James Wheeldon
Heads must roll at corporate regulator ASIC

Greg Medcraft, the chairman of beleaguered corporate regulator the Australian Securities and Investments Commission (ASIC), has had an interesting career.

Ten years ago, in January 2006, the one-time Melbourne accountant who made it big on Wall Street was sharing a Las Vegas stage with B-list comedian David Spade. The event was the “one-of-a-kind industry dinner” at the annual conference of the American Securitisation Forum (ASF), a lobby group that Medcraft co-founded and chaired for several years before he joined ASIC.

Securitisation is the process by which lenders bundle together individual debts – such as residential mortgages – and then sell “tranches” of the bundle to so-called “sophisticated” investors. Securitisation brought us collateralised debt obligations (CDOs) and residential mortgage-backed securities (RMBSs) and other arcane financial instruments that you may be familiar with if you saw or read The Big Short. It also helped bring us the global financial crisis: it was the inevitable bursting of a bubble in the market for those securities that sparked the greatest financial shock since the 1930s.

According to Bloomberg, the ASF was known for its “lavish” annual conferences in Las Vegas until the GFC put a dampener on the festivities. ASF members paid $US1695 to attend the 2006 conference, which featured entertainment by Spade and a pro-am golf tournament at “one of Tiger Woods’ favourite courses” as well as the “opportunity to enjoy a serious day of golf, networking and business dialogue with professional peers and colleagues”. Regulators were invited to attend free.

But Medcraft’s ASF didn’t just host parties. It also lobbied United States lawmakers and regulators for the benefit of the securitisation industry. As he boasted to ASF members in a 2007 chairman’s letter, the ASF had “been, and will continue to be, very active advocates for the policy recommendations we advance on behalf of our members”.

What sort of lobbying? In 2006, Medcraft’s ASF formed a “predatory lending task force”. Of course, the aim of the taskforce was not to prevent predatory lending but rather “to provide focused member input on secondary market implications of anti-predatory lending legislation currently being considered by congress”. The ASF specifically called on issuers in the “subprime residential mortgage market” to get involved. In 2007, the ASF successfully lobbied the US congress against proposed legislation that would have made purchasers of securitised subprime mortgages liable for predatory practices. The laws that Medcraft’s ASF lobbied against, if enacted earlier, might have prevented, or at least severely mitigated, the GFC.

The ASF also had an educational role. In a 2006 ASF publication, Medcraft said – with some degree of foresight, given events that would transpire over the next two years – that the group needed to “be prepared to help the industry deal with any major market disruption or dislocation that might occur”, and that it had “talked about sponsoring an independent, academic study or analysis of the benefits of securitisation to businesses and consumers, which could be helpful in that context”.

Kudos to Medcraft for recognising in 2006 that a “major market disruption” was imminent and that fingers would be pointed at the securitisation industry. But it is revealing – and concerning – to find that he thought the appropriate response would be to commission a report absolving securitisation of blame.

As chairman of the ASF, Medcraft furthered the interests of some of the least attractive denizens of the financial world. David Spade’s 2006 appearance alongside Medcraft was sponsored by United Capital Markets, a hedge fund owned by the notorious John Devaney. The Wall Street Journal has described Devaney as “one of the hedge-fund managers whose gargantuan appetite for risky bonds worsened the real-estate mess by encouraging lenders to make more and more home loans”. Time magazine said that, as a cheerleader for the securitisation of mortgages, Devaney was one of the “25 people to blame for the Financial Crisis”.

In 2006, as the orgy of predatory subprime lending reached its climax, Devaney was partying in Vegas with Medcraft and Spade.

Medcraft left the ASF in 2007 to return to Australia. He was appointed an ASIC commissioner in 2009, and ASIC chairman in 2011. Medcraft’s timing was impeccable: months after he left the ASF, the securitisation bubble burst, decimating the US and global economy and inflicting massive economic misfortune on tens of millions of people. As ASIC chairman, he described his time at ASF as the greatest achievement of his professional career. To this day he remains, it appears, the group’s chairman emeritus.

Having run an industry group that lobbied against regulation, Medcraft now runs an industry regulator. As Australia’s foremost corporate law enforcement officer, he is the “tough cop on the beat” policing Australia’s financial services industry, in the words of Treasurer Scott Morrison. The Turnbull government is sufficiently pleased with Medcraft’s performance that just last week his five-year term, set to expire in May, was extended for another 18 months. Medcraft’s rehiring was announced as part of the government’s response to a scathing capability review of the regulator that recommended a fundamental restructuring of ASIC’s senior management. The top brass at ASIC rejected the review’s findings, and it no doubt suits the government, as it does ASIC, to maintain the status quo.

The alleged toughness and effectiveness of Medcraft’s ASIC is the Turnbull government’s main argument in response to Bill Shorten’s promise to hold a royal commission into the banking and financial services industry if Labor wins the anticipated July election.

The government says ASIC is on the job, and that it has all the powers of a royal commission and then some – so there is no need for further inquiries. But ASIC itself is part of the problem. The regulator has been captured by lobbyists; its senior executives have Stockholm syndrome.

The Financial Services Council (FSC) is the lobby group for Australia’s for-profit superannuation, insurance, financial advice and funds management industry. The FSC boasts that its members are responsible for managing $2.5 trillion – more than Australia’s GDP.

To say the FSC has access to the corridors of political power in Australia would be an understatement. The FSC was a financial member of Joe Hockey’s infamous fundraising outfit, the North Sydney Forum. Not that the FSC needed the North Sydney Forum to have its voice heard.

When I worked as a lawyer in ASIC’s Regulatory Policy Branch a dozen years ago, I witnessed the FSC, or IFSA as it was then known, aggressively lobby the regulator to make various amendments to the law to benefit FSC members. I was staggered to find that a lawyer employed by MLC, the funds management division of NAB, was on secondment to ASIC and was actively involved in formulating ASIC’s response to a lobbying application that he himself – wearing his MLC hat – had helped prepare.

I thought that what the Financial Services Council was lobbying for was something ASIC, as a matter of law, did not have the power to give, and that the involvement of their lawyer in ASIC’s policy project was a flagrant breach of a host of laws and policies regarding management of conflicts of interest. But I was explicitly told by the head of ASIC’s Regulatory Policy Branch that denying the council was not an option: it was just too powerful and politically connected. I was told my job as an ASIC lawyer was to finesse their proposal through the regulatory system with the minimum of fuss. No one was interested in the legalities.

I didn’t want anything to do with this process and so I walked out of ASIC. Over the ensuing years, I have seen the Australian people gradually come to learn what I discovered years ago: ASIC is a weak and insipid regulator, beholden to lobbyists, and woefully inadequate when it comes to its core tasks of protecting retail investors and enforcing the corporations laws.

Relying on ASIC as the “tough cop on the beat” is a fool’s errand. Greg Medcraft is a lobbyist and deal-maker at heart, a member of the CEO club. He does not have a law enforcement mindset.

Even ASIC’s recent actions against Westpac and ANZ banks for allegedly rigging the bank-bill swap rate, a key reference rate for business transactions, is a sign of ASIC’s erratic and incoherent approach to law enforcement. Even if the banks did rig the rate, this posed no direct threat either to the integrity of the financial system or to the financial health of investors.

ASIC’s underlying case against the banks is highly speculative: to prevail, ASIC needs to prove not just that the banks sought to manipulate the swap rate but that their actions resulted in an “artificial price” being set. The question of what constitutes an “artificial price” as a matter of law is incredibly complex and destined to be answered, some years hence, by the High Court.

The banks could have settled the dispute with ASIC years ago and for a relative pittance. The fact they did not shows what they think of the strength of ASIC’s case and its litigation prowess.

No one has lost their home because of swap rate rigging, yet ASIC has repeatedly failed to act in the face of egregious conduct that has destroyed lives – think of, say, Storm Financial. It pains me to criticise the regulator for taking on a tough case, but for ASIC to choose to fight on this particular battleground when it has shirked conflict in so many other cases strikes me as madness. ASIC’s litigation is a kabuki dance: the regulator gets to make a show of being tough on banks, yet the outcome – even in the unlikely event ASIC has a comprehensive win – will do little to protect ordinary investors or to restrain predatory financial behaviour. 

The strongest argument for a royal commission into financial services is that the Australian people deserve to hear the truth about how our financial system is regulated. We are entitled to that information, and nothing short of a royal commission will deliver it. I know that if a royal commission were held, more horror stories of corruption and incompetence would emerge.

But, more than anything, heads need to roll at ASIC.

Medcraft is supported by four commissioners, three of whom first joined ASIC in the previous millennium: Peter Kell joined ASIC in 1998, Greg Tanzer in 1992, and John Price in 1999. Medcraft, Tanzer, Kell and Price have collectively governed during decades of debacles, scandals and incompetence. They are not up to the job and need to be put out to pasture.

Jeff Morris, who blew the whistle on unethical conduct at CBA financial planning yet was ignored for years by ASIC, has done more than anyone to expose ASIC’s failures as a regulator. I will let him have the final word on Morrison’s tough cop:

“The current crew at ASIC have presided over a raft of scandals absolutely breathtaking in scale. Their self-congratulatory rhetoric suggests a high degree of self-delusion, and their relationship with the banks is downright incestuous. ASIC is simply a pawn and does what it is told. To throw more money at this dysfunctional organisation in the vague hope that it will somehow improve transcends the bizarre.”

This article was first published in the print edition of The Saturday Paper on April 30, 2016 as "Fluff cop on the beat".

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James Wheeldon is a Sydney-based lawyer.

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