Watchdog oversight needs reform to be more effective

Former ASIC chairman James Shipton at his home in Melbourne. Picture: Aaron Francis

Having left the Australian Securities & Investments Commission over a year ago I have had time to reflect on financial regulators and believe key reforms are necessary so they run more effectively.

First, the governance and oversight of key economic agencies like ASIC matters. Unfortunately, the statutory governance arrangements are far from optimal. This includes overlapping accountability arrangements for our financial regulators, now undertaken by multiple bodies.

In addition to three parliamentary committees, there is, following the financial services royal commission, a new statutory oversight body – the Financial Regulator Assessment Authority. The creation of FRAA is, essentially, an admission that the parliamentary committees were not fulfilling their oversight roles. They, and other ad hoc accountability reviews, were found not to be subjecting the regulators “to consistent and independent expert reviews over time”.

In my experience, previous parliamentary committees often became not accountability forums, but platforms for soliloquys and interventions. On some occasions attempted political advancement appeared to have a louder voice than accountability. And, while reference committees worked well on specific topics, the main oversight committees lacked co-ordination and consistency when it came to assessing agency-wide performance. Accordingly, I suggest this new parliament carefully considers, and redefines, its important oversight responsibilities and works out how to co-ordinate with FRAA.

Related to this, the government is meant to set its expectations of a regulatory agency via a “statement of expectations”. These statements are vital expressions of strategic direction and an important reference point for an oversight body to hold an agency to account. In my experience, these statements come infrequently and lack a prescribed period. They also become stale as circumstances change. During my tenure, ASIC received only one statement, in April 2018 from the Turnbull government in the early days of the royal commission. We did not receive any revisions to it, even though I sought them at the end of the royal commission, after the 2019 election and during the pandemic.

Having no statement of expectations is equivalent to Qantas asking a pilot to fly a plane without providing the destination. Running a regulatory agency should not be a mystery flight.

There is considerable irony in the fact the agency charged with overseeing corporate governance has sub-optimal legislative governance arrangements. For instance, under two ill-fitting pieces of legislation ASIC has three different overlapping governing organs – the commission (including the chair), the chair (with unique procedural powers) and the accountable authority (also the chair). In my opinion, there is insufficient legislative cohesion in ASIC’s governance structure. There is also a lack of clarity, in statute, around the demarcation between the commissioners’ executive, strategic and governance roles. This confusion would not be tolerated in a leading listed corporation. We made genuine attempts at ASIC to try to streamline this legislative quagmire, and the last government’s 2021 statement of expectations also addressed this, but there is no substitute for a considered review to see whether reform is needed.

Second, the regulatory pendulum appears to be swinging again.

We have come a long way since 2019 when the consensus following the royal commission was that financial institutions’ conduct was, to use the then treasurer’s words, “driven by greed”, “in breach of existing law and fell well below community expectations”, resulting in “broken businesses” and “broken lives”. Instead, a view has formed in the sector that “Hayne is in the past”.

As the former chair, I am proud of the decisive action taken by ASIC and fellow regulators after the royal commission to restore public confidence in the financial system. ASIC and fellow regulators can be proud they helped restore community trust, enabling regulators and institutions to respond swiftly, effectively and, in many cases, compassionately to the economic challenges of the pandemic. And, while economic necessities took priority, governments and regulators need to avoid the regulatory pendulum swinging too far in the other direction. The community and economy cannot afford another crisis of confidence, particularly in a high cost-of-living and high interest-rate environment. The important lessons of the royal commission should not be forgotten.

Third, the suggestion of another former ASIC chair, Tony D’Aloisio, of establishing an independent body to examine any campaign questioning the integrity of independent statutory appointees has merit and should form part of the consideration of a federal integrity commission. As D’Aloisio observed, this would protect against a statutory appointee being pressured by a government to step aside in the midst of a highly charged campaign, even though there is no proper basis for doing so. It is also important future investigations be governed by uniform guidelines to ensure due process. Such guidelines should require that investigations follow appropriate, not politically imposed, timetables and require that complex legal issues be considered by appropriately qualified people. They should mandate strict adherence to the rules of procedural fairness, such as mandating complete document disclosure and prohibiting briefings by investigators to select witnesses once a confidential review has finished.

Finally, the government and its agencies should protect any law enforcement officer from unfounded character attacks by deep-pocketed defendants. Such tactics could be used to intimidate law enforcement or prosecutorial officers.

James Shipton is the former chairman of ASIC.