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Move quickly and firmly on Hayne proposals, British inquiry veterans warn

The banking system needs to find the right balance between staff, shareholders and customers. Ryan Stuart The banking system needs to find the right balance between staff, shareholders and customers. Ryan Stuart

Banking executives and regulators have to have their feet held to the fire if an inquiry like the Hayne royal commission is going to deliver meaningful and long-term change, according to veterans of Britain's own decade of banking commissions and reforms.

As Australia grapples with the political and policy fallout of the Hayne commission, British politicians and experts who were involved in high-profile banking misconduct inquiries over the past decade warn that reform momentum can quickly fade – unless enforcement officials are prodded to use their teeth, and banking chiefs are held sharply to account for misconduct on their watch.

The experience of MPs who presided over the Parliamentary Commission on Banking Standards – a year-long investigation set up in mid-2012 to tackle banking misconduct – suggests the Australian government has to move quickly.

Just a little over a year after the commission wrapped up, some of its members issued a joint statement raising the alarm that the opportunity to implement their wide-ranging reform proposals was already slipping away.

"Almost 18 months on, there are already signs that memories of the events that prompted the creation of the commission are growing hazy, and that, as banks recover their strength and self-confidence, their support for reform is also growing weaker," they wrote.

"There is much work still to do – a necessary condition for the restoration of trust."

Mark Garnier, a Conservative MP and former financier who sat on the commission, says the political outrage generated by a banking scandal was necessary to drive change – although equally there was a risk of being driven too far.

"We came up with ideas that were not particularly good in retrospect, but we tried to focus the Parliament," he says. "Our mistakes came from the political atmosphere of the time, but you need that political atmosphere to drive the change."

The challenge that a banking inquiry always faces, in Garnier's view, is to strike a balance between staff, shareholders and customers.

"If you get that balance right, it works quite well. It's quite a useful tension to have," he says. "In our case the interests of staff far outweighed those of shareholders and customers. We were trying to work out how to realign that tension."

Daniel Awrey, an Oxford University professor of financial regulation who advised the earlier Vickers inquiry into systemic banking risk, agrees that the dynamics of the banking world are often off-balance.

"News of banks ripping off customers can cause share prices to rise, because that type of behaviour benefits shareholders," he says.

"When there are revelations of widespread conduct issues we don't usually see regulatory overhaul ... The political impetus for change isn't there in a lot of cases, because the balance of power isn't there for sweeping reform."

Cracking down on CEOs

Margaret Thatcher's former chancellor Nigel Lawson, who sits in the House of Lords and was also on the commission, reckons there is only one way to reset the balance between customers and bank chiefs: harsh punishment.

"I don't think we're going to crack this until chairmen and CEOs are deemed to take personal responsibility," he says. "If you just fine the banks, the only people who suffer are the shareholders, who are completely innocent in the whole business.

"When the CEOs say they had no idea – it's their business to know. Whether they didn't know, or didn't wish to know, it's their job. If they don't know, they're still responsible, still culpable, because they allowed people beneath them to behave that way without asking any questions."

And since banking executives can afford the fines, and can quickly move on from a scandal to new employment – "reputation doesn't seem to matter so much these days" – Lawson says the punishment has to include jail time.

"If you have a plane crash, it's not a time for blame, but for lessons learned." British Conservative MP Mark Garnier. PA

"The decline in the social consequences of losing your reputation is a serious practical difficulty, and makes it all the more important that when there have been misdeeds on a significant scale the people should go to prison. That really would change things."

His former commission colleague Mark Garnier isn't so sure. "Actually, the people whose heads should roll are the regulators who weren't regulating properly. And if they were regulating properly, it should be the politicians who set the regulations badly."

Awrey observes that the axing or disgracing of CEOs hasn't always been enough. Fred Goodwin of RBS was summarily sacked as CEO and later stripped of a knighthood, but problems at the bank continued well after that as its Global Restructuring Group mistreated tens of thousands of small businesses.

He says the incentives on CEOs have to start earlier than an inquiry years after the fact: senior banking executives should have to be licensed under an Approved Persons Regime.

'... When there have been misdeeds on a significant scale the people should go to prison. That really would change things." Nigel Lawson, Margaret Thatcher's former chancellor. STEFAN ROUSSEAU

"If you are the CEO of an institution that is found guilty of certain types of offences, that's your job. They don't have to fine you, but you can't have someone who isn't authorised by the regulator, so they have to quit," he says.

"It might make the positions less desirable to a certain kind of candidate – people who take conduct risks or systemic risks and don't want to be accountable for it … You've got to get the bad apples out of the barrel."

Shoring up the regulators

But Awrey says reforms of this kind will only work if there's strong regulatory and political backing. Britain's then newly created Financial Conduct Authority went after banking misconduct under its first head, Martin Wheatley, but his ousting by former chancellor George Osborne seemed to sap the ASIC-equivalent's drive.

"The biggest change was showing Martin Wheatley the door – he was brought in to crack the whip and show heavy pressure. When the political winds changed, they booted him in favour of someone more friendly to the finance community. The change of personnel led to a change of policy."

Garnier says the regulator is often at a disadvantage: "In a bank you get incredibly smart people who are always pushing the envelope, who know how to be creative."

Lawson agrees that regulators are likely to be "outgunned and outsmarted", and might need the central bank's artillery on the battlefield.

"It's probably desirable to have the regulatory function entrusted to the central bank, which carries more prestige, status and clout and can attract a higher quality of people than some separate regulator," he says.

Awrey worries about political interference in the regulator – a problem in the US, where its funding would be cut by Congress if it was too tough on Wall Street – and about the revolving door of personnel between the private sector and the regulator that might weaken the drive to implement reform and enforce it.

That said, he thinks many people are naturally inclined either to the private sector or to the public sector, and incentives designed to capture those who might go either way would have to be carefully targeted – and could easily miss that target.

Reshaping the debate

Once the initial furore has run its course, Garnier recommends that through a more reasoned debate that doesn't inflame the public or put the banks too much on the defensive.

"People say banks are a nightmare, or corrupt, but you're never going to buy a home without one. They redistribute cash from where it's accumulated to people who need it to buy a home. It's a very important social function. All this baying for blood means we slightly forget the social dynamic at play," he says.

"To a certain extent, we need a cultural change where we begin to understand what banks are doing and why they are important. When you have a plane crash, it's not a moment for blame, it's a moment for lessons learned."

But he accepts that the scandal and crisis is a more compelling story. "A story of lecturing a community to understand their banks better after they've apparently just stolen money from you – that's not going to sell well."

This article was first published by https://www.afr.com/business/
Author: Hans van Leeuwen

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