The Financial Services Royal Commission is in theory a general inquiry into the financial system. In practice, however, something else is on trial: Australian regulatory systems.
As I set out in my latest column for The CEO Magazine, many of our regulators, including ASIC, AUSTRAC and the ATO, are influenced by a philosophy of regulation called “responsive regulation”. This philosophy says that you treat more gently those offenders who are trying to comply with the law – willing but not able – and more harshly those who seem able but not willing.
The lesson of the Royal Commission so far is that some very big businesses are able but not willing. That seems likely to have far-reaching effects on regulation of businesses throughout the economy. The logic of responsive regulation is that we should be seeing more fines, licence withdrawals and gaol time.
We have plenty of laws regulating financial advice; the bigger problem seems to be enforcing them. Watching the Royal Commission, it seems credible that a bunch of executives would have moved a lot faster and done a lot better if they had been facing the possibility of a year or two in a small barred room. It works wonders in the corporate decision-making process when a decision-maker under pressure is able to say: “if we do that, we might all end up in prison”. ASIC in particular is under the gun for not being tougher on banks’ breaches of financial services law.
Why hasn’t ASIC come down harder? One reason: in our society, locking up people and fining companies hundreds of millions of dollars is expensive, takes years to do, and makes the regulated entities instantly defensive. A Senate inquiry into ASIC made this point in a 2014 report.
The government on Friday announced it would boost civil penalties for corporate law-breaking. What it really needs to do, though, is back ASIC to go hard against some big targets.
They need to start cutting away at the mountains of regulation, but bring back the reserve asset ratio. Bring it back, keep releasing cash, then keep increasing the reserve asset ratio. Any other regime is letting these guys steal from the public. Just a waste of time. Just mucking about. The regulations as they stand make no sense. They are not based on any understanding of how to make a competitive market. They are not based on any theory of how to create a meaningful supply and demand for loanable resources. The regulations as they stand are just a way to have the thieves decide on how to divide up the spoils.
They have just got to start sending them (CEOs/Chairmen/Senior Executives) to jail. That will end the corporate misbehaviour.