Frydenberg’s directions to ASIC throw the banking royal commission under a bus

Mick Tsikas/AAP

Andrew Schmulow, University of WollongongFor Australia’s habitually-abused financial consumers it’s Back to the Future (minus the DeLorean).

Treasurer Josh Frydenberg appears to have thrown the most important findings of the banking royal commission under a bus, in glorious double-speak.

On Thursday he issued a direction to the Australian Securities and Investments Commission through what is known as a statement of expectations.

It is very different from the previous such statement, issued in 2018.

This one includes an entirely new clause, placed right at the top.

The government expects ASIC to:

identify and pursue opportunities to contribute to the government’s economic goals, including supporting Australia’s economic recovery from the COVID pandemic.

It’s an odd role for a corporate cop, on its face inconsistent with the way ASIC itself describes its function in the “our role” tab on its homepage.

Perhaps not yet updated to take account of the guidelines, ASIC’s description says it is a regulator whose job is to “take whatever action we can, and which is necessary, to enforce and give effect to the law”.

From ‘why not litigate’…

It’s how the royal commission saw ASIC’s role. In his final report, Commissioner Kenneth Hayne was scathing about how ASIC carried out those duties, saying it was too ready to negotiate, and not keen enough to litigate.

Financial services entities are not ASIC’s ‘clients’. ASIC does not perform its functions as a service to those entities. And it is well-established that ‘an unconditional preference for negotiated compliance renders an agency susceptible to capture’.

Negotiation and persuasion, without enforcement, all too readily leads to the perception that compliance is voluntary. It is not.

Hayne said the first question ASIC should ask whenever misconduct was identified was “why not litigate?”.

Frydenberg’s new statement of expectations turns that on its head.

…to ‘why not capitulate’

Rather than “why not litigate,” it reads as “why not capitulate” — justified by the need to identify opportunities to contribute to Australia’s economic recovery.

The statement says the government expects ASIC to “act independently” but also says it should “consult with the government and treasury in exercising its policy-related functions” — a requirement not previously expressed in those terms.

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It should “minimise regulatory burdens” (including presumably those that require regulated firms to act in the best interest of their customers).

It should ensure any guidance it offers to financial service providers is not “unduly prescriptive”.

The banks have not earned leniency

Granted, these are conditions that could be interpreted positively if ASIC was charged with supervising an industry that had demonstrated its trustworthiness and its commitment to putting its customers first.

Royal Commissioner Kenneth Hayne believed the banks had not earned out trust.
AAP

But after the evidence that was ventilated before the Hayne Royal Commission no one – not even the Australian Banking Association makes such a claim.

Indeed, the damage done by more than a decade of financial industry misconduct, fraud, criminality and venality, committed on an industrial scale, is yet to be fully quantified.

Colleagues at the University of Melbourne estimate the full cost at north of A$200 billion, affecting approximately 54% of the population.

Frydenberg’s solution appears to be to put the needs of industry first. Separately, he is trying to scrap responsible lending laws.

From somewhere, to nowhere

What will the upshot be of a newly enfeebled ASIC? In light of the demonstrable failure of banks, super funds and insurers to act with integrity after the royal commission, the upshot will be more of the same.

Indeed, as reported in The Klaxon in November, the almost one million customers in Westpac-BT’s “retirement wrap” umbrella fund had been gouged as much as $8 billion over the past decade, thanks to exorbitant fees.

Between mid-2018 and mid-2020 returns to members were close to zero (0.1%).

According to Australian Prudential Regulation Authority data, had the performance of the Westpac funds been merely average, its customers would have been $5 billion better off.

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The matter was reported to ASIC on November 23 last year. All ASIC has done since is “review” the situation. In that time fund members might have lost a further $1.5 billion relative to the industry average.

A better way to support a post-COVID economic recovery would be to give customers confidence that the laws meant to protect them were being properly enforced. It isn’t the road the treasurer has taken.

Andrew Schmulow, Senior Lecturer, Faculty of Law, University of Wollongong

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

There’s a bill before the Senate that would make it easier for banks to lend irresponsibly

Neale Cousland/Shutterstock

Andrew Schmulow, University of Wollongong; Elise Bant, University of Western Australia; Nicola Howell, Queensland University of Technology, and Therese Wilson, Griffith University

The Hayne royal commission into misconduct in the banking, superannuation and financial services industry found Australia’s responsible lending requirements were correctly calibrated.

They are set out in the National Consumer Credit Protection Act, which requires lenders to offer credit that is “not unsuitable” for the borrower.

Hayne’s first recommendation (Recommendation 1.1) was that the National Consumer Credit Protection Act “not be amended to alter the obligation to assess unsuitability”.

He saw “no reason to alter” the relevant provision of the banking code.

On releasing the royal commissioner’s report in 2019 Treasurer Josh Frydenberg said he was “taking action on all 76 recommendations” and “going further”.

Until COVID.

COVID the pretext for weakening rules

In September, in the midst of the COVID recession, Frydenberg said he was “reducing the cost and time it takes consumers and businesses to access credit”.

Credit was “the lifeblood of the Australian economy”.

He put forward a plan to remove responsible lending obligations from the Act, with the exception of small amount credit contracts and consumer leases where he would impose heightened obligations.

Allowing lenders to rely on the information provided by borrowers would replace the current practice of “lender beware” with “borrower responsibility”.

‘Borrower responsibility’

Frydenberg introduced the legislation in December. On Friday a Senate committee recommended approving it, finding the current consumer protection framework “potentially overly prescriptive”.

Labor and Greens Senators dissented. The bill faces a Senate vote this week.

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None of the justifications for weakening bank lending standards quite makes sense

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We are members of a consortium of 12 academics who conducted an in-depth analysis of the proposed changes and found they should be rejected. This is why.

Even after Hayne, banks are continuing to fight their obligations and have yet to show they have changed their ways.

The drop in lending since COVID was not caused by overly strict lending laws. Indeed, after a win by Westpac in a court case brought by the Securities and Investments Commission the banks said the laws were set appropriately.

Lending standards protect against crises

Consumer protection in the field of finance is important — it contributes to strengthening financial stability.

Not everyone knows what they are signing.
Jacob Lund/Shutterstock

The abusive, predatory and irresponsible lending practices that led to the US subprime mortgage crisis make this clear.

The government’s suggestion that it is fair for borrowers to take responsibility for their own circumstances doesn’t hold water.

No matter how diligent their inquiries, consumers frequently lack the expertise to understand their circumstances and what financial products will be best for them.

For many, almost all of the expertise lies with the banks.

Since COVID, their need for this expertise has become greater, not less.

The government says mortgage brokers will fill this gap under a change proposed by Hayne that will require brokers to act in the “best interests” of their clients.

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But Hayne’s recommendations were based on the responsible lending requirements being in place.

And Hayne wanted mortgage brokers banned from taking conflicted remuneration, under which they get paid by the banks they steer customers to, a recommendation Frydenberg at first accepted, then backed away from.

Brokers continue to be paid by the banks whose products they recommend.

APRA has no history of consumer protection

Hayne also recommended (Recommendation 6.1) that Australia’s “twin peaks” system of regulation continue.

Under twin peaks, the Prudential Regulation Authority (APRA) regulates in order to ensure financial system stability, and the Securities and Investments Commission (ASIC) regulates to protect consumers.

While in his final report Hayne found that ASIC’s appetite for law enforcement had been limited, he found APRA’s had been non-existent.

The upshot is that, not only are the responsible lending requirements to be relaxed, but what’s left of them is to be handed to an agency (APRA) with no track record in the field, at the expense of ASIC.

Until now, APRA hasn’t done consumer regulation.
APRA

The government has argued that the Australian Financial Complaints Authority (AFCA) will step up to protect consumers.

But AFCA has to be guided by the law. Without responsible lending laws and regulations, it is unclear what laws AFCA could apply. Thus far, APRA’s standards have been aimed at protecting financial stability rather than consumers.

The Financial Complaints Authority would rely on APRA for guidance.
Tashatuvango/Shutterstock

In our assessment the proposed changes fail in every respect.

They ignore the key lesson of the global financial crisis: that it was caused by reckless and predatory lending.

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It’s about to become easier to lend irresponsibly, to help the recovery

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They ignore the findings of the Hayne Commission and other inquiries dating back at least a decade.

They will neither properly protect consumers nor create the confidence in the financial industry the post-COVID recovery will need.

The government has named its legislation the National Consumer Credit Protection Amendment (Supporting Economic Recovery) Bill.

A more apt title might have been the “Reducing Consumer Protection Bill”.

Andrew Schmulow, Senior Lecturer, Faculty of Law, University of Wollongong; Elise Bant, Professor of Law, University of Western Australia; Nicola Howell, Senior lecturer, Queensland University of Technology, and Therese Wilson, Senior Lecturer, Griffith Law School, Griffith University

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

It’s not only Westpac. What’s behind the biggest fine in Australian corporate history

Marlon Trottmann/Shutterstock

Thomas Clarke, University of Technology Sydney

Westpac is to pay A$1.3 billion, by far Australia’s biggest-ever corporate fine for breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act.

The 93-page statement of agreed facts and admissions prepared by Westpac and the Australian Transaction Reports and Analysis Centre (AUSTRAC) says Westpac contravened the Act more than 23 million times exposing Australia’s financial system to criminal exploitation.

It failed to pass on information to authorities about the origin of international funds transfers, and failed to pass on information to other banks in the transfer chain who needed to manage their own money laundering and terrorism financing risks.

“Westpac failed to identify activity potentially indicative of child exploitation risks by failing to implement appropriate transaction monitoring detection scenarios,” the agreed statement says.

“Three of the customers the subject of these proceedings had prior convictions relating to child exploitation offences.”

“One of these customers has been arrested in relation to further child exploitation offences since the commencement of these proceedings.

Westpac and AUSTRAC, Agreed Statement of Facts and Admissions

In reaching the agreement, Westpac also admitted to 76,000 additional contraventions relating to information that came to light after AUSTRAC launched proceedings last year, some which also relate to “failures to reasonably monitor customers for transactions related to possible child exploitation”.

The action triggered the departures of Westpac chief executive Brian Hartzer and chairman Lindsay Maxsted late last year.

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The A$1.3 billion fine dwarfs the Commonwealth Bank’s A$700 million settlement with AUSTRAC for serious breaches of anti-money laundering and counter-terrorism financing laws in 2018.

The Westpac debacle is far from an isolated instance of international banks demonstrating indifference to their potential involvement in organised crime.

Documents released by the International Consortium of Investigative Journalists on Monday show that major banks around the world conducted US$2 trillion of suspicious transactions in the eight years between 1999-2017.

Australian banks on the international stage

Of a limited sample of transactions assessed, Australian banks received US$3.8 million of suspicious funds and sent out $167.9 million.

International Consortium of Investigative Journalists interactive

The Macquarie Bank was responsible for US$122.1 million of the US$167.9 million, the Commonwealth Bank for US$42.1 million.

The reports relating to Australian banks were filed by the US banks which dealt with them.

The Australian banks themselves might have also filed their own reports.

There’s little to suggest much was done about the reports by US banks at the time, either by the banks themselves or by the regulators they filed them to.

Indeed, the long timespan suggests the banks not only didn’t close suspicious accounts (which might have alerted account holders to suspicions) but also continued to open new ones.

The crime that makes other crimes possible

BuzzFeed, which obtained the documents, said money laundering was a crime that made other crimes possible, and had itself become an integral part of the financial system.

The networks through which dirty money traverse the world have become vital arteries of the global economy. They enable a shadow financial system so wide-ranging and so unchecked that it has become inextricable from what is regarded as the legitimate economy. Banks with household names have helped to make it so.

Certainly after the 2019 report of the banking royal commission it is reasonable to expect Australian banks to do more.

Commissioner Hayne held banks to higher standard than merely abiding by the law. He referred to “the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them”.

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Westpac’s scandal highlights a system failing to deter corporate wrongdoing

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This week’s shocking evidence suggests there’s work to do.

From the wreckage of the global financial crisis the G20 Financial Stability Board erected a new regulatory order requiring banks to have adequate capital.

To this was added a Task Force on Climate Related Financial Disclosures.

It’s time for a third set of reforms, to ensure the financial system doesn’t serve as a conduit for serious crimes.

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

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

Frydenberg outlines financial sector reform timetable

Michelle Grattan, University of Canberra

Treasurer Josh Frydenberg has issued a timetable for the government’s dealing with the recommendations from the royal commission into banking, superannuation and financial services, which aims to have all measures needing legislation introduced by the end of next year.

The opposition has accused the government of dragging its feet on putting into effect the results of the inquiry, which delivered its final report early this year.

“The need for change is undeniable, and the community expects that the government response to the royal commission will be implemented swiftly,” Frydenberg said in a statement on the timetable.

Fydenberg said that in his final report Commissioner Kenneth Hayne made 76 recommendations – 54 directed to the federal government (more than 40 of them needing legislation), 12 to the regulators, and 10 to the industry. Beyond the 76 recommendations, the government had announced another 18 commitments to address issues in the report.

The government had implemented 15 of the commitments it outlined in responding to the report, Frydenberg said. This included eight out of the 54 recommendations, and seven of the 18 additional commitments the government made. “Significant progress” had been made on another five recommendations, with draft legislation in parliament or out for comment or consultation papers produced.

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Frydenberg said that, excluding the reviews to be conducted in 2022, his timetable was:

• by the end of 2019, more than 20 commitments (about a third of the government’s commitments) would have been implemented or have legislation in parliament

• by mid 2020, more than 50 commitments would have been implemented or be before parliament

• by the end of 2020, the rest of the commission’s recommendations needing legislation would have been introduced.

When the Hayne report was released early this year, the government agreed to act on all the recommendations.

But one recommendation it has notably not signed up to was on mortgage brokers.

Hayne found that mortgage brokers should be paid by borrowers, not lenders, and recommended commissions paid by lenders be phased out over two to three years.

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The government at first accepted most of this recommendation, announcing the payment of ongoing so-called “trailing commissions” would be banned on new loans from July 2020. Upfront commissions would be the subject to a separate review. Four weeks later in March Frydenberg announced the government wouldn’t be banning trailing commissions after all. Instead, it would review their operation in three years.

Releasing the timetable, Frydenberg said the reform program was the “biggest shake up of the financial sector in three decades” and the speed of implementation “is unprecedented”.

“It will be done in a way that enhances consumer outcomes with more accountability, transparency and protections without compromising the flow of credit and competition,” he said.

He undertook to ensure the opposition was briefed on each piece of legislation before it came into parliament.

“This will begin with the offer of a briefing by Treasury on the implementation plan. Given both the government and opposition agreed to act on the commission’s recommendations, we expect to achieve passage of relevant legislation without undue delays,” he said.

He said the industry was “on notice. The public’s tolerance has been exhausted. They expect and we will ensure that the reforms are delivered and the behaviour of those in the sector reflects community expectations.”

Michelle Grattan, Professorial Fellow, University of Canberra

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

The new banking code looks impressive, but what will it achieve?

The Banking Association says “in and of itself” the code it won’t restore trust.
Shutterstock

Gerhard Hambusch, University of Technology Sydney and Warren Hogan, University of Technology Sydney

On July 1, the banking industry got yet another code of conduct – its fifth since 1993 – and although it is voluntary, all of the retail banks have signed up.

In the promotional video, Australian Banking Association chairman Shayne Elliott describes it as “a step”, acknowledging that there is a lot of work to do.

In and of itself it won’t restore trust, but it will absolutely help. It’s about the industry saying: hey this is what we stand for, this is how we are going to live our lives, this is how we are going to interact with you, but it’s importantly about holding us to account.

It’s an admission that the previous codes haven’t been worth that much.

Australian Banking Association, Raising Standards – New Banking Code.

The 1993 edition promised customers a quick and fair dispute-resolution mechanism, outside the drawn-out and often costly court system.

However a subsequent revision in 2003 allowed banks to opt out, and steered some disputes back into the courts.

It also created a Code Compliance Monitoring Committee, appointed and funded by subscribing banks and the Australian Banking Association, which over time investigated fewer and fewer breaches of the code.

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It got to the point where in 2017-18 the committee said that five banks reported zero breaches of the code’s credit and dispute resolution obligations, and six banks reported zero breaches of their debt collection obligations.

This was despite a growing body of evidence of breaches assembled for the banking royal commission.

Everything old…

The Code Compliance Monitoring Committee has been rebadged as the Banking Code Compliance Committee. It will have the power to publicly name banks that breach the code, report serious and systemic ongoing issues to Australian Securities and Investments Commission, and
require banks to rectify or take corrective action for serious breaches of the code.

Separately, in November 2018 a new body known as the Australian Financial Complaints Authority replaced the opaque and bank-funded private company known as the Financial Ombudsman Service Limited, which had been limited to providing compensation of A$309,000.

In some cases the new body can offer unlimited compensation.

It has its hands full. In its first six months it has received 35,000 complaints, some dating back up to ten years. About 12,000 of them relate to banks. In May it received more than 600 enquiries per day.

…is new again

For banking customers the new code offers:

• lists of direct debits and recurring payments, making it easier to switch banks

• notice of transaction fees before they occur

• extra care when providing banking services to the vulnerable

• better protections including a cooling-off period for guarantors, and

• notice to guarantors of changes to the borrower’s circumstances.

For credit card customers, banks will:

• remind customers when a credit card introductory offer is about to end

• cease unsolicited offers to increase credit limits, and

• let customers reduce their credit limits or close their card accounts online.

Small businesses are covered for the first time. The code offers:

• simplified loan contracts with fewer conditions for total loans under A$3 million (the Small Business and Family Enterprise Ombudsman wanted a threshold of A$5 million)

• longer notice periods for when loan conditions change, and

• greater transparency when using valuers and insolvency practitioners.

The Australian Securities and Investments Commission will monitor what happens with small business and publish its findings every six months. It has no broader role in administering the code. Only complaints that are deemed severe will be be referred to it for investigation and prosecution.

More than window dressing?

Small business will have to stay on their toes. Only some of the more than 100 institutions that provide services to them have signed up to the code. None of the online-only lenders has signed up.

Will this, the fifth iteration of the code, move beyond what at times has seemed cynical window-dressing?

Trust is built on demonstrated behaviours. Not only will the banks need to stick to their new code, but any breaches will need to be addressed in a timely and substantive manner.

Gerhard Hambusch, Senior Lecturer, University of Technology Sydney and Warren Hogan, Industry Professor, University of Technology Sydney

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

It’s unanimous: Economists’ poll says we can fix the banks. But that doesn’t mean we will

Most of the economists polled think better regulation can make banks put customers first. The rest think it will need more.
Shutterstock

Gigi Foster, UNSW and Paul Frijters, London School of Economics and Political Science

After three years and 35 polls, the Economic Society of Australia has received its first-ever unanimous response to a survey question.

It asked just over 50 of Australia’s leading economists to respond to this statement:

There is no way to significantly increase the degree to which Australian retail banks act in the interests of consumers.

Twenty did. All rejected the proposition that nothing could be done. But there was widespread disagreement about what should be done.

Most thought that regulations should be tightened and better enforced.

Mathew Butlin’s comments typify this “more regulation” approach:

The incentive structures for bank staff, from the top down, play a key role in shaping behaviour. A more complete set of performance measures linked to remuneration that strongly penalises behaviour not in the consumer interest would provide stronger incentives for better behaviour, especially when linked with reliable information on non-compliance going to management and ultimately the bank board and a requirement for both to take action.

A smaller group openly doubted that better regulations would
help, because they were not confident that the current crop of regulators or politicians would be able to devise and properly enforce them.

Allan Fels gave the most damning response (with the highest word count) saying what was needed – among other things – was a
“radical improvement in the performance” of the two main regulators, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.

In particular they need a change of culture. This will prove to be harder to do than it sounds. People have been talking for over twenty years about the ASIC and APRA culture needing improvement.

Geoffrey Kingston called for mandatory minimum sentences
for financial crimes, arguing that the courts were complicit in the maintenance of financial crimes by being reluctant to jail white-collar criminals.

Kingston and Joaquin Vespignani pointed to the monopoly power of the big four banks before then raising the hope that the “big data” revolution would democratise banking and re-empower consumers, an idea at the heart of the government’s Consumer Data Right initiative.

Also targeting market concentration, Allan Fels, James Morley, and
John Quiggin called for the separation of bank functions (with marketing separate from advice) or the breakup of banks themselves as happened in the United States under the Glass-Steagall Act of 1933 which separated investment banks from deposit-taking banks.

Gigi Foster called for foreign countries to send competent regulators to sort out Australian’s banking system, suggesting that Australian regulators were compromised.

John Quiggin called for a stand-alone “no frills” public bank modelled on New Zealand’s Kiwibank, something he hoped would rein in the expansion of the financial sector that began in the 1970s. But he added:

These proposals may be beyond the realm of political feasibility, which is why I have expressed only modest confidence in my view.

Quiggin and a substantial minority of those polled acknowledged that – uncomfortably for economists – many of the barriers to getting banks to behave better lay outside the realm of economics. Like well-meaning doctors, economists have been dispensing prescriptions that “should work”, while the patient continues to die.

But standard prescriptions have their place – among them removing commissions, imposing salary caps, imposing fee caps, revoking licences and setting minimum jail terms, all of which would change the balance of risks and rewards and help put money back into the pcokets of ordinary Australians.

Of course, even applying traditional economic prescriptions require political will.

Perhaps surprisingly for a group of “dismal scientists”, 20 of Australia’s leading economists believe that change is possible. It isn’t the economics that is dismal, it’s the dearth of political courage to do what’s needed.

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This is an edited version of a review for the Economic Society of Australia, available here.

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Gigi Foster, Professor, School of Economics, UNSW and Paul Frijters, Co-Director, Wellbeing Program, London School of Economics and Political Science

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

One-third of Australians think banks do nothing for the greater public good

In a survey of 1,000 Australians, 35.4% agreed banking and financial institutions show ‘no leadership for the greater good’.
Shutterstock

Samuel Wilson, Swinburne University of Technology; Jason Pallant, Swinburne University of Technology, and Timothy Colin Bednall, Swinburne University of Technology

The leaders of our banks and financial institutions are seen as the most self-serving in the nation, according to a national survey undertaken by researchers at Swinburne University of Technology.

More than a third (35.4%) of respondents believe banking and financial institutions show “no leadership for the greater good”. This score is slightly worse than public perceptions of the Federal Government, substantially worse than religious institutions and significantly worse than trade unions.

The results, from a nationally representative sample of 1,000 Australians, also repudiate the Australian Banking Association’s claim a year ago that “Australians believe banks are heading in the right direction”.

And given this survey was done in December 2018, before the Banking Royal Commission had completed its work exposing misconduct in the financial services sector, it’s likely a future poll will show even greater community distrust of bankers.

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Banking Royal Commission: no commissions, no exemptions, no fees without permission. Hayne gets the government to do a U-turn

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Transparency and accountability are crucial

Our findings come from the initial results of the Australian Leadership Index, a new quarterly survey from the Swinburne Business School that measures and tracks community perceptions and expectations of leadership for the greater good across 13 societal institutions.

The index won’t be officially published until later in the year. But given the important public discussion about corporate leadership in the wake of the final report of the banking royal commission, we think it’s useful to share a snapshot of our findings.

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https://datawrapper.dwcdn.net/fXFqO/1/

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Consistent with other studies that highlight the importance of transparency and accountability to perceptions of trust, our research confirms the importance of these attributes to perceptions of leadership for the public good.

From a community perspective, leadership for the greater good occurs when leaders demonstrate high ethical standards, when they demonstrate transparency and accountability for their positive and negative impacts, and when they seek to balance the interests of multiple stakeholders, including the wider community in which their institutions are nested.

So, leadership for the greater good is reflected in what value leaders create, how they create value, and for whom they create value.

Unhappily, banking leaders are found wanting on all counts.

The importance of how value is created

But other institutions are also found wanting, with our results revealing a generalised pessimism about Australian leadership.

Our survey results shed light on where the public think leaders are failing and what the community expects of leaders and their institutions to serve the greater good.

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Notably, creating economic value is not a highly regarded aspect of leadership for the greater good. This is not to say it is unimportant. But on its own it is insufficient.

What looms largest in the public mind when thinking about the greater good is the social value that institutions create, how ethically they create this value, and their transparency and accountability for positive and negative impacts.

Our research demonstrates that leadership for the greater good is as much about how leaders create value for their stakeholders — from their employees to their customers to society-at-large — as it is about what value they create and for whom they create value.

It’s not hugely complicated.

And yet, as revealed by the endless, unedifying parade of misconduct in government, business, religious, sporting and other civil society institutions, community standards and expectations are too often observed in the breach.

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In the wake of the banking royal commission, the Australian community has a golden opportunity for a thoroughgoing discussion about the leadership we need to protect and enhance the public interest.

We hope the Australian Leadership Index will contribute to that discussion, by making all our data freely accessible through a new data visualisation platform. This will enable easy tracking of how institutions are performing according to public perceptions of their impact on the public good.

Wise leaders focus on the greater good. It behoves all leaders to create this new culture of public leadership.

Samuel Wilson, Senior Lecturer in Management, Swinburne University of Technology; Jason Pallant, Lecturer of Marketing, Swinburne University of Technology, and Timothy Colin Bednall, Senior Lecturer in Management, Fellow of the APS College of Organisational Psychologists, Swinburne University of Technology

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

NAB’s Andrew Thorburn and Ken Henry quit after royal commission lashing

Michelle Grattan, University of Canberra

The banking royal commission report has claimed its first high-profile victims, with National Australia Bank’s chief executive officer Andrew Thorburn and chairman Ken Henry quitting their positions.

The two were subject to scathing assessments in the report from
commissioner Kenneth Hayne.

Hayne said that after having heard from both men he was “not as confident as I would wish to be that the lessons of the past have been learned.

More particularly, I was not persuaded that NAB is willing to accept the necessary responsibility for deciding, for itself, what is the right thing to do, and then having its staff act accordingly. I thought it telling that Dr Henry seemed unwilling to accept any criticism of how the board had dealt with some issues.

I thought it telling that Mr Thorburn treated all issues of fees for no service as nothing more than carelessness combined with system deficiencies … Overall, my fear – that there may be a wide gap between the public face NAB seeks to show and what it does in practice – remains.

In a statement late Thursday, NAB said Thorburn would finish at the end of this month while Henry would leave the board once a new CEO had been appointed.

The board will search internationally for a CEO while also considering internal candidates, the statement said.

Philip Chronican, a NAB director with extensive banking experience
will act as CEO from March 1 until a replacement is found.

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Read more:
Defence mechanisms. Why NAB chairman Ken Henry lost his job

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It has been speculated that Mike Baird, former NSW premier, a senior executive at NAB could get the CEO post.

Thorburn, who has been CEO since 2005, said he had had a number of
conversations with Henry this week.

“I acknowledge that the bank has sustained damage as a result of its past practices and comments in the royal commission’s final report about them.

“As CEO, I understand accountability. I have always sought to act in the best interests of the bank and customers and I know that I have always acted with integrity. However, I recognise there is a desire for change.”

Sydney Morning Herald journalist Bevan Shields tweeted: “NAB boss Andrew Thorburn effectively says in a call just now that he was sacked by the board and didn’t voluntarily resign”.

Thornburn appeared to be fighting for his job early this week, cancelling leave, but he admitted on Tuesday that he could not guarantee he would still have his position on Friday.

Henry, a former secretary of the federal treasury, said he and the
board had recognised change was needed.

“The timing of my departure will minimise disruption for customers,
employees and shareholders,” he said.

He said the board should have the opportunity to appoint a new chair as NAB “seeks to reset its culture and ensure all decisions are made on behalf of customers.

“I am enormously proud of what the bank has achieved and equally
disappointed about what the royal commission has brought to light in areas where we have not met customer expectations.

“Andrew and I are deeply sorry for this. My decision is not made in
reaction to any specific event, but more broadly looking at the bank’s needs in coming months and years.”

The Board is to recruit new non-executive directors “to increase
diversity of thinking and experience”. It will also establish a board committee for customer outcomes.

Chronican, who joined the NAB board in 2016, said he was “confident in our existing strategy to
transform the bank to be better for customers”.

“Our strategy and the self-assessment we completed into our culture, governance and accountability set out clearly the steps we need to take to change and we are committed to them,” he said.

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In a mea culpa interview on Thursday night, Henry told the ABC that what had changed since the indications on Tuesday that he and
Thorburn would stay on was that “we’ve had further time for
reflection.

“And we came to the view jointly really that it was in the best
interests of NAB that we take the decision together to step down from our respective roles.”

He said the enduring legacy of the commission’s report “will be that intense scrutiny that it has shone on financial institutions and the way it’s forced senior people in those organisations to confront some really challenging things”.

Asked whether there was as wide a gap as Hayne said between the public face the NAB sought to present and what was does in practice, Henry said: “There is a big gap.

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Read more:
Hayne’s failure to tackle bank structure means that in a decade or so another treasurer will have to call another royal commission

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“The gap as I see it is NAB does aspire to do the right thing by every customer every time and everywhere. And we’re a long way from that. We’ve got an absolute mountain to climb in NAB in order to achieve our aspiration for the bank”, although it was on the right path.

“We’ve not been able to satisfy customer expectations, nor community expectations … For that, we’re deeply sorry”.

He and Thorburn hoped their departures would “contribute to the
development of a better industry that’s capable of delivering better outcomes for customers”.

Quizzed about his performance at the commission, which was widely
criticised as looking defensive and contemptuous, Henry said he was initially surprised by that commentary.

“And I was upset by it. The more I thought about it – and I can’t
tell you how many times I’ve relived that appearance – I understand
the criticism. I did not perform well. I really should have performed quite differently. I should have been much more open”.

He said he believed he was leaving NAB in better shape than he found it. “And yet… I also believe that we are not much closer yet to delivering on community expectations. So the gap that was there, that gap still remains. We’ve closed it a bit. We have an intention to close it completely with the investments we’re making and the changes that are under way in the bank.

“That remains the aspiration. I’m confident within a few years,
hopefully much sooner than that, NAB will be a much stronger
institution than when I joined it”.

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Read more:
Banking Royal Commission: no commissions, no exemptions, no fees without permission. Hayne gets the government to do a U-turn

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Michelle Grattan, Professorial Fellow, University of Canberra

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

Hayne’s failure to tackle bank structure means that in a decade or so another treasurer will have to call another royal commission

Andrew Linden, RMIT University and Warren Staples, RMIT University

Every 10 to 15 years it’s the same.

Ever since financial deregulation in the 1980s we’ve had a finance industry scandal followed by an inquiry, a quick fix, and a declaration that it shouldn’t happen again.

In the early 1990s there were royal commissions into the A$1.7 billion Tri-continental/ State Bank Victoria collapse, the A$3.1 billion State Bank of South Australia collapse and the WA Inc collapse which explored the interrelated activities at Rothwells bank, the A$1.8 billion collapse of Bond Corporation and the A$1.2 billion siphoned from Bell Resources.

A decade later in 2003 Justice Owen reported on the A$5.3 billion collapse of Australia’s largest insurer HIH.

And now, bang on schedule, we have Kenneth Hayne delivering the final report of a royal commission into systemic misconduct in banking, superannuation and financial services industry to a government that voted 26 times against holding it.

There are two particularly striking things about the 10-15 year cycle.

One is the rhythm of public inquiries followed by reports, then (sometimes) trials, then books, then almost everyone forgetting (except for those personally scarred) only for problems to resurface later.

The other is that the times between have been punctuated by government-commissioned banking and financial system reviews: the 1991 Campbell Inauiry, the 1996 Wallis Inquiry, the 2010 Cooper superannuation review and the 2012 Murray Review . Each either missed or downplayed the links between poor governance, industry structure, systemic misconduct and prudential risk.

Has Kenneth got the frequency right this time?

Commissioner Kenneth Hayne’s 1000-page final report hasn’t gone far enough to end this cycle.

While his referral of 24 misdeeds for possible criminal and civil prosecution will help in righting past wrongs and perhaps focus the minds of directors and executives, the impact will be generational rather than permanent.

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Read more:
Compensation scheme to follow Hayne’s indictment of financial sector

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The flurry of prosecutions and actions will again reveal problems with the law – gaps in coverage, inadequate penalties and cases the law won’t allow to stand up.

Taken together the recommendations are a patchwork of measures that if implemented will over time be eaten away – and at some point will be dismantled – because the rationale for their adoption will be forgotten.

Even before they are implemented they will have to run the gauntlet of a massive subterranean lobbying effort from industry to water them down, something Hayne indicated he expected.

The deepest flaw lies unaddressed…

Even though Hayne emphasises the link between systemic misconduct, governance, structure and prudential (system-wide) risk, something that Treasury, the RBA and Australia’s three business regulator amigos, APRA, ASIC and the ACCC, have long rejected, he makes no concrete suggestions to tackle it.

As we have written previously, research tells us big systemically important shareholder-focused universal for-profit banks that cross-sell products are more profitable than smaller banks in the good times but are more prone to misconduct and to failure in the worse times.

Australia’s big four fit the bill – they’re big, they have been vertically integrated one-stop shops, they are very, very profitable and they are very focused on shareholder returns.

While the banks, apart from Westpac, have divested themselves of wealth management and insurance arms for now there is nothing stopping them reacquiring them in the future.

This means we are once again 10 or 15 years away from systemic misconduct resurfacing as big banks seek to become more profitable.

…and putting the onus on directors won’t much help

While heads might roll in yet another round of internal investigations to fix bank culture, it is wise to remember that as Adele Ferguson observed ANZ’s internal investigation of the Opes Prime collapse left the bigger governance lessons “unlearned”.

Directors and senior executives of failed companies continue to live charmed lives.

The directors of Babcock and Brown were cheered as they left the building, while friends and family of the disgraced One.Tel director Jodee Rich have resurfaced at Hayne and other public inquiries.

Some of the One.Tel directors have had long corporate careers. The former chair at of the collapsed Allco Finance Group Bob Mansfield went on to review the ABC.

As Adam Schwab bluntly put it, “corporate Australia is nothing if not forgiving”.

It’ll chase horses rather than close doors

Hayne is persisting with a chasing bolting horses approach to misconduct that relies on detection and enforcement.

We have argued this approach is just not as a effective as other alternatives such as two-tier boards and employee directors which have a better track record of keeping stable doors closed and horses tethered.

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Read more:
Banking Royal Commission: no commissions, no exemptions, no fees without permission. Hayne gets the government to do a U-turn

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Without them we could very easily have another crisis and another royal commission in 15 to 15 years time.

Ireland has taken a been prepared to change corporate structures. After the meltdown of its financial system triggered by the end of a “classic vanilla property boom” its parliament legislated to appoint public interest directors to the boards of its failed banks.

These changes were designed to ensure banks directors put the public interest first, ahead of shareholders interests and even customers interests.

It’s beyond time we did it here.

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

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

Banking Royal Commission: How Hayne failed remote Australia

The remote community of Urapunga in South East Arnhem Land, more at the mercy of the finance industry than most.
J. Louth, CC BY-SA

Jonathon Louth, University of South Australia

It’s been an enormous year for the financial services industry.

First there was a Productivity Commission report calling for major changes to superannuation, then a Senate inquiry into financial services targeted at Australians at risk of hardship, and now the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

And it’s only February.

Yet all three investigations either missed something big or failed to take it sufficiently seriously.

It’s the plight of Australians in remote Indigenous communities.

As if to inoculate himself against such criticism, Commissioner Kenneth Hayne made it clear in his preface that it would have been impossible to hear every case and that inevitably there would be disappointment.

As a consequence, the (relatively privileged) voices that were heard didn’t properly reflect the hardships, vulnerabilities and lives of those far away from the centres of finance, yet increasingly dependent on them as their lives become ever more financialised.

Automatic teller machines

Take the simplest example: ATM fees.

There is not always an understanding within remote Indigenous communities – whether because of language or financial literacy skills – that ATMs attract a A$2.50 fee every time they are used, including to check balances. This often isn’t the case in cities where ATMS are operated by banks.

But in remote locations with only one or two ATMs, they are usually third-party operations, run for profit. It is not uncommon for people waiting for funds to appear in their accounts to check multiple times, draining the account until they find something there.

The only government access point and only phone and only internet service in Urapunga, Northern Territory.
Jonathon Louth, CC BY

While the main report makes generic reference to ATM fees, it is only in the appendices where the question is touched upon.

The Bankers Association is well aware of it.

It conducted a limited two-year trial of free ATMs that concluded at the end of 2017, and was then extended.

It raises a telling question: if there was a recognisable problem and a recognisable solution, why extend the limited trial instead of making it universal?

It is a question about which the Royal Commission was silent.

Superanuation

And then there is super. The Productivity Commission’s earlier 722-page report on super (widely cited in the royal commission report) only twice makes explicit reference to issues faced by Aboriginal people.

This for a product where preservation age for a male is 60 years, yet the average life expectancy for an Indigenous male in the Northern Territory is 63.6.

While it raised the idea of a lower preservation age or releasing superannuation early for medical and associated expenses, the idea was relegated to the appendices.

Yet superannuation is a vital lifeline in remote communities. One Elder in the Northern Territory community of Wadeye made it clear to me that she uses access to super to get their children out of “town”, onto their country and away from social problems.

While the Productivity Commission does note the need to universalise access to hardship payments, it does not acknowledge that the capped amount of A$10,000 is taxed at up to 22%.

Portion control

To Commissioner Hayne’s credit, he urges consultation with Aboriginal and Torres Strait Islanders about making death benefit nominations reflect kinship ties.

It’s an excellent idea – one that would have carried more weight had he made it a formal recommendation.

His recommendations 4.1 and 4.2 are are as bold as they come, calling for a ban on the hawking of insurance policies and for funeral expense policies to be subject to the same rules as insurance policies.

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Final Report, Royal Commission into the Misconduct in the Banking, Superannuation and Financial Services Industry, Vol. 1.

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There’s nothing wrong with these recommendations, but they only deal with a small portion of the range of financial abuses that take place in remote communities or when community members visit larger towns and cities.

They include payday lenders offering multiple loans, telephone companies who sell phones they know have no coverage in remote communities, high-interest credit and motor vehicle insurance contracts, charity collectors who sign up community members for monthly donations (taking advantage of cultural notions of reciprocity), expensive furniture and appliance rentals, rent-to-buy schemes and, now, pay later schemes.

Indeed, while I was conducting an interview with an Elder in Wurrumiyanga in the Tiwi Islands, the Elder asked about the text message he received while we were speaking. It was from a payday lender offering immediate access to funds.

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Read more:
Banking Royal Commission: no commissions, no exemptions, no fees without permission. Hayne gets the government to do a U-turn

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The Senate inquiry is examining some of these exploitative and predatory practices, but the royal commission’s terms of reference appeared to exclude consideration of them.

In the Northern Territory, where 25% of the population identifies as Aboriginal or Torres Strait Islander, they are not so easily excluded.

My research in the NT suggests that financialisation reinforces the systemic disadvantage introduced by white settlement and transmits it across generations.

Any effort to improve financial well-being in remote communities has to take into account the ways in which an imposed economic system has torn at the heart of the one it replaced.

Many of us seem unwilling to accept that an economic world existed prior to European settlement, that (international) trade routes and agriculture were sustained for millennia.

Working through this isn’t simple. It requires spending time with and listening to remote Indigenous communities. Yet as one Elder out past Timber Creek put it:

Government don’t ask, they just tell us. They don’t like to talk to Aboriginal people about what needs to happen, what needs to be done.

This brings us to recommendation 1.8:

Final Report, Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Vol. 1.

The need to “identify a suitable way for those customers to access and undertake their banking” is vague, but important.

It ought to mean that the financial sector works with communities to develop its cultural competencies. It ought to mean exploring community and cultural literacies and embracing community knowledge.

It ought to mean having financial counsellors – who are Indigenous – trained in and able spending time on communities.

It will need commitment and ongoing funding from both industry and government.

But it’s more of a thought bubble than a worked-through proposal. At best, it’s a start.

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Jonathon Louth, Research Fellow, The Australian Alliance for Social Enterprise, University of South Australia

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