Category: Banking Culture

Australia’s banking four pillars wobbly on sustainability record

From The Conversation.

Australian companies will soon be publishing financial results, as well as information about sustainability efforts.

Corporate social responsibility of the big four banks – Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB) and Westpac is a continuing topic of debate following recent scandals and reports of unsustainable activities.

Yet according to ANZ chairman, David Gonski, Australians ought to “stop bashing the banks” for being large and profitable.

This comment should put civil society on guard.

A recent study by the Centre for Corporate Governance at the University of Technology Sydney, part of the UNEP Inquiry into the Design of a Sustainable Financial System, examined self-regulatory and voluntary sustainability efforts of the world’s largest banks, in partnership with Catalyst Australia which scrutinised the efforts of the big four Australian banks.

Sustainable finance

The “four pillars” of the Australian banking system are a dominant part of the Australian economy: the four banks are featured in the top five of the ASX 200 and hold A$522 billion of Australian household deposits, equal to one-third of Australia’s gross domestic product.

In the words of David Murray, former CBA boss and chair of the Financial System Inquiry: “banks fund most of the assets in the economy – whether it’s businesses, governments themselves, homes or projects, whatever else.”

This market dominance results in great power and great responsibility. As banks provide the majority of external finance to companies and governments, they can influence practices: bank lending potentially has more impact on sustainable enterprise than investment and divestment on the stock market.

Banks can thus wield their enormous market power to support sustainable activities, while their actions can likewise contribute to detrimental behaviour.

Conflicting images

The examination of the sustainability efforts of Australian and international banks reveals a schism between symbolic and substantive sustainability efforts.

At the 2014 World Economic Forum, Westpac was named the most sustainable company in the world. ANZ has been named as a leader in the global banking sector by the Dow Jones Sustainability Index, a major reference point for sustainable investors, six times in the last seven years, while NAB and the CBA have likewise been recognised for their sustainability performance.

Yet despite being lauded for their sustainability efforts, the public image of big Australian banks have suffered in the wake of dodgy financial advice scandals, disputed fees, and allegations of rate-fixing and insider trading.

Banks have drawn the ire of environmental activists by extensively funding the fossil fuel industry, coal mining along the great barrier reef, and nuclear arms manufacturing. Oxfam Australia claims the Big Four are also backing agricultural and timber companies accused of land grabbing in developing countries.

As a result, public confidence in banks is low: according to a national survey, part of the research by Catalyst Australia, 76% of respondents believe that banks put profits before their social and environmental responsibilities.

Regulation and Supervision

In 2005, the Government launched an Inquiry into Corporate Responsibility and Triple Bottom Line reporting. It examined the extent to which the Australian legal framework encourages or discourages company directors from considering interests of stakeholders other than shareholders, the suitability of voluntary sustainability measures, and the appropriateness of reporting requirements.

The Committee found that legal amendments were undesirable, as it deemed it “not appropriate to mandate the consideration of stakeholder interests into directors’ duties”.

Furthermore, the Committee recommended that sustainability reporting should remain voluntary, fearing that “mandatory reporting would lead to a ‘tick-the-box’ culture of compliance”.

In the aftermath of the global financial crisis, financial sector regulators were pushed to exercise more supervision and be less trusting of self-regulatory efforts. Consequently, in 2013 the Government launched the Financial System Inquiry. Regrettably, the terms of reference did not address social and environmental sustainability and risks in the financial sector.

The readiness to increase supervision to avoid financial risks is not matched by a similar willingness to supervise and regulate the social and environmental risks caused by the financial sector. This emphasis on voluntary efforts is problematic, as the study by Catalyst Australia shows that only 26% of the Australian public believe banks will behave ethically and responsibly if they self-regulate.

Bridging the governance gap

While many Australian and overseas banks have successfully shaped sustainable corporate imagery, the research by the Centre for Corporate Governance and Catalyst Australia finds that self-regulation permits facts to be obscured and leaves social and environmental matters peripheral to business strategies.

The assurance that banking activities are based on sustainable principles requires public monitoring of compliance and performance – as US litigater Louis D. Brandeis famously said:

“Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”

In order to accomplish this, directors’ duties ought to be reformulated to include social and environmental responsibilities, sustainability reporting requirements should be redefined and further embedded in corporate governance systems, and social and environmental risk assessments should apply the precautionary principle, shifting the burden of proof to actors that potentially cause harm.

Robust governance, regulation and supervision should not be seen as measures that restrain innovation or entrepreneurship, but rather as instruments that can help to restore trust, and ensure that banking activities are conducted openly, fairly and sustainably.

Author: Martijn Boersma, Researcher in Corporate Governance at University of Technology, Sydney

ASIC Investigating Financial Benchmarks

ASIC is investigating a range of financial institutions to determine whether or not there has been benchmark-related misconduct in Australia’s financial markets. Their inquiries are still underway and, given the size and complexity of the relevant markets, will take some time to complete. They are looking at the activity of Australian financial institutions domestically and overseas, as well as foreign financial institutions that are active in Australia.

Benchmarks are of critical importance to a wide range of users in financial markets and throughout the broader economy. Different benchmarks affect the pricing of key financial products such as credit facilities offered by financial institutions, corporate debt securities, exchange-traded funds (ETFs), FX and interest rate derivatives, commodity derivatives, equity and bond index futures and other investments and risk management products.

In Australia, ASIC consider the following benchmarks to be of potential systemic importance:

  • Bank Bill Swap Rate (BBSW)
  • the Interbank Overnight Cash Rate (cash rate)
  • S&P/ASX 200 equity index
  • ASX Clear (Futures) Pty Ltd’s Commonwealth Government Securities (CGS) yields survey for settling bond futures
  • Consumer Price Index (CPI).

Internationally, they consider the IBOR interest rate benchmark family and the WM/Reuters and European Central Bank (ECB) foreign exchange (FX) ‘fix’ rates, among other benchmarks, to be systemically important.

Their investigations are informed by the conduct issues relating to financial benchmarks that have been observed overseas and which have formed the basis of significant settlements by financial institutions with foreign financial regulators. For example:

  • trading designed to move a benchmark rate so that the financial institution derives a benefit (e.g. by increasing the value of a derivative position held by the institution that references the benchmark)
  • inappropriate handling of client orders or positions (e.g. by deliberately triggering ‘stop-loss’ orders)
  • inappropriate disclosure of confidential client information (e.g. by disclosing client orders to traders at competing banks); and
  • inappropriate submitter conduct (e.g. by making submissions in order to reduce the institution’s borrowing costs).

 

Payday Lender Money3 refunds over $100,000 to consumers – ASIC

ASIC announced that Australia’s second-largest listed payday lender, Money3, has stopped offering its two payments ‘fixed fee’ loan arrangement and agreed to refund more than $100,000 to consumers following concerns raised by ASIC that it breached consumer credit laws and engaged in misleading conduct.

Money3’s ‘fixed fee’ loan (also promoted as a ‘LACC’ loan) required only two repayments despite having a term of 16 months. Under the terms of the contract, the first repayment (generally due a week after the loan was taken out) was for a nominal amount, and the much larger second repayment was due 15 months later. This second payment usually accounted for more than 90% of the total amount repaid.

ASIC was concerned that the product was likely to be unsuitable for most of the financially vulnerable customers who obtained it, and in breach of the national responsible lending obligations. Consumers may also have been misled into believing the terms of the loan enabled flexible repayments when the contract in fact disclosed that a large fee could be charged if the consumer asked for a variation of the repayment schedule. ASIC saw examples where the second repayment was as high as 170% of the customer’s Centrelink benefit for that pay period.

Money3 has agreed to finalise outstanding loans and will refund approximately 400 consumers a combined total more than $100,000. These refunds will ensure current consumers have not repaid any monies above the principal amount lent and a cost recovery fee.

ASIC Deputy Chairman Peter Kell said, ‘Small, high cost loans such as this with large one off payments are likely to be of limited benefit to customers who have no savings or savings history as they would be unable to finance the second repayment of the loan without considerable hardship.

‘The difficulties for these vulnerable customers are amplified where there is a large fee where the consumer wants to make any changes to the repayment schedule or amount.’

Money3 has changed the product and its marketing and all LACC contracts now have the repayments spread at even monthly intervals across the 16 months term of the contract.

Consumers are reminded that if they have entered into a credit contract and believe it was unsuitable and suffered a loss or damage they are able to access free internal and external dispute resolution services. Consumers who have previously repaid a LACC loan in full can approach Money3 directly and request a refund similar to what is being offered to current customers.

If a consumer is unable to resolve their complaint directly with the lender via its internal dispute resolution process, they should contact their credit provider’s external dispute resolution scheme, in this case, the Credit and Investments Ombudsman. Consumers may also seek legal advice.

Background

The tighter consumer credit rules for small amount lending included a cap on the fees that can be charged and a strengthening of responsible lending obligations.

For the period Money3 offered the loan, it entered into 24,547 contracts. As at 29 May 2015, 1941 remain on foot.

BT pays $20,400 penalty for misleading statements

According to ASIC, BT Funds Management Ltd (BT) has paid $20,400 in penalties after ASIC issued two infringement notices for misleading statements contained in the online advertising of BT Super.

The misleading statements were contained in two separate online advertising campaigns. Each infringement notice imposed a penalty of $10,200.

The first infringement notice was issued for the statement “BT Super Has Outperformed Industry Super Funds Over the Last 5 Years*” published on search results pages generated via www.google.com.au from 26 June 2014 to 18 September 2014.

ASIC was concerned that BT misled consumers by representing that superannuation products issued by BT had generated greater returns than those generated by all industry super funds during the stated period. In reality, BT’s superannuation products had not generated greater returns during the stated period.

The second infringement notice was issued for the inclusion of the words “Industry Super Australia” in the headlines of BT advertisements published on search result pages generated via www.google.com.au from 29 October 2014 to 17 November 2014.

ASIC was concerned that BT misled consumers into believing that BT had an affiliation with Industry Super Australia (ISA), an organisation which manages collective projects on behalf of fifteen industry super funds. BT has never had an affiliation with ISA.

ASIC Deputy Chairman Peter Kell said, ‘The advertising of financial products and services must be clear, accurate and  balanced and should be presented in a way that avoids potentially misleading or deceiving consumers.

‘ASIC has provided guidance to help promoters comply with their legal obligations when advertising financial products and services. We continue to actively monitor advertising in this area and will take appropriate action where we consider consumers may be misinformed,’ Mr Kell said.

The payment of an infringement notice is not an admission of a contravention of the ASIC Act consumer protection provisions. ASIC can issue an infringement notice where it has reasonable grounds to believe a person has contravened certain consumer protection  laws.

Governor Mark Carney speaks at the Mansion House on 10 June 2015

Bank of England Governor Mark Carney makes a major speech at the Mansion House on 10 June 2015, with Chancellor George Osborne, and Lord Mayor Alan Yarrow. Governor Carney details the reforms that the Fair and Effective Markets Review will bring to ensure real markets and financial services that serve society, free of implicit public subsidy. In the speech, he details reforms under way to market-structures, standards, systems, incentives, training, etc, and outlines the work of the Markets Standards Board. The UK’s global reputation will, he says, be enhanced by the strong reforms under way, which will include individuals taking clear personal accountability for wrongdoing. He also details earlier failings of the Bank of England – as well as its successes.

A transcript of the speech is available.

Rogue Bankers Join the Welfare Cheats on Osborne Hit List

From The Conversation.

Cracking down on bad behaviour. EPA/Andy Rain

“The age of irresponsibility is over” declared the governor of the Bank of England at the annual Mansion House dinner to the great and the good of the financial world. Along with the chancellor of the exchequer, George Osborne, Mark Carney unveiled a host of new sanctions and procedures designed to clean up financial markets.

Delivering the Fair and Effective Markets Review, an annual assessment of the way financial markets operate, they mentioned 11 recommendations ranging from new regulations against manipulating markets to tightening up hiring and training policy in the financial services industry. But the most eye-catching feature of the review was the demand for enhanced criminal prosecutions of “individuals who fraudulently manipulate markets”.

In Osborne’s words, people “who commit financial crime should be treated like the criminals they are”. The review therefore recommended that criminal sanctions for market abuse should be extended to traders in foreign exchange markets and that the maximum sentences for wrongdoing should be lengthened from seven to ten years.

Mervyn King EPA/Franck Robichon

Osborne and Carney were also critical of the Bank of England for failing to identify risks and abuses in the banking system in the run up to the financial crisis. But there are actually far more parallels between Carney and his predecessor, Mervyn King, than you might assume on the evidence of the Mansion House speech.

King, who experienced the banking crises (bail-outs and scandals) in the last few years of his governorship, was also critical of the failures of the largest banks. Carney has followed in his stead, voicing his criticisms of the industry, and has enjoyed new powers as a result of the Financial Services Act, passed in 2012. Strong criticisms have therefore been accompanied by new regulatory bodies such as the Financial Policy Committee and Prudential Regulatory Authority (replacing the old Financial Services Authority).

Culture change

But the real message behind the Mansion House speeches is that the state’s approach to policing the banking system is indeed toughening – precisely because change has been so slow in forthcoming. Amid the creation of new, formal regulatory bodies (FPC, PRA, FCA), a host of other relatively informal, or advisory bodies have emerged too.

These include the Parliamentary Committee on Banking Standards and the Banking Standards Board. Another one was recommended in this latest review – the Market Standards Board. What all these bodies have in common is that they are trying to remedy irresponsible behaviour on the part of individuals working in financial services, and to improve the “culture” of banking.

Improving banking culture has two faces. It is partly a PR exercise aimed at improving consumer confidence in the banks. But it is also about addressing a more substantive threat posed by bad behaviour.

That change in culture has been slow. The recent forex scandal, for example, revealed that corrupt behaviour in these markets was still occurring in the UK up until 2014, long after the Libor, IRSA and PPI revelations.

The market police state

Many in the room at the Mansion House were expecting the big announcement to focus on concessions on the bank levy. The expectation – with half an eye on HSBC’s announcements (read: veiled threats) earlier in the week – was that the chancellor might cede some ground to the largest banks. Instead though, the ominous silence on the bank levy and the tough-talking approach reinforce an important message: that the state is no longer willing or able to turn a blind eye to irresponsible banking.

Bankers are in need of a PR boost. Dominic Lipinski / PA Wire/Press Association Images

What is most noteworthy in the latest review is that it shows the Conservative government – known for its strong stance on welfare cuts and typically labelled a business-friendly party – is also taking a tough stance on the UK’s biggest industry, financial services. But this is not as surprising as it might appear. The same principles that underpin the Tories’ position on the welfare state also underpin their take on individuals who commit fraud and cheat in the financial services industry.

The Conservatives are fulfilling a role assigned to them by classical, liberal thinkers such as Adam Smith – that of a market police ensuring the “better” functioning of the market mechanism itself and maintaining the legitimacy of commercial society. This is because, in the mind of the Conservative government, it is not simply “free-riding” benefit claimants which threaten the market mechanism, but the collusive behaviour of individual bankers as well.

Ultimately, the Fair and Effective Markets Review is more than just another piece of clever political rhetoric. It is being backed up by genuine changes in the regulatory approach to anti-competitive behaviour in the financial services industry.

The hope is that, gradually, the culture of banking will indeed change and legitimacy and credibility can be restored to the banking system. But, as some commentators have also noted with some concern, the UK’s unhealthy addiction to cheap consumer credit, high levels of mortgage borrowing, and consumption-led recoveries, means that Britain’s financial worries run far deeper than just the behaviour of a few “bad apples” in the banking industry.

Author – Huw Macartney – Lecturer in Political Economy at University of Birmingham

War on Banking’s Rotten Culture Must Include Regulators

At conferences in Sydney last week, the heads of ASIC (Greg Medcraft) and APRA (Wayne Byres) agreed on a few things: banking culture is rotten; culture is “hard” to deal with; and regulators are basically at a loss on what to do about it.

As reported in The Conversation, Medcraft said:

“When culture is rotten it often is ordinary Australians who lose their money. And that is my point – markets might recover but often people do not. So that is why we need to clean up culture because people suffer. And people are sick of it. They want to have trust and confidence in the institutions they are dealing with.”

Medcraft wants to be able to criminally charge banks and their directors when company culture has allowed for staff misconduct.

Medcraft’s outrage disguises the fact that Australia’s regulators may have had something to do with fostering a “rotten” banking culture. For example, when the Four Pillars were fined some A$1.7 billion and censured by the New Zealand High Court for Tax Avoidance neither regulator censured the boards or senior management of four banks, or even commented at the time on the cultural messages such behaviour would inevitably reinforce.

To give ASIC credit, in another speech last week Commissioner Greg Tanzer outlined a very long laundry list of things ASIC is now going to look at relating to culture, including: reward structures; whistleblowing policies; conflicts of interest; complaints handling; and corporate governance.

The regulators might wish to look the latest research showing the avoidance culture behind the risk taking by Australian bankers.

Or the experience overseas showing the difficulties of actually changing banking culture.

But the problem is wider than individual banks and includes the culture of the banking and regulatory system itself.

A system beset by groupthink

While Australian regulators bemoan the industry’s culture problem, the Irish parliament is holding yet another inquiry into the tragedy that beset the Irish banking system before the global financial crisis. Irish finance leaders have fronted the inquiry, singing from the same songbook. From bankers, regulators, auditors, the media, to academics, commentators and managers of construction companies, (almost) all were repeating the same thing – ‘No one – but no one – saw it coming’.

There were a few exceptions who had been off-key before the crisis, including Professor Morgan Kelly and a brave regulator, Con Horan, who had warned of the impending calamity but was told not to rock the boat. Aside from those notable exceptions, everyone else appeared to be on same page.

In behavioural economics, such “concurrence” across a group is called groupthink. Everyone in Ireland, or at least those in charge of the financial system, believed the economy would keep growing forever. And why not, as Ireland was in the midst of a 25-year boom – sound familiar?

Groupthink (or more properly in this case “systemsthink” because the whole system was deluded) is unhealthy because, not only do people start to think alike, it is only a short step to believing people who are singing a different tune should be excluded and thrown out of the chorus. Dissent can be destructive, but the role of the Devil’s Advocate is well-understood to be valuable, drawing out important questions people would rather not answer.

But it’s not only in Ireland that people are afraid of rocking the boat. In Senate hearings this week into high credit card interest charges, RBA Assistant Governor Malcolm Edey admitted the Reserve and Treasury were aware of the problem, but said it was not up to them to question Australia’s banks on card rates. He recommended ASIC or APRA be the people to ask, if one was really worried. Since the RBA, APRA, ASIC and the Treasury are the four members of the Council of Financial Regulators (CFR), one would have thought that one of their regular meetings would have been an ideal opportunity to bring this issue up – but no one did.

It is the primary role of Australia’s banking regulators to promote systemic stability. But what if the whole system, including banking regulation, is deluded (as happened in Ireland)?

Seeking solutions

So how could a Devil’s Advocate be introduced into the regulatory process? The recent Murray Inquiry into the Financial System made one recommendation that could help. The inquiry recommended the establishment of a new Financial Regulator Assessment Board (FRAB), which would be asked to “assess how regulators have used the powers and discretions available to them”.

The Murray inquiry envisaged that this new board would consist of knowledgeable experts, crucially not tied to regulators, with a diverse membership that would “act as a safeguard against the FRAB being unduly influenced by the views of one particular group or industry sector”. The Inquiry also recommended that FRAB’s assessments of regulators should be made public. The creation of the FRAB is awaiting the government’s response to the Murray proposals.

Experts, such as Dr Andy Schmulow, suggest the FRAB proposal may however be dead on arrival, due to push-back from regulators. That is a pity, as regulators should welcome the creation of such an independent body, even though they know it may cause them some uncomfortable moments along the way. Constructive questioning of perceived wisdom will enhance rather than reduce systemic stability, which is after all the goal of banking regulation.

By Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre at Macquarie University. Article published in The Conversation