OPED: we put the case for a Royal Commission into regulators as well as the banks. There is no deterrent for bad behaviour in banking. The system is broken. The top brass at the banks invoke the “reverse-Nuremberg defence”. They blame their foot-soldiers for not following orders, claim there is not enough evidence to prove they were following orders or, in CBA’s case … “it was the computers wot did it”.

The annual forum of the Australian Securities and Investments Commission is a deluxe event. This year’s two-day talkfest, held at Sydney’s Hilton Hotel in March, was superb value … if you happen to be a bank, with early-bird registrations priced at just $1,950 per person.

It might seem counter-intuitive but these corporate cops from ASIC cost Canberra nothing. In fact, ASIC generates hundreds of millions of dollars a year in cash for the government; via company registration fees, assorted penalties and the highest search charges for company information in the world.

This year’s annual forum was headlined “Future Focus”; quite a prescient appellation as, six months hence, regulators are beset with what may be the biggest banking scandal in this country’s history, the Commonwealth Bank’s prolific money-laundering fiasco and what appears to be greed and recklessness topped off by a cover-up. The “computer glitch” alibi has all but torched what credibility its board and management have left.

“Complacency, the comfort of impunity, induces reckless behaviour”

Yet the government, ASIC and the other regulators now face an awful dilemma. They may – dread-upon-dread – be forced to do something, something meaningful by way of regulating and prosecuting.

As global authorities bear down upon the CBA, and ordinary Australians become patently fed up with banks being mollycoddled, authorities can’t duck for cover for much longer, they have to act.

When it comes to the Big End of Town, ASIC’s usual approach is regulation by press release but, if it is forced to act, it favours the path of Enforceable Undertakings (EUs) instead of court proceedings; negotiation over litigation. Not even large fines like the US.

Typically, an EU allows the bankers to wipe the slate clean without admitting they had done anything wrong. The CBA already has one of these with ASIC for its financial services imbroglio. It is water off a duck’s back.

It is no wonder then that the focus for financial regulation is on “the future”. The past is pockmarked with the obliteration of billions of dollars of personal wealth of Australian families in an iteration of failures: Storm Financial Group, Comminsure, and the fraud and forgery in the bank’s financial services boiler-room.

Pity the retirees and others who harbour an old-world faith that employees and officers of banks and finance companies can be trusted to do the right thing and, if they don’t, the law will take care of it. The scandals in this “the golden age of banking and finance” keep rolling and the social costs are heavy. Sometimes families pay the ultimate price.

Financial planners enriching themselves and their masters by forging signatures and switching clients into high risk products without permission; life insurance officers changing definitions or changing or destroying medical evidence to deny liability; loan officers lowering valuations to minimise the price paid for a loan book with the collateral damage of customers being forced into receivership; loan managers hiding behind external parties with shoddy margin lending or financial advisory business models which seize assets at the first sign of trouble; traders using inside information, rigging markets, deploying client monies for their own means.

There is no sugar-coating it. We are witnessing a generation of state-sanctioned white-collar crime in the banking and finance sector where the villains amass their wealth at the expense of their customers and the broader economy. And the regulators, what is their response?

“EU… you have done nothing wrong but we are asking you not to do what you didn’t do wrong again”

The odd Enforceable Undertaking; an agreement which says to the bankers, “Okay, you have done nothing wrong but we are asking you not to do what you didn’t do wrong again. And if you do do what we agreed you didn’t do wrong again you must inform us as soon as you become aware that you have done nothing wrong again or you will have breached our agreement that you did nothing wrong”.

The problem of course is culture, that bankers know regulators will inevitably resile from enforcing the law except in the lightest way possible. Complacency, the comfort of impunity, induces reckless behaviour. The bankers know they are unlikely to get caught – but even if they do they won’t be prosecuted. Where there is no discouragement for bad behaviour there is bad behaviour.

A former lawyer with ASIC, James Wheeldon, has exposed the extent of “revolving doors” between industry and government, and regulatory capture.

“We know that ASIC has a policy of allowing bank employees and bank lobbyists to sit at a desk in ASIC, to work on ASIC projects, to read ASIC emails and sensitive internal correspondence, to supervise the work of ASIC lawyers, and to report back to their employers – the banks – about what they observe,” Wheeldon told this reporter.

“When I worked at ASIC as a lawyer, I was required to report to a more senior lawyer who was an employee of MLC [NAB], even as we were working on ASIC’s response to lobbying by MLC itself to have ASIC change the law to benefit MLC. I would not have believed it if I had not seen it with my own eyes.

“That MLC lawyer was on “secondment” to ASIC. When his secondment finished, his desk at ASIC was filled by another MLC lawyer.”

The market forgives them as profits and share prices march higher in a taxpayer-backed banking oligopoly. To rationalise their conduct on a social and legal plane however, bank bosses have developed what might be labelled the reverse-Nuremberg defence.

In the aftermath of World War II, Adolf Hitler’s henchmen denied responsibility for their actions by invoking what became known as the Nuremberg defence. “We are not guilty because we were only following orders,” they said.

In the reverse-Nuremberg defence of corporate Australia, the banks and their executives deny liability for rampant fraud by employees in their buildings because “the offenders responsible were either not following orders or there is not sufficient evidence that they were following orders”.

As part of this defence, the odd offending employee is sacrificed from time to time on the alter of good optics. Some lowly ranked employees are reported to ASIC and banned. Some are moved on to ply their trade with other organisations. Some are moved within the same employer because they have demonstrated their aptitude at bringing in the big bucks. But the regulatory model that allows customers to be routinely exploited by the banks remains.

How about the CBA’s “computer glitch”, its “software error”? It’s the computer wot did it. Low level homo sapiens may be shoved out to cop the rap at a later date but now … it’s metal and plastic that made us do it. We’ve been framed!

For its part, ASIC has been more of a negotiator and commentator rather than feared regulator which has posed a genuine legal risk to the offending organisations. To be fair to the current chairman, Greg Medcraft, he has endeavoured to give truthful commentary in is role as a public official.

His description of Australia as a bit of a paradise for white collar crime is spot on. So too his call for stronger penalties, particularly civil penalties, to “lift the fear and suppress the greed”. These are themes he should continue to impress on everyone with a role in ASIC and the government. Unfortunately, Medcraft’s strong unequivocal message about the important role of legal risk in regulation was lost during 2016. He backed off, or was told to back off and began making noises about culture instead.

There is not a lot to draw from Greg Medcraft’s speech at the ASIC annual forum for last year, titled “Culture Shock”.

“Culture matters to ASIC because culture is a key driver of conduct.

“So now to the question that is on the lips of many in the audience: what is ASIC doing about culture?

“I want to emphasise, however, that culture is not something that can be regulated with black letter law.

“We won’t be looking over everyone’s shoulder to test their culture or dictating how a business should be run. Culture is at the heart of how an organisation and its staff think and behave. It is an issue that companies themselves must address.”

There is one thing ASIC can do about culture, however, and that’s not rabbiting about the culture of others. The only thing it can do, and only with the support of its political overlords, is to prosecute. Enforce culture by hard example, enforce the laws, put white collar criminals behind bars, ban big bank directors, force executives to repay all their at-risk bonus pay – every cent of it – for all the years the offences rolled on.

David Murray, former chief executive of CBA, had this to say about Greg Medcraft’s culture war:

“It’s anti-competitive. It’s inefficient. And to be perfectly candid again, there have been people in the world who’ve tried to enforce culture. Adolf Hitler comes to mind.”

Murray, who made the better part of a $100 million personal fortune from CBA, must field some responsibility for the culture at the bank (though he clearly bears no responsibility for the money-laundering). He ran it for 13 years from privatisation until handing the reins to Ralph Norris in 2005. The culture did not change overnight when Ian Narev took over.

Meanwhile, the government’s response – in the face of growing community calls, and calls by the Federal Opposition, for a Royal Commission into the banks – has been to put a rocket under the prudential regulator APRA (Australian Prudential Regulatory Authority) to conduct an “independent” inquiry into “culture, governance and accountability”.

APRA’s remit is system stability. It is fairly sleepy. It is not a corporate cop, so this is an odd choice of investigator. A lame outcome is assured, an outcome which will only lend force to rising calls for a Royal Commission; a truly independent, judicial investigation. Moreover APRA is funded by the banks themselves so it is a fair bet that CBA is APRA’s biggest single source of funding.

It is “culture, governance and accountability” within government which warrants inquiry too, so if there is to be a Royal Commission, it ought to be into the entire system, regulators included. Banks cannot be expected to effectively regulate themselves and the absence of effective regulation has allowed poor culture to flourish.