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?