ASIC faces challenge getting monitoring right

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In the tent or on the outer: regulators tread fine line in bid to change culture

By David Ross

When ASIC chair James Shipton appeared before the Hayne royal commission last month he boasted of a new breed of regulators, going into the banks, asking hard questions.

“We should be utilising new types of regulatory tools like supervision – on site supervision,” he said. It was a type of regulation he’d seen in his time in Hong Kong and the US, also known as “close and continuous monitoring,” involving regular onsite inspections by staff from the regulator.

ASIC was recently given an A$70.1 million boost to its budget, with A$8 million of this to assign dedicated staff to monitor the five major financial institutions. But unlike in the US, where regulators were embedded alongside bankers, ASIC’s monitors are visiting the banks bi-weekly.

The first of the monitors have already completed a visit to the Commonwealth Bank, with the other banks and AMP to follow. Their job, Shipton recently told a FINSIA conference, is to “modify the behaviour of the large institutions to further encourage them to place consumers first in their decision making and quickly identify and respond to conduct that produces unfair outcomes”.

But some experts are sceptical ASIC’s slightly modified version of close and continuous monitoring will achieve the desired results.

Rules of engagement

Dr Michael Duffy, director of the Corporate Law, Organisation and Litigation Research Group at Monash University told Australian Banking Daily the rules of engagement for ASIC’s monitoring would define how effective it was.

“Are they invited into the tent, or are they kept in a situation of isolation?” he said.

Shipton told the royal commission ASIC’s monitors would work both within ASIC and in meeting rooms at the banks.

“In the case of CBA, we’ve been assigned a meeting room which is for our dedicated use which is sequestered and away so we can keep our own material confidential but we will be interrogating and speaking and discussing and asking questions and finding out more information with those individuals who were involved in these particular case studies.”

The monitoring staff will also be rotated between the banks, something Shipton says is “good regulatory practice”.

“The other issue that we are very highly attuned to is the risk of regulatory capture. And there has been some case studies out of the United States that we have used for training purposes, so that the supervisory officers involved are attuned to some of those regulatory capture risks before they start their work,” Shipton told the royal commission.

Those case studies for training could involve ASIC staff listening to the secret recordings made by Carmen Segarra, a former bank examiner for the Federal Reserve in New York, who was alarmed by what she saw inside the banks in the wake of the global financial crisis. The new regulators brought in to supervise from within encountered banks that didn’t take them seriously, and a culture that emphasised getting along with bankers.

Deep connections

Dr Andrew Schmulow, senior lecturer at the University of Wollongong Faculty of Law, says bi-weekly visits to the banks may be insufficient.

“It seems too short to me,” he said.

But of greater concern to Schmulow is that the 16-20 monitors now going into Australian banks have been sourced from within the organisation. He says this is a risk as they could feed information back into banks, given many ASIC staff go on to work in financial institutions and vice versa.

“There are long-standing and deep connections between these people and their colleagues,“ he said.

Schmulow said Australia should look to follow the South Korean lead of banning those who work in regulated entities from working in regulators, and vice versa.

Duffy, who previously worked as a corporate investigator at ASIC, said judging the success of the investigations would be difficult.

“It’s easier to see something happening, if you prevent something it’s harder to verify that you have prevented something from occurring,” he said.

The investigators will prepare reports on their findings for the financial institutions, with Shipton saying they were considering making them public. Schmulow called on ASIC to ensure they were.

“It’s all about the public exposure,” he said, “there is no disinfectant more powerful than sunshine”.

And, Schmulow said, the introduction of close and continuous monitoring by ASIC would achieve nothing without a reform of ASIC’s internal culture.

He said nothing would change, “unless it comes together with cultural change at ASIC, which is not driven by the people who were culturally at fault… and who were identified for creating the malaise in the ASIC culture that was identified in the royal commission”.

Schmulow, together with his research associates, continues to push for the creation of a regulating organisation to oversee ASIC and APRA to ensure they’re doing their jobs, as was recommended in the 2014 Murray inquiry.


David Ross is a freelance journalist based in Melbourne. He has also written for news.com.au, The New Daily, The Guardian, Your Money, and Domain and has previously worked at the European Parliament and EUobserver.