APRA urges finance sector to properly self-govern

APRA admits some failings, but says the financial industry can’t complain about heavier regulation if it can’t govern itself.

APRA chairman Wayne Byres. Picture: Britta Campion

APRA chairman Wayne Byres has conceded mistakes in supervising the finance sector but turned the criticism back on industry, calling for a revival of self-regulation to restore trust.

In a speech given on Thursday morning, Mr Byres said it was up to the industry, companies and individuals to better regulate their own conduct with a focus on what was right, rather than what it could get away with.

“While after-the-event punishment will act as a general deterrent against illegal behaviour, more than just compliance with the law is needed to restore the financial sector’s reputation,” Mr Byres told the Banking and Finance Oath Summit.

“Individuals, companies and industries must better regulate their own behaviour, to do not only what is legal, but also have regard to what is right.”

His comments come just weeks after a review led by former competition regulator Graeme Samuel found the Australian Prudential Regulatory Authority was secretive, slow to respond and out of step with community expectations. The scathing report recommended a series of internal fixes as well as new measures to be introduced by the government. It followed regulatory failings exposed by Kenneth Hayne’s royal commission into finance sector misconduct.

Mr Byres last month attempted to play down the criticism, describing the review as an “endorsement that we have identified the right priorities” and an evolution in the way the regulator does its job.

But on Thursday he said regulators must accept some responsibility for these failures and do better.

“Stronger and more active enforcement of the law as advocated by the royal commission is part of the solution.

“Supported by stronger powers, both APRA and ASIC are getting on with that,” Mr Byres said.

“Nevertheless, our regulatory framework is rightly and firmly founded on the premise that boards and executives are ultimately responsible for the activities and performance of their companies.”

Mr Byres likened the financial sector’s reputation to Sydney’s Homebush Bay, one of the most polluted and toxic areas of Sydney before it was rehabilitated and become the centre of the 2000 Olympic Games.

“Back in the 1950s and 60s, when much of this pollution took place, there were few laws that restricted factories and businesses from these kinds of harmful waste disposal practices,” Mr Byres said

“And nor was there any incentive for self-regulation; at the time, it was seen as an acceptable way of dealing with waste. As a result, it delivered a classic example of the tragedy of the commons.

“The perception of fairness in the financial system has, in many ways, suffered from similar long-term neglect.”

Mr Byres said all four levels of regulation had “failed to some degree” in the financial sector, leading to APRA getting more powers and a brief to be more activist in its approach via the Government’s Banking Executive Accountability Regime, more prescriptive standards for remuneration and product intervention powers given to the regulator.

“You can argue the extent to which failings in formal regulation and self-regulation are to blame, but one thing is certain: the consequence of weak self-regulation has been an increase in formal regulation.

“Undoubtedly, this additional regulation comes at a cost, and industry complaints about regulatory burden are increasingly being heard again. Thus far, however, not much has been offered as an alternative means of generating better outcomes.”

Mr Byres’ speech came as APRA released an update on its progress in implementing a swag of recommendations for improving the conduct of the industry and the performance of the sector.

APRA said it had included the findings of the capability review in its work developing a better approach to supervising the governance, culture, remuneration and accountability of regulated institutions.