Twin Peaks 2.0: Avoiding Influence Over an Australian Financial Regulator Assessment Authority
| Author | Daniel de Zilva,Paul Mazzola,Andrew Schmulow |
| Date | 01 December 2021 |
| DOI | 10.1177/0067205X211039888 |
| Published date | 01 December 2021 |
| Subject Matter | Articles |
Article
Federal Law Review
2021, Vol. 49(4) 505–527
© The Author(s) 2021
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DOI: 10.1177/0067205X211039888
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Twin Peaks 2.0: Avoiding Influence
Over an Australian Financial
Regulator Assessment Authority
Andrew Schmulow*, Paul Mazzola** and Daniel de Zilva***
Abstract
Globally, financial system regulators are susceptible to deliberate and inadvertent influence by the
industry that they oversee and, hence, are also susceptible to acting to benefit the industry rather
than the public interest –a phenomenon known as ‘regulatory capture’. Australia, arguably, has an
optimal model of financial system regulation (a ‘Twin Peaks’model) comprising separate regulators
for prudential soundness on the one hand, and market conduct and consumer protection on the
other. However, the current design of the Twin Peaks model has not been sufficient to prevent and
address prolonged and systemic misconduct that culminated in a public Royal Commission of
Inquiry into misconduct in the industry. Subsequent to the Royal Commission and other inquiries,
the Department of Treasury has proposed legislation to establish an Assessment Authority to assess
the effectiveness of the Twin Peaks regulators. The proposal includes enquiries by an Assessment
Authority into the regulators’independence, so as to identify instances of, and thereby mitigate,
their capture. As with all financial system regulators, the Assessment Authority itself may be
susceptible to regulatory capture, either by the Twin Peaks regulators, or by the financial industry.
Thus, this paper poses the question: how can the new Assessment Authority be optimally con-
stituted by legislation, and operated, to effectively oversee the effectiveness of the regulators, but
itself remain insulated from the influence of the regulators and industry? We analyse the primary
sources of influence over financial system regulators that the Assessment Authority will likely face
and recommend ways in which a robust design of the Assessment Authority can mitigate those
sources of influence. In doing so, we adopt an inter-disciplinary approach, drawing upon not only
regulatory theory but also for the first time in relation to this question, organisational psychology.
Our findings address gaps in the proposed legislation currently before Federal Parliament and
propose methods by which those gaps may be filled, in order to ensure that this important reform
to Australia’sfinancial regulatory regime has the greatest chance of success.
*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. Senior Lecturer, School of Law, The
University of Wollongong. Visiting Senior Researcher, Oliver Schreiner School of Law, University of the Witwatersrand,
Johannesburg. Visiting Researcher, Centre for International Trade, Sungkyunkwan University, Seoul. The author may be
contacted at andys@uow.edu.au
**BComm MAppFin PhD FCPA FFIN MAICD. Lecturer, Banking and Finance, School of Business, The University of
Wollongong.
***B.Psych (Hons) M.Psych (Org) PhD. Adjunct Fellow, Department of Psychology, Macquarie University.
Keywords
regulatory capture, regulatory theory, organisational theory, organisational psychology, financial
system regulation, Twin Peaks regulation, Banking Royal Commission, Financial Syste m Inquiry,
Financial Regulator Assessment Authority, Hayne Royal Commission, Financial Regulator
Assessment Authority Act, Financial Services Royal Commission, Australian Securi ties and
Investments Commission, Australian Prudential Regulation Authority, regulator efficacy, Royal
Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
Received 22 February 2021
I Background and Research Objective
Australia is currently emerging from a crisis in its financial industry –including a financial regulatory crisis –
borne of ten years of what has emerged as systemic misconduct, fraud and dishonesty. Examples are too
numerous to list and are not within the purview of this paper. Much of this misconduct was known to the
financial industry regulators: the Australian Prudential Regulation Authority (‘APRA’), and the Australian
Securities and Investments Commission (‘ASIC’). The culmination of this sustained misconduct was the
establishment of the Royal Commission into Misconduct in the Banking, Superannuation and Financial
Services Industry (hereafter ‘the Commission’) to investigate misconduct in the Australian financial in-
dustry. Included in the Commission’s terms of reference was an investigation of the role of Australia’s
financial industry watchdogs: ASIC and APRA. That investigation determined that both agencies had
succumbed to capture, and recommended that a new oversight authority be established ‘to assess the
effectiveness of each regulator in discharging its functions and meeting its statutory objects’.
1
That rec-
ommendation has been reflected in proposed legislation currently before Australia’s Federal Parliament: the
Financial Regulator Assessment Authority Bill (‘the Bill’).
2
This article explores the recent and ground-
breaking development in the legislative architecture of the Australian financial system. The Authority’stask
will be to watch over Australia’sfinancial industry regulators, and enhance their efficacy, principally by
mitigating the phenomenon of ‘regulatory capture’.
This Australian initiative can trace its roots to American scholarship going back some 160 years.
Indeed, theearliest well-springs of thisinitiative are based upon the writingsof Charles Francis Adams
Jnr who, writing in the 1860s, put forth the idea –in the words of Thomas K. McCraw –of a ‘Sunshine
Commission’,
3
the purpose of which would have been to exercise oversight over, and mitigate the
capture of, the Railroad Commissions in the United States by the railroad barons.
4
As such, we assert
that this initiative in Australia is of significance, not just domestically, but indeed the world over:
wherever regulators regulate the financial industry, and wherever they are susceptible to capture.
Of further significance to scholars of financial industry regulatory architecture, consumer rights aca-
demics and proponents, and scholars of public policy, is that this is an important reform of the Austr alian
1. Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, 1
February 2019) vol 1, 41.
2. The terms ‘Board of Oversight’,‘Financial Regulator Assessment Board’and ‘Financial Regulator Assessment Authority’
are synonymous, reflecting the nomenclature chosen by various inquiries and proposed reforms. Henceforth ‘Assessment
Authority’will be used as this reflects the proposed legislation.
3. Thomas K McCraw, Prophets of Regulation: Charles Francis Adams; Louis D. Brandeis; James M. Landis; Alfred E.
Kahn, (Belknap, 1986) 19–20.
4. Charles Francis Adams, Railroads:Their Origin and Problems(GP Putnam’s Sons, 1878) 138; Charles Francis Adams, Jr,
‘Art. I. –Boston’(1868) 106(218) (January) The North American Review 1.
506 Federal Law Review 49(4)
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