Australian Financial Review 27 September 2018
The Hayne royal commission is hurtling towards its conclusion after having pulled the finance sector apart.
Hayne has demonstrated how wrong so many of us were at the breadth and depth of malfeasance and dishonesty in the sector – myself included. It was only the full weight of a royal commission's unfettered power which could get to the bottom of the issues.
I spent most of this decade working on financial regulation – and before we even see Hayne's report, there are two key lessons.
Firstly, it is intellectually bankrupt to keep on piling on new laws and regulations unless they are enforced. We risk wasting Hayne's work unless enforcement is front of mind for policymakers.
I am a believer that less regulation is generally better for the economy. No one could argue financial services was lightly regulated.
Even the best laws will be ineffective if they are not enforced.
Reforms such as "Stronger Super" and the "Future of Financial Advice" or FOFA into the superannuation and financial advice sectors were ambitious but they were not fully enforced.
The laws they replaced which existed before and during the financial crisis were weaker. They were also not fully enforced.
Thats has meant that we have not been living in a caveat emptor world. For example, before the financial crisis, there were laws which required advisers to "know your client" and "give appropriate advice". Yet during the crisis many Australians were given terrible advice by licensed advisers.
There will always be a few crims and spivs who manage to escape the policeman, but the scale of the malfeasance shows the whole enforcement approach was unrealistic and simply not up to scratch.
This resulted in ASIC revealing in April that just one criminal prosecution was achieved against a financial adviser in the last decade.
Perhaps the most significant reform over the past few years came as a commitment from the now Prime Minister to ensure ASIC has a commissioner with prosecution experience.
Prosecution is now the key word. Even if the Hayne commission produces the greatest blueprint for policy reform and cultural change Australia has seen, it will all be a waste of time if there is a regulator unable to enforce the new laws.
Perhaps the best way to get immediate change is to make some prominent examples of those that have contravened the existing law.
That will help ensure that any new laws are treated more seriously by the institutions and the regulator. People avoid breaking the law partly because the police will catch them. The same mentality should apply to all industries.
A tough regulator is a prerequisite for any industry that wants to end the groundhog day of endless reviews.
The second lesson is that law reform is not a silver bullet. Expectations were sky high for the financial services reforms delivered over the past decade. Those expectations have not been met.
Policy-based law reform should not be expected to deliver a trifecta of raising standards, changing culture and delivering redress. Many of us in the sector, with the best of intentions, were naive in thinking it would.
For example, after the immediate response to the global financial crisis, the medium term policy response was the structural reforms of the superannuation (Stronger Super) and financial advice (Future of Financial Advice or FOFA) industries.
The reforms banned commissions, lowered superannuation fees, established a fiduciary like duty for advisers and banned or regulated wholesale payments within the industry.
Standards were raised in law but cultural change did not occur and compensation was not required.
When treasury or independent reviews looked at the policy landscape and made policy recommendations, misconduct was not in scope.
The problem was the FOFA and Stronger Super reforms created an expectation gap. Many inside and outside of the industry worked on the basis these extremely expensive reforms would solve all of the problems.
The commission's hearings have revealed the problems were not solved.
In fact, following the changes, there are multiple examples of consumers being put last.
The noise for a royal commission didn't go away because too many people were still being hurt by institutions and/or advisers and felt they were entitled to compensation.
At least the aged care sector is starting out with a royal commission which will likely provide a policy framework as well as looking at culture and redress. This approach is less likely to leave skeletons in the closet.
If there is a culture of non-compliance and failed enforcement in the aged care industry, the new royal commission must deliver the consolidated policy, culture and redress framework in one whack.
If a banking royal commission has been conducted after the financial crisis, that industry would now be thinking about how to grow, not how to deal with more laws and victims.
The "royal commission up front approach" should therefore work in the long term interests of the aged care sector.
Hayne will soon provide his further reform blueprint. Hopefully law enforcement and properly setting expectations will drive the response.
It will be another lost opportunity if these two lessons are lost.