Commbank plunder part of new world economic order

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The furore that has broken out about the Commonwealth Bank's wealth management advice, the result of outstanding work of Fairfax journalist Adele Ferguson, is a rare example of a big Australian company and the corporate regulator, the Australian Securities and Investments Commission (ASIC), being held to account.

For the most part, ASIC is reasonably skilled at pursuing small players. Its record against big players is less than distinguished.  Local business media, meanwhile, conscious of the need to maintain access to Australia's oligopolies, tends to be supine, a situation made worse by the shrinking number of journalists.

The problems at Commonwealth Bank are hardly a surprise. It is just the latest instance in the progressive domination of the financial sector, a phenomenon, known as 'financialisation', that is occurring in most developed economies.

In 2001, the largest industry sector in Australia was manufacturing, which accounted for about 12 per cent of GDP and about 12 per cent of employment. Financial services accounted for about 9 per cent of GDP and less than 4 per cent of employment.

A decade later, financial services accounted for the largest proportion of Australian GDP, 11 per cent. Manufacturing had fallen to 9 per cent. The finance sector's share of employment remained about th same. The Treasury estimates that $20 billion goes on super fees a year, which it believes is about $14 billion too high, based on international comparisons. The $20 billion equates with about 1 per cent of Australia's GDP.

There is a similar trend in Europe and America. In Britain, the financial sector's share of GDP leapt from 7 per cent in 2000 to over 12 per cent in 2007. The rise in America was more steady, increasing from 7 to 8 per cent over the same period. But the general trend is the same.

There has of course been slippage in the financial sectors of developed economies since the global financial crisis – although far less so in Australia, which has had a good Great Recession – but it is only a hiccup. The shift to making money from money, rather than making something useful to serve the real economy, remains relentless.

Financial firms like to think of themselves as businesses, and in the sense that they create products and sell them to customers, that is true. But they are more than that. Finance is a set of rules. After thirty years of financial 'de–regulation' – a nonsense, because rules cannot be deregulated – the rule makers have changed. Instead of governments being in charge of the system, 'de–regulation' has meant that private companies have been allowed to make up their own rules – a free–for–all that almost resulted in the collapse of the entire global banking system in 2008. By allowing finance to grow as big as it has, financiers have become our new sovereign.

This is the prism through which the Commonwealth Bank failings should be seen. Australia's four banks dominate banking to an unusual degree, and they dominate wealth management advice. About four fifths of advisers are essentially sales people for bank wealth management platforms (mostly former insurance sales people). It is hardly surprising, given this dominance, that they start setting their own rules. After all, they are collectively in charge of the market.

It is equally unsurprising that the Abbott government is uninterested about governing the finance sector. The 'de–regulation' ethic is now considered such a self–evident truth by most governments in the developed world, they cannot even imagine retaking control. Much better to let the industry 'self regulate', leaving governments not having to bear any responsibility.

Rarely has the dictum 'buyer beware' been more relevant. Every private business spruiks its own products and neglects to mention any shortcomings, and it is the same with financial advice. They can help clients navigate the rules of investment and tax and superannuation, although that is probably better coming from an accountant who has a more clearly defined professional obligation to act in the clients' interests.  But they cannot offer better than average investment returns, because nobody, or very few, can over time. It is not the case that by paying more for advice you get better quality. Indeed there is strong evidence that the more you pay an adviser the worse the returns will be in the long term (one reason for the rise of self managed super funds, in which you, in effect, pay yourself for advice). Neither is it the case that a history of good returns indicates that they will continue into the future. In fact, the opposite is usually the case.

So wealth management advice is a questionable service at the best of times. But the bigger issue is the trend in Western societies to make financiers our rulers. It is leading to continual asset bubbles, the making of money out of money. For example, the American economy rose by $1.49 trillion during the first quarter of 2014, but the real economy (as measured by GDP) actually contracted by 1 percent. Share price appreciation and real estate appreciation was responsible for $1.1 trillion. The obvious instance of asset appreciation in Australia is the soaring property market, which has greatly benefited the banks.

As the Pope and economist Thomas Pikkety have observed in recent times, the inequity created by capitalism is a growing concern. But the problem with this argument is that 'capitalism' is too broad a term. It encompasses many different types of socio–economic systems and includes business activity as well as financial activity. Indeed it is arguable that there is no such 'ism' as capitalism. The attack would be far better directed against the financialisation of developed economies. A new type of sovereign has emerged, and like all rulers they are cheerfully engaging in acts of plunder.


David JamesDavid James is a business journalist with a PhD in English literature. He edits Personal Super Investor.

Topic tags: David James, Commonwelth Bank, Commbank, economics, capitalism, finance, banking


 

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The advantages of a liberal arts degree are here demonstrated: complex matters eloquently and lucidly explained. Thank you, David James and Eureka Street.
F | 07 July 2014


Thank you David for your clarity, insightful comments and the important and helpful distinction that you make between the generic word 'capitalism'. and the more specific word 'financialisation'. The surrender of the present federal government to the financial oligarchs is particularly worrying. Paul Collins.
Paul Collins | 07 July 2014


Yes, an excellent clear exposition. So many of us on retirement have handed over management of money to financial planners, feeling we are incompetent in the area or could not be bothered. The best thing that could come out of the present scandals is that more people will make sure they have better knowledge of financial and super issues, and at least do more research than I did - I was fortunate in having an honest planner, unlike those employed by Commbank.
Rodney Wetherell | 07 July 2014


Perhaps many of the problems in the financial world are succinctly summed up in Matthew 6:24; "You cannot serve God and mammon."
Robert Liddy | 07 July 2014


A better and accurate description is "managerial economism". It is different from capitalism and far worse, It surrenders power fron human beings to institutions which are beyond the control of humans. The encyclical laborem exercens specifically distinguishes Managerial economism ftrom old style capitalism...It is far worse from the viewpoint of workers and people generally.
Jim Macken | 07 July 2014


To correct a few errors: Financial firms are businesses in the sense that they are businesses, not because they ‘like to think of themselves as businesses’. Implying Self Managed Super Fund trustees can “in effect, pay yourself for advice” can lead to serious trouble with the ATO. No credible theory shows past good returns indicate future bad returns. As Chartered Accountants ourselves, most accountants don’t make good advisors. They are too tax centric & gave woeful advice into tax driven agricultural schemes. The theory that ‘Financiers ruling us’ leads to bubbles has no economic/financial underpinnings whatsoever. ‘Making of money out of money’ may have been unacceptable in Shylock’s time, but most of us have moved on from that sorry episode in history. The industry doesn’t and will never self-regulate. That’s ASIC’s role. The vast majority of financial planners we know are good people doing the right thing by their clients. They hold professional qualifications, relevant degrees, years of experience and put their clients’ interests first. We are financial planners and it is something of which we are immensely proud. We make meaningful differences in our clients’ lives and their families are financially more secure because of our expert independent advice.
Tim Mackay | 07 July 2014


The current concerns about the inadequate response of the CEO of the CBA raise issues beyond the CBA executive. After all , the directors of this and other banks have ultimate responsibility for the banks 'evil deeds I intend to urge my family and friends to vote against the Remuneration Motion at the next AGM. If enough of the many thousands of CBA shareholders ,investors and stockholders in SMS s do likewise then ,I believe , we will see some real action.
john duggan | 07 July 2014