Former APRA/ASIC executive slams the “farce of fake regulation”

Dr Wilson N. Sy, – the former head of research for APRA, and executive at ASIC and the Australian Treasury – has published a paper attacking the “farce of fake regulation” after it was exposed by the banking royal commission. Below is the extract:

The revelations from the Hayne Royal Commission (HRC, 2019), limited though they were by the terms of reference, have come as a shock to most people, including Australian politicians, officials, academics and the media. Their expressed shock indicates a high degree of ignorance about the Australian financial system. For decades, the public was led to believe that Australia has the best financial system in world, being one of the few countries to have avoided a recession in the global financial crisis (GFC).

This complacent view was contradicted by the HRC and this fact needs to be understood and explained. The HRC Final Report lacks an explanation for its major finding that the regulators had failed to enforce the law. The report merely recommended the regulators be more active, when it did not discover why the regulators had been so passive in the past. This paper provides detailed explanations for the observed failure to regulate based on published research, new or old empirical evidence and industry insider experience.

Turning to the body of the paper, Dr Wilson N. Sy goes for the jugular in attacking Australia’s corrupt financial regulation:

The HRC has discovered that there has been little enforcement of regulation in the past decades…

The system was never designed with enforcement in mind. Fake regulation was established as a façade to placate the detractors of deregulation. Deregulation has been implemented progressively by governments for decades, particularly in the finance industry. Deregulation implemented through fake regulation has resulted naturally in the misconduct revealed by the HRC…

After nearly twenty years, APRA has recently announced its first serious enforcement action against the senior executives of IOOF, a small service provider capitalized at $1.6 billion (after a 30 percent plunge in its share price) compared with Commonwealth Bank of Australia (CBA) at $125 billion. This may be a case of token enforcement action on a minnow…

Whether justified or not, Ken Henry, the former secretary of the Australian Treasury (2001- 2011), has been credited with saving Australia in the GFC by advising the Government to “Go hard, go early and go to households”. He took the stand in last days of the HRC as the chair of the National Australia Bank (NAB). His performance in answering the questions posed to him has been described as nonchalant and arrogant because he clearly displayed disrespect for the HRC. Ken Henry, who understands well fake regulation in the financial system, was apparently mocking the regulators and the proceedings as he knows that a major bank is virtually untouchable – “too big to fail” and “too big to jail”. This is typical of the contemptuous attitude major banks have to regulators and government in general. Even if a major bank is untouchable, he was not. He eventually paid the price of being explicitly censured by the HRC for his public display of arrogance; he and the CEO have since resigned under pressure…

Effectively without adequate funding for enforcement, Australian financial regulation has never been properly enforced which was one of the key findings of HRC. Regulation which is not enforced is fake regulation and this pretence at regulation is a farce. The HRC recommendation for greater enforcement will not stop the farce because it has not called for a stop to fake regulation by recommending structural changes to the system.

The farce will continue even when ASIC and APRA have been funded specially by the Government to step up enforcement action and to cooperate with each other more closely. To dissemble and forestall harsher recommendations from the HRC in the final report, the Government had created earlier a second deputy chair at APRA for John Lonsdale, an exAustralian Treasury official of 30 years, to develop at APRA an enforcement strategy about which evidently it had never thought before. This is part of the farce…

Fake regulation does not mean there is no regulation. Fake regulation gives the appearance that regulation is for the benefit of everyone, as the community expects, whereas fake regulation is actually for the benefit of the industry, with the premise that what is good for the industry is good for everyone. The false assumption is: an industry which serves customers will keep customers happy because it is irrational to destroy itself by being bad to customers. Hence on this assumption, the regulation which has been set up to work for the industry would hardly contemplate enforcement which represents external intervention and admission of failure of self-regulation.

The recent promises of enforcement and even making some lame attempts are merely to extend and pretend regulation. They will come to nought, because fake regulation was never meant to be enforced and has not been organized to do so, as explained further below. New attempts at enforcement by ASIC and APRA, even with special litigation funding, will meet with the same old road blocks and will likely fail as before. The Australian regulatory system, like the US system and others, has been designed to be weak and ineffective, as a step towards deregulation…

The truth is APRA and ASIC both work for their paymasters who decide how they want to be regulated in an arrangement of self-regulation, approved by Government policy…

The Australian regulatory system is a flawed system, like others. Fake regulation or Clayton’s regulation is the regulation you have when you are not regulating. Fake regulation is worse than “honest to goodness” overt deregulation, because the regulators actually serve, by making deals with big banks, to hide misconduct and fraud from public view…

There has been little serious acknowledgement that regulation has failed badly for decades and that the new attempts at regulation will make no fundamental difference…

Fake regulation is a farce; it needs to stop. The failure of the global financial system has been seen wrongly as a failure of capitalism and the world is being pushed misguidedly towards socialism, particularly in the UK and the US. These failing systems including that of Australia are not really capitalism, because they are capitalism for the few and socialism for everyone else. The failures are due to government sanctioned oligopolies which have captured the regulators.

Below are recent interviews featuring Dr Wilson N. Sy

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