Kenneth Hayne did plenty to take ASIC and APRA to task but when it came time to explain how to fix them, he appeared to lose his nerve, Patrick McConnell, an honorary fellow at Macquarie University Applied Finance Centre writes.

On regulation, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is a grave disappointment. It feels like the commission ran out of time to think deeply about the implications of its findings for banking regulation.

The Letters Patent that set up the royal commission tasked it with determining: first, whether any conduct of financial institutions “might have amounted to misconduct” and who was responsible; second, whether regulation was effective enough to “identify and address” such misconduct; and third, whether any changes to legal frameworks, practices and regulation were needed to “minimise the likelihood of the misconduct reoccurring in future”.

On the first two, the royal commission was a stunning success, skewering multiple witnesses to demonstrate without doubt that there was rampant misconduct across the sector and that the banking regulators were missing in action in identifying and preventing that misconduct. Definitely an A-plus. Top marks for presentation, also.

Did Hayne lose confidence?

On the third task, however, and arguably the more important – how to fix the problems – the commission’s final report is worth a B-minus at best.

Having thoroughly and correctly castigated ASIC and APRA in the interim report and continued the same in the final report, which was publicly released on Monday afternoon, the commission then appeared to suffer a loss of confidence when faced with having to suggest a way forward.

Commissioner Kenneth Hayne, obviously under the gun to complete the final report on time, concluded that although “there would be some advantages to be gained by detaching some aspects of ASIC’s remit and requiring the [Australian Competition and Consumer Commission] ACCC to take responsibility for their administration, the costs of that disruption outweigh the possible benefits”. That is, don’t rock the boat!

No evidence was produced nor witnesses called to support that conclusion, but the source is obvious – it comes straight from the Treasury’s early submission to the commission. While stating that good leadership of the regulators was critical to creating the correct regulatory culture, the commissioner made no recommendations as to how that leadership culture of the regulators should change, leaving the present incumbents in place, relying on the promises they made to do better.

As a final throwaway line, the commissioner said he had considered “radical change” in the form of a specialist enforcement agency “to prosecute criminal breaches”, arguing cogently that there would be benefits to developing “core skills in what is an increasingly specialised area of the law” (in which ASIC has demonstrated remarkably little capability).

But, nobbled by the Treasury, the commissioner put that suggestion on the ‘wait and see’ pile. In the red ink that denotes that the commissioner is making an important point, he wrote:

“Although I do not now recommend the establishment of a specialist civil enforcement agency, ASIC’s progress in reforming its enforcement function should be closely monitored. If, over the coming years, it becomes apparent that ASIC is not sufficiently enforcing the laws within its remit, or if the size of its remit comes at the expense of its litigation capability, further consideration should be given to developing a specialist agency of the type I have described.”

Kicking the can down the road

In other words, he kicked that can down the road for a few years. Nor did Hayne give a clue as to what “sufficiently enforcing” would look like, given that regulators have not only failed to enforce the laws to date but also, in many cases, they have not even detected that laws have been broken.

Then, having ducked that problem, he decreased the likelihood of ASIC succeeding in its new mission by dumping a whole load of new requirements onto the hapless regulator, not least that it somehow get involved in the superannuation system.

He also required ASIC to get involved in implementing the Banking Executive Accountability Regime legislation alongside APRA, and dumped even more work on the flailing regulators by calling for extending BEAR across the whole financial sector.

A new term, ‘co-regulation’, was invented to describe this mishmash. It cannot be long before that concept becomes no regulation.

The royal commission has baked failure into the regulatory system, and it won’t be long before we will be back revisiting these issues again.

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