It’s like a Monty Python sketch – “This parrot is NOT dead, see, it’s still paying life insurance. Why would it do that if it was deceased? Who would be silly enough to sell a dead parrot life insurance?”
Justice Hayne, Commissioner of the Royal Commission (RC) into Misconduct in the Financial Industry, asked a similar question and in the commission’s interim report provides some answers:greed – “the pursuit of short-term profit at the expense of basic standards of honesty”; and
because they can - “when misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done”.
In 1,000 dense pages, the Commissioner and his team slammed the largest financial institutions, especially the Big Four banks, and the two main financial regulators: the prudential regulator, the Australian Prudential Regulation Authority (APRA); and, with particular venom, the conduct regulator, the Australian Securities and Investments Commission (ASIC).
Volume 2 of the interim report documents a litany of case studies of bad behaviour, mainly by banks, some of which (after further scrutiny in future) might be considered breaches of the Corporations Act.
The revelations of blatant misconduct are shocking but more shocking still is the failure of regulators to take appropriate action: "When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done. The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court." the report said.
A recent report, by the Australian Productivity Commission (PC), into competition in the financial services system echoed the commission’s conclusion that “competition within the banking industry is weak” and worse encourages the types of bad behaviour documented by the commission, such as cold calling vulnerable customers.
Getting away with it
But they get away with it. “But there being little threat of failure of the enterprise, and there being little competitive pressure, pursuit of profit has trumped consideration of how the profit is made. The banks have gone to the edge of what is permitted, and too often beyond that limit, in pursuit of profit.”
Echoing the Productivity Commission, the interim report criticises the lack of real competition in the Australian banking industry, which gives rise to the systemic misconduct documented in the forensic investigations undertaken by the commission’s staff “The law sets the bounds of permissible behaviour. If competitive pressures are absent, if there is little or no threat of enterprise failure, and if banks can and do mitigate the consequences of customers failing to meet obligations, only the regulator can mark and enforce those bounds.”
Scathingly, the commissioner concluded that neither ASIC nor APRA had enforced the legal boundaries “in a way that has prevented the conduct described in this report”.
Nor are there valid excuses for the regulators failing to act, since there are sufficient laws in place already to cover the misconduct reported but there is a reluctance by regulators to implement the laws already in place. The regulatory system has failed, in great part, because the regulators did not do the jobs they were tasked by parliament to do.
Since any attempt to fix the culture of misconduct across the system, must start with addressing the failures of regulators to act, then the regulatory regime must be repaired first. The commission recognises that there are significant barriers to fixing the current Australian financial regulatory system, beyond the reluctance of regulators to take on the ‘big end of town’.
Merely chucking money at the problem or tinkering at the edges will not work. The commissioner notes that despite the fact that ASIC “may be seeking to alter its approach to enforcement, [he …] remains to be persuaded that it can and will make the necessary changes”. In other words, it is very difficult for an especially timid leopard to change its spots?
The first and toughest problem is confusion over ASIC’s remit which, as the corporate as well as the financial regulator, is almost impossibly wide.
And the commission notes that ASIC keeps taking on more work, as new corporations’ legislation is enacted. This increase in workload has been at the expense of ASIC’s enforcement work being given precedence.
The commissioner points out that it is all very well providing advice on new legislation to the industry but that is pretty useless if not backed up with the teeth of enforcement action. Too often, ASIC has sought a negotiated outcome, such as an Enforceable Undertaking (EU) and a nominal “community benefit payment [ ... which is] unrelated to the profit derived by the entity from the contravening conduct”.
That is a slap on the wrist with a promise to do better in future. The commissioner writes that is not enough and “The regulator must do whatever can be done to ensure that breach of the law is not profitable”.
The Interim Report does not answer the very many questions that arise from the failures of the financial regulators to take action against flagrant misconduct but raises many important questions that must be addressed before the systems can be fixed.
How, where and when these vital issues will be tackled remain questions that the Commission has not yet answered. But the questions must be answered before the systemic cultural problems can be fixed.