How Blockchain Can Address Australia’s Banking Dilemma
Australia’s Banking Royal Commission has released its recommendations. Now it’s time for change. Here’s how blockchain can help.
After a decade of scandals fueled by a focus on sales and profits rather than the customer, the Australian Government announced in December 2017 that it was going to hold a Royal Commission into the misconduct happening in the banking industry. After over a year of hearing evidence suggesting forged documents, money lending to people who may not be able to afford it, and the mis-selling of insurance, the Royal Commission concluded on February 1, 2019, and submitted a report to the government.
The report contained 76 recommendations for multiple industries across the banking sector, including mortgage and insurance brokers, banks, lenders, and superannuation funds, with transparency and accountability being key to changing the industry. Recommendations include:
- having mortgage brokers who break their duty to act in the best interest of borrowers face a civil penalty,
- having financial advisers disclosing their lack of independence to clients,
- having the Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) to jointly administer the Banking Executive Accountability Regime (BEAR) Act, which should be amended to require executives to deal with regulators in an “open, constructive” way.
In this article, we’ll cover some of the Royal Commission’s recommendations, and what role blockchain can play to offer an alternative or that banks and regulators could implement to put customers first.
Financial advice
Amongst a number of recommendations provided by the Royal Commission to protect customers, it has been recommended that financial advisers must disclose, in writing to the customer, any lack of independence before providing personal advice to retail clients.
What if retail clients could see this information while doing their due diligence? In the US, the Certified Financial Planner (CFP) Board has certifications of 83,000 financial planners stored on a publicly accessible blockchain distributed ledger. This was done to give members and customers a new way to rapidly verify their certification status in real-time.
This could grow into adding more information about a financial planner, including any relationships they have with banks and other providers to give customers and regulators easy access to this information. One method of doing this is to use Zero-Knowledge Protocols (ZKP) which is also known as Zero-Knowledge Password Proof. It is a way of doing authentication without the use of passwords allowing relationships to be checked without revealing the identities of all parties.
Superannuation
In Australia, aside from personal savings and a government pension, superannuation (super) is a vital part of a person’s retirement income. Money deposited into a super fund is invested by the fund’s trustee, and different fees and outcomes apply depending on which fund and options a person chooses.
According to a report by RateCity, which compared 40-year performance scenarios based on different fees and investment options, making the wrong choice could cost a person more than $100,000 in retirement savings. Knowing this and hearing evidence of banks charging fees for no services provided, had the Royal Commission recommending that some fees be prohibited.
One way for super funds to charge lower fees is to reduce their costs. In August 2018, the Australian Stock Exchange (ASX) said the adoption of blockchain technology could help the super industry save hundreds of millions of dollars in costs by removing multiple databases of share ownership information. The ASX, along with its partners, is developing a distributed ledger technology (DLT) that is expected to go live in late 2020. This could become the first industrial-scale application of DLT in critical financial market infrastructure anywhere in the world.
When it does go live, hundreds of millions of dollars could be saved in removing the need for market participants to reconcile their databases with those held by the exchange, various custodians, and brokers. And these savings will mean lower costs for super funds who can pass these savings onto customers by reducing fees. It will be a win-win situation for all.
Mortgage Lenders
The Royal Commission recommended that mortgage brokers should be required to act in the best interests of the borrower and changes be made to mortgage broker remuneration so that they charge borrowers and not the lenders for acting in connection with home lending (see Recommendation 1.2 and 1.3 of the Royal Commission Final Report).
Both The Royal Commission and ASIC were concerned that commissions encourage brokers to recommend mortgages that borrowers cannot plausibly afford and cause the broker to recommend higher paying products over lower paying products, potentially to the detriment of borrowers.
A home loan system based on blockchain technology could change that. Blockchain technology is simply a list of records linked together and secured so that it is only accessible to authorised parties. Currently, authorised individuals such as mortgage brokers and bank managers need to access this information manually when assessing a borrower’s eligibility to meet the bank’s lending policy as well as your borrowing power.
With blockchain mortgages, the criteria required to assess and approve a loan application would be securely stored on a network where these ledgers would be updated automatically and in real-time. The use of this distributed ledger technology (DLT) technology would allow a loan contract to be generated automatically, set up the home loan account and transfer and register ownership of the property.
The development of smart contracts that are based on code-based sets of rules and application programming interface (API) technology will allow multiple parties to communicate and share information in real-time for all parties involved in the home loan process. This can grow beyond the home loan process into how we transfer property. In 2018, OpenLaw, in conjunction with leading Australian law firm, Corrs Chambers Westgarth, did build an end-to-end real estate transaction on the Ethereum blockchain.
Compliance and Regulators
Lastly, as a response to the themes raised by the Royal Commission, regulatory and legislative changes across the industry have already commenced. These include significant levels of new legislation proposed to increase accountability for executives in addition to other compliance requirements.
The compliance costs to handle these and other legal obligations — such as Know Your Customer (KYC) and Anti-Money Laundering (AML) — is continuing to grow. At the moment, identity checking procedures to complete these requirements are non-standardised, fallible, labour-intensive and costly. Now, if transactions were logged on an immutable, secure and transparent blockchain ledger like Ethereum and had a verifiable timeline, banks and regulators would be able to access these records when needed. The need for inefficient, time-intensive and costly independent procedures would be reduced. Regulators with access to these ledgers could proactively work with banks to spell the end of dreaded audit trails.
Overall, blockchain will play a major role in improving the way banks and other providers can be more transparent and accountable while being more efficient and cost-effective. Australian banks like the Commonwealth Bank of Australia are conducting successful experiments with Ethereum, ANZ have announced the production of a blockchain-based trade finance platform and National Australian Bank is taking part in different blockchain projects. There is no doubt that with more banks, super funds, mortgage, and insurance companies jumping on board, blockchain projects will become more innovative and customers will no doubt benefit from this next take on banking.
For more on how blockchain is changing financial systems, check out the 100+ projects decentralising finance and other banking and finance case studies on our website.
Disclaimer: The views expressed by the author above do not necessarily represent the views of Consensys AG. ConsenSys is a decentralized community with ConsenSys Media being a platform for members to freely express their diverse ideas and perspectives. To learn more about ConsenSys and Ethereum, please visit our website.
