Raising fines key to limiting misconduct occurrence

Speaking at the National Consumer Data Policy Research Centre on Friday, chair of the Australian Competition and Consumer Commission (ACCC) Rod Sims remarked how “appalling” he finds it that banks have knowingly engaged in “inappropriate” behaviour because “they would lose out to their competitors if they did not”.

“I find such an approach, both by bankers and electricity retailers, appalling. Then you hear senior business executives express surprise at how they and their behaviour are perceived by the community,” Mr Sims lamented.

Mr Sims referred to remuneration structures that reward employees for reaching or exceeding certain targets, acknowledging that despite them being a “legitimate and effective way of encouraging sales teams”, they could lead to poor customer outcomes if “proper safeguards are not established to limit how staff or agents achieve their sales targets”.

The chair mentioned the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which showcased some of the negative consequences driven, at least in part, by problematic financial incentives. He further praised the efforts of activists in identifying and shining a light on bad behaviour, which Mr Sims believes is necessary to deter such behaviour in the future.

“Bad behaviour by a company can undermine its brand reputation. The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against such behaviours,” the ACCC chair explained.

“A key value of the royal commission has been to expose the poor behaviour of financial institutions to public scrutiny. The evidence about the conduct of AMP was particularly damning. The resulting damage to AMP’s brand reputation has been substantial.”

Referring to businesses more broadly, Mr Sims suggested that regulators need to do more to “internalise” the negative consequences of inappropriate behaviour, as the incentives for misconduct are stronger than the penalties for misconduct.

As such, the ACCC chair has urged the Parliament to pass a bill to increase penalties for breach of the Australian Consumer Law and the Competition and Consumer Act 2010. Specifically, the ACCC would like the $1.1 million fine for breaching the Australian Consumer Law to be increased to either $10 million, three times the gains generated from misconduct or 10 per cent of a company’s annual revenues.

“Just imagine if the penalties we have achieved recently were 10 to 20 times higher. Then perhaps some companies would not be behaving so badly. And then, when they say they put their customers first, it might have more validity than it does today,” Mr Sims said.

More regulation can be “harmful”

The chair acknowledged, however, that more regulation can “often be harmful to consumers”, particularly in industries that are already heavily regulated such as financial services. He referenced the banning of late fees and overdue payments in the energy sector, which then prompted providers to introduce “pay-on-time discounts”, making the “full price” of the bill large in comparison to the discounted early fee and larger than the previous fees charged for late payments.

“And this is just one example of a perverse policy outcome,” Mr Sims said.

A similar sentiment was communicated by Federal Treasurer Scott Morrison, who warned last month that the government’s response to the financial services royal commission will need to be careful not to “create a self-fulfilling problem” by creating “unnecessary regulation” that “suffocates the economy”.

Many mortgage industry players and economists have also noted the challenges of overregulation, including reduced credit availability to customers. For example, Semper Capital director Andrew Way argued that any increase in regulations that result in limiting the rights in default of lenders providing loans to small business is going to have an adverse effect on lending to small businesses.

In its recent report, titled Credit Crunch? Seven factors to consider, UBS stated that the royal commission’s “rigorous interpretation” of responsible lending is resulting in banks more critically assessing borrowers’ incomes and living expenses, which will continue to impact credit availability.

UBS also cautioned in a report to its customers earlier this year that a tightening of mortgage lending standards will have a “material impact on the economy”, noting that property prices are not dictated by the demand for and supply of housing, but rather the demand for and supply of credit.