Restoring Confidence in Consumer Financial Protection Regulation in Australia: A Sisyphean Task?

AuthorJohn Tarrant,Andrew Schmulow,Karen Fairweather
Date01 March 2019
DOI10.1177/0067205X18816240
Publication Date01 March 2019
SubjectArticles
Article
Restoring Confidence
in Consumer Financial
Protection Regulation in
Australia: A Sisyphean Task?
Andrew Schmulow,* Karen Fairweather**
and John Tarrant***
Abstract
Consumer financial protection and the integrity of the Australian financial system are critical to the
Australian economy in many ways, including the provision of an effective banking system, and the
security of Australia’s significant superannuation savings. This is especially the case in an envi-
ronment where financial products have become more complex and difficult for consumers to
understand. In recent years there have been several scandals in Australia’s financial sector that
have undermined confidence in the financial system, and exposed regulatory failure. The authors
argue that there needs to be a more effective oversight of the key regulators in the Australian
financial system to maintain confidence in the system, and prevent capture of the regulators by the
financial services industry. The authors contend that the recommendation of the Financial System
Inquiry for the establishment of an Assessment Board to provide continuous oversight of the
financial regulators is an effective solution to the poor regulatory outcomes encountered in
Australia in recent years. The consequences of not having such oversight are likely to be more
financial scandals, and further instability in the financial system. These deficiencies must be
addressed as a matter of urgency.
* BA Honours LLB (Witwatersrand) GDLP (cum laude) (ANU) PhD (Melbourne). Admitted by the Supreme Court of
Victoria as an Australian Legal Practitioner. Advocate of the High Court of South Africa. Visiting Senior Researcher, Oliver
Schreiner School of Law, University of the Witwatersrand, Johannesburg. Visiting Researcher, Centre for International
Trade, Sungkyunkwan University , Seoul. Senior Lecturer, School of Law, F aculty of Law, Humanities and the Arts,
University of Wollongong. The author may be contacted at andys@uow.edu.au.
** LLB Honours, PhD, Barrister (England and Wales), Senior Lecturer, Auckland Law School, University of Auckland. The
author may be contacted at k.fairweather@auckland.ac.nz.
*** Professor John Tarrant, SJD (UWA), LLM (ANU), LLB (First Class Honours) (UNE), GradDipIntLaw (Sydney),
GradDipMilLaw (ANU), MDefStud (UNSW), BComm (Melbourne), BA (UNE) and BSc (UNE), Law School,
University of Western Australia. The author may be contacted at john.tarrant@uwa.edu.au.
Federal Law Review
2019, Vol. 47(1) 91–120
ªThe Author(s) 2019
Article reuse guidelines:
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DOI: 10.1177/0067205X18816240
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I Introduction
Nearly 20 years after assuming the role as a consumer
1
financial protection regulator, the Aus-
tralian Securities and Investments Commission’s (ASIC)
2
reputation has been significantly dam-
aged. In recent years there have been a number of high profile scandals in the financial services
sector, including widespread misconduct in the financial advice sector,
3
alleged benchmark inter-
est rate rigging
4
by three of the four major Australian banks,
5
and refusals by Commonwealth
Bank’s CommInsure to pay a large number of claims made under life insurance policies.
6
ASIC’s
failure in the Commonwealth Financial Planning Limited
7
(CFPL) financial advice case to take
any effective action persisted in the face of numerous whistleblower reports made to ASIC. The
CFPL scandal
8
was the catalyst for a 2014 Senate Economics References Committee Inquiry (the
Committee) into ASIC’s p erformance.
9
The Committee described AS IC as a ‘timid, hesitant
regulator, too ready and willing to accept uncritically the assurances of a large institution that
there were no grounds for ASIC’s concerns or intervention’,
10
and which appeared to ‘miss or
ignore clear and persistent early warning signs of corporate wrongdoing or troubling trends that
pose a risk to consumers’.
11
One of the messages to emerge from the submissions to the Committee
was the public perception of ASIC positively prioritising the interests of some of its regulatees over
the consumer interest and broader public interest. Acknowledging the perception that ASIC had
been captured by the businesses that it regulated,
12
the Committee concluded that ‘the public
perception that “the big end of town” is treated differently and less transparently to [sic] other
regulated entities is inherently dangerous to ASIC’s legitimacy’.
13
As well as the inquiry into ASIC by the Committee, the then Australian Treasurer, the Hon Joe
Hockey, announced the establishment of a Financial System Inquiry (FSI) on 20 December 2013,
to be chaired by David Murray AO.
14
The FSI investigated inter alia the efficacy of the Australian
regulators, ASIC and the Australian Prudential Regulation Authority (APRA). The final report of
the FSI was released on 7 December 2014. In the report, the FSI recommended that the government
establish a new ‘Financial Regulator Assessment Board’ (Assessment Board) to undertake annual
ex post reviews of overall regulator performance against their mandates. Such an Assessment
Board would report on the performance of ASIC, APRA and the payment systems regulation
function of the Reserve Bank of Australia.
This paper examines the benefits of the proposed Assessment Board against the background of
recent regulatory failures, with a strong focus on regulatory failures by ASIC, but also with an
albeit briefer examination of the performance of APRA. This paper is divided into two further
parts. In Part II the phenomenon of regulatory capture is examined with a focus on ASIC. Although
ASIC’s regulatory remit extends beyond consumer financial protection, the analysis is restricted to
this aspect of ASIC’s role.
In Part III the recommendation made by the FSI to establish an Assessment Board is examined
by way of a comparative analysis with the proposal for a ‘Sentinel’, and the benefits of such a
Board are assessed. It is concluded that an Assessment Board would be an appropriate response to
recent regulatory failures in the financial services industry, and that such a Board would serve to
reduce the risk of regulatory capture in the Australian context.
II A Brief Overview of Regulatory Capture
Regulatory capture is ‘a process by which policy is directed away from the public interest and
toward the interests of a regulated industry’.
15
Regulatory capture encompasses both ‘legislative’
92 Federal Law Review 47(1)

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