RBA review findings provide lessons for ASIC

Australia’s economic regulatory agencies need to catch up to best corporate governance practice. This is especially so for Australia’s corporate governance regulator, ASIC.

The RBA review identified the Reserve Bank’s two core roles and recommended sensible reforms. Picture: Bloomberg

Australia’s economic regulatory agencies need to catch up to best corporate governance practice. This is especially so for Australia’s corporate governance regulator, ASIC.

There is a confusion of responsibilities between ASIC’s commissioners, chair (also a quasi-CEO as “accountable authority”) and executive. This organisational confusion is exacerbated by ASIC’s vast remit, multiple functions and complex (and contradictory) statutory objectives. This is a complex corporate governance cocktail. The long absence of an up-to-date government statement of expectations makes matters worse. Legislative reform is urgently needed.

Many regulatory agencies have two main functions: regulating, usually by supervising and enforcing relevant laws, and promulgating policies, guidance and (often) rules. When you reflect on these functions, they are quite different: one is very operational, and the other quasi-legislative. Arguably, enforcement litigation should also be separately considered as an additional function (as it is in criminal law). Put simply, many regulators have twin roles, sometimes more, and modern best practice suggests clear division of governance responsibilities between those roles.

Accordingly, ASIC’s governance reform should consider structures that account for these multiple roles. This is what the recent RBA review found. That review identified the RBA’s two core roles: developing monetary policy and running complex central bank operations. Consequently, the RBA review recommended sensible reforms including a governance board (with a separate chair) to oversee the bank’s operations and its management team. The review also proposed the creation of a separate, dedicated and expert monetary policy board. Accordingly, a specialised governance structure was recommended to reflect the RBA’s two core functions.

As things stand, many regulators have their multiple roles retrofitted into a governance structure that results from a badly designed confusion of laws. This is certainly the case with ASIC. Accordingly, the RBA review’s conclusions should be examined for ASIC and other regulators, and three recommendations considered.

ASIC chairman Joe Longo. Picture: David Geraghty

First, an independent, expert regulatory policy board constituted by a majority of non-executive members could be established to perform ASIC’s regulatory policy and guidance functions. It could also advise the government on ASIC regulations. These regulatory policies and rules would then be implemented by ASIC’s operational teams. ASIC’s policy board should, like the proposed RBA monetary policy equivalent, encourage open debate, consult widely, and be appropriately transparent. ASIC’s regulatory policy board would also be informed by the government’s statement of expectations. This board would be made up by relevant experts in the fields being regulated and those being affected by ASIC’s work, including consumer representatives.

Second, ASIC should have a separate, non-executive chaired governance board that would oversee ASIC’s work, its implementation of policies and laws, and its executive. This governance board would ensure that ASIC was meeting its statutory objectives and could be drawn from experts in the fields of regulation, business and consumer advocacy. This board would also have the added advantage of being able to resolve any workplace incidents or governance issues, objectively and neutrally.

This proposal is in line with the RBA review’s recommendation of establishing a governance board “to provide guidance and oversight for RBA management in the running of the organisation”. Importantly, the RBA review advised that “[in] line with corporate governance best practice, it should comprise a majority of non-executive members … and should have a non-executive chair”. Also recommended was that senior executives be represented on its governance board. As such, the proposed RBA governance board is an excellent model for parliament to consider for ASIC and other important economic regulators.

Former ASIC chairman James Shipton. Picture: Aaron Francis

Third, and in line with best practice, ASIC’s management team should be led by a chief executive separate from the chair. That CEO would have full executive authority, and not the confused, overlapping chair-cum-quasi-CEO authority of the current structure. The management team, with the governance board’s approval, would develop ASIC’s strategy in accordance with its statutory objectives and the regulatory policy board’s determinations.

Better separating executive and board roles at ASIC would, as the RBA review observes, avoid the “concentration of authority” that “may unintentionally contribute to institutional inertia and an environment in which debate and challenge are less likely to flourish”. Further, this separation would also avoid, again using the RBA review’s words, the “risk of groupthink that can be driven by concentrated policy and operational decision-making processes”.

Importantly, this proposed structure would enable the clearer division of responsibilities and roles within ASIC. This is especially important for an agency that has, with no exaggeration, one of the widest, most complex, regulatory mandates in the world. As also recommended by the RBA review, the specialist boards could be co-ordinated by “charters setting out their responsibilities and those of the executive”. Moreover, ASIC’s two specialist boards could share the same chairperson.

The proposed structure, just as that proposed for the RBA, is complex. But this is to be expected for an organisation with one of the most complex regulatory remits globally. Another option is to consider a separate civil enforcement agency.

Interestingly, as corporate governance failures in the private sector attract the scrutiny of parliament and the press, the governance design faults of the agency charged with regulating those entities does not garner the same attention. It is therefore fair to ask, whether parliament should first fix the governance structure of the agency that they mandate to regulate corporate governance? To be fair to ASIC, this is parliament’s responsibility.

James Shipton is a Senior Fellow at The University of Melbourne and a former ASIC chairman.