Australia’s banking royal commission did not pull any punches in its final report released last month. Most of them were directed at Australia’s financial services sector.
But commissioner Kenneth Hayne’s report also landed a few blows on the chins of Australia’s two financial markets’ regulators, the Australian Securities and Investments Commission (ASIC), and the Australian Prudential Regulation Authority (APRA). ASIC is Australia’s financial markets conduct regulator and is the equivalent of our Financial Markets Authority (FMA). APRA performs the prudential regulatory function undertaken in New Zealand by the Reserve Bank.
The commissioner was scathing of ASIC. He said the problems he had identified were not so much the rules outlawing bad behaviour but the lack of enforcement. “The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct. The prudential regulator, APRA, never went to court,” Mr Hayne said.
Mr Hayne’s focus on the regulators was not gratuitous. His terms of reference required him to report on “the effectiveness and ability of regulators of financial services entities to identify and address misconduct by those entities.” And he decided he needed to say something about the governance and accountability of both regulators.
Mr Hayne recommended changes to the internal governance of each of ASIC and APRA. Ironically, these changes will introduce management accountability principles of the kind required by banks in the private sector. But Mr Hayne did not go so far as requiring ASIC’s commission structure to be disbanded in favour of an independent governance board.
But this was not surprising. ASIC’s new chairman, James Shipton, has already taken steps to remove ASIC’s commissioners from operational decision-making. These steps effectively separate executive from governance responsibilities.
New watchdog to guard the guards
Mr Hayne also recommended that ASIC and APRA should each be subject to oversight by a new, independent “oversight authority.”
The commissioner acknowledged that both regulators were already subject to a number of existing oversight mechanisms. These include parliamentary oversight, ministerial responsibility, and annual reporting and audit.
However, Mr Hayne noted that none of the existing processes requires “regular and systematic reviews of how well either regulator discharges its statutory functions or exercises its statutory powers.”
Given the importance of each regulator to the Australian economy, Mr Hayne concluded a new permanent oversight body is required. The role of the new watchdog would be to assess and periodically report to Parliament on:
- the effectiveness of each regulator in meeting its statutory objects;
- the performance of the leaders and decision-makers within the regulator; and
- how the regulator exercises its statutory powers.
Similar shortcomings here
Mr Hayne’s conclusions were remarkably similar to The New Zealand Initiative’s findings and recommendations in our 2018 report, Who Guards the Guards? Regulatory Governance in New Zealand. Our report found serious failings in the performance of two of our most important regulators – the Reserve Bank and the Commerce Commission.
We recommended changes strengthening the internal governance arrangements for each of those regulators. We also recommended subjecting these two regulators – and the FMA – to evaluation by an independent oversight body.
Governance of the Reserve Bank’s prudential regulatory functions is the focus of Phase 2 of Finance Minister Grant Robertson’s review of the Reserve Bank of New Zealand Act. And there are promising signs this review will see improvements to the bank’s internal governance. Given the process shortcomings in the Reserve Bank’s current proposals to increase bank capital requirements, these improvements cannot come soon enough.
There are fewer grounds for hope that the Commerce Commission’s archaic and dysfunctional governance arrangements will be improved. But perhaps the Hayne report will be the spur Minister Kris Faafoi needs to tackle the competition regulator’s problems.
Until Mr Hayne’s report, there also seemed little prospect of the government adopting the second recommendation in our report, that is, tasking an independent statutory authority with responsibility for reporting to Parliament on the regulatory strategies and performance of each of the three “all of economy” regulators.
The reasons for our recommendation were identical to Mr Hayne’s. Existing oversight mechanisms are inadequate. And our concerns echoed similar misgivings from the Productivity Commission in its 2014 report, Regulatory Institutions and Practices.
Confidence in the guardians of 21st-century commerce really matters. If that confidence is misplaced, it can have disastrous consequences. We saw that only too well with the losses to retail investors from the collapse of the finance company sector during the global financial crisis. Had the former Securities Commission been awake to the risks, those losses would undoubtedly have been less than the estimated $3 billion suffered by investors.
Australian Federal Treasurer Josh Frydenberg has committed to implement Mr Hayne’s recommendation for a new regulatory oversight authority. The time has come for a new watchdog in New Zealand, too.
And while our Australian neighbours have not thought of extending their super-regulator to Australia’s competition authority, the ACCC – at least not yet – perhaps we could even share resources? Afterall, we share a common interest in guarding the guards.
Mr Partridge is the chairman of the New Zealand Initiative.