Op-ed: Bank inquiry shows that trust doesn’t work
People might be ready to trust machines more than humans, and they might be right to do so.
Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established on 14 December 2017 to shake the tree of Australia's banks and financial institutions, and see what falls out.
Quite a lot, it turns out.
The case study section of the interim report (PDF) is pushing 500 harrowing pages, and as Haynes said in Volume 1 (PDF) "it would be impossible for the Commission to investigate every instance... before the establishment of the Commission, banks and their associated entities had paid hundreds of millions of dollars of compensation to thousands of consumers".
It also wondered at what could feasibly be done to solve these problems in the future.
"The law already requires entities to "do all things necessary to ensure" that the services they are licensed to provide are provided "efficiently, honestly and fairly"," Haynes writes. "Passing some new law to say, again, "Do not do that", would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?" Haynes asks.
The initial investigation into why these things keep happening similarly hits a wall at the most obvious answer.
"Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty," Haynes writes. "How else is charging continuing advice fees to the dead to be explained?"
But perhaps there's an even more obvious answer running through all the findings? The Australian financial services industry employs some half a million people, and maybe any system that depends on 100% of participants being 100% trustworthy and of consistently sound judgement, especially when there's a financial incentive not to be, will obviously have a lot of problems.
Human error, unintentional and otherwise, is all but guaranteed. Trust, by definition, is risky business.
Carnival of errors
Trust is expensive, as you can see from just a small fraction of potential errors over the last few years and the fortune paid to make things right.
An agent of Freedom Insurance called a customer's voicemail and sang Old McDonald Had a Farm to them. The customer, whose surname was McDonald, was not happy. Freedom Insurance's trust in that employee's judgement might have been misplaced.
And some Westpac employees, between 2013 and 2016, set up accounts in their customers' names without their knowledge, and simulated activity in them in order to hit performance targets and earn bonuses. A subsequent investigation resulted in staff being fired.
Westpac or St George customers were also overcharged after discounts were not applied to 160,000 accounts. Since then the bank has paid out $9.2 million in compensation over the error.
A CBA-aligned adviser was caught forging the signatures of clients, including deceased customers, and a CBA internal review between February and March 2017 found breaches of anti-hawking laws in 50% of sampled calls from its business banking services unit. After further training this dropped to only 4% of cases. On a different occasion, CBA failed to refund charges incurred to fraud victims.
Over at ANZ, an "oversight" saw the bank failing to refund customers' accounts when they left cash in non-branch ATMs between 2011 and 2015. 23,500 customers received $2.5 million in compensation. It also reported the conduct of 39 advisers to ASIC in 2015 over "serious compliance concerns" and has made reports over the conduct of 41 advisers or representatives since then. Its concerns included advisers improperly using customer funds, falsifying documents and deliberately overcharging.
AMP has similarly identified 60 advisers with "potential serious compliance concerns" since 2009 and 370 advisers with "potential other compliance concerns".
NAB's planning division cancelled the tickets for two planners after customers received inappropriate advice, but forgot to follow through on it and they continued being planners. An NAB-aligned planner also misappropriated funds from a client's superannuation fund and trust account, and then invested it in a company in which the authorised representative was a director and shareholder.
Meanwhile, Macquarie had about 40 incidents involving the mishandling of client money in 2016 and 2017. It said more than half the incidents were caused by human error.
Haynes said some banks were having trouble even assembling a coherent picture of these kinds of issues, which might be leading to investigations breaking down into a series of case studies, which might then be too-easily dismissed as isolated incidents.
"Information presented in that way points too easily towards explaining what has happened as "a small number of people choosing to behave unethically" or as the product of "people, policies and processes that existed with a pocket of poor culture in that area at that time", he writes.
By the numbers, specifically the Deloitte Trust Index 2018 numbers, Australians don't trust banks in general. 51% said they "do not believe" banks "do what is good, right and fair". 25% said they "doubt" banks do. Only 1 in 5 said they believe banks do. People were much more positive towards their own banks. A full 1 in 3 said they feel their bank has their best interests at heart, and almost half said they trusted their bank to keep its promises – it's still south of lukewarm.
By the results, more than half of survey respondents are entrusting their money to an institution they don't trust.
It's a strange state of affairs.
Customers don't trust banks, banks don't trust their representatives, and bank representatives probably don't trust their customers. And this lack of trust is well founded. Beyond the seeming appearance of deliberate misbehaviour, there are the inevitable human errors from both customers and banks, because wherever you find humans you find human error.
And this lack of trust is expensive. Constantly re-inventing internal procedures, monitoring employee behaviour, paying the fines and reimbursements when errors creep in, and generally trying to fill the holes left by human error by cramming them full of money, is costing hundreds of millions if not billions of dollars.
The kicker is that no amount of spending can permanently solve these problems, because trust-based systems are inherently risky.
From one angle, this is exactly the problem that recent concepts of decentralisation, and public blockchains like bitcoin and Ethereum, were created to solve.
The most ardent cryptocurrency enthusiasts might see bitcoin replacing banks entirely, but a far more likely state of affairs might be for banks to gradually embrace the trustless nature of distributed ledger technology, and automate humans out of systems where possible.
Trust vs trustless
Trust comes with an inherent chance of failure, and by trusting something one is acknowledging the chance that this trust is misplaced.
This is why blockchain-based systems are often described as "trustless". The idea is that they are and can theoretically work with 100% reliability and be completely predictable on account of being immutable, decentralised and fully automated. As such, trust never enters the equation. You can simply know something will work in a certain way rather than hope it will.
Even without achieving full trustlessness, there's still a solid argument for minimising the trust required in certain situations.
For example, consider the difference between human bank-aligned financial advisers and existing robo advisers.
- Human bank-aligned financial adviser: This unknowable entity is motivated, and its performance impacted, by a range of factors beyond your control and beyond its control. There's a chance that its performance will be impacted by factors like your nationality, sexuality or skin colour, or an illogical predilection for certain asset classes. Performance may vary widely between different human advisers. A high degree of trust is required.
- Robo adviser: These robo advisers typically invest based on your chosen risk preferences. You can generally see previous returns for different risk preferences across different periods. Robo advisers will serve all customers equally and as programmed. There is a chance that a robo adviser creator might program it to behave unscrupulously. For example, by investing customer funds into its own parent company. A lower degree of trust is required.
Which seems riskier to you as a consumer?
And which one is more likely to operate for an extended period of time without encountering an error that might result in a customer losing trust in the adviser and its affiliated institution?
It might be counter-intuitive on a certain level, but replacing trust with automated systems where possible might actually be a solid way of improving consumer trust, by minimising the chances of things going wrong.
Face to face interactions are often seen as a good tool for building trust, but at the same time banks are encouraging customers to move online where possible. That the average customer now has much less face time with their banks might also be impacting people's trust to a certain extent.
And already, people are quite ready to trust robots and faceless entities.
"There is a trend here we can't ignore in my mind, so I don’t discount it," as said by Intercontinental Exchange CEO Jeffrey Sprecher previously. "People put more faith in a guy named Satoshi Nakamoto that no one has ever met than they do in the U.S. Fed."
"We see it in our internal research," notes eToro US managing director Guy Hirsch. "More and more people trust these new exchanges - eToro is one of them - than traditional markets. They have this trust that cryptocurrency exchanges are just more… trustworthy. It might be they understand the concepts of decentralisation and trustlessness."
One of the most striking examples might be the decentralised exchanges that let two anonymous people, sight unseen, trade with each other around the world. They don't have to trust the counterparty. Instead, they only need to trust the programming of the exchange they are using. And as long as a decentralised exchange is programmed correctly, and the blockchain holds up its side of the bargain, a user can continue to trade on that platform with complete trust(lessness) in it.
And decentralisation doesn't have to be an all or nothing move. A middle ground of increased automation and tracking might start serving banks extremely well, by reducing the chance of trust-damaging occasions, and the related costs. Public blockchain and smart contracts are still very much a long term goal.
But naturally, uprooting existing systems and replacing them with automation is easier said than done, and even an aggressive move towards it would probably take several years to really make an impact. But the technology is increasingly there, and the alternative is to keep shovelling money into the fire of human error.
And overall, the world might be coming to that point where people are more willing to trust technology than other humans.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA