Australia: ASICs new approach to regulation by embedding supervisory staff in banks

Last Updated: 21 November 2018
Article by Lyn Nicholson and Rebecca Siri
Most Read Contributor in Australia, December 2018

On 17 August 2018, as part of his opening statement to the Parliamentary Joint Committee on Corporations and Financial Services, ASIC's chairman James Shipton, announced plans to embed teams of up to 20 ASIC agents for weeks at a time to sit with bank staff, drop into meetings and trail the CEO, executives and directors to identify misconduct before it arises.

Interestingly, as part of this same speech, he indicated his deputy chair, Peter Kell, was unable to attend as he was appearing as a witness at the Royal Commission into misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission).

The interim report of the Royal Commission has been released with the Executive Summary raising several pertinent issues that are relevant to this announcement, including:

As the Commission's work has gone on, entities and regulators have increasingly sought to anticipate what will come out, or respond to what has been revealed, with a range of announcements.

and; Should the existing law be administered or enforced differently? Is different enforcement what is needed to have entities apply basic standards of fairness and honesty by obeying the law, not misleading or deceiving, acting fairly, providing services that are fit for purpose, delivering services with reasonable care and skill, and when acting for another, acting in the best interests of that other? The basic ideas are very simple. Should the law be simplified to reflect those ideas better?

Is this novel idea a good one?

Clearly ASIC sees benefits in this approach and it is administering the laws differently.

However, will ASIC learn more about the banks by taking this approach or will it have a "chilling" effect, such that the bank employees in contact with the ASIC staff are more guarded in their communications?

This is a very real question and the impact of embedded staff is one that may not achieve the objective set out at the end of chapter 7 of the interim report:

Doing the 'right thing' has not been rewarded. And even in the more recent past, 'balanced scorecards' and 'conduct gateways' have too often used doing the 'wrong thing' as a disqualifying criterion. But penalising default is not the same as rewarding the right and proper performance of a task. Penalising default encourages hiding mistakes; it does not encourage doing the 'right thing'. It does not encourage the intermediary or the employee to ask, 'Should I, should the bank, do this?'

One could suggest that a regulator looking over the shoulder is not the first place to ask that question, as penalty, rather than reward, is the most likely outcome.

What can we learn?

The recurring themes of cultural issues and effective corporate governance, requiring change across the financial sector are sought to be addressed by this strategy.

These themes are a focus in Shipton's approach that ASIC staff begin "at the top" of the major banks and wealth manager AMP to assess culture, accountability and governance.

Our concern is that our regulators aren't learning from past mistakes. In 2004, the Australian Prudential Regulation Authority (APRA) completed its investigation into the National Australia Bank (NAB) (for irregular foreign currency options trading), which included APRA personnel conducting "on-site risk reviews."

Despite APRA's understanding of the misconduct occurring at NAB arising from their on-site visits, NAB continued to fall into further disrepute, with the Authority later being questioned for its knowledge of NAB's issues for period of approximately two years prior to the 2004 scandal. APRA responded to the Senate's concerns by stating it was working collaboratively with NAB to respond to the known issues at hand.

While APRA celebrated its findings from the on-site reviews and its recommendations later handed down to NAB in a publicly available report, others criticised APRA for acting too slow and too soft on NAB for the actions that resulted in an estimated loss of $360 million. APRA's findings isolated the misconduct to four currency option traders while also naming cultural issues to be at the heart of NAB's failure.

Noting two of the key recommendations handed down from APRA to NAB in 2004 were that:

  1. the misconduct of middle-management fails to attract the attention of higher management, with line management turning a blind eye to known management concerns
  2. Executive Risk Committees were particularly ineffective, missing or dismissing risk information pertinent to the problems that emerged and failing to escalate warnings.

While embedding ASIC staff "at the top" may flow through cultural change, it may be that solely focusing on executives and directors of financial institutions will not provide the change the sector truly requires, for example:

  • reducing the risk of misconduct amongst middle-management and front-line staff who are actively involved in the day-to-day conduct and decision-making
  • instilling cultural change, when it is inherent in the roles of senior-executives to focus on profit-deriving conduct.

The lessons learned in 2004 about information flows suggest that a focus on understanding how to comprehensively approach compliance reporting, and exception reporting, remain problematic, as seen in the comment in the interim report:

The difficulties raised by NAB, and by others, about meeting the Commission's requests suggest that those entities deal with regulatory compliance piecemeal rather than comprehensively. Approaching compliance piecemeal does not readily permit identification of underlying causes. Particular events are too readily seen as isolated departures from an assumed norm caused only by aberrant behaviour of individuals. Deeper causes and connections remain unconsidered and unidentified.

Since the initial announcement, ASIC Commissioner John Price, has made the following statement:

We believe this initiative will change the mindset in the thinking of decision-makers inside financial institutions. Any decision-maker inside a financial institution who interacts more regularly with a senior ASIC officer, will have regulatory issues – the physicality of the regulator, almost – firmly in front of mind.

While it is true regulatory issues will be physically front of mind, the remaining missing piece is the benefit the organisation will gain from this reminder. Unless there is an amnesty or an immunity policy, any engagement with the embedded ASIC regulatory staff may be seen as a fast track to adverse outcomes if the proposed action is not 100 per cent within ASIC's view of "legal" – and nothing is ever black and white.

What next?

The Royal Commission is conducting further hearings this month and is due to submit its final report to the Governor-General by 1 February 2019. At that time, we may have the benefit of further recommendations to influence the implementation of this and other policies to encourage "good" behaviour rather than merely be a more constant reminder of the consequences of "bad" behaviour.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Lyn Nicholson
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions