Hayne holds fire, but the banks’ day of reckoning is coming



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Putting people rather than profits at the centre of banking culture is possible, but difficult.
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Andrew Linden, RMIT University and Warren Staples, RMIT University

The evidence presented in the first four rounds of the Royal Commission into Banking and Financial Services was harrowing.

It would be a mistake to think the appalling misbehaviour uncovered so easily by the Commission was unconnected, just a few bad apples, as the banks and their supporters had been claiming.

It’s a mistake Commissioner Hayne doesn’t make in his interim report, describing the misconduct as systemic, orchestrated as a matter of corporate policy, and against the law.




Read more:
Banking Royal Commission’s damning report: ‘Things are so bad that new laws might not help’


So shocked is he about what he concludes is law-breaking sanctioned at the highest levels that he asks rhetorically whether there would be any point in new laws, given the old ones were often ignored by banks and are not enforced by regulators.

The law already requires entities to “do all things necessary to ensure” that the services they are licensed to provide are provided “efficiently, honestly and fairly”. Much more often than not, the conduct now condemned was contrary to law. Passing some new law to say, again, “Do not do that”, would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?

He makes no recommendations in his three-volume 1000 page interim report, instead drawing together a long list of questions he intends to answer in his final report, due in February.

Before then, the bank chief executives appearing in the Comission’s final round of hearings will be asked some very tough questions.

No more convivial chats

It won’t be like the convivial chats the bank executives are used to with the heads of regulators, eager to please their ministers in love with financial innovation and the concept of Australia becoming a global financial centre, a new City of London in the East.

Nor will it be like the “I’m sorry, I’ll take that on notice” parliamentary hearings the government arranged a year or two ago in an effort to fend off the Commission.

We’ve always had the evidence

For decades few have thought to ask why Australia’s big banks have been consistently among the world’s most profitable.

Certainly not shareholders who loved the returns and wanted more.

Too many middle and higher level employees were happy to take the bonuses.

Now a new treasurer, Josh Frydenberg, who wasn’t centrally involved in fending off the Royal Commission, appears to have got the message.

Whatever the criticisms are of the regulator, we should remember actually who perpetrated the wrong conduct. And that was the financial institutions themselves. So they are ultimately, and the individuals involved, ultimately the ones who must be held accountable and responsible for their actions. The regulators need to enforce the laws they have at their disposal, impose the penalties that are available to them, and in doing so we are more likely to see a culture of compliance than what we have seen.

Commissioner Hayne has framed the fundamental problem as one of greed overriding respect for the law and respect for customers.

We allowed greed to become good

Hayne asks how that could change.

We have argued with reference to AMP and IOOF that while greed might be an ever present part of the human condition, it can be suppressed or contained.

Greed-induced systemic financial crises were common before the 1940s and after the 1970s, but not during the war or in the decades immediately after the war.




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Britain’s broken corporate governance regime


The 1980s saw a sea change in attitudes to greed, brought about by financial deregulation and the popularising of the view taught in economics classes that pursuit of individual self interest was in society’s best interest.

Rules, codes and views about what constituted good governance came to be based on a theory that gave a central role to greed, maximising shareholder returns and incentivising managers.

Boards were encouraged to think that putting shareholders first was more important than following directors duties and the law.

Bureaucratically, there was an unrelenting policy preference for self-governance, light touch regulation and cooperation with wrongdoers rather than enforcement.

It’s hard to change

Relying on good character (individual virtue) isn’t enough when corporate structures and policies facilitate systematic misconduct.

It’s impossible to buy organisational culture off the shelf. It is a product of many things.

Changing culture requires more than better professional credentialing, increased financial literacy and embedding regulators inside banks. By themselves, these measures are unlikely to be systemically effective.




Read more:
Trust has to be as important as profit if banks and their boards are to regain their corporate legitimacy


We need to change the rules by which boards operate.

Containing greed requires many, many eyeballs, not just those of shareholders and consumers, but also employees, unions, customer advocacy organisations, regulators and the parliament, as well as clear and well-designed rules, active enforcement, appropriate rewards and strong consequences, and a new shared ethos of prudence, responsibility, honesty, service and fairness.

It is possible, but difficult.The Conversation

Andrew Linden, Sessional Lecturer, PhD (Management) Candidate, School of Management, RMIT University and Warren Staples, Senior Lecturer in Management, RMIT University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Three simple steps to fix our banks



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It isn’t brain surgery.
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Elise Bant, University of Melbourne

Here are three simple steps to address the widespread misconduct revealed in the interim report of the banking royal commission, arising out of research I have undertaken with my colleague Associate Professor Jeannie Paterson.

While not exhaustive, they are good places to start:

Step 1: back to basics

Commissioner Hayne is spot on when he says that simply adding more regulation is not going to do the job.

In fact, more regulation can be more damaging than helpful.

There are literally dozens of overlapping state and federal statutes that prohibit misleading or deceptive conduct, and they often use subtly but significantly different language and impose different penalties.

This “legislative porridge” splits the regulation of financial services and products in ways that defy rational justification.




Read more:
Banking Royal Commission’s damning report: ‘Things are so bad that new laws might not help’


The result is protracted and cripplingly expensive litigation to determine who is covered by what prohibition.

This plays perfectly into the hands of well-funded corporations who know that delaying tactics and the limited resources of regulators and commercial and consumer are likely to produce soft settlements, “agreed penalties” and no real pressure to change behaviour – all while profits continue to flow in.

So we need to get back to basics. Simple, overarching prohibitions contained in one or two pieces of key legislation, which apply to every trader and corporation who engages in trade or commerce. No exceptions. No carve outs. No special treatment. The same penalties and remedies. Simple, powerful and unavoidable.

Step 2: calling out deceptive conduct

For many years, the Australian Securities and Investments Commission has concentrated its relatively meagre litigation efforts on proving “misleading” conduct by corporations. This is probably because it is notoriously difficult to prove the personal dishonesty traditionally required to prove fraud (the “deceptive” part of the prohibition on “misleading or deceptive” conduct).

Part of the problem has been that corporations are artificial persons and so need to operate through directors, managers, employees and agents.




Read more:
Fees for no service: how ASIC is trying to make corporate misconduct hurt


Nailing down instances of individual personal dishonesty, intention and responsibility is often impossible.

Misleading conduct, by contract, is relatively easy to prove, because it focuses on the objective meaning of conduct, does not require proof of fault – and does not require ASIC to identify the personal intentions of individuals behind the conduct.

But, focusing on misleading conduct comes at the cost to effective regulation.

The reputational damage flowing from a finding of misleading conduct is very low.

As Commissioner Hayne has noted, corporations are quick to characterise this sort of conduct as involving “mistakes”, to apologise and to promise reform.




Read more:
Hayne holds fire, but the banks’ day of reckoning is coming


It is time to face the reality that what matters is the behaviour of corporations rather than what is in their (artificial) minds.

It isn’t brain surgery.

As the commissioner himself as noted, you don’t need legal advice to know that “charging for doing what you do not do is dishonest”. Much of the reported conduct “ignores basic standards of honesty”.

A change in focus from personal intention to objective standards of honest conduct is needed to address what the commissioner identifies as “the root causes of conduct, which often lie within the systems, processes and culture cultivated by an entity”.

Step 3: genuine punishment

The final piece of the puzzle (missing from the otherwise incisive discussion in the interim report) is to bring courts on board.

Australian courts have been very cautious in awarding penalties for misleading conduct, and give substantial weight to mitigating factors such as expressions of remorse and cooperation with regulators.

They have said repeatedly that the focus of penalties should be on deterrence rather than punishment.




Read more:
How courts and costs are undermining ASIC and the ACCC’s efforts to police misbehaving banks and businesses


Their approach may be entirely appropriate in cases where courts are dealing with human defendants facing personal ruin. But when applied to corporations, it can undermine the legitimate role of punishment in changing repeated and longstanding corporate misbehaviour.

Again, there are some simple changes to the law that could address this problem.

One is to clarify that punishment is an important aim of the civil penalties regime, required for “public denunciation” of bad behaviour and to provide effective deterrence.




Read more:
The problem with Australia’s banks is one of too much law and too little enforcement


Another is for courts to frame penalties with a strong eye to the profits amassed as a result of the breach. Often the profit earned will be larger than the damage to consumers. Misconduct cannot be allowed to make good financial sense.

Yet another (also not yet on the commission’s radar) is to seriously consider expanding private rights of redress to include additional, punitive damages in cases of serious misconduct.

Not only would this make private claims more feasible for commercial victims. The recent launch of group proceedings by Slater & Gordon shows that, when brought together, private litigants are capable of sharing the regulatory burden of keeping banks on the straight and narrow: it needn’t all be done by the Australian Securities and Investments Commission.

There are important issues to consider about the strengths and dangers of group litigation, currently the subject of review by the Australian Law Reform Commission.

But if it can be done properly, the deep pockets of banks might well meet their match in well organised teams of lawyers and litigation funders, aggressively seeking justice both in the interests of their clients and for their own financial reward.The Conversation

Elise Bant, Professor of Law, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The problem with Australia’s banks is one of too much law and too little enforcement



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bank cards.

Deborah Ralston, Monash University

Prime Minister Scott Morrison and Treasurer Josh Frydenberg moved very quickly to deliver the interim report of the Royal Commission into Financial Services to the public. It was submitted to the Governor General, tabled in parliament (out of session), and made public on the same afternoon – Friday September 28.

The three-volume report is limited to findings from the first four rounds of hearings, on consumer credit, financial services, lending to small- and medium-sized enterprises, and experiences with regional and remote communities.



So far the commission has received almost 10,000 submissions, mainly related to banking (67%), superannuation (12%), and financial advice (9%). Most address issues relating to personal finance, superannuation, or small business finance.

In receiving the interim report, Frydenberg reiterated its key message that financial institutions have put “profits before people”.

It’s about the money

According to the report, poor culture and conduct in banks have been driven by their remuneration policies, with almost every instance of misconduct being directly linked to monetary benefit.




Read more:
Banking Royal Commission’s damning report: ‘Things are so bad that new laws might not help’


The interim report is also highly critical of the regulators, painting a disconcerting picture of their determination to detect and monitor misbehaviour and enforce compliance with the law.

The Australian Securities and Investments Commission comes in for particular scrutiny, with Commissioner Kenneth Hayne noting that where the law had been broken, “little happened beyond an apology from the entity, drawn-out remediation, and an infringement notice or an enforceable undertaking that acknowledged no more than ASIC had reasonable concerns about the entity’s conduct”.

The penalties imposed were often immaterial, given the size of the institutions involved.

The letter of the law can smother its spirit

It’s hard to know how to regulate. On occasions, as with the Future of Financial Advice legislation, the spirit of the law has been lost in complexity about prescribed behaviour, and of course so-called “grandfathering provisions” which ensure commissions that began in the past can continue even though they would no longer be legal.

The interim report asks whether, rather than more legislation, the answer lies in less: in simplifying the laws to better reflect their intentions.




Read more:
Royal Commission shows banks have behaved appallingly, but we’ve helped them do it


It is something Labor had in the original version of the financial advice legalisation – an overarching obligation on advisers to act in their client’s “best interests”, an obligation the Coalition tried to remove on attaining office, arguing that specific provisions would do the job just as well.

On releasing the interim report, Frydenberg was asked where our regulators had been ineffective because they had been captured by industry or had inadequate resources.

Frydenberg replied that culture was indeed substandard, but that giving the regulators more resources would be seriously examined.

The government has already given ASIC and APRA more.

In August, ASIC received A$70 million in additional funding to strengthen supervision and give it the capability to embed its staff members inside major banks.

Earlier this year the government appointed a second ASIC deputy chairman, Daniel Crennan QC, to bolster its enforcement credentials.

The new chairman James Shipton appears to be reshaping the ASIC culture.

But that’s only the beginning of the changes we are likely to see.

It’s our turn now

Public submissions in response to the interim report are now open and are due by Friday October 26, 2018.

Two more rounds of hearings are yet to be held, with the final report due by February 1, 2019.The Conversation

Deborah Ralston, Professor of Finance, Monash University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Royal Commission shows banks have behaved appallingly, but we’ve helped them do it


Andrew Grant, University of Sydney

The term deposit has matured. Initial scepticism over the timing, scope, and overall need for a royal commission into financial services has transformed into deep concern about the culture and practices in one of our most important industries.

Malcolm Turnbull, the (perhaps not coincidentally) ex-prime minister, admitted it had been a “political mistake” to delay the royal commission by nearly two years.

None of the major banks have escaped the Commission’s ire.

Perhaps that’s because none of them have had an incentive to behave better. There’s been little financial reward for being the bank to improve.




Read more:
Banking Royal Commission’s damning report: ‘Things are so bad that new laws might not help’


Australian banks generate the second-highest returns on equity in the world, and so far none has been keen to let those returns go.

In his interim report, Royal Commissioner Kenneth Hayne pilloried them for their greed, putting profits before customers. He hinted that submissions he has not yet fully examined may uncover even more misconduct.

Conflicts in providing credit

Are loan providers offering customers what’s best for them, or what’s best for the bank?

A disproportionate share of loan products recommended by mortgage brokers working for firms affiliated with banks are produced by other firms affiliated with those banks.




Read more:
Vital Signs: for all its worth, the banking royal commission could hurt a generation of battlers


Mortgage brokers currently help originate more than half of all new loans. They operate under an opaque commission structure with rewards that are unlikely to align with the customer’s best interests.

A change to up-front, transparent commissions should be mandated, and enforced by the Australian Securities and Investments Commission.

Irresponsible Lending

ASIC guidelines merely require banks to offer customers products that are “not unsuitable” for their needs.

The guidelines allow banks to do things such as using rough guides for household expenditure rather than individually examining the circumstances of each borrower.

Some have argued that this is a better practice than making inquiries of borrowers, who are likely to exaggerate their ability to repay loans. But it runs the risk of constituting a dangerous form of financial advice.




Read more:
How ‘liar loans’ undermine sound lending practices


If a loan is recommended to a customer, they might infer from that the bank has deemed it as being appropriate for their needs, rather than merely “not unsuitable”.

In several instances detailed to the commission, customers borrowed as much as they have been to allowed by banks, only to later blame the banks for not protecting them from themselves.

Banks also argue that there is a trade-off between obtaining accurate documentation and processing loans quickly.

Reformed?

Inadequate internal processes have led to customers being offered products that they can’t use, such as financial advice for dead people, or insurance that’s impossible to claim against.

These failings have been rightly condemned by the commissioner, even if they might not have affected a significant portion of the banks’ clients.

Ahead of the report, the banks have been trying to pre-empt its findings by arguing that their primary focus has moved from “sales” to “service”.

They say their internal processes have already improved, and bad apples weeded from the staff.

It’s our fault, too

Commissioner Haynes said that one obstacle to greater consumer power is an alarming lack of financial literacy among consumers, which has also been unearthed by the commission.

Banks exploit our loyalty, our inertia, and our inability to negotiate.

They also help exacerbate these things, by offering too many products that are too hard for the average person to compare.




Read more:
Financial literacy is a public policy problem


If we educated ourselves, many of the problems identified by the Royal Commission would disappear.

Making public the actual interest rates paid on our loans, the fees paid to advisers and brokers, and consumer credit scores would help as well.

But it will only help us if we are willing to help ourselves.

The community rightly expects a lot from banks, but a second thread running through the Royal Commission’s interim report is that but we need to expect more from ourselves as well.The Conversation

Andrew Grant, Senior Lecturer, University of Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Banking Royal Commission’s damning report: ‘Things are so bad that new laws might not help’


Peter Martin, The Conversation

Royal Commissioner Kenneth Hayne has identified “greed” as the key reason banks and other financial institutions repeatedly broke the law, along with an inability to manage, and repeated decisions by the Securities and Investments Commission and the Prudential Regulation Authority not to properly punish them.




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Three billion per year. How the financial system rips us off


The three-volume interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, released today, concludes that Australia’s banks have built every part of their operations around selling, to maximise profits, at the expense of serving their customers’ needs.

The report says:

Selling became their focus of attention. Too often it became their sole focus of attention. Products and services multiplied. Banks searched for their “share of the customer’s wallet”. From the executive suite to the front line, staff were measured and rewarded by reference to profits and sales… How else is charging continuing advice fees to the dead to be explained?

The report reaches damning conclusions about the management systems in place at the Commonwealth Bank and the National Australia Bank, saying they were the only two organisations unable to furnish a proper list when asked about the misconduct they had been aware of over the previous five years:

Taken together, the course of events and the explanations proffered can lead only to the conclusion that neither CBA nor NAB could readily identify how, or to what extent, the entity as a whole was failing to comply with the law.

If that is right, neither the senior management nor the board of the entity could be given any single coherent picture of the nature or extent of failures of compliance; they could be given only a disjointed series of bits of information framed by reference to particular events.

It says when misconduct was revealed, it either went unpunished or hurt the perpetrators little:

The corporate regulator ASIC rarely went to court to seek public denunciation of what had been done. The prudential regulator, APRA, never went to court.

Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable “concerns” about the entity’s conduct.

Infringement notices imposed penalties that were immaterial for the large banks. Enforceable undertakings might require a “community benefit payment”, but the amount was far less than the penalty that ASIC could have properly asked a court to impose.

Commissioner Hayne says in the report that it may be pointless to introduce new laws designed to achieve what the existing laws did not:

The law already requires entities to “do all things necessary to ensure” that the services they are licensed to provide re provided “efficiently, honestly and fairly”. Much more often than not, the conduct now condemned was contrary to law… Passing some new law to say, again, “Do not do that” would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?

What is needed is better enforcement in order to ensure that banks and other financial institutions apply basic standards of fairness and honesty “by obeying the law, not misleading or deceiving, acting fairly, providing services that are fit for purpose, delivering services with reasonable care and skill, and, when acting for another, acting in the best interests of that other?”




Read more:
Vital Signs: for all its worth, the banking royal commission could hurt a generation of battlers


Commissioner Hayne says the basic ideas are very simple.

That means there is a case for the laws being made even simpler rather than more complex to reflect the ideas better.

Receiving the report, Treasurer Josh Frydenberg said if the regulators
enforced the laws but they had at their disposal and imposed the
penalties they had available, banks were more likely to comply with the law.

But he said whatever the criticisms of the regulator, it was important to remember who perpetrated the misconduct.

“That was the financial institutions themselves,” he said. “They are
ultimately, and the individuals involved, ultimately the ones who must
be held accountable and responsible for their actions.”




Read more:
There is nothing sacrosanct about corporate culture; we can and must regulate it


The chief executive of the Australian Bankers Association, Anna Bligh, described the report’s findings as “shocking”.

“Our banks have failed in many ways – failed customers, failed to obey
the law and failed to meet community standards. And all of these
failures are totally unacceptable,” she said.

“Too many customers have been hurt and it has to stop.”

“Australians have every right to expect the world’s best
banks. It is clear today that as an industry we have failed to deliver
that.




Read more:
Embedding regulators in banks can help change cultures of wrongdoing, despite the risks


“Make no mistake, today is a day of shame for Australia’s banks.”

“Having lost the trust of the Australian people, we must now do whatever it takes
to earn that trust back. To move from a selling culture
to a service culture, there is much more work to be done in every
bank. But every bank is determined to find the problems, to fix them
and to pay back every penny.”

The interim report released on Friday examined only the behaviour of the banking, financial advice and wealth management industries. An entire volume details case studies of misconduct.

The Commission’s final report, which will also cover the superannuation and insurance industries, is due on February 1.The Conversation

Peter Martin, Editor, Business and Economy, The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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.

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.




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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:
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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.

After damning the Commonwealth Bank’s management, regulators want the bank to fix itself


Helen Bird, Swinburne University of Technology

A report on the Commonwealth Bank’s governance, culture and accountability has stripped away the bank’s delusion that it is well run and a model of good governance.

The report by the Australian Prudential Regulation Authority (APRA) is a damning indictment of every aspect of CBA management, from the board of directors to executive management and even the lower levels of the bank. However, APRA has done little more than rap CBA on the knuckles.

Responsibility for fixing up CBA has been turned over to the bank itself. More could have been done, including placing conditions on CBA’s banking licence and removing board members and executives.

APRA has applied a A$1 billion add-on to CBA’s minimum capital requirement. These are the financial assets that the Commonwealth Bank is required to hold to ensure a stable banking system.

APRA has also accepted an enforceable undertaking from the CBA. This is essentially an agreement under which CBA accepts the report’s findings (but does not expressly agree with them) and promises to prepare a plan to respond to its recommendations.

There are indications in the APRA report that there will be further investigations of the conduct of bank employees.

What penalties?

The A$1 billion add-on to CBA’s capital requirements is not a penalty, despite commentary to that effect. APRA can and does require top-ups of this kind from time to time under the Banking Act to ensure security and confidence in the banking sector.

Given the Commonwealth Bank’s size and leading role in the sector, the additional capital requirement is prudent but hardly controversial. The funds will be returned to CBA when it completes the actions proposed by the enforceable undertaking.

At best, the capital requirement is a temporary but not significant inconvenience for CBA. It represents a mere 0.103% of its total assets as of the last financial year

That leaves the CBA enforceable undertaking as the principal outcome from the APRA report.




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The enforceable undertaking is mostly a procedural document. For instance, CBA must submit its remedial action plan by June 30 2018.

It must have a clear and measurable set of responses and a timetable for each response, and must nominate a person responsible from the CBA executive team. CBA must also appoint an independent reviewer, approved by APRA, to report to APRA on compliance with the enforceable undertaking and the completion of items in the plan. CBA must report separately on executive pay issues.

In essence APRA has handed over the responsibility for cleaning up the management mess found at the CBA to the bank itself, despite finding that it is culturally unfit to properly manage itself.

Why should anyone take comfort from that arrangement?

APRA’s report also makes clear that the problems at the Commonwealth Bank do not stem from one specific issue. The problems affect the whole organisation of more than 45,000 employees with A$967 billion in assets.

An independent reviewer will vet what is being done and report on its success or otherwise to APRA. But that report will be made to APRA, not to the general public. We may never know what measures the bank implements as APRA has no obligation to disclose anything.

What else could have been done?

An enforceable undertaking can save the regulator the time, cost and uncertainty of taking legal action, as well as enable it to craft specific remedial actions to fit the circumstances.

But there is very little tailoring in the Commonwealth Bank’s enforceable undertaking. APRA has opted to wait and see what remedial action the bank comes up with. The regulatory touch is so light that even describing it as featherweight would be an exaggeration.

APRA could have done much more than it did. Banks require a licence and APRA is empowered by Banking Act to place conditions on these licences that restrict or limit how banks can operate.

APRA could have used this power to place immediate restrictions on CBA’s business practices, including on the size and calculation of executive compensation. One of the major findings of APRA’s report is that CBA executive compensation schemes did not provide sufficient incentives for senior executives to account for risk in their decision-making. Certainly, the criticisms of CBA management in the APRA report are sufficient to warrant this kind of action.




Read more:
APRA and ASIC have the legal power to sack bank heads, but they need willpower


APRA has the power to remove a bank director or senior manager if the person does not meet one or more of the criteria for fitness and propriety. That APRA did not do this may be because there have already been resignations and new directors at the Commonwealth Bank.

APRA should have queried whether these changes were sufficient. Perhaps this is part of the wait-and-see approach implied in the enforceable undertaking.

The ConversationThe APRA report highlights systemic problems in Australia’s leading company and premier bank, including a culture of complacency, defensiveness, insularity and overconfidence. But for all of that, and despite the financial and emotional costs borne by the Australia community, APRA’s response appears to be no more than “wait and see”.

Helen Bird, Course Director, Master of Corporate Governance & Research Fellow, Swinburne Law School, Swinburne University of Technology

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.