The cor­po­rate watch­dog has ac­cepted bank­ing royal com­mis­sioner Ken­neth Hayne’s crit­i­cism that it does not go to court of­ten enough against the big end of town.

The Weekend Australian - - BUSINESS REVIEW - BEN BUT­LER MICHAEL RODDAN

The cor­po­rate watch­dog has ac­cepted bank­ing royal com­mis­sioner Ken­neth Hayne’s crit­i­cism it does not go to court of­ten enough against the big end of town, pledg­ing more crim­i­nal and civil ac­tion against large fi­nan­cial in­sti­tu­tions.

It came as the bank­ing reg­u­la­tor warned of a loom­ing crack­down on im­proper agribusi­ness lend­ing at Aus­tralia’s largest banks, telling the royal com­mis­sion it was “com­menc­ing a re­view of busi­ness bank­ing prac­tices within the ma­jor banks” af­ter try­ing to shore up stan­dards in the mort­gage lend­ing busi­ness.

Agribusi­ness lend­ing has loomed large dur­ing the royal com­mis­sion hear­ings, as hun­dreds of farm­ers com­plained they were forced off their prop­er­ties in the wake of loose and lax lend­ing stan­dards and overly pun­ish­ing re­quire­ments for prop­er­ties ex­pe­ri­enc­ing hard­ship.

In its sub­mis­sion to Mr Hayne’s in­terim re­port, the Aus­tralian Se­cu­ri­ties and In­vest­ments Com­mis­sion said it needed in­creased pow­ers, in­clud­ing a role in the new Bank­ing Ex­ec­u­tive Ac­count­abil­ity Regime, which should be ex­tended to cover the en­tire fi­nan­cial ser­vices in­dus­try.

And it again com­plained it was un­der­funded.

“ASIC ac­cepts that it must al­ter its en­force­ment pri­or­i­ties and prac­tices within the fi­nan­cial sec­tor and par­tic­u­larly for larger fi­nan­cial in­sti­tu­tions to be more ag­ile in ini­ti­at­ing and pros­e­cut­ing court ac­tion, and in many in­stances even com­menc­ing with it,” coun­sel for ASIC, Peter Collinson, said.

“ASIC ac­cepts that the proper start­ing point is for it to ask the ques­tion: why not lit­i­gate?”

In its own re­sponse to the royal com­mis­sion’s in­terim re­port, the Aus­tralian Pru­den­tial Reg­u­la­tion Au­thor­ity de­fended its fail­ure to take badly be­haved banks and bankers to court, say­ing its re­sponse to mis­con­duct had been “broadly ap­pro­pri­ate” and that it was “ul­ti­mately” the bank boards that had to take own­er­ship of their ac­tions if they were to drive “be­havioural change”.

The reg­u­la­tor said many banks, in­sur­ers and su­per funds had lied to it for years and said the royal com­mis­sion had re­vealed “un­re­ported breaches of other reg­u­la­tors’ rules and ma­te­rial de­fi­cien­cies in the im­ple­men­ta­tion of poli­cies that were not ev­i­dent from rep­re­sen­ta­tions made to APRA”.

APRA also said ver­ti­cally in­te­grated banks had as­sured the reg­u­la­tor they had frame­works that were man­ag­ing con­flicts of in­ter­ests, but that in re­al­ity “th­ese have not been im­ple­mented ef­fec­tively in prac­tice”.

It said this was “un­sur­pris­ing” given APRA had just 200 front­line staff to mon­i­tor about 600 in­sti­tu­tions. The gov­ern­ment this week boosted APRA’s cof­fers by $60 mil­lion, af­ter top­ping up ASIC’s fund­ing by $70m ear­lier this year.

APRA said it could in­crease its scope to crack down on bad banks, but that the in­dus­try needed to take greater re­spon­si­bil­ity for clean­ing up its act.

“So­lu­tions to past prob­lems must in­volve in­dus­try tak­ing more re­spon­si­bil­ity, not less, for main­tain­ing ap­pro­pri­ate stan­dards of con­duct and guard­ing against mis­con­duct,” APRA said.

APRA also said there was a risk that launch­ing le­gal ac­tion too reg­u­larly could put banks off from tak­ing risk, which could limit ac­cess to fi­nan­cial ser­vices and could re­sult in more ex­pen­sive prod­ucts.

How­ever, ASIC has said fund- ing falls well short of what is needed to po­lice the fi­nan­cial sec­tor and live up to the de­mands of politi­cians, who have crit­i­cised the reg­u­la­tor as be­ing asleep at the wheel.

ASIC and APRA said the BEAR, which cov­ers only banks, should be ex­tended to other fi­nan­cial ser­vices en­ti­ties and credit providers.

ASIC said it should be al­lowed to make reg­u­la­tory rules, as the Bri­tish reg­u­la­tor can, and de­sign and dis­tri­bu­tion rules should be ex­tended to cover credit.

It said it should also be al­lowed to re­quire staff train­ing when us­ing its new prod­uct in­ter­ven­tion power, and that an ex­emp­tion mean­ing en­ti­ties reg­u­lated by sis­ter agency APRA didn’t have to have “ad­e­quate re­sources to pro­vide fi­nan­cial ser­vices and carry out su­per­vi­sion and have ad­e­quate risk man­age­ment sys­tems” should be canned, it said.

“Th­ese ex­emp­tions do not presently take into ac­count the fact that APRA’s fo­cus is on pru­den­tial mat­ters, not con­duct,” Mr Collinson said.

He re­peated ASIC’s warn­ing, which it had also given di­rectly to politi­cians in Can­berra, that the reg­u­la­tor’s bud­get was too small to meet the grow­ing de­mands on it.

The equiv­a­lent Hong Kong reg­u­la­tors had a com­bined bud­get 50 per cent big­ger to cover an in­dus­try a third the size, he said.

“ASIC would be as­sisted by an in­crease in re­sources, par­tic­u­larly per­ma­nent or core in­creases to fund­ing as op­posed to in­cre­ments of short-term project-based fund­ing,” he said.

The reg­u­la­tor also drove a fur­ther nail into the cof­fin of dis­clo­sure-based reg­u­la­tion, which has been the model in Aus­tralia since 1997’s Wal­lis in­quiry, but which has been all but aban­doned fol­low­ing wave af­ter wave of scan­dal in the fi­nance sec­tor over the past half a decade.

Re­spond­ing to Mr Hayne’s ques­tion about whether com­plex laws should be made sim­pler, Mr Collinson said: “In many cases, the most ef­fec­tive way to achieve reg­u­la­tory sim­plic­ity would be to sim­ply pro­hibit cer­tain types of con­flicts or con­duct (for ex­am­ple, the pro­hi­bi­tion of sell­ing fi­nan­cial prod­ucts door to door), rather than to re­quire bur­den­some dis­clo­sure and risk man­age­ment rules that can be un­cer­tain or very costly in their ap­pli­ca­tion.”

APRA also said laws for reg­u­lat­ing superannuation needed to be over­hauled, and that ASIC should take pri­mary re­spon­si­bil­ity for clamp­ing down on bad be­hav­iour. Mr Hayne had slapped down APRA for never tak­ing a superannuation fund to court, de­spite know­ing of sys­temic breaches.

“In APRA’s view, it is also im­por­tant that each reg­u­la­tor stays true to its man­date and uses pow­ers for their in­tended, leg­is­lated pur­pose,” APRA said.

APRA put for­ward sev­eral pro­pos­als to im­prove the fi­nan­cial sys­tem, in­clud­ing bet­ter in­cen­tive struc­tures that re­warded ex­ec­u­tives for com­ply­ing with com­mu­nity ex­pec­ta­tions, bet­ter fund­ing and pow­ers for reg­u­la­tors, and stronger in­dus­try codes to mon­i­tor self reg­u­la­tion.

How­ever, it said ban­ning all in­cen­tive pay­ments made to bankers could have “un­in­tended con­se­quences” such as higher prices for ser­vices.

DAVID GERAGHTY

Ken­neth Hayne at the royal com­mis­sion

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