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20180807 ASIC plans to place a supervisor inside banks. Good or not?

Nigel Morris-Cotterill

Australia's ASIC (Australian Securities and Investments Commission) has been, rightly, stung by the brutal criticism it has suffered during the The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Using the bizarre expression "regulatory capture" which sounds like another one of those phrases designed to attract media attention to the words not their meaning, ASIC's Chairman, Mr James Shipton, told The Australian Broadcasting Corporation "We want to have our supervisory officers physically inside these financial institutions by the end of the month." Is this a good, or even a new, idea?

Don't be under any illusions, the placing of persons in financial institutions, law firms and others is nothing new. Criminal gangs have been doing it for decades. So, has the American government: there were many suspicions that there were "plants" in banks in London after the BCCI scandal and it was inadvertently confirmed by a US government official at a conference in, I think, 1998. My ears pricked up as the speaker said something she instantly realised she should not have said.

The placing of "monitors" within banks is old hat - but it's usually in response to a specific case in which some dodgy non-prosecution deal is done. ASIC's plan is different: it's to openly have an officer, initially at head office, in place at the big four banks plus AMP. The idea is to overcome the widely help opinion that ASIC has been too soft on banks (it has, but then again the same can be said of almost every banking regulator around the globe) and to overcome what Shipton, for whom, incidentally, I do have respect, described with that asinine expression "regulatory capture." It's another of those dumb expressions that someone coined and others thought would make them sound clever if they used it. Bollocks. Say it like it is: it's where a regulator suffers a form of Stockholm Syndrome and swaps sides to protect financial institutions rather than protect customers and markets. See, now the expression (not the risk it purports to describe) just sounds stupid, doesn't it? And it sounds even more stupid when the expression is analysed: it suggests a raid by the bank, etc., in which the regulator is taken captive. That's also bollocks.

This is how it works in the real world: governments create regulators and then tell them not to screw up the economy by preventing the banks lending money or making profits. In short, governments tell regulators to let banks do what banks do and not to get in the way unless the banks do something that might upset the economy.

Also, to make certain that this objective is achieved, financial sector regulation is starved of funds. That means the regulators rely on an insufficient number of staff and those staff they do have are generally inexperienced. Older, more competent, staff, are pushed out, often for reasons of cost. Don't blame ASIC, every regulator is staffed with numpties fresh out of university who think they are the dog's but really, they are just, well, word of the day, bollocks.

Actually, scratch the bit about "fresh out of university." Some years ago, a young woman was interviewed in a UK national newspaper about her internship at the UK's FSA, at the time the unified financial services regulator. Not yet a final year student, she said "I am supervising several banks." Seriously? Whatever level of supervision she was under, it is mind-boggling that she had the impression that she was in any way "supervising."

So, let's take that to the ASIC plan. First, Shipton says that he has secured additional funding (AUD70 million) specifically for his scheme. That's nice but one has to remember that the government actually reduced ASIC's funding before the Royal Commission. Is the not-entirely-new money enough to place someone with the necessary experience to be able to identify malfeasance? And if so, where are they going to find them because, for sure, ASIC doesn't have enough to go around. Shipton says there will be 20 people at the big four banks and wealth manager AMP. Are they (male or female) going to have the balls to take managers and directors to task? Good luck with that: financial crime risk officers have been losing that battle for almost a quarter of a century.

What regulatory failures are they going to be looking for? Shipton told ABC Radio's The World Today (at the time of writing, the interview is here: http://www.abc.net.au/radio/adelaide/programs/worldtoday/new-powers-to-m...) "We'll start with the leadership group, because the initial focus is going to be around governance structures, particularly reporting structures of misconduct and conduct that doesn't meet community expectations."

The plan is that the insertion will be at the most senior levels - within CEO's departments.

There is a far greater chance that a supervisor who is "embedded" in a financial institution is more likely to be drawn into the institution's culture and the Stockholm Syndrome-style attitudes are inevitable. We know this because there are countless examples of where bank staff, supposed to be protecting the bank against financial crime, have become more attuned to the customer than to the responsibilities of his employment. For decades, I have been talking about the bank manager figuratively walking around his desk and sitting on the customer's side, in conflict with his own position.

The officers are not going to be under-cover. They are going to be fully identified spies in the ranks. They won't have to wear jackets with ASIC printed on the back but they might as well.

Shipton's focus on process suggests that he's planning on sending in accountants because accountants are (generally falsely) assumed to be able to define processes and how they should work. If that's the plan, it's.. oh, you get the picture. My fingers already have muscle memory for that B word.

But, Mr Shipton, if you want to have credibility here, don't use expressions such as "pre-plan and pre-deploy... scoping in the superannuation space.." It's bollocks. It's meaningless bollocks. You have a great opportunity to fix problems while there is public and government support. Don't talk like an inadequate middle manager trying to sound bigger and brighter than he is. You are the biggest and brightest star in Australia's regulatory environment: talk like it.

It's a great plan on the surface but on analysis, it's a terrible idea. There aren't the staff, there aren't the skills, there isn't the experience and, most importantly, it assumes a level of co-operation that I cannot believe will be there. Moreover, it assumes a comprehensive under-eye approach to so much of the day-to-day activity within financial institutions that it is almost a takeover by ASIC of the management within the institutions.

So far, no one seems to have given much, if any, thought to ASIC's liability: the river of cases that have provided a torrent of information of illegal, anti-social and unlawful behaviour by the financial institutions and by their staff must stop and it must stop from the day ASIC goes in. This is why: ASIC's adopted remit is that they will police the financial institutions, even if that is limited to issues related to systems although the implication is that it will go much further and into areas of management. So, now ASIC is standing in the position not of external adviser, qua lawyer for example, but as a shadow director.

Let's say that ASIC's staff don't have the power to say "no" when they see an abuse or failure. Let's say that their remit is to report back to ASIC and await further instructions. What if someone suffers while ASIC's office staff - who are already grossly overworked - decide what to do? And, let's face it, with the kind of nu-speak that Shipton is spouting, it is a logical assumption that a culture of multiple meetings before taking action is going to be engendered because nu-speak and meetings go hand in hand. So, while they are chatting over coffee, a case starts its early stages towards someone suffering loss. Logically, ASIC was negligent in failing to stop it.

It might sound as if I think closer supervision is a bad idea. I don't. But I can't see that this scheme is going to work. The pitfalls are too many and too deep.

I wish I could say "great idea, other regulators should follow suit." But I can't. I have to say "terrible idea which other regulators will follow."

Are there ways to fix it? Not really: the first problem is that ASIC along with AUSTRAC and everyone else who exercises any form of supervision is staffed by the wrong people: unless they are prepared to go back to the experienced people they tossed on the scrap heap and to bring in those from outside the cosy world of people that speak in riddles, there are no fixes. The exact extent of authority has to be very clear and it has to include the power for the officer to say "don't do that, and don't do it from this moment forward."

But that brings its own problems: the officer will be exercising value judgements and value judgements are what the management, including directors, are for. Does the officer risk becoming a shadow director?

Is the only way to prevent officers swapping sides to rotate them? That would result in extraordinary inefficiency as officers have to learn a new bank's processes and business - which is likely to take just long enough to take up his swap-out time, even if it's a year.

I wish Mr Shipton well, I really do. His policies are generally good, even if he expresses them in language that has no place in decisive, senior positions in regulators. Leave all that bollocks to politicians and middle managers and estate agents. I'm at odds with all regulators who do back-door deals instead of taking financial institutions to court but Shipton's favour for "Enforceable Undertakings" is no different, in principle, to the misguided "Deferred Prosecution Agreements" with which financial institutions and others bribe their way out of prosecution in other jurisdictions.

So, secure in the knowledge that ASIC's not going to ask me to educate their staff and even thinking that Australia might cancel my current visa, I'm going to put this article to bed.

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