Cricket penalties for the finance sector - now that would be news

Cheating in cricket doesn’t actually hurt anyone. But the sorts of practices the royal commission has uncovered actually do.

ASIC chairman James Shipton. Picture: Britta Campion

One thing we can be sure of following the great cricket ball-tampering scandal of 2018 is that the incentive to tamper with cricket balls has diminished significantly.

The massive personal and ­financial losses Steve Smith, David Warner and Cameron Bancroft have endured will ­ensure other top grade cricketers think twice before considering the tactic: crying in public, condemnation by everyone from the PM down, bans from playing and millions of dollars in fees, sponsorships and lucrative post-sporting career options lost.

This hysterical reaction to what was a pretty minor event — sneakily trying to change the way a ball moves through the air — must ­reflect in part how rare cheating has become in elite cricket.

Ball tampering on the scale witnessed in South Africa isn’t common. Cheating is rare in sport ­because the moral hazards that blight other areas of life aren’t so pronounced. The pay-offs from cheating in sport can be great, yet the costs of discovery are greater again, and they fall squarely on the individuals who broke the rules.

The contrast with the corporate world couldn’t be greater. Indeed, if the cricket world penalised wrongdoing in the same way corporate cheating is treated, cricket fans themselves would have copped the fine for ball tampering.

When business people cheat, the companies they work for are punished, which is a weak disincentive. Blaming companies ­obfuscates bad individual behaviour. Fining companies punishes shareholders.

If the cricketing framework were applied in financial services, for instance, a royal commission into misconduct wouldn’t have happened.

It’s a pity the cricket saga ­exploded a few weeks after James Shipton’s first speech as head of the corporate watchdog ASIC, where he lamented a growing “trust deficit” in finance. “There are high levels of trust in the infrastructure that supports our (financial) system and enables the underlying financial plumbing to work … but financial services is one of the least trusted industries,” Mr Shipton said last month.

Unfortunately, Mr Shipton called for “greater levels of professionalism in finance” as the ­solution. “Industry and the people within it need to do more and need to take more of a leadership role,” he added. These are worthy sentiments but unless the cost-benefit calculus surrounding cheating changes dramatically, it’s hard to see how behaviour will change.

The last thing we need are more oaths, codes or pledges. Bankers aren’t Knights of the Round Table.

Promises to “pursue my ends with ethical restraint” or “speak out against wrongdoing and support others who do the same”, two of the seven parts of the new Banking and Finance Oath, are likely to be overwhelmed — understandably — by financial incentives.

The Turnbull government ­deserves credit for toughening up penalties for corporate wrong­doing but it hasn’t gone far enough.

In October it announced tougher penalties for breaking the Corporations Act. The maximum penalty for individuals is expected to rise from $200,000 to $525,000. Such sums are still dwarfed by the potential gains from wrongdoing, and are still far below the maximums imposed elsewhere, including $1.44 million in Hong Kong and $5.6m in the US. In December the government announced increased legal protection for whistleblowers, but they should also be given a financial ­incentive to speak out. A few weeks ago it ­announced another ASIC deputy commissioner on $597,000 a year, probably the least useful change.

It’s not only the corporate regulator that lacks teeth. An OECD report released last week found the penalties available to the competition regulator, the ACCC, were “lower than in comparable jurisdictions”.

To the extent policymakers want to curb misconduct in financial services, remuneration structures might also need to be changed. Perhaps no other industry ties its workers’ pay so closely to revenues, profits or rates of ­return. That makes perfect sense to top managers and no doubt some shareholders. But the ramifications might not be in the sector’s long-term interests.

It’s all very well to take sales targets off junior staff who sell mortgages or credit cards, but so long as more senior managers’ pay is tied to profits or rates of return — as is typically the case — other things that matter might be overlooked. Financial services licences shouldn’t be licences to gouge.

In his speech, Mr Shipton quoted economist John Kay’s book Other People’s Money at length, one of the best on banking since the financial crisis. Kay explained how misconduct in banking arises from the powerful incentives some staff can face to cheat. An “I’ll be gone, you’ll be gone” attitude permeated the sector, he argued, where high-paid finance workers flit between employers with little regard for problems they might leave for others down the track, by which time they will have moved.

Magellan, a fund manager, dropped its sponsorship of Cricket Australia, saying ball tampering went “to the heart of integrity”. The practice was “so inconsistent with our values that we (were) left with no option but to terminate our ongoing partnership with Cricket Australia”, it said.

Magellan moved into cricket advertising to appeal to retail ­investors, where margins are much higher — that is, it’s easier to make money off uninformed ­retail investors.

Dropping former captain Steve Smith as its “brand ambassador”, Commonwealth Bank insiders told The Australian last week the bank “couldn’t condone cheating”.

Cheating in cricket doesn’t ­actually hurt anyone. But the sorts of practices the royal commission and other inquiries have ­uncovered — such as burdening customers with credit they can’t sustain, charging exorbitant funds management fees or imposing penalty fees thousands of per cent higher than the cost of dealing with them — actually do.

Integrity and trust are valuable economic commodities because they reduce the cost of doing business. No one actually reads the pages of legalese at the end of their deposit account’s terms and conditions. Customers simply expect to be treated reasonably.