25/11/2019 - 14:43

Westpac too reliant on computers

25/11/2019 - 14:43


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OPINION: The Westpac transactions scandal exposes its dependence, and that of the other banks, on computerised processing to replace people and cut costs.

Westpac too reliant on computers
Regulator Austrac has filed for civil penalty orders against Westpac over its alleged contraventions of anti-money laundering laws. Photo: Gabriel Oliveira

OPINION: The Westpac transactions scandal exposes its dependence, and that of the other banks, on computerised processing to replace people and cut costs.

Heads are rolling at Westpac after revelations its money transfer systems were used by child exploiters and other criminals but it remains to be seen whether the bank and its counterparts have woken to the root cause of what went wrong – computer systems which have replaced people.

This is a topic which I have been banging on about for some time, partly because it is obvious the pursuit of profit by banks has replaced common sense, and because computerised processing of data does not have sufficient security safeguards, or simply does not work as designed.

In other words, the banks have created systems which transfer the work and responsibility from an employee to the customer and have glitches which permit their abuse.

The simplest example of this process of “accountability abrogation” is the way in which duties once performed by bank staff, such as depositing and withdrawing money, are jobs now left to customers, allegedly because it’s quicker but mainly because it’s cheaper for the banks.

Most of the time this shifting of costs from the bank to the customer works smoothly but it must have been blindingly obvious even when being set up that providing access to a bank’s money transfer systems opened the door to money laundering by criminal gangs – which it has.

The other two points slowly emerging from the Westpac crisis are less clear but will be played out over the next few months, and perhaps earlier.

The first is to try and pinpoint blame for the bank being used as part of a criminal conspiracy and, while the easiest target is Westpac chief executive Brian Hartzer, he did have a defence in that he was not the person who authorised the installation of the systems even if he is the first man overboard, with more to go.

Westpac chairman Lindsay Maxsted was right when he said there was no direct evidence the chief executive had failed, and tossing him overboard in a knee-jerk reaction might cause the bank more harm than any gain from improving its public image – which is why Maxsted is retiring early.

Sacking Mr Hartzer might provide the head on a stake that politicians, government bureaucrats and the wider public are calling for, but a human sacrifice will not fix the underlying problem of excess reliance on systems which lack oversight.

The second point is that the same over-reliance on computerised systems can be found in other financial products, as well as in the way many people get their daily news.

Investment advice using so-called robo advisers is becoming popular with some investment banks and stockbroking firms because it can be demonstrated that in some situations a computer makes better investment choices than a person.

What no-one seems to be considering is what happens when a crisis hits, which it always does, and computers launch an automated exit from a market, and they all try and sell at the same time.

In such a situation, the same question confronting the Westpac board will be asked: Who is responsible, the man who designed the computer program, the executive who bought it, or the computer itself?

The final word on replacing people with automated systems belongs to the media industry, where the rise of electronic delivery systems and slick forms of mass communication, such as Facebook and Twitter, have led to appalling examples of mass disinformation.

Because there are very few human checks of what people say or post on social media sites, it is possible to intermingle lies with facts to a point where no-one can separate the two and, while old-school media might have its own problems, it was never as damaging as social media is proving to be.

Proxy advice

While on the question of robo advice and tick-the-box systems, which rely on a process rather than a close look at the issues involved, there is the issue of proxy advice, a strange business which has a surprising connection to the Westpac crisis.

Just as the bank relied on a computer program to process money transfers, so too does proxy advice which assesses questions such as board diversity when recommending which way a shareholder should vote.

The result can be as laughable as it is stupid as seen in the case of the Harvey Norman board recently where one proxy adviser recommended voting against the re-election of the chief executive, Katie Page, and her replacement by serial corporate activist (and journalist) Stephen Mayne.

It is possible Mr Mayne would be an excellent director though his reputation is more one of professional stirrer than for his business knowledge.

But there is a deeper question in the proxy advice business that is being ignored and that’s the issue of why the business exists.

If an investor, whether private or as a fund manager, believes it makes sense to own shares in a particular company surely it also makes sense to take a personal interest in how the investment is managed.

Proxy advisers might be able to count the number of male and female directors and suggest that greater diversity is needed, or that directors fees are too high relative to the wider industry in which the company operates, but they do not look closely at how a business works.

Wesfarmers is perhaps an even better example of proxy advice running off the rails with one high-profile adviser telling subscribers to its service that executive remuneration was too generous, a bizarre suggestion given that Wesfarmers has comfortably out-performed most other stock exchange-listed companies.

In other words, the proxy adviser wants Wesfarmers to pay the staff less, possibly attract people with fewer skills, and risk the overall performance of the company by dumbing down the executive ranks.

Jason Beddow, chief executive of Argo Investments (Australia’s second biggest stock exchange-listed investor) put it best when he compared people using proxy advice with those who buy a house next to a noisy pub and then complain about the noise from the pub.

In other words, if you’re not aware of important issues in a company don’t buy its shares, and if you’re not happy, sell the shares.

Centres hold on

The future of shopping centres remains a hot topic, especially in the US where a showdown is looming between investors betting on widespread collapse of the sector and those who see a bright future as centre owners adjust to changing shopper patterns.

Carl Icahn, a billionaire investor, has emerged as the biggest short seller of “mall debt” in the US because he believes a wholesale clean-out is on the way.

So far, Mr Icahn has been a loser as centre owners find ways to retain tenants, but whether that can continue given the continued growth of internet retailing will be watched closely with events in the US likely to be replicated in Australia.


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