The royal commission should result not only in new regulation, but new education


Dirk Baur, University of Western Australia; Elizabeth Ooi, University of Western Australia, and Paul Gerrans, University of Western Australia

The Financial Services Royal Commission has not only shown that banks and their representatives have behaved appallingly, but that we need better-educated consumers.

It is naive not to expect new schemes will pop up to replace the now (or soon to be) banned practices. There is a clear pattern of repeating unconscionable behaviour in the financial services industry.

Consumers need to be trained to ask the right questions. “How much do I have to pay each week over the life of the loan including (hidden) fees?”, “How much do I have to pay in fees each year?”, and “Why is this right for me rather than right for the bank?”

Being able to answer such questions can help reduce the invariably expensive and imperfect regulation that generally follows inquiries such as the royal commission.




Read more:
Royal commission scandals are the result of poor financial regulation, not literacy


A 20-year-old, let’s call him Mark, just started his first job paying A$45,000 a year. Confidently, he walks into a bank branch, applies and is approved for a A$30,000 car loan within 20 minutes. He wants a new car and isn’t too concerned about the 12.5% annual interest.

Mark states afterwards he didn’t know he could hardly afford the loan. It cost more than A$40,000 over five years. And with other commitments he was in over his head, leaving no room for changes in work, illness, etc.

Should Mark be expected to know? Was he taught any of this? Could he know if he had made some effort, or should the bank have informed him better and been more explicit?

And where does the responsibility sit?

We assumed in the story (loosely related to one heard by the royal commission) that the bank had informed Mark about rates and fees, but had not effectively communicated what this meant in terms of weekly payments or total cost.

For the moment, let’s put aside the primary role of the banks and their representatives – it is their practices on the line and we are not blaming or judging the victims. Neither do we know the client’s individual circumstances.

But, caveats established, how much information must be presented and what can be reasonably expected in terms of the financial literacy level of customers? If the response from the royal commission is increased disclosure, these are the relevant questions.

But this still leaves whether we can be confident that education is being provided so customers can make informed decisions.




Read more:
There are serious problems with the concept of ‘financial literacy’


Financial literacy is in the National Curriculum and being taught to primary and secondary students. But, given Mark’s age, there is no guarantee he would have received financial literacy education at school.

For the future Marks, financial literacy is now embedded, but coverage remains uneven as what is taught varies by state and school level.

Elsewhere policy is continuing the trend of transferring financial responsibilities from government to individuals, which requires greater financial literacy. For example, the NDIS aims to build a new disability marketplace, requiring important financial decisions from individuals or their representatives.

But the royal commission has clearly shown people suffered by following bad advice or by not questioning numbers sufficiently.

How were 24% p.a. car loans supported by banks and accepted by customers? Were the numbers too abstract and customers didn’t know what 24% a year meant in dollar terms?

Not just new regulation but new education

Better-educated people are better equipped to ask the right questions and make more informed decisions.

We can’t just rely on regulated disclosure – we need to continue to ensure the “simple” questions about the total costs over the life of the loan and whether it’s right for the customer, rather than just the bank, are taught. Teaching consumers to ask these questions, to question the information provided, is important and can enhance the regulation.

Who should provide this education? Not those with a conflict of interest such as financial institutions. If the royal commission tells us one thing it is that incentives matter.

If you are incentivised, or part of an incentivised brand, it may be better you don’t have a role in education. The Dollarmites scandal may not be the biggest scandal this year but it’s emblematic and part of a problem.

Schools, VET and universities can do better and more.

A new round of regulation will create new incentives to avoid it. Regulation tries to catch up and focuses on institutions – here the banks. But new financial technologies mean financial providers don’t look like they used to – for example, new app-based peer-to-peer lenders at your favourite store.

We can’t rely on education alone but we also can’t rely on regulation alone.

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The Conversation

Let’s recognise the limitations of regulation as we try to improve outcomes and consider whether some of the money spent on designing and enforcing new regulations may be better spent further educating our future customers.

Dirk Baur, Professor of Finance, University of Western Australia; Elizabeth Ooi, Lecturer, Finance, University of Western Australia, and Paul Gerrans, Professor of Finance, University of Western Australia

This article was originally published on The Conversation. Read the original article.

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Criminal charges against banking ‘cartels’ show Australia is getting tough on competition law


Barbora Jedlickova, The University of Queensland

A two-year probe by Australia’s consumer watchdog has resulted in criminal charges against ANZ, Citigroup and Deutsche Bank, as well as six of their senior executives, over alleged “cartel-like” behaviour.

The case, brought by the Commonwealth Director of Public Prosecutions (CDPP) after an investigation by the Australian Competition and Consumer Commission (ACCC), is the second prosecution of its kind to be brought in Australia since competition laws were tightened almost a decade ago.




Read more:
Cartel case shows not all corporate misbehaviour goes unpunished


The banks and six investment bankers are charged with cartel conduct related to the sale of A$2.5 billion worth of unsold ANZ shares to investors in August 2015. The ACCC alleges that senior executives from the three banks colluded in the way they dealt with these shares.

The exact details of the alleged criminal conduct will only become clear at a Sydney court hearing on July 3, 2018.

What is cartel behaviour?

Cartels are forms of anti-competitive conduct where cartel participants decide to stop competing and start colluding. Australian civil law has banned cartels for decades. But the practice only became a criminal offence in 2010. Only its serious forms are subject to criminal law; civil law still governs the rest.

Cartels can take different forms. In the most common instance, participants collude by setting their prices. Other forms include: output restrictions; dividing markets among cartel participants on mutually agreed terms; and bid-rigging, in which a commercial contract is decided in advance but other operators put in sham bids to give the appearance of competition.

There is one primary reason why businesses or executives would stop competing and start colluding: profit. In short, cartel participants cheat to get more money, creating higher prices and lower output in the process. This disadvantages consumers, the economy and society at large.

But proving criminal collusion in a court is harder than it might seem.

Beyond reasonable doubt

Although we need to wait for the case to unfold to find out more, what we can tell at this stage is that the ACCC and the CDPP perceive the alleged conduct as serious enough for it to constitute a criminal case. Criminal cases are harder to prove than civil cases. Cartel collusion must be proved beyond reasonable doubt, and the evidence has to show that the individuals involved knew (or believed) that they were colluding.

What these charges also show is that the ACCC and the CDPP are prepared to go after the most powerful corporations and their executives for alleged cartel-like conduct. This is an enormously important step for deterrence, because criminal charges are naturally more attention-grabbing than civil lawsuits.

Charging high-ranking bank executives will potentially make the deterrent more effective still, because high-ranking executives set the cultural tone for their organisations.

Research has shown that significant prison time – or the threat of it – for individuals is a more effective deterrent than civil penalties; especially if the penalties are not high enough, as was argued in the recent OECD report on corporate penalties for cartels in Australia. The report showed that the penalties applied in Australia were low in comparison with competition law regimes in the European Union and the United States.

Just the beginning?

This is the second Australian criminal case of cartel conduct – the first involved a Japanese company shipping cars to Australia. We can reasonably expect more of these kinds of charges in the future, given that the laws are only eight years old and investigations of this type typically take years to reach fruition. (The alleged cartel conduct in the latest case took place in August 2015, almost three years ago.)

There are differences in investigation procedures between criminal and civil cases, to ensure that collected pieces of evidence are admissible in a criminal proceeding. It is ultimately the CDPP’s (and not the ACCC’s) decision whether or not to prosecute.




Read more:
Cartels caught ripping off Australian consumers should be hit with bigger fines


The final step is for criminal proceedings to be prosecuted. The first cartel criminal case, which concerned the shipping industry, can be perceived as successful, with two global shipping companies pleading guilty.

It is still early days for Australia in terms of tracking down and punishing examples of cartel behaviour via criminal prosecutions. But the latest developments suggest that Australia is prepared to follow the example of the world leader in successful cartel-related criminal prosecutions: the United States.

The US criminal regime is one of the oldest in the world, having existed since 1890. The US boom of cartel-related criminal cases began in the late 1990s with the lysine cartel and the vitamin cartel and with the first foreign national being sentenced to imprisonment in July 1999. One of the first criminal cartel investigations inspired the production of the 2009 movie The Informant!.

The ConversationThe numbers further illustrate the success of the US criminal prosecutions. For instance, 27 corporations and 82 individuals were charged in the fiscal year 2011. Australia has a long way to go before it can match those numbers.

Barbora Jedlickova, Lecturer, School of Law, The University of Queensland

This article was originally published on The Conversation. Read the original article.

Vital Signs: fallout from banking crackdown could be worse than interest rate rises


Richard Holden, UNSW

Vital Signs is a regular economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.

This week: both the RBA and US Fed leave interest rates on hold as all eyes turn to potential new banking regulations and their likely impact on the economy.


This week was all about interest rates – even though the RBA and the US Fed kept both of their official rates unchanged at their most recent meetings.

But as usual, what’s likely to happen in the future is the interesting question.

In Australia, all eyes will be on how ASIC and APRA respond to the findings of the banking royal commission. Will they be defensive about past mistakes, or move forward with tighter regulations on banks and financial planning? What will the RBA do in this context?

On interest rates the answer is probably “nothing soon”.

The official statement by RBA Governor Philip Lowe makes one almost physically feel the contortions.

“The Bank’s central forecast for the Australian economy remains for growth to pick up, to average a bit above 3 per cent in 2018 and 2019. This should see some reduction in spare capacity in the economy.”

OK, growth is about to move up strongly.

“Household income has been growing slowly and debt levels are high.”

Well, that sounds concerning, since household consumption accounts for nearly 60% of GDP.

Unemployment was getting better, but that’s stopped happening.

“Inflation remains low…with both CPI and underlying inflation running marginally below 2 per cent. Inflation is likely to remain low for some time…A gradual pick-up in inflation is, however, expected as the economy strengthens.”

So inflation has been outside the target band of 2-3% for a very long time, but if that courageous GDP growth forecast pans out then we might end up back in the band.

And on, and on. No wonder US President Harry Truman once lamented “Give me a one-handed economist. All my economists say ‘on one hand…’, then ‘but on the other…’”

In any case, for the foreseeable future it is not what the RBA does, but what the big four banks do that will have the biggest impact on the interest rates Australian borrowers face.




Read more:
Four ways an Australian housing bubble could burst


Wholesale funding costs have been ticking up, cutting net interest spreads for the banks. And the wash-up of the Royal Commission is likely to lead to a further tightening of underwriting standards. As ANZ CEO Shayne Elliot put it:

“People are still going to buy a home, so it doesn’t change fundamental demand, but it will change the process and will probably make it harder for people to be successful in their applications.”

Those two factors taken together could easily see a 15-20 basis point increase in rates for home loan borrowers. That might be tempered by potential outrage from the public – banks behave badly and then put their prices up – but the banks have a lot of market power, as history has shown in these matters.

Across the pond, the US Federal Reserve left official rates unchanged from March at 1.5% to 1.75%. That ended, for now, a string of six rate hikes since December 2015.

In a relatively brief statement the Fed noted;

“the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Recent data suggest that growth of household spending moderated from its strong fourth-quarter pace, while business fixed investment continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent.”

The leading interpretation of this is that the Fed thinks inflation is ticking up and will likely raise rates another 25 basis points at the next meeting if nothing material changes in the economy.

All this is a reminder that monetary policy is as much art as it is science.

It is also worth remembering that the other key function of central banks is prudential regulation. That is where the real changes could be interesting. Fed Chair Jay Powell is known to be much more amenable to deregulation of the financial sector than his predecessor Janet Yellen. It may not be too long before we see those instincts put into action.




Read more:
Debunking the myth of our ‘well-regulated’ banks


The ConversationPerhaps the regulatory front will be more interesting than interest rates for the remainder of 2018.

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

This article was originally published on The Conversation. Read the original article.

Abbott suggests sacking bank regulators as ASIC feels the heat


Michelle Grattan, University of Canberra

Former prime minister Tony Abbott has strongly condemned the performance of financial sector regulators, suggesting they should be sacked and replaced by “less complacent” people.

With increasing attention on the apparently inadequate performance of the Australian Securities and Investments Commission (ASIC), Abbott raised the question of what the regulators had been doing as the scandals had gone on.

“We all know there are greedy people everywhere, including in the banks,” he told 2GB on Monday. “But banking is probably the most regulated sector of our economy. What were the regulators doing to allow all this to be happening?”

Abbott said his fear was “that at the end of this royal commission we will have yet another level of regulation imposed upon the banks when frankly what should happen is, I suspect, all the existing regulators should be sacked and people who are much more vigilant and much less complacent go in in their place.”

He said the analogy was, “yes, punish the criminals but if the police are turning a blind eye to the criminals, you’ve got to get rid of the police and get decent people in there”.

Meanwhile Malcolm Turnbull, speaking to reporters in Berlin, defended refusing for so long to set up a royal commission, although he said commentators were correct in saying that “politically we would have been better off setting one up earlier”.

Turnbull said that by taking the course it had the government “put consumers first”.

“The reason I didn’t proceed with a royal commission is this – I wanted to make sure that we took the steps to reform immediately and got on with the job.

“My concern was that a royal commission would go on for several years – that’s generally been the experience – and people would then say, ‘Oh you can’t reform, you can’t legislate, you’ve got to wait for the royal commissioner’s report.’

“So if we’d started a royal commission two years ago, maybe it would be finishing now and then we’d be considering the recommendations … With the benefit of hindsight and recognising you can’t live your life backwards, isn’t it better that we’ve got on with all of those reforms?”

Turnbull dismissed Bill Shorten’s call for the government to consider a compensation scheme for victims by saying this matter was already in the commission’s terms of reference.

Among the reforms it has made, the government highlights giving ASIC more power, resources and a new chair.

But Nationals backbencher senator John Williams, who has been at the forefront of calls for tougher action against wrongdoing in the financial sector, told the ABC that ASIC has got to be “quicker, they’ve got to be stronger, they’ve got to be seen as a feared regulator.

“That is not the situation at the moment,” he said.

He had sent a text message to Peter Kell, ASIC deputy chair, a couple of nights ago “and I said, mate, Australia is waiting for you to act”.

Asked how the culture within ASIC could be changed, Williams said, “I suppose you keep asking them questions at Senate estimates, keep the pressure on them, keep the message going on with the management of ASIC regularly.

“As I have said to the new boss [chair James Shipton], you’ve got to act quickly, you’ve got to be severe, you’ve got to be feared. If you’re not a feared regulator, people are going to continue to abuse the system, do the wrong thing without fear of the punishment”.

He welcomed the increased penalties announced by the government last week.

The chair of the Australian Competition and Consumer Commission (ACCC), Rod Sims, while declining to comment on ASIC, said he agreed with Williams “that you really do have to be feared. And frankly I’d like to think the ACCC is.

“I won’t comment on others but you want people to be really watching out – watch out for the ACCC, watch out that you don’t get caught because if they catch us it’s going to be really dire consequences. And I think we’ve got that mentality,” he told the ABC.

Updated at 4:30pm

The ConversationIn an interview on Sky late Monday, Finance Minister Mathias Cormann admitted, “With the benefit of hindsight, we should have gone earlier with this inquiry.” This was in stark contrast with his colleague, Minister for Financial Services, Kelly O’Dwyer, refusing to make the concession when she was repeatedly pressed in an interview on Sunday.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Heavy penalties are on the table for banks caught lying and taking fees for no service


Dimity Kingsford Smith, UNSW and Alex Steel, UNSW

Another week of hearings of the Financial Services Royal Commission has seen financial services company AMP admitting it mislead the Australian Securities and Investment Commission (ASIC) on 20 occasions. The commission also saw evidence of both AMP and the Commonwealth Bank of Australia paying themselves client money when there was no adviser allocated to provide services, or the client had passed away.

It seems ASIC and the Director of Public Prosecutions will have no lack of evidence to pursue civil penalties and criminal cases. The bigger issue is what charges to go with.

In deciding what to pursue, ASIC and the DPP will need to weigh up the costs, the charges individuals are willing to plead guilty to, and the outcomes that will best serve the public interest.

Convicting individuals clearly “sends a message”, but these employees are easily replaced with others just as willing to commit the offences, unless the organisation’s culture is changed.

ASIC has confirmed it has a broad-ranging investigation into AMP already underway, and the Treasurer has suggested the behaviour might attract jail time.

Whether or not bankers get jail time will depend on the actual offences charged and a range of sentencing factors. However, the courts are increasingly emphasising the importance of substantial sentences for white collar crime.

Offences with similar maximum penalties in the UK led to a UBS banker who manipulated the London Interbank Offered Rate being sentenced to 14 years jail in 2015. Another joined him in 2016 for two years and nine months and three others were also convicted.

What AMP and CBA did

AMP and CBA have admitted they failed to provide information and report breaches to ASIC as required by the Corporations Act. Misleading Australian government agencies is also a criminal offence under the Act and the Commonwealth Criminal Code.

As well as dealing truthfully with ASIC, all entities licensed to offer financial services must act “efficiently, honestly and fairly” and take reasonable steps to ensure their employees do likewise.

It is not hard to see how taking clients’ money without providing a service is not efficient, honest or fair.

Civil penalties

Civil sanctions could apply to conduct at AMP and CBA which could ultimately involve disqualification for up to 20 years from working as a corporate officer and/or a fine of up to A$200,000.

Officers of a corporation are very senior employees and usually immediately below board level. They have a duty to be careful and diligent and act in the best interests of the company under the Corporations Act. There is a range of lesser charges from general dishonesty to false documentation offences.

Officers of a corporation have duties which require them to be careful and diligent. This is because the officers may have failed to follow up or failed to prevent conduct) after finding out about what was going on.

If ASIC and the DPP can go further and prove that AMP and CBA officers have intentionally caused their company to break the law, it is virtually impossible that conduct could be in the interests of the corporation. AMP and CBA officers may have also breached criminal offences in the Corporations Act if the wrongdoing was reckless or intentionally dishonest.

Criminal charges

Turning to more general offences, here criminal penalties range from 12 months in jail for misleading ASIC, to significant penalties for conspiracy to defraud.

Any bank employee who was involved in the creation of misleading documentation might well be exposed to fraud charges. Under Commonwealth and state law, fraud can involve reckless deception of another (either ASIC or the clients) with an intention to gain a financial advantage for another (AMP or CBA) Those offences have maximum penalties of 10 years jail. There is a range of lesser charges from general dishonesty to false documentation offences.
Those who assisted might well also be liable through accessorial liability.

Prosecutors could also turn to the conspiracy to defraud offence. The Commonwealth version of the offence involves an agreement to dishonestly influence a public official’s decisions. An agreement to provide false documents to ASIC would seem easily to fit this offence. Again, this has a maximum penalty of 10 years.

Similarly, common law conspiracy to defraud charges could be available for dishonestly misleading customers in a way that caused them financial loss. There are no prescribed maximum penalties for this version of the offence.

Multiple offences could mean sentences served concurrently, or partly cumulatively.

The ConversationAlthough the wrongdoing may seem clear to the public, it is likely that complex matters of proof will emerge and ASIC will need to make a range of decisions about the best approach to ensuring cultural change occurs. While convictions might be deserved, the public interest is best served by ensuring that prosecutions are part of wider regulatory action leading to better banking practices.

Dimity Kingsford Smith, Professor and Director, Centre for Law Markets and Regulation, UNSW Law, UNSW and Alex Steel, Professor, UNSW Scientia Education Fellow, UNSW

This article was originally published on The Conversation. Read the original article.

Grattan on Friday: Government’s misjudgement on banking royal commission comes back to bite it



File 20180419 163991 1y4wm8w.jpg?ixlib=rb 1.1
In light of what is coming out the government should be ashamed of its past performance.
Flickr, CC BY-SA

Michelle Grattan, University of Canberra

If you are a politician, what do you do when your bad judgement – or worse – has been dramatically called out for all to see?

That’s the question which has faced the government as appalling behaviour by the Commonwealth Bank, AMP and Westpac has been revealed this week at the royal commission into misconduct in the banking, superannuation and financial services industry.

Former deputy prime minister Barnaby Joyce went the full-monty confession. “In the past I argued against a Royal Commission into banking. I was wrong. What I have heard … so far is beyond disturbing”, he tweeted.

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Joyce is now a backbencher, and free with his opinions. It’s another story with current ministers. They continue trying to score political points over Labor, which had been agitating for a royal commission long before it was set up.

The ministers claim the government laid down terms of reference that took the inquiry beyond what Labor was proposing. But although Labor never released terms of reference, it flagged in April 2016 a broad inquiry into “misconduct in the banking and financial services industry”.

The real difference between the government and the opposition was the emphasis on superannuation. While Labor’s inquiry would have covered it, the government wrote in a specific term of reference, hoping evidence about industry funds might embarrass the unions and therefore the ALP. The commission has yet to reach those funds.

Revenue Minister Kelly O’Dwyer, pressed about her refusal to admit the government had erred in opposing a commission, told the ABC on Thursday, “Initially, the government said that it didn’t feel that there was enough need for a royal commission. And we re-evaluated our position and we introduced one”.

Well, that’s the short version. In fact, the government was forced to drop its resistance when Nationals rebels threatened to revolt. Take a bow, Queensland Nationals backbenchers Barry O’Sullivan, George Christensen and Llew O’Brien. You did everyone a service.

Indeed, the Nationals were on the case of the banks very early. Nationals senator John “Wacka” Williams for years pursued the rorts, through Senate committee investigations.

The government’s resistance to the royal commission was bad enough but remember its earlier record on consumer protections in the financial services area.

When the Coalition came to power it was determined to weaken measures Labor had introduced. Eventually, it was thwarted by the Senate crossbench, with the upper house disallowing its changes.

Just why the government was so keen to shield an industry where wrongdoing had been obvious is not entirely clear. It appears to have been a mix of free market ideology, a let-the-buyer-beware philosophy, and some close ministerial ties with the banking sector.

In light of what is coming out, the government should be ashamed of its past performance.

This week, the commission heard about AMP, which provides a wide range of financial products and advice, charging for services it didn’t deliver, and deliberately misleading the regulator, the Australian Securities and Investments Commission (ASIC), about its behaviour. By week’s end, AMP Chief Executive Craig Meller had quit.

It also heard how the Commonwealth Bank’s financial planning business charged customers it knew had died, including in one case for more than a decade. Linda Elkins, from CBA’s wealth management arm Colonial First State, agreed with the proposition put to her that the CBA would “be the gold medallist if ASIC was handing out medals for fee for no service.”

A nurse told of the financial disaster after she and her husband, aspiring to set up a B&B, received advice from a Westpac financial planner, including to sell the family home.

Seasoned journalist Janine Perrett, who now works for Sky, tweeted, “I thought nothing could shock me anymore, but in my forty years as a journo, most of it covering business, I have never seen anything as appalling as what we are witnessing at the banking RC. And I covered the 80’s crooks including Bond and Skase.”

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The commission’s interim report is due September 30 and its final report by February 1, not long before the expected time of the election. There is speculation over whether the reporting date will be extended. Bill Shorten says the inquiry should be given longer if needed; Finance Minister Mathias Cormann has indicated the government would do what Commissioner Kenneth Hayne wanted.

Those in the government who think the original timetable should be adequate note that, unlike for example the royal commission into institutional responses to child sexual abuse, this inquiry is not undertaking deep dives into everything, but exposing the general problems.

From the opposition’s point of view, it would be desirable for the inquiry to run on. That would keep the banks a live debate, and leave it for Labor, if elected, to deal with the commission’s outcome. Shorten is already paving the way for a compensation scheme financed by the industry. Given the poisonous unpopularity of the banks, the Coalition could hardly run a scare about what a Shorten government might do.

Ideally, the government needs the issue squared away before the election.

The government insists it has already put in train a good deal to clean up the industry including a one-stop-shop for complaints, higher standards for financial advisers, beefing up ASIC, and a tougher penalty regime.

Treasurer Scott Morrison and O’Dwyer on Friday announced the detail of hefty new penalties for corporate and financial misconduct, including ASIC being able to ban people from the financial services sector.

One argument the government made against a royal commission was that it would just delay action. But of course if it had been held much earlier, by now we might have in place a full suite of reforms.

The ConversationMost immediately, the shocking stories from the commission are adding to the government’s problems in trying to sell its company tax cuts for big business to key crossbench senators and to the public.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

What the Royal Commission can do if the banks don’t play ball on evidence


Anna Olijnyk, University of Adelaide

At the first round of hearings of the Financial Services Royal Commission, the counsel assisting, Rowena Orr QC, was unimpressed with the material some of the banks have provided. The Commonwealth Bank provided two submissions, the first of which, according to Orr:

…adopted a high level and general approach, which meant that it did not disclose the totality of the conduct that it has engaged in…

The CBA’s second submission was no more helpful: it consisted primarily of a large number of spreadsheets. Orr said these were “not in a form which made it possible to easily understand the type and the scale”, of CBA’s conduct.




Read more:
Broad mandate for financial services royal commission takes the heat off banks


CBA wasn’t alone; the National Australia Bank also won a mention from Orr for “failing to grapple with the task” set by the commissioner.

Can the Royal Commission do anything to get more useful information out of the banks? There are two issues here: what the Royal Commission can make the banks do, and what it has to ask the banks to do.

What can the Royal Commission make the banks do?

The Royal Commission has several powers under the Royal Commissions Act 1902 that might be used here. Failure to comply with the Royal Commission’s requirements under these powers is punishable by up to two years’ imprisonment.

The Royal Commission can require the banks to produce documents. But this is not a power to make the banks create new documents to help the Royal Commission.

The Royal Commission can require witnesses to give evidence. Using this power, the Royal Commission could make key personnel within the banks attend the Royal Commission and answer questions about the bank’s conduct.

It can also require a person to provide information, or a statement, in writing. This is probably limited to matters the person already knows about; it’s not a power to order a person to conduct investigations to provide a full picture of a bank’s conduct.

What the commission can ask for

Quite apart from its coercive powers, the Royal Commission can ask the banks to provide the material it wants, in the form it wants. In fact, the commissioner wrote to the banks the day after the commission was established, inviting them to make submissions. It was in response to this invitation that CBA and NAB provided the documents Rowena Orr QC referred to on the first round of hearings.

The Royal Commission could ask the banks, for example, to provide as much or as little detail as the commission needs; to create summaries or chronologies of events; to explain how to interpret technical documents; to provide a full account of a specified event.

It would then be up to the banks as to whether (and when) they comply with the requests.

The banks have announced their intention to cooperate with the Royal Commission. Given this, it would be surprising to see the banks defying any reasonable requests for additional documents or information without giving a good reason.

But it’s not quite as simple as “ask and it shall be given you”. Banks hold millions of documents.




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Banks and financial providers one step ahead of consumers who struggle with personal bias


Each bank stores its documents in a system that suits the bank’s operational needs, and is unlikely to align with the Royal Commission’s priorities. A request to collate all documents on a given topic might take the bank many hours of searching and analysis across multiple databases. The banks then may have to return to the Royal Commission to clarify what is required.

There’s nothing to stop the Royal Commission using both coercive and cooperative techniques. It may, for example, ask banks to provide an overview of the handling of certain complaints, and then require the banks to produce certain documents mentioned in that summary.

The ConversationBut a combination of asking and demanding may be needed to get the information the Royal Commission needs.

Anna Olijnyk, Lecturer, Adelaide Law School, University of Adelaide

This article was originally published on The Conversation. Read the original article.

The New Payments Platform may mean faster transactions, but it won’t be safer


File 20180213 170650 4w5mem.jpg?ixlib=rb 1.1
The New Payments Platform could lead to more fraud and abuse.
Shutterstock

Steve Worthington, Swinburne University of Technology

Australians will finally enjoy the ability to send each other money in “real time”, with the launch of the New Payments Platform (NPP) today. The platform is a mixture of new processes for settling transactions between banks, guided by the Reserve Bank of Australia.

But while this may make payments faster, it could also make them less safe.

And data from the United Kingdom’s real-time payments platform, Faster Payments, show the take-up of Australia’s system may not be that strong. Although it was launched 10 years ago, Faster Payments has not yet become the most popular payment method in the UK. The most popular is still the traditional system, which takes three days to clear.

Research into the Faster Payments platform shows it is rife with fraud and scams. Part of the problem in the UK is that banks have trouble identifying potentially fraudulent transactions.




Read more:
Australians are now using cards more often than cash to pay for things


The New Payments Platform will also change how you transfer money. BSB and account numbers will still exist, but individuals and businesses can create other identifiers, called “PayID”. This means mobile numbers or email addresses can also be used as a way to identify yourself, both to pay and be paid by others.

The platform will also remove the delays caused by weekends and public holidays and mean you can make transfers after business hours.

The impetus for a real-time payment platform came from a 2012 review by the Reserve Bank of Australia. It found that Australia’s payment system lagged behind even less developed nations, such as Mexico.

But not all banks have signed on to the new payments platform. Those taking a wait-and-see approach include Bank of Queensland, Suncorp and Rabobank. Even some of the subsidiaries of one of the big four banks, Westpac (such as Bank of Melbourne and St George), will not be involved in the launch of the New Payments Platform.

Fraud and abuse in real time

Before the New Payments Platform, numerous safeguards were built into Australia’s payment system that limited fraud and abuse. For instance, if you were planning to buy a car, you would likely go into your bank and ask for a bank cheque. This cheque would be made out to the name of the dealership or person selling the car.

A number of protections are built in to this system. The money is guaranteed by your bank and will clear within three days once deposited. If someone with a different name tries to deposit the cheque, then the cheque will not be accepted and hence the payment will be revoked.

Under the terms and conditions issued by one of the participating banks, banks are not liable for losses that are a result of you giving the wrong account information. Furthermore, a transfer instruction given by you, once accepted by your bank, is irrevocable.

This also applies if you were fraudulently induced to make a transfer via the New Payments Platform. In this case your bank might be able to help you recover the funds, but the recipient of the funds (potentially a fraudster) will have to consent to repay your funds. So if you have a dispute with a recipient of your funds transfer, you will need to resolve the dispute directly with that person or organisation under the new scheme.

It is likely that similar terms and conditions will apply to all the institutions that are members of the New Payments Platform.

The problem will only get worse as the “cap” on transactions is lifted. This happened in the United Kingdom once the Faster Payments cap was raised to £250,000 in 2015.

According to the managing director of the UK Payment Systems Regulator, Hannah Nixon: “There is no silver bullet for [authorised push payment] scams and some people will still, unfortunately, lose out.” Nixon added that account holders also need to take “an appropriate level of care” in protecting themselves.




Read more:
Australia may be closer to being a cashless society but it won’t happen by 2020


The UK experience shows that the New Payment Platform is likely to speed up transactions. It took two years for Faster Payments to pass 500 million transactions, but it sped up and passed 5 billion transactions in just over seven years.

In June 2017, Faster Payments processed 135.7 million payments, which was a 15% increase on the previous June. These payments amounted to a total of £115 billion for that month.

But Faster Payments is still not the biggest payment platform in the United Kingdom. Although we don’t know exactly why, there are many possible reasons – including customers not wanting to switch from something they are used to and a fear of fraud.

It could also be that British financial institutions are not promoting Faster Payments to their customers as they can charge higher fees on the traditional payment platform.

The ConversationAbove all, the big concern is detecting fraudulent activity in real time – something that will concern banks’ risk management and which may have led to some choosing to hang back. Payments on the New Payments Platform may be faster and easier to make, but will they be safer? It could just make fraud faster and easier for fraudsters, and harder to undo for victims.

Steve Worthington, Adjunct Professor, Swinburne University of Technology

This article was originally published on The Conversation. Read the original article.

Why the big four asked for a parliamentary inquiry into banking


George Rennie, University of Melbourne

The major Australian banks are following familiar public relations tactics in requesting a parliamentary commission of inquiry into banking and financial services.

When the public mood is against an industry, it will try to win the public over, while getting the politicians to ignore the public mood. If that fails, the industry gradually concedes ground until attention goes elsewhere.

For this reason, the banks went from being steadfastly against a commission, to offering the option of self-regulation, to proposing a new “banking tribunal”, to eventually conceding, after the battle had already been lost, to a parliamentary inquiry.

The big problem for the banks, and a big part of the reason that their previous lobbying failed, is that their popularity with the Australian public is very low. This allowed, or pressured, politicians to call for the commission, and presents significant problems for the banks going forward, especially if they wish to avoid tougher regulation.


Read more: Royal commissions: how do they work?


The banks capitulated only once it became “all but inevitable” that an inquiry of some sort would be held.

Due to the recent citizenship saga, it was looking likely that a coalition of crossbench, Labor, Greens and some Nationals MPs would pass a bill for a commission of inquiry into the banks and other financial institutions.

Labor had already promised to set up a royal commission into the banking and financial services industry if it won the next election.

Concede ground only when it’s already lost

A royal commission will almost certainly bring many months of bad press for the banks.

As the industry has repeatedly made clear, it never wanted a royal commission. The banks claimed they had corrected the mistakes of the past and that a commission was “unwarranted”.

So the banking industry’s public and private lobbying efforts were geared towards convincing politicians to resist calls for the commission, while trying to boost public opinion by highlighting their corporate social responsibility.

This involved sacking executives over this scandal or that, removing certain ATM fees, and cutting bonuses and director pay.

The banks have also launched advertising campaigns, such as one highlighting that many Australians own bank shares through their superannuation.

Concurrently, the banks hoped that threatening to launch a “mining tax”-style ad campaign might scare politicians away from calling for a commission.

These campaigns have become a common threat since the success of the 2010 mining tax campaign opened corporate Australia’s eyes to the potential effectiveness of advocacy ads.


Read more: Banking royal commission will expose the real cost of bad behaviour


Tactics similar to those the banks are employing now have been used to varying degrees of success in the United States by the tobacco industry and the gun, finance and healthcare lobbies.

In 1998 the American tobacco industry agreed to make payments of over US$200 billion to dozens of states. But this happened only after decades of public education and campaigning against smoking.

Similarly, the American healthcare lobby successfully fought off several attempts to reform healthcare. Obamacare managed to pass in 2010 only after the industry got to substantively write it.

The public relations game

Appearing to co-operate and atone is the best way to try to influence the terms of an inquiry. It also helps to mitigate the worst of any bad press to come. This reflects a wider, pragmatic strategy of lobbying and public relations employed by the banks and other industries.

The focus for the banks will now shift towards damage control, along with heavy promotion of the banks “doing the right thing” by Australia.

To that end, expect to see even more banners proclaiming a bank’s sponsorship of the local footy team, and ads promoting the good work done in your local community.

The ConversationThese, along with an insistence that the commission is a witch hunt, that its findings are “old news”, that the banks have already taken steps to deal with the issue, will underpin the industry’s public relations battle while the royal commission takes place.

George Rennie, Lecturer in American Politics and Lobbying Strategies, University of Melbourne

This article was originally published on The Conversation. Read the original article.

The public should be ‘shocked, dismayed and disgusted’ at the major banks



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ANZ and NAB have settled with ASIC over manipulation of the Bank Bill Swap Rate.
Shutterstock

Pat McConnell, Macquarie University

The Australian public should be dismayed and disgusted that the major banks are still attempting to cover up the extent of their complicity in manipulating the Bank Bill Swap Rate (BBSW), a key interest rate benchmark.

For years, the banks covered up the involvement of their traders in manipulating not only interest rate but also foreign exchange benchmarks, by attempting to outspend the corporate regulator, ASIC, in the courts, using shareholders’ money.

Faced with publication of the evidence they caved in at the very last minute to settle with ASIC, paying even more shareholders’ funds, for fines and legal costs.

Has any director or senior manager taken personal responsibility, or even apologised, for either the rampant misconduct or the failure to monitor it – No!

Little contrition

In a short media release, ANZ acknowledged, with little contrition, that

in the course of trading on the BBSW market, a small number of traders attempted to engage in unconscionable conduct on ten dates between September 2010 and February 2012. ANZ also did not have in place adequate policies and systems to monitor trading and communications of its BBSW traders.

But we should not be fooled by the references to the “small number of traders”, or “ten dates”.

Last year, CBA and NAB agreed to enforceable undertakings with ASIC in relation to manipulating the foreign exchange benchmark, which was arguably much more egregious than the BBSW manipulation, as it involved sharing of information with other market participants, in particular sensitive information about clients’ trades.

Not one of the directors or senior managers of these banks took personal responsibility for the actions of their staff or their collective failure to monitor such obvious misconduct.

The agreement between ASIC, NAB and ANZ stipulates that

Traders involved in the breaches will have to be retrained before they are allowed back on their banks’ trading floors

Trading on nonpublic confidential information, which is what “manipulating the bank bill swap rate to their advantage and the disadvantage of others” was, is often punished by custodial sentences not some short court-ordered training course. This would just reiterate the rules that the traders should have been following anyway and which diligent management should have been enforcing.

The failure to monitor staff seems not to have slowed the progress of some senior managers. For example, ANZ CEO Shayne Elliot, was head of ANZ’s Institutional Bank (i.e. trading operations) during most of the period in which the unconscionable conduct took place.

Why did they pursue the court cases?

So what were the boards of directors of some of Australia’s largest companies doing while this failure to monitor unconscionable conduct was going on?

While neither superstar chairmen Ken Henry (NAB) nor David Gonski (ANZ) were in place during the original misconduct, they have been in place since 2014 and have had ample opportunity to inquire into the details of the scandal.

Having read the same evidence as Justice Jagot, directors chose to proceed with the case before caving in on the day it was due to be heard in court. Investors should be tearing their hair out at such colossal waste of money on high-priced (and in the end useless) lawyers.

The LIBOR and foreign exchange scandals cost overseas banks billions of dollars in fines.

Did they really believe this time was different, given that other banks had already pleaded guilty to manipulating BBSW? Even if they were not in place at the time, the non-executive directors of both banks are certainly responsible for continuing this expensive charade.

Such lack of oversight should surely trigger the first investigation when the new Banking Executive Accountability Regime (BEAR) legislation comes into force, as it covers directors and senior managers.

Pulling no punches

Federal Court Justice Jayne Jagot certainly pulled no punches in her statutory approval of the settlement between ASIC and the ANZ and NAB banks, saying that the Australian public should be “shocked, dismayed and disgusted” by the behaviour of the two banks.

The Australian public is right to be perplexed as to why no one considers themselves personally accountable for such a fiasco. And investors must be afraid that in pursuing the failed litigation so far, without apologising, that further harm is not done by possible class action litigation in the United States.

The Australian taxpayer would be justifiably annoyed to learn that the offences admitted by the banks took place between 2010 and 2012, when the very same banks were given the free handout of a government guarantee following the global financial crisis (GFC) – that really is biting the hand that feeds you.

So, should Australian investors, taxpayers and the public be “shocked, dismayed and disgusted” as the judge suggested? Yes.

The ConversationBut recent history suggests that the largest banks will just try to tough it out before returning to their previous modus operandi. Only a royal commission into banking regulation will break this vicious circle.

Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie University

This article was originally published on The Conversation. Read the original article.