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Last Build Date: Mon, 05 Mar 2018 02:34:57 +0000


Comment on Ethical failures: Where they come from and how to address them by aortmannphd

Mon, 05 Mar 2018 02:34:57 +0000

Appreciate the reading suggestion (Hand). I do not buy into your argument that the current regulatory threatpoint is an effective one. Sure it may not be a joy to be on the receiving end of a customer complaint in the finance industry but there are huge benefits (and profits) to be had from bending the rules and clearly that is done. That's why we now have that particular RC. I agree with you that its scope is ill-defined but that in itself is the outcome of the machinations of a government that did not want this RC in the first place. I agree with you about your shopping list (and your assessment of the PC report but this was probably obvious from what I wrote). I do not agree with your quibble. There is a yuuuge difference between monopolistic competition where products are located somewhere on the line between search and experience goods and those complicated products that we are talking about in the current context (that lie somewhere on the line between experience goods and credence goods) and that are offered typically by very few firms with considerable market power. It is about product proliferation but even more about strategies of obfuscation ("schmeduling"), exactly the kind of strategies that I have observed first-hand. There is now a considerable literature out there on this issue. Google "behavioral contract theory". Koeszegi's 2014 article is a decent starting point and if you check the references to it, you'll be quickly up to speed. It is not clear to me what exactly can be done about this problem; it is actually something I have been thinking about as of lately ...

Comment on Ethical failures: Where they come from and how to address them by Forrest Casey

Wed, 28 Feb 2018 02:09:36 +0000

It is not a joy to be on the receiving end of a customer complaint in the finance industry. It is awful. Banks spend millions of dollars and massive amounts of staff time dealing with customer complaints (for all the reasons I mentioned in my first post). Even when complaints are settled before going to regulators, banks must maintain registers of all complaints (even the trivial nonsense), and these registers are routinely examined and queried by auditors and regulators. If you have not already read “Naked Among Cannibals: What Really Happens Inside Australian Banks” (2001) by Graham Hand, I expect it is a book that will appeal to your sensibilities. The book is voyeuristic fun, but the industry has moved a long way from that short historical episode in a government owned bank. I have read the Productivity Commission report (though only the 55 page version), and it contains many excellent findings and recommendations. The report is excellent because it deals with a lot of structural issues, and some of those issues are quite important. However, nothing in the report suggests to me that we need a Royal Commission with the terms of reference laid out for our current RC. As an aside, the material in the report on asset risk weighting is important, and deserves much more attention. Also, the report beautifully exposes and lays bare the consequences of the bizarre APRA decision to tell banks to limit loans for investment properties. The PC frequently speaks the truth in a way that seems beyond other parts of our governance system. My own shopping list would also add to the report, for example: • Why should banks own insurance companies, as per a lot of Europe? Maybe the market itself will drive an unwinding of these assets. • What reform in business lending regulation would be necessary to facilitated wider syndication of commercial debt to the superannuation funds? How about US style BDCs? Why has the corporate debt market here never developed properly (80% or more is just bank debt funding its own balance sheets)? That is, how can one efficiently move high risk assets off bank balance sheets (with just 10% equity and risk of bankruptcy, and hence risk to the entire economy wide transactions settlement system) and into pensions funds that are unlevered? • Why do banks and insurance companies own financial advisory companies? Is it too simple to turn the clients of these business into stuffees? I could go on, but it gets boring. Maybe some of these things will come up in the public hearings that start today, but I doubt it. If I have a quibble with the PC report, it happens to be on the one topic you raised in your reply, and that is product proliferation. I thought that the profession’s interest in this topic died with the collapse of the FTC case against the US breakfast cereal manufacturers 35 years ago. Let’s think about cars instead of credit cards. There are about 50 brands of car sold in Australia, and hundreds of models. And it depends on your definition of a car. “Holden Commodore/Berlina/Calais, 3 different engine options = 9 different "models", or just one? Falcons with different transmissions, engines, fuels (LPG-only, petrol and dual-fuel) and model designations based on trim level – one model, or many? Toyota Camry standard/hybrid/Aurion – same thing, or different (Aurion = V6 Camry)? Is a 4WD a commercial vehicle, or a car? What about SUVs/"crossovers"? How about paint colours and trim? Vintage also matters, for surely a 2008 Toyota Camry is a different product from a 2018 model? I think this brand and model proliferation is NOT an ethical failure on the part of the automobile industry. I think it is just the way they compete. Indeed, it is very difficult to think of any industry where product proliferation does not occur as a form of competition, something easily confirmed for me by a stroll down any aisle at a Woolworths or Coles store.

Comment on Ethical failures: Where they come from and how to address them by aortmannphd

Tue, 27 Feb 2018 00:22:18 +0000

(a) what to do when we find people behaving unethically, and (b) what can be done to stop such bad behaviour in the future? Yes, these are the questions that both Dennis and I are interested in. My examples were in finance and banking as well as organized religion. And I think the questions to be answered are pretty much the same across these domains. Yes, the purpose of a sales person is arguably to sell (used to be that s/he also was an expert but I guess those times are gone). I did not argue that they were to advise on competitor products and prices. But, then, they also should not actively prevent me from making those price comparisons. Same is true for big companies that engage in schmeduling and related strategies (product proliferation; see pp. 14 - 16 in the recent PC draft report on Competition in the Australian Financial System to which I linked in the original blog entry) to make their pricing schemes hard to compare. Can regulation address these issues? I am as sceptical as you seem to be. But surely there are ways to start addressing these issues (e.g., sufficent time for buyers to beware, reducing the marketpower for the big banks and insurance companies, reputational feedback mechanisms that have been shown to be very effective in a number of contexts even for fairly complicated products, etc.) You should read the draft report of the PK because it documents clearly how necessary a Royal Commission is and that the people that run those businesses seem to think that they get away with a lot. Yes, I know, s### happens, and there is always bad apples (among employees and clients) but the key argument of Gentilin is that the problem really goes beyond a few bad apples and that many of the problems that are documented in his book, as well as in the recent draft report of the PC on the Competition in the Australian Financial Business, are systemic. Did I mention you might want to read that draft report? Yes, I can file a complaint here and there but, frankly, who needs that kind of additional aggravation? It's a very unpersuasive threat point.

Comment on Ethical failures: Where they come from and how to address them by Forrest Casey

Sun, 25 Feb 2018 07:39:10 +0000

It is a fine thought that we should all behave ethically. Furthermore, I agree with the general sentiment that stressing the importance of ethical behaviour is necessary at a personal and organisational level. However, the policy questions that came to me after reading your post are: (a) what to do when we find people behaving unethically, and (b) what can be done to stop such bad behaviour in the future? Since this is an economics blog, let’s keep the discussion to finance and banking. Your other examples were in religion. I am prompted to write because of the last paragraph in your blog post: “Having recently interacted with NAB, once again, with mortgage related issues, I have no doubt that NAB culture is pervaded with everything but a meaningful social purpose that is underpinned by a virtuous set of values (e.g., the loan officer I dealt with did everything to prevent me from comparison shopping, and essentially gave me misleading information about the rates that I would be getting), and I have little doubt that the same applies to each of the other three major banks.” When was the last time any of us bought a car, a computer, a new suit of clothes, fruit at the grocery store, whatever, and the sales person told you that there was a better deal at some other shop? The social purpose of that sales person is to “sell”, and to sell at the best margin. It is not to advise you on competitor products and prices. Why should we think otherwise? False information, i.e. a lie, is a different matter. If you think you received misleading information then complain. Complaints happen all the time – it is the control mechanism in the sales process. You should know that at a big bank staff person found to be providing misleading information is indeed cautioned and penalised. Why? Because the bank is heavily invested in its brand, and it puts enormous effort into managing and maintaining the trust in that brand. All big organisations, not just banks, worry about their brand. So, if I’m correct, and banks do have extensive internal compliance training and control mechanisms, why do these ethical failures occur, even in banks? The answer is simple, it is because the big banks are enormously large and complex in comparison to almost all other businesses, and most people deal with banks with high frequency (BHP is big also, but it is not dealing with millions of customers every day). Once a company is employing 30,000 staff it is nearly inevitable that - no matter what training and precautions are in place - some misbehaviour will occur. Forrest Gump got it: s### happens. Banks spend hundreds of millions of dollars on compliance and compliance training every year in order to stop misbehaviour by the few. You should also recognise that the customers of banks are not a uniformly virtuous group. Every day banks must deal with literally thousands of attempts to defraud them. This might be news to some, but there are a lot of people who tell lies to banks on loan applications and credit card applications, engage in identity theft, scam teller and credit card machines, etc. On top of those fraudsters, there are lots of people who have a poor understanding of the obligations associated with taking someone else’s money, i.e. borrowing from the bank’s depositors. That poor understanding of obligations comes from lack of education, lack of language skills, and lack of intelligence. Such folk frequently feel discriminated against if they are denied loans, and aggrieved when it comes time to repay their debt. Furthermore, they complain a lot. There is no Royal Commission into why there are so many dishonest people in the world. What happens if bank staff misbehave, and the bank does not want to recognise its own misbehaviour? Then you can go to Australian Prudential Regulatory Authority (APRA), the Australian Securities and Investment Commission (ASIC), the Financial Ombudsman Service (FOS), the Superannuation [...]

Comment on Why would banks eliminate ATM fees? by derridaderider

Wed, 27 Sep 2017 06:07:27 +0000

Surely you've got this a bit the wrong way around. Its not so much that free use will cause fewer ATMs as much as demand for ATM withdrawals has fallen, leading to free use. With cards ubiquitous and more useable than ever people carry much less cash, and in any case can get cash fee-free with a paywave swipe at any supermarket. Having ATMs is simply much less profitable for the banks than it was, so making them free costs far less than it once would have. And if you do get rid of them your customers won't care anywhere near as much as they once would have.

Comment on Is cross-ownership a competition problem in Australia? by Casey

Sat, 08 Apr 2017 07:21:19 +0000

It is a bit more complicated than just looking at fund managers. For unitized product the decision to vote resolutions typically rests with the fund manager who is delegated that responsibility from the trust's Responsible Entity. In the case of discrete mandates, the fund manager will sometimes receive a delegation from the owner of the funds (e.g. an underlying superannuation fund) to vote the shares, but on other occasions the decision is referred back to the owner of the funds. Even where a fund manager holds a delegation (to advise the custodian) how to vote the shares, that delegation involves an agreement with the owner about "how" (as in guideline) the shares are to be voted, and when the owner must be consulted prior to issuing a voting instruction. For the great bulk of commercial decision making, I seriously doubt that cross-ownership plays any role. However, there are some areas where the concentration of ownership in a small number of superannuation funds (and fund managers) does create problems, particularly in the small Australian market. The most serious issue arises in the pricing of IPO's and share placements. Prior to launching a deal, issuing companies and their investment bankers typically do what are euphemistically called "sounding" of the large shareholders in the sectors, or in the case of placements they do "soundings" of large existing shareholders. Even if all confidentiality is maintained, pricing gets set by very few investors. It is too easy (and perhaps idle) to speculate, but any leakage of confidential information is big problem, and difficult to prove. The specific issue with the Australian banks and their obscene ROE's is that they have become such a large chunk of everyone's retirement funds that politicians have become scared and paralyzed to do anything about their outrageous behaviour. The most recent round of increases in the mortgage rate spread must rank as one of the best example ever of tacit cooperation among non-competitors. (Abetted of course by regulatory guidance - enough said).

Comment on Is cross-ownership a competition problem in Australia? by harryclarke

Thu, 16 Mar 2017 20:42:48 +0000

Vanguard mainly a passive index fund investor. Blackrock is both active and passive offering a lot of ETFs. A lot more work is necessary here to conclude anything about concentration and overlaps. These observations true for the US as well as Australia.

Comment on Is cross-ownership a competition problem in Australia? by Ben

Thu, 16 Mar 2017 15:09:37 +0000

How much of these ownership percentages are due to the fund managers investing due to passive investment mandates (I.e. Constructing portfolios to replicate market index) versus active investment mandates where concerns about impacts on company decision making might be more legitimate?

Comment on Will pricier soda lead to slimmer waistlines? by Gordon Travers

Thu, 23 Feb 2017 23:45:17 +0000

I have always been dubious about a sugar tax. The major brands dominate the market. They are able to extract a price far in excess of what would be predicted by classical economics. Increasing the price slightly by a sugar tax would not have that much effect. The behavior of this market is much better explained by Behavioral Economics, rather than classical economics. It would appear to me that controlling the advertising would have better results, but is much harder to implement. I would suggest that our society introduce the concept of products and services that are legal, but undesirable. Included in this category would be prostitution, drugs, smoking and gambling. These products and services would not be able to be advertise, the supply would be regulated, and there would be public health campaigns to reduce usage.

Comment on Will pricier soda lead to slimmer waistlines? by nottrampis

Thu, 23 Feb 2017 03:17:59 +0000

low income people smoke more and drink more alcohol. you have a strange looking demand curve. If low income people gradually react to an inelastic demand curve why would they not react pretty quickly to a normal demand curve?