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Australian Industrial Relations Commission Transcripts |
AUSCRIPT AUSTRALASIA PTY LTD
ABN 72 110 028 825
Level 6, 114-120 Castlereagh St SYDNEY NSW 2000
PO Box A2405 SYDNEY SOUTH NSW 1235
Tel:(02) 9238-6500 Fax:(02) 9238-6533
TRANSCRIPT OF PROCEEDINGS
O/N 13972
AUSTRALIAN INDUSTRIAL
RELATIONS COMMISSION
VICE PRESIDENT LAWLER
C2003/2484
FINANCE SECTOR UNION OF AUSTRALIA
and
COMMSEC TRADING LIMITED AND OTHERS
Notification pursuant to section 99 of the Act
of an industrial dispute re log of claims
SYDNEY
10.10 AM, TUESDAY, 28 SEPTEMBER 2004
Continued from 27.9.04
PN3599
THE VICE PRESIDENT: Yes, Mr Douglas.
PN3600
MR DOUGLAS: Your Honour, yesterday I think in the afternoon, but certainly after the adjournment, we filed a submission with respect to the admissibility of Professor Walker's evidence. It's a detailed submission in writing, your Honour. I don't wish to add to it in any oral way. We rely on what's in it and we ask for the Commission to address it. Your Honour, could I refer you, in that respect, to - - -
PN3601
THE VICE PRESIDENT: I presume Ms Gooley is going to seek to lead some evidence on the voir dire to attempt to fill out the qualification or otherwise of the witness, as it were on the voir dire, to the extent we have voir dire's here.
PN3602
MR DOUGLAS: Yes, your Honour and in that respect, your Honour, well, I do wish to refer to annexure 1, RGW1, the first annexure to Professor Walker's statement where some 67 publications are listed. Your Honour, we have some 40 of those publications in two bundles on either side and provide those to the Commission. You can give them back at some later stage if you don't wish to be weighed down by them, but those publications, your Honour, are obviously annexed to the Professor's statement in an attempt to demonstrate the expertise necessary to give the evidence that the union seeks him to give. It's on that basis that I ask the Commission to accept this material.
PN3603
THE VICE PRESIDENT: Well, I think it certainly is properly tendered, as it were, on the notion of voir dire in respect of the qualification of the expert. So if you wish to tender it, that's fine.
PN3604
MR DOUGLAS: Yes, thank you.
PN3605
THE VICE PRESIDENT: Ms Gooley, I take it you do wish to seek to lead some evidence from Professor Walker in relation to this qualification?
PN3606
MS GOOLEY: Well, the first thing I want to do, your Honour, is object to the application itself, before dealing with the question of Professor Walker's expertise.
PN3607
THE VICE PRESIDENT: You feel like you've been spived, do you?
PN3608
MS GOOLEY: Your Honour, nothing surprises me in this matter, but there are a number of reasons why I think you should not entertain this application. Professor Walker's statement was filed on 28 June 2004.
PN3609
MR DOUGLAS: Your Honour, could Professor Walker be outside during this debate?
PN3610
THE VICE PRESIDENT: Yes, I think that's probably appropriate. Professor Walker, if you could just wait outside, we'll be with you shortly. Thank you.
PN3611
MS GOOLEY: Thank you, your Honour. Professor Walker's report was filed on 28 June 2004. On 16 August 2004, Professor Hewson put in a reply to that statement. At that time there was no reservation placed on that reply by CommSec as to it being filed subject to an argument about the admissibility of Professor Walker's statement. The reply to Professor Walker's statement is in evidence before this Commission. It was tendered yesterday by Mr Douglas. So there was no reservation put on the tendering of that reply saying that it was subject to the objection as to whether Professor Walker's statement was admissible or not.
PN3612
We say it is absolutely inappropriate at this point in time for the respondents in this proceeding to now indicate that there was an objection to Professor Walker's evidence. It is after the completion of the cross-examination of Professor Hewson. Such cross-examination may have been different had Professor Walker's statement not been - if we'd been advised that Professor Walker's statement was going to be challenged. So this late application by the respondents in this proceeding has prejudiced the union's ability to put its case.
PN3613
So we say that this application should be rejected. Mr Douglas is, of course, free to cross-examine Professor Walker as to his expertise in an attempt to convince you not to give weight to Professor Walker's evidence. But we say an application to exclude Professor Walker's report should be rejected. If necessary, if you reject that submission, we will call Professor Walker to attest to his expertise, but we think it's far more appropriate that that be done as part of the giving of Professor Walker's evidence.
PN3614
THE VICE PRESIDENT: Mr Douglas, if things had been done strictly in accordance with Hoyle, the report in reply of Professor Hewson would not have been tendered until after Professor Walker's report had been received and would not have been tendered at all if Professor Walker's report was rejected. So what do you say as to the resolution of that particular difficulty that Ms Gooley relies upon?
PN3615
MR DOUGLAS: Well, your Honour, that may be so, but your Honour in a proceeding such as this it's not for us to suggest how the union should run its case or bring evidence to the Commission and I'm sure your Honour would agree with that. I was aware of this difficulty for some time.
PN3616
THE VICE PRESIDENT: I must say, I came equipped yesterday with extracts from Hale Creek and Clarke and Ryan and McKeeter and Sproole, expecting that there would be a debate about both of these reports, both Professor Hewson's and Professor Walker's.
PN3617
MR DOUGLAS: Yes and I took the view, your Honour, rightly or wrongly, that this union, experienced as it is, would probably alight on the difficulty that it faced and even as late as yesterday, take some step to cure that problem. Now, the risk we see, your Honour, in our submission, that the Commission faces is that the Commission could be moved, persuaded by evidence of a person who is, in fact, not an expert or not even near being an expert, in circumstances which could well be quite critical. Your Honour, I don't object - - -
PN3618
THE VICE PRESIDENT: I don't need to be persuaded on that part of the case. My only concern is that there is some substance or some merit in the complaint of Ms Gooley that the report in reply of Professor Hewson is in evidence.
PN3619
MR DOUGLAS: Well, your Honour, that could be cured by, for instance, the Commission rejecting that as evidence if Professor Walker's evidence doesn't come before it. But I must say, your Honour, that I don't object nor could I object in terms of fairness to Ms Gooley having an opportunity now to cure the difficulty that she faces by examining the Professor as to his expertise.
PN3620
THE VICE PRESIDENT: I can well imagine that if you had not tendered the report in reply, Ms Gooley's approach to cross-examination of Professor Hewson may have been very different.
PN3621
MR DOUGLAS: It may well have been, your Honour, but that's water under the bridge and we can't be blamed for that. It's the union's difficulty. They're aware of - you will remember some months back there was another person being spoken of who was going to give evidence on behalf of the union. Now, that person, if he'd come forward, could not have been objected to. So the difficulty has arisen because of the selection that the union has made as to the person that it wishes to call in reply to Professor Hewson.
PN3622
THE VICE PRESIDENT: Thank you, Mr Douglas. Ms Gooley, is there anything further you wish to say?
PN3623
MS GOOLEY: I was going to say no, your Honour. The difficulty has arisen because Mr Douglas, after having had his witness in the box yesterday, has decided that that late notice to advise us that they objected to our witness, that's why this difficulty has arisen. If Mr Douglas had given us notice of this prior to the calling of Professor Hewson, it would have been a different matter. This has arisen out of the difficulties they find themselves in, not the difficulties we find ourselves in.
PN3624
In relation to the idea that you can disavow yourself of Professor Hewson's evidence in reply, in this Commission, as opposed to a court of law, of course, not being, and I agree not being bound by the rules of evidence but not to ignore the rules of evidence, the weight that you give to the evidence is a matter for you, your Honour. The role of expert witnesses in these proceedings is to assist the Commission. To the extent that you are assisted is a decision for you. As I've said, Mr Douglas is able to cross-examine Professor Walker as to his expertise, that may cause you to give less weight to that evidence than we would wish you to give weight to that evidence, but that is a matter for you.
PN3625
Because, in the end, the person who has to make the decision as to whether CommSec is within the eligibility rules of the Finance Sector Union of Australia is not either Professor Hewson or Professor Walker, it is you, your Honour, and you have to weigh the evidence that is before you. We submit that the appropriate course is to allow Professor Walker to give his evidence, for Mr Douglas to be able to cross-examine him as to the matters that he wishes to cross-examine him on and for you then to give whatever weight is appropriate to that evidence.
PN3626
THE VICE PRESIDENT: I'm certain that the appropriate course is to permit Mr Douglas's objection to be made, but I am troubled about the implications of the tender of the report in reply of Professor Hewson in cross-examination, I'll withdraw that, evidence that was given by Professor Hewson which was based upon and directed towards matters in his report in reply. It seems to me that that can be cured by requiring Professor Hewson to come back for further cross-examination, if that becomes necessary.
PN3627
So I do not propose to disallow Mr Douglas from making his objection. It seems to me that the interests of justice favour the airing of the objection. Can Professor Walker be brought in?
PN3628
MS GOOLEY: May I request that the matter be stood down for 15 minutes?
PN3629
THE VICE PRESIDENT: Certainly. Do you have any objection to that course, Mr Douglas?
PN3630
MR DOUGLAS: No, your Honour.
PN3631
THE VICE PRESIDENT: I'll adjourn for 15 minutes.
SHORT ADJOURNMENT [10.20am]
RESUMED [10.40am]
PN3632
PN3633
THE VICE PRESIDENT: We're conducting a notional voir dire on the qualification of Professor Walker to give expert opinion such as those given in his report.
PN3634
MS GOOLEY: Thank you, your Honour.
PN3635
Professor Walker, could you state your name and address for the transcript please?---Robert Graham Walker (address supplied).
PN3636
Professor, did you attach to your statement in these proceedings a curriculum vitae?---I did.
PN3637
Do you have a copy of that with you, Professor Walker?---I have.
PN3638
Might that be marked, your Honour?
PN3639
THE VICE PRESIDENT: Any objection to marking that on the voir dire, on the notional - I'll refer to the voir dire, it's a notional voir dire that's being conducted.
PN3640
MR DOUGLAS: No, your Honour.
PN3641
PN3642
MS GOOLEY: Professor Walker, in that CV you are described as the Professor of Accounting at the University of New South Wales. What's your current position?---I'm a Professor in the School of Business at the University of Sydney.
**** ROBERT GRAHAM WALKER XN MS GOOLEY
PN3643
How long have you occupied that position?---Since 1 September.
PN3644
THE VICE PRESIDENT: The School of Business at the University of New South Wales is the functional equivalent of the Graduate School of Management at Macquarie?---I'm not quite sure what the Graduate School at Macquarie does. It seems to do a lot of overseas and external courses but I'm in the discipline of accounting formerly known as the Discipline of Accounting and Business Law. That changed a week or two ago as well. We provide under-graduate and graduate programs, masters degrees and supervised doctoral re. There are - it's not providing MBA style courses which are essentially compressed courses for people from different disciplines.
PN3645
So I think the answer is no?---No, not quite. If I drew a Venn diagram there would be a considerable overlap.
PN3646
Yes.
PN3647
MS GOOLEY: What are your responsibilities in your new position, Professor?---In the short term I've been asked to engage in some corrective and development activities and I guess continue pursuing re activities.
PN3648
What curriculum development activities are you engaging in?---One of the exercises I'm looking at is developing some graduate programs to serve the financial services industry. There seems to have a large industry which has developed in the last decade which I don't think courses provided by other universities are currently catering for. The extent to which I'm able to negotiate that I suppose depends on how successful I am in developing cooperation of colleagues but it's certainly something that I identified as one of my objectives when I was interviewed for the position.
**** ROBERT GRAHAM WALKER XN MS GOOLEY
PN3649
What specialised knowledge do you have of the finance services industry?---Well currently I'm the chairman of a state owned corporation which has a licence in terms of the FSR Act. That's the Superannuation Administration Corporation. It trades as Pillar Administration. It's the third largest superannuation administration in the country looking after about 900,000 accounts representing an investment of $45 billion or thereabouts. We have clients in both the public and private sectors. Most of our work currently is in the area of industry fund administration but we are actively in the market tendering to take on master trust business and looking at other products. We also provide corporate services to some clients. We manage allocated pensions.
PN3650
And you're the chairman of that company?---I am the chairman of the board. I've been so since - for five years. I've just been re-appointed for another four years.
PN3651
Is there any other basis on which you say you have specialised knowledge of the finance service industry?---Well reading some of the text books that have been mentioned in this case many people describe the financial intermediaries as being factories which process information and I guess I've had some considerable experience of that both being in an academic department with people who are in the area of information systems but also hands on experience in trying to manage migrations of complex software to administration. Before I came in it had just spent - well totally I suppose it spent $40 million in new software developments. Other activities I guess I haven't listed in my CV my private sector consultancies but I have acted on behalf of several credit unions. In one case I did a senior management review of the performance of management in a credit union for the board. In other instances I acted as an expert witness in relation to some reporting issues which involved litigation against auditors. I've also served as a consultant to the Insurance Council of Australia in relation to certain technical accounting reporting issues. That at least made me aware of some issues associated with that industry. I've done other preliminary work in the insurance industry in the course of litigation as an expert witness.
**** ROBERT GRAHAM WALKER XN MS GOOLEY
PN3652
What specialist knowledge do you have of the securities industry?---As an academic I've been very interested in the securities industry because I suppose a core activity of accounting is to provide information for participants in the securities industry. In the 1980s I was engaged by the National Companies and Securities Commission to review financial reporting requirements in terms of the then Companies Act and Codes and they're what I'd describe as the most fundamental change in the reporting requirements in Australia since the 1940s. In the course of that the concern was primarily about what information should be disclosed to the market by different categories of companies and also we introduced a range of new disclosures including disclosure requirements which hadn't then at that stage been addressed by the accounting profession in relation to segment reporting which deals with different industries.
PN3653
THE VICE PRESIDENT: Did you say segment reporting?---Segment reporting. It's a requirement that requires listed companies in particular to disclose the extent of their activities in different industry segments. The disclosure requirements are not entirely satisfactory but that's an area in which I had an academic interest. I think there are a couple of articles in my CV which dealt with disclosure by diversified companies; Abacus 1968 and a follow-up article in The Australian Accountant but that was one of the things that having written about it as an academic I was actually able to implement later on in that role. In relation to other disclosure requirements to the securities industry I could say the same. My main involvement has been in relation to financial reporting. I was engaged by the Australian Stock Exchange to provide advice on what form of disclosures might be required on a regular basis apart from annual reporting. At the time the Stock Exchange had been promoting the idea of quarterly reporting. I advocated what I termed continuous disclosure which was - that proposal was accepted by the Stock Exchange and published by them and later on embodied in the listing rules and subsequently incorporated in the Corporations Act. So I was particularly concerned with developing requirements for a combination of continuous disclosure and half yearly reporting but that was a major involvement with the Exchange. I am of course and as past chairman of the Australian Shareholders Association been actively interested in the operations of the securities industries and the kind of requirement, the regulatory requirements under which they operate.
**** ROBERT GRAHAM WALKER XN MS GOOLEY
PN3654
Professor, you have a Bachelor of Commerce and Master of Economics and a Doctorate of Philosophy?---Yes.
PN3655
Did you study course work in any of those degrees that was focused on banking and finance?---I did subjects in finance. In the course of the masters degree I recall the late Professor Ray Chambers doing a course on corporate failures and collapses and unfortunately many of the cases involved finance companies at that time because there were - and subsequently I wrote some papers looking at the accounting profession's response to company failures looking at particularly what were then official inspectors reports into corporate collapses particularly, sadly, finance companies were well represented.
PN3656
But there has been some course work that you've studied relating to banking and finance?---That term courses in banking and finance really didn't get on the books in the last decade. The School of Banking and Finance at the University of New South Wales was just a development of what had previously been the School of Finance and previously been mixed in with accounting.
PN3657
Are you saying until about a decade ago it wasn't an independently recognised discipline?---I think - I'm a bit of a traditionalist - in my day when I was doing my university studies there was a view that academic courses - curriculums should not be focused on specific industries but should be generic rather than provide a focus on a specific industry and that emphasis has changed somewhat lately, so you have courses in tourism management and sports management and highly specific courses, but certainly the content of the curriculum that was provided at that time was intended to be generic and to cover the circumstances of major industries in the course of illustrating broader issues. So I certainly did courses in business finance. I think I got a high distinction and came second but I don't place much weight on that because my father's firm donated the prize for the subject.
PN3658
Yes, Ms Gooley?
**** ROBERT GRAHAM WALKER XN MS GOOLEY
PN3659
MS GOOLEY: We were talking about your specialist knowledge of the securities industry and you said you had done consulting work with the Stock Exchange. Have you published material in relation to the Securities Industry?---Well, my CV does include some reference to the impact of certain types of disclosures on stock market prices and there's a paper there dealing with bank disclosure of secret reserves, it's impact on the Australian stock market published in the 1980s. In broad terms I can't quickly find others. I suppose a lot of the historical work I did in relation to the history of reporting regulations involved noting that there were differential requirements for different industries at certain stages in history. For example, one of the first disclosure requirements on record in the English law related to requirements for banks to place their financial statements on the wall of the bank. Previously the only other disclosure requirements in 1860s essentially took the form of optional articles of association which companies could, or could not, adopt but this was one of the first mandatory requirements. There were similar mandatory requirements introduced in Britain for insurance companies.
PN3660
So would you say that your studies have been studies of those involved in the finance industry?---I've certainly had considerable interest in the finance industry.
PN3661
Is that an area of your expertise?---Well I would argue that my expertise is more generalised but certainly agree that I can offer informed evidence about certain aspects of the financial services industry.
PN3662
What about expertise in the area of finance intermediaries?---Well that's a term like corporate governance which has become a buzz word in the last decade as I understand it. I think that the meaning of that is relatively self evident and I am happy to provide evidence about that.
PN3663
And have you looked at the CBAs accounts?---Yes.
PN3664
And do you have the expertise to be able to, by examining those accounts, to give us evidence about the nature of the industry of banking?---Because all listed companies are required to provide certain disclosures about the nature of their activities and to describe them in what are called segment reports, I believe I am able to do that.
**** ROBERT GRAHAM WALKER XN MS GOOLEY
PN3665
Do you have any particular expertise in the area of the interpretation of rules?---I guess that's been the heart of my professional career. I've defer of course that the proper interpretation of these matters in this instance is a matter for the Commission, but as one who's PhD studies were essentially documenting the history of disclosure requirements internationally in relation to corporations, UK, US and Australian in particular, it is a particular concern to me to examine the way in which rules are framed and how they are to be interpreted in the world of commerce. Subsequently, I have, when I was on the foundation member of the Accounting Standards Review Board, I was particularly concerned about the looseness of accounting rules as they were currently drafted and wrote papers published by the Accounting Standards Review Board about the future drafting of accounting standards and in that role had extensive consultations with the Attorney Generals Department. In my work with the National Companies and Securities Commission, apart from writing green papers which were outlying proposed reforms to corporate disclosure rules I also participated in working parties which reviewed responses, commented on ambiguities and assisted in the preparation of drafting instructions for new legislation. I don't claim to the a Duarkin or a Pierce but I claim some interest in that area.
PN3666
You talked before about different requirements for different segments of industry?---Yes.
PN3667
Did that require, in the work you did, for you to be able to determine which regulatory requirements applied to which segments of industry?---I think we were responsible for introducing differential disclosure requirements to different classes of company, but that was largely geared around size rather than industry classification, but the relevant accounting standards do require companies to provide information about the performance of segments of business. In the course of seeing that I am aware some of the debates that have gone on as to whether these rules should invoke the use of statistical standards for industry classification. In the event I think a degree of lobbying on the part of business avoided that and the current disclosure requirements essentially leave it up to directors of a company to self-determine what activities they are in and to describe them as they think appropriate.
**** ROBERT GRAHAM WALKER XN MS GOOLEY
PN3668
And as part of your studies, do you ever make assessments about whether those decisions are appropriate decisions of those directors?---I do have a cynical regard for some of the disclosures that I have seen because there is a propensity in many areas for some companies to simply describe themselves as being in a single area of business.
PN3669
THE VICE PRESIDENT: Is it part of the role of an accountant in the modern area to engage in classification exercises? It seems to me that just as a lay person that classification is at the heart of accounting?---Well classification is essential in order to record business transactions.
PN3670
In the modern accounting context is it necessary for accountants to be able to classify the business of their client as belonging to one industry or another for any particular purpose?---The major purpose is a mandatory requirement to comply with particular accounting standards on segment recording which, in a sense, delegated legislation because under the Corporations Act compliance with those is mandatory.
PN3671
And is the finance industry one of the nominated segments, identified segments?---Your Honour, as I've tried to say that was one of the debates whether the rules should actually identify particular industries and say you should disclose this, this and this. There are some specific requirements of course for organisations subject to the oversight of APRA that is to provide special purpose reports to them, but in terms of the public, what we call general purpose financial reports, the outcome of debate about this is that it is left to directors to themselves decide what classification is appropriate. It would be open for auditors to contest that if they thought it was inappropriate, but I've never seen that.
PN3672
Is classification of industry required for proper completion of taxation returns?---I don't hold myself out to be an expert on taxation. I'm just reflecting - - -
PN3673
Well in that case don't bother answering the question. Anything further. Ms Gooley?
**** ROBERT GRAHAM WALKER XN MS GOOLEY
PN3674
MS GOOLEY: No, your Honour.
PN3675
THE VICE PRESIDENT: Actually, can I ask this question, have you heard of the Australian and New Zealand standard industrial classification?---Yes.
PN3676
What is that?---Well there is a format of classification for statistical purposes. I think the Australian Bureau of Statistics issues its industry classification which categorises different types of activities in terms of complex codes. In part this is for overall aggregation of information about the workings of the economy and so forth. I've always had some difficulty with the methodologies used by the ABS in determining what they consider is relevant information to be provided to them for statistical purposes, but since they often don't seem to have regard interested users. There are formal classification schema issued by bodies such as the ABS. I haven't looked at it for some considerable time in detail but when I was looking at the series some years ago I certainly had regard to them.
PN3677
Mr Douglas?
PN3678
PN3679
MR DOUGLAS: Professor, I have got absolutely no doubt that you are an expert in accountancy, in that field is there a speciality that you have followed over your working life?---One of the joys of academic life is that one can dip into areas that take your interests for some considerable period of time, if I reflect backwards on my career I guess, I have been particularly interested in financial reporting issues, I concede that I have also been interested in accountability issues and the manner in which organisations in both the public and private sector are accountable to stake holders.
PN3680
Is that area, is it fair to describe that area as forensic accounting?---No.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3681
No; is there a particular description that fits that particular area of expertise?---I guess I am a generalist in terms of my re output and activities - - -
PN3682
Okay - - -?---But, well.
PN3683
Yes, Professor, I have been through most of the publications that you referred to in your CV - - -
PN3684
THE VICE PRESIDENT: You mean, through the text of the publications.
PN3685
MR DOUGLAS: Yes, your Honour.
PN3686
I read a great deal, there was much that I did not understand, I can assure you, certainly many of the formulae but my examination of some 40 or more of the 67 publications I did not see anywhere where you were involved, either alone or with someone else, in a discussion of the nature of the industry of banking or the finance industry or the activities of financial intermediaries, would that be correct?---I guess as an academic we seek to add to knowledge rather than simply describe institutional arrangements and so, that has not been my interest.
PN3687
No?---You take institutional arrangements as given - - -
PN3688
Yes?--- - - - in my discipline.
PN3689
However, I did notice that there were four papers that you referred to where some mention is made of either stock markets or the stock exchange, can I just refer you to those? If you go to page 2 of your CV just below the middle of the page there is an article referred to as Asset Revaluations and Stock Market Prices, is that the one that you were talking about earlier?---No.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3690
No?---I didn't mention that, no.
PN3691
In any event, the view, the understanding that I have of that particular paper is that there was no discussion in that, the nature of stock brokers, financial intermediaries, participants in the finance industry or the industry of banking, would you agree with that?---Of course not.
PN3692
Yes. Now, on the same page, the last publication, Audit Qualifications and Share Prices, I make the same comment as to that, would you agree with that, that that's accurate?---Yes.
PN3693
Then, if you go over the page, the second article listed on page 3, Banks Disclosure of Secret Reserves Impact on the Australian Stock Market, again, I make the same comment, there is no discussion there of the nature of banking or the finance industry or the activities of financial intermediaries or stock brokers?---Well, I would have to look at the paper actually, it's some time ago but I do believe it looked at a sample of banks and had to identify which entities were banks in order to identify the sample on which that re was based.
PN3694
Yes, I think it is fair to say that you named a number of banks but no other financial bodies of any kind?---Well, I'll take your word of it, it wouldn't have been necessarily relevant, anyway.
PN3695
In any event, it is over 20 years ago?---Yes, well, I've been around a while.
PN3696
Haven't we both. If you go to page 6, other publications, the last one where I notice some reference to the stock exchange, is the one in the middle of the page 6, In Capacity as a consultant the Australian stock exchange contribute extensively to improved reporting by listed companies. Now, that was the work that you referred to earlier?---Yes, I essentially wrote it, I think they changed two sentences.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3697
Yes. Now, that occurred back in 1990. Was that work that you conducted at the Australian stock exchange or back at your office at the university?---A bit of each, the stock exchange had a remarkable library of international listing rules which wasn't available normally to other people.
PN3698
And was that work related to your expertise as an accountant?---No, my knowledge of business, I would have thought.
PN3699
Knowledge of business?---Yes.
PN3700
Yes?---And the securities market.
PN3701
And what were you required to do?---I think I mentioned it earlier, the stock exchange had been promoting the idea of quarterly reporting and this had been resisted by the broking industry and companies and I was asked to see if I could win them over or come up with something different. I chose indeed, to come up with something which has turned out to be quite innovative internationally, so Mr Costello, the Treasurer says. It was actually based I think, largely on listing requirements of the New York and London stock exchanges but a combination of continuous disclosure requirements and half-yearly recording of the pro forma reports, subject to a form of assurance report from auditors and that - - -
PN3702
Apart from your own personal experiences as a lay person, as a citizen, what if any involvement, have you had with banks during your working life?---Directly I haven't been a director of a bank, no and I haven't - - -
PN3703
Have you been a consultant to a bank?---I'm trying to reflect on that. Not the banks, certainly credit unions, as I mentioned earlier.
PN3704
Yes, when was that?---As I said, I don't, I generally don't list private sector consultancies in my CV but it was in the last four or five years.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3705
Which credit unions?---One was a body called SGE the service credit union and another was, worked with the Qantas Credit Union.
PN3706
Qantas Credit Union?---Yes.
PN3707
Over what period of time?---That was - the latter was a case of expert evidence in the court, the former was the case of a management review of senior management and activities of the credit union and in the course or that I was aware of issues associated with systems and the like.
PN3708
What was the nature of the evidence that you were required to give, in short form, for Qantas, for the Qantas Credit Union?---As I mentioned earlier that was and I am repeating myself, that was to do with financial reporting issues. In the other credit union, as I said, it was to do with the performance of the credit union and the nature of its activities, problems with systems.
PN3709
Have you ever had a direct involvement with a - been employed by or consulted to any finance company?---No, no.
PN3710
Any financial intermediary?---No, no.
PN3711
Any stockbroker?---No, I'm a student of the industry, as I've said.
PN3712
Any real estate agent?---No, no.
PN3713
Boat broker?---I've sold boats and bought boats through brokers but - - -
PN3714
Well, we're in the same park.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3715
MS GOOLEY: I'm not surprised if you read the 46 articles.
PN3716
MR DOUGLAS: Cotton broker?---No.
PN3717
Livestock broker?---I've sold cattle and bought cattle brokers but I haven't actually served as a consultant to those industries, no.
PN3718
The curriculum development that you are involved in, have you begun that work?---Yes, yes.
PN3719
Do you have somebody assisting you?---No.
PN3720
No?---No.
PN3721
And what stage have you got to at this point?---Yes, early stages, I mean, one of the difficulties I find about the financial services industries is that it is very hard to pin down what specific skills are totally relevant to management of that industry, indeed, if I was to look at something generic I would have thought that having regard to the legislation and my experience in the industry, I mean, one of the major areas that people need to develop their understanding of, concerns first, internal controls, I think is fundamental to management of financial intermediaries, be they banks, brokers, superannuation administrators or others. Also, the management of systems, I think that some books that have been quoted in evidence by the parties in this case have said that in the modern day most financial intermediaries are factories processing information. So the quality of the systems that are used to process information I think is fundamental. The third area in which I would think there is a major area of interest, is just knowledge of local legislation and institutional arrangements involving APRA and ASIC. The difficulty with that, I mean that is totally ephemeral and policies change and one would certainly hope that some of the financial reporting legislation gets simplified and condensed but I would say they were the three broad areas, coupled also with a knowledge of accounting issues.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3722
Are you developing one or a number of courses in this development?---I am proposing to liaise with specialists in some of the disciplines to incorporate in their courses, material which I believe has a focus on that industry. I propose also to initiate a program of consultation with key players, including regulators and also, to utilise the services of some adjunct professors of the school at the university and others in the industry who serve on advisory committees to the faculty.
PN3723
Will these have an accounting slant?---The whole point of them is not to have a - to have a focus it would be a range of courses.
PN3724
So what will they be about?---Well I just mentioned, fundamentally there's an issue I believe in managing systems of internal control and also breach reporting, to have concerns about data integrity, to ensure that your systems are robust.
PN3725
So it is about information processing?---Largely to do with information processing but also, and one of the things I think has fallen between the cracks in my observation of this industry is a lack of concern with controls because even stockbrokers in my experience provide extensive reports to clients utilising information technology, I certainly get quarterly reports in my broker listing my portfolio and they incorporate information about historical cost and market gains and dividend yields and the like and they are fairly sophisticated systems but in principle the way in which courses in information technology have developed there seems to have been a bit of a gap in the development of linking that to financial controls and conversely the way in which the curriculum in many universities in accounting is developed there's predominantly a focus on financial reporting issues but not on business disciplines within the industry and my concern is to both ensure that some of the accounting courses pay greater attention to business disciplines but also have robust controls. In the middle of all this is the fact that changes in technology has enabled a great degree of what people call business process re engineering or business process improvement whereby the use of technology can eliminate a lot of the steps in processing information, thus cutting costs and improving efficiency. The latter is something of which I spent five years trying to assist the State Government. I was chairman of the body corporate council on the cost of Government and one of the challenges there was to try to develop shared corporate service centres and to encourage streamlining and business processes.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3726
Do you know anything about the alumina industry?---Not all that much, they are great users of electricity.
PN3727
Do you know whether they process information at a highly sophisticated level?---I think ALCOA is probably a subsidiary of an international multinational and some of the - - -
PN3728
It is not?---It's not.
PN3729
It was?---It was okay, I haven't been particularly interested in the resources sector as an investor.
PN3730
THE VICE PRESIDENT: You're giving evidence from the bar table now Mr Douglas.
PN3731
MR DOUGLAS: It is on the record in the Commission your Honour, it's not my evidence.
PN3732
Do you know anything about high quality steel production?---No.
PN3733
Do you know whether they process large volumes of information in producing high quality steel?---I'm sure they do but the nature of the information they process can be largely operational I would imagine if that's where you're leading.
PN3734
What about Qantas, they would process a very large amount of information, wouldn't they?---They would and I believe their corporate services centre is located in Arizona these days and a lot of their business processing is done off shore but that's the information I had when I was talking to some IT people some years ago.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3735
When did you do your Masters Degree?---I graduated in 1967.
PN3736
And your PhD?---I graduated in 1977.
PN3737
You answered a couple of questions about rules interpretation, you said you were familiar with rules interpretation, I take it that you're not talking there about union rules?---I guess I am talking about rules which have application in the world of commerce.
PN3738
Give me an example?---Well I've already given an example of disclosure requirements which require companies to identify what industry they operate and whether they operate in one or more segments of business activity or geographical areas. All accounting standards have requirements in them which refer to particular items, I mean the essence of accounting is to for example disclose gross revenues. One has to determine what a revenue is and what is meant by gross. There are rules prohibiting the set offs of assets and liabilities unless there are legal rights of set off. Now, the proper interpretation of that might probably be regarded as one for lawyers because it uses the word, legal, but in the world of commerce accountants have to make those judgments and auditors have to make those judgments.
PN3739
You're not suggesting, are you, Professor Walker that the work you've done in relation to interpreting rules relevant to the area of accounting gives you an expertise to interpret union rules?---Well I think that's as I said properly a matter for the Commission but I think my, having worked as an academic I think in order to get articles published they have to conform to a certain standard of rigour and written expression or else they don't get accepted, so I am also necessarily compelled to consider ways in which standards define concepts and whether they use exhaustive or extensive definitions and the like.
PN3740
Professor Walker, don't you feel somewhat uncomfortable with the suggestion that you're an expert in relation to the banking and finance sectors?---No, because the issues I think that I've been asked to give evidence about I believe are totally within my area of expertise, I wouldn't bother to try and write a descriptive textbook describing institutional players in that market, I think that's partly the work of financial journalism.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3741
What area of expertise allows you to do that?---Well first I am familiar with some base skills in the area of business.
PN3742
Such as?---Financial concepts such as present value calculations, financial calculations and the like, certain familiarity with some commercial law, some knowledge of some aspects of taxation.
PN3743
Yes, I thought you said before that you didn't have much knowledge in that area?---Well I don't claim to be an expert but I have been involved as an expert witness in some major cases including some involving companies like BHP Billiton, Exon and claims which I think the judgments went to the Full Federal Court.
PN3744
But aren't you suggesting that the knowledge you have about taxation in part puts you in a position of being an expert about the banking and finance sectors?---No, I'm not, I'm saying that I'm familiar with commercial concepts and even your own words when you talk about a sector I wonder what you mean by that.
PN3745
I don't have to answer the questions Professor?---That's an area in which I think there's an accounting standard which defines it, so the use of that segment.
PN3746
Anything else that you would point to that would support that expertise you say you have?
PN3747
THE VICE PRESIDENT: A bit beyond the various things you've identified in your evidence to date?---Well I do have some skills in financial analysis I guess. Occasionally after the excesses of the 1980s I became so appalled by what I saw as appalling financial reporting practices that I became a recreational journalist and contributed a range of articles to the financial press many of which had the substantial impact on the, certainly jogged the regulator into questioning some of the practices of some leading companies and made them redo their accounts in one instance, one to take their own inquiries, that included companies like Elders IXL which had a finance subsidiary which they weren't accounting for properly, I drew attention to that. Hookers was engaged in some dubious treatments of financial instruments.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3748
MR DOUGLAS: It's a real estate agent company?---Hookers IXL, well it had a land bank, they were very proud of their land bank but they engaged in what is technically known as a principal only debt defeasance and recorded a profit on the transaction when that was in my view improper and it was an area in which there were no accounting standards at the time, that it was a case of making paper profits to prop up the market's impression of that company's performance. I think I was the first person to write about how Bond Corporation had quite misleading accounting and they were a diversified company engaged in a range of businesses and were creating profits through a range of dubious transactions particularly sales with options to re-purchase. I drew attention to that.
PN3749
I bet there are some bankers that wish now that they had read your articles?---Well sadly some of the bankers were actually providing these instruments. I mean the State Bank of New South Wales was one of the major providers of the service of liability assumption agreements and indeed I spent some time, I think you asked me whether I had done any work on banks and I neglected to mention that I did some comprehensive analysis of the financial statements of the State Bank of New South Wales initially as a recreational journalist and later as in evidence in another matter but one of the things I noted was that even though the accounts of this bank had consistently reported a profit it had in my view actually recorded a loss in the order of $700 million over several years and subsequently I followed the sale and privatisation of the State Bank, when I last looked it was sold for a net $120 million, several years later it was valued by Anderson Consulting in the merger of Colonial at something like $1.8 billion, two and a half or three years later. I thought here was a case where a particular industry, the banking industry had generated financial statements which were quite misleading when one looked at the underlying substance of the commercial transactions they were engaged in, key areas where I guess my skills enabled me to comment in an informed manner about the activities of that industry.
PN3750
I have no other questions, your Honour.
PN3751
THE VICE PRESIDENT: Thank you, Mr Douglas.
**** ROBERT GRAHAM WALKER XXN MR DOUGLAS
PN3752
Did I get your evidence correct? You are presently a Professor in the School of Business?---Yes Professor of the Accounting School of Business, University of Sydney.
PN3753
Ms Gooley, anything by way of re-examination?
PN3754
MS GOOLEY: No, your Honour.
PN3755
PN3756
MR DOUGLAS: Your Honour, I persist with the application and I have got nothing to add to the submissions that have been filed.
PN3757
MS GOOLEY: We oppose the application, your Honour. We say that in addition to the curriculum vitae that has been provided by Professor Walker his evidence indicates that he has extensive experience both in relation to the finance service industries and the securities industry. That evidence is his chairmanship of a major company in relation to the services industry and as a Chairman of the Board. Surely a requirement to have an extensive understanding of the regulation of financial services industries. In addition, as the Professor at the University he is developing courses for the very industry that is under examination here.
PN3758
One of the critical issues in relation to this matter, that Professor Walker has given evidence of, is whether Commonwealth Securities Limited is part of the financial services industry. We say that his position as the Professor of Accounting at Sydney University enables him to give that expert evidence to this Commission. He has extensive knowledge of and involvement in the securities industry and we say that enables him to be in a position to give evidence as to whether CommSec - which my friends describe as "a stockbroking firm" - is in the finance industry or not. My friends seem to wish to rely on the fact that the Professor is a professor of accounting. As he has indicated his expertise is general but is, nevertheless, expertise.
PN3759
He has had since his studies in the 60s and throughout the 60s, 70s, 80s, 90s and now this decade, obviously been a student of the very industries that we have before us in these proceedings. And his evidence supports that expertise as does his curriculum vitae. We say that you should admit that evidence and that that evidence should be subject to cross-examination by Mr Douglas.
PN3760
THE VICE PRESIDENT: Thank you, Ms Gooley. Mr Douglas?
PN3761
MR DOUGLAS: I have nothing to add, your Honour.
PN3762
THE VICE PRESIDENT: I propose to admit the report of Professor Walker. In Clarke v Ryan Sir Owen Dixon relied upon a principle stated by Williams LJ in R v Silverlock:
PN3763
No-one should be allowed to give evidence as an expert unless his professional course of study gives him more opportunity of judging than other people.
PN3764
Sir Owen Dixon then went on to observe that the evidence of Mr Foster Joy included much that offended against these principles. I take the statement I have read to be included as one of the principles upon which his Honour acted.
PN3765
It seems to me on the basis of the evidence given by Professor Walker in the witness box today that his profession has given him - if I could use that word -a "significantly" greater opportunity of judging than other people. The fact that the University of New South Wales School of Business has seen fit to entrust to him the development of a curriculum for a course in relation to the financial services industry underscores the appropriateness of much of his experience.
PN3766
The weight, though, to be attached given that accounting is not per se concerned in its central focus with the classification of industries is a matter for submission at the end of the day. Clearly on the face of it Professor Hewson's area of expertise is more directly focused on the issues that arise.
PN3767
However, having said that, and not necessarily as part of those reasons, I would make the observation that at the end of the day it seems to me it is a matter for the Commission rather than some sort or oracular pronouncement by an expert as to what the expression "finance industry" or "financial services industry" or "industry of financial intermediaries" means in the rules.
PN3768
In Pennant Hills Restaurants Pty Ltd v Bowral Insurances Pty Ltd 145 CLR at page 682 Sir Anthony Mason was concerned inter alia with the question of whether domestic assistance constituted "nursing" within section 10 of a State Act which had a particular definition of medical treatment including any "nursing", medicines, medical and surgical supplies, etcetera. As part of the majority his Honour noted:
PN3769
In a suitable context "nursing" may denote a wider range of activities than those undertaken by a nurse in caring for a patient who suffers from illness or injury.
PN3770
He refers to a decision and says there:
PN3771
Section 206 of the Public Health Act refers to the nursing and maintenance of a child. Here we have a ...(reads)... injured worker here stands outside this conception.
PN3772
Focusing on the notion that different terms may have different meanings in different contexts seems to me to underscore the limitations on the assistance that the expert evidence of either of the experts can give in relation to the ultimate question for determination. Obviously that is a matter for submission in due course.
PN3773
Professor Walker, could you come back to the witness box, thanks? Are there any other particular objections to parts of Professor Walker's report. Mr Douglas?
PN3774
MR DOUGLAS: No, your Honour.
PN3775
PN3776
MS GOOLEY: Professor Walker, you have prepared a statement in these proceedings?---I have.
PN3777
Do you have a copy of that statement before you?---I do.
PN3778
Are there any corrections you would like to make to the statement?---Yes, paragraph 1. I would like it noted that I am now Professor of Accounting in the School of Business at the University of Sydney.
PN3779
THE VICE PRESIDENT: Just before you do that. I think it is probably appropriate to note for the purposes of the transcript that what I have given is an outline of reasons in relation to my ruling on that notional voir dire, the decision to admit this report, and in the event that it becomes necessary to do so - as seems inevitable - there were will be some expanded reasons in the written decision.
PN3780
MS GOOLEY: Thank you, your Honour.
PN3781
Any other corrections, Professor?---Yes. On page 9, paragraph 21, I think Professor Hewson has drawn attention to a typographical error. That the name Ralston shouldn't have a "U" in it. and on page 10, Professor Hewson has drawn attention to the fact that the book by Saunders and Cornett should read:
PN3782
Financial Institutions Management: A Risk Management Approach.
PN3783
I would point out to the Commission there was no intention to mislead as I have actually provided an appendix with the correct title; showing the cover page of that work. One thing I think that Professor Hewson missed is that McGraw-Hill should be spelt with a hyphen and it is also McGraw-Hill Irwin.
PN3784
Thank you, Professor. Are there any other alterations?---Not that I am aware of.
**** ROBERT GRAHAM WALKER FXN MS GOOLEY
PN3785
Professor, in paragraph 11 of your report you referred to:
PN3786
Standard industry classifications used for statistical purposes.
PN3787
I would like to show Professor Walker what is attachment 1 to the submissions of the Finance Sector Union.
PN3788
Are they the standard that you were referring to IN your report?---I had in mind previous publications by the ABS which I looked at some time ago, but I note that this is an updated version of those which is consolidating both Australian and New Zealand statistical classifications and that is exactly what I had in mind.
PN3789
May I tender that, your Honour.
PN3790
THE VICE PRESIDENT: Yes. Mr Douglas?
PN3791
MR DOUGLAS: No objection, your Honour.
PN3792
PN3793
THE VICE PRESIDENT: Do you feel like a morning tea adjournment or do you wish to just power.
**** ROBERT GRAHAM WALKER FXN MS GOOLEY
PN3794
PN3795
MR DOUGLAS: In paragraph 10 you say:
PN3796
In fairness to Professor Hewson, I note that his brief was not to consider whether the business of CommSec or the employees of CommSec were encompassed by the registered rules of the FSU but rather to address whether the business of CommSec can be distinguished from the industries described in the FSU Eligibility and Industry Rules.
PN3797
Then in paragraph 12, you say this:
PN3798
Usually the choice of criteria for classifying items is linked to some purpose. That purpose so far as Professor Hewson's brief was concerned was to identify the features of CommSec's business that enable CommSec to be regarded as outside the coverage of the FSUs activities in terms of the FSUs Eligibility Rules. Accordingly, he chose to classify CommSec's activities in terms of the following criteria: whether firms are banks or not; whether firms are financial intermediaries or not even though such a classification is not embodied in the FSUs registered rules.
PN3799
There's something inconsistent between those paragraphs, isn't there?---Not really. I mean, Hewson, presumably didn't write his own brief, and secondly, I believe that Hewson went on to adopt that as his purpose. I mean, Professor Hewson, is well known for his antagonism to unions.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3800
So you are deliberately attributing an intent to Professor Hewson in paragraph 12, are you?--No, but I mean he sought the object of trying to find a basis for distinguishing CommSec from the industries described in the FSU eligibility rules, and what I am suggesting is that there is a purpose implicit in any classification, or generally there is, and querying the Australian Bureau of Statistics at times. But the effort he made was to try and find areas of difference, not commonality, and in concepts of these proceedings I make that assumption.
PN3801
But his brief was as set out in paragraph 10, was it?---That's as he describes it, yes.
PN3802
You have no doubt that that is the position?---To distinguish from the industries described there, yes.
PN3803
Well, why do you suggest in paragraph 12 that he went out of his way to conjure up, I suggest, a position that was deliberately anti-FSU?---What you are doing is saying here that he wrote his own brief. I am saying so far the brief was concerned was to identify features in the business that enable CommSec to be regarded as outside the coverage of the FSUs activities. I apologise for interpolating a comment about Professor Hewson's motives, I just recall my prior dealings with him and discussions about work practices and the like. I withdraw that, yes.
PN3804
Let's leave animosity's aside if they exist?---I have no animosity towards Professor Hewson.
PN3805
THE VICE PRESIDENT: You say that's the purpose that might be reasonably inferred from the form and content of the report and the brief?---Yes.
PN3806
MR DOUGLAS: And you don't put it any harder than that?---That's sufficient I think for me to analyse it.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3807
Talking about writing briefs, did you write your report?---Yes,
PN3808
Every word of it?---A clumsy typist, I apologise for some typos.
PN3809
There is no other agile draftsman in preparing this report?---Not at all.
PN3810
I am not suggesting that there was I just want it known that it is your report, your words?---I should - for instance disclosure - my wife actually typed up the titles to annexures.
PN3811
That's no problem. But the reports in this and the opinions in this report are yours?---Absolutely.
PN3812
Can you tell me what is stockbroking?---Stockbroking is an activity where by a broker who is a mediator who stands between buyers and sellers of securities, that's the definition of it.
PN3813
Like acts as an agent?---Acts as an agent but also provides ancillary services.
PN3814
May provide ancillary services?---Commonly does provide ancillary services in this area of competition.
PN3815
Incidentally, who you know when it was that corporations were able to operate as stockbrokers?---I don't recall the history.
PN3816
I mean it is a very long history when members of the Stock Exchange had to be individual person?---Yes, I recall reading the history as recently last week on the Stock Exchange website discloses some history with the ASX and its predecessors and it does refer to that fact but I can't recall the date.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3817
Do you remember whether that regime was in place at the time you did your work for the Stock Exchange, back in when 93?---Yes, it was ASX at that stage, not the Sydney Stock Exchange, but my recollection is hazy on that point but was not highly relevant then.
PN3818
Well, if you were concerned with writing rules you would remember whether the rules were applicable to individual persons or corporations, wouldn't you?---If you are talking about disclosure rules hopefully they are quite above that in many instances so I think there should be personal responsibility sheeted home for agency disclosure as well the company's responsibility or other entities responsible for making disclosures. I do recall at that stage the listing rules of the Stock Exchange referred only to companies and got up to date with the fact that listed entities were trusts and that was one of the changes I made at the time.
PN3819
You told us what stockbroking is. What is a stockbroker?---A person who engages in stockbroking activity by and large and also there is a requirement to have a licence to operate in that area.
PN3820
What legislation requires that licence?---I am not aware of the details.
PN3821
You are not aware of that?---No.
PN3822
Have you ever had cause to inquire as to what legislation applies in relation in licensing of stock brokers?---I've never been in dispute with a stockbroker so I haven't cause to do that, I do recall. Dealing with brokers who are partnerships there has certainly been.
PN3823
Can you tell me what the core functions of a stockbroker are?---One core function is to stand between operators of financial intermediary between buyers and sellers of securities. I would say that was the core function.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3824
So you have given that answer but you are not sure are you, understood to stand between?---Buyers and sellers of securities, intermediary transactions on behalf of purchasers and sellers.
PN3825
What did you say about financial intermediary?---They act as a financial intermediary.
PN3826
That's a core function is it?---By definition an intermediary is someone who stands between a buyer and a seller, they are an intermediary, and they are dealing with financial products in this particular case, securities.
PN3827
So it is as simple as that?---It is a common usage, commercial usage.
PN3828
Is that your view or someone's else view?---That's my view.
PN3829
What do you base that view on?---Reading, observing common usage of language.
PN3830
What did you read?---Well, I read the Financial Review every day. I read materials disseminated by legal firms about the financial services industry. I read for the purpose exploring some of the issues. I read some text books, had a look at some text books that were cited by Dr Hewson.
PN3831
So that material refers to stockbrokers as financial intermediaries,
PN3832
does it?---Generically it talks about financial institutions, financial intermediaries, and it lists brokers as a form of financial intermediary.
PN3833
The Financial Review?---Look, I haven't brought the last 10 years of newspapers with me so I can't cite that, but certainly some of the documents.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3834
But you mention the Financial Review, are you telling me that you have read that in the Financial Review at some time?---You ask me what I read to form that opinion. You didn't ask me what particular citation I could quote.
PN3835
Well, I am asking you now. Have you ever seen it in Financial Review?---That's my recollection, the term, financial intermediary, is commonly used in the marketplace. As are terms like, financial services industry, operators in the financial services industry.
PN3836
So you are saying that you read in the Financial Review a reference to stockbrokers being financial intermediaries?---It must be the basis upon which I reached that conclusion about that definition as I said from my reading. I'm not able to provide you with a particular article in the Australian Financial Review which uses that language, but I do note that contributors to descriptive literature on the financial services industry use that term in that way.
PN3837
So it's that material that's led you to that view?---By in large and also conversations with people in the industry.
PN3838
Is CommSec a stockbroker?---Yes.
PN3839
Can you name any other stockbrokers?---Dixon's, Baillieu Polkinghorne.
PN3840
A large number of them operating in this country you would suggest?---Yes.
PN3841
Are you aware whether Dixon's gone out of business?---I used to use them as a broker and I shifted from them some years ago. I haven't really followed them. They may well have been merged.
PN3842
All right, well, you said one of the core functions of a stockbroker is to act as agent for the client in buying and selling stocks, is that right?---Yes.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3843
What other core functions do they perform?---Brokers can act as sponsoring brokers for new issues or that was exclusively a role of brokers until the Trade Practices Commission found otherwise.
PN3844
Can or do?---I believe they do. I haven't been looking at new floats lately.
PN3845
Would that activity be confined to CommSec?---Confined to CommSec?
PN3846
Yes?---No.
PN3847
Other brokers would do it?---Other brokers and other bodies. In fact, I made representations to the Trade Practices Commission to prevent that exclusivity being confined to brokers.
PN3848
And brokers do that in their own right?---They can, yes.
PN3849
They do?---But brokers other core functions involve the provision of financial advice which is commonly referenced to full service brokers who provide re materials to clients.
PN3850
There are a number of brokers that don't provide advice, aren't there?---That's right, yes.
PN3851
You would agree with that?---Yes.
PN3852
Significant brokers that don't provide advice?---I'm sure there are.
PN3853
And have made a business decision not to provide advice?---Yes, they compete on price rather than service.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3854
And there are ramifications that flow with providing advice that might be bad from time to time?---There are always ways to frame advice, but in addition some brokers maintain databases recording the portfolios of their clients and provide advice in relation to the maintenance of that portfolio including advice as to whether, for example, if there are buy backs or compulsory acquisition and people haven't acted on that.
PN3855
So that's a core function where it's provided by a broker?---Yes.
PN3856
And obviously, it's not a core function if the broker is not providing it. Are there any other core functions that some brokers provide?---I think some brokers may be linked in some way with financial planners, but I have not availed myself of those services.
PN3857
Like performing activities on behalf of somebody else?---Yes, well, sometimes, I mean one of the concerns I have about the industry at the moment is that there are some, I believe some brokers that are wholly owned subsidiaries of banks which also maintain a wealth management business and there are related party transactions which don't have to be disclosed to the market by virtue of them both being wholly owned subsidiaries, that's a concern I have.
PN3858
Concern to you as an accountant?---Concern to me as someone interested in accountability in the securities market.
PN3859
Yes, and that derives from your expertise in your profession, doesn't it?---Yes.
PN3860
What banks do you have in mind that have that relationship?---Well - - -
PN3861
ANZ?---Look, I don't recall the particular banks. I believe one is Westpac, I believe and I'm relying on anecdotes here rather than particular information. It's a project I've pencilled in to look at.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3862
So NAB did, but doesn't now, do you agree with that?---NAB certainly provides - sorry, owns a stockbroking business?
PN3863
Yes?---I believe they divested themselves.
PN3864
Divested themselves, yes?---Yes.
PN3865
It was ASIC - - -?---I'd accept that, yes. Rothschilds, I believe, may have been bought by Westpac, but that's a hazy recollection. That's a wealth management business rather than a broker.
PN3866
So we've identified a number of core functions that brokers do or might not do. Certainly they all carry out the core function of broking, in other words, buying and selling stock for clients?---Yes.
PN3867
Some, but not all, give advice?---Yes.
PN3868
Some, but not all, perform services for other entities?---Yes and some also negotiate margin lending arrangements and the like with financial institutions.
PN3869
Yes, in fact, most large stockbrokers in this country would perform all of those activities, would you agree with that?---Yes.
PN3870
So CommSec is not alone in that?---No.
PN3871
Does CommSec do anything different to that?---It is associated with the bank and as such - - -
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3872
Now I'm asking you does CommSec do anything different to that. I'm not asking about it's association with the bank?---It sells particular products and there are a range of products, particularly those associated with its parent.
PN3873
That's performing an activity on behalf of somebody else, is it?---Yes, okay, or acting on both sides of the fence, you might say.
PN3874
What fence is that?---The fence is that they are negotiating with their clients who are purchasers transactions selling products from their parent which could include loans and other lines of credit.
PN3875
And that's done on a contractual relationship basis?---Between which parties?
PN3876
Between CommSec and its parent?---Yes, there's a contractual relationship of sorts there disclosed - also from my reading it appears that CBA pays certain wages of people employed by - engaged in providing those services by CommSec. So presumably that's part of a contractual arrangement.
PN3877
Where do you find that?---Paragraph 29 page 12.
PN3878
That's the advice that's required to be given by legislation, is it, that you're quoting?---No, I'm quoting from the guide which says "Our representatives are remunerated by salary from CommSec or the Commonwealth Bank".
PN3879
Yes, but you're not suggesting that CommSec remunerates employees of the Commonwealth Bank, are you?---I'm suggesting the Commonwealth Bank remunerates employees of CommSec. That's what the words suggest here. Paragraph 29, it further says:
PN3880
Our representatives -
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3881
These are CommSec's representatives,
PN3882
May also be eligible to receive a free grant of Commonwealth Bank shares under the Commonwealth Bank's employee share acquisition plan and participate in the Commonwealth Bank's long term incentive program.
PN3883
But, Professor Walker, can I take you to your paragraph 23, where you make an all embracing statement about stockbrokers. You say:
PN3884
In fact, an even clearer exposition of the role of stockbrokers as financial intermediaries
PN3885
?---This is page 10, is it?
PN3886
Yes, it's page 10?---Paragraph 23?
PN3887
Paragraph 23?---Right.
PN3888
See that first sentence to the dot point on the second line. There you are saying, aren't you, that all stockbrokers in this country are financial intermediaries?---They are an intermediary between buyers and sellers, I think that's self evident.
PN3889
You said a little while ago they are intermediaries and they're dealing with financial products and what you say in paragraph 23 confirms that position. You are in fact saying, as an expert, that all stockbrokers in this country are financial intermediaries?---In terms of the common usage of that term, yes.
PN3890
Well, is there any other usage?---Professor Hewson seeks to make distinctions, but I think that's the common commercial usage. A financial intermediary is someone who stands between parties in a transaction.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3891
But let's be absolutely clear about this, I don't want his Honour to be in any doubt, you are saying, as an expert, that every stockbroker in this country is a financial intermediary?---In the sense in which I'm using the term, yes.
PN3892
We've already established that some stockbrokers only carry out stockbroking as a function, nothing else, no advice, no services for anybody else, no cash management or whatever?---That's true, yes.
PN3893
Therefore the mere function of carrying out stockbroking activities puts the stockbroker in the - makes a stockbroker a financial intermediary; is that correct?---Yes.
PN3894
Why is it then you rely in your report on other activities performed by CommSec for the Commonwealth Bank to support your argument that CommSec is a financial intermediary?---Could you draw my attention to the clauses where?
PN3895
Well, the very clause that you were referring to a moment ago. The fact that there has to be a statement in accordance with the legislation; the fact that CommSec is a subsidiary of the Commonwealth Bank; the fact that CommSec carried out certain functions on behalf of the Commonwealth Bank. You rely on all of those things to support your position that CommSec is a financial intermediary; don't you?---If I could go back to look at my brief, it is to address not only question whether there is a financial intermediary but also whether CommSec provides financial services; paragraph 1. And whether the business of Commonwealth Securities is in connection with the industry of banking - or in connection with the provision of banking services; paragraph 1. So that is the purpose for which I array a range of other observations.
PN3896
So to designate CommSec as a financial intermediary you don't have to go pass the fact that CommSec buys and sells stock on behalf of clients; is that correct?---That is a form of financial intermediation. There are many forms of financial intermediation; but that is correct, yes.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3897
That is correct?---Yes.
PN3898
And that applies to every stockbroker in this country?---Every stockbroker in those terms is a financial intermediary, yes.
PN3899
On the basis that every stockbroker in this country is a financial intermediary, does that mean that every stockbroker in this country is in the finance industry?---I would say they were in the financial services industry, yes. They are providing a financial service.
PN3900
And not in the finance industry?---Well the term "finance company" is usually applied to entities which are primarily lenders providing finance to borrowers.
PN3901
We have touched on the licensing requirements for stockbrokers and you have said, I think, that you are not aware of those requirements?---Hm.
PN3902
Do you know whether stockbrokers are subject to Reserve Bank or APRA control or oversight?---I presume they are subject to APRA control and oversight, as most players in the industry are.
PN3903
Well, let's not have any presumptions. Are you saying they are, or they aren't? Do you know?---Well, the fact that they are issuing a document titled - I am trying to find the reference.
PN3904
It is the one in paragraph 29; is it?---Well, The Financial Services Guide indicates to me that they are subject to APRA requirements, that is common.
PN3905
I see?---The linkage between APRA and ASIC requirements are somewhat convoluted in the current regime.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3906
Is there any link between APRA and the Reserve Bank?---I am not aware of any link but I believe there are some, certainly common interests and oversight of the securities industry.
PN3907
Are you aware that APRA derived from the Reserve Bank, together with various insurance commissions previously operated by the States?---I am aware that APRA took over from the Insurance and Superannuation Commission; yes. And that that function was merged with APRA.
PN3908
Are you aware that APRA took over the control and oversight activities of the Reserve Bank?---I am not aware of the detail of that.
PN3909
Aren't you. That's interesting. If you are an expert in this area why aren't you aware of that detail?---I am aware that they do engage in some monitoring of banking institutions and insurance companies but I am not aware of the detail.
PN3910
But anyway, anyone that has to put in one of those guides according to the legislation, you say, is subject to a control or oversight by APRA?---That is my expectation. I do that because, you know, as a board member we receive legal advice that we are subject to APRA requirements. We have to provide these kinds of guides to potential customers. In dealing with stockbrokers they have told me that they need certain information to comply with APRA, a profile of customers and the like. So without being a specialist on the law associated with this industry I have that knowledge.
PN3911
If you are right about that, does that mean that every entity, whether corporation or private individual, that is subject to control or oversight by APRA, must be in the financial services industry if they are required to put in one of those reports. It follows, doesn't it?---I am sure there would be a close correspondence. I wouldn't presume to provide legal advice on that issue.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3912
But on the one hand you are saying in your statement that if you have to file one of those guides in accordance with the legislation, then you must be providing financial services?---You asked me before whether that meant that they were subject to oversight by APRA. You are now asking me - putting the question, it seems to me, in a different way.
PN3913
Yes, it is a different question?---Yes.
PN3914
If you are required to put in one of those guides - - -
PN3915
THE VICE PRESIDENT: You have just asserted that that was stated in the report. Whereabouts is that statement in the report?
PN3916
MR DOUGLAS: Well maybe I - let me put it another way, your Honour.
PN3917
It is inherent in what you say in your report about complying with that legislation that requires individuals or corporations to issue guides as to the financial services that they provide, that corporations and individuals who issue those guides must be providing financial services?---I think it is self-description and self-evident if you provide a financial services guide you are subject to the provisions relating to providers of financial services. So ipso facto, yes.
PN3918
And you thereby become a financial services provider?---In the broad sense, yes. You are required to be registered with APRA even though you might stop directly providing advice. You might even - in our experience in the board I am associated with, we have to have a licence even though we are simply an administrator and do not provide investment advice at all.
PN3919
If you go to paragraph 6 of your statement where you have set out rule 5.8 of the FSUs rules. Just have a look at that rule again?---Clause 5.2 or 5.8?
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3920
Rule 5.8. See the words:
PN3921
In connection with the businesses and/or industries of financial services in Australia.
PN3922
Do you see that?---You missed out a word. I think it says:
PN3923
In connection with the businesses and/or industries of financial intermediaries or financial -
PN3924
No, no, I didn't. I left that out deliberately because there are two concepts there; aren't there? One, financial intermediaries, the businesses or industries of financial intermediaries. And a second concept, the business and/or industries of financial services. Surely your learning with respect to the interpretation of rules would allow you to understand that?---I am just trying to respond to your question. You said, do I see the words there and you didn't indicate - you read it as a quote.
PN3925
All right. Let me read the words again:
PN3926
Businesses and/or industries of financial services in Australia.
PN3927
?---I see those words.
PN3928
Accept that that is one concept. One of two concepts in those - the words in that rule?---Yes.
PN3929
Now, it must follow from what you have said, Professor Walker, that corporations and individuals who are required to issue those financial guides in accordance with the legislation must be businesses and/or industries of financial services; must be involved in those industries or businesses?---Yes, it follows.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3930
It follows, yes. One of the things that we might correct while we are looking at your report, Professor. Could I take you to paragraph 29 on page 12. If you go over the page you will see there is paragraph 30 and then 29 is repeated. The fact is we have got two 29s and two 30s. Can we re-number the document so that we don't have that duplication?
PN3931
May be your Honour could do that?
PN3932
THE VICE PRESIDENT: Well, I suggest that the second 29 be amended to 29A.
PN3933
MR DOUGLAS: Yes.
PN3934
THE VICE PRESIDENT: And the second 30 be amended to read 30A.
PN3935
MR DOUGLAS: Thank you, your Honour.
PN3936
Now, if you go to 34. You refer to the fact that CommSec is required to issue a financial services guide. Now that is the guide that we have been talking about. We have no misunderstanding between us on that; have we?---No.
PN3937
Now, what about other brokers? Let's go to the area that you and I both like, stockbrokers or boat brokers, do you know whether they have to - they are required to issue financial services guides?---I've been provided with financial services guides by brokers.
PN3938
Yes; and have you ever been provided with one by a real estate agent?---No.
PN3939
Do you know that they are required or some real estate agents because of the activities they conduct, are required to provide those guides?---I'm not surprised.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3940
Can I suggest to you that cotton brokers up in Southern Queensland are required to issue those guides?---Certainly there are aspects that involve the provision of financial services, I'm not surprised.
PN3941
And machinery brokers, new and second-hand likewise, are required to issue those services guide if they are involved in those sort of activities?---What sort of activities did you have in mind?
PN3942
Yes, providing financial services?---Providing financial services.
PN3943
Yes, so doesn't that mean on the same basis of the discussion we've had about CommSec and all of the other stockbrokers in Australia, that entities that are required to issue financial services guides because of what they can carry out, must fall within those words in rule 5.8, that is to say, they must be businesses and/or industries of financial services in Australia involved in those businesses or industries?---Clause 5.8 is from the FSUs rules and that doesn't oblige companies to, machinery brokers or cotton brokers to - - -
PN3944
Doesn't it?---No.
PN3945
It doesn't?---To provide financial services guides.
PN3946
Yes but - - -?---That's what you are putting to me, that FSUs rules - - -
PN3947
Yes?--- - - - somehow oblige cotton brokers or machinery brokers to prepare financial services guides.
PN3948
But Professor, isn't it a question of logic here? Haven't we reached the position where you have said that if you are providing a financial service you are required to provide one of those guides - - -?---No, the - - -
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3949
- - - by legislation?
PN3950
THE VICE PRESIDENT: No, the professor has not professed expertise on the precise criteria and obligations for the issuing of financial guides, he has expressly eschewed that, he has asserted only a general knowledge that there as obligations to issue such guides, he has denied any detailed knowledge of the circumstances or criteria by which they are issued. As I understand it, you are putting some assumptions to the professor to make namely, would you pleas assume that cotton brokers are obliged to issue these guides and that machinery brokers are obliged to issue these guides and as I understand the witness' evidence, he is prepared to accept that assumption.
PN3951
MR DOUGLAS: Look, yes, I understand, your Honour, yes, yes.
PN3952
But we do know that you have said that if you are an individual person or a corporation and you are required by the legislation to provide one of those guides, then you are caught by being in connection with the businesses or industries of financial services in Australia?---Yes, the legislation casts a wide net.
PN3953
And if it happens that a boat broker is required to give such a guide, then that boat broker would be caught by those words?---Well, presumably the boat broker would be providing some financial service in terms of negotiating lines of credit and even perhaps financing the transaction himself.
PN3954
Yes?---But in those circumstances his core business is that of a boat broker, he is providing some ancillary services in association with that.
PN3955
Yes?---In the area of financial services.
PN3956
And isn't that CommSec's position?---Well, CommSec is a little more closely allied I believe, to the provision of financial services, first it is negotiating the sale of financial products as its principal activity, purchase and sale of financial - - -
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3957
THE VICE PRESIDENT: Do you describe shares as a financial product?---A financial instrument, they are second-hand securities, I suppose, second-hand securities, it's not a new product, it's not a good term to use in that context. They are also providing other financial products produced by its parent company in the form of loans and the like. Perhaps, your Honour, it might best be described as a financial instrument of some kind.
PN3958
Well, a share certificate might be described as a financial instrument of some kind but, yes.
PN3959
MR DOUGLAS: But you as a client go to a stockbroker because you've got some ready cash and you buy some share because it suits you to do that because of the gains that you perceive that you will make from that?---Yes.
PN3960
Yes and by the same token with the same amount of money you might go down to Rushcutters Bay and go to a broker there and buy a boat because you perceive that will be to your benefit?---Certainly not in the expectation of making money out of it.
PN3961
No but that is not the key to being involved in the finance industry, is it?---But the boat isn't a financial product or it's not a financial instrument, it is a piece of physical property which is quite distinct from securities.
PN3962
So are you saying now that the requirement to issue a financial services guide doesn't make any difference one way or the other, it doesn't put a person or an entity within rule 5.8 regardless of what other activities they perform?---I'm not saying that, I am saying that it indicates that the entity concerned that is obliged to make that is engaging in the provision of financial services of some kind.
PN3963
THE VICE PRESIDENT: If it is of any assistance, I don't regard the evidence given by either Professor Hewson or this witness about whether or not a particular circumstance falls within the union rule as a matter that is properly within their expertise. Their expertise is directed towards, what is the meaning of financial services, what is the meaning of financial intermediaries and those other expressions.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3964
MR DOUGLAS: Yes, I understand that, your Honour.
PN3965
THE VICE PRESIDENT: I mean, please, if you think I am wrong about that then - - -
PN3966
MR DOUGLAS: No, no, at the end of the day, your Honour, you are absolutely right, it is for the Commission to decide that issue, determine that issue but I am certainly entitled to cross-examine Professor Walker about what he said because of the way in which we argue as to the FSUs rules. I am not asking him to give an opinion as to whether CommSec or a boat broker is caught by the rules.
PN3967
PN3968
THE VICE PRESIDENT: Yes, well, I think you were which is why I made the observation, that I don't regard those questions as having any relevance at the end of the day.
PN3969
MR DOUGLAS: Well, maybe for the purposes of argument I put it that way, your Honour but let me make it clear, that we don't suggest that these witnesses have that role.
PN3970
Now, the other day I went along to Woolworths, have you got a Woolworths or a Safeway or a Big W close to where you live?---I think Lang Road, not entirely no, we do go to Bondi Junction.
PN3971
And?---And - - -
PN3972
Have you ever heard of Ezy Banking?---Yes, I think have heard of that.
PN3973
Yes, do you understand that it is a joint venture relationship or a joint venture between Woolworths and the Commonwealth Bank of Australia for Woolworths, Safeway and Big W to conduct banking activities at their locations?---I am aware of some relationship with Woolworths and banks, yes.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3974
And to provide Commonwealth Bank products in the same way as CommSec provides Commonwealth Bank products?---Yes, I accept that Woolworths has got itself into the business of providing a financial service.
PN3975
Yes?---It's core activity is retail.
PN3976
Yes, yes, so you say, is Woolworths a financial intermediary because of that?---In that respect.
PN3977
It is in that respect?---It's not its core activity.
PN3978
No?---So in some parts it properly should record part of its activities as within that financial services area.
PN3979
Yes but is Woolworths in those circumstances a financial intermediary?---In that sense if it is standing between customers in a bank through a joint venture it is a financial intermediary.
PN3980
Yes?---It's not its core business.
PN3981
No, I know?---It is ancillary to its core business.
PN3982
Yes, but it's still a financial intermediary?---But it is acting in that capacity, yes.
PN3983
It is still a financial intermediary?---That's right.
PN3984
It doesn't matter what its core business is, it's still a financial intermediary?---It's acting as a financial intermediary in respect of those transactions.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3985
Can I tell you that I also went to the Ezy Banking website which happens to be www.ezybanking.com.au where one can find a whole number of web pages which outline the products that Woolworths is marketing on behalf of the bank, as an agent, and that contained in that material on that site is the financial services guide that Woolworths is required to give. That wouldn't surprise you?---Are you asking me to give evidence to that effect or are you giving evidence to that effect in this case?
PN3986
No, no I'm just asking you, having in mind that Ezy Banking exists, you wouldn't be surprised that that material can be found on the website?---I'm sure you've got the utmost integrity and you are telling the truth.
PN3987
Well that means you are not surprised. Let me ask you about another day. The other day I walked into the post office and they gave me these things, Commonwealth withdrawal slip because I wanted to withdraw some funds from my Commonwealth savings account and I took with me a deposit slip. Now are you aware that the Australia Post, under the name of Gyro Banking, conducts banking agencies on behalf of some nine or 10 banks in this country?---Yes.
PN3988
And some 40 odd credit unions, and some seven or eight finance companies?---Are you asking me whether I am surprised by this?
PN3989
Yes?---I am surprised by the number, yes.
PN3990
Are you?---But if you could show me the documents I'm sure I could take your word for it.
PN3991
Well again you can go to the website, it is a different website of course, let me read the names of the banks:
PN3992
Adelaide Bank, Bank of Queensland, Bankwest, Bendigo Bank, Citibank, Commonwealth Bank - - -
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN3993
THE VICE PRESIDENT: Are you trying to prove this Mr Douglas?
PN3994
MR DOUGLAS: Sorry, your Honour?
PN3995
THE VICE PRESIDENT: Are you trying to prove this is a fact in this fashion?
PN3996
MR DOUGLAS: No, your Honour, I can do that by tendering this material that can be accessed on a public site. I am simply putting the names of these banks and there are others. Now, the fact that Australia Post has agency arrangements with all of those institutions, banks, credit unions, finance companies, does that make Australia Post, like Woolworths, a financial intermediary?---I think this is a called a reductio ad absurdum argument, but plainly my response had been that plainly those activities place them within the role of offering a financial service. It is not the core activity of those enterprises, it is ancillary and as such the legislation that covers the financial services industry obliges them to produce those documents. In some instances companies which produce those documents are doing so because it is their core activity, in other cases it is ancillary.
PN3997
But either way, it still makes them financial intermediaries?---Yes.
PN3998
What are the core functions of a building society?---Building societies accept deposits and lend to members of the building society, or others become members principally for the purpose of funding housing loans.
PN3999
Are building societies subject to APRA control or oversight?---I expect they are.
PN4000
What are the four functions of a finance company?---Finance companies borrow and lend and seek to make money on the margin.
PN4001
Core functions of credit unions?---That's the same. Some credit unions see themselves as having different types of responsibilities in some case the nature of the persons to whom they lend and the quantum of the loans.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4002
You are talking about a social responsibility?---Well, no it is just a core business. I've seen come credit unions lending for used cars.
PN4003
They still borrow and lend though, don't they?---That's true.
PN4004
What about investment banks, what are their core functions, do you know what an investment bank is?---I've got a working idea.
PN4005
What is it?---Investment banks put together deals. They take money and they lend it. Often they seek to structure proposals, initiate projects, encourage institutional investors to place money into certain projects at times. Sometimes they offer securities to the market.
PN4006
Highway projects, airport purchases, that sort of thing?---Yes and securitisation projects.
PN4007
Do merchant banks exist in this country?---That term is also used.
PN4008
What for?---Well, the distinction between merchant banks and investment banks is somewhat blurred in my sense, but merchant banks are engaging in what we now commonly often describe as investment banks.
PN4009
In the Saunders and Lange article that you attached to your report, I think?---It is an extract from a book.
PN4010
Yes, extract, in that extract I think Bain and Co is referred to, remember that, we might go to that and have a look at it?---Remind me what annexure that is.
PN4011
I think it might be the one immediately after your CV?---That's Saunders and Cornett in this volume.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4012
Is it, I'm sorry I might be wrong in the name?---I have a copy of it here.
PN4013
You rely on a passage there I think to support your argument that stockbrokers are financial intermediaries and in connection with banking and so on, and it is in that paragraph that I think Bain & Company are referred to?---Yes, I've got that.
PN4014
Got that?---Yes.
PN4015
What do you know about Bain & Company?---Bain has gone out of the business now and is running a management consulting business.
PN4016
Quite some time ago?---Yes.
PN4017
Do you know what they did when they were operating, they were merchant banks, weren't they?---And a few things, yes.
PN4018
Did they buy and sell stock as a stockbroker?---They were a full service securities firm it's described here. Certainly that implies that's what they did. I didn't have any dealings with Bain & Company.
PN4019
So you don't know from your own personal knowledge what they did?---They were a full service broking company I do recall.
PN4020
Well, isn't there some difference between a full service broking company and a full service security company?---I'm focussing on the words, full service, and you were inviting me previously to distinguish between discount brokers and full service brokers. But Bain went on to do other things.
PN4021
But there is a distinction between a stockbroker per se and a securities company, isn't there?---Well, the term, securities company, is not one that is commonly used. Perhaps you could invite me to - - -
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4022
Well a securities company does very much more than buying and selling shares. It enters into activities much like merchant banks, or as they are now called investment banks?---So this is terminology that has been taken over by events, is it? I'm not familiar with that terminology.
PN4023
Incidentally, we've established that it is your view that every stockbroker is a financial intermediary?---They are engaging in financial mediation of a specific kind.
PN4024
What about the Australian Stock Exchange or the Sydney Stock Exchange, does that put them in the finance industry?---The Stock Exchange is providing a computer which processes transactions and maintaining - - -
PN4025
Well that's your factory isn't it?---It's secondly, yes, providing the back office factory.
PN4026
So that's the factory of information processing?---It's secondly a regulator. It performs a range of functions. I would happily regard it as a regulator. It is associated with the financial services industry by virtue of providing administrative services.
PN4027
It is also an employer?---Correct.
PN4028
Employees have to operate in some or other industry, don't they, they don't operate just in the ether?---They operate and they may operate in a range of industries.
PN4029
I am suggesting that if you are right about stockbrokers it must follow that the Stock Exchange, as an employer, is operating in that industry, the Finance Services Industry?---Just is as the company in which I am a chairman is providing administrative services, doing back office processing and is operating in the Financial Services Industry.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4030
Would that be an appropriate time for an adjournment, your Honour?
PN4031
THE VICE PRESIDENT: Yes. How much longer do you think you will be, Mr Douglas?
PN4032
MR DOUGLAS: I will probably be about an hour, your Honour, half an hour to three-quarters of an hour.
PN4033
THE VICE PRESIDENT: I'll adjourn until 2 o'clock.
LUNCHEON ADJOURNMENT [12.49am]
RESUMED [2.00pm]
PN4034
THE VICE PRESIDENT: Mr Douglas?
PN4035
MR DOUGLAS: Thank you, your Honour.
PN4036
Professor, could I ask you to go to paragraph 13 of your statement where you say that you agree with Professor Hewson's observance that CommSec is not a bank, and then you add in the ordinary or common usage of that term. Now is there anything hidden in those extra words. I mean, CommSec is simply not a bank, is it, we all know what a bank is?---Well, I mentioned earlier that Hookers described itself as having a land bank of a kind.
PN4037
But in terms of the banking act you have to have a banking licence?---Yes.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4038
We know what the Commonwealth Bank is, we would have a fair idea what its core activities are. I mean, what are the core activities of the bank?---I'd agree that CommSec is not a bank, it is not taking deposits from customers, it is not lending, it is not aggregating deposits.
PN4039
So there is nothing hidden in the words, or the words ordinary common usage of that term?---No.
PN4040
Now do you say that you agree with Professor Hewson by reason of what you go on to say in paragraph 14, and for several reasons thereafter?---That's where I disagree with it, yes.
PN4041
Now in the last line of paragraph 14 on page 6 you refer to how some of CommSec's activities are connected to the industry of banking. Do you see that?---Yes.
PN4042
What activities do you have in mind?---I'm referring there to statements made by Professor Hewson, and I don't have his statement immediately in front of me.
PN4043
Well, forget what Professor Hewson said. Do you say that some of CommSec's activities are connected with the industry of banking?---I see there reference now, two paragraphs above he refers to the fact that CommSec acts an agent or broker for the Commonwealth Bank of Australia in relation to a range of financial products including margin lending and insurance deposit accounts, managed funds, etcetera. So he is indicating that it is acting in conjunction with CBA.
PN4044
They are the activities that you are referring to?---They are the activities that I am referring to in that paragraph, yes.
PN4045
Do you say that those activities place CommSec in a position where it is connected to the industry of banking?---As represented by CBA, yes.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4046
Are there any other activities that would place CommSec in connection with the industry of banking as represented by the CBA?---I also refer to the agents how CommSec specifically provide often financial products on behalf of the bank.
PN4047
Yes, it is really the financial products that CommSec provides on behalf of the bank by way of an agency arrangement or the like that you say place CommSec in connection with the banking industry as represented by the CBA, in terms of activities?---That's one of the points, yes.
PN4048
There are no other activities which in your view created that relationship?---Well, I quoted Dr Hewson who referred to a series of activities which included those things.
PN4049
Are you aware of any other activities?---I am not aware of any others that seems a fairly extensive list.
PN4050
You have read Mr Rickard's statement?---Some time ago, yes.
PN4051
And some of the things that you say in your statement are based on the evidence that he gave in that statement?---Well, he also describes CommSec as essentially - if I could find that statement and refresh my memory. Mr Rickard describes Premium Financial Services as a business unit of the CBA, as I recall.
PN4052
Yes, but that's not CommSec, is it?---As I recall he talked about the decision being made, either he or the other witness, a decision being made to build on the platform provided by CommSec, in order to provide Premium Financial Services.
PN4053
Premium Financial Services, is a business unit, a non-legal entity, isn't it?---Well, business units often override legal structures, yes.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4054
For what purposes, accounting purposes?---Principally for management purposes. I notice the Commonwealth Bank annual report describes its banking segment as being consistent with the distinctions made for management purposes, as well, management reporting.
PN4055
THE VICE PRESIDENT: Mr Douglas, am I right in saying the evidence demonstrates the bank has or plans to completely transfer Premium Financial Services as a business unit into CommSec?
PN4056
MR DOUGLAS: No, the decision was made recently that CommSec would become the employer of choice, that that business unit would remain a business unit and not become totally absorbed by CommSec.
PN4057
THE VICE PRESIDENT: So the plan is for a mixed employment situation in relation to Premium Financial Services, some of the employees are employees of the bank and some are employees of CommSec.
PN4058
MR DOUGLAS: That's the position.
PN4059
THE VICE PRESIDENT: But in a functional sense Premium Financial Services moves into CommSec to create the pods that Mr Rickard gave evidence about mainly the motion of a one stop shop for the client with a bank manager who can pass off the customer to someone else in the pod to give investment advice or to provide broking services.
PN4060
MR DOUGLAS: That's part of it, your Honour. I mean, there's a business unit that goes across the legal borders of the CBA in the one hand and CommSec on the other, it straddles in like a bridge, and within that there are two groups of employees that perform activities that result in the business performance of that business unit. Some are employed, I think, the majority are employed by the CBA, that's the evidence. The minority are employed by CommSec, and CommSec's employees as a group can be said to on the one hand be performing
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
activities dedicated totally or mostly to CommSec's stockbroking operations and activities associated with that. Other employees are performing activities that are directed to the performance of the business unit and that of course can change from time to time and it certainly would change with the identity of the employees from time to time.
PN4061
MS GOOLEY: Your Honour, I would not like my silence to be in any taken to any view - - -
PN4062
THE VICE PRESIDENT: It is not.
PN4063
MS GOOLEY: - - - of what Mr Douglas has just described as being the business of CommSec, and of course in our submissions we will take you to the actual evidence which shows you the nature of the business of CommSec.
PN4064
THE VICE PRESIDENT: I shouldn't be interrupting the cross-examination. I note that there is a difference of opinion about what the evidence demonstrates.
PN4065
MR DOUGLAS: Well, I'd guess that, your Honour. I mean, on Thursday we are going to address submissions - and I've undertaken to Ms Gooley not to read slabs of written submissions and that is not the purpose of Thursday, and it will emphasise things and no more. At the end of the day you will have to come to the conclusion about that evidence and the evidence is there in Kath's statement, Rickard's statement and Caddie's statement, and Caddie has got two statements, one that was provided for this hearing and the one that was tendered that was prepared for the Federal Court proceedings. So in effect there were four statements that go to the nature of those activities and one in four and so on.
PN4066
Professor, based on what Mr Richard said - and if you don't remember in general terms what he did say, have a look at it. But can I put this to you, just to test your memory. Doesn't he say that the activities or functions performed by CommSec, the entity CommSec, under the agency or like arrangement for the Commonwealth Bank are activities or functions that are insignificant when viewed in relation to CommSec's overall business? Do you agree with that?---Well, that is an interpretation of I think witness statement. I am not familiar with the particular clause where that was stated. I have in front of me Mr Caddie's statement which said:
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4067
A driving factor in developing the PFS business unit was to integrate the CommSec business with other premium businesses of the group.
PN4068
Which seems to be opposite to what you are saying.
PN4069
I am talking about the business of CommSec, the legal entity. Do you agree with me that that legal entity has its own business?---A legal entity could have a range of businesses.
PN4070
That CommSec has a business; do you agree with that? The legal entity CommSec has a business?---I think one of the issues we have been debating this morning is that entities, like second-hand machinery operators, can have several businesses.
PN4071
Yes, but can you answer my question? Do you agree with me that CommSec has a business?---Has a core business?
PN4072
Has a core business and that core business is stockbroking and activities associated with its stockbroking function?---That is arguably its core business, yes.
PN4073
Would you say in addition to that it has a peripheral business which is concerned with conducting activities as an agent or like an agent for the Commonwealth Bank?---When you say "peripheral" that implies some sort of test of the scale of that business which can be measured in terms of number of employees, profitability, assets committed and the like. I haven't seen evidence about relative profitability of different products but I accept that CommSec, on the face of it, is primarily a stockbroker.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4074
Do you see that the activities - the group of activities that are performed for the Commonwealth Bank as being a separate business of CommSec's or part of CommSec's overall business?---It is essentially integrated. I mean, that is the trend in the financial services industry. Some operators are seeking to present themselves as one-stop shops providing a range of services; others are seeking to specialise.
PN4075
In paragraph 24 you refer to Mr Sinkey's book, which is that one: Commercial Bank Financial Management In The Financial Services Industry. I think you attach as RGW3 an extract from that?---Yes.
PN4076
THE VICE PRESIDENT: Before you go there, Mr Douglas.
PN4077
Professor, Professor Hewson has described your use of the literature as, "incredibly superficial", I think was the expression. What do you say to that?---I think he didn't stop there your Honour. I think I have a list of some of the disparaging comments he made.
PN4078
I understand that is a reasonably long list. But in relation to that particular gibe what do you say?---Well I reject it. If I could just volunteer one brief comment. I am very fond of a book written by a man called Su Les which is called, I think, Fallacy of the Counterfeit of Argument; it has a wonderful appendix in it of 34 fallacious arguments. I went through Dr Hewson's affidavit and ticket off 14 which I though wasn't a bad score out of 38 in a few pages.
PN4079
I will disregard that as being non-responsive. In regard to specific allegation of the selection of literature being incredibly superficial, you say?---I find that an offensive remark from one whose own affidavit displayed a lack of rigour - - -
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4080
Do you say these are leading texts or standard texts?---They are standard texts used in courses - introductory courses - which describe institutional arrangements. It is not rocket science material. These are preliminary texts which are used in courses to acquaint people with various industries. People who are doing courses in banking, finance, or related areas. The Saunders and Lange text is a re-write of an American text. As I said, they are descriptive documents.
PN4081
Yes, Mr Douglas?
PN4082
MR DOUGLAS: Sinkey in his book sets out what he regards to be the six core functions of a bank; doesn't he?---Could you take me to the page?
PN4083
Page 5, for instance. Clearing and settling payments; aggregating - and I think it says, pooling - and dis-aggregating wealth and close of funds; transferring funds; processing of information; managing uncertainty and controlling risk and providing ways for dealing with agency problems that arise in financial contract.
PN4084
MS GOOLEY: Can I just point out, your Honour, that in fact it is financial systems that provide those six basic or core functions. And Mr Douglas has asked about banks.
PN4085
MR DOUGLAS: I am sorry, my friend is quite correct.
PN4086
Sinkey says that normally participants in the financial services industry in America perform those six core functions, in particular banks do so?---He is quoting Merton 1995 and he is listing those as core functions; I accept that.
PN4087
THE VICE PRESIDENT: Is it your client's position, Mr Douglas, that stockbrokers do not also perform those core functions?
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4088
MR DOUGLAS: Well, your Honour, I was going to put a question like that to the Professor.
PN4089
They are stated in greater detail on pages 3, the bottom of 3 and the top of 4 where he says:
PN4090
The primary function of a financial system is resource allocation. To accomplish this task financial systems perform six basic or core functions:
PN4091
1. Clear and settle payments of payment systems to facilitate trade and commerce.
PN4092
2. Aggregate, pool and disaggregate wealth and flows of funds so that both large and small scale projects can be financed. Transfer economic resources over time, space and industries. Accumulate process and disseminate information for decision-making purposes. Provide ways for managing uncertainty and controlling risk. And, lastly, provide ways for dealing with incentive and asymmetric information problems that arise in financial contracting.
PN4093
Now, do you accept that the participants in the financial system in American perform those six core functions?---Yes.
PN4094
And do participates in the financial system in Australia perform those six core functions?---I think we are a bit weaker on number six but, otherwise, yes.
PN4095
Certainly the Commonwealth Bank of Australia would perform those six core functions?---Perhaps - I don't accept, to my knowledge, the Commonwealth Bank of Australia deals with number six. It depends on what sorts of financial contracts we are referring to.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4096
Well, if you go to page five under the last core function there which is stated in a more concise way, and under the heading How Banks Do it:
PN4097
They monitor borrower's credit worthiness, signal changes in credit quality and provide guarantees such as banker's acceptance.
PN4098
Now, the Commonwealth Bank would perform that sort of activity; wouldn't it?---That is quite different from what is on page 4 - - -
PN4099
Yes but that equates with - - - ?---Not dealing with incentive and asymmetric information problems it is dealing with a - - -
PN4100
Yes but the core - yes, I am sorry. But the core function - the last core function referred to on that page. Under the heading, Core Function, is:
PN4101
Provide ways for dealing with agency problems that arise in financial contracts.
PN4102
Now I suggest to you that that is the same core function as number six at the top of page 4, more concisely stated?---Well page 4 was a bit more specific. I mean, agency and asymmetric information problems is the subset of an agency problem.
PN4103
Yes, and if you go to the middle of page 4, two paragraphs above the heading, The Basic Business of Banking and Funding Loans with Deposits, this is said:
PN4104
The banks provide ways for dealing with incentive and asymmetric information problems that arise in financial contracting. They monitor borrower's credit worthiness, signal changes in credit quality and provide guarantees, eg, bankers acceptance. The major innovation in bank contracting technologies has been scrutinisation, the pooling and packaging of loans, eg, mortgages as securities that are sold to investors for banks securitisation is a risk removal technique that generates liquidity.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4105
Now the Commonwealth Bank of Australia would be involved in that activity; wouldn't it? It's a core function?---As you describe it, yes. But that is different from agency problems which can encompass, for example, the relationship between directors and CEOs and boards and the extent to which CEOs might be rewarded by massive incentive packages and so forth, which often are not consistent with the interests of investors.
PN4106
So you are saying that Sinkey is misquoting core function number six on page 4 but summarising it in that way on page 5?---No. I am saying the question you put to me as to whether you agree that agency problems is a more succinct statement than incentive and asymmetric information problems; I am saying that they are quite different concepts and one could be seen as a subset of the other. I accept the general description about banking activities, however, on the middle of page 4 of that Sinkey quote.
PN4107
Go to part one of that document, a couple of pages back, I think. It is headed, Part One, Banking And The Forces Of Change In The Financial Services Industry. See the page marked that way? I think it is in your attachment.
PN4108
Your Honour, do you mind if I approach the witness? Or can the witness be shown this?
PN4109
THE VICE PRESIDENT: Please feel free to approach, Mr Douglas.
PN4110
MR DOUGLAS: Thank you, your Honour.
PN4111
Would you have a look at that please, Professor. Do you remember reading that part of the book? It precedes the passages that we have already looked at?---Yes I have read that.
PN4112
It says in effect, if my recollection is correct, the book has got three chapters I think, or three parts?---Hm.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4113
And that it is reviewing banking and the financial services industry which is called the FSI in the USA. It says that the FSI is shaped by what is called "TRICK", where "T" means "transparency"; "R" means "risk exposure"; "I" means "information technology; "C" means "competition for customers"; and "K" means "kapital adequacy" is that correct?---Yes.
PN4114
Have you ever heard of those concepts before?---I've read that, yes.
PN4115
The CBA would fit each of those; wouldn't it?---Well, I would have to explore the definitions of some of those terms but in principle I am happy to agree with you that the bank is involved in providing a range of services.
PN4116
Did you read this book in any depth before you attached the passage - the extract to your statement?---Yes, I was particularly struck by the spelling of capital with a "K" I remember that.
PN4117
Why did that strike you as strange; its an Americanism?---A rather forced acronym, I thought.
PN4118
Wouldn't many non-bank companies - - -
PN4119
THE VICE PRESIDENT: That is the way that Karl spelt it.
PN4120
MR DOUGLAS: Yes, your Honour.
PN4121
Wouldn't many companies that are not remotely connected with the finance industry also fit that test? In other words meet each of those requirements?---Yes but those requirements are described as the driving forces of change shaping the financial services industry. They are not adumbrated as necessary conditions for an entity to be regarded as in the financial services industry. It is a description of - - -
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4122
No, that is why we have looked at the six core functions that go to make up participants in the financial services industry?---Well these are listed as drivers of change and innovation. And this same page goes on to say that the whole business of banking is changing, particularly with technology and what was regarded as the business of banking some years ago is now a much more extensive arrangement. Giving examples of providing direct deposit services, handling payroll, chequeing, e-banking and so forth.
PN4123
Well, let's go back to the six core functions and I will have that book back because you have got those functions on your extraction. Let's go through them one by one. Does CommSec perform the first core function. That is, clear and settle payments in the terms that are being spoken of in that article?---It is a reference to a financial system. I don't think the bank itself does it on its own. It takes - - -
PN4124
THE VICE PRESIDENT: CommSec is what you are being asked about?---I'm sorry, your Honour.
PN4125
MR DOUGLAS: I'm asking about CommSec?---CommSec does engage in facilitating trade and commerce by arranging for funds provided by purchasers to be transmitted to sellers for securities.
PN4126
I am asking about the clearing and settling of payments?---Well that is a clearing and settlement of payment, yes.
PN4127
In the terms that have been referred to? Isn't that talking about clearing house activities?---It is a clearing house activity in the sense that people who are buying and selling shares deposit moneys with brokers and it is transferred on to sellers. It is a payment system.
PN4128
Does CommSec aggregate, or pool, or disaggregate wealth and close of funds?---To the extent to which it is sponsoring the issues of any security offerings it would be doing that. It is inviting the purchasers of securities to lodge their funds with CommSec which are then passed on to - and aggregated - passed on in this particular case to the Commonwealth Bank.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4129
Are you aware that CommSec does that?---I have received email invitations to the subscribe to PERLS .
PN4130
Yes and would every stockbroker do that?---Discount stockbroking perhaps wouldn't be engaged in that activity.
PN4131
But any stockbroker similar to CommSec would?---In what respect? A subsidiary of a bank, do you mean?
PN4132
No, no. Any stockbroker that is performing the sort of activity range that is performed by CommSec would do the same?---Stockbroking firms perform a key roll in the marshalling of individual savings and their aggregation so that they can be invested in other ventures for productive purposes.
PN4133
So CommSec in your view - - - ?---As indeed does the structure of institutional arrangements allowing the formation of limited liability companies and the like. They are all part of the financial system.
PN4134
What about number 3? Is CommSec involved in the transfer of economic resources over time, space and industries?---Absolutely. In one sense the stock market pricings affects the cost of capital of individual entities and that in itself involves the transfer in economic resources between industries; from the least productive to the most productive.
PN4135
But CommSec is not doing that is it? It is the clients that are doing that?---Well the question is about the functions of the financial system and CommSec is part of the financial system by providing a facility for people to subscribe to buy and sell securities as part of the financial system.
PN4136
All right. Number four. There is evidence that CommSec processes information so we haven't got any difficulty about that one?---Hm.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4137
What about managing uncertainty and controlling risk? Is CommSec involved in that activity?---Well, I would imagine if CommSec is providing advice as a full service broker to premium clients it would be providing advice on how to structure portfolios to control risk through diversification. Also, indeed, part of the process of seeking client information is to assess the extent to which they are risk averse or not; what their primary objectives in investment are, whether they are seeking capital growth or assured income. In that sense they have regard to the risk return profile sought by individual investors and would seek to assist individual investors in making investment decisions with that in mind.
PN4138
This is in the stockbroking function not the activities that CommSec is performing for the Commonwealth Bank?---Absolutely. I mean it is the kind of advice brokers routinely provide to clients.
PN4139
Well what about the last one? The credit worthiness activity?---Well the last ones here that I have got says:
PN4140
Provide ways for dealing with incentive and asymmetric information problems that arise in financial contracting.
PN4141
And I can recall occasions when brokers who have become aware of those kinds of problems do bring that to the attention of clients. I remember with some chagrin that my broker at the time recommended investment in Boral because the CEO had gained a big package of options which indicated he expected a strike price to make a lot of money if the share price went up. That is an incentive problem and it is the kind of advice that they provide to clients. They are drawing to their attention the incentives facing those controlling organisations and the flow of information to the market and how they themselves face incentives to gain from those remuneration arrangements.
PN4142
You are saying that CommSec and other stockbrokers you are aware perform that core function?---Yes.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4143
So on the basis of what you have said then CommSec, aside from the activities that it conducts for the Commonwealth Bank on its agency arrangement, CommSec and other stockbrokers would conduct each and every one of those six core functions?---Those functions are described as functions of the financial system and stockbrokers are a key element of that financial system.
PN4144
And they are the core functions of the Commonwealth Bank?---They are functions which the bank performs as well.
PN4145
They are the core functions that the bank performs- - -?---I think the core function of the bank is to try and make money for its shareholders.
PN4146
And are you aware that in Australia that if you conduct those six core functions you are required to have a banking licence to do so?---I've already said I am not familiar with the specific legislation relating to requirements for holding licences. I would be surprised if any legislation issued in this country refers to incentive and asymmetric information problems as tests for a banking licence, I would be stunned.
PN4147
I'm not suggesting that, but to be a bank you have to have a banking licence, you agree with that?---Yes.
PN4148
With a banking licence, operating as a bank, the bank would perform those six core functions?---Well, I've already expressed my reservations about number six. In relation to number five, the bank would be primarily focussed on controlling risks facing itself through its own loan portfolio and the manner in which it is borrowing and the durations of its borrowings and the duration of its loans. Those six functions that you have referred to, broadly framed as descriptive of the financial system, and it is not intended in the material on page four that they be treated in equal weight by a bank.
PN4149
Notwithstanding the fact that they are called core functions?---They are not called core functions on pages three to four, they are called in fact, basically core functions but later on I think you - - -
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4150
Three to four they are called core functions?---Yes.
PN4151
And then on the table on page five they are called core functions?---When you get to page five you have got a text book writer saying, well okay accepting here are core functions of the financial system, that's on the left hand column, the stuff on the right hand column is headed, how banks do it, and it's a rather catchy way of describing the contribution that banks make to those functions of a financial system. It doesn't follow that banks have to do each of those things to be regarded as a bank, or that they necessarily indeed do absolutely every one of those items as listed. For example, many banks would not make loans to government.
PN4152
But if you do them all you would ordinarily be regarded as a bank, wouldn't you?---No, you would have to have a banking licence to do that, as you said.
PN4153
Yes, with that proviso?---But if you do all the functions or all of the particular means on the right hand side, I mean, plainly that is something that is intended to relate to the specific activities of US banks.
PN4154
You notice that Sinkey describes financial services firms and financial intermediaries as being exactly the same thing?---He did treat them as synonyms at various points. I'm just trying to recall which document, financial services firms in the financial services industry is a heading on page seven.
PN4155
Can I put this to you, yes, he goes on to say that the word financial intermediary is an outdated name. The name now used is, financial services firm, do you accept that, they are exactly the same thing?---It is a contemporary buzz word but it doesn't necessarily follow that companies described as being in the financial services industry, or financial services firms, are necessarily banks.
PN4156
No, I'm not suggesting that at all- - -?---In fact he makes a distinction as I recall between depository and non-depository financial institutions and described brokers as an example of a non-depository financial institution. Perhaps I am confusing it with the other text.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4157
I think you are. The other text is the Saunders and Lange text that you are referring to?---The base text of which Saunders and Lange is just a re-write, the Australian version.
PN4158
Would you have a look at this and see whether you would agree with what is contained in that document - - -
PN4159
MS GOOLEY: Can I just ask Mr Douglas where Professor Walker refers to Saunders and Lange.
PN4160
THE VICE PRESIDENT: I don't know that that is necessary because he hasn't pressed any question.
PN4161
MS GOOLEY: Well I think he is and as I understood it - - -
PN4162
THE VICE PRESIDENT: No, he is about to get the contents of Ms Lange's letter in.
PN4163
MS GOOLEY: Yes, I know, he is going to try, but without having Professor Walker make any reference to the textbook that that is referring to.
PN4164
THE VICE PRESIDENT: Doesn't matter. Professor Walker has been qualified, I'd accept it, as an expert. He can be asked whether or not he agrees with the matters in that letter.
PN4165
MS GOOLEY: But that is a reference to particular stuff in the textbook which he hasn't been taken to, because I think you will find that Professor Walker refers to a book by Saunders and Cornett.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4166
THE VICE PRESIDENT: Professor, is there some reference that you need in order to make sense of that?
PN4167
MR DOUGLAS: I refer you to paragraph 22 of your statement, maybe I should provide you with the document to refer to?---If I could just comment briefly, I notice that this is written by Helen Lange who reports to Dr Hewson at the Graduate School of Management. I am familiar with some of her previous work. She is not directly saying that brokers are not financial intermediaries, in fact she is twisting herself around to avoid acknowledging that and she is seeking to make a distinction between those financial intermediaries which simply provide services and those that are so-called asset transformers which would be primarily those organisations that marshall savings and provide them for re-investment in another form. I think earlier statements that I have made indicated that there can be occasions when brokers can also fill an asset transformation function and I don't believe it is addressed in this book because it is just an introductory description of the industry. I don't think at any stage Helen Lange seeks to disagree with my statements, she is trying to emphasise a distinction which Dr Hewson emphasised and that is that certain types of institutions can be viewed as asset transformers because they are taking their savings, or assets, and re-packing them in a form that is then provided or resold to others. So she has, if anything, simply amplified the text of her book rather than make any statements of disagreement with what I have presented.
PN4168
On that basis do you accept what she is saying, with those qualifications?---Anyone can invent terminology and the financial services industry is one in which terminology comes and goes as we have already canvassed. You were referring to securities companies which you then described as becoming known as merchant bankers or investments bankers. Terminology changes over time. The industry as these textbooks emphasise, has been transformed by technology so that they are doing things in different ways and they are also providing non-traditional services. The financial services industry broadly is going through an enormous period of change where different participants are positioning themselves to what they believe is the most profitable sector.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4169
THE VICE PRESIDENT: The question is do you disagree with what's stated in the letter.
PN4170
MR DOUGLAS: With the qualifications that you made?---Well she defines asset transformers, she says banks are asset transformers. Brokers perform a different function. They are both financial intermediaries. In that sense I disagree with her, if she wishes to say that banks are financial intermediaries and others are not because the passage from which she has herself written is using words like financial institution and financially intermediaries is almost interchangeable, so as we see in paragraph 2 the section in the book headed financial intermediary specialist states there are two general types of institutions, not intermediaries, those that undertake brokerage services and those that act as asset transformers. So reading paragraph 2 she is using the word, intermediary, interchangeably with institution. She goes on to say, to try and re-state it in a sense, in an almost contradictory way, that asset transformers are the financial intermediaries or banks in the vernacular. Certainly I agree that banks undertake a process called asset transformation if you want to use that term. It is a relatively new term but for the reasons I've outlined one could equally argue that brokers engage in similar activities, perhaps to a lesser extent than banks but they certainly engage in the same activities.
PN4171
Thank you Professor, on that basis I tender that letter your Honour with those qualifications.
PN4172
MS GOOLEY: Provided it is only tendered for that purpose and not tendered for the purpose of trying to establish that in the attachment to Professor Hewson's statement that the term FI means anything other than financial intermediaries I don't object.
PN4173
MR DOUGLAS: Well subject to the fact that I agree with the Professor your Honour, that the word financial intermediary and financial institution is used interchangeably in the article.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4174
PN4175
MR DOUGLAS: Professor, can I take you briefly to paragraphs 7, 8 and 13 of your statement, just have a quick look at what you say in those passages, particularly 7 and 8 and 13 at the top of page 6, the point I'm directing your attention to is that you are, in those paragraphs you are saying in effect that rules 4.1, 5.2 and 5.8 of the union's rules are not exhaustive in terms of their drafting?
PN4176
THE VICE PRESIDENT: Mr Douglas you are pushing against an open door here, I propose to disregard anything that either of these experts have said about what the rule actually means. I regard their evidence as being concerned purely with what is the meaning of the relevant terms, finance industry, financial services, financial intermediaries.
PN4177
MR DOUGLAS: Thank you your Honour, I don't need to ask any further questions about that.
PN4178
Could you then go to paragraph 19, in fact I refer you to 19, 26, 27, 29, I think 29A and 30A, where you say that in effect CommSec is different to other entities because on the one hand it is a subsidiary of the bank and on the other because it is a member of the CBA Group. Now you say one or both of those things?---In paragraph 17 I list three issues, the three reasons I give for arguing, disagreeing with Professor Hewson, that CommSec is definitely not engaged in business in connection with the industry of banking and then these three points are then amplified later, so some of the paragraphs which you have quoted appear to straddle two of those points, at least three of those points, so the context is I'm not relying on any one observation to disagree with Professor Hewson, I'm looking at all three.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4179
Do you say that CommSec is in connection with the industry of banking because it is a subsidiary of the Commonwealth Bank of Australia?---I think that I've said that it is not only a subsidiary but it is also acting as an agent for the Commonwealth Bank, it is also staffed by people whose salaries are paid in part by the Commonwealth Bank and it is part of a business unit of the Commonwealth Bank.
PN4180
Don't you also say it's a member of a group or is that the same thing?---Well it's a subsidiary yes, it's part of the banking group, it's a concept known to accountants more than to - - -
PN4181
Your comment as to the payment of staff, and we touched on this before the luncheon adjournment, you accept don't you that the Commonwealth Bank employs some staff that are relevant to the business division, PFS and CommSec employs other staff that perform activities relevant to that division?---I accept that.
PN4182
It is in that sense that you're talking about CommSec paying for the salaries of Commonwealth Bank employees?---No, because I'm quoting in paragraph 29 how representatives are remunerated by salary from CommSec or the Commonwealth Bank, so they're talking here about representatives of CommSec, not representatives of the PFS.
PN4183
Representatives of the group being spoken about there, aren't they, performing work in PFS?---It's a guide produced by CommSec and it's talking about CommSec's representatives.
PN4184
Maybe it can be cleared up by looking at some other evidence, in any event do you say it is significant in terms of CommSec being in your view in connection with the industry of banking that on the one hand CommSec is a subsidiary of the bank and on the other hand it is a member of the Commonwealth Bank Group or does that mean the same thing?---And it's offering products for the Commonwealth Bank, it's not selling products for ANZ or Westpac or NAB.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4185
That aside if for instance CommSec was performing no functions for the Commonwealth Bank, in other words it was acting purely as a stockbroker, the fact that it was a subsidiary of the Commonwealth Bank would that place it in connection with the industry of banking?---No, as I've said by argument you're asking me to answer hypothetical questions, my argument was that all three of these lead me to conclude that CommSec, or disagree with Hewson's observation that CommSec who made a very strong statement is definitely not in engaged in a business in connection with the industry of banking and I'm saying, where are these three factors, the operations in the industry which is turning towards a one stop shop so the industry is changing, the activities undertaken by CommSec which cover acting on behalf of the Commonwealth Bank and CBA products and the third point which you haven't drawn me to is CBAs own descriptions of the role of CommSec in its published annual report, so I am looking at all three of those.
PN4186
That role is simply CommSec's role as a member of the group, isn't it, add legal entity as a member of the group?---There was someone significant the directors chose to describe CommSec as part of the banking division.
PN4187
Part of the banking division?---Yes, they had the choice.
PN4188
Part of the banking division of the group but what does that mean? Does that place CommSec in connection with the banking industry simply because the directors have said that in an annual report?---It is something that is a matter for the Commission to decide whether that persuasive evidence but I would regard it as significant because directors have faced their obligations under the Corporations Act and been required to provide reports on segments of their activity and have chosen to describe CommSec as part of the banking group, banking division. They could have chosen not to, to only as I've mentioned later in the report, to not necessarily to treat CommSec as a separate division because it's immaterial but to report on their major divisions and then provide supplementary information in the report that they are required to provide under the Corporations Act treating the assets and revenues of CommSec as reconciling items and aggregating with other immaterial activities but they have chosen to self describe it as part of the banking division
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4189
Well let's deal with the hypothetical, as an academic you're used to dealing with hypotheticals, aren't you?---Really I try to be practical.
PN4190
Do you?---Yes.
PN4191
Don't you say to your students, let us presume to analyse a potential problem. Anyway let me put this hypothetical to you. You've said in your evidence that you believe that Westpac owns a stockbroker?---That was my recollection, I wasn't very - - -
PN4192
Let's say that that exists, it's not a hypothetical, let me tell you that that stockbroker is a subsidiary of Westpac, let me tell you that that stockbroker does nothing other than stockbroking, that is to say it doesn't perform any banking functions on behalf of the bank, would the fact that it is a subsidiary of Westpac place it in connection with the industry of banking?---Not in the analysis I presented but I mean is this hypothetical or are you leading evidence about Westpac's financial circumstances, I'm just a little unclear about your role here.
PN4193
I am asking you to answer that question?---If there was a stockbroking which was a stand alone stockbroker owned by a bank and had no transactions involving selling the bank's products, in fact was openly selling the products of all other banks, had no related party transactions of any kind with the parent company, then I think you would be entitled to say under that situation that the broking business was independent of the bank and it was not connected to the bank because there were no such transactions or other relationships. What I've argued though is that the conjunction of several factors lead me to conclude taking all things into account that I disagree with Hewson when he says that CommSec is definitely not connected with the industry of banking.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4194
What if CommSec was performing activities for a fee commission however you like to looking at it for another bank and not for its parent, the Commonwealth Bank, would CommSec still be in connection with the industry of banking?---Just in my answer I think we're taking comments from your associate which said that if we had a hypothetical broker which was owned by a bank but was selling products on behalf of a range of banks and had no other related party transactions with the parent, its staff weren't paid by the parent, they were not part of executive remuneration schemes or share purchase schemes and they were completely at arms length and as I said, used the term ring fenced, then I would happily say that they were not engaged in a business in connection with banking because they had taken steps in that way both to operate on behalf of others - - -
PN4195
THE VICE PRESIDENT: In connection with the bank, in connection with the parent bank?---Yes.
PN4196
That the banks though may be in connection with - - -?---Well, in that case I would argue they are simply being a pure broker operating for a range of participants and they had taken steps to totally ring-fence their activities from any banking business, as such, they were taking, as I believe barristers do, the taxi cab rule, they were taking on the first client who approached them and were not promoting individual products and had no other commercial connections,other than through share ownership and dividend payments.
PN4197
Let me put another example to you - - -?---But yes - I'd just amplify that, but I mean, the industry is not going in that direction, it's going towards the idea of one stop shops and there is a tendency of some operators - - -
PN4198
I see, it had been there and was heading back?---Some say that, I discern other movements elsewhere in the industry where some participants in that industry are operating, in fact, the industry funds through members equity, down in Victoria you have a series of industry superannuations which have just - - -
PN4199
Well, we saw that - - -?---And so they are offering financial planning advice, home loans, banking facilities, so when you said it's going the other way, in fact things have reversed in the last year.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4200
And it went the other way with NAB didn't it? It divested itself of A.C. Goode?---Yes.
PN4201
And while A.C. Goode was a subsidiary of NAB it was on your view, in connection with the industry banking?---What I'm saying is that the trend in the industry is for some participants to go towards having one stop shops and try to offer a range of financial services, so the motivation for requiring a stockbroker, it would be totally hypothetical to consider that any bank would buy a stockbroking business and then totally ring-fence it from any of its activities.
PN4202
But just let's take the NAB example, when A.C. Goode was owned by the NAB and operating as a stockbroker, on your view it would be in connection with the industry of banking?---I haven't seen the full particulars of that relationship and I am unable to comment about that.
PN4203
You are unable?---I haven't - - -
PN4204
Well, just presume that its relationship with the NAB was like the relationship that CommSec has with the CBA, on that basis it have then been in connection with the industry of banking, on your view?---If it was selling NAB products, it was part of a business unit which overrode legal structures and was presenting itself as providing a range of services to premium clients, if it was raising money from investors to funnel that to NAB, yes, I would reach the same conclusion.
PN4205
And then the moment it was sold off by NAB it would cease to be in connection with the banking industry?---Once it was sold off, if it severed all other connections as - well, we are dealing with hypotheticals here, I don't know the facts and I don't think any evidence has been admitted about the or been brought to my attention about the relationship between A.C. Goode and NAB at some stage in the past.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4206
One more example and then I will let you go. I will give you an actual example. You will notice that there is a core function that we discussed before, information processing, in fact, twice earlier today you spoke about financial intermediaries or participants in the financial system as being factories processing information?---It was a quote from one of the texts.
PN4207
Yes; and you rely on that?---I endorse that, yes.
PN4208
Information processing is a very significant factor across the whole of the finance sector or financial system, however you like to put it today, isn't it?---Yes.
PN4209
In fact, information processing would lie at the heart of say, the operations of a bank like the CBA?---Yes.
PN4210
There is evidence on the record of this Commission that all of that information processing for the CBA is conducted by another company, that company is owned 35 per cent by the CBA, would that company be in connection with the industry of banking?---Well, it depends exactly what services it performs, as I said, from my own experience as chair of a company that provides administration services and information processing for a number of trustee clients of super funds, we are trapped by the financial services legislation, I wouldn't necessarily suggest that that would place us within the ambit of the union rules because they have different definitions and I'm not seeking to interpret the union rules but to - - -
PN4211
Would that be because such a company would not be required to provide a financial services guide?---If it is simply doing back office computer processing and running a computer and had no contact with individuals in the market place, it didn't generate correspondence and communicate with persons, didn't run call centres, then I think it would be fair to say it was simply a data processing business. It would however, be arguably obliged by the clients to maintain very robust controls and I am aware that APRA has a particular interest in the integrity of data that is processed by such administrators and in the robustness of their access controls and other controls to those information systems.
**** ROBERT GRAHAM WALKER FXXN MR DOUGLAS
PN4212
Your Honour, there is one further matter, in paragraph 35, I think the second one Professor Walker speaks about the objects rule of the union, I suggest that that is in the same category as the other matter that your Honour referred to a moment ago and I won't ask any questions on it.
PN4213
Thank you, Professor Walker.
PN4214
PN4215
MS GOOLEY: Now, Professor Walker you have been asked about questions that may or may not be in the finance industry, can I just ask you whether a business that describes itself in this way would in your view, be in the finance industry or in the financial services industry?
PN4216
THE VICE PRESIDENT: This does not arise from cross-examination.
PN4217
MS GOOLEY: Yes, it does, he has had a number of hypotheticals put to him about the nature of businesses that are in or are not in and he's been asked about what his view is of companies that are in or are not in the financial services industry.
PN4218
THE VICE PRESIDENT: Yes, which may enliven questions in re-examination about the particular hypothetical examples that were put to him but because he's asked a hypothetical example about subject A doesn't thereby enliven in re-examination hypotheticals about B, C and D but - - -
PN4219
MS GOOLEY: No, this is about a stockbroking business that provides financial products as well which I think Mr Douglas took him to.
**** ROBERT GRAHAM WALKER RXN MS GOOLEY
PN4220
THE VICE PRESIDENT: Yes, I will allow it and to the extent that you wish to cross-examine further on it, Mr Douglas you can.
PN4221
MS GOOLEY: Is your view is a stockbroker - - -
PN4222
MR DOUGLAS: Don't lead him.
PN4223
MS GOOLEY: I think that is the pot calling the kettle black.
PN4224
THE VICE PRESIDENT: Well, he is entitled to take the point.
PN4225
But do you regard it as leading, Mr Douglas, to say, would you please make the following assumptions?
PN4226
MR DOUGLAS: No, your Honour.
PN4227
THE VICE PRESIDENT: Yes, if you proceed in that fashion, Ms Gooley.
PN4228
MS GOOLEY: Thank you, your Honour.
PN4229
Please make the following assumptions: this business provides stockbroking services and related securities services to the general public, it also assume, that it conducts for the purposes of this hypothetical, assume that it conducts the business of providing financial products and deposits and lending services to the general public, in your view what industry does that business fall within?---It is in the financial services industry in my view.
PN4230
In the document that Mr Douglas took you to which was annexure RGW3 to your report, does the financial services industry described in that test, apply to Australia? Is it a useful description in Australia?---In general terms I agree.
**** ROBERT GRAHAM WALKER RXN MS GOOLEY
PN4231
What types of businesses are included in financial services industries?---Well, a range of businesses, banks, stockbrokers, we've dealt with that, superannuation funds, mutual funds, credit unions, building societies, a range of others, investment banks I think we've mentioned, insurance companies are providing financial services at times, the term is very broad.
PN4232
And when you in your evidence keep using the term, the industry, which industry are you referring to?---Well, the financial services industry is now deemed very broadly as encompassing a range of institutions.
PN4233
And what industry do stockbrokers fit into?---Part of the financial services industry.
PN4234
I have no further questions.
PN4235
THE VICE PRESIDENT: Do you wish to cross-examine further, Mr Douglas in relation to any of that?
PN4236
MR DOUGLAS: No, your Honour.
PN4237
PN4238
MS GOOLEY: There is a house-keeping matter, your Honour.
PN4239
THE VICE PRESIDENT: Yes, you have the tender of submissions I think and annexures.
PN4240
MS GOOLEY: I was going to wait until Thursday for that, your Honour.
PN4241
THE VICE PRESIDENT: Yes.
PN4242
MS GOOLEY: No, it was more the reply which we have not received as yet. If you recall, in your directions your Honour, CommSec was directed to file their submissions, we were directed to file ours and then there was a reply by CommSec, CommSec was initially late in the provision of their submissions, we then had the equivalent amount of time in relation to our submissions but we have not yet received a reply and - - -
PN4243
THE VICE PRESIDENT: Have you bothered to ask Mr Douglas?
PN4244
MS GOOLEY: I understand my instructor has asked about where the reply is on the previous occasion.
PN4245
MR DOUGLAS; It will be delivered early tomorrow morning, your Honour. Duncan Fletcher, has been one working on it, I physically haven't been able to do anything on it today or last night so that's the reason why it won't be ready until tomorrow.
PN4246
THE VICE PRESIDENT: Thanks, anything else?
PN4247
MR DOUGLAS: No, your Honour. So the Commission is adjourned until Thursday, at 10.00 am.
ADJOURNED UNTIL THURSDAY, 30 SEPTEMBER 2004 (3.15pm)]
INDEX
LIST OF WITNESSES, EXHIBITS AND MFIs |
ROBERT GRAHAM WALKER, AFFIRMED PN3633
EXAMINATION-IN-CHIEF BY MS GOOLEY PN3633
EXHIBIT #B1 CURRICULUM VITAE OF PROFESSOR WALKER PN3642
CROSS-EXAMINATION BY MR DOUGLAS PN3679
WITNESS WITHDREW PN3756
EXHIBIT #F17 PROFESSOR WALKER'S REPORT AND ANNEXURES PN3776
ROBERT GRAHAM WALKER, ON FORMER OATH PN3776
FURTHER EXAMINATION BY MS GOOLEY PN3776
EXHIBIT #F18 ATTACHMENT A TO THE SUBMISSIONS OF THE APPLICANT PN3793
FURTHER CROSS-EXAMINATION BY MR DOUGLAS PN3795
EXHIBIT #C20 LETTER FROM HELEN LANGE TO JOHN HEWSON DATED 17/09/2004 PN4175
RE-EXAMINATION BY MS GOOLEY PN4215
WITNESS WITHDREW PN4238
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