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Hayne v ASIC: two tribes go to war at the royal commission

ASIC's Michael Saadat. Photo: Supplied ASIC's Michael Saadat. Photo: Supplied

There’s an interesting divergence emerging from the banking royal commission between the strategy the commissioner, Kenneth Hayne, is pursuing and the way the Australian Securities and Investments Commission actually regulates.

The commission is using individual case studies to highlight treatment of customers that it presents as egregiously unfair or unlawful.

There’s no context or perspective. By focusing selectively on instances that could be characterised as poor treatment of individual customers, the impression is that their treatment reflects the normal behaviour of the banks towards all customers.

The commission is focusing on individual experiences and viewing them through the lenses of the law and "community expectations’’ to make a wider case against the banks; the regulator takes a slightly different and rather more pragmatic and holistic approach.

Two senior ASIC executives appeared before the commission last week: senior executive leaders Michael Saadat and Tim Mullaly.

Commissioner Hayne, in a discussion about the introduction of the unfair contract terms legislation, asked Saadat why ASIC worked with lenders. "Why not just say ‘Do it,’?’’

"We have to balance the different options. If a lender is prepared to make changes in response to the concerns we have raised that can often be a faster and more effective way of getting that change in place as distinct from going down the path of tasking court action," Saadat said.

Later, Mullaly was asked by the counsel assisting the commission about the process by which a decision was made to issue an infringement notice rather than seek a pecuniary penalty via the courts.

"Well, we consider the nature of the conduct and the seriousness of the conduct. We consider whether or not there was a deliberate attempt, or dishonest attempt, to break the law or whether there was inadvertence," he said.

"We consider the co-operation of the entity in seeking to finalise and resolve the matter with ASIC and we consider what might be the market impact of that particular conduct."

Commissioner Kenneth Hayne is putting the heat on ASIC to take action against the banks. Photo: Eddie Jim

Subsequently, when asked whether it was preferable to pursue court proceedings against larger entities, he said it depended on the particular facts of each matter.

"One of the considerations that we give to both commencing an investigation but also to the type of outcome that we will seek is whether that outcome will have an impact on the market; whether it will change behaviour, both specifically and more generally.’’

ASIC’s use of enforceable undertakings rather than seeking court-imposed penalties for breaches of the banks’ legal obligations has led to it being accused of being too soft and risk-averse and too close to those it regulates. It’s not that it doesn’t litigate – it does – but rather that its preference appears to be the negotiated outcome supported by enforceable undertakings.

While that preference might be influenced by the costs, time and risks of litigating, it appears its approach is driven by pragmatism and a view that it can use breaches to improve, not just the offending institution’s behaviour, but that of the system more generally.

Despite seeing “jaw-droppingly bad” advice from financial planners, the corporate watchdog has never taken action against a financial institution for neglecting its duty to act in best interest of clients.

Earlier this year the UK's Financial Conduct Authority published a collection of essays on the topic of transforming culture in financial services organisations. One contribution came from ASIC’s senior executive leader for strategic policy, Andrew Fawcett.

He focused on breach reporting – the self-reporting by institutions of breaches of regulatory requirements – saying ASIC recognised a natural part of doing business was that things would go wrong from time to time. Errors, mistakes and breaches provided, he said, an opportunity for regulated firms to learn and improve.

In its settlements, ASIC typically imposes undertakings that force the offending institution to improve weaknesses in the systems and processes that allowed the breach to occur.

Where the royal commission is highlighting the treatment of individuals within the system, ASIC appears to be as concerned about ensuring the system is improved by understandings gleaned from the mistakes of its members as it is in punishing the banks and others for those mistakes.

Maybe the royal commission will arrive at the same destination as ASIC from its different starting point. To do so it would have to accept like Fawcett that, however regrettable, in such large and complex organisations mistakes will occur.

If we want improved cultures within the financial services sector and fewer behaviours of the type illustrated by the commission’s case studies, it will come from changes that leverage and broadcast the experiences and learnings of individual institutions and their regulators.

For that reason the searching and scathing findings from the Australian Prudential Regulation-commissioned inquiry into Commonwealth Bank’s governance, culture and accountability are likely to have a far more profound and positive impact on the sector than almost anything the royal commission might recommend.

This article was first published by
Author: Stephen Bartholomeusz
Last modified onSaturday, 07 July 2018 23:34

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