The much anticipated public release of the final report into the banking Royal Commission has been delayed till 4.10pm on Monday February 4th. The government will receive the report as scheduled on Friday but will not release it to the public until the ASX closes on the following Monday.
Treasurer Frydenberg has previously stated concerns that the release of the report could impact the share market, and said the public release of the report and its recommendations would “take into account” its potential market ramifications. Shadow Treasurer Chris Bowen criticised the decision saying “Refusing to release the royal commission’s final report immediately would unnecessarily politicise the handling of the report and give rise to potential material market risks around leaks of all or part of the report”.
Why not release the report on the Friday afternoon? One cynical wag has suggested the government needs the weekend to formulate their strategic response before going public, while another said it would provide the opportunity to give “their mates” in the finance industry a heads up as well. The decision does seem to promote such speculation…
Speculation? Yes Please!
To the potential contents of the report itself – the scope of the commission is so widespread, we’ve decided just to look at possible outcomes for the industry regulators at this point. What could the regulatory future look like following Hayne’s recommendations?
The commission’s interim report was scathing in its assessment of both APRA's and ASIC's enforcement of standards of behaviour and punishment. Both regulators have been described as taking a “good cop” approach, and have had their enforcement methods described as “soft touch”. ASIC has only taken legal action against a bank for breaching an enforceable undertaking twice in the last 10 years, while APRA has been criticised for not enforcing the superannuation laws and has never taken action against a bank for failing to comply with its remuneration rules.
How Did We Get Here - Soft Touch Regulation
The interim report stated that “in the last 10 years ASIC has issued 45 infringement notices to the major banks, and accepted 13 enforceable undertakings” however, enforceable undertakings have been negotiated and agreed on terms that the entity admits no more than that ASIC has reasonably based ‘concerns’ about the entity’s conduct. Similarly, by paying an infringement notice, the entity makes no admission. It is not taken to have engaged in the relevant contravention. Yet, ASIC and the Commonwealth are prevented from starting a civil or criminal proceeding in relation to the contravention that caused ASIC to issue to the infringement notice.
In the same 10 year period, ASIC’s infringement notices to the major banks have amounted to less than $1.3 million. By contrast, in one year (the year ending 30 June 2017) one bank, CBA, declared a profit about 7,000 times greater – $9.93 billion (net profit after tax on a statutory basis). And the total amount that CBA had paid out in remediation of customers was many hundreds of millions of dollars.
Banks or Regulation: Who Is To Blame?
As Michael Pascoe has written “When an ASIC-negotiated penalty is less than the profit made from egregious behaviour, breaking the law becomes a mere “cost of business”. Breaking the law is effectively encouraged by the lax regulator.”
This dynamic throws up a couple of questions when considering a response and recommendation:
- Which is worse: financial institutions “preferring pursuit of profit to pursuit of any other purpose” or the supposed regulator letting them?
- Is it the law, or the regulators’ lack of enforcement of the law that’s the issue?
Hayne has previously suggested the industry did not need new laws and regulations but it needed the existing rules to be better enforced. Both regulators claimed that some of their previous lack of action has been the result of a lack of resources.
Already in response to the Royal Commission, ASIC has been granted an additional $70 million of funding by the government to further its supervisory capabilities. The major new initiative is called ‘Close and Continuous Monitoring’ (CCM). ASIC is embedding its staff in banks, attempting to modify banks behaviour to ensure consumers are put first. ASIC hopes to "change the mind-set in the thinking of decision-makers" in the big four banks and AMP.
Apparently similar practices have had good outcomes overseas, but it seems akin to having the teacher watch over pupils in detention. One wonders whether as soon as the teacher leaves the room, if the naughty bank boys and girls will revert to type. It will be interesting to see if and what Hayne might recommend as appropriate punishment for breaches. Joe Public might argue that a form that is easily understood ($$$) would seem an obvious solution.
You would also hope any embedded staff would be wise to the recent public revelations that the corporate watchdogs have previously had their staff wined and dined by those they are supposed to be monitoring. You could almost see it happening… “Hey Bert (ASIC rep), this weekend we’re all heading down to our corporate tent at the Spring Racing Carnival, would you like to join?”
Former ACCC chairman Graeme Samuel has slammed such hobnobbing between watchdogs and businesses they are supposed to police. Just in case it needed to be spelled out, Samuel does so: ‘gifts and hospitality are not given for reasons of altruism…they were for “ingratiation”’. He continued - “It’s about creating that sense of obligation or a relationship so that officials start to think ‘maybe I shouldn’t be as tough on this lot’”. Does it really need to be said? Apparently so.
It’s Regulation, But Not As We Know It
Hayne has previously asked if ASIC simply has too much on its plate – the implication being that it does. Although both ASIC and APRA have signalled they will continue to take a tougher approach to their regulatory activities – their deficient past performance could result in Hayne recommending they be stripped of some of their powers, resulting in a new regulator being formed to cover some parts of financial services. Whatever Hayne actually recommends in his findings; it will be in the hope of remedying the key theme that he has previously articulated:
“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 breach remedied”
Undoubtedly, things are gonna change.