The Conversation – Page 41 – Digital Finance Analytics (DFA) Blog

Apple Pay dispute may mean less opportunity to pay with your mobile

As people increasingly reach for their phone to pay for goods in Australia, existing players in the contactless payment industry are trying to seek competitive advantage. Four of Australia’s leading banks are trying to secure collective bargaining rights for technology that grants access to Apple Pay.

This service is currently is only available to customers with American Express proprietary cards and ANZ American Express companion cards and ANZ Visa cardholders.

The Reserve Bank of Australia’s (RBA) Payments System Board noted that innovations in mobile wallets can boost consumer choice and convenience. Cardholders may be able to consolidate a range of payment cards into a single app on their mobile device.

Australia is one of the leading countries in the take-up of contactless payment transactions. If Apple is blocking banks from offering this service to their customers, it should be questioned.

Australia ahead when it comes to contactless payments

The way that Australians pay for the goods and services that they consume is rapidly changing. The use of cash as a payment mechanism has continued to decline as consumers shift to electronic payment methods, especially for smaller transactions.

Credit and debit cards are the most frequently used non-cash payments methods. In the financial year 2015-16, Australian cardholders made around 6.9 billion payments, worth $538 billion. That is an increase in value on the previous year of around 7%.
Payments System Board Annual Report
This trend is largely due to the prevalence of contactless technology at the point-of-sale. For example, some Australian banks claim that 74% of all MasterCard in-store transactions are now contactless and that per capita, contactless payments in Australia are amongst the highest in the world. Added to that, the A$100 cap on such transactions is the highest in the world.

The contactless payments industry has made substantial investments in the technologies that underpin convenient and secure payments. In particular this has seen the deployment of Near Field Communications (NFC) technology, used to accept both contactless card payments and mobile wallet payments.

Merchant terminals that accept contactless payments via the NFC technology are now commonplace in Australia. Mobile payment applications such as Apple Pay, Samsung Pay and Android Pay have all been recently launched in Australia.

Apple Pay arrived in November 2015, originally only for proprietary American Express cards. In April 2016, it was made available also for ANZ issued American Express companion cards and Visa cards.

In June 2016, Samsung Pay launched its mobile wallet application in Australia, in partnership with American Express and Citibank. Finally, Android Pay launched in July 2016 with ANZ, American Express, Macquarie and a wide range of credit unions and mutual banks, using Cuscal as their service provider.

The Apple dispute

Four banks – the Commonwealth Bank of Australia, Westpac, National Australia Bank and Bendigo and Adelaide Bank – have applied to the Australian Competition and Consumer Commission (ACCC), to collectively negotiate with Apple Pay in Australia.

In their evidence to the ACCC, the banks accuse Apple of trying to piggyback on their investment in Australia’s contactless payment infrastructure, while remaining “intransigent, closed and controlling”, in dictating terms for access to Apple Pay.

The banks claim that Apple is seeking for itself the exclusive use of Australia’s existing NFC terminal infrastructure, “which has been built and paid for by Australian banks and merchants for the benefit of all Australians”.

This negotiation is worth a lot to the banks, the banks claim Apple has approximately 40% of the smartphone market in Australia.

The banks dismiss Apple’s claim that opening up access to the NFC function would undermine the security of mobile wallets. The banks point to the experience of Apple in China and Japan, where Apple Pay was forced to modify its demands in order to maintain parity with Samsung Pay.

Besides seeking non-exclusive access to the NFC and standardised security for all mobile payment systems, the four banks want price transparency on transaction costs for mobile payments within Australia. This is an ongoing objective for the RBA.

In its recent review of card payments regulation, the RBA set out to ensure that its reforms would promote competition and efficiency in the payments system by improving price signals and thus encouraging efficient payment choices for consumers.

Apple Pay derives most of its income from taking part of the Merchant Service Fee (MSF) that merchants pay to the card issuers. In the USA, where contactless payments have yet to take off, MSF’s are much higher than in Australia. According to media reports, Apple Pay take around 0.15% of the value of every credit card transaction via its mobile wallet in that country.
Apple has locked its devices so only Apple Pay can be used to make contactless payments. Maxim Zmeyev/Reuters
In Australia, the average fee paid by merchants to the financial institution for transactions on MasterCard and Visa cards was 0.72% of the value of the transaction in June 2016. This followed a review of the calculation of the interchange element of the MSF’s in November 2015.

These interchange fees are now 0.50% of the value of the transaction for the credit card schemes and 12 cents per transaction for the debit card schemes. So there is not as much interchange revenue to share in Australia as there is in the USA.

In its deal with Apple Pay, media reports say that ANZ has given up some of its interchange fees to Apple, but the actual amount has not been disclosed.

In a submission to the ACCC, the four banks’ pointed out if Apple Pay were to gain a dominant share of all mobile wallet transactions in Australia, then consumers would not be aware of the costs that are associated with this method of payment. This would conflict with the RBA’s objective of improving signalling to consumers the price of each payment option.

The four banks have received support for their bid to negotiate collectively with Apple from a number of card schemes, merchants, other banks and payment associations. The ACCC is expected to give its decision on their claim in November 2016.

Is Australia is serious about offering consumers as wide a variety of payment options as possible and making consumers aware of the costs of each option? If so, then everyone should be able to use whichever payment method suits them best, no matter which mobile phone or bank they use.

Author: Steve Worthington, Adjunct Professor, Swinburne University of Technology

Executive’s short-term outlooks the real killer of Australian innovation

From The Conversation.

Malcolm Turnbull’s Innovation Agenda focused attention on startups and technology-driven innovation, but this is not enough to overcome the broader problems inhibiting innovation in Australia. Businesses may be looking to the government to ease red tape as a means to increase innovation but what’s really blocking innovation is the short-term view of senior executives, our research finds.

We interviewed 12 board Chairs and nine CEOs of top ASX-listed companies, one-on-one in wide-ranging interviews to try and find out what the leaders of large Australian businesses are thinking and doing in the innovation space.

Our interviewees pointed out there is no real interest among senior executives in taking a risk that may pay off in the long-term because of current risk-reward practices that reward short-term outcomes. One CEO said:

“People try and blame shareholders, but it’s not. It’s management saying, ‘am I really going to be here in 10 years’ time when this actually kicks off’?”

And another board chairperson agreed:

“Does great innovation come out of Australasia? Not normally because the risk-reward perspective is skewed towards I must turn up with my number.”

As a result of this short-term thinking, the amount of money allocated to innovation projects is conservative and released through a stage gate process with the need to report on outcomes. We also found there were very few innovation strategies within these companies.

Executives were risk averse even when a company could afford to make significant investment in innovation. For example one CEO said:

“We are deliberately followers in pretty much everything we do whether it is financial structuring or application of technologies and it’s borne of a risk profile that is a consequence of our market position…we might distribute a couple of hundred million dollars, (and have) A$1 million to spend on something that’s risky.”

Who needs to lead innovation?

Executives and academics have argued that innovation often takes place in large, established businesses. Yet, there is evidence that big business mostly fails at innovation.

In Australia, the 2015 NAB report on business innovation showed that only 29% of very large firms (ASX 300) rated themselves as highly innovative. A recent study by the Centre for Workplace Leadership at the University of Melbourne revealed that just 18% of private sector organisations reported high levels of radical innovation.

The people we talked to as part of this study identified various challenges for innovation in Australia. They pointed out that the Australian market is too small and the Australian culture too laid-back, resulting in less motivation to innovate and disrupt.

Others blamed the large and complex system of government regulations, corporate tax levels, inflexible industrial relations, and the toll poppy syndrome.

However there was little evidence of global aspiration or ambition. Nor was there much discussion about companies’ positioning in a global marketplace.

Some CEOs and Chairs agreed that they are too risk averse to engage in radical innovation, but blamed the short-term orientation of the market and shareholders for their failure to innovate big.

As recognised by others, large organisations tend to frame innovation in terms of improving existing business models rather than disrupting them. As one chair described it:

“I don’t think innovation requires [betting] the business. Innovation now is much more about improving, constant change, constant improvement.”

Based on the interviews we conducted, the current outlook for innovation being fostered by Australia’s established companies is bleak, as summarised by this interviewee:

“Talking about business in Australia, I have a lot of concerns, because I don’t think that there’s enough people in the bigger companies in Australia saying, ‘OK, let’s develop a strategy, let’s develop a business plan, let’s engage with the market and tell them what we are doing, in a very open way, and let them take the rise and fall with us, as to if we get there we get there, if we miss it by a little bit, [let’s] explain to them why we missed it. That doesn’t happen.’ ”

A lot has to change for Australian big business to become more innovative. As a start, companies need to introduce long-term incentives for executives, change attitudes to support taking risks and thinking big, and focus on developing innovation strategies.

Authors: Linda Leung, Honorary Associate, University of Technology Sydney; Jochen Schweitzer, Director MBA Entrepreneurship and Senior Lecturer Strategy and Innovation, University of Technology Sydney; Natalia Nikolova, Senior Lecturer in Management, University of Technology Sydney

The risks in Australia’s housing market shouldn’t be downplayed

From The Conversation.

The Reserve Bank of Australia (RBA) sees housing finance as a smaller danger than in the past, judging by its latest Financial Stability Review, but we aren’t back to happy days just yet. A number of economic indicators still show there’s cause for concern in the property market.

The review does acknowledge some problems in the apartment markets in Brisbane and Melbourne, but it sees major threats to the resilience of the Australian financial system overseas: examples are the rising debt levels in China, the low performance of European banks, the Brexit, and the impact of low milk prices on New Zealand farmers (with a possible feedback effect to Australian banks).

The review highlights Australian banks’ stronger capital buffers and compliance with toughened prudential standards from the Australian Prudential Regulation Authority (APRA). Because house price growth has moderated and mortgage borrowers are substantially ahead of their scheduled payments, the risk from mortgage lending is somewhat lower.

However, it’s surprising that the review doesn’t stress some aspects that are obvious.

What the RBA didn’t say

Although Australia hasn’t experienced the type of shock to the economy the United States did, due to the sub-prime mortgage crisis, there is substantial risk due to a large portion of mortgage loans being subject to interest-only periods of typically five years. Research for US home equity lines of credit finds the risk that people won’t be able to pay mortgage expenses increases substantially towards the end of flexible repayment terms, in particular during times of increasing lending standards.

Mortgage borrowers often have the expectation that they are able to refinance at the end of the interest-only term into a similar loan with a new interest-only period. However, this rollover is not possible in economic downturns when banks suddenly tighten their lending standards and and are likely to cut refinancing.

The RBA’s review shows that Australian banks have tightened their lending standards and have room for further tightening, but currently we do not see larger impacts on delinquencies. Current rates of people not being able to make their mortgage payments are low but may quickly change in an economic downturn. It’s also difficult to forecast whether this will change judging by medium- to long-term trends.

There might be other reasons why people might struggle to make their mortgage repayments. We have seen central banks following the European and US central banks in lowering interest rates and markets are expecting a reversal in the future. As most mortgage loans in Australia are at a floating rate this would imply that the largest relative payment increase will be to interest-only loans, should the RBA follow these leads.

In addition to this, Australia continues to enjoy low unemployment rates. This may change and lower the average income levels, putting more stress on people’s ability to pay mortgage loans.

Other risk factors at play in the property market

House prices continue to grow at annualised rates of approximately 10.2% and 9% in the largest cities Sydney and Melbourne. Housing price growth has slowed down, but prices are still increasing and new mortgages are underwritten based on house prices that are disengaged with national income levels. The growth rate continues to be above the historic averages and other developed economies that have experienced similar rate cuts.

Banks have relatively reduced interest only loans and high loan to valuation ratio (LVR) style loans. However, it is also clear that origins of high risk mortgages continue at relative high levels.
Australian Prudential Regulation, new mortgage loans for ADIs with greater than $1 bn of term loans
The fraction of interest-only loans has come down from 44% in December 2014 to 36% in March 2016. While this is a noticable decrease, more than a third of loans continue to be interest-only.

The RBA’s review argues that Australian mortgage borrowers are on average approximately two and a half years ahead of the scheduled payments. This argument does not take interest-only loans into account.

Prepayments are generally made into offset accounts which include a redraw facility and are generally used when new properties are used. In other words, these prepayments may be quickly depleted to increase leverage but also in situations when borrowers have difficulties making payments.

Dominance of housing loans on bank books

The largest problem of Australian banks remains the dominance of housing loans on bank books. Approximately 60% of total loans are for residential properties, and 36% of loans are business loans dominated by commercial real estate loans and loans to small and medium sized companies, which are often backed by the real estate of the business owner.

This over-concentration is the Achilles’ heel of the Australian banking system and hard to protect against. It’s a reflection of demand for bank loans in Australia and alternatives to bank lending available to large firms.

International financial markets may provide a solution, allowing banks to diversify and risk transfer via asset risk swaps. Unfortunately, these solutions have not been explored much in the past . The reluctance to do this is mostly based on the poor performance of overseas assets during the global financial crisis.

The RBA’s review further discusses the achievements under the Basel Committee on Banking Supervision to limit the systemic risk of financial institutions via increased regulation and higher capital buffers. The review further notes that no Australian bank is of global systemic importance.

However this is not a reason for complacency as the failure of one of the largest Australian banks would lead to a great shock to the Australian economy. A further concentration in the banking industry would make bank products more expensive than they would be in a competitive system.

Forcing insurers to reveal rejected claims a win for consumers

From The Conversation.

Companies offering life insurance will now disclose the outcomes of claims, under a new reporting regime in a bid to increase transparency in the industry. This information won’t only be used by individual customers but also by financial advisers and in the case of many of us, by our superannuation fund, via a group policy.

If super funds consumers and financial planners use this data, it will likely place considerable pressure on insurers who have high rejection rates to improve internal practices, terms of insurance policies and better inform consumers about the scope of the insurance coverage. A history of high rejections would suggest that there is a relatively high risk the insurer would reject future claims. Awareness that an insurer has a high rate of rejections would lead to business being diverted away from them.

Australian Securities and Investments Commission

The new disclosure regime arises from an ASIC review of life insurance claims. As part of the review ASIC looked at the histories of 15 insurers that provide life, total and permanent disability (TPD), trauma and income protection insurance.

The review found the highest rejection of claims rates were for TPD (average declined claim rate of 16%) and trauma cover (14%). The rejections were lowest for life cover (4%) and income protection cover (7%).

Disconcertingly, the rejection rates vary substantially as between insurers. For TPD, three insurers had rejection rates of 37%, 25% and 24% respectively, compared to an industry average of 16%.

ASIC provided a comparison of rejection rates among the insurers it examined, but it kept the insurer names anonymous. For example the reporting on TPD rejections ranged widely.

ASIC’s reluctance to name names in this review is understandable. It found that making comparisons was difficult, partly because the insurance policies have different terms and definitions. Sometimes these differences are subtle, and at other times substantial.

What is heartening is that ASIC proposes reporting on the conduct of individual insurers – that is, it appears ASIC intends naming names. The sooner this is done, the better.

It is in the mutual interests of consumers, superannuation funds managers, financial planners who advise clients on the purchasing of insurance, and the insurance industry itself that there is an improved capacity for purchasers to make informed choices.

Purchasing the right insurance policy is fiendishly difficult. Making anything resembling a rational and informed choice requires knowing which future events are covered by the insurance, and the likelihood of the insurer paying up if a claim is made.

Finding out which events are covered by a policy often requires wading through lengthy and complex product disclosure statements (PDS). In addition, making any reliable assessments about whether the insurer is likely to pay up on a claim is next to impossible. It is somewhat ironic these uncertainties exist as a reason for insuring is to buy peace of mind, and an assurance that if things go wrong we will receive money to compensate for some or all of the insured loss.

The difficulties consumers face in making comparisons when shopping for the right product contribute towards an inadequately competitive marketplace and a lack of consumer trust in insurers. This in turn is fuelling public disquiet that led to ASIC review of the industry.

ASIC found that overall the life insurance industry accepts 90% of claims in the first instance if a decision was made to about whether or not to make a claim. For death claims, an average 96% of claims are paid.

ASIC is concerned, however, that in some cases claims are being rejected on technical or contractual grounds that are not in accordance with the spirit or the intent of the policy. This presents a challenge for insurers to decide how to deal with that small number of claims that may not be covered under the fine print, but under any reasonable consumer or community expectation should be paid.

This sort of information is already published in the United Kingdom where the Association of British Insurers publishes data on claims payouts.

In Australia ASIC proposes working with the Australian Prudential Regulation Authority, the insurance industry and stakeholders to establish a consistent public reporting regime for claims data and claims outcomes. ASIC will report on claims handling timeframes and dispute levels across all policy types.

Enhancing the capacity for consumers to make better informed choices will help build trust in the industry and a more competitive marketplace. It will also help bring greater peace of mind for those purchasing insurance.

Author: Justin Malbon, Professor of Law, Monash University

Can Australia stop interest rates from approaching zero? Only with a big shift in policy

From The Conversation.

Australian Treasurer Scott Morrison recently suggested the Reserve Bank of Australia (RBA) avoid cutting interest rates below the current 1.5%. The Turnbull government’s “fiscal consolidation”, he said, was more important for stimulating the economy.

This is big talk, and to be anything close to credible it needs to be backed up by big policies.

Morrison is not alone among politicians wading into the current debate on interest rates. Republican presidential nominee Donald Trump has said US Federal Reserve Chair Janet Yellen “should feel ashamed” for keeping rates so low. US President Barack Obama and UK Prime Minister Theresa May have been more lucid, taking greater care to understand the tradeoffs that central banks face.

Debate is certainly warranted. Negative interest rates were widely considered “impossible” just a decade ago, yet today they are the norm for OECD countries. If they are here to stay then serious reforms will be necessary to keep capitalism working.
Acting Man blog
Australia, so far, remains an outlier. The RBA’s rate of 1.5% may be a record low on our shores, but it is enviably high compared to most of the OECD.

But as Australia faces the end of the mining boom, the end of a housing boom, and the end of car manufacturing and gas-intensive manufacturing, downward pressure on growth and interest rates is building.

To counter this, Morrison must offer a credible way of avoiding further cuts in Australia.

Excess savings

Interest rates are low across the OECD due to excess savings. This is the same problem that caused prolonged unemployment during the Great Depression.

Imagine the world spontaneously decided to save 10% more of its income in 2017. As the year progressed, demand for goods and services would collapse. Businesses would find their warehouses packed with unsold goods and their staff under-utilised. They would be forced to lay off workers and halt production. Spooked investors would be unwilling to expand businesses, build housing, or invest in production. Asset prices would collapse, many debts would become unpayable, and the resulting financial crisis would further cut into employment.

In turn, high unemployment would feed back to further reduce demand. The negative feedback between employment and demand would send the economy into a downward spiral. During the Great Depression, US industrial output shrank by an astounding 50% and unemployment reached 25%.

What sends savings higher in the first place?

Both the Great Depression and Great Financial Crisis were triggered by asset bubbles. When the bubbles burst, savings increased rapidly while investment plummeted, due to negative expectations (which increase savings for the coming hard times), financial instability (which leads people and companies to hold on to their money rather than lend it to potentially insolvent others), and high levels of debt (which increase savings to pay down debt).
During the Great Financial Crisis, a giant hole opened up between private savings and investment. Even by 2012, the glut of savings above investment in the U.S. was still US$800 billion. Wikimedia Commons
The role of monetary policy

Interest rates are so important in this story because they affect the rate of savings and investment – they reward savers and cost investors.

Higher interest rates increase the incentive to save and reduce the incentive to invest. They will tend to cool the economy. Lower interest reduce the incentive to save and increase the incentive to invest, and tend to heat the economy up.

The role of central banks is to set monetary policy to what is termed the “neutral” rate of interest. This is the rate that keeps the economy running at its full potential, by balancing intentions to save and intentions to invest – so that neither is in excess.

For this reason, central banks do not reduce rates “on purpose”, but follow the underlying neutral rate by using (roughly) the following formula:

If unemployment is high and inflation is below target (usually around 2-3%), then there is spare capacity in the economy. Interest rates are above the neutral rate and should be lowered to heat things up.

If unemployment is low and inflation is above target, then the economy is likely overheating. Interest rates are below the neutral rate and should be raised before inflation gets out of control.

Extremely low interest rates at OECD central banks are a symptom of current economic conditions, where too many people are saving and not enough people are consuming or investing.

Why is the “neutral” interest rate so low today?

The global neutral interest rate has actually been trending steadily downward since the 1980s. This is unprecedented in the history of capitalism, and its importance cannot be overstated.
Bond prices are a useful proxy for real interest rates. European Central Bank
Bank of England researchers identify several reasons behind this trend, each of which either increases intentions to save or reduces intentions to invest:

growing inequality, which increases savings because the rich save more of their income

an ageing population living longer, which increases lifecycle savings for retirement

the growth of emerging markets, predominantly China, which have very high levels of savings

the lower cost of capital goods, which reduces the capital outlay needed for the same investment

reduced population growth, slowed productivity growth, and reduced public investment, each of which cut demand for new investment.

Together these trends towards excess saving have reduced the neutral rate by around 4% since 1980.

Importantly, we can be confident that most of these changes are here to stay. Low interest rates appear to be the new normal for advanced capitalist societies.

Can our government policies credibly keep interest rates higher?

Treasurer Morrison acknowledges that rate cuts are a “matter for the RBA”, and that his comments will have little influence on its decision making.

To actually influence the path of RBA interest rates, the Turnbull government must take actions that place substantially more of the load in boosting demand on fiscal policy (government spending). Given increasing government spending will further increase an already problematic budget deficit, such policies are only justifiable where their long-term benefits outweigh their immediate costs.

The Turnbull government’s policy in this area rests heavily on the proposed company tax cut of A$48 billion over the next ten years. Ordinarily such a tax cut might increase investment. But investment in the OECD has been disappointingly unresponsive to the kind of small change in profitability that the company tax cut will bring.

In the US, for example, investment remains low even while corporate profits are around record highs. Instead of investing, businesses are hoarding trillions of dollars in profits. This pattern is highly suggestive of monopoly-like rents being pervasive among larger corporations, in which case company tax cuts will only increase savings.

The pro-investment signal businesses really need is greater consumer demand for goods and services. Yet to fund company tax cuts, the Turnbull government is cutting back on the most effective of demand-boosting fiscal policies: welfare programs. Poorer individuals live closer to subsistence, so tend to spend most of the additional income they receive. Taking money from welfare and sending it to corporations risks increasing corporate saving while reducing consumer demand – the exact opposite of what is needed.

Given the cost to the ailing budget of A$48 billion, the proposed tax cuts are a waste of the Australian government’s minimal fiscal headroom. It is fortunate they will soon be blocked in the Senate.

Scott Morrison’s comments show some understanding of the challenges presented by the new low-rate era. The policies he promotes do not.

While Australia faces its greatest economic challenges in a generation, it seems we are still waiting for the greatest economic reformers in a generation to arrive.

Author: Reuben Finighan, Senior Research Officer at The Melbourne Institute and Fellow of the ARC Life Course Centre of Excellence, University of Melbourne

New life insurance code riddled with loopholes

From The Conversation.

Life insurance has stood out as an industry without a code of practice when others such as general insurers have one. The latest attempt by the Financial Services Council to remedy this may be a last chance for life insurers to reform, before the government forces them to.

The code from the Financial Services Council focuses on the relationship between the insurer and the customer and aims at high standards of consumer service; professional behaviour and industry consistency. It should complement the legislation announced in 2015 to deal the problems of excessive up front premiums, remuneration practices and commissions which were incentives for insurers to churn customers through policies.

The code is also a result of the Trowbridge Report on retail life insurance which gave the life insurance industry a final opportunity to shape its future through a co-regulatory approach, rather than being reformed by the government alone.

Hopefully this latest attempt at reform does not go the same way as the earlier 1995 code of practice for the industry, which lapsed in 2001. This covered similar territory to the Financial Services Council code, but made little difference to the way the industry behaved. A positive sign is this new code was developed in consultation with industry, while the last one wasn’t.

What’s in the code?

This latest code will again try to address problems with selling practices and the quality of advice, high lapse rates, increases in premiums and their affordability as individuals age, and the redesign and repricing of products. The CommInsure scandal revealed further problems with outdated definitions and problems with making claims.

ASIC can approve these codes of practice for industry but rarely does so. This latest code is yet to be approved as well.

Some sectors have agreed to codes to forestall unwanted legislative change. Other codes establish higher standards of behaviour than required by law.

Codes are legally binding between an enterprise and a customer. This is because when an enterprise agrees to abide by a code it forms a kind of contract on the basis of this promise.

The very first part of the latest code of practice states that the code is binding and commits the entity to the standards in the code. The framework of the code looks at types of business rather than types of product.

One big omission in the code, is that it does not cover superannuation fund trustees or financial advisers, unless they explicitly adopt the code. This means it doesn’t cover a group policy where it is the employer or the superannuation fund trustee who has taken out the policy. As a result many Australians with life insurance within their super funds do not benefit at all from the code.

It does however apply to life products such as death, total and permanent disability, critical illness, disability, funeral, income protection, business expense and consumer credit insurance. But it does not cover products issued by a general insurer or a health insurer. This could create some confusion, for example it means that consumer credit insurance is covered by the code if provided by a life insurer, but not if provided by a general insurer.

Compliance with the code will be monitored by a Life Code Compliance committee. This is similar to the banking codes. The Financial Services Council and the insurers both have obligations to make consumers aware of the code.

Consumers can make a complaint using the code to the insurer, the Financial Ombudsman Service or Superannuation Complaints Tribunal. But if a complainant goes to a court, tribunal or other external dispute resolution body, the code no longer applies.

This code has an interesting take on the issue of designing life insurance products, as discussed in the 2014 Financial Systems Inquiry. It clearly states that when new policies are designed, “we will define suitable customers for the product”. This may stop the sale of products to those who don’t need them.

This is good but it still falls short of an obligation to sell a product that is suitable for the particular person, rather than a product that is generic for a class of targeted people. For example tailoring a policy to suit a person’s particular set of circumstances.

It’s a shame that the code has to set out that there will be rules to prevent sales to someone who is, “unlikely ever to be eligible to claim the benefits under a policy”. This really should be a part of the system already.

The obligation to review and update medical definitions is a good sign. But this applies only to policies that are currently being sold and won’t help those who are tied to policies with older definitions, that are no longer being sold.

The code also doesn’t have an obligation for insurers to disclose the exclusions in the policy, in plain language, to a customer before they sign a contract. This is something that really should be taken up by the industry.

Funeral insurance is the only life insurance product that requires a pre contract key fact sheet for offers. This type of disclosure shortcut is mandatory for home building and contents general insurance. Although there are difficulties inherent in simplification for key fact sheets this should be reconsidered for other life insurance products.

There are provisions for pre-sale disclosure for consumer credit insurance. Insurers are required to offer an alternative form of payment, when there is an offer of an initial loan to pay for insurance. In addition to this, insurers have an obligation to disclose the cost of loan repayments without and with the premiums and the interest payable on them. It may prevent some of the practices revealed in the reports on the problems of add-on insurance.

The code is a step towards a better relationship between the industry and consumers, particularly through the provisions to assist the vulnerable and helping customers make claims. It is not perfect.

The industry should continue to listen and take on board the virtues of the code. It can easily be changed to guide even better standards of conduct and meet newly identified problems.

Author: Gail Pearson, Professor, Business School, University of Sydney

Data surveillance is all around us, and it’s going to change our behaviour

From The Conversation.

Enabled by exponential technological advancements in data storage, transmission and analysis, the drive to “datify” our lives is creating an ultra-transparent world where we are never free from being under surveillance.

Increasing aspects of our lives are now recorded as digital data that are systematically stored, aggregated, analysed, and sold. Despite the promise of big data to improve our lives, all encompassing data surveillance constitutes a new form of power that poses a risk not only to our privacy, but to our free will.

Data surveillance started out with online behaviour tracking designed to help marketers customise their messages and offerings. Driven by companies aiming to provide personalised product, service and content recommendations, data were utilised to generate value for customers.

But data surveillance has become increasingly invasive and its scope has broadened with the proliferation of the internet-of-things and embedded computing. The former expands surveillance to our homes, cars, and daily activities by harvesting data from smart and mobile devices. The latter extends surveillance and places it inside our bodies where biometric data can be collected.

Two characteristics of data surveillance enable its expansion.

It’s multifaceted

Data are used to track and circumscribe people’s behaviour across space and time dimensions. An example of space-based tracking is geo-marketing. With access to real-time physical location data, marketers can send tailored ads to consumers’ mobile devices to prompt them to visit stores in their vicinity. To maximise their effectiveness, marketers can tailor the content and timing of ads based on consumers’ past and current location behaviours, sometimes without consumers’ consent.

Location data from GPS or street maps can only approximate a person’s location. But with recent technology, marketers can accurately determine whether a consumer has been inside a store or merely passed by it. This way they can check whether serving ads has resulted in a store visit, and refine subsequent ads.

Health applications track and structure people’s time. They allow users to plan daily activities, schedule workouts, and monitor their progress. Some applications enable users to plan their caloric intake over time. Other applications let users track their sleep pattern.

While users can set their initial health goals, many applications rely on the initial information to structure a progress plan that includes recommended rest times, workout load, caloric intake, and sleep. Applications can send users notifications to ensure compliance with the plan: a reminder that a workout is overdue; a warning that a caloric limit is reached; or a positive reinforcement when a goal has been reached. Despite the sensitive nature of these data, it is not uncommon that they are sold to third parties.

It’s opaque and distributed

Our digital traces are collected by multiple governmental and business entities which engage in data exchange through markets whose structure is mostly hidden from people.

Data are typically classified into three categories: first-party, which companies gather directly from their customers through their website, app, or customer-relationship-management system; second-party, which is another company’s first-party data and is acquired directly from it, and; third-party, which is collected, aggregated, and sold by specialised data vendors.

Despite the size of this market, how data are exchanged through it remains unknown to most people (how many of us know who can see our Facebook likes, Google searches, or Uber rides, and what they use these data for?).

Some data surveillance applications go beyond recording to predicting behavioural trends.

Predictive analytics are used in healthcare, public policy, and management to render organisations and people more productive. Growing in popularity, these practices have raised serious ethical concerns around social inequality, social discrimination, and privacy. They have also sparked a debate about what predictive big data can be used for.

It’s nudging us

A more worrying trend is the use of big data to manipulate human behaviour at scale by incentivising “appropriate” activities, and penalising “inappropriate” activities. In recent years, governments in the UK, US, and Australia have been experimenting with attempts to “correct” the behaviour of their citizens through “nudge units”.

With the application of big data, the scope of such efforts can be greatly extended. For instance, based on data acquired (directly or indirectly) from your favourite health app, your insurance company could raise your rates if it determined your lifestyle to be unhealthy. Based on the same data, your bank could classify you as a “high-risk customer” and charge you a higher interest on your loan.

Using data from your smart car, your car insurance company could decrease your premium if it deemed your driving to be safe.

By signalling “appropriate behaviours” companies and governments aim to shape our behaviour. As the scope of data surveillance increases, more of our behaviours will be evaluated and “corrected” and this disciplinary drive will become increasingly inescapable.

With this disciplinary drive becoming routine, there is a danger we will start to accept it as the norm, and pattern our own behaviour to comply with external expectations, to the detriment of our free will.

The “datafication” of our lives is an undeniable trend which is impacting all of us. However, its societal consequences are not predetermined. We need to have an open discussion about its nature and implications, and about the kind of society we want to live in.

Author: Uri Gal, Associate Professor in Business Information Systems, University of Sydney

Do the governance experts at the World Bank have a governance problem?

From The Conversation.

As a source of financial and technical assistance to developing countries around the world, the World Bank should be an example of how to manage transparently, with accountability and inclusion. Yet the bank isn’t following the principles of good governance when it comes to the bank itself.

If the World Bank wants to stay relevant and a part of the process of creating global agreements, it needs to keep up with other agencies that are improving transparency. If it doesn’t, it risks becoming redundant to similar international agencies like the Asian Infrastructure Investment Bank.

One striking example of how the bank is falling behind is in the selection process of its president. The incumbent president of the World Bank, Jim Kim, was recently appointed for a second term in a process that was largely devoid of transparency.

The selection process has been mired in intense internal lobbying from both the president and stakeholders in his candidacy, both through personal visits to countries such as China and India and then at multilateral forums such as the G7 meeting in Japan this May. As incumbent, the president has the power to make deals and promises contingent upon his selection.

The process normally lasts several months so that countries might offer alternative candidates, but this was cut to mere weeks this time around. That made it impossible for other countries to put forth other qualified names.

What is the biggest consequence of the World Bank refusing to apply its own medicine? Perhaps the most severe effect is the resulting organisational disgruntlement.

The World Bank Staff Association has openly articulated its disappointment in a published letter:

“We preach principles of good governance, transparency, diversity, international competition, and merit-based selection. Unfortunately, none of these principles have applied to the appointment of past World Bank Group Presidents.”

Discontent among senior and mid-level staff is rife. In four years, the president’s office has had five chiefs-of-staff.

Heads of departments are leaving. According to a survey, World Bank staff also fear blowing the whistle. Only a third believed that senior management created “a culture of openness and trust”.

It’s been a problem for a while

The World Bank’s governance problem has been a concern for many years. For the past three decades at least, academics have called for the bank’s leadership selection process, its constitutional rules, decision-making procedures, staffing and expertise and the balancing of stakeholders’ rights to be reconsidered.

In the early 1990s the World Bank became a strong advocate of high standards of “legitimacy”, “representation” and “accountability” for the countries that sought to borrow from the bank. These standards were given the collective title of “good governance”.

Yet the World Bank has had a difficult time demonstrating this in its own workings. Part of the problem lies in what the World Bank considers participation and inclusion – a problem of double standards.

Typically, the World Bank has thought of “participation” as informing stakeholders of what it is doing, rather than taking input from stakeholders in the decision-making process. For example, the bank tells stakeholders who should be president, rather than having a transparent selection process where stakeholders have a say.

This extends to other aspects of the bank, such as in the priorities and type of research it conducts. This should reflect the bank’s diverse stakeholders, but that’s often not the case.

For example, during the presidency of Ronald Reagan, when the neoliberal agenda came to the front-and-centre of political discourse, the World Bank disfavoured research on debt relief because it was an approach in line with the political left.

The risk of becoming redundant

Consider the United Nations, a similar multinational body which is also 70 years old. It has gone through far more reform, which is why UN candidates are being more transparently elected over a longer time. While it too does not have a fully transparent process, at least UN nominees are able to present a stronger case for their candidature and devise more thorough plans, while also making these plans more evident to all stakeholders.

In the longer run, the question of exercising good governance is part of the World Bank’s need to stay relevant. The World Bank operates in a world very different from that which existed when it was created. This was immediately after the second world war, when the allied countries were assigned voting shares based on their gold and dollar holdings.

If important countries consider the World Bank to be a relic of a bygone era, they will find alternative mechanisms to conduct multilateral engagements. This is already happening through powerful new institutions such as the China-led Asian Infrastructure Investment Bank, which has begun approving lending in conjunction with other banks for projects in countries such as Pakistan.

The World Bank promised as far back as 2011 to improve transparency, but changes haven’t been made.

The World Bank Staff Association recommends the following:

“an international call for candidates, women and men, with clear qualification criteria, followed by nominations and a long-listing process handled by a credible search committee, together with a transparent interview and selection process”.

Through such changes, the governance experts might finally begin to resolve their own governance problem.

Author: Usman W. Chohan, Doctoral Candidate, Policy Reform and Economics, UNSW Australia

How alternative finance can offer a better banking future

From The Conversation.

Do you know where your money is? If you immediately think of cash, then there’s a good chance you’ve just patted a pocket or looked in a purse to reassure yourself. But if you thought of your savings and investments, then there’s actually a good chance you have no idea where your money is – other than to draw the quick (and misleading) conclusion that it is “safely in the bank”.

After all, where else would it be?

We recently saw the revelation that another major bank – this time Germany’s Deutsche Bank – could collapse. According to Germany’s economy minister, Sigmar Gabriel, it “made speculation its business model”, though now claims to be the “victim of speculators”.

But there is an alternative to this banking model that isn’t based on financial speculation. Research that colleagues and I have done into economic resilience would suggest that many people might be better off investing in alternative finance and, to encourage them, the government should guarantee alternative finance investments up to a maximum of £5,000.

Finally, an alternative

The UK is the home of Europe’s rapidly-growing alternative finance (or “alt fin”) movement, which is fast becoming a major player in the financial sector. Valued at £3.2 billion in 2015, a big part of its appeal is that we can often know more precisely where our money is and what it is doing. Whereas with mainstream banks, your money is used to fund various investments, often on financial markets that you have no control over, investors in alternative finance projects tend to invest in a specific project.

Alternative finance has been around since at least 2004, with the founding of online peer-to-peer lender, Zopa. But a far broader range of options have sprung up since the financial crisis. In our research, we found online peer-to-peer platforms that bypass the banks entirely, community share schemes that allow both direct investment in and democratic influence of a given project, and crowdfunding to support a local SME business take off. Greater transparency so that people know exactly where their money is and what it is doing is key.

Beyond this there are many different financial arrangements, all with different implications for funders and fundraisers. Peer-to-peer loans, bonds and debentures have to be repaid with interest. Community shares are regulated to keep dividend payments low, but give shareholders a say in the governance of the fundraising organisation.

Government backing?

Despite the very public loss of reputation suffered by high street banks following the financial crisis in 2007, we still seem to trust them with our money. In wondering how mainstream banks were able to return so quickly to “business as usual”, one answer is that we did too. A big reason for this might be that we didn’t know what else we could do with our money and the perceived risks of new ways of investing.

There are understandable anxieties about alternative investments at a time of significant restraints on household budgets, especially when two in five of the UK workforce have less than £100 in savings. This is why the government should step in and guarantee retail investments in alternative finance.

It’s a relatively small ask compared to the Financial Services Compensation Scheme, which is the current guarantee of cash deposited in UK-regulated accounts in banks and building societies up to a limit of £75,000 – even though such investments provide very little financial return to savers or deliver tangible social or environmental value from this money.

Alt fin tries to provide us with a way of diverting our money away from habitual patterns of economic behaviour. And it is delivering real social and environmental benefit to communities. These include renewable energy schemes, community home building, or renovating disused land into play spaces for children.
One of the banks that has been bailed out by the government since the financial crisis. Elliott Brown, CC BY
We argue that the government should help the process of building trust in alternative finance investments by providing this maximum guarantee with the condition that investment is directed into the “real economy” and not just financial markets.

Proceed with caution

Of course, any such guarantee should be approached with caution. After all, this suggests a breaking of the “risk/return” cycle – a basic tenet of banking that with any investment comes risk – and potentially opens the way to abuse, with people making risky investments with the comfort of a government backstop.

But if we are to build a more resilient financial system, we need a far greater range of options for where to direct our money. Alternative finance is not perfect, and a growing entanglement with mainstream finance may see the sector start to resemble mainstream practices. To manage the process of truly democratising finance and providing genuine alternatives to putting our money “safely in the bank”, the Financial Conduct Authority should play a leading role as regulator.

And if a taxpayer guarantee sounds contentious, it is worth remembering that the risk/return cycle was significantly broken by the process of bailing out the banks in 2007-08. Banks, too big to fail and to jail, currently create 97% of “money” through credit, preferring to speculate on money and financial markets in the hope of creating profit, rather than investing in the “real economy”.

If the practice is good for safeguarding the hidden financial speculation of the few, why not for safeguarding the transparent material social and environmental gains for the many?

In continuing to assume the mainstream banks are the safest place to invest, we might be missing the opportunity to make our money do good by working harder for us and our communities.

Author: Mark Davis, Associate Professor of Sociology, University of Leeds

Eager homebuyers still falling victim to shadowy rent-to-buy deals

From The Conversation.

Those looking to get a piece of the Australian dream of buying a home are still falling victim to the shadow property market of rent-to-buy deals, a new report shows.

In a typical rent-to-buy deal, the buyer agrees to an inflated property price, then pays market rent (or above), an “option fee” to buy the property in several years’ time, and in some cases a deposit and outgoings. The option fees are at least partly credited to the purchase price. The catch is that the buyer has to refinance with a mainstream lender to buy the home by the time the rent-to-buy deal expires.

People who have signed up to rent-to-buy deals find it virtually impossible to refinance. The Consumer Action Law Centre has seen no examples of successful rent-to-buy deals. They are extremely risky financially and the legal protections for buyers are grossly inadequate.

In vendor finance schemes, the buyer agrees to an inflated property price, then pays a deposit, instalments, outgoings and, in some cases, their First Home Owner Grant. Vendor finance agreements are typically for between two and 30 years. However, the buyer will often need to refinance within several years and will face the same obstacles as in rent-to-buy deals.

The Consumer Action Law Centre report, Fringe Dwellings: The vendor finance and rent-to-buy housing black market, collected and published 10 case studies from Victoria and beyond. The studies detail the experiences of people across Australia who have bought into these schemes. There are some striking similarities between these cases.

The sales pitch is the same – “Own a home quickly and easily”, “Buy without a bank!”, “Tell the landlord to shove it!” and so on. The dream of home ownership is a very easy sell, especially to someone who thought it was out of their reach.

There are many examples of failed vendor finance deals. Many buyers have paid significant amounts towards what they hope will be their home, only to find they cannot complete the purchase and will lose everything.

The people who fall victim to these schemes don’t have the income, savings or credit history to get a mortgage. Often the banks have said no and people are drawn in by someone who seems to understands their predicament and finally says yes.

In most cases the deals were unaffordable from the beginning. The purchase price is well in excess of market value and the repayments are much higher than you’d see in a mainstream mortgage.

How people fall into the trap

Owning your own home is at the centre of the modern Australian dream. Yet this dream is increasingly out of reach of many as housing affordability worsens with rocketing property prices in our major cities. A report published earlier this year by the Australian Population Research Institute cited international research data ranking Sydney and Melbourne as second and fourth respectively among the most unaffordable locations in the world across the 86 major markets surveyed.

So it’s no wonder that people will go to extreme lengths, and are susceptible to the seductions of smooth-talking property spruikers, as they chase the dream of home ownership.

The legal framework is almost impossible for an individual to navigate without expert advice. In Victoria alone, there are nine pieces of state and federal legislation that can apply to rent-to-buy and/or vendor finance arrangements.

Although the various deals are sold to buyers in much the same way, it’s when they unravel that the complicated nature of the deals comes to light. This is essentially a black market, because it does not sit within established property markets or laws.

How common is this in Australia?

Such schemes have a long history in Australia and elsewhere but have achieved somewhat of a renaissance with the rise of the people who promote these schemes.

Unfortunately, it is difficult to identify how many people have entered into these sorts of schemes due to a lack of available data. Answers to questions in the census also do not provide this information. For the most part, therefore, these transactions are invisible.

As the property has not changed hands, there is no record on the title to the land and consumers rarely register caveats. However, the Consumer Action Law Centre and other legal services around Australia have assisted clients regarding these schemes in recent years.

In addition to this, there is an unhealthy level of interest in getting involved in these schemes. Thousands of potential brokers have attended vendor finance and rent-to-buy promotions in Australia. We Buy Houses Pty Ltd, the biggest of the operators, had a turnover of $20 million between January 2011 and June 2014. The role that some lawyers play in the establishment of the schemes is another concern.

People who use the rent-to-buy schemes may or may not fall under the protection of the law. Dan Peled/AAP

What can be done?

These schemes operate in a legal twilight zone. The patchwork of state and federal laws does not adequately regulate these transactions.

Depending on the structure of the particular transaction and the jurisdiction in which it occurs, some consumers may qualify for some legal protection while others simply fall through the cracks. Given the already onerous financial and emotional burdens incurred, consumers may recoil at the prospect of further expense and stress through engagement with the legal system.

Obviously the best course is to discourage consumers from entering into these transactions in the first place, so more public awareness of the pitfalls is desirable. The reality is, however, that the tantalising prospect of home ownership will mean that many hopeful but vulnerable homebuyers will still enter into these transactions. Proactive legal intervention is necessary and urgent.

As suggested by the Consumer Action Law Centre, the most effective solution would be to prohibit such schemes. Their track record in Australia and elsewhere is poor. The only benefit flows to the broker.

Failing this, property investment advice should be more tightly regulated.

The Corporations Act and the Australian Securities and Investments Commission Act impose tight regulations upon other forms of financial advice and all of these transactions should be no exception. Also purveyors should be licensed under the national credit laws to ensure compliance with national standards and make sanctions available for non-compliance.

These measures are essential to ensure that advice provided complies with existing regulation, that consumers are aware of the pitfalls of the schemes and that an especially vulnerable cohort of consumers is protected.

Another concern is the coverage of existing national and state laws. It is ironic that, in many cases, these transactions do not fall under the national credit law, the cornerstone of responsible lending and protection from unjust contracts.

State legislatures, which have carriage of real property laws, also have a role to play. Again, depending on the the structure of the transaction, laws could potentially overlap and yet other scenarios are not addressed at all.

Finally, regulators should use consumer protection laws to pursue these schemes. These laws prohibit misleading or deceptive and unconscionable conduct – although proving these legal standards before a court can be onerous.

The Consumer Action Law Centre’s suggestion of an extension of the provisions to include unfair trading – especially within the context of the ongoing review of the Australian Consumer Law – is timely.

These types of shonky schemes are not new and their shortcomings cannot be denied. The desire for a home means that many consumers will be vulnerable, especially in a time of declining home affordability and tighter credit. It seems we have reached a point where a national approach to the regulation of these transactions is not just desirable, but essential.

Authors: Eileen Webb, Associate Professor, Curtin Law School, Curtin University; Allan Fels, Professorial Fellow, University of Melbourne