As the royal commission smashed the reputations of major financial institutions this week, there was understandable focus on the individuals involved and the inherently flawed structure of vertically integrated wealth management. “Fee for no service” — the charging of customers for services banks and AMP had no intention of ever providing — is only the most recent of a long list of consequences of the major institutions’ involvement in financial planning and wealth management. But understanding AMP and the Commonwealth Bank’s systematic ripping off of customers and their equally systematic role in trying to hide it from the regulator, as purely the result of individual venality and a corporate structure that incentivised it, can mislead.
I’m a bit like a broken record on this, but it’s crucial to understand the sort of outcomes exposed by the royal commission as the result of an entire policy system, otherwise any response risks treating the symptoms rather than the cause. As anyone with a rash will tell you, treating symptoms is quite important, but they’ll simply recur without seeing the underlying causes.
Let’s tease out how what we’ve seen this week is the result of the way we’ve done economic policy in general, not just individual malfeasance or conflicted structures.
1. Greater concentration
One of the key features of deregulated economies over recent decades is the growing concentration of markets as successful corporations not merely grow organically but acquire competitors and merge with rivals. Last year, Labor MP and economist Andrew Leigh noted the rise in the number of mergers and acquisitions since 1990 that “has led to a substantial increase in market concentration in supermarkets, banking, airlines, meat processing, bottled drinks, telecommunications and a range of other important industries”.
This concentration is sold as enabling greater efficiencies and economies of scale, but the real benefits are in the greater power it gives companies over consumers (and other business that consume their services) and workers. And concentration applies up and down product chains as well. Banks moved into wealth management and financial planning, they said, because it would enable them to offer a one-stop shop for financial products. The real benefit was to steer people looking for financial advice and products to suit their financial circumstances into the banks’ own products. AMP, which was demutualised in 1998, already had its own wealth management arm, AMP Capital, that it could direct its financial advice clients into. For these companies, competition — the idea of letting their own products compete fairly on performance with rival products, and allowing independent financial planners to decide which were best for clients — was anathema; they wanted to control the whole process.
2. A weak regulator
By its own admission, the Australian Securities and Investments Commission (ASIC) has long known the financial planning and wealth management industries were riddled with spivs gouging and giving poor advice to customers. But it was a reluctant regulator — preferring to work with, rather than regulate, the financial industry, fearing litigation with the biggest corporations, reluctant even to impose enforceable undertakings, ignoring complaints from bank victims and ignoring whistleblowers. ASIC — which still boasts of its exchange program with the financial industry — had been captured by the sector it was supposed to regulate, and was focused more on the needs of industry than consumers. Worse, it was crippled by significant funding cuts under both side of politics, but especially under the Abbott government — cuts that have yet to be fully restored.
3. Political protection
Labor came late to the idea of a banking royal commission — it was the Greens who first pushed for a broad inquiry into the financial sector. But Labor in government had implemented the Future of Financial Advice (FOFA) reforms against intense opposition from AMP and the big banks, and the Liberals. The Liberals tried, and nearly succeeded, in gutting the FOFA reforms in 2014, and then protected the banks against a royal commission until late 2017, incurring major political damage along the way. The big four banks, AMP, Macquarie Bank and the sector peak bodies have delivered $3.85 million in donations to the Coalition since 2010, and $2.66 million in donations to Labor, and a former Labor premier heads the Australian Banking Association.
4. ‘Independent reports’
The AMP scandal also featured a perennial of policymaking in recent decades, the independent report that wasn’t. Policymaking in Australia is plagued by reports commissioned by self-interested parties and touted as independent verification of the policy they want adopted. Facing the need to account for its charging of fees for services it had no intention of providing, AMP commissioned law firm Clayton Utz to provide an “independent report” that was anything but, since it was the subject of constant editorial exchanges between AMP, right up to board level, and the firm. The report was then submitted to ASIC as a fully independent work.
Market concentration, learned helplessness by government, the distortion of policymaking by corporate interests, the use of carefully contrived but notionally objective evidence, are all features of how we’ve been doing economic policy under neoliberalism. They’re all features of our policymaking process, not flaws. Only reforms aimed at addressing that process will achieve genuinely systemic change.
More crap governance from a so called government.
The LNP had to be dragged to kicking and screaming to the RC and now our intelligence is further being insulted by the line from Morrisson, O’Dwyer and the rest of their mendacious mob when asked why they said was it not necessary to have a RC, ignore that and parrot more cant; we are having a “much better RC than the one Labor” because we have expanded it to include super funds; read, particularly industry funds.
As far as I’m aware, the industry run funds are the best performing of all and there was no need for them to be included.
What that’s really about is so the very mob being investigated by the RC enabled by the government to get their grubby hands on these well managed goldmines and to try and damage trade unions.
Don’t be too quick to let industry super funds off the hook. With such a big pot of money in these funds it is likely the RC will turn up something rotten somewhere.
and I’m sure that’ll be timed perfectly for an early election later this year.
Yes, I’m sure some official in one of the Industry Superannuation companies cheated on their travel costs… leading to the government handing over OUR super to the big banks to pluder.
The Australian Banking/Finance industry and it’s political, corporate backers stand stark naked before the Royal Commission Inquiry. Despite LNP internalised reluctance to allow an Inquiry, now even Treasurer Morrison has called for blood. Sure, government has inserted a get out of jail free clause severely limiting time allowed for the Commissioner to expose extent of corruption; but boy, has he got off to a cracker of a start. The business models of CBA and AMP are indefensible. Their corralling of clients springs to mind every time TV replays those atrocious videos of dying sheep ‘compressed’ one on top of other on airless ship decks?
Crikey is a recognised social media site . . . maybe a powerful social media public voice? Current exposures by Royal Commission Inquiry into Financial Services industry reaches into all sectors of government and community and irrefutably links corporate despicable misbehaviour at best, with Regulatory Authority failures.
The Australian Liberal National Party (LNP), over the past two years blocked, obfuscated and deflected intense public pressure for a Royal Commission Inquiry into Banks and Financial Services industries. Following the RC’s shattering exposures now, like dominoes, LNP Ministers public mea culpa’s evidence their previous culpability. We, the Australian electorate are also shattered. Governance, and Corporate accountability exposed. Corruption endemic.
The public voice must be heard. Social Media is a flawed tool; but it is virtually the only tool now available to a public voice. This member of the public demands the PM attend the Governor General; and request a General Election be called within six months.
Well I doubt there’s going to be an GE any time soon, because after the corporate tax cuts in July the Libs know they would lose it. 18 months will buy them some time before they lose, unless Labor totally drops the ball which I don’t rule out.
Not the point Bref. The public voice, speaking as one, taking to ourselves the right to speak out . . . require PM to present his government before, and accountable to the people. All it takes is one more voice . . .
As I say to my friends constantly, ‘OK I agree with you, I’ll sign the petition, but you know it won’t make any difference!’ And it seldom does.
Bullseye Bernard. Policy has not only been woeful, it has been for decades complicit with business and particularly the financial sector. In fact, the bilateral 4 Pillars policy is one of the most corrosive detriments to our democracy. When did you last hear any bank publicly lobbying government? Never! Because banks do not have to transparently argue financial industry policy in public. Banks have so much power, they simply, and privately, go to Canberra and threaten the Treasurer with ‘economic mayhem’ as retaliation for any policy that threatens the torrent of bank profits. And we, the voters, never hear about that. Disappointingly, it seems the majority of voters subscribe to a delusion that their individual interests are aligned with the interests of big business. That was amply demonstrated by the Mining Resource Rent Tax debacle that Labor facilitated. Now this Royal Commission is laying bare the soft touch both parties apply to policy on any business activity as a policy disaster. And remember, 6 months ago that Libs were vociferously arguing that a Royal Commission was not necessary. It could turn out to be the most effective Royal Commission ever convened in this country. At least the delusion of alignment of interests will not be sustainable after all the evidence is in. But the policy wreck will be repaired only if politicians suddenly wake up to the fact that corporations do not vote for them and consultation with business on social regulation of business is directly contrary to the real interests on their constituents; ie us.
Well said. There is an election coming.
5 *
The headline tells the story perfectly.
We’re not hearing anything about the effect on these corporations’ shareholders – aside from the drop in ASX prices. Are shareholders angry? Do they feel ashamed to be benefiting via dividends from these crooked institutions? Regulations have been violated for greed, profit – are shareholders unwittingly engaging in proceeds of crime?
Australia itself is “benefiting” from the proceeds of this crime.
Our “recession free” economy has been artificially pumped up by financialised garbage sold to “muppets” for decades.
Commonly known as the “wealth effect”, this can be tracked by the massively growing pile of consumer debt (the source of our so-called “economic growth”). Somehow this keeps growing even as wages fall! It’s like the laws of mathematics never applied!
All it takes is for someone to point out the emperor has no clothes and our economy will soon go the way of our waste recycling industry.
Unfortunately, Damien, you are spot-on. Steve Keen, one of the few economists who predicted the GFC, lumps Australia into his category of ‘zombie economies’ because we are sleep-walking into an unavoidable recession. When Hawke and Keating came under the spell of neoliberalism and deregulated the finance industry, they unleashed the stimulative power of debt. While the growth in (private) debt exceeds the growth in GDP (as it did exceptionally well under Howard) the economy booms. But as with all stimulants, the high can’t go on forever. And the minute you start to ease off on the debt binge so that debt grows more slowly than the GDP (even if debt is still growing in absolute terms), the economy will slip into recession. But the zombies keep marching on regardless.
You’re right Peter, with the caveat that Steve Keen predicted 7 of the last 2 GFC’s.
However the underlying principles that Keen and many others pointed out still apply. An economy that grows on debt has to come a cropper at some stage. It’s actually simple mathematics. This ramped up under Howard and he encouraged it. This is where we are.
Now should line up another Royal Commission on large shopping centre leases where there is the same principle’s in play as in banking large retailers get easy terms and the smaller the retailer worse the terms- and government instrumentalities as well as public companies are involved such as QIC.