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.

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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.

Grattan on Friday: Nationals force reluctant Turnbull to dress in Shorten’s banking clothes


Michelle Grattan, University of Canberra

Only a few months ago Bill Shorten would have thought that if he won the election he’d be delivering same-sex marriage and a royal commission into the banks early in his government.

Now Malcolm Turnbull is bringing us both – in each case, his hand forced by a (different) group of rebel backbenchers.

The marriage bill, which will go through the House of Representatives next week, has some disgruntled conservatives arcing up after the Senate rejected their amendments, but Turnbull will mark it down as one of the achievements of his prime ministership.

It’s another matter with the banking royal commission. Seldom is a government’s impotence and frustration as much on display as it was when Turnbull finally capitulated and announced on Thursday that the government would establish the inquiry it has so long resisted and denounced.

For quite a time political hardheads had been arguing the government should accept the inevitable and “own” an inquiry. Well, now it does – and what a reluctant owner it is, miserable and bitter.

Turnbull and Treasurer Scott Morrison lamented that setting up the royal commission, which covers superannuation and insurance providers as well as banking, was “regrettable but necessary”, driven by the political circumstances in which they found themselves.

In the end, there wasn’t a choice.

The bad result for the Liberal National Party in Saturday’s Queensland election strengthened the hand and determination of the rebel federal Nationals, intent on pushing Barry O’Sullivan’s private senator’s bill for parliament to set up a commission of inquiry.

Two lower house Nationals, George Christensen and Llew O’Brien, were willing to cross the floor to give the bill the numbers there. In the background Nationals leader Barnaby Joyce, on the New England campaign trail, was not resisting the flow. Joyce judged that if the issue reached the Nationals’ partyroom, the commission would get support.

The Nationals also knew an inquiry had strong public backing, a point underlined by an Essential poll this week showing 64% wanted a royal commission. That included 62% of Coalition voters.

The banks themselves came to accept that opposition had become too costly. In their Thursday letter to the government (flagged late Wednesday) advocating “a properly constituted inquiry”, the chairmen and chief executives of the four major banks said it was “in the national interest for the political uncertainty to end.

“It is hurting confidence in our financial services system, including in offshore markets, and has diminished trust and respect for our sector and people,” they wrote.

As Australian Bankers’ Association chief executive Anna Bligh, a former Queensland Labor premier, put it bluntly, it was too a big a risk to have a inquiry where the terms of reference and choice of commissioner were in “the hands of minor parties and fringe elements of the parliament”.

On Tuesday and Wednesday, O’Sullivan, Turnbull and senior ministers sparred over the issue. O’Sullivan, a tough ex-cop from Queensland, says the government didn’t try to get him to drop his bill. Rather, it was attempting to “manage time”. He knew it was working on something, though he didn’t know what.

The ministers wanted to find out when his bill would be ready for the Senate. Some say O’Sullivan put it on pause. He denies this, saying his negotiations with the Greens and others and the preparation and printing processes pushed it back to early Thursday, which helped the government.

Cabinet met first thing that morning – Turnbull’s announcement was at a 9am news conference. The bill had done its job without having to make an actual appearance in parliament.

The government’s perennial arguments – until Thursday – against a royal commission have included that it would undermine international investor confidence in Australia’s banks and that an inevitably prolonged inquiry would have delayed the reforms the government has introduced or proposed.

The first proposition will be tested now that the inquiry is to proceed. It is doubtful, however, that overseas investors are as easily frightened as the government has been suggesting. They’re surely sophisticated enough to understand the fundamentals of our banking system, and those are sound.

The government has maintained its measures are adequate to address the issues but O’Sullivan and other proponents of an inquiry insisted they would not deal with the dimension of “culture”. The banks’ “profit before people” attitude, as Nationals senator John Williams puts it.

A circuit-breaker is needed to restore public confidence in banks. But the material to emerge during the inquiry may lower that confidence further before there is any sign of its restoration.

The royal commission will be led by a former or serving judicial figure and will be asked to deliver a final report by February 1, 2019, with an interim report before that. The terms of reference will be tight: “it’s not going to be an inquiry into capitalism”, Turnbull said.

The Nationals’ brutal power play may deepen tensions between Liberals and the junior Coalition partner. Not that the Nationals care that much.

Christensen didn’t hesitate to rub salt into Turnbull’s open wound. “I just don’t understand why it took a number of National Party backbenchers to drag the prime minister kicking and screaming to this decision,” he said, in a cutting but pertinent observation.

O’Sullivan was more diplomatic, speaking of Turnbull “making his own journey”. A journey, it might be said, under armed escort.

Meanwhile, the Nationals were relishing shades of the 1937 royal commission into the banking system. As a Senate report of a few years ago recounted:
“At the 1935 election the Country Party (and the Labor Party) had promised an inquiry and when the conservative government led by Joseph Lyons was forced to form a coalition with the Country Party, he agreed to establish an inquiry”.

If it had responded much earlier to the pressure for an inquiry the government could have hoped to reap credit for appreciating the depth of public complaints and concerns.

As it is, with its grudging decision through gritted teeth, it doesn’t seem to be looking for plaudits.

But the political reality is that by establishing the royal commission it has neutralised one of Shorten’s issues.

The ConversationFor all that, it could be a Shorten government that deals with the commission’s ultimate recommendations. By the time the final report rolls round, an election will be imminent, assuming the royal commission runs on time and the government runs full term.

https://www.podbean.com/media/player/hdjfk-7dce11?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0

Michelle Grattan, Professorial Fellow, University of Canberra

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

Turnbull talks with rebel National on banks


Michelle Grattan, University of Canberra

Malcolm Turnbull and senator Barry O’Sullivan have discussed the rebel National’s private senator’s bill for a commission of inquiry into the banks and other financial institutions.

As the stand-off continues over an inquiry, Turnbull on Tuesday publicly reaffirmed that “we are not going to establish a royal commission”.

But behind the scenes Turnbull appears to be seeking some resolution of the impasse, which could lead to his hand being forced.

It is believed he is due to have a further discussion with O’Sullivan after the bill is printed.

O’Sullivan refused to confirm Tuesday’s meeting.

The bill is now considered to have the numbers to pass not just in the Senate but in the House of Representatives as well. Two lower house Nationals, George Christensen and Llew O’Brien, are supporters, although O’Brien has cast his backing in terms of being “quite likely” to vote for it.

Nationals leader Barnaby Joyce, who is fighting a byelection in New England to get back into parliament, has indicated he is very willing to have the bank inquiry issue considered by the Nationals’ partyroom, and has signalled he is relaxed about the outcome. The O’Sullivan bill will be discussed there on Monday.

If the Nationals as a party moved to support an inquiry, Turnbull would be deeply embarrassed.

O’Sullivan was inundated with suggestions for fine-tuning after circulating his draft bill, and it has taken some time for these to be dealt with and a final version to be sent to the parliamentary draftsman.

Turnbull, campaigning in Bennelong for the byelection in that seat, said the government had been concentrating on “positive steps, real reforms right now”.

“We have put more money into the regulators to give them stronger teeth and more effective powers. And of course we are setting up the one-stop shop, the Australian Financial Complaints Authority, which will mean that people will have one place to go to for help and assistance with complaints and concerns with their financial service providers.

“We are constantly working to ensure that the cultural change in the banks occurs and we are getting strong support for that,” he said.

“Our focus is on results. It is on action. That is why we have not supported a royal commission.”

Turnbull argues that a royal commission would take a very long time and delay getting results.

But O’Sullivan has maintained that what is fundamental is achieving cultural change and this won’t happen without a bright light being shone on the way banks and other institution have operated.

The commission proposed in the O’Sullivan bill is one that would be set up by parliament and report back to parliament. A royal commission is set up by the executive and reports to the executive.

The ConversationEssential Media, in a poll published on Tuesday, reported 64% supported holding a royal commission into banking and the financial services industry and 12% opposed. Support among Labor voters was 72% – among Coalition voters it was 62%.

https://www.podbean.com/media/player/nqtdd-7bf599?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0

Michelle Grattan, Professorial Fellow, University of Canberra

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

Turnbull backed against the wall by rebel Nationals on bank inquiry


Michelle Grattan, University of Canberra

Prime Minister Malcolm Turnbull and Treasurer Scott Morrison appear to have become hostages to rebel Nationals determined at all costs to secure a commission of inquiry into the banks.

On Monday a second federal National, Llew O’Brien, from Queensland flagged he is likely to cross the floor in the House of Representatives to support the private member’s bill sponsored by Queensland Nationals senator Barry O’Sullivan to set up a commission of inquiry that would investigate a broad range of financial institutions.

O’Brien, who has inserted an extra term of reference to protect people with mental health issues from discrimination, said “I like what I see” in the proposed bill. But he added that he would respect his party’s process. The bill is due to go to the Nationals’ partyroom on Monday.

The bill, which has the numbers to get through the Senate, is supported in the lower house by Queensland MP George Christensen, who after Saturday’s Queensland election apologised to One Nation voters for “we in the LNP” letting them down.

Backed by Christensen and O’Brien, together with Labor and crossbenchers, the bill would have the required 76 votes to enable its consideration by the lower house – although when it can get to be debated there is not clear.

In a discussion last week – later leaked – cabinet considered whether the government should adopt a pragmatic position and give in to calls for a royal commission. But Turnbull and Morrison have refused to do so.

Now the cabinet looks like it will have to decide whether to own the process of an inquiry or have it forced on it.

If Monday’s Nationals’ party meeting endorsed the bill, that would escalate the situation dangerously for the government, unless it had softened its opposition to an inquiry. It would amount to the minor Coalition partner formally rejecting a government position.

Cabinet would have to back down, or find some other way through.

As the crisis over the banking probe deepens for the government, there is currently no-one with the authority or availability within the Nationals to manage the situation.

Barnaby Joyce remains leader but he’s absorbed in Saturday’s New England byelection, which is his path back into parliament. Senator Nigel Scullion is parliamentary leader but has little clout to curb the determined rebels.

With the commission push gaining momentum there is also less desire from some senior Nationals to fight it. Joyce is said to be relaxed about having a banking inquiry, which would be popular among voters and could be chalked up as a win for the Nationals.

The election loss in Queensland has strengthened the federal Nationals’ determination to pursue brand differentiation.

O’Sullivan has repeatedly referenced the example of Liberal Dean Smith’s use of a private member’s bill to pursue the cause of same-sex marriage, arguing he is following Smith’s pathway.

But there are still divided opinions within the parliamentary party about the bank probe. Resources Minister Matt Canavan, a member of cabinet, on Monday reaffirmed his opposition to a royal commission.

Joyce is likely to attend Monday’s party meeting although he will not be formally back in parliament by then.

Nationals are not clear whether they will elect their new deputy on Monday to replace Fiona Nash, who was ruled ineligible by the High Court because she had been a dual British citizen when she nominated. There is some speculation that this might be delayed to give aspirants time to lobby.

If there is no deputy leader chosen on Monday, it would mean that the minor party would be literally leaderless on the government frontbench in the House of Representatives. Infrastructure Minister Darren Chester would be the most senior National sitting behind Turnbull in Question Time.

Christensen on Monday launched a website with a petition seeking signatures for a banking inquiry.

“Misconduct is not in the ‘past’,” he says on the site. “It is not being fixed by the industry to a standard acceptable to the community. Although positive steps are being made by government reforms, gaps still exist.

“Enough is enough … unless the government acts to establish a royal commission, I will be acting before the end of this year to vote for a commission of inquiry into the banks.” The site also invites people “bitten by the banks” to “tell your story”.

The ConversationA commission of inquiry differs from a royal commission in being set up by and reporting to parliament, rather than being established by and reporting to the executive.

https://www.podbean.com/media/player/nqtdd-7bf599?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0

Michelle Grattan, Professorial Fellow, University of Canberra

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

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



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

Pat McConnell, Macquarie University

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

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

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

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

Little contrition

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

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

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

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

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

The agreement between ASIC, NAB and ANZ stipulates that

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

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

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

Why did they pursue the court cases?

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

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

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

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

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

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

Pulling no punches

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

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

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

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

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

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

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

It’s time for a royal commission into banking regulation


Pat McConnell, Macquarie University

The handling of recent financial scandals show that regulators are confused about what they do, or should do. And as a result the regulation of the financial system, which is vital to a strong functioning economy, is just not working effectively.

We can see the problem in the recent testimony to the House Economics Committee. Recounting the sequence of events that led the Commonwealth Bank to inform regulators of the alleged breaches of money-laundering legislation, CBA Chair Catherine Livingstone said:

We were having board meetings at the time I was being called to Canberra by the Treasurer. When the board meeting, which went over multiple days, finished, which was lunchtime on the Wednesday, I immediately phoned the other two regulators, ASIC and APRA.

This raises a raft of questions. Having known about the allegations of money laundering since 2015, why did CBA not inform the regulators until August 2017? Why did the treasurer warn CBA before CBA talked to the two regulators? When did the Treasurer first hear of the money-laundering breaches? And why did the treasurer not instruct AUSTRAC (an agency of the Attorney General’s department) to inform ASIC and APRA?

In a previous parliamentary hearing, Greg Medcraft, Chairman of ASIC, had said:

I met two days before with the chairman of the Commonwealth Bank, the chair of risk and the chair of the audit committee… There was no mention of what happened. Then I saw the announcement and, about a week later, the chair called me in to apologise. Timeliness and transparency are big issues in this one

So, either ASIC and/or APRA were aware of the allegations of money laundering at CBA and took no action until prompted by the treasurer, or the communications between the various agencies of government are not working as planned. Either way, this is no way to regulate a modern financial system.

Even more regulatory confusion

Just as he is due to leave his role as head of ASIC, Greg Medcraft managed to end two high profile cases with modest wins.

Both ANZ Bank and NAB have settled with ASIC for their parts in manipulating the BBSW intereset rate benchmark. Although the settlement remains to be approved by the Federal Court.

Westpac remains the hold out, and the prosecution’s case has opened in the Federal Court.

But in the euphoria at ASIC, a niggling question remains – what about the Commonwealth Bank?

For some time, Medcraft has warned that action against CBA had not been ruled out and that information was being gathered. Recently Medcraft confirmed that the regulator had “plenty of time” to take action against CBA.

This also raises a number of questions. Not least why ASIC has not filed claims against CBA or announced that there would be no action taken against the bank. If CBA has no case to answer then ASIC should come out and exonerate the bank and relieve its long-suffering shareholders.

But if CBA has even a minor case to answer, and the regulator has held off hoping that the bank would settle without going to court, then ASIC may have been much too clever for their own good.

As a result of a shareholder action following the alleged money-laundering scandal, ASIC is now looking at whether the CBA board “complied with continuous disclosure laws when it decided not to alert investors to the suspicious behaviour”.

This leaves ASIC in an extremely difficult position – looking at a possible failure to disclose the money-laundering scandal at CBA, while at the same time hinting that CBA may have done the same thing with BBSW.

But ASIC is not the only regulator to be operating in the dark. The latest Banking Executive Accountability Regime (BEAR) legislation only adds to the confusion on how best to regulate financial services.

When questioned in recent Senate Estimates about the regulatory impact statements that have been done for new BEAR legislation, Helen Rowell, deputy Chair of APRA, replied that she personally had “not seen them; I couldn’t say whether anyone else within APRA has seen them”.

This is despite the fact that APRA has been given an extra A$40 million over four year to handle the new legislation – for what, and where did this figure come from?

Again, this is no way to regulate a banking system. The confusion around what regulators do and how they do it, must be sorted out.

Where next?

The most obvious answer to clearing up this mess is to initiate a royal commission that looks specifically at banking regulation. In particular, what form a modern banking regulation system should take; which regulators should do what; what the responsibilities of parliament, ministers and regulators should be; and how regulators should share information and tackle common problems (such as banking culture).

Such a royal commission should concentrate on clearing up issues of regulatory philosophy, structure, legal requirements and administration. Whether or not there is an all-purpose banking royal commission, the failures in the current system have to be remedied.

Of course, the government has only got itself to blame for getting in this mess.

The government’s own Murray Inquiry into the Financial System made a recommendation that could have helped. The inquiry recommended the establishment of a new Financial Regulator Assessment Board (FRAB), which would:

advise government annually on how financial regulators have implemented their mandates. Provide clearer guidance to regulators in Statements of Expectation and increase the use of performance indicators for regulator performance.

Sounds sensible? Not to the government, as it chose to accept all of the major recommendations of David Murray’s inquiry except for this one.

And, instead of having one professional body that looks at the performance of regulators, there has been a nonstop procession of “independent” inquiries, by banks themselves, the banking industry and even regulators. No big picture, just a patchwork of unconnected recommendations. And undoubtedly more to come.

The ConversationAn opportunity missed.

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

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

Allegations against the CBA show the need for a Royal Commission into the banks


Thomas Clarke, University of Technology Sydney

The Commonwealth Bank is facing another scandal as the Australian Transactions Reports and Analysis Centre (AUSTRAC) launches civil proceedings accusing the bank of being complicit in money laundering.

This exposes a deeply worrying prospect, that the Australian public are vulnerable to crime and terrorism directly funded through the Australian banking system.

AUSTRAC alleges CBA breached the Anti-Money Laundering and Counter-Terrorism Financing Act (2006) 53,700 times since 2012, where transactions were not reported by the bank, or reported too late. The bank faces a potential penalty of A$18 million per breach, which could amount to billions of dollars.

According to AUSTRAC, criminals deposited cash, amounting to tens of millions of dollars, over a period of two years in intelligent deposit machines where it was automatically counted and credited instantly to the nominated recipient account. The funds were then available for immediate transfer to other accounts both domestically and internationally.

In their evidence AUSTRAC details how four identified criminal syndicates were able to readily use CBA ATMs to breach the A$10,000 transaction threshold on 1640 occasions amounting to A$17.3 million. A total of A$625 million of suspicious transactions flowed through these CBA ATMs.

CBA’s response to these serious allegations is that it reports 4 million transactions to AUSTRAC per year contributing to the effort to “combat any suspicious activity as quickly and efficiently as we can.” The bank insists all key personnel have been trained in compliance with the Money-Laundering Act. The CBA acknowledges there was a software fault with a number of their ATMs which allowed these transactions to take place, but apparently this took several years to fix.

Unfortunately this response in the circumstances only provokes further questions.

Regulators asleep at the wheel

What this really shows up is the government’s “light touch” regulatory approach which translates into soft touch regulation. It seems regulators in Australia are too frightened to take action even when there is mounting evidence of illegality.

AUSTRAC itself did not launch any proceedings under the Anti-Money Laundering and Counter-Terrorism Financing Act until 2015. This followed a lengthy report of the Financial Action Task Force which concluded:

[AUSTRAC’s] graduated approach does not seem to be adequate to ensure compliance.

Since then AUSTRAC has taken action against Tabcorp on a money-laundering case which reached a A$45 million settlement in February 2017. This contrasts with far larger fines imposed on international banks for money laundering including a US$1.2 billion fine for HSBC and a US$262 million fine for Standard Chartered in 2012 from the US Justice Department.

At a US Senate hearings in 2012, a HSBC chief compliance officer famously quit his post on the spot in answering money laundering allegations, implying he could not defend the indefensible.

The Australian banking industry has faced minimal pressure to reform compared to other countries, where the restructuring of the banks is progressing. Australia has seen a succession of inquiries however each has focused on particular aspects of the banks functioning and proposed specific reforms.

It will require a Royal Commission into the Australian banks to examine the structural and systemic failures of the banks. The banks have become the main providers of not only retail but investment banking, insurance, superannuation and financial advice, and this deserves critical scrutiny.

If the AUSTRAC allegations against the CBA are proven in the Federal Court, this matter is of a different order of magnitude to earlier problems. It suggests a degree of irresponsibility which is unacceptable in major financial institutions.

It also suggests it’s deeply embedded in the banks cultural and operating processes, which undermines the security of Australian citizens. This would demand a substantive inquiry into the management, integrity and culture of the banks that only a Royal Commission could provide.

The ConversationIn the meantime, the CBA needs to provide firm evidence to the Australian public that none of its ATM machines can continue to be used for money laundering. It also needs to prove there are procedures in place for ensuring all suspicious banking activity by potential criminals or terrorists is fully reported to the Australian authorities as soon as the CBA has any knowledge of such activity.

Thomas Clarke, Professor, UTS Business, University of Technology Sydney

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

Research shows the banks will pass the bank levy on to customers


Fabrizio Carmignani, Griffith University and Ross Guest, Griffith University

Studies of European countries show that bank taxes similar to the 0.06% bank levy introduced by the government in the 2017 federal budget will be largely borne by customers, not shareholders. The Conversation

The levy could also make the banking system more, rather than less risky. The fact that a bank is asked to pay the levy is a confirmation that it is “too big to fail”. This could in turn encourage riskier behaviour. The levy might also trigger a higher probability of default by reducing a bank’s after-tax profitability

But it is difficult to say whether banks will pass the levy on to customers by increasing their loan rates, fees or both.

In its response to the levy, NAB confirmed it will not just be borne by shareholders:

The levy is not just on banks, it is a tax on every Australian who benefits from, and is part of, the banking industry. This includes NAB’s 10 million customers, 570,000 direct NAB shareholders, those who own NAB shares through their superannuation, our 1,700 suppliers and NAB’s 34,000 employees. The levy cannot be
absorbed; it will be borne by these people.

Aware of this problem, the government has asked the Australian Competition and Consumer Commission (ACCC) to undertake an inquiry into residential mortgage pricing. The ACCC can require banks to explain changes to mortgage pricing and fees.

When banks pass on these taxes

The bank levy is similar to taxes recently introduced by some G20 economies, including the UK. These had the dual purpose of raising revenues and stabilising the balance sheets of large banks in the aftermath of the global financial crisis.

An analysis of bank taxes in the UK and 13 other European Union countries shows that the extent to which taxes are passed on to customers depends on how concentrated the banking industry is.

The more the industry is dominated by a small number of banks, the greater the share of the tax that is passed on to customers and the less that is borne by shareholders. In more concentrated industries customers have relatively fewer alternative options and therefore tend to be less mobile across banks. This in turn gives the large banks greater market power to increase interest rates and fees without losing customers.

Australia’s banking industry is quite concentrated. In fact, we’re around the middle of the pack of OECD countries, much higher than the US, but lower than some European countries. From this we can surmise that at least some of the cost of the bank levy here will be passed on to borrowers through higher loan rates, fees or both.

An IMF study of G20 countries suggests that a levy of 20 basis points (i.e. 0.2%, approximately three times higher than the Australian government’s bank levy), could lead to an increase in loan rates of between 5 and 10 basis points. This means that the monthly repayment on a loan (assuming an initial rate of 5.5%) would increase by approximately A$6 for every A$100,000 borrowed.

The IMF also found that the bank levy doesn’t just hit customers. A 0.2% levy would reduce banks’ asset growth rate by approximately 0.05% and permanently lower real GDP by 0.3%.

The impact on customers

If the banks pass on the levy to customers then it becomes just another indirect tax, similar to the GST. The question then is whether this is regressive – does it have a greater impact on those on lower incomes than higher incomes.

Lower income earners are likely to borrow less than higher income earners. However, lower income earners are also less able to bear an interest rate increase. They are also more likely to be excluded from borrowing when the cost of borrowing increases.

In this sense, then, if the bank levy is passed on to customers it could become a barrier to home ownership for some lower income borrowers.

More generally, if the value of bank transactions is a higher proportion of low incomes than of high incomes, then the bank levy would operate as a regressive tax and contribute to sharpening (rather than smoothing) inequalities.

Both of these would be unintended, but undesirable, consequences of the levy.

Fabrizio Carmignani, Professor, Griffith Business School, Griffith University and Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

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