We need a national renewables approach, or some states – like NSW – will miss out

In the absence of federal policy, states are pursing their own renewable targets.Karsten Würth/UnsplashAustralia’s primary federal renewable energy target – to have 33 terawatts of re...

Scott Hamilton, Strategic Advisory Panel Member, Australian-German Energy Transition Hub, University of Melbourne - avatar Scott Hamilton, Strategic Advisory Panel Member, Australian-German Energy Transition Hub, University of Melbourne

A Hippocratic Oath for data science? We’ll settle for a little more data literacy

Bias in, bias out: many algorithms have inherent design problems.Vintage Tone/ShutterstockI swear by Hypatia, by Lovelace, by Turing, by Fisher (and/or Bayes), and by all the statisticians and data sc...

Lewis Mitchell, Senior Lecturer in Applied Mathematics, University of Adelaide - avatar Lewis Mitchell, Senior Lecturer in Applied Mathematics, University of Adelaide

Australia's latest military commitment should spark assessment of how well we use our defence forces

Just when we thought Australia was getting serious about shifting priorities away from the Middle East to its own neighbourhood, the prime minister has announced another Middle East step up. Australia...

John Blaxland, Professor, Strategic and Defence Studies Centre, Australian National University - avatar John Blaxland, Professor, Strategic and Defence Studies Centre, Australian National University

Australia bans video games for things you'd see in movies. But gamers can access them anyway

A screenshot from survival videogame DayZ.Bohemia InteractiveIn the last three months, the Australian Classification Board has “refused classification” for at least four video games &ndash...

Brendan Keogh, ARC DECRA Fellow, Queensland University of Technology - avatar Brendan Keogh, ARC DECRA Fellow, Queensland University of Technology

Victorian changes to gender on birth certificate will not increase sexual violence. Here's why

Under the proposed changes, TGD people in Victoria can change the gender on their birth certificate without having to undergo medical intervention.ShutterstockThe Victorian government is considering c...

Bianca Fileborn, Lecturer in Criminology, University of Melbourne - avatar Bianca Fileborn, Lecturer in Criminology, University of Melbourne

What kind of state values a freeway's heritage above the heritage of our oldest living culture?

The government intends to destroy Djab Wurrung sacred trees and sites to upgrade the Western Highway at the same time as it seeks heritage status for the Eastern Freeway.Allies Decolonising/gofundmeTh...

Libby Porter, Professor of Urban Planning, Centre for Urban Research, RMIT University - avatar Libby Porter, Professor of Urban Planning, Centre for Urban Research, RMIT University

Why full-fat milk is now OK if you're healthy, but reduced-fat dairy is still best if you're not

The Heart Foundation now backs full-fat milk if you're healthy. But it still recommends reduced-fat milk if you have high blood pressure or heart disease.from www.shutterstock.comThe Heart Foundation ...

Clare Collins, Professor in Nutrition and Dietetics, University of Newcastle - avatar Clare Collins, Professor in Nutrition and Dietetics, University of Newcastle

Tim Fischer – a man of courage and loyalty – dies from cancer

Tim Fischer aboard a one-off passenger train last month to raise money for the Albury Wodonga Cancer Centre trust fund.Sally Evans/ Albury Wodonga Regional Cancer Centre Trust FundFormer deputy prime ...

Michelle Grattan, Professorial Fellow, University of Canberra - avatar Michelle Grattan, Professorial Fellow, University of Canberra

The Strait of Hormuz is the most important oil choke point in the world. Use our interactive map to explore it

Wes Mountain/The Conversation, CC BY-NDAfter months of increasing tension between Iran and the US, on Tuesday the Morrison government committed a warship, surveillance aircraft and about 200 troops to...

Wes Mountain, Multimedia Editor - avatar Wes Mountain, Multimedia Editor

Greenland isn't Denmark's to sell: some essential reading for Trump on colonialism

The coast of Greenland is not for sale.ShutterstockDonald Trump is not the first US President to make an offer of buying Greenland from Denmark – but he might be the last.Home of some 56,000 peo...

Felicity Jensz, Research associate professor, University of Münster - avatar Felicity Jensz, Research associate professor, University of Münster

Catholic Church sex abuse: The difference a Pennsylvania grand jury made in lives of survivors

The Pennsylvania grand jury report may have played a role in helping survivors come to grips with their past.AP Photo/Matt RourkeIt has been one year since the Pennsylvania grand jury report named 300...

Brian Clites, Instructor and Associate Director, Case Western Reserve University - avatar Brian Clites, Instructor and Associate Director, Case Western Reserve University

Setting the historical record straight for the critics of The New York Times project on slavery in America

Screen Shot of the New York Times homepage for its series, "1619."New York TimesFour hundred years after the event, the New York Times has published a special project focusing on the first Africans ar...

Kelley Fanto Deetz, Lecturer in American Studies, University of Virginia - avatar Kelley Fanto Deetz, Lecturer in American Studies, University of Virginia

The Amazon is burning: 4 essential reads on Brazil's vanishing rainforest

Nearly 40,000 fires are incinerating Brazil’s Amazon rainforest, the latest outbreak in an overactive fire season that has charred 1,330 square miles of the rainforest this year. Don’t bla...

Catesby Holmes, Global Affairs Editor, The Conversation US - avatar Catesby Holmes, Global Affairs Editor, The Conversation US

Removing mini-shampoos from hotel rooms won't save the environment

The movement to ban miniature toiletries isn't likely to make a dent in the global plastic crisis.vaidehi shah/Flickr, CC BYInterContinental Hotels Group will replace mini-shampoos and conditioners wi...

Yossi Sheffi, Professor of Engineering; Director of the MIT Center for Transportation & Logistics, Massachusetts Institute of Technology - avatar Yossi Sheffi, Professor of Engineering; Director of the MIT Center for Transportation & Logistics, Massachusetts Institute of Technology

Will the banking services royal commission have a lasting effect of improving the banking and financial sector? The answer is “no”. A temporary change is apparent, but the problems lie deeper than those addressed by the royal commissioner.

The worldwide pervasiveness of financial sector misconduct is an indication.

This is not a criticism of the Royal Commission as such. It had a limited mandate and limited time, although its approach of focusing on Australian case studies further limited its scope. And a broader investigation of economic and social underpinnings of financial sector misconduct would have required a different sort of Inquiry.

It’ll be hard to act on the report we had

Even then, any recommendations for fundamental changes to financial sector structure and activities needed to inhibit misbehaviour would have to run the gauntlet of gaining political support in the face of vested interests.

The response to, and government capitulation on, the Hayne recommendation regarding mortgage broking fees starkly illustrates the point.

Why will the recommendations not be a lasting solution? An important reason is that the royal commission interpreted “behaviour consistent with community standards” in a limited way to refer to situations in which customers were actually harmed.

But much of community angst over financial sector conduct relates to the broader use of market power and superior knowledge to extract an “unfair” share of the benefits from transactions with customers.

And it missed the broader problem…

Customers don’t get a fair share of the benefits from transactions, competition doesn’t work to make sure they do, and customers are often unaware that they have been exploited.

Why is it happening? The answer lies partly in this comment of Royal Commissioner Kenneth Hayne on page 54 of his interim report:

Much if not all of the conduct identified in the first round of hearings can be traced to entities preferring pursuit of profit to pursuit of any other purpose

Economists will rightly argue that there is nothing inherently wrong with the pursuit of profit or self-interest. It facilitates the efficient allocation of resources.

But unless it is accompanied by a concern with fairness (“do unto others as you would have them do unto you”) in situations of market power and superior information, as typically occurs in financial markets, it will lead to vulnerable consumers being exploited.

…which is a grey zone of unfairness

There is a large and poorly defined grey area between self-interested but clearly fair behaviour and self-interested unfair behaviour, which, in turn, merges into misconduct and illegal activity.

It is difficult for (particularly large) institutions operating in that grey area, even if committed to “fairness”, to ensure their employees do not slide towards the boundary. Or over it.

Moreover, competition between financial institutions in search of profits can lead to a “race to the bottom” in terms of lower financial product quality. This is not always apparent to some (or many) consumers – at their expense.

Read more: Defence mechanisms. Why NAB chairman Ken Henry lost his job

The financial sector particularly vulnerable to this problem.

First, many financial products and services are “credence goods” where the consumer needs them but is unable to assess their real worth either before or after the purchase.

A perfect example is a visit to the doctor. Often the reason we are visiting the doctor is because we don’t know what’s wrong with us. It makes it necessarily difficult or impossible to tell whether the doctor is good at her job.

Bankers sharpen their claws on each other

Second, much of the activity in financial markets is about trading and making profits (supposedly using superior information and expertise) at the expense of the another party in those markets.

If it is “right” for that part of the entity that does that to make money at someone else’s expense, why is it wrong for the part of the entity that deals with consumers to do that?

Here’s how the Commission could have tackled these problems in order to achieve real, longer term benefits.

Yet we license them…

First, it could have considered whether giving financial institutions a valuable “social licence” to operate in important business areas under advantageous institutional structures should bring with it extra enforceable obligations.

It could have also considered whether, given the lack of misconduct found in the mutual and cooperative sector, banks and other financial institutions could be organised more like mutuals.

Second, it could have recommended changes that would have given stakeholders other than shareholders (such as depositors and employees) a greater say in running those organisations (perhaps at board level) and a say in shaping their culture.

…and we could change the way they’re run

Third, it could have recommended structural separation between the retail and wholesale arms of firms to reduce complexity and the risks of deficiencies in control systems.

Structural separation could have also reduced the risk that the culture of trading and position-taking, in which profits are made at the expense of another party, spilled over into other parts of the institution where it wasn’t wanted.

Finally, it could (and should) have concentrated more on consumer protection.

It is a much broader issue than deterring and penalising misconduct.

Until consumer financial literacy catches up with financial product innovation and complexity, there will continue to be a big “market for financial misconduct”.

Exhorting institutions to do no harm won’t take it away.

The arguments made in this paper are developed in more detail in “The Hayne Royal Commission and Financial Sector Misbehaviour: Lasting Change or Temporary Fix? Economics and Labour Relations Review, Vol 30 (2), June 2019.

The Conversation

Authors: The Conversation

Read more http://theconversation.com/do-no-harm-isnt-enough-why-the-banking-royal-commission-will-ultimately-achieve-little-116076