ASIC under pressure
The Australian National Audit Office is not known for colourful language. Its reports and communications are normally dry, the facts left to speak for themselves.
So, the letter sent by the auditor-general to Treasurer Josh Frydenberg this week was equivalent to shouting and banging the table.
It told Frydenberg that not only had payments been made to the chair and deputy chair of the Australian Securities and Investments Commission in breach of government rules, but also that the agency couldn’t be trusted to fix the problems itself.
“I formed a view … that in order to gain greater confidence that appropriate action would be taken, I should indicate that I would bring the matter to your attention,” the auditor-general said.
The reasons for the lack of trust were clear. They speak to deeper problems in the culture and processes of ASIC, one of Australia’s most important law enforcement and regulatory agencies. The context and the likely consequences of the scandal will affect us all.
Less than two years after a royal commission found Australia’s financial institutions were guilty of appalling misconduct, the banks are back on top – with the ear of government and largely getting their way.
Meanwhile, ASIC, which the banking royal commission urged to be more aggressive in its enforcement of the law, has made itself more vulnerable to an already frosty government. The watchdog has been defeated in the courts and undermined by the treasurer, and it now finds itself friendless. The government is expected to take the opportunity presented by the expenses scandal to completely make over the agency. Nobody expects that stronger regulation of Australia’s financial sector will be the result.
This week’s controversy concerned ASIC payments to its chair, James Shipton, of more than $118,000 for personal tax advice, and to its deputy chair, Daniel Crennan, of nearly $70,000 for housing costs. Both men claim they didn’t know the payments might breach government rules, and both have repaid the cash.
The auditor-general first identified problems with the payments to Crennan in August 2019 and recommended that ASIC seek the advice of the Remuneration Tribunal. By September this year, though, nothing had been done.
Action had been, as acting ASIC chair Karen Chester admitted to senate estimates on Tuesday, “glacial”. She and other ASIC commissioners had not even been told about the auditor-general’s concerns.
Crennan has resigned, and Shipton stood aside pending an independent review, but it’s not expected he will return.
Allan Fels, former chair of ASIC’s sibling regulator, the Australian Competition and Consumer Commission, says the ASIC scandal highlights problems with the culture of the regulator, and the suitability of the people at the top – people from the private sector.
“Things that are okay in the private sector can trip you very badly in the public sector,” he says. “I’m not saying people shouldn’t be brought in from the private sector, but they need to be able to operate in the public sector better, because things like this wreck careers and undermine organisations.”
Shipton joined ASIC in 2018, coming from a senior position at the Harvard Law School. He had also been an executive of the Securities and Futures Commission of Hong Kong, and before that was with Goldman Sachs.
Crennan, a QC at the Victorian bar with a practice in corporate and commercial law, was specifically recruited to beef up ASIC’s litigation and enforcement in the wake of the royal commission.
Announcing his appointment, the then Financial Services minister, Kelly O’Dwyer, said Crennan would “boost the powers of ASIC to protect Australian consumers from corporate and financial misconduct”.
In its February 2019 report, the royal commission warned that ASIC had been captured by its “clients” – the banking and financial institutions it was meant to be regulating. Commissioner Kenneth Hayne, QC, found ASIC had been too keen to cut deals and come to agreements with organisations that had broken the law, rather than taking them to court.
“Negotiation and persuasion, without enforcement, all too readily leads to the perception that compliance is voluntary. It is not. All financial services entities must obey the law, not just those who are willing to do so,” Hayne said.
ASIC adopted the Hayne mantra – “why not litigate?” – as its default.
The showdown over this new approach was a case against Westpac, filed in the Federal Court in 2017. The bank had tried to settle by paying a civil penalty, but instead the case became a test of the responsible lending laws that had been introduced by the Rudd government in 2009.
ASIC alleged Westpac had breached the law on more than a quarter of a million home loan applications by using an unrealistically “frugal” benchmark of expenses for homeowners so as to lend more than was appropriate.
The benchmark had been heavily criticised by the royal commission on the grounds it underestimated living expenses.
In August last year, the court found that wasn’t the case – because consumers could alter their spending habits.
In a quote that’s become famous in financial circles – and infamous among financial counsellors – Justice Nye Perram said, “I may eat Wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.”
The Consumer Action Law Centre and the Financial Rights Legal Centre said the judgement was out of touch with the realities faced by most home borrowers. The organisations said ASIC’s defeat was a sign the law needed to be toughened up.
ASIC appealed, only to lose again. It was considering pushing on to the High Court, but in July this year decided to drop the case. According to reports in The Australian Financial Review, this came after pressure from Treasury about the likely impact of inhibiting lending during the Covid-19 crisis. Shipton said ASIC wanted to be a “force for the recovery”.
Meanwhile, there were reports of tension between Shipton and other ASIC commissioners. The AFR quoted unnamed sources in banks and law firms who complained the regulator was behaving too aggressively, unreasonably, and not being the model litigant usually expected of government agencies. ASIC was refusing to strike agreements even when – at least in the view of the banks and their lawyers – that was the reasonable thing to do.
In September, Frydenberg pulled the rug out from under ASIC, announcing he was winding back the responsible lending laws. “Now more than ever, it is critical that unnecessary barriers to accessing credit are removed so that consumers can continue to spend and businesses can invest and create jobs,” he said.
The responsibility for regulating the new arrangements would be taken away from ASIC and instead given to the Australian Prudential Regulation Authority. The message was clear: ASIC was out of favour.
While the draft legislation has not been released, there are no signs the relaxation of the rules will be temporary.
Allan Fels says ASIC is regarded as a weak regulator and was “not particularly talented at running cases”, even when it tried to beef up. Partly, this is to do with the extreme complexity of the law.
ASIC also regulates laws that include criminal penalties, meaning corporate Australia fights hard, whereas in civil cases they are more inclined to crumble and pay “pecuniary penalties”.
Added to this, says Fels, is the fact that key areas of the law – including responsible lending – are relatively new and the concepts untested.
These challenges are compounded by the power of the financial services industry. Says Fels: “Banks and other financial institutions are especially powerful and influential. They all lobby constantly. The Treasury has some history of resisting interest-group pressures. But they’re not as strong on the financial services sector.
“As soon as the virus arrived the government decided it didn’t like what ASIC was doing, so suddenly the authorising environment sort of changed, and now they’re suffering a bit from doing what it was originally intended they should do.”
It would be a difficult tightrope for any agency to walk, says Fels. Quality leadership at ASIC may have been able to manage the difficulties but, with this week’s missteps, its most senior people have shown they can’t meet that test.
The wind-back of responsible lending laws is of a piece with other moves to overhaul the legal framework governing Australia’s finance and business sector. While each change has been justified as a temporary measure during the crisis, they all have the potential for long-term impacts on consumers and contractors.
There are moves to allow smaller companies to trade while insolvent and talk of measures to wind back directors’ responsibilities to make disclosures to investors.
It would be wrong to say nothing has resulted from the banking royal commission. Billions have been repaid in compensation to financial services customers; banks have worked hard to improve their image and, they claim, their culture. There have been changes to laws affecting insurance and financial advisers.
But the banks are back, with the ear of the treasurer, and the Covid-19 crisis helping their case for lighter-touch regulation. It was a bad time for the regulator to shoot itself in the foot.
This article is supported by the Judith Neilson Institute for Journalism and Ideas.
This article was first published in the print edition of The Saturday Paper on Oct 31, 2020 as "ASIC instincts".
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