Academics urge board to monitor ASIC and APRA

An over-arching assessment board should be appointed to provide continuous oversight of Australia’s financial services regulators, according to a new paper published by academics in Wollongong, New Zealand and West Australia.

The research, published in the Law and Financial Markets Review journal, was led by Dr Andy Schmulow, a senior lecturer at the University of Wollongong’s School of Law along with Karen Fairweather from the University of Auckland and John Tarrant from the University of Western Autralia.

They have pointed to what has been heard during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry and suggested that the creation of an Assessment Board providing continuous oversight of the regulators would represent an effective solution to regulatory failures.

The three academics have claimed the Royal Commission has provided ample evidence of the phenomenon of regulatory capture which, in turn, has led to a “financial regulatory crisis”, noting that regulatory capture occurs when agencies responsible for regulation have their efforts diverted away from public interest and act more favourably toward the interests of the industry groups who were subject to regulation.

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Explaining the contents of their research, Schmulow and co-authors argue that the structure of financial regulation is fertile ground for capture, particularly as the close nature of supervision and monitoring required can lead to a “cosiness” between the regulator and the regulated.

“The notion that banks are ‘too big to fail’ leads to deferential treatment, particularly when the regulators can exercise discretion in enforcement actions,” Schmulow said, claiming that the Royal Commission had brought to light examples of regulatory capture, including where ASIC allowed major banks to water down announcements about industry misconduct.

To test the idea of a board of oversight, the researchers conducted an internationally comparative, cross-jurisdictional analysis of the method’s effectiveness to deter and prevent regulatory capture, including on the part of the UK’s Financial Policy Committee and the United States Government Accountability Office.

The three academics are arguing that the proposed assessment board be governed by a secretariat provided by The Treasury, but with the board at arm’s length from the bulk of Treasury and with its membership drawn from diverse, highly experienced people serving fixed terms to prevent one person or industry group dominating.