Revelation after revelation of misconduct has plagued the financial-services industry, and, according to the Treasury, the preferred method of operation of Australia’s prudential regulator may no longer be effective in addressing the industry’s serious failings.
That view was delivered as part of a response to a series of questions by the Hayne banking commission about the culture of financial firms, the effectiveness of regulators, and conflicted remuneration.
The Treasury said strong profits propped up by a lack of effective competition have collectively dulled the senses of board members to conduct failures, as it urged APRA to drop the cooperative approach it uses in favour of a harder line against regulated firms, The Australian Financial Review reported.
The Treasury conceded that serious failings exposed by the Hayne inquiry, including persistent failures to meet legal obligations, delays in reporting breaches, and resistance to compensating consumers, are worthy of consideration, even as it argued that no financial system is free of misconduct.
“Despite their conduct failures, many financial firms have continued to generate strong profits assisted by a lack of effective competition in the financial system,” Treasury said. “In these circumstances, boards seem to have had their ‘senses dulled’ to the significance of the misconduct by their firm and its employees, and shareholders have had little incentive to intervene.”
The reference to “senses dulled” was from an APRA-commissioned report into the governance, culture, and accountability at Commonwealth Bank following the AUSTRAC debacle.
To address conduct failures, the Treasury proposed direct regulation of corporate governance mechanisms, extending the banking executive accountability regime to a wider range of entities, and enhancing remuneration disclosure requirements, among other options, the report said.
“In light of the evidence emerging from the Commission, APRA’s inquiry into CBA and its review of remuneration practices, APRA may need to continue to strengthen its work in relation to governance and risk culture,” the Treasury said.
It added that implementing the BEAR may require a shift “towards enforcement” as the regulator’s willingness to penalise those accountable could have a significant impact on compliance.
The department also acknowledged the shift would create additional funding costs, and that while APRA’s funding levels have remained the same for nearly a decade, the scope and intensity of its work has increased, AFR reported.