The spotlight put on Australia’s ‘twin peaks’ regulators this week by AMP chairman David Murray should be the catalyst for a deeper discussion about the role they must play in restoring trust in the financial system.
Murray said the Australian Securities and Investments Commission needed to be far quicker in its response to self-reported breaches of the law and the Australian Prudential Regulation Authority needed to back away from its inclusion of ASX corporate governance principles in its prudential rules.
He suggested both regulators needed to do more to help rebuild trust by collaborating more closely with the entities they regulate.
Murray’s comments about ASIC and APRA were timely considering the Hayne royal commission is next week expected to expose widespread failings in their joint supervision of the $2 trillion superannuation sector.
In fact, we don’t need Commissioner Hayne to dissect case studies to prove that ASIC and APRA have dropped the ball in relation to the protection of the interests of members of super funds.
This was made blatantly obvious from the draft findings of the Productivity Commission’s inquiry into the competitiveness and efficiency of the super system.
Two glaring issues
The PC found that the industry has too many unintended multiple member accounts and there is serious entrenched underperformance among a not insignificant number of funds. Fixing these two problems could benefit members to the tune of $3.9 billion a year.
It is staggering that about 20 super funds were found by the PC to have under performed over the 12-year measurement period.
It is obvious that whichever regulator is responsible for the enforcement of the law in relation to superannuation should be calling to account the trustees of the super funds that have manifestly failed to serve the interests of their members.
The trustees concerned should be removed from their cushy jobs and the funds they run should be merged with others in order to improve the performance.
With any financial product apart from super, you could argue that caveat emptor should apply. It is up to the consumer to do their due diligence and decide if a product is what it claims to be.
But that’s not the case with super. This is a compulsory system pushing people into default funds, a third of which are failing to provide acceptable performance, according to the PC.
Where are the regulators? What is APRA deputy chairman Helen Rowell doing about this? Or, should I say, what is the ASIC deputy chairman Peter Kell doing about this?
Who does what?
The question needs to be asked of both Rowell and Kell because nobody is quite clear about their roles and responsibilities in the supervision of super.
Many are waiting with baited breath for a joint statement from Rowell and Kell about which regulator is responsible for what in super. If this joint statement says that ASIC is responsible for super product disclosure, advertising and other consumer-related issues and APRA is responsible for the rest, it will simply feed the confusion.
Karen Chester, who has steered the PC inquiry into the competitiveness and efficiency of super, told the Financial Services Council annual conference last week that she has not been able to find out the division of regulatory roles.
“We want regulators to be member champions and do more strategic conduct regulation,” she said.
“The murky division of roles between APRA and ASIC is not conducive to that today … and when things are overlapped and murky, accountability goes out the window.”
A closer reading of the PC draft report on super makes it clear that there is a lack of reliable data available about the performance of super funds. Surely APRA must carry at least some of the blame for this fundamental failing.
It is noteworthy that Murray, who chaired the Financial System Inquiry, told Chanticleer on Tuesday that the federal government “missed the boat” on the FSI recommendation that APRA and ASIC be held accountable for their actions through regular reviews by a new Financial Regulator Assessment Board.
This was the only recommendation of the FSI that was not adopted by the federal government. The government declared that existing mechanisms for monitoring regulatory performance were sufficient.
The government did make a tiny concession to Murray’s call for assessing the accountability of the regulators by reconstituting the Financial Sector Advisory Council. But it proved to be ineffectual. The council had no power and it was no surprise when it sunk without trace in March this year when it was suspended.
Treasurer Scott Morrison’s ineffectual oversight of the regulators is evident from his failure to adopt one of the key recommendations of the FSI – conduct capability reviews of ASIC, APRA and the Payment Systems Board every six years. Morrison agreed to this but has never ordered a capability review of APRA or the PSB.
The damning ASIC capability review was completed in December 2015. ASIC has implemented its recommendations.
It would be worrying if a review of APRA’s capabilities drew the same conclusions as the PC’s inquiry into competition in the financial system published in January this year. It found that APRA suffered from a lack of transparency.
Chanticleer has long known about APRA’s lack of transparency because of reporting on the blatant rorts that occurred at the NSW Bookmakers Super Fund about six years ago. Members of this fund had legal advice that the trustees breached their fiduciary duties and there were questions raised about the role played by the trustee company that held the assets of the fund.
Murray’s comment about the weaknesses in the corporate governance of ASX-listed companies obviously struck a chord.
The reaction ranged from forthright support from respected company directors to criticism on Twitter for Murray’s failure to discuss values, culture and ethics.
To be fair to Murray, he did talk about ethics and values in his interview with Chanticleer and it’s worth repeating them.
After talking about the need for strong internal control systems at AMP, Murray made some comments about ethics and values.
“Now, in saying all of that, I didn’t mention the word ethics or values and they are obviously important,” he said.
“Which company in the world would knowingly employ someone who is dishonest?”
Murray argued that values and ethics were not the real issue when it came to governance.
“It’s whether the work systems are properly designed,” he said. “What is then important is whether leaders behave in a way that enforces or negates the importance of those systems.
“If the leader behaves in a way that demonstrates that it’s not as important as it is, you think you’ve lost and those beliefs then change.
“They’re terribly important around human systems. If you appoint somebody to a role that everybody knows is not the most meritorious person, they then start having to do work-arounds on their jobs to cover up the fact that this person is not very good.
“It’s those work-arounds that set up activities which can be unauthorised, illegal, unproductive or disreputable.”