Banking royal commission: ASIC failed to enforce the law

Opinion Piece

Date : 29 September 2018

Author: The Hon. Josh Frydenberg MP

Publication: The Australian

Our financial system is the largest sector in the economy, employing more than 400,000 people directly and affecting nearly every aspect of our lives. But it is clear is that the culture, conduct and compliance of the sector are well below the standard Australians expect and deserve.

It is against this background that at the end of last year the Coalition government announced a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Its task is to report on misconduct and conduct that falls short of community standards and expectations and to identify the causes of that conduct.

It is important to appreciate that the commission’s role is to exercise executive, not judicial, power. The commission does not determine disputes, award damages or decide whether there has been misconduct. These are tasks for a court.

The commission’s interim report, which was delivered to the Governor-General yesterday, shines a very bright light on the poor behaviour of the financial sector. Banks and other financial institutions have put profits before people. Greed has been the motive. Short-term profits have been pursued “at the expense of basic standards of honesty”.

Too often, selling products and services became the sole focus of attention. The culture and conduct of the banks was, in the words of commissioner Kenneth Hayne, “driven by, and reflected in, their remuneration practices and policies”. This was coupled with deficiencies in governance and risk management.

In any organisation, rules, systems and processes are all necessary; but having the right culture and performance depends “on people applying the right standards and doing their job properly”. In this respect many of those working in our financial sector were found wanting.

The interim report also makes clear that while behaviour was poor, misconduct when revealed was insufficiently punished or not punished at all. The effectiveness and ability of regulators to detect, monitor and enforce compliance with the law was questioned.

The Australian Securities & Investments Commission “rarely went to court to seek public denunciation of, and punishment for, misconduct”. Indeed, “little happened beyond apology from the entity, a drawn-out remediation, an infringement notice or an enforceable undertaking that acknowledged no more than that (ASIC) had reasonable ‘concerns’ about the entities’ conduct”.

In particular, infringement notices imposed penalties that were immaterial for the large banks. The punishment rarely fitted the crime. ASIC typically favoured negotiation over litigation, even though its success rate for litigation since 2011-12 averaged more than 90 per cent and in 2015-16 96 per cent. With ASIC’s preference being for “easily won cases”, it is only appropriate to ask why.

The answer does not lie in a scarcity of resources because, as the commissioner points out, that is not an acceptable reason for the regulator “to avoid compulsory enforcement action and instead attempt to settle all delinquencies by agreement”.

Essentially a failure to enforce the law undermines the authority of the regulator whose fundamental responsibility is to do just that. Without the “moral suasion” and the “big stick” that comes with enforcement, a culture of compliance is hard to achieve. The interim report bears this out.

Unfortunately, what a lack of enforcement and appropriate punishment in the financial services sector has produced is a situation where the tail is wagging the dog. As Haynes makes clear, “too often entities have been treated in ways that would allow them to think that they, not ASIC, not the parliament, not the courts, will decide when and how the law will be obeyed or the consequences of the breach remedied”.

This is clearly unacceptable and must not continue.

The commissioner also asks what can be done to prevent the conduct happening again, making the telling observation that “much more often than not, the conduct now condemned was contrary to the law”.

This raises the issue as to whether new laws are required or whether existing laws simply need to be better enforced. Simplification may be, according to the commissioner, a better route rather than adding “an extra layer of legal complexity to an already complex regulatory regime”.

The basic principles he articulates for the sector are: obey the law; do not mislead or deceive; be fair; provide services that are fit for purpose and delivered with reasonable care and skill; and finally, when acting for another, act in the best interests of that other. These are values that all Australians can relate to and would expect from their financial institutions.

Josh Frydenberg is the federal Treasurer.

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