A UK-based strategic adviser and expert on regulatory authorities has urged local legislators to take their cues from the US rather than the UK in a potential reform of Australia’s financial service and corporate regulators, ASIC and APRA, arguing the UK model has led to “confusion in” as well as “underlaps and overlaps” of responsibility.
Questioned during today’s Senate economics committee, which covers potential reforms of ASIC’s investigation and enforcement powers, Mark Bishop from the Transparency Task Force, a UK-based advocacy group for regulatory reform, argued that “overall, the [Financial Conduct Authority] is not an exemplar of best practice that I would suggest Australia should emulate”.
“Over the past three years alone, it has been the subject of four highly critical external reviews, with several other proposed reviews “at least as deserving of such scrutiny”, Bishop said.
He added: “The FCA announced a big transformation program in response to the first two of the external reviews involving significant investment in data and ID, improvements in staff training at its contact centre and enhancing attention to whistleblowers. At this stage, evidence about their success or otherwise is mixed.”
Whilst qualifying that no regulator is perfect, he praised the US’s Securities and Exchange Commission (SEC), particularly for its “muscular” response to corporate breaches and efforts to protect whistleblowers.
“The Securities and Exchange Commission (SEC) has a lot going for it. Its treatment of whistleblowers and their evidence is streets ahead of what we have in the UK,” Bishop said.
“There is something to be welcomed about the way the SEC’s approach to regulation is quite muscular with respect to individuals. Basically, [those accused] go on a perp walk, and if they’re guilty, they go to prison for a very long time.”
He said the approach of US regulators to target malfeasant individuals rather than businesses was a far better for protecting the financial system.
“That’s a lot better than the approach we have in the UK, which broadly speaking is to fine the firm.
“Fining the firm creates a number of problems. Firstly, it makes the firm less solvent, which creates a prudential risk. The second is, that it sends out a [negative] signal to shareholders – and if it’s a listed firm… those shareholders are not the perpetrators.
“If you fine them, they may be disinclined to be shareholders in the future,” which is typically at the time a firm would require immediate recapitalisation to cover the costs of the misconduct.
“Those shareholders may be reluctant to put their hands in their pockets,” creating, he said, “a perverse incentive”.
“It also signals to the perpetrators, ‘We’ve got your backs. We’re not going to put you in jail, we’re not going to fine you, we’re just going after the shareholders’. It’s just a displacement activity.”
Bishop also praised the work of the US’s Consumer Financial Protection Bureau (CFPB), noting he would like to see similar regulatory authority take shape in the UK.
“In fact, we’ve proposed a transparency task force, which if created would sit somewhere between the CFPB and [Australia’s] FRAA [Financial Regulator Assessment Authority], which assesses the effectiveness of regulators.
“[This] body would represent consumer interests and keep the regulators honest, and it would also make some of the appointments in the government structure.
With industry representatives often “speaking quite loudly in the ears of regulators and treasury officials”, he said such an authority would serve as a practical “counterweight”.
Whistleblower protections
Bishop, in particular, praised the SEC for its protection and fair treatment of whistleblowers.
“Their evidence is streets ahead of what we have in the UK,” he said.
He said efforts are nevertheless being made in the United Kingdom, notably from advocacy group WhistleblowersUK, to introduce legislation that would create a dedicated ‘Office of the Whistleblower’.
“The idea of this office is that it’d be a statutory body that could be notified by whistleblowers and would then make sure they were treated well by their employer or by regulators. At the moment, that probably isn’t the case.”
He noted that a common thread in three of the four external reviews of the FCA was the “appalling treatment of whistleblowers and their evidence”.
“In one case, a whistleblower was publicly outed by a statement by the regulator, [leading] to the end of his career. Ignoring whistleblower’s evidence, having fights effectively with whistleblowers sometimes even in court trying to shut them up. It’s really quite abysmal.”
Bishop noted a curious cultural quirk, and tension, in how whistleblowers are treated in the UK.
“Some people will say that we really like the plucky individual that stands up against the big corporation, but we also like the idea of taking one for the team and sticking by your mates.
“Anglo-Saxon societies are quite divided in our treatment of whistleblowers. Personally I’d like to see cultural leadership from regulators and lawmakers to improve it.”
Keep ‘em separated
Bishop advocates for a strict separation of responsibilities for conduct regulators and prudential regulators.
He notes a “widely circulating myth” that the UK has moved to twin peaks regulation.
While this is may be true of banks and systemically important insurers, he said, which are now regulated under the PRA, “it’s not true of the majority of authorised firms”.
“Of the 50,000 authorised firms, only 1500 of them are dual-regulated – which means that the prudential regulation authority looks after their prudential regulation.”
In the case of the UK, he said, competition regulation should go “wholly to the Competition and Markets Authority”, the UK’s ASIC equivalent, rather than being shared with the Financial Conduct Authority (FCA), the conduct regulator for around 50,000 UK-based financial services companies.
The UK’s Prudential Regulation Authority (PRA), which was created in 2013 in the wake of the fallout of the global financial crisis, also supervises more than 1,500 financial institutions, including the country’s banks and insurers.
He recognised the intrinsic conflicts of regulators handling both conduct and prudential concerns.
“If the conduct of a firm is bad, and the consequences that it has to, for example, pay redress to its customers, or it might have some of its permissions removed or it might be fined, suddenly it will become insolvent or financially in some jeopardy and that’s a problem for a prudential regulator.
“If those people [on the prudential and conduct side] are working in the same building, there is an automatic and intrinsic tension between the two, as well as create “underlaps and overlaps” in responsibilities.
“That’s one of the reasons why the UK legislated to separate out those functions for the big banks and insurers, but didn’t do so for the rest of the market, and I’m wondering if it might need to do so for the future.
“Effectively what I’d be suggesting is that it’d be a standalone conduct regulator. It would do nothing else but conduct regulation. And the great beauty of that is if conduct is bad, then it’s the fault of the conduct regulator, ultimately.”
“Our regulator as well, the FCA, has a competition mandate, so it’s supposed to make sure there are no trusts forming, that you get genuine price, quality and innovation and competition going on, but it shares that responsibility with the Competition Markets Authority.”
“The message I wanted to give you, it’s a really good thing for regulators to have a single and clear focus. Giving them multiple things for them to do creates opportunities for things to slip.”
