Post hoc ergo propter hoc

After this, therefore because of this.

The recent Hayne Royal Commission has highlighted some appalling behaviours within the Australian Financial Services industry.  But how did we get here?

At the same time that financial services misconduct has been increasing, the resources and powers of the financial services regulators have been increasing.  Ditto the number of financial services regulations.

The usual arguments for increased regulations and regulatory powers is that misconduct is increasing.  But could it actually be that the causation is incorrect.  Could it actually be that increased regulations and regulatory powers are actually driving increased misconduct?

One of the unspoken costs of increased regulation is that increased the returns to scale.  To maintain a business in such environments requires bulk to cover the cost of compliance.  This crowds and pushes out the smaller independent operators.  The price of entry has now increased and keeps increasing.

In strategy lingo, this is known as a barrier to entry and affects competition.

And what happens when the returns to scale are huge?  You get scale operations.

For the same reason that TAFKAS believes that the best government is small close to the voter, he has a similar view about business.

The bank manager is a member of the community and his customers are his neighbours.  They would not want to walk down the street having ripped of their neighbours.  But the distance and the number of levels between the CBA CEO and the CBA teller allow the CEO the comfort of not having to look in to the eyes of those they screwed.  Much like the existence of Canberra protects the bureaucrats for seeing the messes they cause far away.

This distance is only enabled by the benefits of scale because small and local operators can’t support the compliance costs.  Small operators can’t support the cost of service from the regulatory industrial complex – the lawyers, accountants and advisors.  Which is why they no longer exist.

Most of the recent increased powers for ASIC are about making ASIC’s life easier and to increase the work and profitability of regulatory industrial complex services providers – all the dodgies need to do is hire one of the major law firms, accountants or advisors to continue their business.

ASIC spends 80% of its time and resources beating up on the people and businesses who honest are behaving properly and 20% of its time and resources chasing those who are misbehaving.  Should it not be the other way around?  Should not ASIC spend 80% of its time and resources on those misbehaving?

The financial services sector is increasingly concentrated, significantly in response to the increased cost of regulation and compliance.  And while the ACCC pursues free radge egg labeling, APRA is driving further concentration through industry super fund amalgamation.  Yes.  To make APRA’s life easier, it is better to have 4 Australian Super sized operations that to have 20 smaller funds.

One has to wonder for whose benefit is all this increased regulation.

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11 Responses to Post hoc ergo propter hoc

  1. Karabar

    The effect of scale is by the same token observed in society.
    If a town or city is small enough, good behaviour is to a large extent imposed by peer pressure.
    One can hardly go downtown without meeting someone he knows.
    But when these communities grow in size to millions, misconduct is overlooked, requiring more an more regulation, which begets more misconduct.

  2. stackja

    #3138922, posted on August 23, 2019 at 10:40 am

    And fewer face to face contacts.
    I have only had two face to face contacts with bank personnel in the past two years. I have only seen face to face my financial adviser about four times in the past two years. The days of face to face seemingly are rare today.

  3. max

    big government, big regulation, big cartels. There is no escape.

  4. John A

    TAFKAS, please take some more time to ensure that your text is comprehensible.

    Not all here have the luxury of sufficient reading time to decipher
    “One of the unspoken costs of increased regulation is that increased the returns to scale”
    “ASIC spends 80% of its time and resources beating up on the people and businesses who honest are behaving properly”
    “free radge egg labelling”

    Now to some substance.

    The usual arguments for increased regulations and regulatory powers is that misconduct is increasing. But could it actually be that the causation is incorrect. Could it actually be that increased regulations and regulatory powers are actually driving increased misconduct?

    As I understand you, your point is that as levels of regulation increase then more people within the regulated sector/s actually engage in behaviours previously not engaged in, that these are now defined as illegal, and that the diligent regulators (ha!) seize upon the miscreants/perpetrators and bring them to justice-nouveau.

    I put to you an alternative: that the level of actual misconduct may not have increased (much) but that the increase in regulation has defined more behaviours to be mis-behaviours than was previously the case. Consequently, more of those behaviours are exposed to view (eventually) and the miscreants are brought to justice-nouveau.

  5. Arnost

    As the costs of compliance with new regulations increase, to maintain and meet market profit expectations costs need to decrease elsewhere. And shortcuts and risks are taken.

  6. thefrollickingmole

    A week or 2 ago one of the big 4 banks escaped prosecution for irresponsible lending.

    This was 100% within the definition and would have been prosecuted if it had been my old business in the crosshairs.

    ASIC had alleged that Westpac breached responsible lending laws on up to 262,000 home loan approvals made using an automated process that relied on the Household Expenditure Measure benchmark, rather than using each applicant’s individually assessed living costs.

    This is 100% against the regulations for lenders, from pay-day, rental and car loan lenders.
    You can be lied to, but you arent allowed to use a “guesstimate” on individuals.

    An example:

    Thorn Group Limited, the company that operates Radio Rentals, has also agreed to pay a $2 million fine after admitting to breaking national consumer laws.

    The agreement follows a lengthy investigation by the Australian Securities and Investment Commission (ASIC) into the business’s lending practices, focusing on whether people signing the leases had the capacity to pay.


  7. Old Lefty

    And of course (as with p3d0 stuff), the so-called progressives will never acknowledge the cancerous effect of their assault on traditional moral values since the 60s. As CS Lewis said, we sneer at honour and pretend to be shocked when we find traitors in our midst; the same applies to spivs.

  8. Zatara

    the best government is small close to the voter

    Missing a word or a bit of punctuation?

  9. Bruce J

    Nobody seems to understand that problems caused by breeches of existing laws and/or regulations cannot be solved by imposing more laws and/or regulation. Logic says that failure to comply with the existing requirements just means that the new requirements will not be complied with either. In fact, the more restrictions imposed only ensures that there will be more non-compliance.

    The only way to improve the situation is to get the regulators to do the job they are employed to do. If the subject businesses do not comply over an extended period, sack the regulators for not performing.

  10. Terry

    “irresponsible lending”

    Why, exactly, are “The Banks” responsible for repaying the loan?

    If they are responsible for repaying the loan, then why is security needed in case the loan cannot or is not repaid by the borrower (after all, to comply with the law/regulations, they have already “ensured” that the intended borrower can repay the loan).

    Surely, the responsibility of the Lender is limited to primarily ensuring that they are being transparent with their lending contracts (ie not secretive, predatory or “unfair” – yes, that’s where laws/regulation should be focused) and secondarily to the owner of the funds being lent, that they are satisfied that the proposed loan represents an acceptable risk of repayment for the terms and conditions being offered (including suitable security).

    The major problem with consumer credit in Australia is the transference of responsibility of repayment (courtesy of Julia Gillard’s NCCP) from the borrower to the lender.

    Any system that allows a borrower to turn around and say, “well you should not have lent me the money in the first place” is fundamentally broken.

    No amount of new legislation/regulation can “fix” it, unless the term “fix” is meant to mean broken further.

    Look at the damage it has already done.

    Instead of Lenders simply satisfying themselves of the risk of a credit decision (and being allowed to take a risk, if they choose to), now they must take “reasonable steps” (wow, how the definition of “reasonable” seems to change) to dig into the lives of potential borrowers, including “active” credit reporting, big data matching and mining and on the list goes. (Prudent lending has been replaced by obsessive intrusion).

    This is simply big-government (lobbied by big-business) tightening the yoke on citizens they see as their servants rather than their masters.

    The government and its instruments should be limited to ensuring transparency and “fairness” (real fairness) between lender and borrower and ensuring that reward and risk are coupled, so that stupidly risky loans incur their own speed-brake limitations and are not made simply because there is no risk (or that risk is pushed onto someone else).

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