We got the regulatory framework wrong - On the front page of the Sydney Morning Herald, 25 April 2018, we read: One of the architects of Australia's financial system has expressed doubts about the decision to hand protection of finance consumers to the Australian Securities and Investments Commission …. Dr. Evan Jones
(That article is not available on the web, but a shorter version is available here.)
That architect is Ian Harper. Harper, bedeck with honours right and left, is an integral member of the economics establishment, with long term close links to the authorities.
Harper was a member of the Wallis Committee, established by Prime Minister Howard in 1996, responsible for its 1997 Report. The Committee honed in on the increasing linkages between institutions of superannuation/wealth management and insurance and those of banking.
These linkages were reflected in the evolution of Colonial Mutual Life Insurance, which acquired the privatised State Bank of NSW in 1994, subsequently demutualising in 1997 before being taken over by the Commonwealth Bank in 2000.
The Committee decided to endorse these linkages, essentially facilitating their subsequent fusion. In particular, the Howard Government followed the report’s recommendations in expanding the narrowly-oriented Australian Securities Commission into ASIC, and taking the prudential arm out of the Reserve Bank with the formation of a separate APRA.
Consumer protection regarding financial services was to be located solely with ASIC.
The Sydney Morning Herald elaborates:
Yesterday Professor Harper said at the time the committee had thought a specialist body would be better able to handle the complex nature of consumer financial products, although he conceded that even then there was concern that it would become too close to the institutions it regulated.
Harper is there quoted:
"We now know of clear cases in which ASIC has been misled. … I have already said that with the benefit of hindsight we were wrong about several things,".
Cases where the ASIC has been misled are important, of course, but the real story is the criminal complicity of ASIC with the institutions it is supposed to regulate.
The limited distorted vision of the financial experts
Blind Freddie could see the potential minefield ahead. Formally concerned with the possibility of regulatory capture, the Wallis Committee’s creations, ASIC and APRA, are exemplary exhibits of the phenomenon.
Harper goes on to say:
"We placed too much faith in the efficient-market hypothesis and in light-touch regulation. We said the government didn't need to guarantee bank deposits. 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."
This admission is simply appalling. The “efficient-market hypothesis”, much loved by finance academics from which it originated, was always a myth. But its adherents had it applying to stock and financial instrument pricing, not to financial systems in general.
Harper’s admission to adhering to “light-touch regulation” sheds more light. Convenient then that Harper was appointed the National Australia Bank Professor of Monetary and Financial Economics at Melbourne University in 1988 at the tender age of 31.
Harper appears to have a calling in common with sometime Monash University banking academic Wickrema Weerasooria who, in the 1990s, was Director of the Banking Law Centre established by the same National Australia Bank. Weerasooria is the author of a major text in Australian banking law (which has nothing to say about bank crimes against its customers). He is also significant as the author of the telling generalisation (title of an article published in the Australian Banking & Finance Law Bulletin, April 2000):
‘Banks owe no fiduciary or special “special duty” to customers: a reaffirmation’
Here Weerasooria converted a perennial and prejudiced practice of the courts into a hifalutin principle. Regulatory capture, it appears, is not confined to the regulators.
Harper has been much in demand. He was appointed in 2014 to oversee a revisiting of competition regulation, the special competence for which had eluded his professional trajectory to that date.
More significant, in November 2005 Harper was appointed Chairman of the new Fair Pay Commission, which Prime Minister Howard had created as replacement for the Industrial Relations Commission. It was Howard’s ambition to use the new body to complement his WorkChoices legislation, introduced earlier in 2005, to strangle wages and conditions for the workforce. Harper was hired for the job, in a field for which he had no competence or experience whatsoever.
At the time, I was writing a blog (Alert & Alarmed), and penned a piece on the anomaly. I noted that Harper is a committed Christian, being at home in the two worlds of God and Mammon.
Then Canberra Times journalist Paul Malone quoted Harper (Canberra Times, 22 October 2005):
“My economics is constrained by, is circumscribed by, rounded by my Christian morality. And I don’t ask the market to be my religion or my God. That would be to me as an individual, apart from being stupid, in a sense a kind of blasphemy.”
The Deity upstairs being too busy to intervene in mundane mercenary matters, we are left with the (almost) omnipotent market mechanism to serve as proxy, with a helping hand from Harper and his colleagues. (Adam Smith’s infamous “invisible hand” had a touch of almighty benevolence behind it, but we’ve moved on from the mid-18th Century mentality.)
Alas, institutions like ASIC and APRA have declined to play God, deferring to that biblical injunction that is the leitmotif of market participants everywhere (Mark 4:25, KJV):
For he that hath, to him shall be given: and he that hath not, from him shall be taken even that which he hath.
It appears that the main players in our maverick and well-remunerated financial sector must repeat that catechism on a daily basis. And who are these bleeding hearts staffing the Royal Commission that deign to question holy writ?
In my November 2005 blog I claimed:
Harper is a technician. Even his understanding of his specialty, the finance sector, is constrained by his impoverished economics training. The finance sector is like any sector and should compete in the same way — such was the mentality of Harper’s contribution to the deregulatory thrust of the 1981 Campbell Report on Australia’s finance sector.
Harper is a market economist, not so much a market ideologue, more a market economist because that’s all he knows. Technically bright, a non-lateral thinker, intellectually inept in terms of a capacity to understand the broader social economy.
I think that my then quick evaluation still stands. Harper, as eminent financial economist, has never looked below the bonnet to understand the nature of the lender-borrower or advisor-investor relationship.
Academic “expertise” to the fore
A key article written by Harper (with Robert Ackland) in 1992 is highly instructive. The said article is “Financial deregulation in Australia: Boon or bane?”, in Peter Forsyth (ed.), Microeconomic Reform in Australia.
Ackland/Harper turn a potential downside into an asset:
Deregulation is inevitably associated with a higher level of financial risk. Taking on more risk is the only way to realise higher financial returns, and it was intended from the outset that deregulation would increase the social return from the financial system. … In particular investors should take their responsibilities seriously …
Buyer beware then. Tell that to the victims of Storm Financial and Colonial First State, for example.
Ackland/Harper were writing this article in 1991. The 1980s financial madness had just played out and had reached its denouement in “the recession we had to have”. The foreign currency loans scandal was in the media on a daily basis. Democrat Senator Paul McLean was regularly reading instances of bank bastardry into Hansard.
Surely Ackland/Harper were aware of the iconic cover of the Bulletin, 2 May 1989 — “Why the banks are Bastards”.
Inside, Stuart Kennedy’s article was prefaced by the leader:
Judging by their television commercials, the banks see themselves as branch offices of heaven. The reality is that they are for many clients grasping versions of hell.
Quite. What lessons for Ackland/Harper?
Australian banks have been the subject of a deal of adverse publicity, some of it highly emotive …
Disdain. What would the hoi polloi know? The adverse publicity was indeed “highly emotive”, and for good reason. The authors proceed immediately to claim that the 1991 Martin inquiry dispelled all concerns:
While critical of some aspects of the performance of banks since deregulation, the Martin Committee basically endorsed deregulation as beneficial to the Australian community …
The Committee certainly did that, exonerating the banks at the same time. As I keep emphasising, it was a whitewash job, established to derail the whistleblower Senator McLean. McLean was harassed: “Put up with the evidence, or shut up”. McLean did so, submitting thousands of pages. It was totally ignored. As was the evidence submitted to and given in hearings, most notably concerning foreign currency loans.
Ackland/Harper acknowledge (how could they not?) the excesses of the 1980s, but consign it to history:
Deregulation precipitated a scramble for market share among banks and non-banks which, especially against the background of relatively easy monetary conditions [incorrect], provided the right environment for questionable lending practices to develop. It is reasonable, however, to view much of this as a one-off effect of deregulation, a ‘rush of blood to the head’ born of new-found freedom and the imperatives of a competitive market.
Following the Martin inquiry extravaganza, Treasurer Keating consigned the banking sector to self regulation (banking ombudsman, code of banking practice) and the sector has engaged in a rush of blood to the head ever since.
The evidence from this 1992 article indicates that there is a touch of charlatanry about Ian Harper. A key concern for this renowned Australian economist is that he (and his fraternity) have shown no inclination to examine in fine detail what “the imperatives of a competitive market” means in the specific arena of banking.
Harper was appointed as member of the 1996 Wallis Committee. The Committee legitimated the fusion of banking/superannuation/insurance services which elevated the Big 4 into allfinanz institutions — with all the bounteous “social returns” that we now enjoy.
Not content with Big 4 dominance, Harper came out with a distinctly hardline view that the 4 pillars policy has passed its use by date (“at best redundant and at worst corrosive”) — this in ‘Four pillars, not much wisdom’, Australian Financial Review 3 June 2008.
Government should cease direct intervention in this arena and leave the matter to deliberations by the ACCC, the competition regulator. Well no. The competition regulator, both under Allan Fels (1991-2003) and Graeme Samuels (2003-2011), sanctioned a long string of bank takeovers and mergers whose rationale was dicey. This process reached its peak in the sanctioning in 2008 of the Westpac takeover of St George and the CBA takeover of Bankwest, both decisions reeking of incompetence and/or subjugation of its “independence” to political verities.
Harper has second thoughts
Following the 2008 GFC, Harper authored a report devoted to the combined aims of shoring up the financial system but also maintaining its freedoms and flexibility to facilitate “innovation” aimed at enhancing Australia’s capacity to serve as a regional financial hub.
It is questionable whether this preoccupation with leveraging Australia as a big player on the block, involving deepening of the sophisticated financial instruments that brought us the GFC in the first place, has anything to do with serving domestic consumers, retail and commercial.
In the current context, of importance we learn from Harper’s report that:
… the ''neat division'' of responsibilities between the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority might ''no longer be tenable'', noting that, in the wake of the crisis, ''matters no longer seem as simple as assigning prudential supervision to APRA, market supervision to ASIC and systemic stability to the Reserve Bank''.
This is October 2009.
It is now eight and a half years down the track. There has been a lot of water bearing drowning victims under the proverbial bridge in that time.
Has Harper been paying attention?
In the meantime, Harper should have been checking ASIC annual reports. He would have discovered the lacuna in ASIC’s treatment of customer complaints.
In August 2001, effective March 2002, ASIC was handed responsibility (an extended s12 of the ASIC Act) for unconscionable conduct in financial services – read, in particular, credit relationships.
Sixteen years down the track, ASIC has systematically ignored its legislated obligations.
Worse, ASIC has developed an industry devoted to turning away small business/farmer bank victims. In my October 2010 document titled ‘Business to business unconscionability – ASIC missing in action’ I cited sections of correspondence from ASIC to various victims. “We’ve examined your case closely” (they haven’t), “we can’t pursue individual cases” (incorrect), “we pursue cases where there is a systemic significance (they don’t), “this is the domain of FOS” (FOS treats the victim with contempt), etc. At the end of the letter, ASIC tells the victim that they can always pursue the lender in the courts.
Following the Commonwealth Financial Planning wealth management scandal, in 2013 the Senate initiated an inquiry into ASIC. I outlined the above issues at greater length in my submission to that inquiry, annexing my October 2010 document.
The contents of these documents were ignored. Moreover, the report dealt only with the wealth management / financial planner segment (of which, however, it was extremely critical) and ignored the small business / farmer segments.
In 2016 I heard from a woman who had been ripped off by her ex-husband. The ex-husband and the (ANZ) bank manager had acted to forge her signature on a mortgage document. Forged signatures were also applied to documents involving insurance and the appropriation of joint collateral for the husband’s borrowing. It is desirable to cite a slab of ASIC’s response in late 2015 to the ex-wife’s plea for assistance. The signatory of the response was located in ASIC’s ‘Misconduct and Breach Reporting, Assessment & Intelligence’ Branch.
ASIC is responsible for ensuring that credit services are licensed and that licensees provide enough information to consumers to allow them to make informed decisions and the risks and benefits of using credit or taking out loans.
ASIC has considered the information you have provided and undertaken our own inquiries into the concerns that you have raised.
… making a false document is an offense under the Crimes Act 1958 (NSW) which is administered by the NSW Police. As such the NSW Police is better placed to assist you with your concerns. …
We thank you for taking the time to report this matter to ASIC. ASIC values the information we receive from the public and reports such as yours assist ASIC to build an accurate picture of the companies and services that we regulate. We have recorded your report on our internal database.
The cynicism of this response is breathtaking. Of course, fraud is a police matter, but the police routinely do not follow through with such complaints — as in this instance. But here we have ASIC being exposed to criminality by a major institution that it purports to regulate and admitting to storing such information away for purposes of inaction.
Worse, the response is standard fare, produced from a template with variations to suit the particulars of the complainant.
As early as 2004, ex-ACCC Chairman Allan Fels was pushing for the power to protect consumers of financial services to be returned to the ACCC (John Garnaut, ‘It’s a super mess …’, Sydney Morning Herald, 26 July 2004). An ASIC spokesperson defended ASIC’s monopoly. However another ASIC spokesperson, responding to publicity regarding the regulator’s failure to deal with a superannuation-related complaint, claimed:
“We only deal with the law. We don’t deal in practical issues.”
In 2016, Fels used a speech to push the same lesson (Ruth Williams, ‘'Tough cop' ASIC too timid on enforcement’, Sydney Morning Herald, 14 April 2016). Fels was reported:
"A law enforcement body needs to have an unconditional commitment to upholding the law without fear or favour"… He said that ASIC's culture had been lacking for "many years" and that while it was starting to improve, "there is a long way to go."
During the 2015-16 Impairment of Customer Loans inquiry ASIC senior executives, appearing in hearing 23 November 2015, belatedly admitted that ASIC had done nothing about victim complaints regarding unconscionability. They claimed that the task was in the too hard basket and blamed others for their inaction.
To this day, ASIC retains the monopoly regarding “regulation” of financial services, while being criminally complicit in the financial sector’s ongoing malpractice.
This history ought to be well known to Ian Harper. But Harper insouciantly admits, in the hothouse atmosphere of the Royal Commission, that he and his fellow Wallis Committee members and the Howard Government got it wrong on the post-1998 regulatory carve-up. And without apology.
Harper is currently a member of the Reserve Bank Board. Is he using this leverage to push for a fundamental re-think of the financial regulatory framework?
Harper has also recently been appointed the new Dean of the Melbourne Business School. Does he intend to go to work henceforth in sackcloth?This article first appeared on Independent Australia.