The Royal Commission into Misconduct in the Banking, Superannuation, and Finances Services Industry has uncovered some inexcusable behaviour. Charging client’s fees without providing services, pressured selling of insurance to a man with down syndrome, and thousands of breaches for providing unsolicited advice and insurance are just a few examples highlighted in the Royal Commission’s interim report released last Sunday.
Almost as damning has been the lack of response from regulators. According to the Royal Commission, “[w]hen misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done.”
But what most observers haven’t pieced together is that business misconduct and regulator inaction are two sides of the same coin: crony capitalism.
Crony capitalism is an economic system where government and business are linked. Governments provide favours to certain businesses, such as through direct subsidisation, favourable tax treatment, or erecting regulatory barriers to market entrants which stunts competition.
Those businesses return the favour by building a factory in a marginal seat, providing donations, or promotion of a broader political agenda through advertising.
Crony capitalism was epitomised by the Global Financial Crises of 2007-08 in the United States where banks were bailed out with taxpayer dollars at the expense of working-class Americans.
Some ideologues have tried to place the crises at the feet of free markets. However, there is nothing free about a market where government confiscates workers’ hard-earned income and uses it to bail out multi-billion dollar businesses and line the pockets of wealthy executives.
Capitalism proper, by contrast, is a system of profit and loss, risk and reward, intense competition between businesses, government neutrality, and level legal playing fields.
By definition, there is no room for government favouritism, special favours, or backroom lobbying in a capitalist system. These are all hallmarks of cronyism. And Australia’s financial sector is far more cronyist than it is capitalist.
Banks in Australia can profit without providing good customer service as a substantial part of their market share is guaranteed by government.
The “four pillars” policy prevents underperforming banks from being merged with or acquired by better performing banks.
Compulsory superannuation provides financial institutions with a guaranteed revenue stream.
The myriad of prudential and corporate regulations shields the big firms from smaller would-be competitors who cannot afford the expensive accountants, lawyers, and human resource departments to sift through the paperwork and red tape.
The implicit government guarantee of the major four banks who are “the too big to fail” means in the event a bank was to go under they would be bailed out by taxpayers, as occurred in the United States.
Finally, there is the issue of regulatory capture, where regulators act to advance the interest of the businesses they regulate rather than forward the “public interest” however defined.
Regulatory capture is unavoidable as staff from regulators routinely work for the businesses they once regulated. Regulatory officials do not want to be too harsh on businesses lest they undermine their future employment prospects.
This all gets to a broader point about the proper role of government. The more a business relies upon government for its commercial success, the more incentive there is for that business to lobby for favourable treatment.
Even the left-wing, taxpayer funded Grattan Institute found in a recent report that corporates in highly regulated industries donated the largest share of all donations in 2015-16 and 2016-17. The report also stated that “highly regulated industries lobby hardest”, and found that 45 per cent of clients on the federal lobby register in 2018 represented clients in highly regulated industries, compared with 15 per cent in less regulated industries.
The logic of these findings is to reduce the size, scope, and reach of government interference.
Banks should stand on their ability to meet the needs of consumers, shareholders, and employees, not through lobbying, rent-seeking, and special favours.
To achieve this, superannuation should be made voluntary. This would force financial institutions to offer better services to entice workers to give up their hard earned money, rather than automatically receiving a slice.
The four pillars policy should be abolished. This would put underperforming banks on notice that they are at risk of being taken over.
Government should make it clear that banks will not be bailed out if they fail. The “too big to fail” policy results in the socialisation of losses and the privatisation of profits.
And red tape and regulation should be slashed by, perhaps counter-intuitively, reducing the role of the major financial and corporate regulators.
The failures of Australia’s financial system highlighted in the Royal Commission’s interim report are substantial. But they are an unavoidable consequences of a crony capitalist system that is designed to benefit big business, big regulators, and big government at the expense of consumers, shareholders, and employees.
Free market capitalism, buttressed by highly competitive markets and the real threat of commercial failure, is the best way to safeguard and protect consumers.
This means substantially reducing the role of government putting banks at the mercy of the market.