by Dr. Andrew D. Schmulow

Daily Post, 19 March 2015.

SOUTH Africa is well on its way to the adoption of a new financial system regime – the socalled Twin Peaks. This regime is modelled closely on Australia, and represents the most important financial system reforms since the Republic left the Gold Standard in 1932.

Twin Peaks is currently in vogue internationally. Credited as it is with Australia’s remarkable performance during the global financial crisis. Twin Peaks has been adopted in the Netherlands, New Zealand, the UK, variants in France and Germany, and is under consideration in China. Australia was first to implement it, fourteen years ago.

As the name suggests, two peak government bodies are created – one to enforce bank regulations – the Prudential Authority, and another to ensure market conduct and consumer protection – the Financial Sector Conduct Authority. Together with the SA Reserve Bank, these agencies will be charged with protecting South Africa from financial crises and international financial contagion, while ensuring that market participants behave, and do not abuse consumers.

Also published in The Star, The Pretoria News, Cape Times, Cape Argus, The Natal Mercury and Isolezwe.

by Dr. Andrew D. Schmulow

The Conversation, (2016), published electronically.

While ASIC has failed spectacularly to enforce the law to prosecute corrupt banks, regulators in the UK and the U.S. have brought guilty bankers to trial and collected massive fines. The University of WA’s Andrew Schmulow reports.

THE TURNBULL GOVERNMENT’S new laws to tackle manipulation of the bank bill swap rate may seem like a crackdown on badly behaving bank employees, but in reality the Australian Securities and Investments Commission (ASIC) hasn’t used the full force of the law in the past to prosecute.

So perhaps it’s time Australia followed the lead of the U.S. and the UK who are really using law to hold banks to account.

The bank bill swap rate (BBSW) is used to set rates on hundreds of trillions of dollars worth of transactions, including interest rates on credit cards, student loans and mortgages.

Banks also use the swap rate to determine the cost of borrowing from one another.

Three of Australia’s big four banks – ANZ, Westpac and NAB – were accused of manipulating this rate. These latest measures, which include civil and criminal liability for bankers found guilty, come six years after the scandal first broke.

This article first appeared in The Conversation. Also published in Independent Australia (Title: ‘New laws on bank malpractice useless in light of ASIC’s spectacular inaction‘).

by Dr. Andrew D. Schmulow

Published electronically by The London Institute of Banking & Finance.

Andy Schmulow examines what the scandal at Australia Westpac bank shows about wider failures of governance and culture in financial services and the need for personal accountability at the top.

As part of a panel discussion in late 2018, I was asked whether the findings of the [Australian] Royal Commission – into misconduct in the banking, superannuation and financial services industry (the Hayne inquiry) – would be the end of the problems facing the banking industry in Australia.

My response was that not only were we not at the end of the scandals – we were barely at the beginning.

Misconduct in Australia’s financial industry is as a result of a significant deterioration in culture and a relentless drive for profit.

Compliance departments have been starved of resources, and disempowered. Investments in infrastructure – like IT platforms capable of complying with a bank’s anti money-laundering and counter-terrorism financing obligations – have not been made.

Don’t forget, those obligations are laid down in legislation, and integral to bank licence conditions. We have witnessed leadership in these institutions incapable of reading the writing on the wall – writing large enough to be read from space.

Take two examples.

by Dr. Andrew D. Schmulow

The Conversation, (2015), published electronically.

The federal government has given itself until the end of the year to respond to the many recommendations contained within last year’s Financial System Inquiry report, but in one area it has already decided to act against the Chair David Murray’s advice.

From January 1, 2016 the government will levy a bank deposit tax. In all likelihood this will be 0.05% of deposits up to $250,000. The scheme would be limited to the big four (ANZ, NAB, CBA and Westpac). The thinking is that the big four are big enough to absorb the tax, without passing it onto depositors. The small banks, credit unions and friendly societies would be exempt.

Under the proposal, if a bank fails and needs a bail-out, the money generated by the tax (one estimate puts it at A$500 million annually) would foot the bill. Whether that’s correct is debatable. A modest A$10 billion bailout would require the scheme to run for twenty years.

Murray says this “ex ante”, or upfront arrangement, is the incorrect approach. He argues the levy should be “ex post” – in other words, the scheme should seek to collect the funds after a bank becomes insolvent, from all of the banks that remain. This, he argues, would only be necessary in the event that the government was not able to recoup its costs through the liquidation of the failed bank’s assets. Pretty unfair to those banks that were well run, and, in effect, a free pass to the ones that fail.

This article first appeared in The Conversation. Also published at Michael Yardney’s and The Australian.

by Dr. Andrew D. Schmulow

Financial World, published electronically by The London Institute of Banking & Finance in association with the Centre for the Study of Financial Innovation (CSFI).

In the wake of a series of Australian financial scandals, Andy Schmulow urges the government to ensure that reports on regulators’ performance are made public.

Australia is wrestling with the aftermath of 10 years of eye-popping financial scandals. Major institutions misappropriated billions – some estimates put remediation at more than AU$7bn. They lied to regulators with regularity and impunity. There was large-scale money-laundering – Commonwealth Bank alone breached compliance legislation 53,700 times – and there was regulatory capture of a kind that would make Wall Street raiders blush. Now, Australia’s Hayne Royal Commission (the Financial Services Royal Commission – FSRC) recommends a board of oversight to carry out ongoing reviews of the regulators – the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority. Yes, unfortunately, a regulator is needed to regulate the regulators. There are two main reasons why.

by Dr. Andrew D. Schmulow

The Conversation, (2015), published electronically.

The 14-year sentence handed to Tom Hayes, the Yen trader at the centre of the Libor-fixing scandal in the UK, is the longest sentence yet in a scandal that has cost his former employer UBS, and others, US$17 billion in fines.

Apart from his obvious guilt, Hayes went out of his way to antagonise the Court, and the Judge.

Hayes, described as the “Machiavelli of Libor”, will not be the last to suffer the consequences of this fraud. Unfortunately, however, it appears bank executives will not be among those punished. And this is curious. UBS either knew, turned a blind eye, or had such weak internal controls that Hayes was able to perpetrate this fraud for three some years.

UBS was no doubt motivated, in part, by the US$260 million Hayes made for it. All the while he was being courted by the usual suspects: Lehman Brothers and Goldman Sachs.

He then fell out with UBS, over pay, and joined Citibank. Within a year Citibank had discovered his fraud. What at UBS we were led to believe remained undiscovered for in excess of three years, Citi sacked him for.

by Dr. Andrew D. Schmulow

Published electronically in The Sydney Morning Herald Online, 15 April 2016.

Synopsis: There are cultural and ethical malpractices in Australian banks which our regulations do not address, and which our regulators struggle to contain. We need to find solutions, and the FSI failed to address the problem. A royal commission would.

The Global Financial Crisis (GFC) started out as the subprime disaster. Understanding that is important later in the story. So, very briefly, here are the significant bits: a large industry developed around writing dodgy loans, sold using pressure-cooker predatory lending, by unscrupulous lenders – none more so than Bank of America’s Countrywide Financial.

When that was not enough, banks, including Bank of America, engaged in document fraud on an industrial scale (something Commonwealth Bank employees dabbled in too). Those dodgy loans were sold in baskets called CDOs. Those CDOs, like drops of poison, were sold in the hundreds of billions of dollars worth to banks all over the world. In that way market misconduct and malpractices in the US home loan market became the subprime disaster, which then metastasised into a financial firestorm that swept the globe.

Also published in The Age.

by Dr. Andrew D. Schmulow and Dr. Patrick McConnell

Opinion Pieces, (2015), published electronically.

The Federal government announced this week that it will not proceed to introduce a deposit levy on Australian bank customers. Just as well. As ideas go it was both ill-advised and unnecessary.

First of all, Australia does not have a high rate of savings. Taxing savings is hardly sending the correct message, therefore. And especially from a government whose core philosophies are belt-tightening, paying off debts, and living within our means. In fact as messages go, this one was to be deeply counterproductive.

Secondly, it was not needed. Not even for its stated purpose of funding a depositor bail-out fund. Australian depositors will not, in all likelihood, need taxpayers to bail them out in the event that an Australian bank becomes insolvent, and for two reasons.

by Dr. Andrew D. Schmulow

South African Business Integrator, Vol. 6, no. 1, published by Media Xpose, March/August 2020 2020, pp. 78-80.

Following in-depth discussions with 25 of South Africa’s top financial firms, and the Royal Commission of Inquiry’s report on misconduct in the financial industry, it is encouraging to see that initial findings point to a financial services industry that comports well with standards of good conduct. However, gaps remain that need to be overcome.

by Dr. Andrew D. Schmulow

The Conversation, (2019), published electronically.

South Africa’s regulatory regime for the financial services sector is going through major changes. The question is whether companies can adapt to a principles-based approach. Or will they default back to rules-based compliance during the implementation of the Conduct of Financial Institutions Act? The aim of the new law is to improve financial sector conduct and ensure fairer outcomes, particularly for customers.

There are strong arguments that a business that prioritizes the values of good conduct will be rewarded with loyal customers. They, in turn, have a high degree of trust in the business, and are more likely to source products and services from it. There are also indications that more loyal customers are less concerned about marginal differences in the price of a product or service, when compared to those of competitors.

In a wider social context, the South African government has made it clear that it expects financial services companies to take seriously the idea of a social contract. And that this, is essentially, their licence to operate in the financial industry.

This article first appeared in The Conversation. Also published at BizCommunity and Tech Financials (Title: ‘SA Banks Should Take Their Role in Society More Seriously‘)