The Greens would like to place on record our thanks to those who
participated in this inquiry. In particular, the Greens would like to thank the
victims of financial industry misconduct who, on top of all of the loss and
distress they have experienced as a result of this misconduct, have found the
time and energy to participate in this inquiry. We thank you.
It is because of the loss and distress experienced by victims of
financial industry misconduct, and because of the enormous and economy wide
problems that are the root cause of this misconduct, that the Greens have
dissented to the Chair's report. After an inquiry lasting two years, after
taking 147 submissions from a range of people, and after having held three
public hearings, all at the taxpayer's expense, this Chair's report is a joke.
Three recommendations, none of which even hint at changes to the way the
financial service industry is structured or regulated. This Chair's Report is
disrespectful to those who took the time to participate in this inquiry and it
reflects poorly on the Australian Senate and the otherwise well respected
The Greens have real concerns that there is a gulf developing between
the rhetoric about reforming the financial sector, and the commitment to
actually reforming the financial sector. Bank bashing is not an end unto
itself. Policy reform is the goal. And this Chair's report fails terribly by
The best way to ensure victims of misconduct by the banks are not
forgotten is to undertake reform to stop it happening again. This Dissenting
Report by the Australian Greens is drawn from our submission to the Interim
Report of the Royal Commission into Misconduct in the Banking, Superannuation
and Financial Services Industry. It addresses two of the three recommendations
of the Chair's report, and includes the kind of policy reforms that members of
this parliament should be recommending if they were focused on doing their job
rather than just grandstanding.
The Commission has laid bare many of the problems in Australia's
banking, superannuation and financial services industry. Misconduct involving
varying levels of deception, lying and other forms of dishonesty have been
shown to be widespread. Fraud and bribery has been uncovered within once
When announcing the establishment of this Commission, the then Prime
Minister, Malcolm Turnbull, said that it would not 'put capitalism on trial'. That might be
true, but the Commission has exposed the worst excesses of capitalism. After
all, banks are the arteries of capital, and they have become fat and bloated.
As the Commission highlights, the misconduct uncovered has been driven
by the pursuit of profit above customer interest. This is not just a problem of
individuals. It is not just 'a few bad apples' as the banks tried in vain to
tell everyone for so many years. The misconduct uncovered by the Commission
represents a systemic failure.
The problems in Australia's banks are emblematic of the problems in the
financial industry the world over. Through globalisation, technology and blind
faith in the wisdom of markets, the financial system has become too big, too
complicated and too interwoven to properly serve the interests of consumers or
Australia has embraced this new order. We are one of the most heavily
financialised economies in the world.
The banking and finance sector accounts for 9 per centof GDP and is the largest
single sector in the economy.
But the increase in the size and scope of banking has not been matched by an
increase in financial stability or an increase in the distribution of economic
Overwhelmingly, financial complexity has been of more benefit to the
finance industry than it has been to consumers or society. Beyond a certain point, an
oversized banking and finance sector actually constrains the real economy. And the global
financial crisis showed that no-one truly comprehends the level of
interconnectedness between complex financial products and everyday life. Risk
is everywhere and it's everyone's problem, whether you signed up for it or not.
The existence of this Royal Commission—the first of its kind since the
1935 inquiry into monetary and banking systems—is a seismic moment. In the
lead-up to the announcement of this Commission, a common refrain from those
opposing its establishment was that there had been a proliferation of inquiries
into the financial system in recent years. While these inquiries have been
worthwhile, the policy responses have been incremental and marginal, and have
fallen short of what is needed to deal with the magnitude of the problem. The
failure of previous inquiries to get to the bottom of the problem was a
significant reason why the call for a Royal Commission was so persistent and so
This Royal Commission must think big. In the same way the misconduct is
systemic, the response must be systemic. The best way to ensure victims of
misconduct by the banks are not forgotten is to undertake reform to stop it
Summary of Greens proposals
The Greens main proposals
A government provider of everyday banking – a People's Bank.
A more level playing field for non-major banks.
Caps on executive pay.
An expanded scope for the Banking Executive Accountability Regime
Structural separation of financial institutions – break-up the
Genuine income verification by mortgage lenders.
Restrictions on the ownership of retail grade intermediaries.
End all value-based commissions on retail grade products.
End the carve-outs from the best interest duties for retail grade
Re-establish the Australian Competition and Consumer Commission (ACCC)
as the conduct regulator over retail grade products and services.
Elevate the standing of the Council of Financial Regulators.
Establish a Financial Regulators Assessment Board.
Report by February 2019 but extend so as to undertake further
Establish a last resort compensation scheme.
Increase funding for financial counselling and advocacy centres.
Competition and profit
Despite the promised benefits of privatisation and deregulation, and despite
thirty-odd years with a largely privatised and deregulated banking system,
competition among Australia's banks is far from vigorous. Consumers are paying
more for products and services than they should, and banks' profits are well in
excess of that which they have earned, either through effort or prudent
management of risk. On the contrary, banks' profits have remained excessive in
spite of their indifference to customers and their disregard for risk. The
conclusion of the inquiry into the Commonwealth Bank commissioned by the
Australian Prudential Regulation Authority (APRA) was that 'continued financial
success dulled the senses of the institution', and that in this environment the
'voice' of customers and of risk were being drowned out.
The Productivity Commission recently outlined why competition is so
Australia's banking sector is an established oligopoly with a
long tail of smaller providers.
The four major banks as a group hold substantial market
power, as a result of their size, strong brands and broad geographical reach.
This is substantially supported by regulatory settings, which contribute to the
major banks' structural advantages.
As a result, the major banks have the ability to pass on cost
increases and set prices that maintain high levels of profitability — with
minimal loss of market share.
The smaller banks and non-bank financial institutions
typically follow the pricing trend set by the major banks, and are not a
significant competitive constraint on the major banks' market power.
The Productivity Commission's conclusion after an extensive inquiry into
competition in the financial system was that 'price competition in the banking
system is limited'.
The ACCC has concluded similarly during an inquiry into residential
ACCC Chair, Rod Sims, said at the launch of the interim findings that the major
banks' interest rate behaviour 'resembles synchronised swimming more than it
does vigorous competition'.
The major banks' 'front book/back book' strategy explored during this inquiry
is a clear example of how the banks fail to compete on price and how they do
this by taking existing customers for granted.
All of this is in keeping with the Commission's summary of the market
and regulatory fundamentals that go towards explaining why misconduct has been
so common and so widespread.
While the Greens agree with the Commission's diagnosis, we disagree with the
limitations of the following conclusion:
The law sets the bounds of permissible behaviour. If
competitive pressures are absent, if there is little or no threat of enterprise
failure, and if banks can and do mitigate the consequences of customers failing
to meet obligations, only the regulator can mark and enforce those bounds.
The Greens submit that, in response to the contempt shown for customers,
the supremacy of profits, and so as to present some competitive pressures that
might jolt the market out of its torpor, the Commission should consider a
government-owned bank to 'mark' the bounds of permissible behaviour, as well as
other measures that would create a more level playing field for other non-major
banks. The Commission is asked to regard the impact of its recommendations on
the economy, access to and cost of financial services, competition, and
financial system stability.
The Greens submit that consideration of the provision of products and services
by government are relevant to these directions, as are consideration of the
structural and regulatory impediments to competition.
The Commissioner has rightly concluded that:
The conduct identified and criticised in this report was
driven by the pursuit of profit – the entity's revenue and profit and the
individual actor's profit. Employees of banks learned to treat sales, or
revenue and profit, as the measure of their success.
The problem of profit in the banking system is a perennial issue, and
the provision of services by government has been a perennial response. In his
dissenting statement to the Royal Commission into the Monetary and Banking
System, Commissioner Ben Chifley stated that:
Banking differs from any other form of business, because any
action, good or bad, by a banking system affects almost every phase of national
life. A banking policy should have one aim – service for the general good of
the community. The making of profit is not necessary to such a policy.
The provision of not-for-profit banking services by the government is
not a novel concept. From 1911 until 1991, the Commonwealth Bank was government
owned and provided basic and essential banking services across the country. The
Banking Act 1947 (Cth) provided for the nationalisation of all banks. It
passed both houses of parliament, although was subsequently ruled
Across the Tasman Sea, the New Zealand Post Office Bank was
established in 1867, sold in 1989, and then re-established in 2002. Elsewhere
in the world, government provided banks are commonplace. Germany is the most
notable advanced economy with a high proportion of banking undertaken through
publicly owned institutions.
In the immediate wake of the global financial crisis, six eminent
economists from diverse standpoints wrote an open letter putting forward issues
to consider during an inquiry into the financial system. This letter included an
open question that summarises the benefits of re-establishing a People's Bank
Should citizens who feel unsure and unqualified to shop
wisely in our financial markets be able to access basic savings, payments, and
wealth management products that have been vouchsafed by governments as being
safe and professionally managed (for example, why can't Australians invest with
the Future Fund)? Is there a role for a publicly-owned entity to offer
essential services in Australia's finance sector that leverage off unique
government infrastructure, such as Australia Post, the tax system, and the
government bond market?
The Greens submit that a People's Bank, with the imprimatur of the
government, using the existing outlets of government agencies, and offering
products on a cost recovery basis, would be able to challenge the existing
banking model through price competition in a way that no other new or existing
entrant is able to. A People's Bank would not necessarily need to obtain a
major share of the market to have an impact. The mere existence of a credible,
accessible and widely respected participant in the market providing a baseline
is likely to be enough to force changes in the market.
The Greens have proposed a detailed plan that would see the People's
Savings accounts pegged to the RBA cash rate, with debit cards
linked to these accounts also available.
Term deposits pegged to the Commonwealth bond rate.
Mortgage tracker accounts pegged to the RBA cash rate.
The design adopted by the Greens is largely based on that proposed by
A particular feature of this design is that it would involve people holding
accounts directly with the Reserve Bank of Australia (RBA). In the digital age,
there is little impediment to individuals being granted the same privileges as
banks in being able to access the RBA directly. This would not mean that the
RBA would need to establish a 'shopfront'. Rather, people would hold accounts
with the RBA, but the transactions with these accounts would be handled by an
intermediary. The Greens have proposed, as have many others, that Australia
Post be the primary government outlet for a People's Bank. However, depending
on the design, existing retail banks could also be afforded the opportunity to
intermediate the accounts of individuals with the RBA.
Irrespective, the Commission might also consider the provision of
services for commercial banks by Australia Post. Australia Post currently
processes transactions for commercial banks and is increasingly used by
customers of commercial banks as the outlet for physical transactions. However,
the discretionary nature of this service has recently come to light following
ANZ's unilateral refusal to agree to the revised terms of the service agreement
proposed by Australia Post.
The Commission might consider whether a condition of being granted a license is
that banks are required to allow Australia Post to process basic transactions.
The cost of Australia Post providing this service could then be levied on
banks. This model would ensure universal access to physical banking outlets for
level playing field
The Greens submit that competition in the banking industry would also be
improved if the structural and regulatory advantages afforded to the major
banks were addressed. While the Commission is not required to examine
macro-prudential policy and regulation, we submit that where a clear link can
be made between macro-prudential settings, weak competition and misconduct,
then the Commissioner should examine these relationships and consider
Wholesale funding advantage
The Productivity Commission has summarised how the major banks' market
power begets market power through their wholesale funding advantage, including
as a result of them being perceived to be too-big-to-fail:
With their better credit ratings and a perception of being 'too
big to fail', the major banks are able to source funds from investors and
depositors at lower interest rates than are smaller institutions. The smaller
entities (especially non-ADIs that are unable to accept deposits) both compete
against the larger institutions and at the same time rely on them to access
some of the funds that allow them to continue competing. A substantial gap also
remains between the average operating costs of Australia's major banks and its
In the wake of the global financial crisis, the IMF prepared a
report for the G-20 considering how the public might be compensated for the
value of implicit guarantees provided to systemically important banks.  The IMF
recommended a levy to pay for 'the fiscal cost of any future government support
to the sector'.
The Major Bank Levy introduced in 2017 has gone some way towards
addressing these issues. The Explanatory Memorandum to the Major Bank Levy Bill
2017 also stated that:
The major bank levy will also contribute to a more level
playing field for smaller, often regional, banks and non-bank competitors. As
the House of Representatives Standing Committee on Economics report on the four
largest banks found, the major banks' size and market dominance affords them
significant funding cost advantages and pricing power at the expense of their
However, the annual levy rate of six basis points on covered
liabilities is short of the value of the wholesale funding advantage extended
to the major banks. The RBA estimated the value of this advantage at between 20
and 40 basis point in a 2016 paper.
As a result of a number of subsequent changes to the major bank's capital
requirements, the Productivity Commission suggested that 'the funding cost
advantage of the major banks may have reduced from that modelled by the RBA'.
Nevertheless, the Productivity Commission found that ratings agencies still
provide an uplift to the major banks' on the basis of their too-big-to-fail
status, which implies that the Major Bank Levy has not covered the full value
of the wholesale funding advantages.
The Greens submit that the Council of Financial Regulators should
commission an annual estimate of the funding advantage of the implicit
government guarantee to the major banks, and that the Major Bank Levy should be
adjusted annually to reflect this value.
Mortgage risk weights
The Productivity Commission has also summarised how regulatory settings
assist the major banks in maintaining their market power, including the
exceptional arrangements regarding mortgage risk weights.
On one hand, the major banks (as well as Macquarie and ING)
use internally developed risk models, approved by Australian Prudential
Regulation Authority (APRA), that in effect lower their funding costs compared
with all other ADIs, which use APRA's standard risk weighting. On the other
hand, it is only the major banks that are required by APRA to hold additional
capital because of their size and complexity. This requirement can be costly
for the major banks, but it can also support them to the extent that it is viewed
by international credit rating agencies as an indirect recognition of their 'too
big to fail' status. The net result of these regulatory measures is a funding
advantage for the major banks over smaller Australian banks that rises in times
of heightened instability.
The Productivity Commission estimated that the major banks' exceptional
use of internal risk based (IRB) models equates to a 0.14 per cent reduction in
the cost of funding across an otherwise identical loan portfolio.
APRA explained that achieving IRB approval 'requires an ADI to have a
strong and sophisticated risk management framework and capacity'. In 2016, in
the wake reports of systemic issues with the major banks lending standards,
APRA requested that the major banks undertake an audit of their data policies,
procedures and controls relating to mortgage lending. In February 2017, APRA
explained why it had singled out the major banks.
The work was requested of the banks that are authorised to
use their internal models for risk rating purposes—that is common knowledge.
That is the four major banks and Macquarie. The reason we focused on those
banks is that if they do not have their data right then the risk weights are
not as accurate as they might otherwise be.
APRA had previously refused to make these targeted reviews public. However, the
Commission has published them. The targeted reviews show that the major banks'
approach to data collection, analysis and management is neither the strong nor
sophisticated approach required by APRA to receive IRB accreditation. UBS went
so far as to downgrade its investment advice for Westpac on the back of the
Commission's release of these reports.
The targeted reviews show that there is no justification for the major
banks to continue to receive differential and favourable treatment by APRA with
respect to mortgage risk weights. The Greens submit that this is relevant to
the considerations of the Commission because of the competitive advantage that
IRB accreditation provides the major banks. The Greens have suggested that all
banks should be required to use standardised mortgage risk weights. Failing
that, the Commission should consider endorsing the recommendation of the
Productivity Commission that standardised risk weights be used for small
business lending, and the conclusion that:
More nuance in the design of APRA's prudential measures —
both in risk weightings and in directions to authorised deposit-taking
institutions — is essential to lessen market power and address an imbalance
that has emerged in lending between businesses and housing.
Culture starts at the top. When the CEOs of banks are rewarding
themselves for returns above everything else, then it is not surprising that a
culture that prioritises sales and profit above the interests of customers has
become a defining feature of banks.
The Commission is to be commended for having emphasised the role of
remuneration in the misconduct that has been uncovered, including the role of
incentive based remuneration. This is an obvious problem that has been
recognised for many years, as is noted by the Commission. Yet it remains
unaddressed because the current approach relies on self-regulation.
Put simply, the banking fraternity decides how much they will pay
themselves, and they've been quite happy to pay themselves handsomely. Some
senior bank executives earn over 100 times the average wage. This practice
clearly falls below community standards and expectations. Yet banks have been able
to get away with it because they are comfortably insulated from the threat of
any serious retribution. A reliance on self-regulation without there being any
incentive to self-regulate is next to useless.
In the past, to the extent that they felt compelled to provide a
justification, banks would often say that sky-high salaries were required to
ensure that best-of-the-best are in charge of these important national
institutions. The Commission has debunked this myth: if obscene salaries
attract more competent managers, then how is the level of misconduct uncovered
by the Commission to be explained?
On the contrary, excessive executive salaries appear to be part of the
problem. Beyond a certain point, increased pay does not provide an incentive
for executives to perform better or to act in the long term interests of a
company or the public.
And exorbitant executive pay may also be leading to adverse selection where
executives more motivated by personal reward are more likely to apply for a
job. In turn, these executives then tend to employ like-minded individuals,
thus creating an 'executive club' that re-enforces the culture and behaviours
that justify exorbitant executive pay.
But, besides all else, there is simply no justification for bank
executives, who run a business that has a privileged position within society,
is effectively an essential service, and that has a clear social
responsibility, to be paying themselves the ridiculous salaries that they have
The Greens submit absolute limits should be established on the
remuneration payable to bank executives, and have nominated that a cap be set
at ten-times the average wage for base remuneration and a further five-times
the average wage for variable remuneration. Further, the Greens submit that the
Bank Executive Accountability Regime (BEAR) should be extended to cover all
institutions that provide simple and essential financial products and services,
or other retail grade products (see further exploration of these concepts
Australia would not be a pioneer in establishing executive pay caps. In
2016, Israel agreed to establish a cap on executive pay in the banking and
insurance sector at 35 times the wage of the lowest paid worker in the company. The Knesset's
Finance Committee Chairman, MK Moshe Gafni, explained the merits of the
Financial corporations are different from other entities.
They are part of a monopoly and they were given a license to handle the public's
funds, and they give themselves salaries that are excessive and disproportional
to the returns they bring.
At the core of the problems with the modern banking and finance is the
rise of universal banking, where everything from saving accounts to derivatives
trading is under the one roof. As outlined by the Commission, this has been
characterised in Australia by development of the big-four banks into vertically
integrated institutions during the late 1990s and early 2000's.
This privatised and deregulated model has failed in banking for the same
reason it has failed in so many essential services: it is built on the fallacy
of the efficient-market hypothesis. The efficient-market hypothesis has been
the economic orthodoxy in most of the western world for most of the last
thirty-odd years. The efficient-market hypothesis justifies a laissez-faire approach
to financial market regulation. Subscription to the efficient-market hypothesis
is reflected in the architecture of Australia's financial system that is, by
and large, the product of Keating-era deregulation; and that was bedded down
through the 1997 Wallis Financial System Inquiry and the legislative response
The efficient-market hypothesis puts store in the idea that
well-informed individuals will act rationally and seek out the best deal for
themselves; and, in doing so, these individuals will bring discipline to the
market and ensure that asset prices reflect their underlying value. In other
words, the system will be self-regulating.
This is nonsense. To start with, most Australians either don't have the
time, wealth or inclination to warrant spending their evenings poring over
financial reports. Most people only ever want or need basic banking services at
a fair price. And even if people are up for playing the market, then it is
going to take some effort get in a position to compete with these financial
behemoths, all the more so given the ever increasing complexity of modern
finance. In the words of the Commission, 'there is always a striking asymmetry
of power and information between bank and customer that favours the bank'.
Instead, universal banking has allowed banks to pray upon customer's
trust and loyalty to them. The vast bulk of instances of misconduct revealed by
the Commission have been within vertically integrated institutions. Whether
people wanted to play in the market or not, banks have made a habit of talking
customers into buying products they do not understand or do not need.
Basic banking: Simple and essential
products and services
The Greens submit consideration of the structure of banking
businesses—and concurrent consideration of the regulatory architecture—would be
well informed by a distinction being made between the simple and essential
products and services that the vast majority of Australians use (retail
banking, superannuation and insurance), and the more complex and selective
activity that is the domain of big business, the wealthy, and the adventurous.
This distinction would create the concept of 'banking between the flags'
that comes with a high level of consumer protection: caveat vendor to a
greater extent, and caveat emptor to a lesser extent. As the providers
of an essential service, banks, superannuation funds and insurance institutions
should be obliged to make all reasonable efforts to ascertain a customer's
circumstances and the suitability of the products offered to them. People
should be able to deal with banks, superannuation funds or insurance firms with
confidence that their best interests are being attended to.
This is not to say that individuals and small business should be blithe
to the risks they are taking on. But there should be limitations on what
individuals and small business are expected to understand when consuming basic
To make an analogy with buying a car, consumers need to be conscious
with how much they are spending and what basic features they want, but they are
not expected to understand the mechanics of the vehicle in any detail. As is
the case with most retail consumption, in the words of the ACCC, the products
should 'do all the things someone would normally expect them to do'.
The Greens submit that the starting position for the regulation of
simple and essential products and services should be based on this principal. Accordingly,
carve-outs given to particular products and services that are simple and
essential (e.g. insurance from unfair contract terms; life insurance and
investment property from financial advice standards) should be abolished.
The Commission has well detailed the inherent conflicts of interest
within vertically integrated institutions. It has long been evident to
observers of the financial sector that vertical integration is at the heart of
a large number of instances of misconduct with the financial sector. This was
evident during the Senate's landmark inquiry in the conduct of ASIC that
uncovered problems within the CBA's financial planning arm. It was also evident
within misconduct revealed prior to the Royal Commission within the financial
planning arms of other institutions, including those involved in forestry
managed investment schemes.
The Greens submit that these conflicts and the incentives to cross-sell
and subsidise within vertically integrated institutions cannot be sufficiently
regulated so as to prevent the myriad ways in which consumers can be unfairly
or unknowingly disadvantaged. It is simply too difficult for legislators and
regulators to identify, and act to prevent, all of the opportunities that arise
within integrated institutions to do something other than act in the best
interests of consumers, be it by subtly but consistently directing
existing customers towards in-house products, or by exploiting the loyalty and
inertia of customers with excessive fees and charges. The profit motive is
simply too strong and structural separation is necessary to curb its worst
The Greens submit that financial institutions should be constrained
through ownership to being one of the following:
an authorised deposit-taking institution (bank);
an APRA regulated superannuation fund;
an insurance provider, including life insurance and general
product insurance; or
a provider of other financial services, including wholesale and
retail wealth management, investment banking, shadow banking, hedge funds,
self-managed super funds, financial markets, and auditors and liquidators.
The cross-selling of bank owned superannuation and insurance has been a
feature of the misconduct uncovered through this inquiry. The model proposed by
the Greens would remove the inherent conflicts for the cross-selling of these
products within vertically integrated institutions.
This would not prevent these institutions from selling other products
altogether, only to stop them from manufacturing and selling in-house products.
Banks could still sell investment into (retail-grade) unit trusts
(managed investment schemes).
Banks could still offer mortgage insurance.
Superannuation funds could and should still include group (life)
insurance within default funds.
The Greens submit that the distinction between banks, superannuation and
insurance is appropriate for the following reasons:
Banks are unique as the recipients of deposits, and the issuers
of loans against these deposits. These savings and loans facilities provide for
the everyday management of cash by individuals and small business. Consumers
have a high level of engagement with their banks and the products they are
Superannuation funds have a very specific role as the managers of
(mostly) compulsory savings for retirement. As illustrated in the Round 5
hearings of the Commission, consumer engagement with superannuation funds is
very low. This reflects that many people have a set and forget approach to
Insurance is altogether different to banking and superannuation
in that it provides relatively affordable protection against financial loss in
the case of adverse events by pooling risk.
Consideration of the structure of financial sector institutions cannot
and should not be constrained to a consideration of misconduct alone. The
Greens submit that the Commission should give close consideration to the impact
on financial system stability and the economy more generally that arises from
The Murray Financial System Inquiry identified four sources of systemic
risk to Australia.
The first two—our reliance on foreign capital and our susceptibility to shocks
in foreign markets—are largely inescapable and beyond the scope of this
inquiry. The government can help mitigate the impact of these risks, but it can
do little to stop them manifesting. The second pair—the concentration in the
market and the exposure of banks to housing—are domestic in origin and
intimately linked to the existing business model of banks.
Despite the promise of the efficient-market hypothesis, universal
banking has failed to provide much in the way of market discipline or
protection against the build-up of systemic risk. Instead, universal banking
encouraged market concentration, resulting in individual banks having even more
power, and becoming 'too-big-to-fail' and riddled with moral hazard. With the
government compelled to act as a lender of last resort, too-big-to-fail banks
have been more willing to take risks. That was the global financial crisis.
The issues associated with too-big-to-fail received significant
attention in the wake of the global financial crisis, including the imposition
of levies on systemically important banks. The OECD Secretariat also considered
the risks associated with 'horizontal integration', and recommended the
structural separation of retail banking from investment banking. This
addresses the proliferation of counterparty risk through derivatives contracts
within systemically important banks that are the beneficiaries of implicit and
explicit government guarantees. It says to banks: if you want to play in the
securities market, then you're on your own.
Consideration of the business models of banks also requires
consideration of whether universal banks are simply too-big-to-manage: in the
ever more complicated world of modern finance, can executives and directors
ever be expected to get their heads around all of the workings of vertically
and horizontally integrated institutions?
This issue also emerged in the wake of the global financial crisis as an
accompaniment to too-big-to-fail. However, it has not been given the same level
of attention as too-big-to-fail, particularly in the Australian context. A
recent paper by Deloitte explores the issue of managing universal banks given
that 'post-crisis it is more difficult than ever before'. A recent study undertaken
by officials at the US Federal Reserve of Richmond concluded:
that larger banking organizations are more exposed to
operational risk. Specifically, larger banks have higher operational losses per
dollar of total assets, a result largely driven by their failure to meet
professional obligations to clients, or from the design of their products.
In considering whether banking behemoths are too-big-to-manage, the
Greens also submit that the issue of worker and customer representation within
the governance structures of banks might be considered. Worker and customer
representation is a common feature in corporate management in many parts of
Europe. It is a natural question to ask: if banks had a greater range of voices
sitting around the board room table would the Commission be uncovering such
systemic and widespread misconduct?
Exposed to housing
The build-up of housing debt within Australia economy represents a
massive failure of banking regulators over the last twenty years. Instead of
using the global financial crisis as a catalyst to re-order the financial
system, governments allowed banks to continue to pump money into asset bubbles.
A crisis founded on loose lending standards and a build-up of private debt has
been responded to with loose lending standards and a build-up of private debt.
Property bubbles are now a world-wide. But Australia is a world leader
in overpriced housing and household indebtedness. Since 2008, housing debt to
household income has increased from around 110 per cent to around 140 per cent. The market
for land is being turbo-charged by generous tax incentives and record low
interest rates. But the banks have played their part too and have built
business models 'heavily exposed to developments in the housing market'.
The banking-property complex has created a number of economic problems,
the enormity of which is difficult to understate. Firstly, the decline in
homeownership rates is contributing to an increase in wealth inequality. This is not
just a moral issue: inequality is widely recognised to be a drag on growth.
Secondly, the banking-property complex is drain on productivity,
restricting private capacity to spend in other areas of the economy, and
redirecting capital away from businesses and infrastructure. The Reserve Bank
has insured around $250 billion worth of bank assets through the Committed
to address the mismatch in the ratio of government debt to bank debt within the
Finally, as identified above, banks are not diversifying their risk.
This is not surprising. Banks have been creaming it off home loans. Since the
global financial crisis, the average margin between the RBA cash rate and
standard mortgages interest rates—the spread—has doubled from just below 2 per
cent to now just below 4 per cent.
The Greens submit that the banking-property complex is relevant to the
Commission's considerations not only because of the weight of the associated
economic issues, but also because it cannot be disentangled from the business
structures of the major banks. Within vertically and horizontally integrated
major banks, mortgage brokers are owned by the very banks whose loans they are
recommending, and these banks then securitise these mortgages and on-sell them
through in-house brokers. Not surprisingly, they have been happy to write home
loans to anyone with a pulse. This the natural response of institutions who are
the beneficiaries of implicit and explicit government guarantees that
underwrite this model, as well as tax settings that create incentives to invest
in housing, and regulatory settings that create incentives to lend for housing.
The Commission has already had an impact on this front. The first round
of hearings—including the release of APRA's targeted reviews—has exposed a
fallacious approach to mortgage lending, especially by the major banks. A
regulator unambiguously tasked with consumer protection (see below) would and
should ensure that lenders undertake proper verification of a borrower's
expenses. It follows that the widespread use of the Household Expenditure
Measure cannot be justified for mortgage lending.
Further, a regulator tasked with considering the financial position of households
would know that measuring lending standards by the rate of default is a false
indicator in today's economic climate. The cash rate in Australia has been at
the record low rate of 1.5 per cent for more than two years. If default rates
were anything other than low during this period then that would be cause for
enormous concern. And the persistence of ultra-low interest rates is itself a
result of the level of household debt in the economy.
and retail investors
The Commission has well identified the inherent conflict where product
issuers are also the intermediaries of these products. The Greens submit that,
again, the policy response to this issue would be well informed by
distinguishing between simple and essential (retail) products and services, and
those which are more complex and selective (wholesale).
In the case of investment products, such a distinction already exists
between retail and sophisticated (wholesale) investors. However, there is no
framework to ensure its consistent application. In fact, the Commission details
how, through the establishment of ASIC and the subsequent Corporate Law
Economic Reform Program, the Wallis-era reforms provided for a more uniform
treatment of intermediation, and placed no restriction on the ownership of
intermediaries or the offering of wholesale grade products to retail investors.
Instead, this approach placed faith in the efficient-market hypothesis, and in
mandatory product disclosure being adequate to protect retail investors.
The scandal that was forestry managed investment schemes (MIS) is a
tragic example of what can happen when wholesale grade products are sold to
retail investors. Forestry MIS was a Ponzi scheme built up on the back of a tax
break. When it collapsed tens of thousands of ordinary Australians lost their
money, a network of fast-and-loose financial practices were exposed, and
farming communities around the country were left reeling by the rapid
acquisition and then abandonment of agricultural land.
The widespread sale of hybrid debt/equity securities is a live example
of retail consumers being sold a complicated product without due understanding
of the risk that they are taking on. Former ASIC Chairman, Greg Medcraft,
They are banned in the United Kingdom for sale to retail. I
am very concerned that people don't understand, when you get paid 400 basis
points over the benchmark, that is extremely high risk, and I think that,
because they are issued by banks, people feel that they are as safe as banks.
Well, you are not paid 400 basis points for not taking risks, and I do think
this is, frankly, a ticking time bomb.
The Greens submit that the intermediaries of retail grade products,
including mortgage brokers and financial advisors, should be separately owned
from the institutions who originate the products they sell, save for the
provision of financial advice by superannuation funds regarding the asset
allocation of a member's contributions within that fund. The Greens also submit
that retail grade intermediaries should be individually licensed so as make
them individually accountable, and should be required to hold professional
It follows that value based commission structures are not appropriate
when dealing with retail grade products, and that intermediaries should be
subject to the best interest duty in the same way that product producers are.
The Commission should recommend a clean slate for commissions on all past,
present and future sales of banking, superannuation, insurance or any other
retail grade products. Value based commissions for all retail grade products
should be prohibited, including ending the current carve-outs for certain
products, and ending the grandfathering of subsequently banned commissions.
One of the most striking findings of the Commission is that the
misconduct uncovered was 'contrary to existing laws'. The inescapable
conclusion is that the regulators have failed. The Commission has well detailed
the shortcomings of ASIC and APRA, and their failure to 'mark and enforce' the bounds of
This is not to say that changes to existing laws or powers are not
required, or that budget cuts have not impacted upon the regulators' ability to
do their job. But at the heart of the problem is that both ASIC and APRA have
conflicted mandates, and that this has exacerbated a soft-touch approach and
has further exposed them to regulatory capture. The Greens submit that is the
result of a regulatory system that is broken, and that an overhaul of the
regulatory architecture is required.
The ASIC Act does not give the regulator a primary objective other than
to enforce the laws it is empowered to enforce. However, the Act asks ASIC to, inter
alia, strive to:
maintain, facilitate and improve the performance of the
financial system and the entities within that system in the interests of
commercial certainty, reducing business costs, and the efficiency and
development of the economy; and
promote the confident and informed participation of investors
and consumers in the financial system.
Very recently, this was further expanded to include consideration by
ASIC of 'effects that the performance of its functions and the exercise of its
powers will have on competition in the financial system'.
APRA is given a clearer primary responsibility, namely prudential
regulation. Nevertheless, in doing so:
APRA is to balance the objectives of financial safety and
efficiency, competition, contestability and competitive neutrality and, in
balancing these objectives, is to promote financial system stability in
ASIC's conflicted mandate came about at its inception, when the Howard
Government implemented the recommendation of the Wallis Financial System
Inquiry and took consumer protection powers for the financial sector away from
the ACCC. The thinking was that a specialist financial regulator would be
better able to understand financial products and services. The wisdom of this
decision has been questioned ever since. One the key members of the Wallis
Inquiry, Professor Ian Harper, recently admitted that it was likely to have
been a mistake to disempower the ACCC, saying:
We placed too much faith in the efficient market hypothesis
and in light touch regulation...
With the benefit of hindsight and what's been coming out at
the royal commission, the weaknesses of the specialist approach we took to
regulation are also evident.
Prof. Harper's comments highlight that the 'all things to all people'
approach to regulators is an extension of the logic that says banks too can be 'all
things to all people'. It is steeped in a belief in the efficient-market
hypothesis, and that, through the rational application of the law, a financial
regulator will treat consumers and banks alike.
The problem with this approach is that there is an inherent conflict
between conduct regulation and system regulation. In respect of APRA, this was
adroitly identified by Counsel Assisting in his Opening Address to the Round 5
...first, it is not obvious that it is possible to separate
public enforcement action from a regulator properly undertaking conduct
regulation. Secondly, there may be an inherent tension between, on the one
hand, maintaining stability and, on the other hand, the destabilising effect
for one or more entities of public enforcement action.
In other words, what is good for markets is not necessarily what is good
A soft-touch approach to regulation is also a complement to the
efficient-market hypothesis. As noted above, a belief that markets will be
self-regulating is inherent to the efficient-market hypothesis. It follows that
a regulator need not be heavy-handed, all the more so when they are required to
'balance' the outcomes for consumers and banks.
And it is natural for regulators with a conflicted mandate taking a
soft-touch approach to work closely with the very institutions they are
regulating so as to understand the impacts of any possible enforcement on the
institutions and to 'accommodate the expressed wishes of the entity'. The
unedifying spectacle of ASIC consulting on the wording of media releases with
the very banks they were supposedly reprimanding is a textbook example of
The problems with this are obvious and run deep. Primarily, as
documented by the Commission, there is a lack of deterrence. It is not
surprising that the banks have behaved as if they are untouchable. In respect
of ASIC, Allan Fels, the inaugural Chair of the ACCC, put it bluntly: they 'are
Another former Chair of the ACCC, Graeme Samuel, said similarly:
The regulators have got to be totally feared, for their
independence, their rigor, their commitment and their intolerance to bad
behaviour, and they have not been feared for that – neither ASIC nor APRA.
As forecast above, the Greens submit that a reorder of the regulatory
architecture should be informed by a distinction between simple and essential
products and services, and more complex and selective activity. In the case of
simple and essential products and services, distinction should be made between
conduct regulation and system regulation, and that these two distinct
responsibilities be given to separate regulators. This would make it clear
that, where is it caveat vendor to a greater extent, and caveat
emptor to a lesser extent, that there is a regulator with an unambiguous
mandate to protect consumers, including through the fostering of competition.
This is the distinction made in the so-called Twin Peaks model where one
regulator is 'responsible for regulating to prevent financial crises (the
prudential regulation peak), the other to ensure good market conduct and
consumer protection (the good conduct peak)'.
The Greens propose that:
The ACCC be the conduct regulator for retail banking,
superannuation, insurance, retail grade intermediators (financial advisers and
mortgage brokers), and the sale of other retail grade products and services.
APRA would continue to be the system (prudential) regulator, but
no longer be required to balance this with competition or consumer objectives.
ASIC would be the conduct and system (market integrity) regulator
over the remainder of the financial system.
This is not a conclusion that the Greens came to in haste. Throughout
the Senate inquiry into the conduct of ASIC, the Greens were critical of the
performance of ASIC, but largely supportive of the institution. Faith in public
institutions is important to the operation of the financial system. However,
the Commission's hearings have shown that the current structure is no longer
The ACCC is already the conduct regulator over almost every other market
place. The objects of the Competition and Consumer Act that directs the ACCC
are unambiguous: 'The object of this Act is to enhance the welfare of
Australians through the promotion of competition and fair trading and provision
for consumer protection'.
Whether conduct regulation over simple and essential products and
services is entirely provided for by the Competition and Consumer Act would
require further consideration. Irrespective, the ACCC should be also given the
power to enforce the provisions of the Banking Code of Practice and other
financial services industry codes of conduct under Part IVB of the Competition
and Consumer Act 2010.
There is a large body of support for reinstating the ACCC as the primary
conduct regulator, particularly in the wake of the findings of the Commission. As noted
above, support for this model is being hinted at by Prof. Harper, and is
clearly advocated for by the inaugural Chair of the ACCC, Allan Fels. Another
clear supporter is former chief economist at ASIC, Alan Erskine, who has
examined the regulatory architecture in detail, and says that, 'The ACCC should
receive the competition mandates currently held (and generally ignored) by APRA
and other regulators'.
The government has tacitly acknowledged the ACCC's suitability for the
role of conduct regulator when it tasked them to inquire into any impact the
Major Bank Levy had on mortgage rates.
The Commission itself has highlighted the distinct difference in approach
between the ACCC and ASIC in respect of the implementation of the new laws
regarding unfair contact terms.
The Productivity Commission recommended the ACCC be appointed as competition
champion over financial services, though did not recommend any further changes
to regulatory responsibilities.
In taking on responsibility for competition and consumer regulation, the
ACCC should also be tasked with considering the impact that banking and finance
is having on the wellbeing of households. As has been discussed above, the
financialisation of everyday life has been considered intrinsically good by
adherents to the efficient-market hypothesis. But the reality is that the last
thirty-odd years have resulted in an increase in debt and risk exposure carried
by households, and this is reshaping the very nature of society. Yet, at the
moment, this is largely outside the consideration of financial system
regulators. As former Productivity Commission chair, Peter Harris, recently
noted, 'there is no entity charged to think about cost to consumers'.
The Greens consider that, in the case of complex and selective products
and services, ASIC could continue to be both a conduct and system (market
integrity) regulator given that participants in these markets are expected to
be more informed and more active, and the products concerned are more likely to
require specialist understanding. That is not to say that no consumer
protections exist, just that it is more clearly a case of 'buyer beware'.
Cooperation and oversight
The Greens submit that two further changes to the regulatory
architecture should be made to ensure better cooperation between regulators,
and better public oversight of regulators.
The Council of Financial Regulators should be elevated. An independent Chair
should be appointed and minutes of the meetings should be published in a
similar vein to those of the Reserve Bank of Australia. Further, the ACCC
should be given a permanent position on the Council. This is largely in accord
with the recommendation of the Productivity Commission who noted that the
Council has the capacity to 'generate timely and trusted debate' among
Such debate would all the more important if and when a clear distinction was
made between conduct and system regulation.
The Greens also submit that a Financial Regulator Assessment Board be
established to advise Government annually on how financial regulators have
implemented their mandates, as recommended by the Murray Financial System
Justice and redress
The Commission would be well aware that the existence of this inquiry is
in no small part a result of advocacy by aggrieved customers seeking justice
for the harm inflicted upon them by banks and other financial services
providers. Many of these customers, understandably, see this Commission as a
means to provide them with satisfactory resolution. For many, simply having
their case heard before the Commission and having the banks admit to their
misconduct would a consolation.
The Greens appreciate the difficulty that the Commission faces in this
respect, having received in the order of 9,000 submissions outlining instances
of misconduct, and being tasked with considering the causes and remedies of
this misconduct within a twelve month period. However, there is no point in the
Commission undertaking this inquiry if the government and parliament does not
respond. Unfortunately, the nature of modern politics is that the impetus for
reform can quickly wane. The Greens support the Commission reporting by
February 2019, to the extent that it is confident in doing so, so that the
government and parliament can consider and implement the Commission's
recommendations as quickly as is practicable.
Nonetheless, the Greens support an extension to the Commission's inquiry
to allow for the examination of a greater number of individual cases, as well
as further examination of particular issues, including the role of receivers
and administrators, the collapse of forestry managed investment schemes, and
the conduct of Commonwealth financial service providers.
The Greens also submit that the Commission should make recommendations
in relation to external dispute resolution (EDR) mechanisms and a compensation
scheme of last resort, advocacy on behalf of customers through these processes,
as well as what can reasonably be done to redress outstanding instances of past
External dispute resolution
The first step for customers seeking remediation should be a
well-functioning EDR body. The establishment of the Australian Financial
Complaints Authority (AFCA) as single and compulsory EDR body promises to
improve this process for customers. The previous system of multiple EDR bodies
was plagued with problems, including, in the case of the Financial Ombudsman
Service, a broad discretion to exclude disputes and inadequate funding. Many of these
problems extended from the regulator having little capacity to direct the
functioning of privately-established EDR bodies beyond a binary decision to
approve or not approve an EDR scheme. Accordingly, AFCA's success will depend
heavily on the relevant regulator using the directions powers provided to it to
ensure the proper function of the organisation in the interests of consumers,
including powers to make directions on the limits of eligible claims and the
funding of the organisation.
Last resort compensation scheme
While a well-functioning EDR scheme will provide adequate resolution in
many cases, history has shown that it will not provide for all cases, most
notably where institutions become insolvent. The Greens support the
establishment of a last resort compensation scheme to provide remedy in these
circumstances based on the design features recommended in the supplementary
final report of the Ramsay review into external dispute resolution and
This last resort compensation scheme must be well targeted so as to avoid moral
hazard, and should accompany other measures identified in the Ramsay review, in
particular the requirement for intermediaries to have professional indemnity
However, this would not provide redress for many past victims of
misconduct. The Commission would well understand the legal and constitutional
difficulties in revisiting cases that have previously been resolved, regardless
of how unjust the outcome was. Nonetheless, the Greens submit that the
Commission should consider how past disputes might be remedied; and how
currently solvent and operating institutions might be expected, if not
compelled, to reopen cases where the commission has reasonable grounds for a
finding against these institutions, and where customers have not been
adequately compensated. For example, in the case of forestry MIS, the
Commission should consider how the banks who lent money to these schemes, and
who profited from these schemes, might be asked to act upon their moral
responsibility to provide redress to the victims of these schemes.
The Ramsay review identifies options to provide redress for past
disputes for individuals and small business. Within these options, the Greens
suggest that the Commission considers whether the ACCC could be tasked as the
body to scope and re-examine past disputes, and to make recommendations for
Funding for advocates
Through this inquiry, the Commission would have come to appreciate the
work undertaken by financial counselling and advocacy centres. These centres do
an admirable job providing legal assistance to the victims of the banks.
However, they are not able to provide assistance for all of the viable cases
that they are presented with. The Ramsay review identified the inability to
access legal assistance as an impediment to some individuals and small business
receiving adequate redress.
Funding for financial counselling and advocacy centres should be
increased to enable greater access to legal assistance; and this increase in
funding should be provided for by the banking and financial services industry.
APRA, ASIC and AFCA are all funded through arms-length industry levies. A
similar approach to the funding for financial counselling and advocacy centres
should be considered appropriate given their essential role in providing
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