The last month has been a forgettable one for the Financial Services regulators ASIC and APRA after both had their cases shut down by the courts. The "litigation first" directive signalled by the regulators after the royal commission was supposed to help draw a fresh line in the sand for the financial services industry. Unfortunately, many think these court judgements have only further compounded the uncertainty for industry players. Although everyone is aware of the refocussed regulatory gaze, business may question future action that little bit more thoroughly, with the view that the regulators could be overreaching and simply trying to create compliance through speculative threats.
Last week a Federal Court judge dismissed APRA’s efforts to ban former IOOF CEO Chris Kelaher and other executives from the group, saying APRA’s argument was “unpersuasive” and showed “systemic weakness”.
Although disappointed with the decision, APRA deputy chair Helen Rowell said “Litigation outcomes are inherently unpredictable; however, APRA remains prepared to launch court action – where appropriate – when entities breach the law or fail to act in an open and cooperative manner. APRA still believes this was an important case to pursue given the nature, seriousness and number of potential contraventions APRA had identified with IOOF.”
ASIC Lose – But Appeal
It it’s failed action, which has theatrically become known as the “Waygu Beef and Shiraz ruling”, ASIC had alleged that Wespac had broken responsible lending laws hundreds of thousands of times by relying on the Household Expenditure Measure benchmark, instead of their customers' actual expenses.
For its part, ASIC will appeal in the Westpac case, and has said this is evidence they will continue with its staunch approach in the name of creating clarity for consumers.
ASIC Not To Blame For Uncertainty
In a statement, ASIC said they thought the judgement against them created uncertainty as to what is required for a lender to comply with its assessment obligation, and doubled down saying that they do not “regard the decision as consistent with the legislative intention of the responsible lending regime.”
In spite of the recent ruling ASIC have said “We continue to pursue this work via our ‘Why not litigate?’ enforcement approach” that was outlined in their Enforcement Policy Update. Both ASIC and APRA have been keen to both send a message and create a new standard of what is expected regarding industry compliance and behaviour. They have been emboldened by a combined $550 million boost in funding from the federal government in March after both regulators were slammed by the royal commission for failing to litigate against major financial institutions.
What’s The Alternative?
Industry, Politicians and media have all been quick to criticise the regulators following their underwhelming forays into litigation. An editorial in Fairfax pointedly asks the question – “If the regulators do not know what the law is – which was the case over Westpac and IOOF – then how are financial institutions supposed to know what they are obeying?” But the same editorial states that “the regulators’ previous penchant for companies to enter into enforceable undertakings not to repeat bad behaviour may have become too cosy”.
Rather than bemoan a couple of false starts in the litigation space, the industry should recognise that hopefully this action is the beginning of the solution to the problem that the industry finds itself in after years of ineffectual practices. The industry has shown that self-regulation has had far from perfect outcomes – this is what we get for it.
When questioned about their adherence to the “why not litigate” approach, ASIC Chair James Shipton told Parliamentary Joint Committee’s hearing last week that the regulator was seeking “judicial certainty” by pursuing matters in court and that this action was what ASIC was encouraged and expected to take. Shipton said the action was part of getting “clarity as to the extent of our own jurisdiction and to get clarity as to the extent of the rules and obligations that exist on financial institutions”.
It may take a few false starts but hopefully a behavioural line will become apparent that both industry and the regulators will recognise and agree on going forward. If they don’t – the courts – for all their own shortcomings in their abilities to make these decisions – will adjudicate.