The final report had a great deal to say about the regulators of the financial services industry – ASIC, APRA and the ACCC – with 14 recommendations expressly directed at them.
But it is important to realise that those recommendations will have profound implications for the regulated, who should ensure that they are ready for what is to come.
Failures of enforcement
The Commissioner has given the regulators, particularly ASIC, a clear message: improve or be replaced. It is abundantly evident that the Commissioner gave serious consideration to the establishment of a specialist civil enforcement agency, drastically curtailing ASIC’s remit. Though not among the recommendations in the final report, the Commissioner clearly signals that it may be necessary in the future.
A number of circumstances were also identified where misconduct had been observed in APRA-regulated institutions. The Commissioner questioned APRA’s apparent lack of enforcement action against those institutions, though the final report did identify a tension between:
- APRA’s core mandate as a prudential regulator; and
- increasing community expectations that it should also be a conduct regulator and undertake enforcement actions for the purposes of consumer protection.
Twin Peaks retained, but other changes to come
Despite speculation to the contrary before the final report was released, the Commissioner has recommended the retention of the “Twin Peaks” model, with ASIC as the primary conduct and disclosure regulator, while APRA is charged with prudential responsibility.
The final report notes potential advantages in removing parts of ASIC’s remit, such as financial services consumer protection, and transferring them to the ACCC. The Commissioner has concluded, however, that such a change would “disrupt the processes of responding to what has happened in the Australian financial services industry”. He concludes that the costs of associated disruption would outweigh the possible benefit.
The final report has attempted to address existing issues in relation to the supervision of the superannuation system and of the BEAR.
In relation to superannuation, the Commissioner recommended that the roles of APRA and ASIC be adjusted so that:
- APRA retains its current functions of ensuring that the financial promises made by superannuation entities that APRA supervises are met within a stable, efficient and competitive financial system; and
- ASIC’s remit is broadened so that it has the power to enforce all the provisions in the Superannuation Industry (Supervision) Act (currently limited to matters of disclosure).
In relation to the BEAR, which is currently solely regulated by APRA, the Commissioner recommended that ASIC and APRA be joint administrators. ASIC is to be charged with overseeing those parts of the BEAR that concern consumer protection and market conduct matters while APRA will oversee the prudential aspects. Over time the BEAR should be extended to all APRA-regulated financial services institutions, and APRA and ASIC should jointly administer those provisions.
These recommendations clearly allocate responsibilities for enforcement between the regulators in order to address apparent failures in enforcement against the types of misconduct that was revealed in the Commission. The recommended broadening of ASIC’s remit in relation to the superannuation system and the BEAR will likely see increased enforcement action given ASIC’s new “why not litigate” enforcement approach.
Watching the watchdogs
Following the Commission, there will also be further regulation of the regulators, including “capability reviews” and a new independently-chaired oversight body.