Tuesday, April 24, 2018

'Benefit of hindsight': ASIC may have been wrong body

One of the architects of Australia's financial system has expressed doubts about the policing power given to one of the corporate regulators now under fire for failing to prevent fraud and deception by the banks.

Professor Ian Harper was a member of the Wallis committee of inquiry into the financial system which in 1997 recommended the creation of a specialist organisation to regulate financial markets and financial institutions known as the Australian Securities and Investments Commission, or ASIC.

He later chaired the Harper Competition Review for the Abbott and Turnbull governments, and is a Reserve Bank of Australia board member.

Critically, the Wallis recommendations allowed ASIC to take over responsibility for policing consumer laws previously conducted by the Australian Competition and Consumer Commission.

On Tuesday Professor Harper said at the time the committee had thought a specialist body would be better able to handle the complex nature of consumer financial products, although he conceded that even then there was concern it would become too close to the institutions it regulated.

“The argument in favour of leaving consumer protection with the ACCC was that it wouldn’t be captured,” Professor Harper told Fairfax Media. “One day it deals with the electricity industry, the next day it deals with Coles and Woolies. It doesn’t have time to become close to the industries it polices.

“The argument against a specialist regulator is that it will succumb to the ‘Stockholm Syndrome’, that the regulator and the industry will hire from each other and go to the same conferences and so on.

“We now know of clear cases in which ASIC has been misled. Would it have tried harder, would it have made further inquiries had it been less close to the organisations it regulated? It might have.”

Regulatory agencies like ASIC have come under fire at the royal commission but are yet to appear at hearings. Asked if the ACCC would be prepared to take back responsibilities ceded to ASIC a spokesman for ACCC chairman Rod Sims declined to comment.

Professor Harper said concern about being too close to industry was one of the reasons the Wallis Review recommended the creation of a body separate from the Reserve Bank to oversee the prudential health of the retail banks.

“I have already said that with the benefit of hindsight we were wrong about several things,” Professor Harper said. “We placed too much faith in the efficient market hypothesis and in light touch regulation, we said the government didn’t need to guarantee bank deposits.

“With the benefit of hindsight and what's been coming out at the royal commission, the weaknesses of the specialist approach we took to regulation are also evident.”

It was “quite apparent” that the ACCC would have been able to handle the complexities inherent in financial products without needing to defer to a specialist body, he added. He noted the competition watchdog was more than capable of handling energy pricing, petrol pricing and the complex relationship between petrol stations and supermarkets.

Had it retained responsibility for policy consumer laws as well as responsibility for competition laws governing market power and mergers and acquisition which it kept, Australia’s financial landscape might have been different.

“It was 20 years ago, we would have been expected to learn something,” Professor Harper said.

The royal commission hearings will reconvene on Thursday.

In The Age and Sydney Morning Herald