
<p>However, Pearson used this information in the context of company tax rate cuts, arguing that small business owners “want a tax cut that will help them be profitable”.</p>
<p>In reality, due to the way Australia’s tax system works, it’s the small business owner’s <em>personal</em> income tax rate that is more relevant for the profitability of their business.</p>
<hr>
<h2>Calculating small business owner salaries</h2>
<p>There’s <a href="https://www.ato.gov.au/business/small-business-entity-concessions/eligibility/">more</a> <a href="http://asic.gov.au/for-business/your-business/small-business/small-business-overview/small-business-what-is-small-business/">than</a> <a href="https://www.fwc.gov.au/termination-of-employment/unfair-dismissal">one</a> definition for ‘small business’ in Australia, and there’s no perfect data set against which to test Pearson’s statement.</p>
<p>But we can assess the Australian Taxation Office data Pearson’s office provided, and we can also look at Census 2016 data. </p>
<p>Pearson’s spokesperson provided The Conversation with a graph based on unpublished Australian Taxation Office data for the 2014-15 financial year. The Conversation verified the information in the graph with the Australian Taxation Office.</p>
<p>The graph shows that in 2014-15, 58.1% of the business owners listed earned less than $50,000. But the data aren’t specific to small business owners, and don’t include taxable income people received through companies – only through partnerships, trusts or as sole traders.</p>
<p>A spokesperson for the Australian Taxation Office told The Conversation the “figures were produced to approximate the distribution of small business owners”.</p>
<p>Now let’s look at <a href="http://www.abs.gov.au/websitedbs/censushome.nsf/home/2016">Census 2016 data</a>. </p>
<p><a href="http://asic.gov.au/for-business/your-business/small-business/small-business-overview/small-business-what-is-small-business/">According to</a> the Australian Securities and Investments Commission, “many regulators have informally adopted the definition of ‘small business’ used by the Australian Bureau of Statistics” – which is a business that employs <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/1321.0">fewer than 20 people</a>.</p>
<p>If we look at Census 2016 data using that measure, then we see that 50% of small business owners were paid less than $1,000 per week in 2016 – or $52,000 per year or less.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=498&fit=crop&dpr=1 754w, https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=498&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/206316/original/file-20180214-174986-ig8bux.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=498&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"></span>
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<h2>Putting Pearson’s statement in context</h2>
<p>In making his statement, Pearson described the financial struggles facing some small business owners. Pearson said these people “want a tax cut, they want a tax cut that will help them be profitable”. </p>
<blockquote>
<p>They’ll employ more people, they’ll offer longer hours, more people will have jobs, more people will be paid more. That’s how it works.</p>
</blockquote>
<p>Pearson added that when small business owners “see more productivity in their workforce, they can take the risk and grow their business”. </p>
<p>But the reality is, when an Australian resident is trying to decide whether to invest in their small business, it’s their personal income tax rate, not the company tax rate, that really matters. </p>
<p>Why?</p>
<p>Because company tax paid by Australian businesses on income earned in Australia acts as a ‘pre-payment’ of personal income tax when that income is distributed to shareholders in the company (or the owners of the company) via <a href="https://www.investopedia.com/terms/f/frankeddividend.asp">franked dividend payments</a>.</p>
<p><a href="https://data.gov.au/dataset/taxation-statistics-2014-15/resource/b51ea9cc-4eac-4b25-b45a-175d7797c9d5">Australian Taxation Office</a> statistics show that in the 2014-15 financial year, more than 95% of dividends paid to Australian households were franked.</p>
<p>The fact that Australian business owners can claim back any tax paid by their businesses when they lodge their <em>personal</em> tax returns makes their personal income tax rate the more relevant concern to the potential profitability of their business.</p>
<p>In addition, Pearson argued that company tax cuts would lead to higher wages, a statement supported by the <a href="https://treasury.gov.au/publication/analysis-of-the-long-term-effects-of-a-company-tax-cut/">Australian Treasury</a>. The Treasury modelling shows that the wage hike would be the result of greater foreign investment in Australia, leaving the owners of small businesses needing to pay higher wages to attract or retain workers.</p>
<p>Small business owners who receive their income via franked dividends won’t receive any tax relief to cover this expense. So it’s possible that cuts to the company tax rate could hinder small businesses, rather than benefit them. <strong>– Janine Dixon and Jason Nassios</strong></p>
<h2>Blind review</h2>
<p>This verdict finds a reasonable level of support from the available data.</p>
<p><a href="http://researchdirect.westernsydney.edu.au/islandora/object/uws:28654">Research</a> from the University of Western Sydney <a href="https://www.westernsydney.edu.au/newscentre/news_centre/story_archive/2014/australias_business_owners_income-poor_but_asset-rich">published in 2014</a>, based on <a href="http://melbourneinstitute.unimelb.edu.au/hilda">HILDA</a> data and Australian Bureau of Statistics data, found that business owner <em>households</em> (as opposed to individuals) reported an average weekly income of $1,975 in 2010. That’s around $103,000 per household.</p>
<p>If there were two adults per household, this would equate to $51,500 per person.</p>
<p>Also, because the ‘average’ is skewed upwards by high income earners, 50% of earners would earn less than the average, which lends further support to Pearson’s statement.</p>
<p><a href="https://www.payscale.com/research/AU/Job=Small_Business_Owner_%2F_Operator/Hourly_Rate">Information published</a> by an American company called PayScale suggests the average salary for a small business owner/operator in Australia is around $67,000 per year, and the median salary is $62,000. </p>
<p>If true, this would not be consistent with the claim that almost 60% of small business owners earn less than $50,000 per year. However, this information is based on a survey with a relatively small sample size. This source is a private sector consulting firm, and no other detail on their data source is provided. <strong>– Ross Guest</strong></p>
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<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/162128/original/image-20170323-13486-72k52f.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
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<p><em>The Conversation’s FactCheck unit was the first fact-checking team in Australia and one of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/91328/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has received funding from the ARC in the past. </span></em></p><p class="fine-print"><em><span>Janine Dixon and Jason Nassios 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>On Q&A, Australian Chamber of Commerce and Industry chief executive James Pearson said almost 60% of small business owners in Australia are paid $50,000 or less. Is that right?Janine Dixon, Economist at Centre of Policy Studies, Victoria UniversityJason Nassios, Research Fellow, Centre of Policy Studies, Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.