Category Archives: Compliance

The wrong end of the stick!

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In a typical knee-jerk and censorial reaction, Australia’s Federal Parliament has recently approved legislation that will attempt to ban anyone under the age of 16 from accessing social media.

Knee-jerk, because the legislative process was rushed, with barely a 24 hour public consultation period. The policy itself was only aired less than 6 months earlier, and was not part of the Labor Government’s election manifesto in 2022.

Censorial, because Australia has a long history of heavy-handed censorship. I still recall when I lived in Adelaide in 1970 (aged 10), broadcasts of the children’s TV series, “Do Not Adjust Your Set” were accompanied by a “Mature Audience” rating – the same series which I had watched when it was first broadcast in the UK in 1967 during the tea-time slot!

As yet another example of government not understanding technology, the implementation details have been left deliberately vague. At its simplest, the technology companies behind the world’s most popular social media platforms (to be defined) will be responsible for compliance, while enforcement will likely come from the eSafety Commissioner (to be confirmed).

The Commissioner herself was somewhat critical of the new policy on its announcement, but has since “welcomed” the legislation, albeit with significant caveats.

From the perspective of both technology and privacy, the legislation is a joke. Whatever tools are going to be used, there will be ways around them (VPN, AI image filters…) And if tech companies are going to be required to hold yet more of our personal data, they just become a target for hackers and other malicious actors (cf. the great Optus data breach of 2022).

Even the Australian Human Rights Commission has been equivocal in showing any support for (or criticism of) the new law. While the “pros” may seem laudable, they are very generic and can be achieved by other, more specific and less onerous means. As for the “cons”, they are very significant, with serious implications and unintended consequences for personal privacy and individual freedoms.

Of course, domestic and international news media are taking a keen interest in Australia’s policy. The Federal Government is used to picking fights with social media companies (on paying for news content), tobacco giants (on plain packaging) and the vaping industry (restricting sales via pharmacies only), so is probably unconcerned about its public image abroad. And while some of this interest attempts to understand the ban and its implications (here and overseas), others such as Amnesty International, have been more critical. If anything, the ban will likely have a negative impact on Australia’s score for internet freedom, as assessed by Freedom House.

The aim of reducing, mitigating or removing “harm” experienced on-line is no doubt an admirable cause. But let’s consider the following:

  • On-line platforms such as social media are simply reflections of the society we live in. Such ills are not unique or limited to Facebook and others. Surely it would be far better to examine and address the root causes of such harms (and their real-world manifestations) rather than some of the on-line outcomes? This feels like a band-aid solution – totally inappropriate, based on the wrong diagnosis.
  • When it comes to addressing on-line abuse and bullying, our politicians need to think about their own behaviour. Their Orwellian use of language, their Parliamentary performances, their manipulation of the media for personal grandstanding, and their “calling out” of anything that does not accord with their own political dogma (while downplaying the numerous rorts, murky back-room deals and factional conflicts that pass for “party politics”). I can’t help thinking that the social media ban is either a deflection from their own failings, or a weird mea culpa where everyone else is having to pay the price for Parliamentary indiscretions.
  • A blanket “one size fits all” ban fails to recognise that children and young people mature and develop at different rates. Why is 16 seen as the magic age? (There are plenty of “dick heads” in their 20s, 30s, 40s etc. who get to vote, drive, reproduce and stand for public office, as well as post on social media…) From about the age of 12, I started reading books that would probably be deemed beyond my years. As a consequence, I by-passed young adult fiction, because much of it was naff in my opinion. Novels such as “Decline and Fall”, “A Clockwork Orange” or “The Drowned World” were essential parts of my formative reading. And let’s remember that as highly critical and critically acclaimed works of fiction, they should neither be regarded as the individual views of their authors, nor should they serve as life manuals for their readers. The clue is in the word “fiction”.
  • Children and young people can gain enormous benefits from using social media – connecting with family and friends, finding people with like-minded interests, getting tips on hobbies and sports, researching ideas and information for their school projects, learning about other communities and countries, even getting their daily news. Why deny them access to these rich resources, just because the Federal Government has a dearth of effective policies on digital platforms, and can’t figure a way of curbing the harms without taking away the benefits (or imposing more restrictions) for everyone else?
  • In another area of social policy designed to address personal harm, Governments are engaging with strategies such as pill-testing at music festivals, because in that example, they know that an outright ban on recreational drugs is increasingly ineffective. Likewise, wider sex, drug and alcohol education for children and young people. Draconian laws like the under-16 social media ban can end up absolving parents, teachers and other community leaders from their own responsibilities for parenting, education, civic guidance and instilling a sense of individual accountability. So perhaps more effort needs to go into helping minors in how they navigate social media, and improving their resilience levels when dealing with unpleasant stuff they are bound to encounter. Plus, making all social media users aware that they are personally responsible for what they post, share and like. Just as we shouldn’t allow our kids to cycle out on the street without undertaking some basic road safety education, I’d rather see children becoming internet savvy from an early age – not just against on-line bullying, but to be alert to financial scams and other consumer traps.
  • Finally, the new Australian legislation was introduced by the Labor Government, and had support from the Liberal Opposition, but not much from the cross-benches in the Senate. So it’s hardly a multi-partisan Act despite the alleged amount of public support expressed. It may even be pandering to the more reactionary elements in our society – such as religious fundamentalists and social conservatives. For example, banning under-16s from using social media could prevent them from seeking help and advice on things like health and reproductive rights, forced marriage, wage theft, coercive relationships and domestic violence. Just some of the unintended consequences likely to come as a result of this ill-considered and hastily assembled piece of legislation.

Accounting for Crypto

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The period leading up to June 30 saw the usual raft of end of financial year updates, special offers and reminders from equipment suppliers, business service providers, accountants, tax specialists and even the ATO itself.

Crypto is certainly getting a lot of attention in Australia at the moment.

First, there is a Senate Select Committee on Australia as a Technology and Financial Centre, including “opportunities and risks in the digital asset and cryptocurrency sector”. The Select Committee is also looking at ways to define and/or potentially regulate crypto assets.

Second, ASIC has launched a public consultation process on crypto ETFs. This follows a desire from the regulator for more policy guidance from the Federal Government on the “regulatory perimeter” for crypto assets.

Third, the CPA published an op ed on the need for more clarity in crypto asset accounting. Not just in Australia, but across the world of International Financial Reporting Standards.

None of this should be surprising, as governments, regulators, tax authorities, professional bodies and institutional investors are still struggling to comprehend this new asset class, and the technology that underpins it.

Do crypto and digital assets represent currency, commodity, real estate, software license, network membership, utility access, payment mechanism, store of value, financial security, or unique property rights? Depending on the design, use case and origination of a token and its economic properties, the answer could be “yes” in each case – albeit not all at the same time.

In my consulting work with Brave New Coin, I get to speak to clients on a daily basis about their own crypto activities – be they exchanges, asset managers, accountants, tax authorities, regulators or investors. A lot of the discussion involves education – helping them to make sense of the technology and its potential. Some of the time they are simply asking our advice about how to address a particular issue, or they need a recommendation for a custodian or broker. A few share the regulatory challenges they face, and seek our perspective in how to navigate them. Others need more technical help, in building software solutions, or with on-chain analysis and wallet tracking (even though “free” block explorers already do a pretty good job in that regard). While many simply need a source of market data and indices for price discovery and NAV calculations, or a process to capture and track the crypto equivalents of corporate actions.

If anyone wonders how we are doing to make the reporting of crypto holdings as simple as equities or fixed income assets, my own experiences suggest we have a way to go. Legacy accounting and portfolio tools struggle with crypto: for example, can they calculate to 8 decimal places? how do they deal with an air drop? and how do they distinguish between Ether and Ethan Minerals (both use ETH as their ticker symbols), or Cardano and Adacel Technologies (both use ADA). And if I am an accountant, auditor, financial planner or adviser, how can I make sure I understand my clients’ portfolio of crypto investments, if I don’t have the appropriate tools?

Next week: Goya – allegories and reportage for the modern age

Responsibility vs Accountability

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One of the issues to have emerged from the response to the current coronavirus pandemic is the notion that “responsibility” is quite distinct from “accountability”.

In the Australian political arena, this is being played out in two specific aspects, both of which reveal some weaknesses in the Federal and State delineation. The first is the Ruby Princess, the passenger cruise ship that appears to have been a significant source of Covid19 infections from returning and in-bound travellers. In this case, blame or liability for the breach in quarantine measures is being kicked around between Border Force (Federal), and NSW Health (State): who was responsible and/or accountable for allowing infected passengers to disembark?

The second arises from the number of Covid19 cases among aged care residents in the Melbourne Metropolitan area. Here, the issue is the governance of aged care facilities as between privately-run homes (Federal oversight), and public homes (State operation). As an example of the strange delineation between Federal and State, “…the Victorian government mandates minimum nurse-to-resident ratios of up to one nurse for every seven residents during the day, the Commonwealth laws only call for an “adequate” number of “appropriately skilled” staff – both terms are undefined.”

As with all key areas of public policy and administration (health, education, social services), the relationship between different government departments and administrative bodies can be confusing and complex. In very broad terms, public funding comes from the Commonwealth (via direct Federal taxes and the redistribution of GST back to the States), since States have limited options to raise direct revenue (land taxes, stamp duty, payroll tax, and fees from licenses and permits). The Commonwealth funding can be allocated direct, or co-mingled with/co-dependent upon State funding. Likewise, service delivery can be direct by the Commonwealth, jointly with the States, or purely at the State (or even Local) level.

Within Victoria, there is an added dimension to the “responsibility” vs “accountability” debate, largely triggered by apparent failures in the oversight of the hotel quarantine programme. This in turn led to the second wave of Covid19 infections via community transmission (and the tragic number of deaths among aged care residents). The Premier has said he wasn’t responsible for the decision to use private firms to operate the security arrangements at the relevant hotels. In fact, the Premier appears not to have known (or wasn’t aware) who made that decision (or how/why it was made). But he does admit to being accountable for it.

Meanwhile, his departmental ministers have similarly denied knowing who made the decision, or they have said that it was a “multi-agency” response – maybe they are trying to shield each other in a strange show of cabinet collective responsibility, and to avoid apportioning direct blame to their colleagues. But if the government didn’t know who was supposed to be running the hotel quarantine programme, then surely the private security firms certainly couldn’t have known either – if so, who was paying them, and from whom did they take their orders and direction?

We are being drip-fed information on the failures in the hotel quarantine programme: did the AMA “write a letter” to the Victoria Department of Health & Human Services about their concerns over the hotel quarantine programme? did the DHHS provide “inappropriate advice” on the use of PPE by hotel security staff? did the Victorian Premier actually propose the hotel quarantine programme at National Cabinet, and then omit to request support from the police and/or the ADF?

It’s not surprising, therfore, that confusion reigns over who was responsible, and who is accountable; more importantly, who will be liable? What would be the situation if, for example, front line medical staff or employees in “high risk settings” have died from Covid19 as a result of community transmission within their workplace (itself stemming from the hotel breakout), and where there were inadequate workplace protections, especially if the latter were based on government advice and supervision?

The new offence of criminal manslaughter applies in Victoria since July 1, 2020. It will only apply to deaths caused since that date and as a result of “negligent conduct by an employer or other duty holders … or an officer of an organisation, which breaches certain duties under the Occupational Health and Safety Act 2004 (OHS Act) and causes the death of another person who was owed the duty”.

Finally, in reading around this topic, I came across an academic paper which discusses the treatment of responsibility, accountability and liability in the context of professional healthcare. In trying to define each from a clinical, professional and legal perspective, the author concluded that:

“….[R]esponsibility means to be responsible for ensuring that something is carried out whilst accountability moves beyond this to encompass the responsibility but adds a requirement that the healthcare professional provides an account of how they undertook the particular task. Liability moves the definition forward by adding a dimension of jeopardy to the definition of accountability. In a strict legal sense once the accountable person has provide their account they have fulfilled their duty. However, if the healthcare professional is liable rather than accountable for their action then the account they provide will be judged and, if found to be wanting, there may be a penalty for the healthcare professional.” (emphasis added)

I wonder if we should be assessing political and administrative liability by the same standard?

Next week: Startupbootcamp Demo Day – Sports & EventTech

 

 

Life After the Royal Commission – Be Careful What You Wish For….

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In the wake of the recommendations from the Royal Commission into Misconduct in the Financial Services Industry (aka the Hayne Report), one of the four major banks announced that it would be removing bonus payments for its front line tellers. This was supposedly in line with Hayne’s proposal that performance-linked remuneration, financial incentives and sales commissions in the financial services industry need to be restructured.

Image sourced from Small Caps

This prompted a mixed reaction among the public, based on some of the comments I have read on social media. Some felt that the tellers were being made scapegoats for the banks’ bigger failings – others felt that this was an inevitable outcome from the banking backlash.

Personally, I believe the announcement is potentially just one of the many likely “unforeseen consequences” to come out of the Royal Commission – I’m not saying this particular decision is good or bad, just that we need to be aware of what’s likely to happen based on Hayne’s key recommendations. Be careful what you wish for. And, as an underlying theme to this whole debate, let’s not forget that most Australians are shareholders (directly or indirectly via their Super) of the Four Pillar Banks (one of the greatest government-endorsed and legislatively protected market oligopolies around which also helped steer us through the GFC relatively unscathed….).

So, what else might we see?

First, as with financial advice, residential mortgages will move to a “buyer pays” model. Brokers would not be able to receive commissions from mortgage providers or other intermediaries based on the products they sell, recommend or refer – instead, mortgage applicants will be expected to pay for the services of a broker, who will therefore be under an obligation to find the best product for their client. But removing trailing commissions and other conflicted remuneration may also mean that brokers could seek to earn additional fees from their mortgage clients by re-contacting them a year or so later (with permission, of course) to inform them of a better deal. (Even now, lenders are not explicitly obliged to let existing customers know if they have a newer product that may be better for them). Some estimates suggest that fee-for-service will add about $3,000 to the initial cost of applying for a mortgage. Whether this will also lead to more competition among mortgage providers (who will no longer have to pay broker commissions) is not clear.

Second, the increased focus on acting in the best interests of the customer may result in placing all financial planners, brokers, advisors, insurers, and banks (and their officers, agents and employees) under a fiduciary duty of care to their clients – even if they are not directly managing specific assets, selling a specific product or advising on specific services or financial strategies. In other words, advisors etc. will be deemed to have taken ALL of a client’s needs and circumstances into account. (This is largely the result of the miss-selling of financial products, and the charging of fees for “no service”, by banks and their retail wealth management arms.)

Third, the increased cost of compliance will disproportionately impact smaller financial institutions such as credit unions, member-owned banks and other mutual societies, who came through the Royal Commission pretty much unscathed. Those costs will need to be passed on, to customers and members. Of course, there has also been some political debate around the need for some sort of banking levy – which will ultimately be passed on to shareholders or customers (who are often the same people…).

Fourth, and related to the above, the separation of roles between those superannuation trustees who act as both fund trustees and as responsible entities of managed investment schemes will have a knock-on effect in terms of operating and compliance costs. Such dual-regulated entities will have to decide whether to focus on their trustee role, or appoint a separate and independent responsible entity in respect of the asset management.

Fifth, the higher compliance and regulatory obligations may deter or inhibit more competition – either from new market entrants from overseas, or from local start-ups. The recent restricted ADI model (aimed at enabling challenger or neo-bank brands) has not exactly seen a raft of applications, and off-shore banks tend to come and go in successive waves, largely driven by market conditions. If lending standards are further tightened, it may be less attractive for foreign firms to set up local operations. In fact, there have been calls to force some smaller superannuation funds to merge with larger funds, or exit altogether for reasons of scale and efficiency – potentially taking out some of the competition in that sector. And if mortgage brokers have to move to a fee-for-service model, it will likely force some providers to exit the industry, as happened with the FOFA reforms in financial planning and wealth management.

Sixth, at the level of corporate governance, boards of financial services providers will need to be mindful of their duty to act in the best interests of the company – which has traditionally meant the share holders – and the increased duty of care towards their customers, which may at times be at complete odds. Non-executive directors willing to serve on the boards of banks and insurers may also be harder to find, at a time when there is already a high concentration of directors who sit on multiple boards across Australia’s biggest companies. So, board diversity may be even harder to achieve, especially if non-executive directorships become subject to even greater formal qualification, to ensure board members have appropriate professional experience, industry knowledge and technical expertise, as well as financial competence and risk management skills.

Finally, all this is happening as we face something of a credit squeeze (thanks to increased lending standards and greater provisioning for risk-weighted assets) heightened economic uncertainty (slowing GDP growth, lower productivity, wage stagnation, falling property prices), and an upcoming General Election campaign during which the Hayne Report will be held up as a key reason for why “things have to change”. The irony being that, except in a few areas, the complaints aired and wrong-doing uncovered during the Royal Commission could have been addressed by the regulators and enforcement agencies via existing laws on financial services, prudential standards, and general consumer protection (unfair contract terms, unconscionable conduct, deceptive and misleading behaviour). Plus, the Australian Financial Complaints Authority (which combines the remit of the former Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal) has a wide jurisdiction over consumer complaints relating to Credit, Finance and Loans, Insurance, Banking Deposits and Payments, Investments and Financial Advice, and Superannuation. And as with most External Dispute Resolution agencies, AFCA and its predecessors have an obligation to report on systemic issues within their industry.

Next week: Pitch X