Published by Australian Financial Review on Wednesday 8 August 2018
The Hayne royal commission is damaging a lot of reputations. Much of this was to be expected from an inquiry into misconduct. Somewhat less expected has been the damage to the reputation of the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority. Most of the egregious behaviour that has been revealed to the public was previously well known to the financial sector regulators.
The questions we need to ask are: why they did not act, or why they did not act more decisively?
Broadly there are three sorts of inference we might draw. The regulators have the wrong mandates, that they have the right mandates but insufficient resources to pursue them, or they lack the capabilities or will to do what they are charged with.
Most of the suggestions from the regulators sound familiar – “give us more money, and stronger regulatory powers and we will solve the problems”. It is a common refrain from the armed forces, the police, the teachers and so on. Just give us more and we will fix it. As with all these other claimants, government needs to consider carefully the use of resources. The problem is even more acute when the funds are taken directly in the form of industry levies (effectively hidden taxation).
Putting that aside, the question of what the regulators are asked to do is of more fundamental and lasting importance.
In the case of APRA, the Productivity Commission has suggested that the problem is largely one of mandate. It argues that the prudential regulator is almost completely one-eyed, and will inevitably favour prudence above all other objectives. Fat and lazy institutions are unlikely to fail, so the current regulatory structure is unlikely to challenge them vigorously.
The commission argues for a larger role for the Australian Competition and Consumer Commission in financial regulation, notably to champion competition issues, to promote a more balanced regulatory debate. This is an obvious and easy change for the government to make and it is really quite disappointing that it seems to have been rejected already.
While this is a structural change, many of the other changes being discussed are potentially much more insidious.
The Banking Executive Accountability Regime has just commenced operating. It gives APRA very extensive powers to intervene in decisions made by management and directors of banks. These go to issues such as who banks can employ and how much and how they are paid. This legislation makes APRA part of the management of banks. The government is actively considering extending the regime to other industries.
ASIC is now proposing to get in on the act. It is planning to embed members of its staff within banks. The concept is apparently that government agents would spend extended periods inside private businesses observing and reporting on decisions and behaviours. Again there is the suggestion that this “policy” might be extended to other businesses.
While these might seem like small steps, they involve very significant extension of the power of the state in a mixed economy like ours. Once the principle of government agents being embedded within private companies is conceded it is likely to be extended. It would be logical to agents embedded to make sure that hiring practices are not discriminatory; or to make sure that the latest environmental standards are being followed.
These are quite dangerous precedents.
Civil libertarians should also be concerned. The proposal is that government agents will be able to sit in on what would normally be considered private meetings.
Principles of governance
These steps also make a mess of the normal principles of governance. APRA and ASIC are in the process of becoming deeply embedded in the running of private businesses. They can stop firms hiring certain people, they can dictate how they are paid, they can stop certain products from being developed, and they can sit in on private meetings, not just board meetings, but a range of others as well. Who is responsible then for the performance of the company?
There is an old adage that you should never waste a crisis. The regulators are certainly making a feast of it. They seem to have convinced the government that they need more money and more power. The argument about whether the money is better spent on hospitals, warships or regulators is a standard one for the government to resolve.
The issue of whether to give more power to regulators is a deeper one and goes to the heart of our economic and political system. There are fundamental issues of privacy, of private ownership, of the freedom to run a business, and of responsibility for the outcomes, which need to be discussed. Acting in haste seems likely to push our society in a more authoritarian direction.