Kenneth Hayne’s vision for a reformed financial services industry is less about punishing the big banks — apart from some nervous executives who might end up in the dock, the banks will be happy with yesterday’s report — and more about simplicity.
Hayne has uncovered an industry broken at its core, with complex and unsatisfactory regulation and inept, tame regulators. His vision is an industry with a better culture, driven by overhauled remuneration and an extended and more aggressive BEAR Act. An industry working to a simplified regulatory framework that is clearer and has few or no carve-outs and exemptions. One with no conflicts of interest to motivate participants to rip off their own customers, enforced by more aggressive regulators whose first instinct is to prosecute, not tap crooks on the wrist.
However ambitious the other elements are, it’s that last part that is most problematic.
Hayne’s report is, unsurprisingly, damning of both ASIC and APRA. As a lawyer and judge, Hayne can barely conceal his disgust at the failure of the “police” of financial services to go after so many crooks. Wayne Byers of APRA is singled out for particular criticism for his blase approach to fees for no service, which Byers seemed to think was just some glitches in the software, not — as in Hayne’s view — a billion dollar criminal enterprise for which people should be jailed.
But Hayne recommends keeping the current “twin peaks” model of financial services regulation, rather than undertaking any major change. “Twin peaks” is apt, because under the current ASIC-APRA regime, plenty of consumers have found themselves in a Lynchian nightmare filled with absurdities and malevolent entities.
The obvious change was to move the financial services consumer protection function to the ACCC from ASIC. The latter has operated more like an enabler of consumer rip-offs than the “tough cop on the beat” Scott Morrison claimed it was when he ferociously insisted there was no need for a royal commission. But Hayne rejects the ACCC option. He says there will be transitional costs and disruption to enforcement in such a move, and that the function will be demanding wherever it sits.
He cites Treasury’s view that there’s no point shifting the function because “the impact of the breadth of remit on a regulator is largely a function of its leadership and resourcing (including staffing) … with strong leadership and adequate resources (including staff), a broad remit is not a problem”.
Treasury, probably without realising it, thus put their finger on why the twin peaks model is broken — irremediably so — in a way that Hayne never fully explores. The Hayne report covers the history of the twin peaks without identifying the core problem that on consumer protection, ASIC was set up to protect the banks from regulators, not consumers from banks. The result of the Wallis Inquiry in the late 1990s was the shift by the Howard government of consumer protection in financial services from the ACCC, which had infuriated the big banks by pursuing them aggressively, to ASIC, which from the outset was a toothless — even barkless — watchpoodle.
If consumer protection in financial services had stayed with the ACCC, the history of banking scandals over the last 20 years would have been very different.
To make things worse, ASIC endured efficiency dividends from Labor that crimped whatever faint regulatory pulse it might have had. Then the Abbott government gutted it, slashing its budget by hundreds of millions and hundreds of staff, as part of the Liberals’ agenda to make life ever easier for their big bank donors. After all, the banks’ former executives populated a number of frontbench spots (sorry — is that the sort of observation that got us excluded from former Deutsche Bank executive Josh Frydenberg’s royal commission lock-up yesterday? Oops).
As Treasury says, resourcing is critical to fulfilling a remit. And ASIC hasn’t had the resourcing for years.
But leadership, or lack thereof, has been the long-running problem at ASIC. ASIC has never been led by a regulator feared by the banks, like corporations feared Allan Fels, Graeme Samuel and Rod Sims at the ACCC. Its current leader, Liberal appointee James Shipton, has continued the ASIC tradition of gutlessness, having only been prodded into action by the humiliations of the royal commission hearings.
Hayne thinks the problem can be solved by telling ASIC to get more litigious, and by having a new (though government-appointed) oversight body to monitor its and APRA’s performance. A watchdog for the watchdogs, if you like. Except, ASIC had a watchdog in 2014 — a Senate committee led by Labor’s Mark Bishop and the Nationals’ John Williams, who forensically exposed ASIC’s astonishing failings around Commonwealth Financial Planning.
The exposure and humiliation of ASIC’s senior executives — and their extensive mea culpas about lessons learnt blah blah — did nothing to improve ASIC’s performance in the ensuing four years. True, part of that was because Abbott and Joe Hockey had crippled it with savage cuts. But its mindset of letting the perpetrators dictate how they should be punished for breaking the law was still apparent even as its executives were fronting Hayne last year.
Nor is this APRA’s first time at the rodeo. APRA’s response to the collapse of HIH Insurance in March 2001 — later found to have cost $5.3 billion — was criticised by another royal commission for not recognising the seriousness of the unfolding collapse, for the dearth of resources the regulator had committed to HIH, and not being sufficiently sceptical of the information it was receiving from HIH.
That royal commission, under Neville Owen, recommended significant changes to APRA, including an overhaul of its governance framework. APRA and Treasury have both since argued that the regulator significantly lifted its game after HIH. Judging by the evidence to the royal commission and yesterday’s report, that’s no longer the case. But Hayne wants to give APRA a third chance to get it right.
For all of Hayne’s proposals to make ASIC more aggressive, make it work better with APRA and set a watchdog over both, nothing will stop a future government from again doing the behest of the big banks and gutting ASIC. And nothing will provide the “leadership” that is so sorely needed to make the twin peaks model a success. On consumer protection, the current regulatory framework is weak in its very DNA, and has been since the day it was established for the purpose of making life easier for the banks.
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