Banking inquiry: ASIC lashed for letting misconduct go unpunished

Kenneth Hayne has strongly criticised the financial regulators, effectively saying they have been missing in action.

ASIC boss James Shipton with former financial services minister Kelly O’Dwyer in Melbourne on August 7. Picture: AAP

Royal commissioner Kenneth Hayne has issued a scathing critique of the nation’s most powerful financial regulators, effectively saying they have been missing in action as misconduct and poor behaviour became endemic in the financial services industry.

Mr Hayne said in his interim report that misconduct either went unpunished, or the consequences did not match the seriousness of what had occurred.

The conduct regulator, the Australian Securities & Investments Commission, rarely went to court to seek public denunciation or punishment for the misconduct, and the prudential regulator, the Australian Prudential Regulation Authority, never went to court.

“Much more often than not, when misconduct was revealed, 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,” Mr Hayne said.

“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.” New ASIC chair James Shipton, who succeeded Greg Medcraft early this year, yesterday noted the interim report’s “serious and important observations” on ASIC’s role as a regulator.

ASIC, he said, would carefully consider the observations, as well as the broader findings in the report, and would respond in its submission due by October 26.

Mr Shipton said the regulator would continue to work with the royal commission, the government, parliament and other regulators to build a stronger legislative, enforcement and regulatory framework with tougher penalties.

Mr Hayne slammed ASIC’s starting point in relation to misconduct, which he characterised as: “How can this be resolved by agreement?”

He said emphatically that this could not be the starting point for a conduct regulator.

“When contravening conduct comes to its attention, the regulator must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach,” Mr Hayne said.

“Laws are to be obeyed. Penalties are prescribed for failure to obey the law because society expects and requires obedience to the law.”

Contraventions of the law, he said, were not to be treated as little more than bargaining chips to ensure agreement to remediate customers.

Further, breaches of the offence and civil penalty provisions of financial services laws were not to be treated as “just a breach of those laws”, as if they were a less important area of the law.

The commissioner also excoriated ASIC for taking too long to negotiate outcomes, most likely to accommodate the wishes of the institution rather than determine what it wanted from the negotiation. “There have been too many cases where remediation programs have taken months, even years, to formulate and implement,” Mr Hayne said.

“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.”

While ASIC’s powers were limited, the regulator had more enforcement powers than it had been prepared to use.

Its resources were finite. But Mr Hayne said he did not accept that the appropriate response to scarce resources was to avoid compulsory enforcement action and settle all delinquencies by agreement.

APRA did not fare much better in the report, although the commissioner said its limited misconduct mandate partly explained its lack of action.

The prudential regulator was required to examine issues of governance and risk culture through the lens of financial stability.

APRA moved last August to establish a prudential inquiry into CBA’s culture, saying there had been so many incidents in the bank’s recent history that had damaged its reputation.

“Until that time, APRA had taken no public step pointing to any deficiency in the governance and risk culture of any of the major banks or any of the other large financial services entities falling within APRA’s remit,” Mr Hayne said.

“As this report records, other entities have engaged in conduct of the kind that led APRA to conduct its inquiry into CBA.

“The conduct suggests that there has been insufficient attention given within those entities to regulatory and compliance risk.”

As this was only an interim report, with the final report due by next February, Mr Hayne merely asked the question of what steps APRA should take in relation to other institutions with governance problems.

More often than not, he said, the conduct which had now been condemned was contrary to the law. Passing new laws that said “do not do that” would add an extra layer of legal complexity to an already complicated regime.

“What would that gain?” the commissioner asked.

Alternatively, the existing laws could be simplified, or enforced differently.

Answers to those questions would be in the final report.