ASIC finds its regulatory teeth

The Australian Securities & Investments Commission (ASIC) has launched about 25 cases against banks in the wake of the financial services royal commission. ASIC commissioner Sean Hughes says further legal action is pending, and he says it is possible that further misconduct and wrongdoings in the financial sector will emerge. Hughes adds that banks are starting to take their obligation to submit breach reports in a timely manner a lot more seriously following the royal commission. From The AFR:

“We are not at the bottom of the well yet,” Commissioner Hughes said.

“My own view is that it is too early to say they have met all their obligations; there is a lot of dirty laundry that needs to be washed first.”

ASIC is pursuing the banks over dozens of matters under its new mantra of “why not litigate”, with around 25 cases flowing directly from the Hayne royal commission…

Mr Hughes says more cases are in the works and the public should brace themselves as they come to light.

The most important case by far is the Westpac versus ASIC case, which is going to have a direct bearing on the legality of the Household Expenditure Measure (HEM) benchmark – a relative poverty measure that has been used by banks to estimate borrower expenses.

According to Endeavour Equities, widespread use of the HEM to estimate borrower expenses “upwardly biased Debt Service to Income ratios by 10-15%”, and “the size of the credit crunch is directly proportional to the unreasonableness of the HEM expenses benchmark”.

A modified HEM will soon come into effect that will more accurately match expenditure benchmarks with income. According to UBS, this will constrain credit availability going forward and should offset much of the stimulus coming down the pipe:

But if Westpac loses the ASIC case, then ADIs may be forced to abandon the HEM altogether and more rigorously scrutinise a borrowers’ capacity, with the end result being even tighter credit availability.

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith is an economist and has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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