You won’t find it in the headlines about the Hayne Royal Commission’s 1,000-page interim report that slammed the greed, ‘profit priority’ and illegal behaviour of the big bad banks. Despite not being headline news, it is his only policy recommendation that could not wait, as intended, for inclusion in February’s final report. It is his crucial proposal that goes to the heart of the problem that has destroyed Australians’ trust in the financial system. In blunt terms, Hayne warns politicians and bureaucrats against trying to fix things by hitting Australia’s financial sector with even more laws and regulations that have already made it so difficult for effective compliance. Instead of new laws and regulations he wants the existing ones to be simplified – and, most importantly, effectively enforced. But there is a real risk that politicians, particularly Labor’s anti-capitalist interventionists, will be unable to resist the temptation to ‘be seen to be doing something’ in response to justifiable public dismay at the dishonesty and deception of these once-trusted institutions, by proposing tough legislation that meets political objectives but at serious cost to the economy. Remember that it was a realistic fear of the potentially damaging impact on a remarkably stable and prudentially sound Australian banking system (despite the global financial crisis) that had initially prompted strong opposition to the establishment of this Royal Commission – until the mounting evidence of bank misbehaviour became irresistible. It is to counter the real prospect of a damaging legislative and regulatory over-reaction to what Hayne is still in the process of revealing, that has prompted his warning that the ‘need is to simplify the existing law rather than add some new layer of regulation’.
As his interim report points out, ‘the conduct now condemned was contrary to the law. Passing some new law to say, again, “Do not do that” would add legal complexity to an already complex regulatory regime. What would that gain? The law already requires entities to do all things necessary to ensure that the services they are licensed to provide are provided efficiently, honestly and fairly’. He labels the existing law ‘labyrinthine and overly detailed’ making it easier to lose sight of the simple principles that should guide the conduct of financial services. These are: obey the law, do not mislead or deceive, be fair, provide services that are fit for purpose, deliver services with reasonable care and skill and when acting for another do so in their best interests. While not diminishing his strong criticism of the abject failure of regulators Asic and Apra to enforce the law, Hayne concedes that current laws’ complexity does not help the regulator to impose discipline and places pressure on its resources while allowing some companies to develop cultures and practices that were unfavourable to compliance; so banks decided when and how laws would be obeyed. ‘Asic has had greater enforcement powers than it has used’, Hayne notes, largely because of ‘a deeply entrenched culture of negotiating outcomes rather than insisting on public denunciation and punishment for wrongdoing’. With Asic under the new leadership of James Shipton already proceeding with greater compliance requirements, it ‘is now working to build a stronger legislative, enforcement and regulatory framework with tougher penalties’. But as Hayne laments, these will only have limited effect ‘unless there is greater willingness [by Asic] to seek their application’.
As the Australian editorialised, ‘The laws… need to protect customers’ interests without crushing [vital] institutions.’ But there is a real risk that Hayne’s criticisms of the banks’ pursuit of profit (‘greed’) will be misused by Labor in its ‘politics-of-envy’ attack on the ‘big end of town’ that has already successfully destroyed the government’s economically-sound proposed corporate tax cuts. Already Labor has announced a Hayne implementation task-force ‘to reform the culture of putting profit over people’. While Hayne is right to criticise the banks for their ‘pursuit of short-term profit at the expense of basic standards of honesty’, proper implementation of the law provides an answer; the conflict between shareholders and customers over profit is a matter for the market-place, where keeping customers satisfied is in shareholders’ best interests.
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