ASIC: Who regulates the regulator?

In the wake of the banking Royal Commission, a new regulatory body responsible for monitoring ASIC's accountability is up for debate.

In the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, released in February 2019, Commissioner Kenneth Hayne AC QC observed that, “Notions of accountability lie at the heart of governance”. This is true for both financial institutions and the agencies that regulate them, including the Australian Securities and Investments Commission (ASIC).

Among the Commissioner’s 76 recommendations are two directed specifically at improving ASIC’s accountability: the creation of a new independent oversight authority to review and report on aspects of ASIC’s operations; and that ASIC apply the principles of the Banking Executive Accountability Regime (BEAR) to its own governance.

ASIC’s governance is unusual. Since it was established almost 30 years ago, it has been led by full-time commissioners who at different times have been deep in the weeds of operational responsibility. Unlike many foreign regulators, including the Financial Conduct Authority in the UK and the Financial Markets Authority in New Zealand, ASIC does not include members who are not engaged in the operation of ASIC full-time. This is despite its constituting legislation allowing for up to five of the maximum eight members of ASIC to be part-time appointments.

Instead, ASIC’s governing body is the commission, which is comprised entirely of full-time members. Governance matters that are ordinarily the responsibility of a board, including the strategic direction and priorities of the organisation and its internal organisation, are for the commission to determine.

Concerns about the accountability of ASIC are not new. Like other parts of executive government, ASIC is subject to parliamentary and ministerial oversight, and must comply with the formal reporting requirements that apply to all federal regulators. However, there are longstanding concerns that these mechanisms do not actually provide a robust accountability framework.

The challenge is to craft an arrangement that holds ASIC and its staff appropriately to account, without compromising its operational independence. In 2014, the Murray Financial System Inquiry concluded that government “lacks a regular mechanism to assess the overall performance of its financial regulators” and recommended the establishment of a new Assessment Board to advise government annually on how ASIC had implemented its mandate. The recommendation was not adopted. In 2015, the ASIC Capability Review concluded that giving commissioners both an executive (management) role and a non-executive (governance) role “inherently undermines accountability” and recommended that the two roles be separated. ASIC declined to act on this recommendation at the time. The Capability Review also identified the need for the government and ASIC to “commit to fostering a more strategic long-term oversight function”.

Winds of change

Commissioner Hayne’s final report canvasses various options for strengthening ASIC’s accountability, including the appointment of independent non-executive members. He notes there may be “no obvious reason why ASIC would not benefit in the same ways that listed entities do from the inclusion of non-executive directors on their boards”. The final report identifies three potential benefits of an independent board: improving the scope and quality of internal oversight by placing independent, disinterested voices within ASIC’s highest forum; increasing and potentially broadening the skills and experience of ASIC’s ultimate governing body; and reinforcing the independence of ASIC from those it regulates and the government of the day.

In the end, the Royal Commissioner rejected the independent director model, favouring instead the creation of the new oversight authority and the application of the BEAR principles to ASIC’s governance.

In November 2018, ASIC Chair James Shipton announced changes to ASIC’s structure designed to separate management and governance roles. These changes, which took effect in January 2019, are intended to remove ASIC’s chair, two deputy chairs and four full-time commissioners from operational decision-making. They created an additional layer of 10 executive directors between the commission and the senior executives responsible for operational matters. While this internal restructure addresses the Capability Review’s concern about combining management and governance roles, it does not bring with it any of the benefits that Hayne suggests may flow from including non-executive, part-time members at the top of ASIC’s decision-making structure.

The success of the proposed new independent oversight authority will therefore be crucial. The Royal Commissioner’s recommendation is that the authority should comprise three part-time members who are “people of unquestionable experience in relevant disciplines”, supported by a full-time secretariat with a remit covering both ASIC and the Australian Prudential Regulation Authority (APRA). The authority would be independent of government; empowered to conduct inspections of and require information and documents from both regulators at will; and empowered to issue directions to ASIC or APRA in connection with the adoption and implementation of the BEAR principles. It would report to government on regulator performance and be required to produce or commission quadrennial capability reviews of each regulator.

In recommending this framework, Commissioner Hayne said, “I think the choice of those who are to perform the role of external review is more urgent and important than appointing non-executive members to ASIC. The essential requirement for both the role of external review and for a non-executive member of the commission would be the same: deeply experienced, independent-minded people prepared to question what the full-time members of ASIC and the staff of ASIC do. The pool of suitable appointees is not large.”

But the authority will not perform an equivalent function to non-executive directors. It and its staff will be external to the regulators and its reviews will necessarily be ex-post.

Decisions about ASIC’s internal governance arrangements remain with ASIC and are open to change by future chairs. There are tensions inherent in the current structure of ASIC — between the different mindsets of a securities and markets regulator and a consumer protection regulator; and between the need to engage constructively with regulated entities to reduce regulatory frictions while maintaining distance and objectivity in enforcement. They are not resolved by ASIC’s new structure. And Hayne leaves on the table the option of creating a specialist civil enforcement agency unless ASIC can demonstrate that real and durable changes to its ineffective enforcement culture can be made.

For now, debate about improving ASIC’s accountability will focus on these two recommendations of the Royal Commission. However, alternative governance arrangements allowed for under ASIC’s existing legislation, including the appointment of non-executive members and the establishment of separate divisions of ASIC (for example, to create a division with dedicated responsibility for consumer protection in financial services) remain available to future governments. This provides scope to revisit the arrangements recommended by the Royal Commission if they do not lead to greater accountability and improved regulatory performance.