JOHN MENADUE. How and why corporate regulators have failed us. And not just bank regulators.

Feb 7, 2019

The surge yesterday in bank shares was no surprise. Investors  at least concluded that Kenneth Hayne ‘s slap on the wrist would not really disturb the bank’s business model. His report did not go to the heart of the abuse, the vertical integration of  financial product and  financial advice. The conflict of interest will remain.

I did not expect much from the Hayne Royal Commission. I was not disappointed. But it was good theatre.  For me the most important revelation was the way people behave when incentives are all there to get rich quick starting with greedy bank CEOs

What the Royal Commission showed us was that we need to embark on a re regulation of  our economy to curb the spivs operating at senior levels in our major companies. Our politicians must address this need for re regulation to protect the public interest.  Under the guise of ‘cutting  red tape’  regulations to protect the public interest have been whittled away..

But in emphasising the need for regulators to lift their game Kenneth Hayne reveals his naivety. These are just the people who have failed us.

The banks will keep there heads down for a  month or two, while rolling out lobbyists and PR people to minimise any change.

The failure of corporate regulation and regulators is in plain sight for all to see. And it is not just in banking. Political ideology and corporate conceit has enabled the powerful to tilt the ‘market’ in their favour at the expense of the less privileged. The result is growing inequality and insecurity. In this blog yesterday Karen Cox,Adele Ferguson and Simon Long all highlighted the failure of bank regulators and that even with changes  pending they are not up to the job.

The Liberal Party branch offices, the BCA, News Corp and the Australian Financial Review  failed to uncover corporate failure and malfeasance on a grand scale. Was this deliberate or were they just asleep? Now they will be doing their beat to help  take the banks out of the firing line.

We know from Freedom of Information that the banks collaborated with the government on the terms of reference for the Royal Commission.. By limiting the Royal Commission to one year many issues were not examined. By contrast the Royal Commission into Institutional Responses to Child Sexual aAbuse had five years

It is unlikely that the regulars were wilful. It is more likely that they just wanted to please the big end of town.  They felt that that was really where they wanted to be, craving acceptance.

The Abbott Royal Commission into the conduct of trade unions revealed only minor misdeeds by the trade union movement. But the Royal Commission into banking  has unearthed widespread greed ,corruption and arrogance.

Whilst unions are heavily regulated and the CFMEU is a regular whipping boy for the government,The Australian  and the Australian Financial Review  the wealthy and powerful are handled with kid gloves. I would rather trust the CFMEU than the Commonwealth Bank or NAB

Just look at some of the abject failures of regulators.

  • In vocational employment we have seen widespread waste of public money and exploitation of vulnerable young people as a result of regulators failing to ensure that unscrupulous operators could not exploit the system.
  • As Charles Livingstone, in this blog, has pointed out, Crown Casino, other casinos and club and betting interests are just too powerful to regulate. Fines for breach of regulations are miniscule.
  • Our intelligence and security services have become increasingly politicised and uncontrolled. The regulators have joined the club. See John Menadue. Our intelligence agencies are out of control– An edited re post.
  • Regulators failed to protect the Murray-Darling Basin from blatant water theft and over allocation.
  • In Sydney we have had the saga of Opal Towers and dodgy ‘building certifiers’
  • ‘Entrepreneurs ‘in child care received large payments for children they never cared for.
  • Fair Work Australia and other regulators have failed to protect mainly young people, particularly working holiday makers and students who have been exploited by labour hire companies. The Seven/Eleven chain has become a symbol of failed regulation in the labour field.
  • Live sheep exporters brazenly defy regulations to protect animals.
  • Land clearance regulations to protect vegetation are widely ignored particularly in Queensland.
  • Regulations to ensure that miners repair degraded land are seldom effective.
  • And then there are the banks with their lying to clients, their deceit and greed.  Did the RBA consider withdrawing any banking licences? Obviously not. The banks knew that the regulators would not seriously challenge them. They felt invulnerable. The cozy banker’s club had to remain solid.

Why has corporate regulation failed?

  • A major cause of failure amongst regulators is the prevailing ideological view expressed by the Coalition and big business that only business can deliver prosperity and jobs for Australians. Business therefore deserves favourable treatment. The Liberal Party platform expressly states that ‘only businesses and individuals are the creators of wealth and employment’. If businesses are to perform this role effectively, government and regulators must get out of the way. And after all, regulation is akin to socialism. Timid regulators read these clear signs.
  • One of the first things the Abbott government did was to establish a Commission of Audit headed by businessman Tony Shepherd. A key recommendation of this Commission was ‘reducing red tape’. The Coalition government then established a regulatory reform agenda to address ‘unnecessary regulation and red tape’. In this process, many regulations designed to protect the public interest were removed or degraded. It was all done in the name of that popular conservative slogan ‘get rid of the red tape’.
  • Consistent with this view of red tape and regulation, Tony Abbott cut funding to ASIC by $120 million over four years in his 2014 budget. ASIC was  later cut by a further $26 million. The budget of the Office of the Director of Public Prosecutions was also cut. Not surprisingly, regulators got the clear message-go easy on business.
  • But even with considerable resources, regulators can often find it difficult to match the knowledge and experience that operators have so easily at hand. I found at Qantas that it was not all that difficult to best the Department of Transport that lacked the resources and know-how that we had of the international airline industry.
  • Unlike the ACCC which has been a tough cop on the beat, ASIC and APRA, even with their considerable powers, have failed as effective regulators. Far from being tough watchdogs, APRA and ASIC became compliant puppy dogs who were so anxious to please. ASIC has power to launch criminal and civil prosecutions against corporations. But for 15 years it chose not to. Instead of prosecuting, offenders were obliged to sign ‘enforceable undertakings’ for serious breaches of regulations. No one went to gaol . The regulators imposed fines that would not cause any big company to even blink. The CBA admitted to ‘unconscionable conduct’ in rigging the bank bill swap rate in 2012.  The penalty was a derisory $25 million. Only lengthly gaol sentences will deter many of our greedy and dishonest corporate cowboys in the ranks of directors and chief executives. These are the people who keep telling us time and time again that it was the fault of a few ‘bad apples’ and in any event the problems had been fixed. But the problems continued and they continued to pick up outrageous salaries.
  • Any problems were invariably found to be attributable to the lower ranks and never the Board or CEO. The multi-million dollar bonuses, handshakes and golden-parachutes continued.
  • There were comfortable relationships between regulators and the regulated. Some of the key bank regulators on retirement from Treasury and the RBA moved across to well-paid jobs with the banks. It was all a cosy bankers club.
  • Too much faith was placed in efficient markets, so light or even self-regulation was preferred. After all the regulators obviously felt that they were all members of the same trustworthy family. They  were all largely ‘ male. pale and stale’ They appointed people with the same background and limitations as themselves. A failed clique!
  • . The fundamental problem is timid regulators who want to please their ministers, conservative political ideologies and the big end of town.

The failure of regulation in the banking field will inevitably lead to a focus on how effective regulation is in other fields such as health and private health insurance, VET, gambling, alcohol and mining. We need to clean up the whole corrupt lobbying scourge.

Kenneth Hayne may hope for ‘culture change ‘ in our banks but with so much greed on display at the top ,that change will be very difficult if not impossible. Why should any CEO be paid more than the Prime Minister?

The government is unlikely to force change after vilifying everyone who pressed for a Royal Commission. We know from Freedom of Information that the banks cooperated with government in drafting the Terms Of Reference. The Royal Commission was limited to one year. It could only scratch the surface

We have seen the consequences of open slather in capitalism. It needs to be curbed in the pubic interest as well as the interests of the perpetrators of so much illegality and mal practice. As Ross Gittins put it in the SMH yesterday ‘The 30 year experiment with deregulation,privatisation and outsourcing is now seen to have ended badly’

The tide is clearly turning against unfettered and corrupt capitalism. We need more ‘red tape’ to protect the public interest

Will our next government help turn the tide,?

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