Helen Rowell, APRA deputy chairman
Helen Rowell, APRA deputy chairman

Given that most commentators cheered and some grumbled about the reach of the interim report from the Hayne royal commission, you could probably conclude that Commissioner Kenneth Hayne got it pretty much right.

An interim report was never going to please everybody because in this case it’s all about what went wrong, most particularly in the bank lending and financial advice areas, and there’s a total absence of heads appearing on spikes.

That said, some organisations got a pretty substantial towelling up, most particularly the supposed twin peaks regulators, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.

As Hayne put it, “The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court.”

There are ways to punish miscreants other than via court action. But as Hayne wrote, ASIC went for what has long been called the ‘wet lettuce’ penalty approach:

“Little happened beyond apology from the entity, a drawn-out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct.

“Infringement notices imposed penalties that were immaterial for the large banks. Enforceable undertakings might require a ‘community benefit payment’, but the amount was far less than the penalty that ASIC could properly have asked a court to impose.”

We already knew that but when a former justice of the High Court spells out in easily understood language what has really got up his nose, you pay rapt attention.

What rankled him was that once the big players realised they could arm wrestle and obfuscate their way to coughing up a financial penalty that was less than the profit they had made by doing the wrong thing, it was game over.

APRA will be getting quite a serve in the final report, too. I’d often wondered how a prudential regulator charged with keeping an eye on financial institution solvency was ever going to get dragged into a fight about consumers being ripped off but the charter makes it clear.

If anything, it puts consumers ahead of financial stability. Talking about the banks and insurers APRA oversees, it states: “These institutions currently hold approximately $6 trillion in assets for Australian depositors, policyholders and superannuation fund members (our ‘beneficiaries’). APRA supervision is aimed at protecting the interests of these beneficiaries and promoting the stability of the Australian financial system.”

It’s pretty clear.

Royal commission deja vu

As a veteran of the HIH Royal Commission of 2002, I can’t help noticing just how much this is a case of history repeating itself.  The two commissions seem to run in parallel in the area of ethics.

Much of Hayne’s ire in the interim report is directed at bank employees and advisers who were more interested in earning lots of bonuses and commissions than in safeguarding the interests of their various clients.

Looking, for instance, at the mortgage broking industry, he noted that, “For individuals, the conduct resulted in being paid more. For entities, the conduct resulted in greater profit. How is a value-based commission consistent with acting in the interests, or best interests, of the client?”

That’s a punchy rhetorical question with an obvious answer – it isn’t – and it’s quite an echo of Commissioner Neville Owen’s musings in his 2003 report on HIH, in which he wondered whether insurance company executives doing dodgy things such as hiding reserve shortfalls ever asked themselves, “Is this right?”

That question, of course, has the same obvious answer.

In both commissions, there’s an air of judicially worded incredulity at how people with good salaries and financial educations can get themselves into such a mess that they manage to ruin their own reputations and those of their organisations for years or even decades.

Regulators and resources

Talk of reputation brings us back to ASIC and APRA. While the zealots are muttering about ditching both of them because of their feeble performance, let’s remember that APRA got a wholesale cleanout in 2003 after HIH. The entire top layer of management walked the plank. What replaced it was a triumvirate of commissioners headed by the well-respected John Laker.

You could be cynical about the fact that APRA’s back in the crosshairs but that doesn’t mean the overhaul was wasted. It’s generally believed nowadays that the reboot of APRA 15 years ago was the single most significant factor in Australia having avoided the GFC of 2008. APRA has basically done well on the financial stability half of its charter, at the cost of the near-abandonment of the other half.

It might be logical now to hand the consumer protection side of the APRA charter entirely to ASIC or to a muscled up version of the ASIC we see now.

Lots of things will have to change there because we know we’ve been lied to by the government, in particular our new Prime Minister Scott Morrison when he was treasurer, about ASIC being the “tough cop on the beat”.

It’s telling that Peter Kell, the ASIC deputy chairman with the most responsibility for consumer protection, has announced he’s leaving his post before the end of his contract. That news came out a couple of weeks before the interim report. But he’s just a bloke who has been doing a very difficult job with limited resources.

There will obviously be some damning recommendations in the final report but Kell will have made his exit by then. Meanwhile, new chairman James Shipton can safely claim he arrived after the train wreck.

The ASIC people are culpable, as Hayne wrote, for beating up on the small fry while letting the big banks off very lightly, but it’s also true that the federal government has been careless in cutting ASIC’s funding at unsuitable moments, and it’s always more expensive to tackle big fish than small ones.

Conclusion? The government must be prepared to resource the consumer-protecting regulator in such a way that it can treat both scales of villain equally – in court if necessary. What is bound to happen is that the ‘cost of doing business’ approach to penalties that the big banks have been enjoying will absolutely come to an end.

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