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.

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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.




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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.




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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.

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:
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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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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.

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.

Banking royal commission will expose the real cost of bad behaviour


Jenni Henderson, The Conversation

Australia’s federal government has announced a royal commission into the financial services sector, following a letter from the big four bank heads supporting the move.

The commission will run for 12 months, delivering a final report in February 2019, at an estimated cost of A$75 million. It will explore not only banking but also the wealth management, superannuation and insurance industries.

Prime Minister Malcolm Turnbull had previously denied the need for a royal commission but said in announcing the move that political uncertainty had forced the decision.

“Uncertainty…over the potential for such an inquiry is starting to undermine confidence in our financial system. And as a result, the national economy. And that is precisely what we have always been determined to avoid,” he said.

The commission should be allowed to go on for longer, for closer to three years, because the 12-month period is the bare minimum, says Andrew Schmulow, a senior lecturer in the faculty of law at University of Western Australia.

“If the commission doesn’t find other skeletons in the closet, I will eat my hat,” he adds.

Schmulow believes there will be more revelations to come from the commission and that the banks will have to answer for covering up these as well.

“You can’t have this many scandals on this kind of scale without a corporate culture that is rotten to the core,” he said.

The royal commission won’t award compensation but will have the powers to compel the banks and other institutions to present documents and witnesses.

Earlier in the year, in an attempt to fend off a royal commission, the government announced a raft of new measures in the 2017 Federal Budget to address concerns surrounding the finance industry.

Timeline of Australian bank scandals

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Timing of the announcement

Malcolm Turnbull defended the delay in calling the royal commission due to these measures.

“There would’ve been legitimate calls to delay any new measures until the findings of the inquiry were handed down. And that is one of the reasons why we have not established a banking inquiry to date,” he said.

Opposition leader Bill Shorten said the timing of the commission called into question the government’s credibility and said that Australians had every right to be cynical.

“It says everything about Turnbull’s values and priorities that he only agreed to Labor’s Royal Commission when the banks told him he had to. He ignored the pleas of families and small businesses, he rejected the words of whistle-blowers. But when the big banks wrote him a letter, he folded the same day.”

Turnbull’s move comes after the possibility of a Nationals bill on the same issue. Andrew Schmulow, said it was “stage managed”, designed to regain control on the terms of reference and the length of the commission.

“Turnbull either losses control or keeps a modicum of control. It’s one or the other,” Schmulow said.

Costs of a banking royal commission versus bad behaviour

The bank heads, in their letter to the government, described the deliberations on the commission as “costly and distracting”. But the real cost is to the economy and is a direct result of the bank behaviour, Schmulow said.

The funding costs of the banks are based on a risk profile which is underwritten by taxpayers through an implicit bank guarantee, which will only be affected if the government itself suffers a credit downgrade, Schmulow said.

Mum and dad investors are often brought up as having a vested interest in the banks’ strength through their superannuation. But Schmulow says a small portion of super is invested in the banks but it’s also invested in other things in the economy as well. He says investors’ savings are more likely to be hurt by the impact of the behaviour of the banks in other areas of the economy.

“They are already making so much profit off every individual and company that borrows money we have the most profitable banking sector in the world, you only get that by gouging,” Schmulow says.

Banks have traditionally prioritised shareholders and investors have had a superb return on equity said Elizabeth Sheedy, associate professor of financial risk management at Macquarie University.

But she said the community seemed to be wanting the balance to shift more in favour of the customer rather than returns and this raised fundamental questions about bank governance.

“Should remuneration be based on the metrics of concern to shareholders (profits, return on equity) or metrics of concern to customers (lack of complaints, value for money)? These fundamental questions are not going to be resolved in the ordinary course of business and a far-reaching inquiry seems to be a way that they can be thoroughly aired and debated,” Sheedy said.

“It seems that the community is prepared to pay that price in order to create a better deal for customers,” she added.

The commission won’t examine regulators like the Australian Securities and Investments Commission (ASIC) or the Australian Prudential Regulation Authority (APRA) who have recently been given more power to hold the banks to account.

The regulators have been criticised in the past for their inaction on scandals in the banking and financial sectors. But Andy Schmulow said the royal commission would show up their inaction and raise serious questions about who was watching the watchdogs.

Eliza Wu, associate professor in finance at the University of Sydney says the banking sector’s exposure to the real estate market and the lack of regulatory oversight of the fintech and peer-to-peer lending sectors, were a worry.

The Conversation“The heavily disrupted world of banking and finance is evolving very quickly and the regulators and often industry operators themselves, exist under an unforgiving regime of catch-up,” she said.

Jenni Henderson, Section Editor: Business + Economy, The Conversation

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

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


Kevin Davis, Australian Centre for Financial Studies

It does seem anomalous that the major banks have now become supporters of the royal commission into financial services, given they have been the principal targets. But the alternatives are probably less palatable, particularly if the banks think that all past major issues of misconduct and immoral behaviour have already been brought to light. And the broadening of the terms of reference beyond banking may dilute the focus on the banks themselves.

The banks argue that ongoing speculation and uncertainty are creating unnecessary costs and distractions for them, and that is most likely the case. Even if the major banks were to spend A$100 million in dealing with the royal commission that is less than 0.3% of the annual profits of the majors – so it has little impact on shareholder returns.

And with annual interest expenses in the order of A$65 billion, a cost of A$100 million or so could be quickly offset by improvements in bank borrowing costs from resolution of uncertainty. Whether the government spending a similar sum of taxpayer money on a royal commission is worthwhile is another matter.

Terms of reference too broad

The draft terms of reference of the royal commission ask it to focus primarily on three issues involving financial service entities. One is the essentially legal issue of identifying past cases of misconduct in violation of regulations and laws, as well as what might be termed “misbehaviour” (legal but immoral or unethical or unfair activities).

One apparent omission in the draft terms of reference relates to credit – and lending has been a major problem area in the past. While bank lending is covered, the definition of financial services entities to be considered does not appear to include those (such as mortgage brokers and some lenders) who only require an Australian Credit Licence and not an Australian Financial Services Licence (AFSL). Likewise, some financial services entities are exempt from the AFSL requirement and that may prove problematic if the draft terms of reference are not amended.

The boards and senior management of the banks (and other entities) no doubt hope there are no hidden skeletons in the closets which may be uncovered to shock them, and that revisiting the known past problems will be a case of yesterday’s news.

Although the term “misbehaviour” strays into grey areas of defining consistency with “community standards and expectations”, identifying past misconduct is a task suitable for a royal commission. But it shouldn’t be needed. ASIC and other regulators have adequate powers (if not adequate resources) to identify and prosecute misconduct. The adequacy of those powers is also a topic for the commission.

The second major task of the royal commission is to identify whether misconduct and misbehaviour can be attributed to poor culture and governance practices. This is particularly problematic.

What evidence is to be used to show, beyond reasonable doubt, that there is a causal relationship from the amorphous, non-quantifiable, concepts of culture and governance to specific instances of, or general proclivity towards, misconduct? There’s also undoubtedly many positive behaviours and outcomes occurring within these institutions they could point to, which may imply that, on balance, the arrangements are not bad.

So, the third question the commission then faces, is what changes might be made to reduce these problems. Here, the danger is that it involves a step into the unknown – what would be the likely outcomes under any proposed changes.

In its task of making recommendations, the commission faces a number of other difficulties. There is a raft of regulatory changes in progress following on from the 2014 Financial Services Inquiry and other government policy initiatives.

Also relevant is the financial technology or “fintech” revolution creating new business models, products and services, and methods of customer interaction with financial services entities. These create potential for new types of misconduct and misbehaviour. How relevant lessons the royal commission draws from history will be for this new world is unclear.

The ConversationThe banks will no doubt be pleased that the scope of the royal commission encompasses most of the financial services sector rather than focusing primarily upon them. In particular, the reference to superannuation fund trustees and use of member funds would seem to bring the controversial issue of fund governance right to the fore and will partly distract attention from the banks.

Kevin Davis, Research Director of Australian Centre for FInancial Studies and Professor of Finance at Melbourne and Monash Universities, Australian Centre for Financial Studies

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