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


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

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

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

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

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




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


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

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

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

And where does the responsibility sit?

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

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

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

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




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


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

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

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

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

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

Not just new regulation but new education

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

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

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

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

Schools, VET and universities can do better and more.

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

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

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

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

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

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Turnbull dumps emissions legislation to stop rebels crossing the floor


Michelle Grattan, University of Canberra

Prime Minister Malcolm Turnbull has done a backflip on his proposal to put the emission reduction target into legislation, in the face of rebel backbenchers threatening to cross the floor.

The new plan is for the energy target – a 26% reduction to carbon dioxide emissions for the electricity sector – to be set by an executive order of the minister. Such an order cannot be disallowed.

The stunning retreat emerged as the energy issue threatened to turn into a crisis for Turnbull’s leadership, and the government worked on measures to reduce power prices to meet the demands of Coalition dissidents.

Cabinet Minister Peter Dutton remained conspicuously silent on Friday in face of a report that conservatives in the Liberal party were urging him to challenge Malcolm Turnbull within weeks.




Read more:
VIDEO: Michelle Grattan on the NEG showdown and a ray of parliamentary unity after Fraser Anning’s racist speech


A report in Sydney’s Daily Telegraph injected leadership speculation into the centre of Turnbull’s already highly difficult battle to curb a backbench rebellion over the government’s National Energy Guarantee (NEG).

The government has consistently refused a demand from the Victorian Labor government that the target should be set by regulation not legislation.




Read more:
Infographic: the National Energy Guarantee at a glance


The executive order would be accompanied by an Australian Competition and Consumer Commission report to parliament on the price impact of the target.

If Turnbull had gone ahead with legislation, and enough backbenchers had crossed the floor to defeat the bill, it would have amounted to an effective vote of no confidence in his leadership.

While some of the backbench rebels will be satisfied with the price package, it is not clear whether this will include Tony Abbott and his hardcore supporters, who want to bring Turnbull down and have smelled political blood.

Tuesday’s Coalition parties meeting will discuss the new proposals.

On another front, Nationals leader and Deputy Prime Minister Michael McCormack is facing mounting criticism of his performance, as the Nationals federal council meets in Canberra at the weekend. The energy issue is likely to be front and centre there.

Despite his public silence, it is understood that Dutton on Friday privately told Turnbull that he was comfortable with the government’s energy policy.

The backbench critics have had two major areas of concern. They did not think the NEG plan did enough to reduce electricity prices. And they were unhappy with the 26% target for reducing emissions in the electricity sector being legislated.

But the retreat from the target being enshrined in legislation will not be enough to satisfy those who want Australia to walk away from the target altogether and pull out of the Paris climate agreement.

Up to 10 backbenchers had threatened to cross the floor on the emissions reduction legislation.

The report about Dutton followed his interview with Ray Hadley on 2GB on Thursday in which Hadley challenged him over whether he was “blindly loyal” to Turnbull.

Dutton said he gave his views privately as a cabinet member and wasn’t going to bag out his colleagues or the Prime Minister publicly.

“If my position changes – that is, it gets to a point where I can’t accept what the government’s proposing or I don’t agree – then the Westminster system is very clear: you resign your commission,” he told Hadley.

The Telegraph report said Dutton was being urged to challenge Turnbull “on a policy platform of lower immigration levels and a new energy policy focusing on cheaper bills rather than lowering emissions.” Conservative MPs had told the Telegraph “a ‘torn’ Mr Dutton was considering his options,” the report said.

Asked on Nine whether Dutton was going to have a crack at the leadership, Defence Industry Minister Christopher Pyne said “absolutely not.”

Pyne also rejected the suggestion the government was on the ropes. In an obvious reference to Abbott and his supporters, Pyne said: “The polls are about 50-50 and there’s a lot of hyperventilating going on, and there’s a few people I think who are trying to put the band back together from the late 2000s, noughties.”




Read more:
Grattan on Friday: Malcolm Turnbull’s NEG remains in snake-infested territory


Finance minister Mathias Cormann said he had not heard any talk of some conservatives urging Dutton to challenge.

Cormann, a fellow conservative who is close to Dutton and said they had had four walks this week at 5.30 am, told Sky,: “We are both very committed to the success of the Turnbull Government and to winning the next election.

“We strongly support the Turnbull leadership of course and we want to see the Coalition government successfully re-elected early next year when the election is due.”




Read more:
The National Energy Guarantee is a flagship policy. So why hasn’t the modelling been made public?


The prices package would be based on recommendations made in the recent report of the Australian Competition and Consumer Commission.

The government has been briefing that Turnbull is willing to take a “big stick” to companies to ensure consumers get better deals.

The government is looking at cracking down on how companies bid into the wholesale electricity market and secret contracts between different players.

There would be closer scrutiny of energy companies buying and selling electricity internally between their own generation and retail companies at inflated prices.

This would put the contracts of “gentailers” under attention to ensure transfer prices did not disadvantage consumers. The ACCC said high transfer prices “raise concerns about the potential for substantial profit to be allocated to the wholesale businesses.”

The ACCC has also urged more transparency on direct contracts between retailers and individual generators, proposing these be put on a public register.

Among other changes being discusssed are:

  • providing the Australian Energy Regulator (AER) with powers to deal with manipulation of the wholesale market.

  • requiring the reporting and disclosing of over-the-counter trades (in a de-identified format) to make available important market information.

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    expanding the AER wholesale market monitoring functions to include monitoring, analysing and reporting on the contract market.

Michelle Grattan, Professorial Fellow, University of Canberra

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

The Barnaby Joyce affair highlights Australia’s weak regulation of ministerial staffers



File 20180213 58315 1i9gpqg.jpg?ixlib=rb 1.1
Barnaby Joyce has denied he breached ministerial standards with the employment of his partner, Vikki Campion.
AAP/Mick Tsikas

Yee-Fui Ng, RMIT University

Deputy Prime Minister Barnaby Joyce continues to face questions about the employment of his former media adviser – now current partner – Vicki Campion. Campion left Joyce’s office last year to take another ministerial adviser position with Resources Minister Matthew Canavan, and then with Nationals whip Damian Drum.

Prime Minister Malcolm Turnbull has claimed Joyce did not breach the Statement of Ministerial Standards regarding employment of spouses and family members as Campion was not his partner at the time of her appointment. Joyce has also denied he breached the ministerial rules.




Read more:
Labor moves in on the Barnaby Joyce affair


What is the role of ministerial staffers?

Ministerial advisers are politically partisan staff who are personally appointed by ministers to work out of their private offices.

These advisers have become an integral part of the political landscape in the last 40 years. The number of Commonwealth ministerial staff increased from 155 in 1972 to 423 in 2015.

The advisers undertake a wide range of functions. Tony Nutt, a former senior ministerial staffer, said:

… a ministerial adviser deals with the press. A ministerial adviser handles the politics. A ministerial adviser talks to the union. All of that happens every day of the week, everywhere in Australia all the time. Including, frankly, the odd bit of, you know, ancient Spanish practices and a bit of bastardry on the way through. That’s all the nature of politics.

How do they fit in our system of government?

The modern Westminster ministerial advisory system is built on the 1853 Northcote-Trevelyan report in Britain.

In the 18th and early 19th century, it was difficult to be appointed to a UK government office unless you were an aristocrat with the right connections to a very small elite. The Northcote-Trevelyan report rejected appointment based on patronage. It argued this led to difficulties in getting a good supply of employees in the public service compared to other professions.

This report forms the basis of the Westminster public service today. Public servants are expected to be neutral and apolitical, and recruited and promoted on the basis of merit. The intention was very much to purge the system of patronage.

Ministerial advisers pose a challenge to the Westminster system as they are largely recruited on a partisan basis and are expected to be politically committed to the government of the day. This undermines the intentions of having ministerial advisers who are recruited on the basis of merit, rather than patronage.

How are ministerial staff appointed?

Australian ministerial advisers are employed under the Members of Parliament (Staff) Act as ministers’ personal staff.

The employing minister determines the employment terms and conditions of ministerial advisers; the prime minister can vary these. The law is sparse and does not stipulate any precise requirements in terms of staff appointments.

In practice, the appointment of ministerial advisers is based on a party-political network of patronage. The primary consideration is loyalty to the political party – not merit.

There have been notorious instances of the appointment of unsuitable staff. These include then deputy prime minister Jim Cairns’ appointment of his mistress, Junie Morosi, as his principal private secretary (although she was considered spectacularly unqualified for her position).




Read more:
Grattan on Friday: Is Barnaby’s baby a matter of ‘public interest’ or just of interest to the public?


Some prime ministers have instituted a centralised process to reduce the appointment of unsuitable candidates. However, my research has shown that some senior ministers are able to circumvent such a process due to their position within the party.

Also, these processes primarily seek to filter candidates based on political danger – rather than on merit considerations.

Is there a breach of the rules in Joyce’s case?

Turnbull’s Statement of Ministerial Standards provides that ministers’ close relatives and partners are banned from being appointed to positions in their ministerial or electorate offices. They also must not be employed in the offices of other members of the executive government without the prime minister’s express approval.

Joyce and Campion claim their relationship started after her appointment – so the government has argued this clause does not apply.

However, the ministerial standards also specify that ministers must declare any private interests held by them or members of their immediate family. And under the Statement of Standards for Ministerial Staff, ministerial advisers have to disclose – and take reasonable steps to avoid – any real or apparent conflicts of interest connected with their employment. Staff are required to provide their employing minister and the special minister of state with a statement of private interests.

Therefore, the relationship between Joyce and Campion should have been disclosed when it arose, as there might have been an apparent conflict of interest connected with Joyce’s ministerial position. It is then up to the prime minister to decide what is to happen following this.

But both the standards for ministers and for their advisers are not legislated. They are not enforceable in the courts or in parliament. Enforcement is handled completely within the executive, which has an incentive to bury embarrassing material wherever possible.

This means any breaches of the standards by ministers and their advisers would be handled behind closed doors, without any formal scrutiny by parliament or any external bodies.

The enforcement of ministerial and adviser standards has been patchy. Whether a minister resigns depends on the prime minister of the day and if there is media furore and public outrage over an issue.

Are the rules too lax?

The legislation governing the employment of advisers is sparse and limited to affirming ministers’ powers to employ their advisers. Beyond this, there is no legislative requirement for ministerial advisers to adhere to certain behavioural rules.

The weak appointment rules have allowed Campion to be shuffled around different offices without a formal appointment process.

Other Westminster countries have stricter restrictions on the employment of advisers, either through a cap on the number of advisers (as in the UK) or a cap on the total budget for advisers (as in Canada).

The UK has a cap of two advisers per minister. Australia has no such limits.

Australia has the weakest regulation of ministerial staff when compared to other similar Westminster democracies. Other countries have stricter regulations that both restrict the actions of advisers and increase transparency.

The ConversationAustralian ministerial staff are now very important players in our democracy, but ministers and advisers are weakly regulated within our system. The law has lagged behind, but now is the time for reform.

Yee-Fui Ng, Lecturer, Graduate School of Business and Law, RMIT University

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

Consumers are biggest losers of Trump’s ongoing war on regulations



File 20180207 74476 1tg0ftt.jpg?ixlib=rb 1.1
Some worry Mick Mulvaney is putting banks before consumers as head of the CFPB.
Reuters/Yuri Gripas

Jeff Sovern, St. John’s University

President Donald Trump has been waging a war on regulation since he got into office on the ground that government red tape costs the economy billions of dollars a year.

Among the victors in this battle have been energy companies, banks and the president himself, who recently promised he’s “just getting started.” Perhaps the biggest losers, however, have been consumers.

The best illustration of this is the neutering of the Consumer Financial Protection Bureau, which began immediately after Mick Mulvaney stepped in as interim director in November.

So how much harm could he do in two short months? As someone who has written about consumer law for more than 30 years, let me count the ways.

Mick Mulvaney is governing the CFPB very differently than his predecessor.
AP Photo/Alex Brandon

‘Pushing the envelope’

The Consumer Financial Protection Bureau may be best known for levying a US$100 million fine against Wells Fargo in 2016 after the bank opened millions of unauthorized accounts.

But the bureau, originally conceived by Sen. Elizabeth Warren, has done so much more since Congress created the independent agency in 2010. Under Mulvaney’s predecessor, Richard Cordray, the bureau moved forcefully when it concluded companies had cheated consumers.

Through last summer, the bureau recovered nearly $12 billion for more than 29 million consumer victims of everything from illegal credit card fees to auto lenders that discriminated against people of color. In 2016 alone, the bureau announced 42 new enforcement actions, or nearly four new cases a month.

Mulvaney, who is also Trump’s budget director, argued his predecessor’s governing philosophy was to “push the envelope” in pursuing the bureau’s mission. Mulvaney, Trump and other Republicans argue that the CFPB director – who can’t be easily removed by the president – has too much power, making the bureau a prime target in their goal to eliminate regulation they believe puts a strain on the economy and small businesses.

While Cordray had previously never used the “push the envelope” language in describing his mission, he reacted to Mulvaney’s charge by embracing it, tweeting that he did “push hard to see that people are treated fairly by big banks, debt collectors and payday lenders.”

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It seems unlikely that the bureau would take on a bank like Wells Fargo for similar fraudulent conduct or pursue many of Cordray’s other actions now that Mulvaney is in charge. His boss has even praised a bill passed by the House that would strip the CFPB of the authority to go after banks for doing what Wells Fargo did, while Mulvaney himself has co-sponsored legislation aimed at killing the bureau.

Former CFPB Director Richard Cordray, center, embraced the idea that he ‘pushed the envelope’ to protect consumers.
AP Photo/Steve Helber

A new governing mission

While Mulvaney agrees that the bureau’s job includes protecting consumers such as credit card users, he says it also works for credit card issuers – despite the fact that its very name states that it exists to protect consumers, not banks.

One reason Congress wanted an agency to protect consumers was because existing bank regulators in the run-up to the Great Recession had not only failed to prevent predatory lenders from taking advantage of consumers, thus contributing to the subprime fiasco, but at least one even protected them. I believe the U.S. already has enough bank protection agencies, from the Federal Reserve to the Office of the Comptroller of the Currency, without adding the bureau to the list.

In January, Mulvaney told his staff that the bureau’s actions should be guided by how many complaints it receives on a particular matter.

By that measure, the CFPB wouldn’t have gone after Wells Fargo because few consumers seem to have complained to the bureau about the unauthorized Wells accounts. That may be because consumers often don’t bother to complain when they have suffered only a small loss. And yet collectively the Wells customers had much at stake, as demonstrated by the fact that Wells has agreed to settle the case for $142 million, a number that may yet grow.

Sally Greenberg, with the National Consumers League, is among the groups that have voiced strong opposition to Mulvaney taking over the bureau.
AP Photo/Jacquelyn Martin

Enforcement – or lack thereof

So what has Mulvaney actually done since taking over?

While he pledged to be vigorous and consistent in enforcement of federal consumer financial law, he has also said that the bureau should bring cases reluctantly. As such, you might wonder how many he is actually filing.

The answer would be none.

The bureau has instead dropped a case, without explanation, against a group of payday lenders that charged consumers as much as 950 percent interest a year.

It also terminated at least one investigation, though we can’t know for sure how many it has ended because the bureau usually doesn’t publicly announce such actions.

That investigation was against a company that had made several campaign donations to Mulvaney. A ProPublica investigation previously reported that the installment lender, World Acceptance Corp., trapped consumers in a cycle of debt with deceptively expensive loans.

We can’t know whether Cordray himself would have eventually ended that investigation anyway and thus determine if its termination was the result of a lack of evidence. But we can be fairly certain that he wouldn’t have done what Mulvaney did around the same time: say, he may reconsider a rule intended to keep payday customers from falling into endless debt traps. That rule took the unremarkable step of requiring lenders, before extending some loans, to verify that borrowers can repay the debt.

Another noteworthy move by Mulvaney concerns the CFPB’s Fair Lending Office. The law that originally set up the bureau tasked this office with enforcing laws prohibiting discriminatory lending. He has revoked that power, suggesting that preventing discrimination on the basis of race and gender will now be less important at the bureau.

For the next five months – or until the Senate confirms a permanent director – the CFPB is led by someone who once called it a “sad, sick” joke.

The ConversationWhat is sad and sick, in my view, is that an agency established to protect consumers may be more eager to protect predatory lenders than consumers. And that is no joke.

Jeff Sovern, Professor of Law, St. John’s 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.

Why retirement village contracts need to be regulated like insurance


Timothy Kyng, Macquarie University

While you may think signing a retirement village contract is similar to buying a house or apartment, it isn’t. Retirement village contracts resemble insurance contracts more than purchase agreements, only they aren’t regulated like insurance products.

The lack of regulation increases the risk for retirees. They face considerable delays in receiving their payments when they leave, costs due to the delay, and the potential loss of all payment from companies that don’t need to meet the financial standards of an insurance company.

Most retirement village contracts provide the consumer with a combination of the right to reside in the retirement village (until death, incapacity for independent living, or voluntarily relocation) and an “exit payment” upon leaving. As both the amount and timing of this payment depends on the resident’s death or ill health, the payment is a de facto insurance payout.

This makes the retirement village contract a combination of the right to reside and a de facto insurance policy. But the insurance policy comes from companies that wouldn’t normally be allowed to sell insurance.

Retirement villages are mostly small private companies or not-for-profit organisations. This means they aren’t required to publish their annual financial statements, hold reserves, or have reinsurance arrangements like an insurance company. The consumer can’t be confident that the retirement village is financially healthy and able to pay out the exit fee, due to the absence of information about their accounts and financial condition.

Fees and more fees

There is a great variation in the structure of the fees that retirement villages charge – entry fees, ongoing fees and a so-called “deferred management fee”, which is an amount taken out of the money refunded to departing residents.

These fees can be substantial – the entry fee alone is often comparable with the cost of buying an apartment. Although the amount varies by location, one operator told a Victorian parliamentary inquiry the entry fee was equivalent to 80% of the cost of a house nearby.

A retirement village contract might have an entry fee of A$1 million, a deferred management fee of 6% of the entry fee per year of residence, and a maintenance fee of A$500 per month.

For a contract with a A$1 million entry fee, after five or more years of residence, the deferred management fee is A$300,000, so the exit payment is A$700,000. But the deferred management fee can vary greatly. It may be 10% per year for three years, or 3% for 10 years etc.

The exit payment can also include some share of the resale value of the apartment. But the retirement village needs to be able to pay out this exit payment.

The need for proper regulation

The assets held by retirement villages are almost all invested in real estate. This is risky, as they aren’t diversified and their assets can’t be easily turned into cash.

When a retirement village has to pay a departing resident their exit payment it may take a long time to sell their apartment, which could involve a loss on resale. This can also lead to delays in receiving exit payments.

After signing their retirement village contract, residents are also in a weaker bargaining position than a traditional tenant in a normal pay-as-you-go rental arrangement. This is because residents have already paid their rent in advance for the rest of their life, and it usually costs a lot of money to get out of these contracts.

In some retirement village contracts the resident may be forced to spend a lot of money on renovations – such as for a new bathroom and kitchen – so that the apartment can be sold and they can get the exit payment.

This issue is compounded by the complexity of the contracts, which can be hard for both consumers and financial advisers to understand.

This creates substantial risk for consumers, and the lack of a requirement to publish financial statements and related information makes it very difficult to assess the financial soundness of a retirement village operator.

If retirement village contracts are in fact insurance agreements, then they should be regulated differently – by the Australian Prudential Regulatory Authority and not by state governments, as is now the case.

The ConversationIf retirement villages were properly regulated then consumers would be better protected from failure of operators and better protected from delays and capital losses when they get their exit payment.

Timothy Kyng, Senior Lecturer, Department of Applied Finance and Actuarial Studies, Macquarie University

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

Legal Status Foreseen for Christianity in Buddhist Bhutan


Country’s religious regulatory authority expected to consider recognition before year’s end.

NEW DELHI, November 4 (CDN) — For the first time in Bhutan’s history, the Buddhist nation’s government seems ready to grant much-awaited official recognition and accompanying rights to a miniscule Christian population that has remained largely underground.

The authority that regulates religious organizations will discuss in its next meeting – to be held by the end of December – how a Christian organization can be registered to represent its community, agency secretary Dorji Tshering told Compass by phone.

Thus far only Buddhist and Hindu organizations have been registered by the authority, locally known as Chhoedey Lhentshog. As a result, only these two communities have the right to openly practice their religion and build places of worship.

Asked if Christians were likely to get the same rights soon, Tshering replied, “Absolutely” – an apparent paradigm shift in policy given that Bhutan’s National Assembly had banned open practice of non-Buddhist and non-Hindu religions by passing resolutions in 1969 and in 1979.

“The constitution of Bhutan says that Buddhism is the country’s spiritual heritage, but it also says that his majesty [the king] is the protector of all religions,” he added, explaining the basis on which the nascent democracy is willing to accept Christianity as one of the faiths of its citizens.

The former king of Bhutan, Jigme Singye Wangchuck, envisioned democracy in the country in 2006 – after the rule of an absolute monarchy for over a century. The first elections were held in 2008, and since then the government has gradually given rights that accompany democracy to its people.

The government’s move to legalize Christianity seems to have the consent of the present king, Jigme Khesar Namgyel Wangchuck, who is respected by almost all people and communities in the country. In his early thirties, the king studied in universities in the United States and the United Kingdom. Prime Minister Lyonchen Jigmey Thinley is also believed to have agreed in principle to recognition of other faiths.

According to source who requested anonymity, the government is likely to register only one Christian organization and would expect it to represent all Christians in Bhutan – which would call for Christian unity in the country.

All Hindus, who constitute around 22 percent of Bhutan’s less than 700,000 people, are also represented by one legal entity, the Hindu Dharma Samudaya (Hindu Religion Community) of Bhutan, which was registered with the Chhoedey Lhentshog authority along with Buddhist organizations a year ago.

Tshering said the planned discussion at the December meeting is meant to look at technicalities in the Religious Organizations Act of 2007, which provides for registration and regulation of religious groups with intent to protect and promote the country’s spiritual heritage. The government began to enforce the Act only in November 2009, a year after the advent of democracy.

Asked what some of the government’s concerns are over allowing Christianity in the country, Tshering said “conversion must not be forced, because it causes social tensions which Bhutan cannot afford to have. However, the constitution says that no one should be forced to believe in a religion, and that aspect will be taken care of. We will ensure that no one is forced to convert.”

The government’s willingness to recognize Christians is partly aimed at bringing the community under religious regulation, said the anonymous source. This is why it is evoking mixed response among the country’s Christians, who number around 6,000 according to rough estimates.

Last month, a court in south Bhutan sentenced a Christian man to three years of prison for screening films on Christianity – which was criticized by Christian organizations around the world. (See http://www.compassdirect.org, “Christian in Bhutan Imprisoned for Showing Film on Christ,” Oct. 18.)

The government is in the process of introducing a clause banning conversions by force or allurement in the country’s penal code.

Though never colonized, landlocked Bhutan has historically seen its sovereignty as fragile due to its small size and location between two Asian giants, India and China. It has sought to protect its sovereignty by preserving its distinct cultural identity based on Buddhism and by not allowing social tensions or unrest.

In the 1980s, when the king sought to strengthen the nation’s cultural unity, ethnic Nepalese citizens, who are mainly Hindu and from south Bhutan, rebelled against it. But a military crackdown forced over 100,000 of them – some of them secret Christians – to either flee to or voluntarily leave the country for neighboring Nepal.

Tshering said that while some individual Christians had approached the authority with queries, no organization had formally filed papers for registration.

After the December meeting, if members of the regulatory authority feel that Chhoedey Lhentshog’s mandate does not include registering a Christian organization, Christians will then be registered by another authority, the source said.

After official recognition, Christians would require permission from local authorities to hold public meetings. Receiving foreign aid or inviting foreign speakers would be subject to special permission from the home ministry, added the source.

Bhutan’s first contact with Christians came in the 17th century when Guru Rimpoche, a Buddhist leader and the unifier of Bhutan as a nation state, hosted the first two foreigners, who were Jesuits. Much later, Catholics were invited to provide education in Bhutan; the Jesuits came to Bhutan in 1963 and the Salesians in 1982 to run schools. The Salesians, however, were expelled in 1982 on accusations of proselytizing, and the Jesuits left the country in 1988.

“As Bhutanese capacities (scholarly, administrative and otherwise) increased, the need for active Jesuit involvement in the educational system declined, ending in 1988, when the umbrella agreement between the Jesuit order and the kingdom expired and the administration of all remaining Jesuit institutions was turned over to the government,” writes David M. Malone, Canada’s high commissioner to India and ambassador to Bhutan, in the March 2008 edition of Literary Review of Canada.

After a Christian organization is registered, Christian institutions may also be allowed once again in the country, given the government’s stress on educating young Bhutanese.

A local Christian requesting anonymity said the community respects Bhutan’s political and religious leaders, especially the king and the prime minister, will help preserve the country’s unique culture and seeks to contribute to the building of the nation.

Report from Compass Direct News

Religious freedom survey in Belarus: persecution continues


Belarusian President Aleksandr Lukashenko’s repressive religious policies remain unchanged, Forum 18 News Service finds in its survey analysis of freedom of religion or belief.

“Legal” restrictions include: requiring all religious activity by groups to have state permission, and be limited to one geographical area; barring meetings for worship or other religious activity in private homes that are either regular or large scale; requiring all places of worship to be state-approved; and routinely expelling both Catholic and Protestant foreign religious workers.

As one Belarusian Protestant notes, “They have created conditions so you can’t live by the law. We would need to close half our churches in order to operate technically in accordance with the law.” By reducing religious communities’ aspirations, they are being contained within an invisible ghetto of regulation.

The authorities have crushed independent political, business and social organisations inside the country, and fear the potential of the largest remaining internal group of independent organisations – churches. This fear is reinforced by the fact that a number of key figures in the opposition are also committed Christians.

Report from the Christian Telegraph

UZBEKISTAN GOVERNMENT INTERFERENCE SLOWS CHURCH GROWTH


Three Christians have each been sentenced to 15 days in prison in the Andijan region of eastern Uzbekistan after police raided a home. Uzbekistan is located in Central Asia, north of Afghanistan, reports MNN.

According to Forum 18 News, speaking on condition of anonymity because of fear of retaliation, three additional Protestants at the house were detained in a homeless center for between four and eleven days, for not having their identification documents with them.

In a separate case, a Baptist in the capital city of Tashkent was given a ten-day prison sentence after approximately 20 officials from various state agencies — including the Presidential Administration — raided a prayer meeting in a registered church.

Officials told church members that they need special permission for any services aside from those on Sundays, though Forum 18 said the news service can’t find any legal requirement for this alleged regulation.

Vice President of Russian Ministries Sergey Rakhuba says they have work in the region, and he confirms that attacks against Christians are on the increase. “It looks like officials are targeting everybody who is talking about their faith, claiming that they are there to destroy their country.”

Rakhuba says these aren’t isolated cases of oppression. He says it’s happening all over the country. “People we work with are sending us messages saying that this is the beginning of another wave of very intense and very serious persecution.”

Ironically this has nothing to do with a new religion law in Uzbekistan, according to Rakhuba. “The believers were in their homes. They were in their churches. They were doing what their constitution allows. They were praying and reading the Bible. But government officials arrested them under their terrorist act or regulation, implying that they’re trying to [create an uprising] against their country, which it totally not true.”

Rakhuba says authorities are even trying to fabricate violations of the religion law. “They will stop somebody in the car, or arrest somebody on the streets, and then they plant New Testaments or Bibles or other literature, claiming that they were trying to distribute it on the streets, when they’re not trying to do that.”

He says even the long time Russian Baptist are having difficulties in the country.

Because the government’s taking such a hard stand on evangelical Christians, the church has gone underground. “That’s really who they are after. The more pressure they create, the more success we see in the underground movement, just like any other place on earth.”

Rakhuba reports that the underground church movement is growing like wildfire. Russian Ministries’ Schools Without Walls program has been created to work well in underground situations — training the next generation church leaders. “You don’t have to have schools or classrooms or schedules or approvals. You just have to have a leader” who’s willing to go and train.

Report from the Christian Telegraph