Should the finance and banking industries be in charge of writing their own rules? We think not.
Find out how they do it, and why it doesn’t work.
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Many valid points. One extra comment that I have is
optional – in many cases if a particular business doesn’t like the code, they can just leave or choose not to comply.
The other side of the coin is rules in an industry code are “written by the big boys of the industry in order to keep the small boys small and/or keep new entrants out of the industry”. Hence in some sense it is desirable to allow a company to opt out of an industry code. When the rules are written by the industry itself, it should be optional.
There is no particular reason to demand that every player in an industry operate identically to the extent that the rules mandate a particular way of operating, and specifically when the rules are written by the industry itself.
On the other hand, when the rules are written by government they are always tempted to write too many rules or write rules that are too prescriptive or write rules that are too restrictive - and government may not be sufficiently expert in the industry to avoid writing rules that serve to reduce competition.
Every new rule written by government should be required to come with the following justification:
- here is a problem
- it has actually occurred (preferably in Australia)
- the problem is not addressed by an existing rule
- the problem occurs often enough to justify doing something
- all alternative responses to the problem have been adequately considered
- the new rule will actually stop the problem occurring
- the negative aspects of the rule are justified by the positive aspects
But that doesn’t happen.
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You’re right, there’s always a balance to be struck. The advantage of a regulator like ASIC having to power to do it is that they’re independent and free from the politics.
We don’t always agree with them (it would be silly if we did!), but they’ll listen to a variety of stakeholders, and in many cases actually do things like behaviour research to see what the impacts of particular rules would be.
Everything in balance, we just think the balance has tipped too far in favour of industries when they get to write and enforce their own rules!
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ASIC as an example need to be more active. They already have good powers, not saying that some shouldn’t be improved or even new ones given, but they need both to be funded properly to exercise the powers and to actually use those powers to the extent required. Negotiated agreements too often used being one bugbear.
The ACCC are similar but perhaps more willing to go to litigation, some issues though are fines/penalties that don’t meet the severity of the breaches, lack of funding to properly prosecute offenders (which does lead to diminished fines/penalties).
Independent or Free of politics? In reality they are very beholding to the political masters as most of the funding they required is budgeted to them from our Government. The Chairman are politically chosen and often who is in the Chair colours the outcomes and direction an organisation takes. Political leanings occur because of those selections of who leads.
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Both of the previous posts raise additional issues, related though to the enforcement of the existing rules.
You can imagine, inside an agency like ASIC or the ACCC, that the decision over when to litigate and when to settle is not an easy one - and likewise it is exactly the same inside the company.
The agency would know that when going after a large corporation, said corporation can litigate for years if need be but the corporation is not going to settle out of court unless the deal is a good one, in particular the deal offered is better than litigating.
If the deal offered (to an Australian company) is “a fine of $2b” then you don’t have to be a genius to realise that $2b buys a lot of lawyers for a lot of billable hours. If the company ends up paying $200m in legal fees to fight for 3 years in court, and the final result is a fine of $500m, plus the government agency’s legal costs (let’s say, another $200m) - then that is still a huge win for the company (compared with bending over and taking the original fine that was offered, a win of $1.1b), and the company would be irresponsible (borderline breaking the law) not to fight the original fine in court.
The higher the fine, the greater the incentive to fight it in court.
However a company can never predict with certainty what the outcome in court is going to be - and nor can the government.
I’m not going to judge either party’s decision with the benefit of hindsight.
Do we think though that government agencies have been too willing to offer a good deal and settle? It is difficult to reconcile such an opinion with the idea that the agency should operate independently of the government.
One way in which the situation could be improved would be for the government to ensure that the rules are “clear” (a point that I omitted from my original list). That would give both government agency and company a better chance to judge the likely outcome of the case - and hence a better chance of a fair settlement without litigation.
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Not disagreeing with that. On balance, it is doubtful that in general it is ever in anyone’s interest for an industry to write its own rules. My comments were pointing out two additional reasons why an industry shouldn’t write its own rules.
However I did then go on to suggest that when government writes rules certain minimum standards should apply. Do we need Australian Standard 9999 that would apply to all government legislation and regulations? 
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This became evident that it indeed happened when at the Banking Royal Commission it was shown that too often easy deals were made and then at times not enforced when breaches occurred.
Effectual fines/penalties can be written into Law but when big business uses it’s political influence (money, friendships etc) then what we end up getting is a very much different outcome. Budgets pared back which then leads to under-staffing, not enough funds to fight even some of the more clearly winnable fights, delays in dealing with matters so that they become lost or stale, and a number of other hindrances to proper “policing” and outcomes. Then we have the political choices made in legislation that water down the outcomes available or required to be achieved by these semi-autonomous organisations. They can put all the nice words in the preamble but the “meat” is lacking in the real working words.
Too often we allow self-regulation with in reality no real restraint placed on the self-regulated industries to meet community expectations.
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I think a lot of commonsense was lost in the Banking Royal Commission in the pursuit of sound bites and agendas. Somewhere in there among all the sound and fury were, I believe, as you say, examples of agencies either not enforcing at all or perhaps settling too readily. Whether that needs a Royal Commission to address is arguable. No new legislation is needed in order to get agencies to enforce the law as it currently exists.
As you say, whether an agency is funded adequately to do its job is a political choice. How is that to be addressed?
Perhaps a funding levy on all fines imposed (either a fine agreed to out of court by the company or a fine determined by a court). (This differs from the idea of a funding levy simply imposed on all companies or all companies in a given industry, because that is like fining all companies just in case they break the law. )
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I firmly believe this is the crux of the problem. A fine of $1000 can really hurt a small business, whereas a fine of $1M can almost be treated like petty cash by the large ones businesses like the banks.
Fines should be a percentage of turn-over (not income which hides the real earnings) on the basis that the larger an organisation is the greater their responsibility to do the right thing, and their capacity to allocate staff dedicated to monitoring and controlling corporate behaviour. Additionally, their influence in the market is proportianately greater, so their misdeeds can have both deeper and broader effects.
The other obvious issue is the apparent complete lack of personal responsibility by the top echelons of big corporations. Even if they are ‘let go’ or resign they soon find other employment at the same or higher levels. It would seem that large corporations value these peoples ability to maximise profits above the damage they cause to clients. Until the people responsible fear being held personally accountable for their in/actions they have a greater incentive to make profits in preference to adhering to morals and rules and the law.
This statement should be extended to ALL industries and topics. As an example, I believe the mining industry provided people to write legislation to do with mining.
While we need people with expertise to write legislation, we also need impartiality so we get the best practice outcome.
Of course stakeholders should be consulted and their input considered, no one stakeholder group should take the reins. Imagine the hew and cry if the Australian Consumer Association wrote all the legislation relating to consumers.
We need balance in all things.
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Do we really allow it or is it imposed upon us?
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