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The last three weeks have crystalised a regulatory and accountability crisis for financial services: AMP lying to the regulator, that regulator admitting to enfeeblement, chairs and CEOs forced out, the CBA’s culture damned by another regulator, its board and remuneration policies savaged, financial planning regulation exposed as a joke, speculation about the end of vertical integration. The dreaded phrase “burning platform” has been used about Australian banking.
For investors — especially AMP investors, who’ve seen shares fall by around a fifth since the start of the year — it’s a deeply uncertain time. For citizens and consumers, it’s frustrating that the loathing of the banks they’ve felt for so long has been justified. For politicians caught on the wrong side of the issue, it’s required backflips, apologies, demands for corporate scalps and threats of further regulation. And for borrowers, it’s likely to be the start of a period of significantly tighter lending standards that may well flow into the broader economy, which is heavily reliant on housing construction.
This has all unfolded not long after similar circumstances occurred in another core component of our economic infrastructure: the energy sector. The markets (gas, and electricity generation, separately) are different and the policy challenges have been broader, but the events were extraordinarily similar: dominant companies in ostensibly heavily regulated, and highly complex, markets that were permitted by relevant regulators to gouge consumers until a crisis point was reached that prompted a dramatic turnaround by politicians. That saw a “liberal” government — which had railed against its opponents’ (in retrospect timid) proposals for regulatory intervention as rank socialism — become almost Stalinist in its regulatory demands, including threatening to impose a domestic gas reservation and trying to dictate what companies did with their assets.
Both instances demonstrate a key feature of neoliberal policymaking: its tendency to disequilibrium. We’ve allowed greater political power for corporations, established corporate interests as the crucial guide to economic policymaking and allowed corporations to grow to dominate their markets. Along the way, we’ve hamstrung regulators. “We placed too much faith in the efficient market hypothesis and in light touch regulation,” one of the members of the late 1990s Wallis Inquiry into financial services, Ian Harper, recently admitted. And we’ve curbed the capacity of unions to represent workers effectively. The result is dominant corporations, used to getting their way from politicians, unrestrained by regulators or trade unions in how they deal with consumers and workers.
Unsurprisingly, corporations use that power to increase profits — one of the reasons the share of national income in many countries, not just Australia, has shifted significantly from wages to profits in recent decades, and one of the reasons wages are stagnant across the Western world despite low unemployment. But this is where the disequilibrium emerges, because corporations can’t help themselves. They so aggressively use their enhanced power against consumers, workers and other businesses that they eventually spark a backlash.
The mechanics of this process were exposed this week by the Australian Prudential Regulation Authority’s review of the Commonwealth Bank’s culture.
“CBA’s continued financial success dulled the senses of the institution,” APRA found, leading to complacency and over-confidence.
Alarm bells from the treatment of aggrieved customers, which should have alerted CBA to serious shortcomings in customer outcomes, did not sound loudly. These various failings have culminated in a dilution of the ‘voice of risk’ and the ‘customer voice’, which did not provide a sufficient counterweight to a strong and mature ‘voice of finance’ …
Eventually, the banks treated customers so shabbily that their power was no longer enough. Even the Liberals stopped protecting them. Donations and close personal links with political parties are good, but eventually all politicians must heed electoral reality, and the Liberals reached that point in 2017. If the banks had managed to couple their financial success in a neoliberal policy landscape with some regard for their customers, they could have staved that fate off. But they couldn’t help themselves. Just like electricity companies.
The result is regulation-by-backlash, with politicians racing to play catch-up with the electorate, imposing new regulations, new taxes and new regulatory bodies on industries, heedless of the long-term consequences.
We’ve seen it in energy. We’re seeing it now in financial services. Where will the “burning platform” catch fire next? Aged care? Health insurance? Tech? And will politicians make the same mistake of allowing powerful corporations to get their way all the way to the crisis point when regulation-by-backlash sets in?
The odds on it being Aged care are shortening rapidly, the shysters and spivs are in it up to their necks:
https://www.smh.com.au/politics/federal/big-nursing-home-industry-is-aggressively-minimising-tax-20180501-p4zcq9.html
& the government couldn’t give a toss how it affects outcomes for residents:
http://www.abc.net.au/news/2018-05-02/aged-care-accreditation-does-not-tell-what-you-need-to-know/9716578
And will politicians make the same mistake of allowing powerful corporations to get their way all the way to the crisis point when regulation-by-backlash sets in?
Why persist with the delusion it is a “mistake” when the plain reality is that it is by design ?
“Never waste a good crisis.”
Unfortunately the answer to the question in your last paragraph is yes. As communism worked very well on paper but not in the real world, free market forces do the same, that is, work well as a theory but fall down in practice. Maybe we could try the in between economic way, that is, a semi regulated economy. Australia used to be one when our Liberal Party actually was Liberal not neocon. Unfortunately I doubt if any of the current members of the liberal party or the corporate class would have the self interest to admit how much their economic ideology is just plain wrong.
The semi-regulated economy run by Menzies seems to have served Australia pretty well – of course taxes were higher and the natural human tendency towards inequality was in check.
Spoeaking as a rusted-on lefty, I never got how communism worked very well on paper either. “From each according to his abilities, to each according to his needs” always seemed like a terrible idea on paper that shafted merit and gave no incentive to improve your abilities or decrease your needs.
I broadly agree, Bernard. In the face of large corporates who develop international expertise in bypassing regulation as a core business competence, a magical belief in the ethical oversight of market forces results in instability that leads to regulation by backlash, which tends to be tokenistic, oversimplified and then not monitored afterward — so you get all the fear and fire of public outrage, yet not all the benefits of diligent inquiry and continuous improvement.
As to where next, I’d bet health insurance, then social networks, probably in that order, largely due to the cost of health insurance being felt more acutely than the loss of data privacy, and the effect of Baby Boomers ageing.
Aged care has been problematic for two and a half decades that I know of. It’s not that the issues are less acute — only that it seems nobody wants to lift the bonnet and face both the reality and the inevitably divisive moral and economic discussion that will follow. I don’t know what might trigger the last — perhaps whatever happens when Boomers convert their reverse mortgages into Refundable Accommodation Deposits, only to discover that the choices they consigned Mom and Dad to aren’t actually acceptable for themselves, and there’s no framework to negotiate nor enforce quality of service.
Good article. it’s nice to see you back in form again.
And let’s not forget the role of our alt-right media in laying down withering cover fire to justify ignoring calls for or forestalling such an inquiry – not least from Limited News and the Fin Rev – preferring to champion the powers of market forces. From whom subsequent mea culpas don’t go as far as countenancing the damage they did in helping to justify putting it off?
How often can they be wrong before they’re dismissed from their positions of “expert” influence – how many of them saw the GFC coming?
Too right Klewso. I saw a headline today, while scrolling through junk media, about Rupert complaining about Google and Facebook’s ‘fake news’.
He invented the thing, and has the hide to complain about others taking over HIS space. A remarkable turd.
The rest of our soft-centred media whine in chorus with the Limited News Party over the propagandising by the likes of GetUp! and Cambridge Analytic : but can’t see the similarities of their operations with Murdoch’s devotion to trying to sway opinion through that 70% of our hard copy “newsmedia”, plus FUX/Sky News that he runs like some Ministry of Misinformation and Obfuscation, and the way he meddles in other media (feeding shock-jocks and the like).
When that same Murdoch m.o. gave the world “It’s The Sun Wot Won It”?
[And it’s all good Limited News re Adani and coal : while Rupert sits on the advisory board of Genie Oil and Gas, along with the likes of Dick Cheney?]
Did you notice the AFR’s front page state of high dudgeon today about the Chair of an industry super fund being forced to resign because of some malfeasance in his day job as a union official. Where are the bank and insurance executives and board members being shown the door? Where are the AFR’s calls for such heads to roll. The executives’ club, and its media boosters, are still alive and well.