How Australia Shot the Corporate Sherif

(Bloomberg) -- If you want to know a government’s priorities, don’t listen to what politicians are talking about. Look where they’re spending your money.

That’s one reason to doubt much will come of the considerable sound and fury emanating from the Royal Commission into Australia’s financial services industry.

Go back three weeks to when Treasurer Scott Morrison was announcing new powers for the main corporate regulator, the Australian Securities & Investments Commission. You’d be inclined to think from the language that the sort of lax approach to enforcement that allowed a culture of misconduct to flourish was a thing of the past.

“If there is potential complacency about behavior in institutions we need to set the tone through the law and the penalties that apply,” he told reporters in Melbourne at the time.

How’s this for setting the tone? Government spending on Asic will be cut from A$346 million ($259 million) to A$320 million and 30 staff positions will go as a result of the country’s budget Tuesday, the Australian Financial Review reported Thursday. By 2022, the last year for which the budget provided funding forecasts, the A$322 million spend will be the lowest in real terms since 2006.

How Australia Shot the Corporate Sherif

It’s hard to square these two decisions if you think the government is really serious about cracking down on misconduct. Asic has been criticized for years for its timidity in bringing major malfeasance cases, but it’s impossible to separate this tendency from the tight constraints within which the regulator has operated.

Where large-scale infractions don't lead to clear evidence of criminal conduct, Asic is forced to bring civil suits through the courts in order to enforce penalties. Considering its meager litigation budget, and the might major financial institutions can deploy, it’s no surprise the regulator has grown gun-shy – or that some firms, such as fund manager AMP Ltd. have grown used to thumbing their noses at the organization.

Take Asic’s actions against Commonwealth Bank of Australia around the manipulation of the bank bill swap rate, Australia’s interbank interest rate benchmark. Banks elsewhere paid out almost $9 billion in fines over Libor tinkering, but Asic waited five years before even bringing a civil suit against CBA. On Wednesday, it settled with the lender for A$25 million.

How Australia Shot the Corporate Sherif

Executives and directors should – rightly – be looking after the interests of their shareholders first and foremost. But that fact is why bland appeals to “improve the culture” in the industry won’t count for much unless a beefed-up enforcement regime, armed with profit-killing fines, makes looking after customers a fundamental part of their fiduciary duties. The enhanced powers Morrison announced last month will help, but only if they have a regulator empowered to deploy them.

In the meantime, markets may be overestimating the damage to earnings that may result from the Royal Commission.

Tuesday’s budget suggests the government fundamentally doesn’t believe that root-and-branch reform of the financial system is warranted, and the opposition Labor party’s polling lead ahead of an election due in the coming 12 months is narrowing.

Australia’s banks have skirted challenges to their dominance in the past. Don’t dismiss their ability to repeat the trick again.

To contact the author of this story: David Fickling at dfickling@bloomberg.net.

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