Australian regulators the biggest losers from interim Royal Commission

When the publication of a 1,000-page damning account of bank greed and misbehaviour results in bank shares having their best day in recent memory, you begin to wonder if the world has gone awry.

Such was the response to the interim report of the Financial Services Royal Commission, submitted in Australia on Friday.

The report, from royal commissioner Kenneth Hayne, calls banks greedy and regulators lazy, but it actually proposes nothing new.

“Passing some new law to say, again, ‘do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime,” the report says. “What would that gain?”

Finger wag

In fact, it makes no real, concrete recommendations at all, but instead wags its finger at the banks for their pursuit of profits at the expense of ethics, and calls for better enforcement of existing laws.

It still has 1,000 pages summarizing testimony from wronged customers, all pretty gruesome stuff reputationally, but as the share-price movement on Friday tells us, all of this was already in the price and the banks – and their shareholders – were braced for far worse.

Even if there had been solid recommendations – such as insisting that banks are separated from wealth management businesses, or reforming mortgage broking commissions – most banks have got well ahead of that anyway.

So on Friday, the institution that comes out with the worst reputational hit relative to what we already knew is the Australian Securities and Investments Commission (Asic). The Australian Prudential Regulation Authority (Apra) doesn’t come out much better.

Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn-out remediation program and protracted negotiation with Asic of a media release 

 – Kenneth Hayne

The regulators are right up the front of Hayne’s executive summary of his report.

“When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done,” he says.

Asic rarely went to court, Apra never, he says, adding: “Much more often than not, when misconduct was revealed, little happened beyond apology from the entity, a drawn-out remediation program and protracted negotiation with Asic of a media release,” plus insignificant infringement notices or enforceable undertakings.

“Infringement notices imposed penalties that were immaterial for the large banks,” he continues. Enforceable undertakings might require a community benefit payment, “but the amount was far less than the penalty that Asic could properly have asked a court to impose”.

Too cozy

The clear implication is that the regulator was far too cozy with the institutions it was supposed to regulate.

Still, though the banks appear to have got away with little more than profound shame and embarrassment, this isn’t necessarily the end of the story. What was announced on Friday was an interim report, for consultation; the final report must appear by February, and that may include more substantial recommendations.

Also, in the never-ending merry-go-round of Australian prime ministers, there is likely to be a general election and possibly a change of government around that time. If that happens, Labor has pledged to establish an implementation taskforce for the commission, “to reform the culture of profit over people in the financial services sector”.

That might prove to have more teeth than a commission, which, while big on public venting, had no actual power to do anything more than expose.