Why it is good policy, not bad politics, to ignore bad modelling on negative gearing

From The Conversation.

Negative gearing and capital gains tax are a looming battleground in the federal election. The debate was heightened last month by the release of modelling by consultants BIS Shrapnel purporting to show that reforms would lead to rent increases of between 4% and 10%. If correct, this would scare any political party.

An article in The Australian on Tuesday revealed that the ALP had seen this modelling before it released its policy to wind back the tax breaks on negative gearing and capital gains,

The ALP should be applauded for proceeding nevertheless. The report was clearly going to be inconvenient. But it was also not worth the paper on which it was printed.

The report implied that a $2 billion increase in tax would reduce economic activity by $19 billion a year. The report’s model also suggested that every additional house or apartment would increase the size of the Australian economy by $2.6 million.

None of this is remotely plausible, and consequently, it is difficult to believe anything else that the modelling or the report has to say.

Nonetheless, this report is still being discussed a month later – so it clearly needs some more critical analysis.

Tax changes will clearly reduce the after tax benefits for property investors. The key question is whether the market responds by reducing the price of housing, or by increasing rents, or by absorbing a reduction in returns.

Most likely, the price of housing will fall somewhat, investor returns will reduce a little, and rents will barely move. This is why.

Changes to negative gearing and capital gains tax will increase taxes for investors and lower their returns. Normally this would lead to lower asset prices.

But the outlook for home-buyers is different. The benefits for a home-buyer (of living in the home) won’t change. The price of the home will be a little lower due to the changes in negative gearing and capital gains tax. Therefore the return on assets (the benefits divided by the price) will be a little higher for home-buyers.

Combining the effects of the changes for investors and home-owners leads to an average after tax return on housing that is about the same as today. There will be more home-owners and correspondingly fewer investors – but higher rates of home ownership are the political goal.

The outcome might be different if the supply of new housing dried up. If there were fewer incentives to develop new homes, then eventually rents would increase.

However, our best guess is that tax changes will have little effect on housing construction. The supply of new housing is mainly restricted by planning rules rather than a lack of returns. In any case, reforms to negative gearing are likely to reduce the price of developable land, but they won’t change the returns on development.

BIS Shrapnel assume otherwise. They believe that changes to negative gearing rules will reduce the price and therefore the profitability of property developments, but not the price of developable land. And so they assert that tax changes will lead to less residential development, and therefore higher rents in the long run. Their report assumed that the price of developable land wouldn’t change based on three claims.

First claim: if the price of developable housing land fell, sites would instead be used for commercial purposes. But as a firm that advises clients on property development, BIS Shrapnel should know that in most localities land provides a much higher return per square metre when turned into residences than when used for commercial purposes. Indeed, there are concerns that too much of the Melbourne and Sydney CBDs is being converted to residential rather than commercial uses. There isn’t much evidence of enormous pent-up demand for commercial development.

Second claim: landholders will be reluctant to sell at lower prices. This is simply wishful thinking. Prices don’t rise just because sellers would like them to do so.

Third claim: it will be more expensive to aggregate sites for development. But lower prices as a result of negative gearing reform will affect all residential properties, irrespective of whether they have already been developed, or have potential to be aggregated further.

Instead of assuming that tax changes will only affect the price of development, it is much more plausible that changes in after tax returns to investors will primarily lead to lower land prices. This won’t hurt the profitability of development, the supply of rental property will continue, and the impacts on rents will be minimal.

Even if tax changes did affect the profitability of development, it’s all small beer. Quick sanity checks (the kind of things that property developers do to ensure that their modellers don’t lose them a fortune) show that the effect of negative gearing changes on property prices will be less than 2 per cent across the Australian market.

One way to think about it is that negative gearing and capital gains tax provide investors in real estate with a tax benefit of about $3 billion a year; that annual benefit converts to an asset value of about $55 billion; and all Australian residential property is worth a little over $5 trillion. If negative gearing were abolished entirely the lost value would be $55 billion, just over 1 per cent of $5 trillion of property value.

Another way to crunch the numbers shows that negative gearing and capital gains tax changes would reduce the after tax returns on real estate investment assets by about 7 per cent. But this wouldn’t affect all housing assets – only 30 per cent are investment properties, and the rest are owner occupied. So across the market, return on assets – and therefore asset values –would fall by about 2 per cent. Or in the unlikely event that investors succeed in passing on tax costs, rents would rise by at most 2 per cent.

BIS Shrapnel presented the ALP with a claim that tax changes would increase rents by 4 to 10 per cent. But that claim was several times larger than fundamentals would suggest. It used a model that was not publicly available. It was allied with a series of manifestly ridiculous economic results. And it all rested on an unjustifiable assumption that tax changes won’t affect land prices.

The ALP was right to ignore such flawed analysis. It is a relief to discover that – sometimes – a political party’s policy cannot be bought off just by commissioning a flawed report with scary numbers.

Author: John Daley, Chief Executive Officer , Grattan Institute

Talk of reforming toxic banks is misguided: improve the product and culture will follow

From The Conversation.

The recent and strident language from financial regulators, politicians and credit ratings agencies about financial services culture is a sure indicator that something is seriously amiss in the sector.

This spike in hostility has arisen from some despicable behaviour and outcomes; however, neither reform of culture nor technological innovation are panaceas, as ideologies cannot replace a clear understanding of these complex businesses.

There are several markers in this conversation which need to need to be teased out because there is a real danger that consumers could end up suffering higher costs, achieve even less peace of mind dealing with financial services providers, and potentially transfer huge enterprise value to disruptive players which may ultimately misplace consumers’ trust in even quicker time than the so-called legacy institutions.

Firstly, understanding and addressing culture is far more complex than expressing a reactive political and regulatory narrative. As conduits of reasonable anger and disillusionment, politicians express a belief that parentalism will ensure that consumers are protected from harm. There are limitations to the regulatory narrative. Columbia University Law School Professor John Coffee identifies the causal and lagged link between appalling market outcomes and regulatory response.

On the other hand, industry participants need to re-assume authority over both narratives and rebuff further regulation.

This authority should arise from their constant and deep engagement with customers. Financial services firms own the benefits of information asymmetry (including emerging issues and product failures). This reinforces their authority.

Second, financial services institutions are complex businesses with many moving parts. Their interactions with customers occur in highly varied contexts or “customer-product interfaces”. Not surprisingly, it is a challenge to articulate an authentic cultural message for a financial services conglomerate.

Aggrieved customers and stakeholders mean that the term “customer-centric” is hollow. The customer’s wallet is the centre of what financial conglomerates do.

This commercial imperative is the legitimate reason that financial services exist. Similarly, financial innovation occurs because of the need to address customers’ economic needs, rather than mere predation. It solves customers’ problems and achieves a reasonable return for the provider within a highly regulated sector of the economy.

Providers of financial services therefore need to better explain what they actually offer and from there consumers can make informed decisions. There have been advances. The industry communicates in plain English and consumers are savvy enough to intuit that this industry provides a range of largely intangible things.

On the other hand, the industry seems to have difficulty in levelling with consumers about this, preferring to maintain institutional mystique (“trust us, there’s something more to it”).

The real challenge (and opportunity) is to reassure consumers in product interfaces, to clarify what is being provided, and if and when any trust is actually warranted. In other words, providers need to unbundle and explain simply what their products entail so that consumers (personal and institutional) understand what they are buying, if it suits their circumstances, and what (if any) trust is involved. Some examples are set out in the figure:

Bnak-Culture-ConversationThird, criticisms of culture are entwined with questions of morality. Legislation and regulation set boundaries informed by knowledge and conventions, and within this perimeter and the associated contested marketplace, providers must organise their businesses sustainably.At a high level, it is important to acknowledge that financial services firms are a mirror on their customers which have varying ethics and values. This must be the case, because otherwise they would not remain in business.

Society’s mores do change over time. Witness the prevailing household debt culture, the post-GFC emergence of government bailouts, the shallowing of thought and synthetic reasoning. However, it is unreasonable to expect the financial services industry to lead morality debates: rather that is the domain of legislators and regulators who need to both represent society and understand existing product markets.

Finally, informed regulation is especially important because digital technologies are being aggressively deployed to unbundle highly-regulated financial services. Innovations and industry disruption need to be carefully assessed so that consumers do not suffer from misunderstandings, broken promises and a loss of trust.

Although technology generally may suggest individual freedoms, transparency, engagement and creativity, when applied within financial services it is largely used for the more mundane functions of customer aggregation, processing documentation and bulk communications.

Informed regulators and providers therefore must work together to carefully consider if in fact innovation and disruptive technologies can genuinely resolve economic trade-offs and maintain a durable consumer trust. This will usually require an old-fashioned – but perennially trendy – strong balance sheet.

Author:  Martin Gold, Senior lecturer, Sydney Business School, Faculity of Business, University of Wollongong

How blockchain could be used to make trusts more transparent

From The Conversation.

Amid the outcry over David Cameron’s tax affairs is the UK prime minister’s intervention in 2013 to block EU transparency rules regarding offshore trusts. It was decided that trusts should not be held to the same standards as companies when it came to making the end owners and beneficiaries publicly known.

But now the Panama Papers raise important questions as to whether trusts ought to be more open to public scrutiny. A major reason for this relates to fairness when it comes to paying taxes. Blockchain may provide a solution to this problem, enabling trusts to be more transparent, while ensuring the security of their holdings, too.

Trusts are often highly complex legal arrangements; but they tend to work on the same fundamental basis. First conceived many hundreds of years ago, trusts provide a unique method of property management. This uniqueness relates to how wealth is used, and relies on the separation of beneficial ownership from the responsibilities of property management that come with holding legal title.

Trusts come in both public and private forms. But their history points to an intimate desire for individuals and families to be able to preserve their wealth and, importantly, pass it on to the next generation.

One popular story of how trusts came into being involved the Crusaders of the 11th and 12th centuries who, before leaving to fight in the Middle East, arranged for their land to be tended and managed by a friend in trust (a trustee), on behalf of their family (as beneficiaries). This method of property management and transfer had not previously been recognised by Common Law, which viewed the friend as taking the land absolutely when given charge of it. But Equity, at the time a separate body of law in England and Wales, saw things differently.

David Cameron’s shares in an offshore fund were kept secret. Dan Kitwood / PA Wire

Based on fairness, Equity developed rules that protected the beneficial interest of the family, while at the same time applying strict fiduciary duties and obligations of trust and loyalty to the friend. This meant that the friend had to look after the property as they had been directed to by the Crusader.

Trusts now appear in the form of international commercial investment and trade vehicles; public and private pension funds; and charities, to name but three of the more economically significant. Yet those same foundations and consensual principles between the Crusader, the friend and the family fundamentally remain.

This means that trusts conform to traditional privacy models found elsewhere in banking and finance, insofar as they shield from public view the identities of the objects of the trust, as well as the nature of many of the trust’s investments and transactions. It is primarily in regard to where this “shield” is positioned that greater levels of transparency apply on the blockchain.

Smart contracts

As part of some recent research, I have been considering how blockchain technology (most famous for its role in the cryptocurrency Bitcoin) and other legal-like processes that blockchain facilitates, namely computer programs called “smart contracts”, might be mapped onto trusts law and trusteeship.

The key to the question of whether or not blockchain can make trusts more open to the public lies in its fundamental characteristics. Blockchain is essentially a peer-to-peer, distributed ledger system that is able to register information in an immutable way. This could take the form of a register of legal titles to property and beneficial interests, both of which are central to trusts.

In this sense, blockchain is a highly reliable witness regarding the information it deals with. Furthermore, as part of the process of adding or registering information on blockchain, that information is announced publicly, providing an entire, transparent history capable of public scrutiny. This does not mean that the blockchain is not private – cultural as well as commercial sensitivity around the privacy of financial information can still be maintained – but it is achieved in a different way.

Using two sets of encrypted keys, one public and one private, to validate transactions provides the possibility for secure, private spaces that nevertheless remain in public view. Unlike other methods that maintain privacy of investments and transactions by shielding the entire process from public view, including the identities of individual parties, the blockchain breaks the flow of information in another place: by keeping public keys anonymous.

So a trust could take the form of a “private space”. More specifically what is legally defined as a trust could be mapped onto the blockchain processes behind that “private space”. This would create, what I call a “smart trust” – a secure private space, yet one primed for public scrutiny.

The potential of the blockchain as described here is something of a “third-way” to existing privacy models. Because trusts come in many shapes and sizes, blockchain “smart trusts” would undeniably suit some types more than others – it is not a case of one size fits all. While trusts have a very long history, the blockchain has a very short one. It will take time to understand if and how the two might work together. But if greater levels of honesty and transparency are needed, the blockchain could provide an answer.

Author: Robert Herian, Lecturer in Law, The Open University

Superannuation ‘objective’ likely to be captured by industry

From The Conversation.

As the government moves closer to enshrining the objective of superannuation in legislation, it’s worth considering the unintended consequences that could come from such a move.

Based on recommendations of the Financial Systems Inquiry (FSI), chaired by former Commonwealth Bank chief David Murray, the change to legislation is open to “intellectual capture” by industry participants. The background of most of the people involved means, as John Kay says, that they may see things “through the eyes of market participants rather than the end users they exist to serve”. My research with Sue Taylor suggests that such capture is visible in the Australian superannuation system more widely.

The idea that there should be a fundamental purpose of super is not obvious. The Treasury paper says “a legislated objective will provide a way in which competing superannuation proposals can be measured”. But how many Trojan horses will be released to subvert the regulatory review process and provide arguments against proposals that otherwise have merit? We do not have objectives for the education and health systems, for instance.

The SIS Act already has “a sole purpose test” in section 62. Like much of the Act, the section is complex, clumsy and lacks clarity. Its purpose appears to be to prevent SMSFs from investing in the family home. However, it takes over 900 words to say that a superannuation fund must be set up to provide benefits on the death, disability or retirement of a member.

The absence of reference to insurance benefits in the Treasury paper is possibly an oversight. It is unfortunate however, because life and disability insurance are intimately connected with retirement planning and should not be lost to superannuation.

A significant number of people are forced to retire for health reasons, and the integration of retirement and disability benefits allows for seamless and higher benefits.

Death benefits should decline as superannuation balances increase, and spouses should make provision for each other if one has lower superannuation benefits as a consequence of time out of the workforce (particularly if it was to care for the children of both).

While the case is not made vociferously, the industry would seem to resent insurance premiums inside superannuation as it reduces the market for more profitable individual policies at thrice the price.

The failure of most superannuation funds to provide lifelong annuity benefits received prominence in the FSI report, is the ostensible driver of the discussion on objectives. The FSI recommendation in the Treasury paper, is:

“to provide income in retirement to substitute or supplement the Age Pension.”

Set as a subsidiary objective, is to:

“facilitate consumption smoothing over the course of an individual’s life”.

Three elements of the wording may be critical for future debates:

“Facilitate” implies no compulsion; “to provide” suggests compulsion perhaps after as well as before retirement.

Superannuation funds, of course, love compulsion in any form as it increases their funds under management. The majority of the public seem to agree, but majority approval does not justify interference in people’s lives without good reasons. It has long been knownthat young families are liquidity constrained and this is aggravated by mandatory superannuation contributions. If we must have a legislated purpose, it should avoid any suggestion that compulsion should be part of it.

“Substitute or supplement the Age Pension” seems an acceptable objective for the individual, but the question is broader and deeper. I would be concerned that “substituting the Age Pension” could be used to justify reduction in the Age Pension as some might have it, or more inappropriate means tests.

The Australia Institute makes the point that a higher universal pension with no tax concessions for superannuation would be cheaper, easier and fairer. I agree that the means tests in their current form are unfair and represent an unwarranted interference in the lives of pensioners – and do need reform.

“Consumption smoothing over the life time” and “an acceptable standard of living in retirement” are not the same.

My research with Adam Butt, Gaurav Khemka and Ujwal Kayande on retirement planning assumes as self-evident that the aim of planning is for relatively level consumption over the lifetime – after adjusting for the costs of children and for mortgage repayments. Most calculators, however, can suggest that users reduce themselves to penury in order to meet unrealistic retirement objectives.

Objectives such as 65% of pre-retirement income or the ASFA comfortable standard are seldom right. The first is almost always too high – the latter appropriate for someone slightly above middle income, but too high for some and low for others.

If we must have a fundamental objective, I suggest:

“To facilitate consumption smoothing for families/households over the course of life.”

If we must also refer to fiscal pressures:

“Integrate with other government programs to address special needs, and to achieve intergenerational equity.”

Author: Anthony Asher, Associate Professor, UNSW Australia

Six things a tax haven expert learned from the Panama Papers

From The Conversation.

The Panama Papers is a treasure trove of information on the activities and clientele of a large, but not atypical law firm operating in an offshore financial centre. In this case, it is a firm called Mossack Fonseca, based in Panama. It follows a series of spectacular leaks by the International Consortium of Investigative Journalists, including the HSBC files and the Luxembourg leaks. Here are six things that stand out from the latest revelations.

1. Same old techniques

Although it is still early days and it will take some time for the 11.5m files that were leaked from the Panama-based law firm Mossack Fonseca to be analysed, I have not come across any information on any new or unfamiliar techniques of tax avoidance. Everything that has been revealed so far: the use of offshore entities, nominee directors, accounting firms, legal firms and the like, is depressingly familiar.

2. Part of modern business

I am least surprised to learn about the profile of the typical Mossack Fonseca client. They are members of the globe-trotting elite: politicians, top echelon lawyers and accountants from a vast number of countries, some businessmen, many more in the business of finance.

In a book written by Richard Murphy, Christian Chavagneux and me on tax havens, we use the sub-title: How Globalization Really Works. We argue that tax havens are now a central component of the way international business is conducted. The Panama Papers leak is just further evidence that tax havens are an integral component of modern business.

3. A lot of it is legal

The law firm Mossack Fonseca is probably not any worse or better than your typical law firm specialising in offshore activities. If we have learnt anything from the various leaks about what takes place in the offshore economy, then it is that the accountancy and legal firms are key players in making them function.

Will this law firm be subject to penalties or taken to court? Very, very unlikely. In response to the leak, Mossack Fonseca have stressed the legality of their activities:

Our firm, like many firms, provides worldwide registered agent services for our professional clients (e.g., lawyers, banks, and trusts) who are intermediaries …

Finally, it is well established that many countries (e.g. UK, USA) have trust laws that permit a person or enterprise to represent a third party in a fiduciary capacity, which is 100% legal and serves an important purpose in global commerce.

It is up to the Panamanian government to take the firm to court to establish whether it broke the laws on compliance, due diligence and money laundering standards. Only then will we know if all their actions were legal, despite what the Panama Papers show.

What is worrying, though, is that when it comes to fighting tax avoidance (and evasion), it is highly likely that governments around the world will turn yet again to these large accounting firms and top law firms. The problem here is that these advisers then have the power to sell their expertise in tax planning to wealthy clients – after all, they know the law best, as they more or less wrote it.

4. Watch out for the whistleblower

The person who is likely to suffer most from the leak is its originator: the whistleblower. Their life – if they are identified – will be hell. Members of our globe-trotting elites will make sure of that. They are as likely to suffer from Putin’s henchman as from the courts of a leading and supposedly fair nation such as Sweden or the UK where they could be sued for the theft of the data.

Edward Snowden. 360b / Shutterstock.com

The whistleblower who exposed wrongdoing at HSBC’s Swiss bank, Hervé Falciani, was sentenced to five years in prison by a Swiss court for industrial espionage, data theft and violation of commercial and banking secrecy. He has managed to escape imprisonment by living in exile in France, but it goes to show that whistleblowers do not necessarily have the law on their side. Edward Snowden who released the Wikileaks files remains in Russia, hiding from US prosecutors.

5. There’s a long way to go

The OECD may claim that there are no longer any unco-operative tax havens in the world; UK prime minister, David Cameron, may say that Britain is taking a lead in the fight against tax abuse. The reality is that there are a number of tax havens facilitating these secretive deals and Britain is connected to a lot of them. More than 100,000 companies in the leak are based in the British Virgin Islands, a British overseas territory.

The Panama Papers, which revealed the activity of only one legal firm operating largely in one of the less glamorous tax havens, Panama, is another reminder that we face a very long fight against tax abuse in the offshore economy, and anyone professing to have conquered that world is either wilfully misleading us or blissfully ignorant.

6. Public outcry is needed

To end on a positive note, the Panama Papers when added to previous leaks will have a cumulative effect on the public that cannot easily be predicted. It may fuel a complete and utter disgust with the establishment, and the further rise of either right-wing populist politicians such as Donald Trump in the US, or a left-wing social democratic response such as that espoused by Bernie Sanders in the US or Jeremy Corbyn in the UK. The perpetrators may get off lightly, as has been the experience so far with the other leaks, but the impact on society may yet be far reaching.

Author: Ronen Palan, Professor of International Politics, City University London

Millennials v baby boomers: a battle we could have done without

From The Conversation.

The generation of young people who came of age during the new millennium – “millennials”, as they’re commonly known – has divided opinion like no other. Some have deemed them a self-pitying and entitled bunch; lazy, deluded and narcissistic. Others take a more sympathetic view, raising concerns that millennials are at risk of becoming a “lost generation”. After all, they are making the transition into adulthood under much more precarious circumstances than their parents experienced as part of the “baby boomers” generation.

The challenges millennials face include the rising costs of education; an increased likelihood of unemployment and underemployment – even for a growing number of graduates – and falling incomes even when they are employed. For millennials, home ownership is an increasingly distant prospect, and private rents are soaring. To top it all off, young people have been hit particularly hard by benefit sanctions and cuts to public sector funding.

Since the global financial crisis, the supposed plight of the millennials has given rise to the argument that inequality is an age-related issue: young people are disadvantaged, while baby boomers collectively prosper at their expense. This idea is exemplified by the Guardian’s recent series on millennials, and perpetuated by other outlets. With austerity and weak economic growth ensuring that the opportunities for younger people are comparatively diminished, even academics are raising “the issue of youth-as-class”.

Facing the changes

We don’t deny that the experience of being young has changed significantly. But this notion of a single millennial experience deserves some serious questioning. While young people are encountering changes – and often challenges – in terms of employment, education and housing, they do not all experience this hostile landscape in the same way.

By talking about “the millennials” as a disadvantaged group, we’re in danger of obscuring other, more fundamental differences between young people. For example, class background is still a particularly important determinant of a young person’s life chances. Our ownresearch – as well as the work of many others – demonstrates the importance of parental support for young people transitioning into adulthood.

Where’s my parental support? from www.shutterstock.com

Having a room in the family home or access to other family finances is key to undertaking unpaid internships or volunteer work. A monthly allowance from your folks while at university facilitates access to important CV building activities, which top graduate employers seek from applicants. It ensures that during your exams you don’t have to carry on looking for a job, and it helps you to avoid the choice between eating or heating.

Gifting or loaning deposits for a rented or purchased home is still a middle-class practice. There are many other ways that parents can, and do, use their resources to help their children onto the property ladder.

Class struggle

So, while middle-class young people are clearly facing difficulties during their transition to independence, they are also more likely to have access to resources that are unavailable to their less-advantaged peers, which help to reduce risks and protect them from uncertainties. These resources help young people to “weather the storm” and influence who survives and prospers in the current conditions.

Let us recall some other significant class-based advantages: higher education remains very stratified, and those attending elite research-intensive institutions are disproportionately middle class. Children of middle-class parents earn more than peers of working class origins, even when they obtain employment in top jobs. And while baby-boomers may be holding onto the housing stock for now, the children of the property-owning middle classes will one day inherit it.

What’s in an age? from www.shutterstock.com

As well as class, research has long shown how gender, race, disability and a host of other factors work to shape a person’s future. More recent evidence suggests that the financial crisis and subsequent austerity have had a particularly disproportionate effect on women, certain black and minority ethnic groups and the disabled.

What’s more, proclaiming an inter-generational war unhelpfully clouds the fact that the prospects for certain groups of older people are just as bad – if not worse – than for many young people. Despite the dominant media image of the resource-rich retiree, many older people do not have comfortable pensions, homes or savings to fall back on. And as the state withdraws funding for public services such as social care, older women have been forced to step in and undertake unpaid labour by caring for elderly family members.

Declarations of inter-generational conflict between baby boomers and millennials might grab headlines. But the real story is the same as it ever was; that our society is plagued by long-standing, ongoing inequalities relating to class, race and gender. The portrayal of millennials as victims has allowed the experience of the squeezed middle class to take centre stage. Now, it’s up to us to question who’s really at a disadvantage in our society – and how we can make life fairer for all.

Authors: Steven Roberts, Senior Lecturer in Sociology, Monash University; Kim Allen, University Academic Fellow – Sociology , University of Leeds

Banks get a bollocking from Turnbull on ethics

From The Conversation.

Prime Minister Malcolm Turnbull has given Australia’s banks a bollocking for unethical behaviour, suggesting they have not repaid the support they received during the global financial crisis.

Speaking at Westpac’s 199th birthday lunch – a day after the Australian Securities and Investment Commission launched legal action against the bank for allegedly manipulating the bank bill swap rate (BBSW) – Turnbull said many Australians were asking whether banks had lived up “to the standards we expect”.

He said he made no comments about any specific cases or institutions. “But we have to acknowledge that there have been too many troubling incidents over recent times for them simply to be dismissed.”

Banks did not just operate under a banking licence – “they operate under a social licence and that is underwritten by public confidence and trust”.

“We expect our bankers to have higher standards, we expect them always, rigorously, to put their customers’ interests first – to deal with their depositors and their borrowers, with those they advise and those with whom they transact in precisely the same way they would have them deal with themselves.”

He said he knew this was what the leaders of Westpac expected.

Turnbull said that during the global financial crisis – “or what probably should be better called the global banking crisis” – the Australian public, through the government, had provided the banks with vital support.

“Australians understood that we needed to ensure our banks kept trading, that a strong well-regulated financial sector in Australia was a great blessing, a great national asset,” he said.

He said today, many Australians were asking: “have our bankers done enough in return for this support?

“Have they lived up to the standards we expect, not just the laws we enact?”

Wise bankers recognised these were legitimate questions, Turnbull said. “Dismissing them as bank bashing misses the point.”

“The truth is that despite the public support offered at their time of need, our bankers have not always treated their customers as they should.

“Some, regrettably as we know, have taken advantage of fellow Australians and the savings they have spent a lifetime accumulating, seeking only dignity and independence in their retirement.”

Turnbull said that redressing wrongs was important, especially when “done promptly and generously”.

“Wise bankers understand that banks need to very publicly demonstrate that their values of trust, integrity, placing the customer first in every way – these must be lived and not just spoken.

“They recognise that remuneration and promotion cannot any longer be based solely on direct financial contribution to the bottom line. Employees who live those values, impart them to others and call out those who do not should be rewarded and recognised and promoted in a healthy banking culture.

“The singular pursuit of an extra dollar of profit at the expense of those values is not simply wrong but it places at risk the whole social licence, the good name and reputation upon which great institutions depend.

“Now all business is about more than just a profit or a new product – it’s about building opportunities for Australians, customers and staff and making a greater contribution to our nation.”

Nationals senator John Williams renewed his call for a royal commission into the financial sector. “First cab off the rank was Storm Financial. Then we went through the liquidators industry, where there’s some very bad eggs.

“Then of course we had the financial planning scandal. Now we’ve just had the managed investment schemes where billions of dollars were lost. Now the life insurance industry – and of course these latest allegations of bank bill swap rates.

“As time goes by the case builds stronger and stronger, in my opinion, for a royal commission into the finance sector. My concern is the culture is simply profit, profit, profit and to hell with the customers.”

Speaking to journalists after his address, Turnbull dodged a question on whether he would support a Royal Commission.

Author: Michelle Grattan, Professorial Fellow, University of Canberra

Apple at 40: can walled garden thrive in the new digital era?

From The Conversation.

The stand-out feature of Apple’s 40-year rise to become the world’s largest public company has been its ability to convert ideas into designs that have redefined consumer products. It is astonishing that the iPhone only arrived in 2007 but, in less than a decade, has helped redefine communication, computers, music and the internet.

But just as the PC age transitioned into the mobile computing market, we are now seeing the start of a shift to the era of the “Internet of Things”. What is the future for Apple as the focus shifts from computers in our pockets to computers in all the objects around us, from our buildings to our transport to our kitchen appliances?

The greatest sales growth in Apple’s history came in 2015 but we’re already seeing the mobile and tablet markets mature. Apple’s latest releases – the iPhone SE and the iPad Pro – are really just variations on existing products. When a company runs out of new countries to expand into and its new products are just there to fuel replacement sales, it can expect to see less and less growth.

Internet of Things

The technology market is a fickle and fluid world, new devices and solutions can often come from new directions that disrupt products and services. While the PC and mobile market has become a connected cloud of content and apps – such as Apple’s iCloud online storage system and Siri voice recognition program – this design is now shifting into “connected objects and things”.

“Internet of Things” has become a broad term covering “what is coming next”. This is a move to connect 50 billion objects or more into a new era where individual cars help plan a city’s traffic management and fridges automatically order more food for you when you run out.

But how do I make a phone call? Shutterstock

We’ve already seen the beginning of this movement with the advent of wearable devices that track your fitness levels and allow you to make contactless payments. But Apple’s entry to this market, the Apple Watch, has made far less of an impact than previous new launches. Its first connected device for the home, Apple TV, has had similarly limited success.

Apple has also introduced developer software to allow other manufacturers to connect their home appliances (HomeKit), medical and fitness devices (HealthKit) and even cars (CarPlay) to the company’s technology. But these things remain underdeveloped – early market rather than mainstream.

Can Apple replicate its success?

Apple’s success has been based on redefining existing products, but when it comes to new technology markets it has little to no track record. While Apple Watch and Apple TV are potentially leading products in their markets, they still aren’t radical compositions of technologies that can produce the kind of popularity and “wow factor” we saw with the iPhone and iPad. Even with the firm’s reported move into driverless cars or other possible difficult, high-risk “moon shot” projects, the question remains whether it can create a critical mass for the new category of connected computing.

The other issue for Apple is that the Internet of Things involves connecting many different types of products, appliances and content services from not just one company but potentially hundreds, including rival system manufacturers.says above they are doing this – are the above apps, which he then says below?. This differs significantly from Apple’s previous “walled garden” approach that has involved working with app developers, but making core technology incompatible with that of competitors – right down to its charging cables. The question is whether the firm’s home, health and car development platforms will also remain closed to rival companies, preventing customers from picking and choosing from different systems.

With its past record, the expectation of Apple is sky high. But even the enormous funds of US$160 billion that the company is sitting on – more than the GDP of many small countries – is no substitute for creativity and genius. I believe Apple will be able to position itself at the vanguard as the market moves past this latest inflexion point. But having your own walled garden may not be enough when consumers and enterprise want a multiple-connected experience.

Author: Mark Skilton, Professor of Practice, University of Warwick

Don’t blame Bitcoin for the madness of men

From The Conversation.

Virtual currency Bitcoin is much-maligned, partly due to its shady history and its treatment as a trading commodity. However, with the dismantling of Silk Road and the collapse of Mt Gox, Bitcoin is no longer a mere play thing for drug dealers and fantasy gamers.

It has real potential as a means to conduct seamless and secure online transactions. Its role as a key player in our fintech future should be assured.

But in order to achieve this status, its price needs to stop fluctuating so wildly. The main cause of the Bitcoin roller-coaster has been speculation. Speculation has consequences.

In 1720, when the South Sea Company collapsed, Sir Isaac Newton famously quipped, “I can calculate the movement of the stars, but not the madness of men”. Newton was referring to the frenzied trade in South Sea Stock that had gripped England and her neighbours. The collapse of the South Sea Company was the first global financial crisis. When the bubble burst, Newton himself lost the equivalent of almost US$5 million.

In the months leading up to the scheme’s demise, Daniel Defoe published a pamphlet warning against too much speculation. What would these learned gentlemen make of our recent interest in Bitcoin? Newton would be fascinated by the ingenuity of our modern technology and Defoe (himself a tradesmen and very interested in finance) would likely be enchanted by the invention of an unregulated nationless currency.

But what would they think of all the speculation? I think neither would approve. In 2013, the price of Bitcoin soared from US$15 in January to over US$1,000 by the end of November. Bitcoin’s increasing value was loosely tied to its emerging legitimacy, but the biggest surge in price was driven by Chinese investors hoarding Bitcoin and stashing it offshore. For the first time, Bitcoin was serving as both a digital currency and as an investment product in its own right. Whether Bitcoin’s performance in 2013 meets the definition of a speculative bubble deserves a closer look.

Irrational exuberance

Bubbles begin by stealth. The price of any commodity will only take off when smart institutional investors notice the product’s potential value and step in. They buy while the price is still low and sell when it has made a gain over a short period of time. The first sell-off is followed by a dip in price, known as a “bear trap”. Once the investment has the media’s attention, public enthusiasm follows. Demand pushes the price up and then the madness sets in: namely, greed, delusion, fear, panic and finally despair.

In Bitcoin’s early years, its price was even-tempered. In July 2010, one Bitcoin cost 9 cents. For the next ten months, it hovered around this mark. Nothing remarkable happened until April 2011, when the price of Bitcoin suddenly climbed steeply, spiked at US$29.60 and then steadily dipped back to US$13.00, which became the new normal. This lasted almost two years. Then on April 9, 2013, the price soared to US$230, followed by a rapid sell-off and another dip in price.

An article in CNN Money published on April 12, 2013 reported that the Bitcoin bubble may have burst. In fact, this was just the bear trap. Frenzied trading ensued and on December 4, 2013, it peaked at US$1,047.25. It has not been back there since. For the past two years, the closing price for Bitcoin has fluctuated between US$250 and US$450.

The events of 2013 have all the hallmarks of a speculative bubble. What is the problem? All this volatility is giving Bitcoin a bad name.

As we know, economic bubbles are driven by greed, delusion and fear. These emotions impair judgement. Greed lures us to believe in schemes and promises that are just too good to be true. In Bitcoin’s brief and turbulent history, fortunes have been made and lost. Some investors have been unlucky, but most were duped. In December last year, 10,000 investors lost US$19 million in a Bitcoin Ponzi scheme. A number of exchanges have also completely imploded. Some have fallen foul of hackers, while others have been shut down by regulators for running sham operations or laundering the ill-gotten gains of a black market.

Notwithstanding all these shocks and crashes, I would argue that we should not be put off Bitcoin. Our negative impressions are borne of the way it has been used so far, but this will change.

The technology that drives Bitcoin enables almost riskless storage and transfer of value and data. In an increasingly digitised world, this is a really useful innovation. Once the regulators step in and (for example) curb the influence of speculative trading in Bitcoin, its role as a legitimate currency will prevail and the madness will stop.

Author: Philippa Ryan, Lecturer in Civil Practice and Commercial Equity, University of Technology Sydney

Four reasons payday lending will still flourish despite Nimble’s $1.5m penalty

From The Conversation.

The payday lending sector is under scrutiny again after the Australian Securities and Investment Commission’s investigation into Nimble.

After failing to meet responsible lending obligations, Nimble must refund more than 7,000 customers, at a cost of more than A$1.5 million. Aside from the refunds, Nimble must also pay A$50,000 to Financial Counselling Australia. Are these penalties enough to change the practices of Nimble and similar lenders?

It’s very unlikely, given these refunds represent a very small proportion of Nimble’s small loan business – 1.2% of its approximately 600,000 loans over two years (1 July 2013 – 22 July 2015).

The National Consumer Credit Protection Act 2009 and small amount lending provisions play a critical role in protecting vulnerable consumers. Credit licensees, for example, are required to “take reasonable steps to verify the consumer’s financial situation” and the suitability of the credit product. That means a consumer who is unlikely to be able to afford to repay a loan should be deemed “unsuitable”.

The problem is, regulation is just one piece of a complex puzzle in protecting consumers.

  1. It’s going to be difficult for the regulator to keep pace with a booming supply.Nimble ranked 55th in the BRW Fast 100 2014 list with revenue of almost A$37 million and growth of 63%. In just six months in 2014, Cash Converters’ online lending increased by 42% to A$44.6 million. And in February 2016, Money3 reported a A$7 million increase in revenue after purchasing the online lender Cash Train.
  2. Consumers need to have high levels of financial literacy to identify and access appropriate and affordable financial products and services.The National Financial Literacy Strategy, Money Smart and Financial Counselling Australia, among other providers and initiatives, aim to improve the financial literacy of Australians, but as a country we still have significant progress to make. According to the Financial Literacy Around the World report, 36% of adults in Australia are not financially literate.
  3. The demand for small loans is high and yet there are insufficient supply alternatives to payday lending in the market.The payday loan sector dominates supply. Other options, such as the Good Shepherd Microfinance No Interest Loan Scheme (NILS) or StepUP loans, are relatively small in scale. As we’ve noted previously, to seriously challenge the market, realistic alternatives must be available and be accessible, appropriate and affordable.
  4. Demand is not likely to decrease. People who face financial adversity but cannot access other credit alternatives will continue to seek out payday loans.ACOSS’s Poverty in Australia Report 2014 found that 2.5 million Australians live in poverty. Having access to credit alone is not going to help financially vulnerable Australians if they experience an economic shock and need to borrow money, but lack the economic capacity to meet their financial obligations.

    Social capital can be an important resource in these situations. For example, having family or friends to reach out to. This can help when an unexpected bill, such as a fridge, washing machine or car repair, is beyond immediate financial means. Yet, according to the Australian Bureau of Statistics General Social Survey, more than one in eight (13.1%) people are unable to raise A$2,000 within a week for something important.

Coupled with regulation, these different puzzle pieces all play an important role in influencing the entire picture: regulators and regulation; the supply of accessible, affordable and appropriate financial products; the financial literacy and capacity of consumers; people’s economic circumstances; and people’s social capital.

Previous responses to financial vulnerability have often focused on financial inclusion (being able to access appropriate and affordable financial products and services), financial literacy (addressing knowledge and behaviour), providing emergency relief, or regulating the credit market. Dealing with these aspects in silos is insufficient to support vulnerable consumers.

A more holistic response is needed: one that puts the individual at the centre and understands and addresses people’s personal, economic and social contexts. At the same time, it must factor in the role of legislation, the market and technology.

The Turnbull government recently committed to “creat[ing] an environment for Australia’s FinTech sector where it can be internationally competitive”.

With more online lenders coming, it’s important we work towards strengthening people’s financial resilience.

Improving the financial resilience of the population, coupled with strong reinforced regulation, will help to protect financially vulnerable Australians from predatory lenders.

Authors: Kristy Muir, Associate Professor of Social Policy / Research Director, Centre for Social Impact, UNSW Australia; Fanny Salignac,
Research Fellow – Centre for Social Impact, UNSW Australia; Rebecca Reeve, Senior Research Fellow, Centre for Social Impact, UNSW Australia