Industry and professional codes and standards are only as good as how well they are enforced and how well breaches are disciplined, the Banking and Finance Ethics Conference has heard.
Professor Dimity Kingsford Smith, a director of the Centre for Law, Markets and Regulation at the University of New South Wales and a member of the Australian Securities and Investments Commission (ASIC) External Advisory Panel, said enforcement and discipline are the biggest problems facing co-regulatory and self-regulatory bodies.
“Enforcement, as we all know is incredibly expensive,” Kingsford Smith said.
“It requires expertise, it requires endurance and persistence, and then there’s a laundry list of technical legal difficulties.”
Kingsford Smith, a former and the first chair of the Financial Planning Association’s Conduct Review Commission, told the Banking and Finance Oath’s Banking and Finance Ethics Conference in Sydney last week that most self-regulatory or co-regulatory bodies do not have powers of compulsion.
“When you are actually investigating somebody, having a hearing, you can’t ask them for evidence, compel testimony, do cross-examination or even require them to attend,” she said.
“There are problems sometimes with independence. The public sees a lot of this stuff as being done behind closed doors, so I think there’s a very big imperative on having well-written, expertised determinations put on the internet for these organisations so what they do and the standards they set though the disciplinary process can be taken on by everybody.”
Kingsford Smith also said co-regulatory and self-regulatory disciplinary processes often are not very good at identifying systemic issues in an industry or a profession, which is why co-regulation, alongside an industry-wide regulator, is often preferable to self-regualtion.
She said there is still “some work to be done legislatively to up the ante of the powers the self-regulatory or co-regulatory organisations can have for enforcement”.
That is not to say self-regulatory and co-regulatory bodies do not have a part to play in formulating, setting and enforcing standards, she said.
“Perhaps the best part is…that you create an interpretive community of people, who begin to agree about what their obligations mean in practice,” she said.
“And they provide peer support and mentoring and basically, professional formation for those coming behind them. Civil society organisations, whether they are self-regulators or co-regulators, can do that really well. They can do training pretty well, too, if they really have the resources for it.”
Kingsford Smith said the most effective regulation of professions is by a monopoly, and competition between co-regulatory or self-regulatory bodies tends to lead to “a race to the bottom rather than a race to the top”.
“The established professions regulate as monopolies, and that’s one of the reasons why they are very successful,” she said.
“They have homogenous regulation and professional formation, they have a single set of standards and they have an exit [mechanism] for those that don’t comply.
ASIC deputy chair Peter Kell said the question of self-regulation might be moot anyway, as long as the public distrusts any industry, and particularly financial services, to modulate its own behaviour and standards.
“We can have a nuanced discussion in this room, but just remember that 99.9 per cent of people [outside the room] would give you a resounding ‘no’,” Kell said.
Kell said the major issue with industry codes and ethical and other standards is not so much the substantive elements of the code as the implications for individuals who breach them.
“That’s the sticking point, and that’s where the community has become cynical about some of these measures, because they do not see consequences or accountability where the standards, which can be quite good standards, are not met,” he said.
“It’s also I think complicated by the fact that this is a sector, perhaps more than most others, where you have a proliferation of different bodies, industry associations, professional bodies of one sort or another, that at times operate primarily as lobby groups rather than groups that are aimed at raising standards.”
ASIC recently approved the FPA’s Professional Ongoing Fees Code, which enables FPA members to meet their legislative opt-in requirements by complying with the FPA code, and submitting to FPA monitoring and discipline, rather than with the Future of Financial Advice (FoFA) laws.
Kell said industry and professional codes often work particularly well “if some of these measures don’t try to boil the ocean”.
He said the Australian Bankers Association (ABA) standard on checking the references of financial planners is another industry code that addresses the “frankly hopeless situation” where a poor financial planner can be terminated by one Australian financial service licensee (AFSL) but join another one immediately.
“The first firm doesn’t provide a clear reference, and the second firm doesn’t even ask for it,” Kell said. “That is both self-defeating and, in my view, unethical, and it shouldn’t require regulation to fix that, you would have thought.”
The deputy char of the Australian Prudential Regulation Authority, Helen Rowell, said codes can be a helpful adjunct to regulation, but they are not enough on their own and that’s why both ASIC and APRA continue to focus on organisational culture.
Rowell said financial services businesses generally are more aware of cultural issues ans, but “there’s still a lot of way to go in terms of really understanding what that means in terms of outcomes for customers”.
She said organisations need to think about culture holistically, rather than division-by-division or from one business unit to another.
“It’s easy to say well, we’ve had problems in our financial advice areas so there’s clearly a cultural problem over there and all we have to do is get rid of a few people and that will be OK; or we see something in the insurance line and we’ll tackle that at an individual level,” Rowell said.
“Actually step back and say, what does that tell us about the environment in the organisation that’s there that needs to change? And it needs to be driven from the top.”
