Beware of lawyers making recommendations about regulating the business community; they will inevitably lead to more business – for lawyers. It is now clear that more litigation, penalties and jobs for high-fee lawyers will be nominated as the solution to the mounting evidence of the failure of banks and other leading financial institution to meet community expectations of honesty. And the strongly criticised financial regulators under whose watch the laws and licence requirements were repeatedly broken have already been handed multi-millions of dollars to finance a tougher legalistic approach. All this is even before next week’s opening of the final round of hearings of the Royal Commission into financial services misbehaviour. While the star turns will be the top brass of the big four banks, there will also be plenty of interest in what the chairmen of the two regulatory bodies, Asic and Apra, have to say.

Already, in response to Commissioner Hayne’s concern about the failure of the regulators to prosecute evident illegalities, and his suggestion they should beef up enforcement, counsel for Asic, Peter Collinson QC, has undertaken to keep the Bar busier. Instead of its traditional role of seeking to resolve matters by negotiation, settlements and enforceable undertakings, ‘Asic accepts that it must alter its enforcement priorities and be more agile in initiating and prosecuting court action; for larger financial institutions it should deploy enforcement more frequently, particularly criminal and civil court actions…The proper starting point is for it to ask the question: Why not litigate?’

But Hayne’s criticism of Apra rested on a misunderstanding not only of its objectives, but also of how remarkably successful Australia’s prudential record has been, particularly in the face of the world financial crisis. For Apra to convert its supervisory style away from giving priority to prevention and rectification into an aggressive confrontational legal one, would create more risks than benefits. Despite being blasted by Hayne for never taking legal action to enforce its regulatory powers over the banks, insurance companies and most superannuation funds, Apra insists its role of ensuring that prudential objectives are met does not encompass wrongdoing that poses no prudential threat. ‘Apra accepts that it has traditionally examined cases of poor conduct through a prudential risk lens, and has primarily relied on Asic to ensure that specific cases of misconduct and consumer harm were properly remediated… Apra’s core mandate is focused on safety and soundness while Asic’s is on consumer protection… It is important that each regulator stays true to its mandate and uses powers for their intended legislative purpose’. But it nevertheless is undertaking a formal review of whether it should widen the issues over which it takes public action from its present concentration on things that threaten financial stability to use ‘enforcement action to achieve its prudential objectives… and hold individuals to account’ to deter wrongdoing. As chairman Byers said, there is a potential for greater use of enforcement powers.

But Apra will not be rushing into court. In its response to the RC, chairman Byers described its actions on bank misconduct as ‘broadly appropriate’ and he had some sound advice for Mr Hayne, warning that launching legal action too regularly could discourage banks from taking risks, limiting access to financial services and resulting in more expensive products. He also warned against Mr Hayne’s idea that complex laws could be simplified as a potential cure for industry bad behaviour; ‘There are trade-offs between simplicity, on the one hand, and clarity and enforceability, on the other’. Another warning against over-reacting to next February’s final Hayne report comes from the Reserve Bank: ‘It is important that the response to the findings balances the need for banks to be able to efficiently recover bad debts with the need to protect consumers from inappropriate conduct’.

However, there is a way to avoid the legal profession prospering out of stricter enforcement; rather than using the courts to seek cash penalties, regulators could simply impose the far more effective sanction of suspending for a period the right of financial institutions to deal in whatever product was the subject of misbehaviour.