Tag: The Conversation

The Waves of “Reputational Damage” Spread Far and Wide

From The Conversation.

The Liberals are always urging the business community to get onto the political battlefield and argue for what it believes, rather than leaving the space to the ACTU, GetUp! and others on the left.

The Business Council of Australia in particular has felt the heat. In 2016 Victorian Liberal president Michael Kroger said of the BCA, “these people have got no idea how to influence public opinion” and called for its chief executive, Jennifer Westacott, to be sacked.

Now the BCA has taken up the challenge to join the fray, a decision that might be described as “courageous”, in the Yes Minister use of the word. Westacott is on the frontline in what has become the toughest of gigs, given the shocking disclosures, and subsequent fallout, in the financial sector.

Just this week, on Monday AMP’s chairman Catherine Brenner quit, while a day later the Australian Prudential Regulation Authority (APRA) released a scathing report on Commonwealth Bank wrongdoing after an inquiry into allegations that it facilitated money laundering.

With the BCA conducting an “Australia at Work” advertising campaign to counter anti-business sentiment and running local forums around the country in conjunction with Sky, Westacott was on Perth radio on Tuesday prosecuting the message.

The BCA represents some 130 of the biggest companies – among them, all four major banks and AMP.

Questioned about corporate bad behaviour including that perpetrated by other major companies as well as the financial institutions, Westacott admitted “we’ve got huge issues in the business community to fix, and my advice to boards and to CEOs is to fix them and fix them fast”.

“Business has got to get back to its purpose of providing excellent service to its customers, treating its employees properly, treating its suppliers properly,” she said. She pointed to the BCA having pushed its companies to pay small businesses in 30 days – a good move, but surely a very modest one, in the wider scheme of things.

But Westacott’s warning was: “If we allow [the bad behaviour] as an opportunity for this anti-business movement that has been there … for a long time, to get a stranglehold on the policy agenda of our country, we will be poorer for it”.

Earlier, in Tuesday’s Australian, Westacott wrote that indefensible behaviour “has handed anti-business campaigners a fresh excuse to seek to punish the engine of Australia’s prosperity.”

Just as, anyone into scoring tit-for-tat points could say, the bad behaviour of some unions – the most notable being the Construction, Forestry, Maritime, Mining and Energy Union – has handed the anti-union campaigners very useful weaponry.

That’s what happens with reputational damage. Its impact can be both deep and broad. This is one reason why some companies are very concerned, for example in their climate change and environmental policies, with living up to what they understand to be the “social licence” they have.

Very obviously, reputational damage is a hazard for governments. We see this as Treasurer Scott Morrison (who incidentally, unlike his predecessor Joe Hockey, is not personally close to the big end of town) struggles in responding to the serial revelations about the financial sector.

In this case, the reputational damage has two dimensions.

Firstly, the fact the government resisted the royal commission until it could do so no longer means people apply a discount to the various measures it did take – for example the provision in the 2017 budget that before appointing senior executives and directors, banks need to register them with APRA.

On Tuesday Morrison was out with strong language saying that the APRA report condemning the CBA “should be a wake-up call for every board member in the country”. He’s quite right. But Labor was quick to counter by claiming that Morrison – as shown by his opposition to the banking royal commission – “gets the big calls wrong”.

Secondly, the banks’ bad name has boosted the case of those arguing that they should not receive a company tax cut, via the package the government is trying to get through the Senate. The economic argument that there are separate issues involved finds it hard to compete with the more emotive one.

Late last week there was a notable example of a minister trying to repair personal reputational damage she’d suffered.

In an excruciating TV interview Minister for Financial Services Kelly O’Dwyer, following the government talking points, had refused to acknowledge the government should have called the royal commission earlier. She was pilloried. A few days later, off her own bat after Malcolm Turnbull had admitted prompter action would have left the government better off politically, she said, “With the benefit of hindsight we should have called it earlier. I am sorry we didn’t, and I regret not saying this when asked earlier this week.”

In talking about the campaigning it will undertake as the election approaches Westacott says the BCA will “take on issues across the political spectrum”. In practice, however, the BCA will be seeking to reinforce the case of one side.

“Some will claim this is yet another anti-GetUp! campaign,” Westacott wrote.

GetUp! certainly sees it that way. On Tuesday the activist group was appealing for funds to help it “double down on our organising efforts for the next election, and leverage the latest in technology and tactics, to start winning the fight against destructive corporate power.”

Author: Michelle Grattan, Professorial Fellow, University of Canberra

APRA and ASIC have the legal power to sack bank heads, but they need willpower

From The Conversation.

The chairwoman and CEO of AMP have resigned after the company admitted to charging for advice never provided and lying to clients and regulators. But no banking CEOs have been toppled despite the Financial Services Royal Commission unearthing instances of fraud, bribery, impersonating customers, failures to report misconduct to regulators and other poor behaviour.

Similar conduct in the United States has resulted in bank executives and directors being forced to resign. That this is not happening in Australia shows how the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) aren’t using their full powers to take action on the banks’ bad behaviour.

APRA already has the power under the Banking Act to remove someone from a bank board and install its own nominee. The recently enacted Banking Executive Accountability Regime has given APRA more power to remove directors and install new ones.

So ASIC and APRA are not bedevilled by a lack of power, but by a lack of willpower.

In 1998 the Wallis Inquiry hived off the consumer protection and market conduct functions from the Australian Competition and Consumer Commission (ACCC) and gave these to ASIC. Professor Ian Harper, a member of the inquiry, now concedes that may have been an error.

The ACCC is an excellent regulator, with a long history of being a tough cop. Handing the consumer protection and market conduct function back to the ACCC is a step that federal Treasurer Scott Morrison should take now.

The royal commission heard that a Commonwealth Bank subsidiary was billing customers for ongoing service after their deaths. But no executives have been sacked for this.

Indeed, Matt Comyn, who was responsible for this division from 2012 onwards, has been promoted to Commonwealth Bank CEO. Former CEO Ian Narev has been permitted to sail off into the sunset with bonuses intact.

This shows ASIC is the same, or worse, than what it was in 2014: a timid, hesitant regulator, too quick to accept the assurances of regulated entities.

Despite United States authorities being widely regarded as weak in standing up to their banks, American CEOs are being held accountable.

Take the example of John Stumpf, chairman and CEO of Wells Fargo, the biggest retail bank in the US. Under his direction Wells Fargo staff had been opening multiple accounts for clients, with neither their knowledge nor their consent, and then charged account-keeping fees.

When the scandal hit, Stumpf was hauled before the US Senate. He performed so disastrously that the board told him he needed to go straight away.

No one is suggesting Stumpf knew about the fraud, or that Comyn knew that CBA was charging fees for advice to dead people. But Stumpf’s misstep caused his departure. Why is no one suggesting Comyn must go?

This is the true state of the Australian financial sector: bank executives and CEOs who could be facing criminal charges, and should have resigned, don’t even acknowledge the buck stops with them.

Regulatory failure

And if there is any doubt about the need to get cracking, here is the knockout blow: UBS has downgraded Westpac shares because the royal commission revealed that the percentage of “liar loans” in the bank’s A$400 billion loan book may be much higher than stated, or even than Westpac itself is aware of.

This is the culmination of ten years of cowboy behaviour in a financial system that now resembles the Wild West.

This is what happens when compliance culture breaks down, which in turn is a function of regulatory oversight and enforcement. Put differently, our regulators have failed to act for so long that the problem is assuming systemic proportions.

What will be interesting to see is whether the APRA inquiry is another whitewash. I half suspect that if it failed to excoriate CBA it would look pretty silly.

Let’s hope the panellists understand that. But if they don’t, then they must be called out.

Author: Andrew Schmulow, Senior Lecturer, Faculty of Law, University of Western Australia

Why you can’t have free trade and save the planet

When Donald Trump recently announced tariffs on steel and aluminium imports he was condemned by proponents of free trade across the world.

His critics said the US president had not understood how protectionist policies would spell disaster for the world economy. Fair enough. But this is the same Trump whose decision to withdraw from the Paris climate agreement also met with massive disapproval.

Trump is simultaneously chided for refusing to cut emissions, and for promoting a trade policy that reduces the causes of such emissions. Both sets of critics may be right on their own terms, but the contradiction between the two reproaches exposes big problems in the mainstream modern worldview. Is it really reasonable to advocate for both more trade and greater concern for the environment?

For centuries world trade has increased not only environmental degradation, but also global inequality. The expanding ecological footprints of affluent people are unjust as well as unsustainable. The concepts developed in wealthier nations to celebrate “growth” and “progress” obscure the net transfers of labour time and natural resources between richer and poorer parts of the world.

Per capita net imports of resources to the EU, Japan and US in 2007. Dorninger and Hornborg, 2015, Author provided

For instance, the household of an average American couple with one child has the equivalent of an invisible servant working full time for it outside the nation’s borders, while the average Japanese household with one child uses three hectares of land overseas. Yet such material asymmetry appears to be a side issue for mainstream economists, who continue to assert the overall benefits of free trade.

This same ignorance is particularly apparent in the fight against climate change. Most environmentalists and researchers put their faith in new technologies for harnessing the sun and wind, and hope that politicians can be persuaded to act. But solar panels and wind farms are not merely products of human ingenuity that have been revealed to us by nature. Nor are they magical keys to limitless energy.

Renewable energy technologies emerged in this specific human society – inequality, globalisation and all – and their very feasibility is dependent on world market prices. Like other modern technologies they depend on high domestic purchasing power combined with cheap Asian labour, Brazilian land, or Congolese cobalt.

Almost 50 years ago the ecological economist Nicholas Georgescu-Roegen warned that the notion that solar power could replace fossil energy was an illusion, because it would require such enormous volumes of materials to harness the requisite amounts of diffuse sunlight to satisfy a modern high-tech society. Some of these materials are rare and expensive and degrade the environment. Moreover, the United Nations Environmental Programme recently warned that the world is heading for ecological disaster unless we use less resources per dollar of economic growth.

The Czech-Canadian energy researcher Vaclav Smil has found that switching to renewable energy would use up vast amounts of land, reversing the land-saving benefits of the Industrial Revolution. Meanwhile the money to invest in solar is still ultimately generated from cheap labour and cheap land. The fact that solar panels have recently become less expensive is partly because they are increasingly being manufactured by low-wage labour in Asia.

When viewed this way it is perhaps no wonder that renewable energy has not even begun to replace fossil energy, and has only been added to the still-increasing use of oil, coal and gas. Solar power still only accounts for about 1% of global energy use. It has hardly made a dent on the global use of energy for electricity, industry, or transports. And this cannot be blamed on the oil lobby, as is illustrated by the case of Cuba. Nearly all of the island’s electricity still derives from fossil fuels. There is obviously something problematic about shifting to solar power that goes beyond corporate obstruction. To explain it in terms of a lack of capital or in terms of the vast land requirements are two sides of the same coin.

So here is the impasse of modern civilization: the free trade promoted by most economists and politicians continues to drive a substantial part of the greenhouse gas emissions that they want to reduce, and yet the sustainable technologies they propose to cut emissions are in themselves dependent on economic growth, international trade, and the use of more and more natural resources.

So how to break this impasse? Economists could start by recognising that the economy is not insulated from nature, just as engineering is not insulated from world society. Global challenges of sustainability, justice and resilience all demand much more integrated thinking.

This will involve confronting conventional ideologies of technological progress and free trade. Rather than nervously safeguarding world trade with its escalating greenhouse gas emissions, we have every reason to reconsider what might be perceived as true human progress and quality of life. Instead of economic policies maximising economic growth and resource use, humankind needs to develop an economy that is aligned with the constraints of our fragile biosphere – and a science of engineering that takes account of global inequalities.

Author: Alf Hornborg, Professor of Human Ecology, Lund University

Interest only loans are an economic debacle that could bust the property market

From The Conversation.

This week’s Australian consumer price inflation figures revealed a 0.4% increase for the March quarter, and 1.9% for the last 12 months. The March quarter figure was below market expectations of 0.5%, and also the previous (December quarter) figure of 0.6%. Education prices were up 2.6% on the quarter, and health prices up 2.2% (or 4.2% for the year to March 2018).

This puts inflation still below the Reserve Bank of Australia’s (RBA) target band of 2-3%. That band, of course, has been in place since the early 1990s – beginning with this speech by then governor Bernie Fraser.

Numerous central banks around the world have a similar approach. The basic idea is that a central bank can build a reputation over time to commit to monetary policy such that inflation lies in the band.

Now there are pros and cons to this approach to monetary policy, and it has its critics. But that is another tale for another day.

Just assuming that inflation targeting is the correct objective, how is the RBA doing? Well, one small hitch in the plan is that inflation has been outside the band for a long time now (basically since 2014), as the RBA’s own figures show.

Given the level of unemployment in Australia, low wages growth, and stubbornly low inflation, the RBA probably should have cut rates further a fair while back. But they seem, probably rightly, terrified of further fuelling a potential housing bubble.

Meanwhile, the credibility of their commitment to the inflation target withers. If only the regulation of our banking and finance sector had been better for the last, say, decade or two.

Speaking of such regulation, RBA assistant governor Chris Kent gave a speech Tuesday about the important issue of interest-only loans. Kent’s speech was significant because it followed up on remarks in the RBA minutes about the same issue that I discussed in this column last week.

It seems that the RBA “house view” on interest only loans is as follows. There could be a problem but the Australian Prudential Regulation Authority (APRA) stepped in and the banks have voluntarily tightened lending standards recently. Also because the average household with an interest only loan has a buffer of savings, everything will be fine. Nothing to see here.

I hope the RBA’s conclusion is right, but I know for sure that the reasoning is not. It’s actually the marginal household’s financial position and behaviour that matters, not the average household.

The average United States borrower with an adjustable-rate mortgage did not default in 2007, 2008 or 2009. But these mortgages were a huge contributor to the financial crisis, along with subprime mortgages.

Kent dutifully laid out the risks from interest only loans, saying:

Because there’s no need to pay down principal initially, the required payments are lower during the interest-only period. But when that ends, there is a significant step-up in required payments (unless the interest-only loans are rolled over).

Indeed, unless they can be rolled over. Which they can’t now because of APRA and the banks finally doing something.

Now, prices (interest rates) on interest only loans have gone up as part of the bank response. This has led a bunch of folks to shift to amortising loans, where the principal of the loan is paid down over the life of the loan. So those borrowers who haven’t shifted to these loans already, really don’t want to.

Maybe they can’t afford to because of the increased repayments, that can jump 30% or more per month.

So what does happen? First Kent says many borrowers save ahead of time, expecting a rise in repayments. Yes, the prudent ones.

But how many non-prudent borrowers have their been in the Australian property market in recent years? Hint: a lot.

Kent also points to borrowers who seek to refinance their interest only loan. But banks don’t really want to, and APRA doesn’t want to let them. And who is going to be able to? The safer borrowers who did save and so don’t really need to avoid amortisation. The risky borrowers can’t refinance.

Kent says some borrowers will have to cut their spending. Chuckle, chuckle. And the final option is to sell their house.

Sure, no problem, unless lots of folks want to do that all at once. Then it’s a fire sale that detonates the housing market.

I really do hope we escape the interest only debacle unscathed. But if we do it will be pure, dumb luck, not a consequence of good design or sound regulation.

It definitely doesn’t justify the RBA’s house view in Kent’s concluding remarks that:

The substantial transition away from interest-only loans over the past year has been relatively smooth overall, and is likely to remain so. Nevertheless, it is something that we will continue to monitor closely.

Perhaps a there should have been a little more monitoring before interest only loans got to be 40% of all loans and more than half of the loan book of one of our biggest banks.

Author: Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

Abbott suggests sacking bank regulators as ASIC feels the heat

From The Conversation.

Former prime minister Tony Abbott has strongly condemned the performance of financial sector regulators, suggesting they should be sacked and replaced by “less complacent” people.

With increasing attention on the apparently inadequate performance of the Australian Securities and Investments Commission (ASIC), Abbott raised the question of what the regulators had been doing as the scandals had gone on.

“We all know there are greedy people everywhere, including in the banks,” he told 2GB on Monday. “But banking is probably the most regulated sector of our economy. What were the regulators doing to allow all this to be happening?”

Abbott said his fear was “that at the end of this royal commission we will have yet another level of regulation imposed upon the banks when frankly what should happen is, I suspect, all the existing regulators should be sacked and people who are much more vigilant and much less complacent go in in their place.”

He said the analogy was, “yes, punish the criminals but if the police are turning a blind eye to the criminals, you’ve got to get rid of the police and get decent people in there”.

Meanwhile Malcolm Turnbull, speaking to reporters in Berlin, defended refusing for so long to set up a royal commission, although he said commentators were correct in saying that “politically we would have been better off setting one up earlier”.

Turnbull said that by taking the course it had the government “put consumers first”.

“The reason I didn’t proceed with a royal commission is this – I wanted to make sure that we took the steps to reform immediately and got on with the job.

“My concern was that a royal commission would go on for several years – that’s generally been the experience – and people would then say, ‘Oh you can’t reform, you can’t legislate, you’ve got to wait for the royal commissioner’s report.’

“So if we’d started a royal commission two years ago, maybe it would be finishing now and then we’d be considering the recommendations … With the benefit of hindsight and recognising you can’t live your life backwards, isn’t it better that we’ve got on with all of those reforms?”

Turnbull dismissed Bill Shorten’s call for the government to consider a compensation scheme for victims by saying this matter was already in the commission’s terms of reference.

Among the reforms it has made, the government highlights giving ASIC more power, resources and a new chair.

But Nationals backbencher senator John Williams, who has been at the forefront of calls for tougher action against wrongdoing in the financial sector, told the ABC that ASIC has got to be “quicker, they’ve got to be stronger, they’ve got to be seen as a feared regulator.

“That is not the situation at the moment,” he said.

He had sent a text message to Peter Kell, ASIC deputy chair, a couple of nights ago “and I said, mate, Australia is waiting for you to act”.

Asked how the culture within ASIC could be changed, Williams said, “I suppose you keep asking them questions at Senate estimates, keep the pressure on them, keep the message going on with the management of ASIC regularly.

“As I have said to the new boss [chair James Shipton], you’ve got to act quickly, you’ve got to be severe, you’ve got to be feared. If you’re not a feared regulator, people are going to continue to abuse the system, do the wrong thing without fear of the punishment”.

He welcomed the increased penalties announced by the government last week.

The chair of the Australian Competition and Consumer Commission (ACCC), Rod Sims, while declining to comment on ASIC, said he agreed with Williams “that you really do have to be feared. And frankly I’d like to think the ACCC is.

“I won’t comment on others but you want people to be really watching out – watch out for the ACCC, watch out that you don’t get caught because if they catch us it’s going to be really dire consequences. And I think we’ve got that mentality,” he told the ABC.

Updated at 4:30pm

In an interview on Sky late Monday, Finance Minister Mathias Cormann admitted, “With the benefit of hindsight, we should have gone earlier with this inquiry.” This was in stark contrast with his colleague, Minister for Financial Services, Kelly O’Dwyer, refusing to make the concession when she was repeatedly pressed in an interview on Sunday.

Author: Michelle Grattan, Professorial Fellow, University of Canberra

Sydneysiders more supportive of foreign investment

From The Conversation.

Property investors are more likely to support foreign investment in the property market than people without such investments, we have found in a survey of Sydneysiders’ views about foreign real estate investment. Perhaps more surprising, would-be buyers, who might be expected to worry about demand pushing up prices, were also more likely to be supportive than those who were not looking to buy a property.

We reported previously that over 60% of Sydneysiders do not want more individual foreign investment in residential real estate in Sydney.

Within this context, we surveyed almost 900 people in Sydney to examine the relationships between home ownership, real estate investment, housing stress and views about foreign investment. Our analysis shows:

  1. Those who have property market investments are more likely to be supportive of foreign investment than those who don’t have such investments.
  2. Comparing those who are in housing stress to those who are not in housing stress, there are no significant differences in the two groups’ beliefs about foreign real estate investment.

Property investors’ views

We know that rising house prices, the era of Generation Rent and foreign real estate investment are creating the social conditions that could increase cultural tension between foreign and local buyers.

One group with a strong interest in Sydney’s real estate market are local real estate investors. We were interested in whether those with investment properties and those without differed in their views about individual foreign investment in residential real estate.

We found those with investment properties were likely to be more supportive of foreign investment in Sydney’s housing market than those without investment properties.

For example, 29% of the investment property owners agreed that “foreign investors should be able to buy properties in Sydney” compared to 17% of those without investment properties. They were similarly supportive of foreign students being allowed to buy properties while studying in Australia, with 32% agreeing with this compared to 19% among those without investment properties.

Property investors were more positive about the government’s regulation of foreign investment as well: 28% agreed it has been effectively regulated, compared to 16% of those without investment properties.

House hunters’ views

House prices in Greater Sydney have increased rapidly over the last decade and household debt has grown too.

We might expect people who are actively looking to buy a property to be particularly concerned about foreign real estate investment, as they may feel they are competing against and being priced out of the market by foreign buyers.

For this reason, we asked survey participants whether they were actively looking to buy a property. In response, 23% said they were. Of this group, 31% agreed that foreign investors should be able to buy properties in Sydney, compared to 15% of those not looking for a property.

Housing-stressed households’ views

Increasing mortgage and rental costs are a source of discontent within Sydney’s population. Measurements of housing stress are disputed, but are nonetheless used to give a comparative value to how hard it is for a household to meet housing costs. A ratio of housing costs to income of 30% and above is a common benchmark for housing stress.

Using this measure, we found that more than half (52%) of our survey participants were experiencing housing stress. Another 33% spent less than 30% of their income on their housing and 15% indicated they did not know.

Comparing those over the 30% threshold with those who spend less of their income on housing, we found no significant differences in beliefs about foreign real estate investment.

Other drivers of concern

We found those who are active in the local real estate market remain concerned about foreign investment in general.

If housing stress levels do not lead to differences in attitudes to foreign investment, as our findings suggest, cultural or other factors may be at work in the general discontent about foreign investors in Sydney.

We need to investigate further how being active in the housing market informs Sydneysiders’ views about the right of foreign investors to use real estate as a vehicle for growing capital.

Sydneysiders with equity in the housing market, such as home owners or investors, might view foreign buyers pushing up housing values as positive. As a result, they might fear that restricting foreign investors might depress their assets.

If this type of shared commitment to real estate investment were present across the domestic-foreign investor divide, this could reinforce the idea of treating real estate as an asset class at the global scale, while cultural tensions between foreign and local investors remain at the local level.

Authors: Dallas Rogers, Program Director, Master of Urbanism. School of Architecture, Design and Planning, University of Sydney; Alexandra Wong, Engaged Research Fellow, Institute for Culture and Society, Western Sydney University; Jacqueline Nelson, Chancellor’s Postdoctoral Research Fellow, University of Technology Sydney

Government’s misjudgement on banking royal commission comes back to bite it

From The Conversation.

If you are a politician, what do you do when your bad judgement – or worse – has been dramatically called out for all to see?

That’s the question which has faced the government as appalling behaviour by the Commonwealth Bank, AMP and Westpac has been revealed this week at the royal commission into misconduct in the banking, superannuation and financial services industry.

Former deputy prime minister Barnaby Joyce went the full-monty confession. “In the past I argued against a Royal Commission into banking. I was wrong. What I have heard … so far is beyond disturbing”, he tweeted.

Joyce is now a backbencher, and free with his opinions. It’s another story with current ministers. They continue trying to score political points over Labor, which had been agitating for a royal commission long before it was set up.

The ministers claim the government laid down terms of reference that took the inquiry beyond what Labor was proposing. But although Labor never released terms of reference, it flagged in April 2016 a broad inquiry into “misconduct in the banking and financial services industry”.

The real difference between the government and the opposition was the emphasis on superannuation. While Labor’s inquiry would have covered it, the government wrote in a specific term of reference, hoping evidence about industry funds might embarrass the unions and therefore the ALP. The commission has yet to reach those funds.

Revenue Minister Kelly O’Dwyer, pressed about her refusal to admit the government had erred in opposing a commission, told the ABC on Thursday, “Initially, the government said that it didn’t feel that there was enough need for a royal commission. And we re-evaluated our position and we introduced one”.

Well, that’s the short version. In fact, the government was forced to drop its resistance when Nationals rebels threatened to revolt. Take a bow, Queensland Nationals backbenchers Barry O’Sullivan, George Christensen and Llew O’Brien. You did everyone a service.

Indeed, the Nationals were on the case of the banks very early. Nationals senator John “Wacka” Williams for years pursued the rorts, through Senate committee investigations.

The government’s resistance to the royal commission was bad enough but remember its earlier record on consumer protections in the financial services area.

When the Coalition came to power it was determined to weaken measures Labor had introduced. Eventually, it was thwarted by the Senate crossbench, with the upper house disallowing its changes.

Just why the government was so keen to shield an industry where wrongdoing had been obvious is not entirely clear. It appears to have been a mix of free market ideology, a let-the-buyer-beware philosophy, and some close ministerial ties with the banking sector.

In light of what is coming out, the government should be ashamed of its past performance.

This week, the commission heard about AMP, which provides a wide range of financial products and advice, charging for services it didn’t deliver, and deliberately misleading the regulator, the Australian Securities and Investments Commission (ASIC), about its behaviour.

It also heard how the Commonwealth Bank’s financial planning business charged customers it knew had died, including in one case for more than a decade. Linda Elkins, from CBA’s wealth management arm Colonial First State, agreed with the proposition put to her that the CBA would “be the gold medallist if ASIC was handing out medals for fee for no service.”

A nurse told of the financial disaster after she and her husband, aspiring to set up a B&B, received advice from a Westpac financial planner, including to sell the family home.

Seasoned journalist Janine Perrett, who now works for Sky, tweeted, “I thought nothing could shock me anymore, but in my forty years as a journo, most of it covering business, I have never seen anything as appalling as what we are witnessing at the banking RC. And I covered the 80’s crooks including Bond and Skase.”

The commission’s interim report is due September 30 and its final report by February 1, not long before the expected time of the election. There is speculation over whether the reporting date will be extended. Bill Shorten says the inquiry should be given longer if needed; Finance Minister Mathias Cormann has indicated the government would do what Commissioner Kenneth Hayne wanted.

Those in the government who think the original timetable should be adequate note that, unlike for example the royal commission into institutional responses to child sexual abuse, this inquiry is not undertaking deep dives into everything, but exposing the general problems.

From the opposition’s point of view, it would be desirable for the inquiry to run on. That would keep the banks a live debate, and leave it for Labor, if elected, to deal with the commission’s outcome. Shorten is already paving the way for a compensation scheme financed by the industry. Given the poisonous unpopularity of the banks, the Coalition could hardly run a scare about what a Shorten government might do.

Ideally, the government needs the issue squared away before the election.

The government insists it has already put in train a good deal to clean up the industry including a one-stop-shop for complaints, higher standards for financial advisers, beefing up ASIC, and a tougher penalty regime.

Morrison on Friday will announce the detail of stronger new penalties for corporate and financial misconduct, including ASIC being able to ban people from the financial services sector.

One argument the government made against a royal commission was that it would just delay action. But of course if it had been held much earlier, by now we might have in place a full suite of reforms.

Most immediately, the shocking stories from the commission are adding to the government’s problems in trying to sell its company tax cuts for big business to key crossbench senators and to the public.

Author: Michelle Grattan, Professorial Fellow, University of Canberra

Heavy penalties are on the table for banks caught lying and taking fees for no service

From The Conversation.

Another week of hearings of the Financial Services Royal Commission has seen financial services company AMP admitting it mislead the Australian Securities and Investment Commission (ASIC) on 20 occasions. The commission also saw evidence of both AMP and the Commonwealth Bank of Australia paying themselves client money when there was no adviser allocated to provide services, or the client had passed away.

It seems ASIC and the Director of Public Prosecutions will have no lack of evidence to pursue civil penalties and criminal cases. The bigger issue is what charges to go with.

In deciding what to pursue, ASIC and the DPP will need to weigh up the costs, the charges individuals are willing to plead guilty to, and the outcomes that will best serve the public interest.

Convicting individuals clearly “sends a message”, but these employees are easily replaced with others just as willing to commit the offences, unless the organisation’s culture is changed.

ASIC has confirmed it has a broad-ranging investigation into AMP already underway, and the Treasurer has suggested the behaviour might attract jail time.

Whether or not bankers get jail time will depend on the actual offences charged and a range of sentencing factors. However, the courts are increasingly emphasising the importance of substantial sentences for white collar crime.

Offences with similar maximum penalties in the UK led to a UBS banker who manipulated the London Interbank Offered Rate being sentenced to 14 years jail in 2015. Another joined him in 2016 for two years and nine months and three others were also convicted.

What AMP and CBA did

AMP and CBA have admitted they failed to provide information and report breaches to ASIC as required by the Corporations Act. Misleading Australian government agencies is also a criminal offence under the Act and the Commonwealth Criminal Code.

As well as dealing truthfully with ASIC, all entities licensed to offer financial services must act “efficiently, honestly and fairly” and take reasonable steps to ensure their employees do likewise.

It is not hard to see how taking clients’ money without providing a service is not efficient, honest or fair.

Civil penalties

Civil sanctions could apply to conduct at AMP and CBA which could ultimately involve disqualification for up to 20 years from working as a corporate officer and/or a fine of up to A$200,000.

Officers of a corporation are very senior employees and usually immediately below board level. They have a duty to be careful and diligent and act in the best interests of the company under the Corporations Act. There is a range of lesser charges from general dishonesty to false documentation offences.

Officers of a corporation have duties which require them to be careful and diligent. This is because the officers may have failed to follow up or failed to prevent conduct) after finding out about what was going on.

If ASIC and the DPP can go further and prove that AMP and CBA officers have intentionally caused their company to break the law, it is virtually impossible that conduct could be in the interests of the corporation. AMP and CBA officers may have also breached criminal offences in the Corporations Act if the wrongdoing was reckless or intentionally dishonest.

Criminal charges

Turning to more general offences, here criminal penalties range from 12 months in jail for misleading ASIC, to significant penalties for conspiracy to defraud.

Any bank employee who was involved in the creation of misleading documentation might well be exposed to fraud charges. Under Commonwealth and state law, fraud can involve reckless deception of another (either ASIC or the clients) with an intention to gain a financial advantage for another (AMP or CBA) Those offences have maximum penalties of 10 years jail. There is a range of lesser charges from general dishonesty to false documentation offences.
Those who assisted might well also be liable through accessorial liability.

Prosecutors could also turn to the conspiracy to defraud offence. The Commonwealth version of the offence involves an agreement to dishonestly influence a public official’s decisions. An agreement to provide false documents to ASIC would seem easily to fit this offence. Again, this has a maximum penalty of 10 years.

Similarly, common law conspiracy to defraud charges could be available for dishonestly misleading customers in a way that caused them financial loss. There are no prescribed maximum penalties for this version of the offence.

Multiple offences could mean sentences served concurrently, or partly cumulatively.

Although the wrongdoing may seem clear to the public, it is likely that complex matters of proof will emerge and ASIC will need to make a range of decisions about the best approach to ensuring cultural change occurs. While convictions might be deserved, the public interest is best served by ensuring that prosecutions are part of wider regulatory action leading to better banking practices.

Authors: Dimity Kingsford Smith, Professor and Director, Centre for Law Markets and Regulation, UNSW Law, UNSW; Alex Steel, Professor, UNSW Scientia Education Fellow, UNSW

Precarious employment is rising rapidly among men: new research

From The Conversation.

Precarious employment is increasing over time, and it still remains higher for women than men in Australia. But over the last nine years it has increased far more rapidly among men.

This is despite greater workforce participation and lower unemployment rates in Australia’s labour market. The quality of jobs in Australia has been declining.

In a new Bankwest Curtin Economics Centre report, we develop a composite index of precarious employment using data from the Household Income and Labour Dynamics in Australia (HILDA) survey.

The HILDA survey captures job attributes, labour force circumstances and other information about a large and representative sample of Australian workers. The index is based on 12 component indicators that capture different dimensions of precarious employment.

These include measures related to job insecurity like workers’ own views of their future employment prospects, the chance of losing their jobs, and their overall sense of job security.

We also looked at irregular hours, working fewer or more hours than desired, and a loss of work-life balance to capture the degree of control over working hours. For employment protections and other working conditions, the index uses measures related to leave entitlements including sick, family and compassionate leave.

The calculated index is centred on the average measure of precarity across all occupations and industries. Negative numbers mean lower employment precarity than the average and positives convey greater precarity. The larger the value, the more precarious the work, relative to the all-industry average.

The index shows the overall state of the economy has had a significant impact on the level of precarious employment in the labour market.

It shows levels rising for both men and women since the global financial crisis.

However, for men, precariousness is now above 2003 levels, which suggests precarious work is being driven by more than just economic conditions. And while men are still below the levels of women, the two are beginning to converge.

A major source of this trend is an increase in the self-reported probability of losing one’s job and accompanying dissatisfaction with job security.

Despite relatively stable and low levels of unemployment, workers are increasingly concerned that their jobs are at risk. The same holds true for satisfaction with job prospects, which dropped significantly since the global financial crisis and has yet to recover.

As expected, higher skilled occupations such as professionals and managers have more stable employment, while labourers and machinery operators and drivers are in the most precarious job circumstances.

Job insecurity has increased most among clerical and administrative workers and labourers, while for managers the key drivers are the loss of control over working hours and a reduction in work-life balance.

Working for government, a bank or insurance company appears to still be a relatively “safe” option. Industries with the lowest levels of precarious employment are public administration, financial and insurance services, and utilities.

By contrast, accommodation and food, agriculture, forestry and fishing, and arts and recreation services are much more precarious for their employees. Mining and to a lesser extent education have become more precarious in recent years.

Precariousness by industry and occupation

Employment precariousness, by occupation and industry. The index is centred on the overall industry average (as represented by zero). Negative numbers correspond to lower employment precarity than the average, positives convey greater precarity.

Precarious work more prevalent in some industries

There are several factors affecting the likelihood of a worker facing more or less precarious work, including the nature of the industry they are working in.

Some industry sectors, such as manufacturing, construction or mining, have a greater exposure to economic downturns or upturns, and global market forces.

Workers in the mining industry used to be among the most secure, with their sense of optimism supported by strong demand for labour during the heart of the resources boom.

But our index confirms times have changed for the sector.

Precarious work has increased in mining at a greater rate than in any other sector, driven mainly by workers’ sense of job insecurity as the sector shifts to a less labour intensive production phase, and the volatility of global resource prices.

We found employment in other sectors, in hospitality, arts and recreation, or agriculture for example, to be intrinsically more precarious by nature. These industries had irregular or uncertain hours, casual contracts, or relatively low pay.

The expanding role of technology and automation in production is another potential factor driving the growing sense of insecurity in employment, especially among lower-skilled men.

This highlights the need to ensure workers can access retraining and education opportunities that smooth their transition to new, higher skilled jobs, or into other forms of employment.

There is a shared responsibility on governments, employers, and education and training organisations to ensure that no-one is left behind.

Authors: Rebecca Cassells, Associate Professor, Bankwest Curtin Economics Centre, Curtin University; Alan Duncan, Director, Bankwest Curtin Economics Centre and Bankwest Research Chair in Economic Policy, Curtin University; Astghik Mavisakalyan, Senior Research Fellow, Curtin University; John Phillimore, Executive Director, John Curtin Institute of Public Policy, Curtin University; Yashar Tarverdi, Research fellow, Bankwest Curtin Economics Centre, Curtin University

That contract your computer made could get you in a legal bind

From The Conversation.

There is a lot of hype in the business world surrounding the emerging blockchain technology and so called “smart contracts” – computer programs which execute the terms of an agreement. But like all computer programs, smart contracts can malfunction and even develop a mind of their own.

Smart contracts are popular because they promise cheaper, more secure and more efficient commercial transactions, so much so that even the federal government is investing millions of dollars into this technology.

Transactions in smart contracts are enforced by a network of people who use the blockchain– a decentralised, digital global ledger recording transactions. The blockchain effectively replaces traditional intermediaries such as banks, credit companies and lawyers because smart contracts can perform the usual “middleman” functions themselves.

Smart contracts can not only perform the terms of a contract autonomously, but can also be programmed to enter the human parties that created them into subsequent, separate follow-on contracts.

Whether these follow-on contracts are legally binding is not so straightforward. In fact, it highlights the complex intersection of new technology and old law.

What are smart contracts used for?

US law professor Harry Surden says financial firms often program computers to contract with other parties in security trades. Another example of smart contracts is the pricing and purchasing of certain types of advertisements on Google, which are negotiated autonomously between computers without any human intervention.

Companies are now using smart contracts to instantaneously buy and sell real estate, compensate airline passengers with travel insurance, collect debts, make rental payments, and more. But if a smart contract goes rogue, there can be significant consequences.

For example, in June 2017 Canadian digital currency exchange QuadrigaCX lost US$14 million worth of the cryptocurrency Ether when its underlying smart contract platform reacted to a software upgrade. The contract merely locked itself and subsequently lost the money.

Smart contracts on the blockchain are designed to be immutable, meaning the transactions they carry out cannot be amended or interrupted. So if things go wrong, there is little recourse.

When smart contracts make new agreements

So what would happen if a smart contract, which has been coded to make decisions, decided to enter parties into a another contract? In some cases, the human has final say to approve or reject the follow-on contract.

However, if the coding of a smart contract allowed sufficient intuition, it could bypass a human’s consent. Contracts written with code are capable of learning and may occasionally behave in a manner inconsistent with their instructions.

This possibility, and the questionable status of follow-on contracts, was raised in a white paper issued by renowned international law firm Norton Rose Fulbright in November 2016. The paper highlighted a number of possible legal views regarding follow-on contracts.

One view is that a programmed smart contract might be seen as the legal “agent” of its human creator and therefore has the power to make binding agreements on their behalf. This view has been rejected by some English courts on the basis that computer programs lack the consciousness of a human mind.

Some American courts have gone the opposite way, deeming a computer program acting autonomously in entering and violating contracts as acting with the dispatcher’s authority. In Australia, section 15C of the Electronic Transactions Act 1999(Cth) makes clear that a contract formed entirely through the interaction of automated message systems is:

…not invalid, void or unenforceable on the sole ground that no natural person reviewed or intervened in each of the individual actions carried out by the automated message systems or the resulting contract.

The law can imply an agency relationship in certain circumstances. Legally, then, a follow-on contract might be regarded as pre-authorised by the human creator of the original smart contract.

An alternative view is that a follow-on contract is not enforceable because the parties did not necessarily intend to create them. Legal intent is one of the core elements of contract validity.

However, in law, this is determined objectively: would a reasonable person in the position of the parties think a follow-on smart contract was acting with the legal authority of its human creator?

Some academics suggest that the answer may be yes, as the parties made the initial decision to enter into the smart contract and therefore indirectly assented to be bound by the system in which it operates.

As one commentator has argued, if a human intentionally coded a smart contract to make its own decisions, they must have intended to accept those decisions as their own.

The law generally presumes that commercial contracts are intended to be legally binding, even where computers play a part in the bargain.

Should we pull the plug?

So should we be hesitant to use smart contracts? Not necessarily: they offer enormous opportunity for businesses and consumers.

Blockchain technology is maturing rapidly and so it is only a matter of time before smart contracts feature more prominently in commerce.

Rather than being fearful, prospective users should be aware of and address the legal risks, including that autonomous smart contracts may be programmed with the capacity to spontaneously enter binding follow-on contracts.

Author: Mark Gianca, Lecturer in Law, University of Adelaide