Is ASIC victim of regulatory capture, a situation in which a regulatory body becomes influenced or dominated by the industries it regulates?

In recent years, criticisms of ASIC (Australian Securities and Investments Commission) suggest that it’s too lenient with big financial institutions. Especially during and after significant scandals involving misconduct, such as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (2018).

These concerns lead some to question whether ASIC is truly independent and whether it is doing enough to hold powerful financial institutions accountable.

What is Regulatory Capture?

Regulatory capture refers to a situation where the regulatory body becomes unduly influenced by or aligned with the interests of the industry it’s overseeing. In the case of ASIC, regulatory capture would mean that ASIC makes decisions more favourable to banks than customers. Or ASIC might fail to take enforcement actions that are necessary to protect consumers.

Concerns About ASIC and Regulatory Capture

There’s multiple instances where ASIC’s actions (or inaction) raise questions about its effectiveness and independence in regulating banks. Some of the concerns include:

a) Failures in Holding Banks Accountable:

Despite the major findings of the Royal Commission into the financial services industry, ASIC is criticized for being too slow or too lenient in taking action against banks guilty of misconduct. Examples include:

  • The Commonwealth Bank of Australia (CBA) scandal over its financial planning arm, where ASIC was accused of failing to act quickly on fraudulent activities that had been going on for years.
  • The “fees for no service” scandal, where banks continued to charge customers for services they never provided, despite the issue being known for some time. Critics argued that ASIC did not intervene in a timely manner to stop this practice or compensate affected customers.

b) Light Penalties:

When ASIC does take action, the penalties imposed on banks too light to act as a deterrent for future misconduct. For example:

Slap-on-the-wrist fines: Critics argue that penalties do not reflect the scale of the harm caused to consumers. For example, when banks are fined for misconduct, the penalties are often much smaller than the amount the bank gained through the misconduct, making it a cost of doing business rather than a true deterrent.

ASIC Inconsistent Enforcement

Another concern is inconsistent enforcement of regulations. ASIC has been accused of taking tougher stances against smaller companies or individuals, while being more lenient with large financial institutions. This has led to accusations of “two-tier” regulation — where the rich and powerful (like big banks) receive more leniency than ordinary consumers or smaller players in the financial services industry.

a) Close Ties to the Industry:

Is ASIC victim to the scrutiny it faces for having close ties with the banks? Many former senior ASIC officials now work in senior positions within major banks, and vice versa. These revolving-door dynamics between the regulator and the regulated industry leads to conflicts of interest, or the perception of conflicts, and contributes to concerns about regulatory capture.

b) Consumer Protection vs. Industry Protection

ASIC’s mandate is to protect consumers, maintain market integrity, and promote competition. However, its actions (or lack of them) sometimes seem to reflect a greater concern for industry stability rather than consumer protection. For example, after the Royal Commission, many feel that the Commission’s findings are damning. But ASIC’s response is viewed by many as insufficiently strong, both in terms of penalties and corrective actions.

ASIC in the Context of Regulatory Capture

ASIC’s role as a financial regulator is critical in maintaining consumer confidence and the integrity of Australia’s financial system. The agency is responsible for enforcing laws and regulations across a wide range of financial activities, including banking, securities, insurance, and superannuation. Is ASIC victim or perceived as compromised or ineffective in its role, which undermines trust in the entire system?

There are a few fundamental challenges that ASIC faces in trying to balance its regulatory role:

a) Political and Economic Pressure?

ASIC, like other regulators, operates within a political and economic environment. This sometimes places pressure to avoid overly harsh actions against banks, that are seen as too important to the economy. So political and economic considerations override consumer protection, potentially contributing to regulatory capture.

b) Insufficient Resources?

Another factor of ASIC’s apparent lack of enforcement is a lack of resources. Regulators often struggle with limited budgets and staffing. This can limit their ability to thoroughly investigate and pursue cases, particularly against large, resource-rich banks. While ASIC receives increases in funding it’s challenging to keep up with the scale and complexity of misconduct in the banking industry.

What Can Be Done to Address These Concerns?

To address concerns about regulatory capture and improve ASIC’s effectiveness, there are several actions that could be considered:

a) Increased Transparency

ASIC could benefit from greater transparency in its decision-making process. This would include clearer explanations for why certain enforcement actions are taken or not taken, as well as a more public-facing role in terms of the investigations and prosecutions it pursues.

a) Increased Penalties

To discourage financial institutions from engaging in misconduct, ASIC could pursue larger penalties that reflect the true scale of harm done to consumers. This would make it more costly for banks to engage in illegal or unethical behaviour. And such behaviour will not be tolerated.

b) Stronger Political Will

Political leaders and policymakers should actively support ASIC in its efforts to hold banks accountable. Instead it seems they focus on protecting the interests of the industry. This includes allowing ASIC to take strong action even when it might cause short-term economic or political discomfort.

Is ASIC victim of losing full public trust? ASIC must continue to demonstrate its ability to act in the public interest, remain transparent. ASIC must make sure that penalties for misconduct are not just symbolic but meaningful deterrents.