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A failed financial regulatory regime

A failed financial regulatory regime

Every second month a new scandal emanates from within the Australian financial sector. Each scandal has its unique set of victims, accompanied by devastating consequences. Few of these victims have achieved justice or adequate compensation.

Not merely incompetence, but corruption is rampant in the sector.

These developments have spawned a string of recent parliamentary inquiries into the finance sector. Some reports have been powerful (the 2014 Senate Economics Committee ASIC inquiry) whereas others have been vapid (the 2012 Senate Economics Committee Post-GFC Banking inquiry). Following bipartisan government indifference, the overall impact has been negligible.

The Abbott government established a designated Financial System Inquiry, under ex-Commonwealth Bank CEO David Murray. Given the original claim to comprehensiveness, the report was narrowly focused. Its dominant emphasis was on the refining of the sector's prudential capital adequacy requirements. The inquiry steered clear of the dimension of corruption.

The system is seriously broken. Yet, in retrospect, this situation is entirely predictable, foreordained.

The current state of play is a direct consequence of the reforming zeal of the banking vested interests, the neo-liberal ideologues and ill-tutored technocrats. It can be read directly from the directions generated by three key events.

First, the 1981 Campbell Committee report, which recommended wholesale deregulation and privatisation of the banking sector. The only regulation deemed necessary was that of a "prudential" character that would enforce minimum capital holdings on lending institutions to ensure the stability of this key sector of the economy.

The public interest would be served by the sector's pursuit of private interest via the single vehicle of "competition". But the character of this saviour, glorious in the abstract, was not examined at the time. It still isn't.

Second, the 1991 Martin parliamentary inquiry into the banking sector. This inquiry was initiated to quell the groundswell of contemporary resentment against the banks, reflecting that the promise of Campbell and the late 1980s reality were two different animals.

The Martin report recommended more of the same, with self-regulation added – embodied in a banking ombudsman and a code of banking practice.

Third, the 1995 Wallis inquiry, motivated by the creeping overlap of segments of the financial sector, especially banking and superannuation/insurance. Wallis recommended no more walls, and a regulatory apparatus that accommodated the free-for-all.

The trajectory of Colonial Mutual Life is Exhibit A for this third plank. CML, founded in 1873, effectively entered the banking arena when it was permitted to take over the State Bank of NSW in 1994. It demutualised and listed in 1997 and was taken over by the CBA in 2000.

Post-Campbell, comprehensive privatisation has deprived us of a direct vehicle for serving the public purpose (specialist institutions such as the Commonwealth Development Bank, accessible banking facilities, etc.).

The much-vaunted "competition" has been consistently undermined by a succession of inexcusable green lights to bank takeovers by the competition authority, leaving us with the omnipresent Big Four. The de facto cartel competes aggressively in misleading advertising, but declines to compete where it matters – competence and integrity in customer relations.

In particular, the typical loan facilities for small business and farmers are not fit for purpose. Who cares? The strategy: take security on customer and guarantor assets and default at will.

Post-Martin, self-regulation is an oxymoron. The Financial Ombudsman Service, apart from pedestrian assistance to retail customer complaints, is actively complicit in bank corruption. The Code of Banking Practice, currently 72 meaningless pages, is universally honoured in the breach.

Post-Wallis, bank takeover of superannuation and wealth management has been a disaster. For example, Colonial's key businesses provided the foundation for the CBA's Commonwealth Financial Planning and its insurance division CommInsure – both, as we now know, infested by criminal intent and generating a social catastrophe for its customers.

The finance sector is now a societal monolith, and with parasitical tendencies. Its scope is reflected in its endlessly rising share of national income. In 1980-81 (year of the Campbell report), the finance sector's gross income as a percentage of total corporate income was 5.1 per cent and of total business income 3 per cent. By December 2015, the comparable figures were 23.6 per cent and 17.1 per cent respectively. Is there an end to this rise?

The entire financial regulatory apparatus is part of the problem.

At the current parliamentary inquiry into 'The Impairment of Customer Loans', ASIC personnel (hearings, November 23, 2015) admitted that they refuse to implement their legislated responsibility for bank unconscionable conduct against small business/farmer customers. The other regulators claim that the problem is not in their bailiwick. Moreover, there is no police unit dedicated to the pursuit of finance sector fraud.

The cracks in the current regulatory apparatus are seismic.

ASIC chairman Greg Medcraft (with other regulators) has recently honed in on the "culture" meme. The companies must fix their dysfunctional cultures, he claims. This tack is mere grandstanding. Bank senior management (with corrupt law firms and liquidators in tow) act with impunity because they know that they have, to date, been granted immunity.

In turn, bank victims seeking justice in court face a narrowly educated and often complicit judiciary, almost always deciding for the bank.

The entire financial regulatory system demands to be re-examined and reconstructed from the bottom up. But who among our leaders has the detachment, the vision and the courage to take up the challenge?

Author: DR Evan Jones

Dr Evan Jones is a retired political economist from the University of Sydney.

This Article first apeared in the Canberra Times on the 8th April 2016

Last modified onThursday, 12 May 2016 13:43

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