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TOPIC: ASIC finally gains upper hand

ASIC finally gains upper hand 1 year 6 months ago #4229

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ASIC finally gains the upper hand against big banks, AMP
Karen Maley
By Karen Maley
07 Jan 2019 — 7:26 PM

Whatever Commissioner Kenneth Hayne recommends in his final report, one thing is certain: the days when the corporate regulator grovelled before the country's financial elite are mercifully over.

For years, the major banks and AMP felt they had absolute liberty to interpret corporate laws as they wished because they knew there was little chance they would be held to account by the corporate watchdog, the Australian Securities and Investments Commission.

Indeed, AMP insiders recall that in late 2017, Greg Medcraft, who at that time was the chairman of ASIC, expressed his gratitude to AMP's then chair, Catherine Brenner, after the wealth-management giant presented the corporate regulator with a supposedly independent report that law firm Clayton Utz had prepared on AMP's practice of charging customers for financial advice that wasn't delivered.

Commissioner Mr Kenneth Hayne AC QC at the Royal Commission into Banking. Thursday 22nd November 2018 . supplied

Even though AMP had repeatedly misled the corporate watchdog about its practice of deliberately charging fees for no service, Brenner told senior AMP executives that after the Clayton Utz report was presented to the corporate regulator, she had received a message from ASIC's Medcraft that thanked AMP for its openness and transparency in confessing its past misbehaviour. Brenner declined to comment on Monday.
NAB's flagrant example

Of course, AMP wasn't the only financial giant to take advantage of the pathetically low bar ASIC set for acceptable corporate conduct: the National Australia Bank provided an even more flagrant example.

By September 2016, and after a protracted internal debate, the NAB executive had finally conceded it had wrongly charged plan-service fees to customers, even though no service had been provided.

The following month, ASIC sent out a draft report on fees for no service, which indicated that some 120,000 of NAB's clients had been charged these fees for no service, and that the bank's compensation bill was likely to amount to about $16.2 million.

The problem was that senior management in NAB's wealth division already knew that the compensation was more likely to be about $35 million and that about 220,000 clients had been charged plan-service fees even though there was no financial adviser to provide this service.

But in a catastrophic coincidence of timing, the release of the ASIC report was likely to coincide with the most important date on the bank's calendar: the release of NAB's full-year results.

NAB senior executive Andrew Hagger called ASIC and, in an extremely cryptic and vague fashion, let it know that bank's fee-for-no-service problem was somewhat larger than suggested by the ASIC draft report. Darrian Traynor

This left NAB's senior management contemplating the dire possibility that the excitement over the bank's strong profit performance would be ruined by criticisms of the bank's behaviour in gouging fees from unsuspecting clients. Alternatively, if NAB failed to disclose the full extent of its fee-for-no-service issue, there was an awkward risk that ASIC would be annoyed when it discovered the bank's behaviour.

To resolve this dilemma, it was decided that a senior NAB executive, Andrew Hagger, would call the corporate regulator and, in an extremely cryptic and vague fashion, would let it know that bank's fee-for-no-service problem was somewhat larger than suggested by the ASIC draft report.

In other words, NAB decided that ensuring its profit announcement went off without a hitch was of vastly more importance than maintaining good relations with the corporate regulator.

There's no doubt senior NAB executives had very good reasons for their decision. After all, they stood to benefit handsomely from a strongly rising share price, while they had little to fear from a piqued regulator.

As Commissioner Hayne said in his interim report, "when banks have disclosed, or ASIC has otherwise learned of, misconduct, ASIC has almost always sought to negotiate what will be done in response."

In these protracted negotiations, he noted, "too often, I suspect, ASIC has sought to accommodate the expressed wishes of the entity rather than determine what ASIC wants from the negotiation, tell the entity what it wants and insist upon it provided promptly."

Commissioner Hayne also rightly noted that "too often, entities have been treated in ways that would allow them to think that they, not ASIC, not Parliament, not the courts, will decide when and how the law will be obeyed or the consequences of breach remedied."
ASIC's funding problem

Of course, it's all too easy to conclude that this timidity on the part of ASIC reflects an ingrained cultural problem, and to excoriate the corporate regulator for its reluctance to do legal battle with the country's most powerful financial institutions.

But that ignores the fact there have always been plenty of senior executives within ASIC ready and raring to take on the major financial institutions. What the regulator lacked were the financial resources that were essential if it was to do battle with deep-pocketed banks and wealth managers.

Instead, ASIC has watched with dismay as its budget has been progressively whittled back, at the same time that its range of responsibilities has widened.

This dismal lack of funding no doubt explains why ASIC felt it needed to adopt a conciliatory approach with major financial institutions. Rather than adopting a permanently aggressive demeanour, ASIC clearly felt it was better to encourage the big banks and AMP when they spent money on hiring external legal firms to write independent reports. At least by doing so they demonstrated some acknowledgement of past wrong-doing and some desire to make amends.

But the days of the humble and amenable regulator are coming to an end. The federal government has already moved to remedy the corporate regulator's chronic lack of resources, by giving ASIC a $70 million funding boost.

Part of this money will be used to embed teams of up to 20 ASIC staff in major financial institutions, which should give the corporate regulator much greater insight into the attitudes and behaviour of the financial institutions it is responsible for overseeing. As a result, ASIC will no longer be reduced to expressing its gratitude whenever a financial firm deigns to provide it with an independent report of its misdeeds.

But the regulator is flexing its muscles even further by setting up a corporate governance taskforce that will take a close look at an issue dear to bankers' hearts: how the payment of large bonuses leads to misbehaviour in the financial sector.

As they watch the balance of power tilt inexorably against them, the country's financial giants will no doubt have occasion to rue the disdainful peremptory attitude they displayed towards ASIC in the past.
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