They ran it like a business. Bonuses for top staff, deals done with the banks, negotiations rather than prosecutions, press releases to spin their product, “tough” regulation. And like a poorly run company, the corporate regulator delivered fat pay cheques to its executives and dispensed favours for the banks but failed to protect its key stakeholders, the rest of Australia, from systemic abuse. Michael West reports on the three-volume, thousand-page clutch of documents which are the Royal Commission’s interim reports.
AS the Royal Commission was bearing down upon them, the corporate cops at the Australian Securities & Investments Commission (ASIC) were busy thrashing out a suite of “deals” with the big banks. “Enforceable Undertakings” they call them. The banks agree to sign a document which says the regulator has concerns they have been naughty. In return, the regulators agree the banks have not really done anything wrong and they agree not to prosecute them. Sometimes there’s a trifling financial “penalty” in the mix.
Soon before the Royal Commission was to begin taking evidence, ASIC struck EU deals with the ANZ and Commonwealth Bank. These EUs appear to have undermined the Royal Commission by effectively limiting the actions it could recommend against ANZ and CBA for clear evidence of misconduct.
As the Interim Report notes: Enforceable undertakings have been negotiated and agreed on terms that the entity admits no more than that ASIC has reasonably based ‘concerns’ about the entity’s conduct. ASIC has issued infringement notices. But by paying the infringement notice the entity makes no admission. It is not taken to have engaged in the relevant contravention. Yet, ASIC and the Commonwealth are prevented from starting a civil or criminal proceeding in relation to the contravention that caused ASIC to issue the infringement notice.
That’s it. Infringement notices. Thousands of ordinary Australians ripped off but the banks are immunised from prosecution; barely a slap on the wrist.
The Royal Commission’s Interim Report showcases two things, both anticipated:
- Driven by greed, the banks behaved with appalling dishonesty. Bankers exploited their customers for personal financial gain, often behaving illegally.
- The Australian Securities and Investments Commission (ASIC), is “captive” to those it regulates.
There are no “rogue” players in this. AMP, CBA, ANZ, NAB, Westpac, Suncorp; all have been pinged. Miraculously, Macquarie has managed to slither out of proceedings. It is a rogue system which has evolved from neo-liberal culture. That is, the collapse of regulation arising from the view that government agencies should be run like a business; it’s supposedly more efficient that way. The very institutions which ASIC regulates have experienced the same fate: the demutualisation of AMP, the privatisation of CBA.
ASIC has been crewed by many of the same people over many years and these same people go about things in the same way. A negotiation here, a deal there, victims deflected sideways to an ombudsman, tick a few boxes, issue a press release, announce a crackdown, don’t upset the apple cart, that might upset the bonus.
This Royal Commission is merely the latest in a long line of parliamentary inquiries in which the regulator has been caught up: insolvency, construction, financial advice, gold-plating energy companies, life insurance, managed investment schemes, foreign bribery, ASIC itself.
And it’s all been said before, as here: “Entire sectors – agribusiness and mortgage funds, structured financiers and financial engineers – have come and gone, and with them dozens of billions in savings vanished. Yet try to bring to mind a high-profile prosecution …”
So it is that the excuses are already flowing: “insufficient funding”, “we were not aware”, “we need tougher penalties”, there is a lack of “consumer education”. The fact is the existing penalties are fine, they are simply not enforced. The law is adequate, it is simply not enforced. Inevitably, the regulator will respond to the Royal Commission the way it has always responded to inquiries: shifting blame, denying responsibility, sallying forth with a crackdown.
It has been happening all along, with the connivance of the over-lunched financial press which touted the government’s line from the outset and cried there was no need for a Royal Commission. They had a crackdown ready to go this week to coincide with the Hayne interim findings:
“ASIC poised to drop hammer on AMP,” said the headline in the AFR. There was an ASIC “hammer” story in The Australian not so long ago too. The financial press thinks its getting a scoop when it runs a press release one day early.
It is clear that culture is the problem. People run the culture and the people at the top of ASIC need to go. It is hard to imagine the Commissioner Kenneth Hayne and his team would ignore the rule of law and embark on a spree of EU negotiations if they were running the show. What is needed at ASIC is top quality judges and lawyers, not accountants and financiers like the last two chairmen Greg Medcraft and James Shipton, investment bankers from SocGen and Goldman Sachs.
Goldman Sachs is part of the problem. It can’t even publish proper financial statements in Australia. What possible hope is there of regulating Goldman Sachs?
It should be said this is an institutional failure of government, not particularly the fault of individuals per se. People get swept up in the culture of the institution in which they find themselves; bankers and regulators alike.
Yet a perusal of the Hayne report leaves no doubt that the only solution is a radical overhaul. Hayne is explicit that the banks are running the show, that the foxes are in charge of the henhouse:
Too often, (the banks) have been treated in ways that would allow them to think that they, not ASIC, not the Parliament, not the courts, will decide when and how the law will be obeyed or the consequences of breach remedied.
Here are the choice excerpts:
The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn out remediation program and protracted negotiation with ASIC of a media release, an infringement notice, or an enforceable undertaking that acknowledged no more than that ASIC had reasonable ‘concerns’ about the entity’s conduct. Infringement notices imposed penalties that were immaterial for the large banks. Enforceable undertakings might require a ‘community benefit payment’, but the amount was far less than the penalty that ASIC could properly have asked a court to impose.
Over the 10 years to 1 June 2018, ASIC’s infringement notices to the major banks have amounted to less than $1.3 million.
When deciding what to do in response to misconduct, ASIC’s starting point appears to have been: How can this be resolved by agreement?
This cannot be the starting point for a conduct regulator. When contravening conduct comes to its attention, the regulator must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach. Laws are to be obeyed. Penalties are prescribed for failure to obey the law because society expects and requires obedience to the law.
These ideas are hardly novel. They inform the prosecuting policies of the CDPP and every state and territory prosecuting authority. Can a case be made? Is it in the public interest that proceedings not be commenced? If a case can be made, and there is no public interest reason for not prosecuting, charges are laid.
Breaches of the offence and civil penalty provisions of the financial services laws are not to be dismissed as ‘just a breach of those laws’ as if the laws governing the conduct of financial services entities are some less important form of law. The financial services laws regulate the conduct of central actors in the Australian economy. Their enforcement should be governed by the same principles that inform enforcement of the general law.
Contraventions of law are not to be treated as no more than bargaining chips to procure agreement to remediate customers. If a contravener wants to face a penalty hearing without offering effective compensation to those harmed by its conduct, the absence of compensation will be reflected in the penalty. It will go directly to whether the entity remains a fit and proper person to retain the licence that it has to operate in the industry. Of course ASIC can, and should, offer its views about remediation and the adequacy of any proposal for remediation. But if ASIC has a reasonable prospect of proving contravention, the starting point must be that the consequences of contravention should be determined by a court.
When ASIC has sought to negotiate outcomes with entities, the negotiations have taken far too long. Too often, I suspect, ASIC has sought to accommodate the expressed wishes of the entity rather than determine what ASIC wants from the negotiation, tell the entity what it wants and insist upon it being provided promptly. Too often ASIC appears to have accepted an entity’s request for time to take steps to remedy past misconduct or prevent future breach without examining, let alone examining closely, whether that time is needed. There have been too many cases where remediation programs have taken months, even years, to formulate and implement.
Then there are the institutions themselves:
AMP acknowledged that inappropriate advice by 14 advisers between 1 January 2009 and 30 June 2015 had resulted in compensation to 1,079 customers. AMP also acknowledged numerous events that involved an AMP licensee continuing to charge a customer fees for services that were not provided
ANZ acknowledged that between 2006 and 2013, more than 10,000 Prime Access customers paid fees for documented annual reviews that were never provided by ANZ financial planners. ANZ also acknowledged that between June 2007 and August 2016, service fees were deducted from customers’ accounts in amounts or at rates in excess of those quoted in their service agreements. This affected approximately 4,035 customers.
CBA identified instances in the period from July 2007 to June 2015 where clients of CFPL, BW Financial Advice and Count Financial were charged ongoing fees for financial advice where no such services were provided.
NAB acknowledged misconduct concerning the charging of Adviser Service Fees between 2008 and 2015, and of Plan Service Fees between September 2012 and January 2017, in circumstances where no adviser was allocated to the client
Westpac acknowledged that BT Financial Group commenced an Ongoing Advice Services review program in 2016. This program identified retail clients who, in the period from 1 July 2008 to 31 December 2015, had been charged fees for ongoing advice, where they had not received the service paid for, or evidence of such service being provided …”
Next: ASIC’s “performance bonuses”
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