JOHN MENADUE. How and why corporate regulators have failed us. And not just bank regulators.

The surge yesterday in bank shares was no surprise. Investors  at least concluded that Kenneth Hayne ‘s slap on the wrist would not really disturb the bank’s business model. His report did not go to the heart of the abuse, the vertical integration of  financial product and  financial advice. The conflict of interest will remain.

I did not expect much from the Hayne Royal Commission. I was not disappointed. But it was good theatre.  For me the most important revelation was the way people behave when incentives are all there to get rich quick starting with greedy bank CEOs

What the Royal Commission showed us was that we need to embark on a re regulation of  our economy to curb the spivs operating at senior levels in our major companies. Our politicians must address this need for re regulation to protect the public interest.  Under the guise of ‘cutting  red tape’  regulations to protect the public interest have been whittled away..

But in emphasising the need for regulators to lift their game Kenneth Hayne reveals his naivety. These are just the people who have failed us.

The banks will keep there heads down for a  month or two, while rolling out lobbyists and PR people to minimise any change.

The failure of corporate regulation and regulators is in plain sight for all to see. And it is not just in banking. Political ideology and corporate conceit has enabled the powerful to tilt the ‘market’ in their favour at the expense of the less privileged. The result is growing inequality and insecurity. In this blog yesterday Karen Cox,Adele Ferguson and Simon Long all highlighted the failure of bank regulators and that even with changes  pending they are not up to the job.

The Liberal Party branch offices, the BCA, News Corp and the Australian Financial Review  failed to uncover corporate failure and malfeasance on a grand scale. Was this deliberate or were they just asleep? Now they will be doing their beat to help  take the banks out of the firing line.

We know from Freedom of Information that the banks collaborated with the government on the terms of reference for the Royal Commission.. By limiting the Royal Commission to one year many issues were not examined. By contrast the Royal Commission into Institutional Responses to Child Sexual aAbuse had five years

It is unlikely that the regulars were wilful. It is more likely that they just wanted to please the big end of town.  They felt that that was really where they wanted to be, craving acceptance.

The Abbott Royal Commission into the conduct of trade unions revealed only minor misdeeds by the trade union movement. But the Royal Commission into banking  has unearthed widespread greed ,corruption and arrogance.

Whilst unions are heavily regulated and the CFMEU is a regular whipping boy for the government,The Australian  and the Australian Financial Review  the wealthy and powerful are handled with kid gloves. I would rather trust the CFMEU than the Commonwealth Bank or NAB

Just look at some of the abject failures of regulators.

  • In vocational employment we have seen widespread waste of public money and exploitation of vulnerable young people as a result of regulators failing to ensure that unscrupulous operators could not exploit the system.
  • As Charles Livingstone, in this blog, has pointed out, Crown Casino, other casinos and club and betting interests are just too powerful to regulate. Fines for breach of regulations are miniscule.
  • Our intelligence and security services have become increasingly politicised and uncontrolled. The regulators have joined the club. See John Menadue. Our intelligence agencies are out of control– An edited re post.
  • Regulators failed to protect the Murray-Darling Basin from blatant water theft and over allocation.
  • In Sydney we have had the saga of Opal Towers and dodgy ‘building certifiers’
  • ‘Entrepreneurs ‘in child care received large payments for children they never cared for.
  • Fair Work Australia and other regulators have failed to protect mainly young people, particularly working holiday makers and students who have been exploited by labour hire companies. The Seven/Eleven chain has become a symbol of failed regulation in the labour field.
  • Live sheep exporters brazenly defy regulations to protect animals.
  • Land clearance regulations to protect vegetation are widely ignored particularly in Queensland.
  • Regulations to ensure that miners repair degraded land are seldom effective.
  • And then there are the banks with their lying to clients, their deceit and greed.  Did the RBA consider withdrawing any banking licences? Obviously not. The banks knew that the regulators would not seriously challenge them. They felt invulnerable. The cozy banker’s club had to remain solid.

Why has corporate regulation failed?

  • A major cause of failure amongst regulators is the prevailing ideological view expressed by the Coalition and big business that only business can deliver prosperity and jobs for Australians. Business therefore deserves favourable treatment. The Liberal Party platform expressly states that ‘only businesses and individuals are the creators of wealth and employment’. If businesses are to perform this role effectively, government and regulators must get out of the way. And after all, regulation is akin to socialism. Timid regulators read these clear signs.
  • One of the first things the Abbott government did was to establish a Commission of Audit headed by businessman Tony Shepherd. A key recommendation of this Commission was ‘reducing red tape’. The Coalition government then established a regulatory reform agenda to address ‘unnecessary regulation and red tape’. In this process, many regulations designed to protect the public interest were removed or degraded. It was all done in the name of that popular conservative slogan ‘get rid of the red tape’.
  • Consistent with this view of red tape and regulation, Tony Abbott cut funding to ASIC by $120 million over four years in his 2014 budget. ASIC was  later cut by a further $26 million. The budget of the Office of the Director of Public Prosecutions was also cut. Not surprisingly, regulators got the clear message-go easy on business.
  • But even with considerable resources, regulators can often find it difficult to match the knowledge and experience that operators have so easily at hand. I found at Qantas that it was not all that difficult to best the Department of Transport that lacked the resources and know-how that we had of the international airline industry.
  • Unlike the ACCC which has been a tough cop on the beat, ASIC and APRA, even with their considerable powers, have failed as effective regulators. Far from being tough watchdogs, APRA and ASIC became compliant puppy dogs who were so anxious to please. ASIC has power to launch criminal and civil prosecutions against corporations. But for 15 years it chose not to. Instead of prosecuting, offenders were obliged to sign ‘enforceable undertakings’ for serious breaches of regulations. No one went to gaol . The regulators imposed fines that would not cause any big company to even blink. The CBA admitted to ‘unconscionable conduct’ in rigging the bank bill swap rate in 2012.  The penalty was a derisory $25 million. Only lengthly gaol sentences will deter many of our greedy and dishonest corporate cowboys in the ranks of directors and chief executives. These are the people who keep telling us time and time again that it was the fault of a few ‘bad apples’ and in any event the problems had been fixed. But the problems continued and they continued to pick up outrageous salaries.
  • Any problems were invariably found to be attributable to the lower ranks and never the Board or CEO. The multi-million dollar bonuses, handshakes and golden-parachutes continued.
  • There were comfortable relationships between regulators and the regulated. Some of the key bank regulators on retirement from Treasury and the RBA moved across to well-paid jobs with the banks. It was all a cosy bankers club.
  • Too much faith was placed in efficient markets, so light or even self-regulation was preferred. After all the regulators obviously felt that they were all members of the same trustworthy family. They  were all largely ‘ male. pale and stale’ They appointed people with the same background and limitations as themselves. A failed clique!
  • . The fundamental problem is timid regulators who want to please their ministers, conservative political ideologies and the big end of town.

The failure of regulation in the banking field will inevitably lead to a focus on how effective regulation is in other fields such as health and private health insurance, VET, gambling, alcohol and mining. We need to clean up the whole corrupt lobbying scourge.

Kenneth Hayne may hope for ‘culture change ‘ in our banks but with so much greed on display at the top ,that change will be very difficult if not impossible. Why should any CEO be paid more than the Prime Minister?

The government is unlikely to force change after vilifying everyone who pressed for a Royal Commission. We know from Freedom of Information that the banks cooperated with government in drafting the Terms Of Reference. The Royal Commission was limited to one year. It could only scratch the surface

We have seen the consequences of open slather in capitalism. It needs to be curbed in the pubic interest as well as the interests of the perpetrators of so much illegality and mal practice. As Ross Gittins put it in the SMH yesterday ‘The 30 year experiment with deregulation,privatisation and outsourcing is now seen to have ended badly’

The tide is clearly turning against unfettered and corrupt capitalism. We need more ‘red tape’ to protect the public interest

Will our next government help turn the tide,?

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11 Responses to JOHN MENADUE. How and why corporate regulators have failed us. And not just bank regulators.

  1. Charles Lowe says:

    John, you’ve had such a depth of experience at the absolutely topmost levels of administration in both the ‘private’ and ‘public’ sectors.

    I have found this article completely mesmeric.

    Do you agree with this thesis: that Shorten and his senior colleagues will simply seek to do as our surfing community does – to ride the political waves and tides for as long as practicable and with as much skill and memorability as they can muster?

  2. Peter Sainsbury says:

    Good article, John, and good comments.
    As for the cosy relationship between the regulated and the regulators, how come there wasn’t more and longer commentary a couple of weeks ago regarding the revelations about the presents and kick-backs from the (not very well) regulated to the (not very effective) regulators?? It’s absolutely outrageous that the regulators should get any benefits at all from the people they are supposed to be regulating. What would happen if I gave my local police sergeant a crate of whisky and tickets for the Test Match at Christmas? S/he and I would be in deep trouble, and rightly so. Any decent government would have stepped in immediately and stopped it dead. In fact, the regulatory bodies’ CEOs should have stopped it before the relevant ministers had time to.

  3. Hi John and your responders. All comments were accurate and understandable to the ‘fair minded’. I was concerned that the failing of the media regulator were not mentioned. We can talk to each other and substantially agree, however, reaching a large percentage of the population is impossible.

    I can attest, as a thwarted regulator, that the major impediment to effective barriers to corruption is out of date legislation. Corruption has grown in the neo-liberal experiment as a cost/benefit or risk benefit determination. It is one thing to call for prosecution, yet another to make a case stick with less expensive legal teams and inadequate legislative support. Clearly the Pollies are to blame. Any weaknesses in new legislation or regulation is quickly determined by the corrupt profiteers.

    Moderating the greed of corporate executives may be a distant dream.

  4. Rhonda says:

    Couldn’t agree more, John. More tape, both red and green, to contain some of the shit. Plus a bit of fabric of social cohesion and decency for good measure, too

  5. Malcolm Crout says:

    The neoliberal experiment is in it’s final stages as Global macro indicators provide irrefutable evidence that unfettered capitalism has failed to provide the promised improvements in the lives of the populace. We now have a new elite mixed in with the old money who “own” Governments. The lobbyists promoted the ideology of small Government and it has delivered a sh#$ sandwich for ordinary citizens, who are now waking up to the spin that passes for political and economic commentary out of the mouths of the polity and press. After the NEG shenanigans and dragged kicking the a banking RC, the LNP are in a nose dive to electoral oblivion. Sadly, the ALP are fiddling with pointless taxation rorts when the big targets are not being addressed. This fascination with surpluses is almost comical as each side trade blows over a number which is completely irrelevant to the macro economic health of the country. Hopefully they will rely heavily upon independents to govern and we may get some much needed action on electoral donations and federal ICAC which should put us on track to regain some form of democracy.
    It is the role of Governments to protect citizens and over 30 odd years they have done a poor job of fulfilling that mandate. Hopefully the incoming Gvernment can get their policy priorities in perspective, but I won’t hold my breath.

  6. Rob Stewart says:

    Another long list and devastating overview of modern capitalism’s miserable failures for the many and success for the few John.

    Regulatory failures are a major issue as you point out. Decent people who want to do their regulatory jobs properly are considered trouble makers though and they walk, leaving rogues and the incompetent to run the show, sucking up to those who they’re supposed to keep honest. It’s systematic, structural corruption by design.

    I don’t see anyway regulation can be effective in the long run in this perverse neoliberal world, where governments don’t actually want regulators to do their job properly. They don’t want the bad news. They just want the appearance of “a cop on the beat”. And regulators can look forward to cuts if they don’t do their jobs well and bigger cuts if they do do their jobs well.

    As you point out banking licences were never on the table – they should have been. Unions behaving half as badly get deregistered. As Stiglutz said of the GFC “banking needed to be saved but not the bankers”. But that didn’t happen. The lot of them should be nationalised but it will never happen. They have proven time and time again that they are overpaid, inefficient, corrupt, stupid and useless. That’s what too big to fail ends up looking like.

  7. Michael lester says:

    Spot on john. At the root of regulatory failure is a degraded political culture. Abetted by lobbying, revolving door, etc. quiz custodiet? I write about this at length elsewhere…

  8. Ken Derrick says:

    I have never used the “big” four bank and never will.
    That’s the best way to change their bad culture.

  9. Sandra Hey says:

    Thank you for your well informed article. With regards to the Banking Industry, if I had the powers to be, I would forthwith set up a ” Peoples Bank ” funded by the taxpayer under the “Glass-Steagall” formula standard of banking. The peoples bank should only be for legitimate commercial banking functions, such as small business loans, home mortgages, pensions, infrastructure and savings accounts short or long term. In the event of another GFC melt down savings would be protected. Legislation would have to be put in place to stop any government from privatisation like what happened to the Commonwealth Bank.

    As for the speculative investments functions such as derivatives, exotic instruments, MBS’s (mortgage-backed security) and CDO’s (collateralised debt obligation), carbon swaps and Investor housing market and the like can be taken up by the big 4 banks and the many arms of the Macquarie group. As we live in a so called Democracy then the risk to the above speculative type of investments will have no impact on ordinary Australians who are traditional in their needs for banking services.

  10. We’re all in it John, including the churches. We all knew what the bankers and other chief execs were paying themselves. I have just read Karl Polanyi’s 1937 essay on “The Christian Criticism of our Social Order.”

    “When liberal capitalism took hold of society, Christians, including the orthodox, denounced it as patently inhuman. Impressed by the vast increase in production due to the system, they gradually subsided into toleration.

    Though the needs of material production no longer demand the maintenance of this system, Christians still fail to protest against its continuance, partly because the moral sensibility of the Church has been fatally impaired by the consistent toleration of the intolerable, partly because her materiel and financial interests have become inextricably interwoven with the present order of things.”

  11. Evan Hadkins says:

    I would like the churches to be more social activist – ethical businesses, co-op’s, alternative institutions. They seem to be the only major grouping with an alternative ideology to neoliberalism. They could be doing much – they are in the charity sector, I wish them more active in institutional justice (and yes, there are some who are; I just want more).

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