Greed is the problem, and Fear the solution

“We’re truly sorry, our CEO has resigned and we’ll never do it again”, said yet another Australian Financial Services institution, yet again. These pillars of our oligopolous Financial Services industry, who we protect lest our fragile financial system (or worse still the economy) should suffer, were caught at it again.

But how many Australians suffer when they charge dead people fees (for-no-service, I assume)? The perpetrators continue to operate and fines are barely more that an additional operating cost of (bad) business.

The Hayne Royal Commission this week heard from senior financial institution executives what the ABC’s Daniel Ziffer described as “utterly shocking… Extraordinary deception. Atrocious behaviour. No concern about consequences”.

As a consequence, tougher new civil and criminal penalties have been proposed including 10-year prison sentences and stripping 10% of offenders’ turnover (capped at $210 million). Last year the CBA reported a net profit just shy of $10 billion. Therefore the $210 million cap puts this at around 2% of that profit. That is clearly not sufficient disincentive to doing the wrong thing.

Higher education standards including ethics training are also imminent for the financial services industry. Broadly speaking I welcome these. The problems I see here are that firstly ethics are learned at home, not via correspondence course. Secondly proposed standards will force many senior professionals (yes, professionals) out of the industry. These older professionals aren’t employed by the banks; they are often self-employed. They are not the perpetrators, but will be the victims of this new regime.

As well as harsher penalties for these crimes we also need a resolute regulator who will enforce them. Focus should be on the perverse incentives and appropriate tough penalties.

Greed is indeed the problem and (as I see it) fear is the solution.