FINANCIAL REGULATION: Editorials: Edition: July / September 2019


A guardian of

the guardians

Oversight body, higher than the twins, proposed in Oz.

For consideration in SA too?

When a Twin Peaks regulatory regime was being considered for SA, much focus was on the appropriateness of the model in Australia. It was seen to work well.

Not so any longer. Appointed to investigate the Australian experience with Twin Peaks was a Royal Commission into misconduct in the banking, superannuation (pensions) and financial services industries, it has produced a forensic report with far-reaching recommendations for reform and restructure.

Many findings are unflattering, to put it mildly, of financial institutions and of their regulators. Best then for SA policymakers to take a close look. The commission has done work that resonates in countries, SA definitely included, which have significantly emulated Australia.

Both the interim and final reports of the commission, respectively tabled last year and this, are voluminous. Their detail is intense. The conclusions are thoroughly argued and several are radical.

Prominent amongst them is the motivation for a permanent oversight body that sits above the twin peaks – the Australian equivalents of SA’s prudential and market-conduct authorities – to monitor and publicly report on their performance. The body’s essential role would be to assess:

• The effectiveness of each regulator in discharging  its functions and meeting its statutory objectives;

The performance of the leaders and decision-makers within the regulator;

How the regulator exercises its statutory powers.

Hayne . . . deep digs

The task entrusted to each regulator by statute must be the foundation of any assessment. In most cases, the commission believes, assessment will not be capable of measurement or quantitative expression. For example, the number of proceedings filed or infringement notices issued will not say anything about the regulator’s enforcement culture unless the decisions behind those numbers are evaluated.

While the “broad contours” of the enquiry areas would be largely obvious – licensing, enforcement, consumer protection, regulatory cooperation and market supervision – an important consideration will be how effective the agencies are in enforcing the laws within their remit. This will determine whether more radical steps, such as creating a civil enforcement agency, should be considered.

“I consider that a new (oversight) body is required,” said commissioner Kenneth Hayne, a former judge in Australia’s highest court. “It should be established by legislation and be independent of government.”

The requirement would be unnecessary if the two regulators were operating as effectively as needed. Clearly, they aren’t.

With the Twin Peaks model having operated for many years, the report noted that both the Australian Securities & Investments Commission and the Australian Prudential Regulation Authority recognised that their approach to enforcement must change: “That change cannot be effected by the passing of legislation. It must come from within the agencies. But it is also important to strengthen the accountability of both…by both being accountable to a new oversight body.”

The central task of the commission was to inquire into whether any conduct of financial-services entities might have amounted to misconduct in falling below community standards and expectations. Innumerable instances of common practice are cited and condemned. The commission’s analysis produced four observations:

• In almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain. Providing a service to customers was relegated to second place. Sales became all-important. Advisers became sellers and sellers became advisers. Rewards have been paid regardless of whether the persons rewarded should have done what they did;

Entities and individuals acted in the ways they did because they could. Entities set the terms on which they would deal. Customers often had little detailed knowledge or understanding of the transaction and next to no power to negotiate the terms. At most, a consumer could choose from an array of products. There was a marked imbalance of power and knowledge between those providing and those acquiring the product or service;

Consumers often deal through an intermediary. In many cases, the intermediary is paid by the provider and may act in the interests of the provider or only in the interests of the intermediary. The interests of client, intermediary and provider are not merely different but are opposed;

• Entities that break the law are too often not properly held to account. Misconduct will be deterred only if entities believe that misconduct will be detected, denounced and justly punished. It is not deterred by requiring those who are found to have done wrong to do no more than pay compensation and wrongdoing is not denounced by issuing a media release.

The misconduct identified in the report has caused large damage to individuals as well as the overall health and reputation of the financial services industry, the commission finds: “The industry is too important to the economy to allow what has happened in the past to continue or to happen again.”

SA policymakers can take another good, hard look at Australia. It previously spared them the trouble of reinventing the wheel. ν


Probably yes, for a SA retirement-fund industry constantly on the receiving end of regulation upon regulation. In its interim report, the Australian commission began from the premise that breaches of existing law are not prevented by passing some new law.

Any new layer will add to cost and complexity, it warns. This should not be done unless there is a clearly defined advantage. Otherwise it serves only to distract attention from the simple ideas that must inform the conduct of financial-services entities.

These ideas are: obey the law; do not mislead or deceive; be fair; create products fit for purpose; deliver services with reasonable care and skill; when acting for another, act in the best interests of that other.

The simplicity of these ideas points firmly towards a need to simplify existing law rather than add new layers. The more complicated the law, the easier it is for compliance to be seen as asking ‘Can I do this?’ rather than ‘What is the right thing to do?’ “There is every reason to think that the (mis) conduct examined in this report has occurred when the only question asked is ‘Can I?’.”

Regulatory complexity – labyrinthine and overly detailed – may foster a box-ticking approach where entities focus on internal procedures intended to fulfil various complicated legal obligations. Not only is this at the expense of considering the circumstances in each matter on their merits, it finds, “but also at the expense of measuring what is proposed against these simple ideas”.