APRA slammed over weak bank regulation

A former research head at the Australian Prudential Regulation Authority has branded bank regulation a ‘farce’ and ‘fake’

A former research head at the Australian Prudential Regulation Authority has branded bank regulation a “farce” and “fake”, penning a 27-page missive accusing the regulator of acting as a “financial trade guild” that protected bank profits.

Wilson Sy, who worked at APRA for six years to 2010 including a stint as research head, said the reputation of regulators as “tough cops on the beat” was a myth propagated by regulators and the major banks.

“Regulators work to benefit the industry rather than the whole community,” he said, suggesting the heads of agencies were chosen “not to rock the boat”.

“Enforcement is totally alien to this trade guild philosophy of self-regulation. Even with new rules and regulation entities can delay compliance citing impracticality or unreasonable demands by regulators, who are ignorant of real-world operations,” he wrote.

The royal commission into financial services, which delivered recommendations earlier this year, accused APRA and the Australian Securities and Investments Commission of lax enforcement.

“Regulation that is not enforced is fake regulation,” Mr Sy wrote, condemning the commission for stopping short of recommending structural changes.

“Regulations are too complex and ambiguous to enforce,” he said.

APRA received another $145 million in the latest federal budget, on top of $7m for a new regulator to oversee it and ASIC

Descrdibed by a former colleage as “bright” but “simply having different views”, Mr Sy, a semi-retired former physicist, said regulation had created huge barriers to entry that meant the major banks “acted as a monopoly”.

“Through industry consultation, guidance notes, compliance rules and prudential standards, APRA has been acting as a trade guild to harmonise trade practices,” he wrote.

His analysis, published in the Social Science Research Network in May, has been submitted to Graeme Samuel as part of the APRA capability review, a recommendation of the Productivity Commission’s inquiry into financial competition.

“It’s a systemic issue, it’s not about a particular person,” said Mr Sy, who was a physicist at the Australian National University in the 1980s.

APRA lacked experts and its databases were a “shambles because they have not been properly used or maintained”, he said.

The royal commission showed banks “competed” to maximise their profits rather than lower prices and serve customers, and they “acted as a monopoly”.

“The conglomerate structure of major banks operating the gamut of financial services allows them to extract invisibly high fees and costs from consumers,” wrote Mr Sy, who recommended the sort of structural separation among commercial, investment banks and fund managers that existed in the US until 1999.

Mr Sy said capitalism was wrongly being blamed for failings in the financial system, when failures were as result of “government sanctioned oligopolies which have captured the regulators”. APRA declined to comment on the analysis.