Tag: The Conversation

CBA’s board needs to take ultimate responsibility for the bank’s failings

From The Conversation.

Something appears to be very wrong with risk management at the Commonwealth Bank (CBA), that cuts right across the bank. There have been risk management problems in the retail (money laundering), institutional banking (foreign exchange and bank bill swap rate benchmark manipulation) and wealth management (Comminsure scandal) arms of the bank.

This tsunami of scandals helped to trigger the Financial Services Royal Commission which will examine banking misconduct.

And the responsibility, the accountability for risk management stops, and starts, with the bank’s board.

In presenting its 2018 half yearly profits, the CBA board announced that the bank had set aside provisions of A$375 million in anticipation of a penalty resulting from failures to properly implement anti-money laundering controls.

In the media conference following the appointment of Matt Comyn as the new CEO of CBA, the chair of the banks’ board Catherine Livingstone, admitted, while it was:

…entirely appropriate to share a collective accountability for the issues that we have had… [that] the processes around operational risk management and compliance risk management…is where we have not performed as we should have.

In his first media conference as CEO, Mr Comyn, not surprisingly, concurred with his new boss.

And it became unanimous, when a few days later the progress report of the Australian Prudential Regulation Authority’s Prudential Inquiry Panel into the culture at CBA, reported that investigations were being focused on “capabilities and accountabilities for risk management in the organisation, particularly for operational, compliance and reputational risk”.

How the CBA manages risk

CBA’s latest annual report describes in some detail the risk management framework that is supposed to direct risk management across the bank. The framework, which incorporates the requirements of APRA’s prudential standard for risk management, comprises three main components: a risk appetite statement (which describes the types and maximum levels of risk that the board is willing to accept), a three year rolling group business plan and a risk management strategy.

The bank’s risk appetite is formulated by the Board Risk Committee, approved by the board, and dictates the levels of risk-taking in each business line.

In practise the bank actually follows what is called a Three Lines of Defence model. The so-called first line of defence is business management, which is responsible for the effective implementation of the board-approved risk management framework.

The second line is a separate group of staff with specific risk management skills to develop and monitor the risk management process. The third and last line is an independent group that acts as an internal audit function.

CBA is a large and complex organisation, and naturally there is a large, complex risk bureaucracy. This is detailed in the bank’s latest risk report.

However, APRA is clear that the board should take ultimate responsibility.

The lines of defence are clearly broken. If there had been one single, or maybe two, risk management failures at CBA, you could put it down to complexity, teething problems or just bad luck. But over the last decade, there has been a catalogue of bad risk decisions affecting the bank’s customers, shareholders and the Australian financial system.

After the first few times, surely the effectiveness of the risk framework and the three lines of defence should have been questioned and remedial action taken? But apparently it was not, and there is now frantic action by the people responsible – the CBA board – to do something (anything) about it.

In the media conference, Catherine Livingstone and the new CEO repeatedly talked about “collective accountability” and tried to diffuse the severity of the situation by talking about “organisation wide” and “culture” issues, as if even the staff in the bank’s branches were somehow to blame.

In fact, in the case of money laundering through ATMs that has drawn the ire of AUSTRAC, it was the first line business staff in the branches who raised the alarm. Their warnings were not taken seriously. To claim that the lower-level staff are somehow “collectively accountable” is bordering on the bizarre.

The accountability for the risk management failures is indeed spread far and wide but by far and away it is the joint responsibility of the board and executive committee. The knee-jerk reaction to cut a few bonuses is insufficient.

Someone in the board of the bank has to resign or be fired. Where failures are detected, bonuses already paid out, for example to recently retired board members, should be retrieved.

And going forward, the three lines of defence must become a real protection for customers rather than a convenient pretence, and APRA must ensure, for customers’ sakes, that the three lines are operating effectively in all large financial institutions.

Author: Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie University

Australia’s Financial Regulators Need Policing

From The Conversation.

A Productivity Commission report analysing competition in the financial sector has pointed out that our finance regulators have become enablers of an industry that is an impediment to our economic competitiveness and exploitative of their most loyal customers.

It proves the need for a board to oversee the conduct of our financial regulators, policing the bodies that are supposed to be keeping our financial system in check.

It could not have come at a worse time for our big four banks. Perennially pilloried for their rampant market misconduct (fraudulently manipulating benchmark interest rates) and their equally rampant abuse of upwards of hundreds of thousands of consumers across every one of their retail operations at one stage or another – financial advice, life insurance and credit card insurance, just to name a few.

The Australian Securities and Investments Commission (ASIC) most recently launched a bank-bill swap rate manipulation case against the Commonwealth Bank, but only across a very narrow range of infringements. The bulk of the infringements can’t be prosecuted because ASIC has dithered for so long, the statute of limitations has run out, and the alleged crimes have proscribed.

And what of our other financial regulator – the Australian Prudential Regulation Authority (APRA)? The Productivity Commission reckons that APRA’s ham-fisted use of macro-prudential tools, usually used to reduce risk in our financial system, has benefited the big four banks to the tune of A$1 billion.

APRA has been criticised for pursuing stability in a manner that has killed competition, hurt consumers, and starved small businesses of life-giving capital. The dominance by a few banks, whose profits are based on runaway property prices, is its own systemic threat.

The result is that small banks are squeezed out, big banks raking in higher rates, and investors offsetting higher rates against their taxes and so costing the Australian Taxation Office an estimated A$500 million in deductions. As the old saying goes, when your only tool is a hammer, every problem looks like a nail.

Who will regulate the regulators?

So what to do about ASIC and APRA? Back in 2014, the Financial System Inquiry recommended a board of oversight – a regulator for the regulators – to ensure that the regulators discharge their mandates.

So, for example, to ensure that ASIC acts like a cop, not a co-op; that APRA acts with foresight and finesse, as opposed to damaging competition. APRA and ASIC pushed back at the time, and the Abbott government rejected the recommendation.

Now to add impetus to the Financial System Inquiry recommendation, the Productivity Commission says there is a lack of transparency and accountability exhibited by our regulators. Add to that the implications regarding regulator’s efficacy that comes with the establishment of the Financial Services Royal Commission. The public deserves better than this.

A regulator for the regulators – a Financial Regulator Assessment Board – would conduct ex post analyses of how regulators had discharged their mandates, evaluate their policies and the efficacy of their policy tools. It would be a sober second thought, and a crucial mechanism of double redundancy – to pick up on crucial elements that the regulator may have overlooked.

The idea has form. The British have created something similar, called a Financial Policy Committee, this body’s aim is to review the British regulators, while keeping a look-out for where the next “bombshell” may come from.

That development in turn builds on the work of James Barth, Gerard Caprio and Ross Levine whose research indicates that regulators simply cannot be trusted to perform these crucial functions as the guardians of finance, without oversight. The researchers call their proposed board of oversight the “Sentinel”, and point out that no industry is more adept and more practised at suborning the guardians of finance than banks and insurers. Sound familiar?

Australia’s financial system is increasingly governed by a lawless financial sector, presided over by regulators that are at best misguided, and at worst captured. A board of oversight is the least we can do.

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

Labor’s 2% cap on private health insurance premium rises won’t fix affordability

From The Conversation.

This week, Opposition Leader Bill Shorten announced a new private health insurance policy the Labor Party will take to the next election. First, Labor will get the Productivity Commission to conduct a full review of the private health insurance system. Second, and more controversially, Shorten promised a short-term 2% cap on premium increases for two years.

The promised cap is in response to consistently high premium increases of around 5% in recent years. In justifying the policy, Shorten said:

… the idea these big insurers are making record profits and yet the premiums keep going up and up, it can’t be sustained.

This announcement has already been greeted with scepticism and fury from the health insurance industry, with industry body Private Healthcare Australia branding the proposal “disastrous”.

As the proposal explicitly targets their profit margins, their response is predictable. However, in this case, they are right to complain. The premium cap policy is a crude measure that is unlikely to improve long-term affordability and may further distort the market in the short term.

Unintended consequences

Price controls introduced by governments usually have good intentions, but often have unintended consequences.

Consider, for example, the proposal to introduce caps on rent increases in the United Kingdom. Rent controls are among the most well-understood policies in economics: they reduce the quality and quantity of housing, leaving renters facing long search times to find housing and poorly maintained properties.

In health insurance, the most likely immediate response to the cap would be for insurers to increase the amount of exclusions – procedures and treatments that aren’t funded – and co-payments associated with policies.

So, while prices are kept low by the cap, consumers are effectively getting less coverage for their money. This would enable insurers to maintain their profit margins, but produce no gain, and further confusion, for consumers.

We already know the number of policies with exclusions, such as hip replacements and childbirth, has grown substantially. Labor’s proposal will probably accelerate the trend.

Long-term pain

Alternatively, as this proposed cap is time-limited, insurers may just put up with the pain of lower margins for a couple of years, with the timeline too short for significant changes to exclusions.

However, there may still be negative long-term impacts. We can look back in history for a clue about the long-term effects of a temporary cap on premiums. In 2000 and 2001, the Howard government implemented an effective “freeze” on private health insurance premium increases.

As can be seen in the graph, average premium increases were below 2% in 2000 (the largest insurer, Medibank Private, had a 0% increase in 2000), and were zero in 2001.

Average private health insurance premium increases in Australia from 2000 to 2018. Author

While consumers in 2000 and 2001 may have gained from lower real-terms premiums, we can see the long-term effects in the years from 2002 to 2005, when premium increases were between 7 and 8%. This is clearly an attempt by health insurance companies to “catch up” on the increases they missed in 2000 and 2001.

So, we may expect history to repeat itself if Labor wins the next election and introduces this policy: premiums will just rise faster in the years following the cap, negating any short-term benefit to consumers.

Why costs are rising

The proposed Productivity Commission review is much more promising in tackling important issues in the market, including lack of competition, confusing exclusions in policies, and its interaction with public funding through Medicare and public hospitals.

However, there is no solution to premium rises way in excess of general inflation if recent trends in healthcare technology and use continue. The number of hospital visits funded by private health insurance is growing strongly, at an average of 5.5% per year over the past five years.

Growth is across all areas of health care, from elective surgery like cataracts (4.9% a year) and hip replacement (5.5% a year) to diagnostic procedures such as endoscopy (4.4% a year) and life-saving cancer treatments like chemotherapy (5.5% a year).

We are paying more for our health insurance because we are using it more. No crude, short-term measures to restrict premium growth will deal with this fact. And good luck to the Productivity Commission in trying to reverse a global trend for higher private health care expenditure.

Author: Peter Sivey, Associate Professor, School of Economics, Finance and Marketing, RMIT University

There’s no evidence behind the strategies banks are using to police behaviour and pay

From The Conversation.

APRA’s investigation into the Commonwealth Bank’s culture is starting to look at how it compensates employees, and whether that incentivises bad behaviour. In fact, my research has shown that cash bonuses are at least partly responsible for the scandals plaguing the financial services industry.

But there isn’t good evidence either to support the banks’ alternative – balanced scorecards. This is a system organisations use to set and track their goals. Companies first set out a series of strategies to achieve their objectives, then create criteria (linked to individual team members) to track progress and give feedback.

If anything, research suggests that balanced scorecards don’t work. Many of the criteria are subjective and therefore can be gamed. And the few objective metrics that are included in the scorecard often face the same issues as cash bonuses – incentivising employees to increase short-term profits.

Financial institutions previously gave employees incentives by linking their bonuses to profits and sales. This created an unhealthy fixation on short-term profits and a lack of concern for the longer-term consequences.

Under these schemes, an employee is incentivised to increase short-term profits, even if this may mean selling products that are unsuitable for customers. In the short term this leads to higher profits (and bonuses), but eventually customers figure out they’ve been mistreated. The result is often a loss of reputation and customers, legal costs, customer remediation programs and fines.

To counter this problem, many financial institutions have introduced the balanced scorecard as a method for measuring staff performance and, ultimately, deciding who receives a bonus.

The idea is that by considering a range of performance criteria, not just profits and sales, employees will become less focused on these short-term financial measures. This will, in turn, reduce misconduct.

Implementing balanced scorecards was one of the key recommendations of last year’s Sedgwick Report. The Australian Bankers’ Association sponsored the report.

But even though the balanced scorecard is considered best practice by many in the industry, there is little research to support its adoption.

The research on balanced scorecards

A recent study by Danish researchers reviewed 117 empirical papers on the balanced scorecard that were published in leading academic journals. They found that much of the research has been done on small and medium-sized firms, and that there were design problems in many of the other papers. Therefore, there is too little evidence to conclude whether the balanced scorecards are successful or not.

When balanced scorecards are implemented in financial institutions, they typically include subjective criteria. For example, one criterion could be that an employee’s “behaviour is consistent with organisational values”. A manager would be required to apply a rating to this criterion.

But there is a lot of doubt as to how credible and consistent these ratings really are.

There’s also nothing to definitely discourage bad behaviour (especially in the short term) when criteria include subjective ratings. Due to the large amount of discretion in applying them, managers may give a high rating to staff who are top performers in sales/profits despite poor behaviour.

When scorecards include both subjective and objective measures (which often include sales and profits), staff will tend to focus on the objective criteria. In other words, the balance in the balanced scorecard goes out the window.

The last thing to consider is that behaviour is influenced not just by bonuses, but also the possibility of promotion. If staff see that those who produce high profits are promoted, regardless of the short-term incentive structure applied, they will draw their own conclusions about how best to climb the corporate ladder.

That is why the promotion of Matt Comyn to CEO of the Commonwealth Bank sends a dangerous message.

Author: Elizabeth Sheedy, Associate Professor – Financial Risk Management, Macquarie University

How Australian Regulators Would Handle a Cryptocurrency Hack Like Coincheck

From The Conversation.

New risk rules for cryptocurrency exchanges will be put to the test with the latest hack on Japanese exchange Coincheck. Hackers stole US$660 million worth of NEM (its native cryptocurrency).

In the past eight years, more than a third of all cryptocurrency exchanges have been hacked. The total losses exceed US$1 billion. Because cryptocurrencies are almost untraceable, the rate of recovery after a hack is very low.

A number of countries (including Australia) have enacted legislative provisions to regulate the conduct of cryptocurrency exchanges. Regulators hope these will reduce the risk of attack and make operators more accountable for losses suffered by customers when an attack does occur.

These hacks don’t just expose gullible investors to risk. They mean funds could be flowing undetected into the hands of money launderers and terrorists.

While cryptocurrency exchanges may operate like banks, they are not regulated in the same way as banks. There is no depositor’s insurance and most exchanges remain unregulated.

Due to the almost anonymity afforded to users of Bitcoin and other cryptocurrencies, it is very difficult to trace missing funds. When a hack occurs, the attacker gains access to the virtual wallet operated by the exchange and then transfers the cryptocurrency to their own virtual wallet.

The Coincheck Hack

The Japanese exchange Coincheck hack dwarfs an earlier hack on Bitcoin exchange platform Mt Gox in 2014, which saw the theft of US$480 million worth of Bitcoin.

The operator of Mt Gox, Mark Karpeles was arrested and jailed for his role in the collapse. At the time Mt Gox was the world’s biggest Bitcoin exchange.

He was charged with falsifying records and embezzlement, but there were no laws in place at the time to regulate the Mt Gox exchange and its trade in Bitcoin.

So as to bring virtual currency exchanges in line with international anti-money laundering and counter-terrorism financing measures, Japanese lawmakers enacted the Amended Settlement Act. Under these new laws, all exchanges operating in Japan must register and comply with rules. These rules include knowing their customers, employing sufficient staff, keeping balance sheets, and (critically) must keep all customers’ deposits in “cold storage” (that is, on a computer hard drive that is not accessible via the internet).

These new laws mean that when an exchange is hacked or collapses, operators can be made liable for the way that they managed their customers’ funds. Japanese authorities are threatening to prosecute the operators of Coincheck for their failure to comply with the new laws.

In their online apology, the operators of Coincheck have admitted that the hacked deposits were in a “hot wallet” (connected to the internet instead of being offline) and that this was due to “staff shortages”. Both of these failures to comply will give the Japanese authorities good reason to prosecute.

Close scrutiny of the accounts will be likely to reveal other irregularities. But this is little comfort for Coincheck’s investors. Coincheck has promised to return 90% of the lost NEM to its customers, but has yet to say how or when this will happen.

How would Australia’s regulator react?

Japan is not alone in its scramble to regulate cryptocurrency exchanges. Just this month, the Australian government announced the Australian Transaction Reports and Analysis Centre (AUSTRAC) will have new powers to monitor Bitcoin and other cryptocurrencies. New legislation also forces cryptocurrency exchanges to disclose details of investors and transactions.

The new laws are part of the government’s efforts to combat money laundering and terrorism financing. Exchanges will be required to identify customers more stringently and report suspicious transactions.

All transactions of A$10,000 or more must reported to AUSTRAC. The report must include the names of the customers conducting the transaction, the names of the the recipient of the proceeds of the transaction, and how the transaction was effected.

Any failure by an operator to comply with these laws would result in heavy fines and possibly imprisonment. However, as breaches are almost impossible to detect, enforcement of these laws depends on honesty of the exchange.

One way to detect reportable transactions is to monitor the size of the deposits made into the exchange’s bank account. However, individuals can create fake trading accounts and money-laundering syndicates breakup deposits into smaller amounts, so as to avoid raising suspicion.

Complying with AUSTRAC’s new regulations will be expensive for exchanges. With Australia’s new data breach notification laws coming into effect next month, gathering and securing sensitive information about customers and their deposits will be more onerous than ever.

The problem that faces regulators and investors is that the cost of compliance acts as a deterrent to registration. And because registration requires compliance, exchanges need to outlay significant capital before they start to trade. The sheer size of Coincheck’s losses indicates it was a high-volume exchange and yet, at the time of the hack, its registration was still pending.

Traditionally, when a foreign exchange collapses and is unable to return customers’ deposits, the regulator might prosecute the directors for operating without a licence, failure to comply with financial services regulations, or for insolvent trading. Insolvent trading, for example, attracts both civil and criminal sanctions.

When a cryptocurrency exchange is hacked, the operators and their customers are all victims, but the operators will be made liable for those losses. Under Australia’s current laws, a major hack of a cryptocurrency exchange will be met with similar challenges as those facing the Japanese authorities in the wake of the Coincheck theft.

Any investigation of an exchange could involve the Australian Securities and Investments Commission (ASIC), the Australian Taxation Office (ATO) and AUSTRAC. The level of scrutiny that would follow, could reveal a multitude of sins, including some that are unrelated to the hack.

For example, ASIC has the power to prosecute for insolvent trading, operating a Ponzi Scheme and breaches of financial services legislation. The ATO could investigate whether GST was being paid on trades.

Frustratingly for the customers and investors, seeing the operators punished does not reimburse them for their financial losses. Repaying deposits after a hack depends on whether the operators remain in the jurisdiction and have any funds of their own.

Author: Philippa Ryan, Lecturer in Commercial Equity and Disruptive Technologies and the Law, University of Technology Sydney

How anti-globalisation switched from a left to a right-wing issue – and where it will go next

From The Conversation.

The world is currently witnessing a new backlash against economic globalisation. Supporters of the UK’s exit from the European Union seek to “take back control” from Brussels, while Donald Trump’s economic ethno-nationalism has promised to put “America first”.

Trump arrives at the 2018 World Economic Forum in Davos after his administration claimed that US support for China joining the World Trade Organisation (WTO) in 2001 was a mistake and having just announced large tariffs on imported solar panels. It is remarkable that the backlash that he represents emerged from the right of the political spectrum, in countries long recognised as the chief architects and beneficiaries of economic globalisation.

At the turn of the millennium, the primary opposition to globalisation was concerned with its impacts in the Global South. Joseph Stiglitz, former chief economist at the World Bank, wrote in his 2006 book Making Globalization Work that “the rules of the game have been largely set by the advanced industrial countries”, who unsurprisingly “shaped globalisation to further their own interests.” Their political influence was represented through dominant roles in organisations such as the World Bank, International Monetary Fund and WTO, and the corporate dominance of their multinationals.

In the 1990s the anti-globalisation movement opposed neoliberal economic integration from a range of perspectives, with a particular emphasis on the Global South. The movement was populated by activists, non-governmental organisations and groups with a variety of concerns: peace, climate change, conservation, indigenous rights, fair trade, debt relief, organised labour, sweatshops, and the AIDS pandemic.

The big switch

Economic globalisation in the 21st century has evolved in ways that neither its extreme proponents nor its most vocal critics predicted. A big switch has occurred, and today’s backlash against globalisation emerged from concerns about its impacts in the Global North.

In the aftermath of the Brexit vote, UK prime minister Theresa May offered a sceptical assessment at the 2017 World Economic Forum at Davos, arguing that “talk of greater globalisation can make people fearful. For many, it means their jobs being outsourced and wages undercut. It means having to sit back as they watch their communities change around them.” The US, under Trump, subsequently began renegotiating NAFTA and withdrew from the Trans-Pacific Partnership.

The polling company YouGov, in a 2016 survey of people across 19 countries, found that France, the US and the UK were the places where the fewest people believe that “globalisation has been a force for good”. In contrast, the survey found the most enthusiasm for globalisation in East and Southeast Asia, where over 70% in all countries believed it has been a force for good. The highest approval, 91%, was in Vietnam.

Most notably, China took a very different stance on globalisation than the US and the UK at the 2017 Davos gathering. China’s president, Xi Jinping, said that his country will assume the leadership of 21st century globalisation. Defending the current economic order, Xi said that China was committed to make globalisation work for everyone, which was its responsibility as “leaders of our times”.

At Davos in 2018, Narendra Modi, prime minister of India, has already warned against de-globalisation:

It feels like the opposite of globalisation is happening. The negative impact of this kind of mindset and wrong priorities cannot be considered less dangerous than climate change or terrorism.

What drove the switch?

Significant proportions of the US and other countries in the Global North have experienced limited, if any, income gains in the most recent era of globalisation. Leading global inequality expert Branko Milanovic has explored changes in real incomes between 1988 and 2008 to show who particularly lost out on relative gains in income. He found two groups lost most: the global upper middle class – those between the 75th and 90th percentiles on the global income distribution, of whom 86% were from advanced economies – and the poorest 5% of the world population.

A different picture emerges in the Global South. People living in Asia accounted for the vast majority of those who experienced relative income gains from 1988 to 2008. In comparison with the 1990s, the Global South now earns a much larger share of world GDP, has more middle-income countries, more middle-class people, less dependency on foreign aid, considerably greater life expectancy, and lower child and maternal mortality.

Emerging evidence indicates that increased global trade has played a role in economic stagnation or decline for people in the north, especially in the US. MIT economist David Autor and his colleagues suggest that the “China shock” has had major redistributive effects in the US, leading to declines in manufacturing employment.

Economists had previously argued that the “losers” from trade could be compensated by transfers of wealth. Autor and his colleagues found that while there have been increases in welfare payments to regions of the US hardest hit by the trade shock, they fall far short of compensating for the income loss.

Not just globalisation

Not all of the stagnation and decline experienced in the Global North can be attributed to economic globalisation. Technological change is a big factor and national policy choices around taxation and social welfare have also played key roles in shaping inequality patterns within countries. In such a context, “globalisation” has been deployed as a scapegoat by some governments, invoking external blame for economic problems made at home.

The current backlash is not just about economic globalisation. It has involved ethno-nationalist and anti-immigrant components, for example among supporters of Trump and Brexit.

Neither does less of a backlash in the Global South necessarily mean support for neoliberal globalisation – and the optimism in countries such as Vietnam may paradoxically be a result of an earlier rejection of it. China, in particular, has not followed the same approach to economic globalisation as that which was encouraged by the US and organisations such as the IMF and World Bank in the late 20th century.

Meanwhile, many of the world’s poorest in the Global South have seen very little improvement in quality of life in recent years, yet are much more marginal and less well positioned to express their frustrations than the “losers” in countries such as the US and UK. They must not be forgotten.

A key lesson from the late 20th century is to be wary of wholesale attacks on, and sweeping defences of, 21st century economic globalisation. In light of the difficulties of establishing solidarity between “losers” in different parts of the world, the challenge of our times is for an alter-globalisation movement which addresses all of them.

 

Authors: Rory Horner, Lecturer, Global Development Institute, University of Manchester; Daniel Haberly, Lecturer In Human Geography, University of Sussex; Seth Schindler, Lecturer, Department of Geography, University of Sheffield; Yuko Aoyama, Professor of Economic Geography, Clark University

Who Are The Winners Under The Revised Trans-Pacific Partnership Trade Deal?

From The Conversation.

The revived trade agreement, now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), has finally made it across the line. It’s a considerable win for Australian farmers and service providers, in a trading area worth about A$90 billion.

The 11 remaining countries from the initial Trans-Pacific Partnership agreement finally agreed to go ahead with the deal without the US, at the annual meeting of the World Economic Forum in Davos, Switzerland.

The deal reduces the scope for controversial investor-state dispute settlements, where foreign investors can bypass national courts and sue governments for compensation for harming their investments. It introduces stronger safeguards to protect the governments’ right to regulate in the public interest and prevent unwarranted claims.

Despite earlier union fears of the impact for Australian workers, the CPTPP does not regulate the movement of workers. It only has minor changes to domestic labour rights and practices.

The new agreement is more of an umbrella framework for separate yet coordinated bilateral deals. In fact, Australia’s Trade Minister Steven Ciobo said:

The agreement will deliver 18 new free trade agreements between the CPTPP parties. For Australia that means new trade agreements with Canada and Mexico and greater market access to Japan, Chile, Singapore, Malaysia, Vietnam and Brunei.

It means a speedier process for reducing import barriers on key Australian products, such as beef, lamb, seafood, cheese, wine and cotton wool.

It also promises less competition for Australian services exports, encouraging other governments to look to use Australian services and reducing the regulations of state-owned enterprises.

Australia now also has new bilateral trade deals with Canada and Mexico as part and parcel of the new agreement. This could be worth a lot to the Australian economy if it were to fill commercial gaps created by potential trade battles within North America and between the US and China.

What’s in and out of the new agreement

The new CPTPP rose from the ashes of the old agreement because of the inclusion of a list of 20 suspended provisions on matters that were of interest for the US. These would be revived in the event of a US comeback.

These suspended provisions involved substantial changes in areas like investment, public procurement, intellectual property rights and transparency. With the freezing of further copyright restrictions and the provisions on investor-state dispute settlements, these suspensions appear to re-balance the agreement in favour of Australian governments and consumers.

In fact, the scope of investor-state dispute settlements are narrower in the CPTPP, because foreign private companies who enter into an investment contract with the Australian government will not be able to use it if there is a dispute about that contract. The broader safeguards in the agreement make sure that the Australian government cannot be sued for measures related to public education, health and other social services.

The one part of the agreement relating to the temporary entry for business people is rather limited in scope and does not have the potential to impact on low-skilled or struggling categories of Australian workers. In fact, it only commits Australia to providing temporary entry (from three months, up to two years) of only five generic categories of CPTPP workers. These include occupations like installers and servicers, intra-corporate transferees, independent executives, and contractual service suppliers.

The above categories squarely match the shortages in the Australian labour market, according to the Lists of Eligible Skilled Occupation of the Home Affairs Department.

Bits of the original agreement are still included in the CPTPP such as tariffs schedules that slash custom duties on 95% of trade in goods. But this was the easy part of the deal.

Before the deal is signed

The new agreement will be formally signed in Chile on March 8 2018, and will enter into force as soon as at least six members ratify it. This will probably happen later in the year or in early 2019.

The geopolitical symbolism of this timing is poignant. The CPTPP is coming out just as Donald Trump raises the temperature in the China trade battle by introducing new tariffs. It also runs alongside China’s attempts to finalise a much bigger regional trade agreement, the 16-nation Regional Comprehensive Economic Partnership.

Even though substantially the CPTPP is only a TPP-lite at best, it still puts considerable pressure on the US to come out of Trump’s protectionist corner.

It spells out the geopolitical consequences of the US trade policy switch, namely that the Asia Pacific countries are willing to either form a more independent bloc or align more closely with Chinese interests.

Will this be enough to convince the Trump administration to reverse its course on global trade? At present, this seems highly unlikely. To bet on the second marriage of the US with transpacific multilateral trade would be a triumph of hope over experience.

Author: Giovanni Di Lieto, Lecturer, Bachelor of International Business, Monash Business School, Monash University

What Australia can learn from overseas about the future of rental housing

From The Conversation.

When we talk about rental housing in Australia, we often make comparisons with renting overseas. Faced with insecure tenancies and unaffordable home ownership, we sometimes try to envisage European-style tenancies being imported here.

And, over the past year, there has been a surge of enthusiasm for developing a sector of large-scale institutional landlords, modelled on the UK’s build-to-rent sector or “multi-family” housing in the US.

Our review of the private rental sectors of ten countries in Australasia, Europe and North America identified innovations in rental housing policies and markets Australia might try to emulate – and avoid. International comparisons also give a different perspective on aspects of Australia’s own rental housing institutions that might otherwise be taken for granted.

Not everyone in Europe rents

In nine of the ten countries we reviewed, private rental is the second-largest tenure after owner-occupation. Only in Germany do more households rent privately than own their housing. Most of the European countries we reviewed have higher rates of home ownership than Australia.

In most of the European and North American countries in our study, single people and lower-income households and apartments are heavily represented in the private rental sector. Higher-income households, families with kids, and detached houses are represented much more in owner-occupation. It’s less uneven in Australia: more houses, kids and higher-income households are in private rental.

Two key potential implications follow from this.

First, it suggests a high degree of integration between the Australian private rental and owner-occupier sectors, and that policy settings and market conditions applying to one will be transmitted readily to the other.

So, policies that give preferential treatment to owner-occupied housing will also induce purchase of housing for rental, and rental housing investor activity will directly affect prices and accessibility in the owner-occupied sector.

It also heightens the prospect of investment in both sectors falling simultaneously, with little established institutional capacity for countercyclical investment that makes necessary increases in ongoing supply.

A second implication relates to equality. Australian households of similar composition and similar incomes differ in their housing tenure – and, considering the traditional value placed on owner-occupation, this may not be by choice.

This suggests housing tenure may figure strongly in the subjective experience of inequality. It raises the question of whether housing is a primary driver of inequality, and not the outcome of difference or inequality in other aspects of life.

The rise of large corporate landlords

In almost all of the countries we reviewed, the ownership of private rental housing is dominated by individuals with relatively small holdings. Only in Sweden are housing companies the dominant type of landlord.

However, most countries also have a sector of large corporate landlords. In some countries, these landlords are very large. For example, America’s five largest corporate landlords own about 420,000 properties in total. Germany’s largest landlord, Vonovia, has more than 330,000 properties alone.

These landlords’ origins vary. Germany’s arose from massive sell-offs of municipal housing and industry-related housing in the early 2000s.

In the US, multi-family (apartment) landlords have been around for decades. And in the aftermath of the global financial crisis, they have been joined by a new sector of single-family (detached house) landlords that have rapidly acquired large portfolios from bulk purchases of foreclosed, formerly owner-occupied homes.

In these countries and elsewhere, the rise of largest corporate landlords has been controversial. Germany’s have a poor record of relations with tenants – to the extent of being the subject of popular protests in the 2000s – and their practice of characterising repairs as improvements to justify rent increases.

American housing advocates have voiced concern about “the rise of the corporate landlord” – especially in the single-family sector, where there’s some evidence that they more readily terminate tenancies.

These landlords also don’t build much housing. They are most active in renovating (for higher rents), merging with one another, and – especially in the US – developing innovative financial instruments such as “rental-backed securities”.

“Institutional landlords” are now a standing item on the Australian housing policy agenda. Considering the activities of large corporate landlords internationally, we should get specific about the sort of institutional landlords we really want, how we will get them, and how we will ensure they deliver desired housing outcomes.

Policymakers and housing advocates have, for years, looked to the community housing sector as the prime candidate for this role. They envisage its transformation into an affordable housing industry that works across the sector toward a wide range of policy outcomes in housing supply, affordability, security, social housing renewal and community development.

With interest in the prospect of build-to-rent and multifamily housing rising in the property development and finance sectors, there is a risk that affordable housing policy may be colonised by for-profit interests.

The development of a for-profit large corporate landlord sector may be desirable for greater professionalisation and efficiencies in the management of tenancies and properties. However, this should not come at the expense of a mission-oriented affordable housing industry that makes a distinctive contribution to housing outcomes.

Bringing it home

Looking at the policy settings in the ten countries, we found some surprising results and strange bedfellows.

For example, Germany – which has had a remarkably long period of stable house prices – has negative gearing provisions and tax exemptions for capital gains, much like Australia. But, in Australia, these policies are blamed for driving speculation and booming prices.

And while the UK taxes landlords more heavily than most other countries, it has the fastest-growing private rental sector of the countries we reviewed.

However, these challenging findings should not be taken to diminish the explanatory power or effectiveness of these settings in each country’s housing policy. Rather, they show the necessity of considering taxation and other policy settings in interaction with each other and in wider systemic contexts.

So, for example, Germany’s conservative housing finance practices, and regulation of rents, may mean the speculative potential of negative gearing and tax-free capital gains isn’t activated there.

Strategy in Australia for its private rental sector should join consideration of finance, taxation, supply and demand-side subsidies and regulation with the objective of making private rental housing outcomes competitive with other sectors.

Author: Chris Martin, Research Fellow, City Housing, UNSW

Why Bitcoin is taken more seriously than Dogecoin

From The Conversation.

As Bitcoin loses value, it may seem like it’s just as useful as the cryptocurrency invented for a joke – Dogecoin.

But there are genuine differences between these cryptocurrencies, and it’s not just because one is “much currency, such volatility”.

There are 1,448 cryptocurrencies around the world, by some counts. For every Bitcoin you have a programmable coin like Ethereum, or a coin that acts like a token for specific services, like Augur.

Some of these coins earn better reputations because of their usefulness, the people who made them, or the tech itself. They are not all taken seriously by investors, researchers and users.

The developers behind these cryptocurrencies are also important as they convince other people to adopt them and write new code for the technology to evolve. This new tech attracts new users into the system.

Different functions

Cryptocurrencies can be divided into several types. Cryptocurrencies like Bitcoin, Litecoin, and Dogecoin only provide basic functions such as transferring value from one party to another.

The next category are smart contract cryptocurrencies like Ethereum, Cardano, NEO, and Waves. These cryptocurrencies can be programmed, and so can become the basis for applications like games and digital markets.

The third type are cryptocurrencies designed to preserve your privacy like Monero and Zcash. These claim to be “untraceable” although transaction records are still available.

Then there are tokens, which are built with smart contracts to serve many purposes. They are often sold to raise funds to build services, and used as tickets for the services (such as Augur and Power Ledger).

Technological differences

The differing technologies in these cryptocurrencies mean that certain coins have more potential than others.

IOTA is used for “Internet of Things” devices (such as a smart kettle). But it has a special kind of blockchain (the technology that tracks transactions) and so can achieve much higher speeds of transaction and quicker confirmation of trades than Bitcoin.

Others like Nxt, and Ardor have built-in features that let users to do other things than just sending coins, such as creating marketplaces and even messaging.

People use cryptocurrencies like Zcash and Monero to settle transactions with “zero-knowledge”. This means the cryptocurrencies hide the information of the real payers and payees, and even the amount of coins transacted.

Monero has largely replaced the use of Bitcoin in exchanges on the dark web.

And smart contracts built with cryptocurrencies like Ethereum have countless potential usecases, from property transactions to digital asset management and fundraising.

The technology also means that one cryptocurrency might use significantly less electricity than another.

Limitations

The major cryptocurrencies, like Bitcoin and Ethereum, are slow because of their inability to handle massive amount of data being sent by users. The technology used to secure the data are expensive and inefficient.

Bitcoin can only handle a maximum of seven transactions per second; Ethereum can handle 15 transactions per second. Compare this with the VISA payment system, which can process up to 56,000 transactions per second.

But new entrants, such as Red Belly from the University of Sydney, might be able to solve this problem, handling up to 660,000 transactions per second.

Smart contracts can also run into problems if they contain bugs. When a decentralised organisation built on Ethereum was hacked in 2016, US$50 million in Ether was stolen.

When something achieves the success of Bitcoin we’re bound to see competitors entering the market, hoping to grab a share.

This explains the explosion in cryptocurrencies since the Bitcoin source code was released under an open licence. Anyone can copy, modify, and release a modified version of Bitcoin.

By looking at the current trend, we will see more cryptocoins in the near future.

But as we can see, “cryptocurrency” is a term that encompasses a wide range of different technologies, communities and uses. It’s all of these factors that inform whether users, investors, developers and researchers take a coin seriously.

Author: Dimaz Wijaya  PhD Student, Monash University

Open banking – the invisible reform that will shake up UK financial services

From The Conversation.

Open banking launched on January 13 in the UK. It requires major banks to share data with third party financial providers. This will bring a new level of transparency and encourage competition, shaking up the financial services industry and levelling the playing field for new challengers to take on the more established high street banks.

The reforms follow a 2016 investigation by the Competition and Markets Authority into retail banking. Its report concluded that the existence of barriers to entry for smaller and newer banks made the banking market less competitive.

This paved the way for open banking, which requires banks to securely share customers’ financial data with other financial institutions – provided customers give their permission. This should boost the range of products and deals made available to people and facilitate more switching, with offers better tailored to individuals, based on their past spending habits.

It will also enable people to bring together their financial information from different providers so they can, for example, open one app and see a list of their accounts with other banks.

All in all open banking is set to change the financial services industry in several ways.

Better banking options

The launch of open banking will be a turning point for large retail banks in the UK. The traditional retail banking business model will be transformed from a closed one to a modern, open source one.

The basis is a united financial platform that has been designed to provide users with a network of their financial data. This will disrupt the existing advantages that big banks in the UK have where they have a monopoly on customers’ data, not making it easy for customers to see the alternatives that are out there.

With more access to customers’ data, new financial technology (fintech) start ups, which are able to provide innovative solutions and modern financial products, will develop and challenge the traditional industry. Meanwhile, the increased competition and narrower profit margins will force existing big banks to adopt new technologies, improve their customer services and open up new revenue streams to keep up.

Better payment systems

Open banking will enable financial institutions to launch easy, fast and innovative global payment methods. Linked with the EU’s Second Payment Services Directive, which also comes into force this year, open banking also aims to boost competition in payment methods, which has been in need of a modernisation in the digital era.

The open access to people’s financial data means that new payment services can be developed. New providers will be able to initiate online payments (whether to friends, retailers, charities) directly from the payer’s bank account, avoiding the use of intermediaries like banks. Paying bills and transferring money will become as easy as sending a message.

As well as the emergence of new services that are more efficient, they should also be secure. Key to the new open banking standards is enhancing financial safety. Third party financial services providers will be required to obtain licenses and to meet the rules set by the main UK bank regulator, the Financial Conduct Authority.

Collaboration between banks and fintech

Open banking will digitise UK banking and strengthen UK fintech. Under the new regulation, fintech firms will play a more important role in the financial services industry and a huge number of fintech startups will enter into competition with existing major banks.

In a world of digital financial systems, big banks will have to rethink their position. Until now, collaboration between banks and fintech firms has mostly involved the financing of acquisition of fintech firms by big banks or partnership agreements, which enable a bank to use or acquire a digital solution developed by the fintech company.

Collaboration needs to become more customer focused – providing people with better products and solutions. Plus, a successful strategy for banks lies in greater cooperation with fintech firms to improve their own, often older technology to help them lower costs and improve customer experience, as well as developing new income streams so they can compete in the long term.

There are still unanswered questions about how open banking will play out. Security and privacy is fundamental to its successful implementation. Nonetheless, it is a revolutionary experiment aimed at boosting retail banking competition and will help new challengers in the financial services space to grow.

Authors: Ru Xie, Senior Lecturer in Finance, University of Bath;
Philip Molyneux, Professor of Banking and Finance, University of Sharjah