The banking royal commission has released its final report and the stories of banking, superannuation and financial services misconduct have been laid bare for the community to see.
Many issues have arisen with respect to the unacceptable actions of financial businesses and the consequently justifiable claims and retribution.
Commissioner Hayne distinctly articulates the failure of banks and other financial service providers to discharge the obligations they owe their customers.
Highlights include charging possibly a billion dollars for services never delivered and exposing to the light the greedy decisions of key executives.
Hayne has recommended 24 referrals for prosecution; however, he has stopped short of recommending significant new regulation or a structural reshaping of the regulators.
Instead he has focussed on the impetus to change the cultures of all industry players from one of self-serving greed to a set of values more in tune with broader community expectations.
Nowhere is this more apparent than with respect to the regulators. Hayne asks the question, where were the regulators?
As this train wreck unfolded the twin peak regulators, APRA and ASIC were found wanting, the banks were shown to have played them for the toothless tigers they were.
Hayne clearly lays responsibility for enforcing industry compliance with ASIC.
ASIC has had it’s co-operative compliance strategy of soft engagement exposed as a hollow attempt at remediation presenting an alternative to enforcement.
Hayne has made it clear it is time for ASIC to step up to the plate and litigate, using enforcement to induce entities into change or serve the consequences.
Penalties must reflect deterrence within the business context and not merely an expense of doing business. ASIC has been given legal authority, the public power, to be exercised for good public reasons.
Hayne has put ASIC on notice that it must take hard compliance options or default these powers to a separate authority.
Hayne states that the starting point ‘must always be, that the law is to be obeyed and enforced …. An adequate deterrence of misconduct depends on visible public denunciation and punishment’.
The regulators presented the regulatory pyramid as a cost effective deterrent sanctioning low level fines and enforceable undertakings, which when applied to banking revenues, paled into insignificance.
The top of the metaphoric pyramid shows that the highest level of regulatory response, litigation, is required to adequately address the “breaches of law by large entities”.
Hayne notes that this has been missing.
The government and ASIC must accept the inevitable time and cost of going down the litigation path.
The regulator’s staff must exercise a new investigative skillset in order to bring maters to the court before they escalate to the proportions exposed by Hayne.
The government must fund this clean-up cost. Hayne proposes that ASIC’s mantra has to change from one of “how can this be resolved by agreement?” to one of “Why not litigate?”.
This means a shift in the mindset of ASIC’s staff accompanied by an expanded set of skills and qualifications which may not be inherent in the current cohort, either at management or operational level.
The government would need to support this staff with significant on-going budget commitments beyond the additional $26.2 million provided to accelerate and increase the intensity of ASIC's enforcement activities and enhance its capacity to pursue actions for serious misconduct against well-funded litigants, through the Enforcement Special Account in the 2018 federal budget.
Moreover improving staff professional capabilities in areas such as forensic accounting and in marshalling legal cases should require funding.
To ensure that the regulators pursue and maintain a strengthened regulatory stance Hayne recommends the creation of a new external oversight authority for both APRA and ASIC, independent of government, established by regulation.
Reporting through the appropriate minister to the parliament at least biennially, this authority would report on the regulators “discharge of their functions and meeting of their statutory objectives”.
Of particular note is the proposed requirement that “the authority produce or commission quadrennial capability reviews of each entity (APRA, ASIC)”.
The costs of establishing a new authority with members and permanent support staff, together with the increase in potentially drawn out litigation will be significant and whilst government will be expected to initially increase funding the current spirit of user pays means that the costs of doing financial services business will rise for both the regulators and the regulated.
No doubt banks will seek to recoup transaction costs and ASIC/APRA will seek to recover ‘budget efficiencies’ through broad based registration fees that primarily effect small to medium entities.
Dr Ian Fargher is a Lecturer in Accounting at the University of Wollongong Sydney Business School