On regulating banking and financial services

On 15^th October the Hobart Mercury reported that ASIC, the corporate watchdog, was aware some life insurers were rewarding staff according to the claims they rejected, but could not name them because of the reputational and business damage. A senior executive said he expected this practice to cease, but did not explain why, when it remains legal, profitable and secret.

Readers may recall Michael Moore’s 2007 documentary Sicko, a disturbing account of the US medical insurance industry, which pays special agents to ferret out minor instances of non-disclosure, such as a young woman who was refused cover for a life-threatening cancer because she failed to mention a yeast infection.

What does this mean? It means ASIC cannot protect consumers until and unless such practices are prohibited by law or the culprits are named. It belies repeated claims this body can regulate banking and financial services, including insurance, and adds to the case for a royal commission based on the 56 major banking scandals recorded since 2009 (The Guardian, April 28).

That case was discussed in On Line Opinion (July 19), where it was argued that ASIC’s ability to protect the public is compromised by a culture of confidentiality and by the fact that, as a government agency, it cannot publicly question current business practice. By contrast, a royal commission is an open public inquiry into problems which have defied the efforts of regulatory agencies.

In a recent contribution to this debate Tasmanian Labor Senator Helen Polley criticized  the refusal to hold this inquiry and described the PM’s alternative proposal - to set up a banking tribunal to deal with customer complaints - as a ‘reactionary response’ to protect an industry which funds his party. (The Mercury, 5^th November)

The proposal can, however, be judged on its merits. For reflection suggests it will risk an unpredictable liability for conduct which is accepted in the market place but which a tribunal later finds questionable and decides ought to be discouraged by an award of compensation, as if it were a successful action in a court of law.

For a common feature of the complaints is that the conduct is either clearly legal or not clearly illegal, despite being unfair, deceptive, or otherwise objectionable. It means the industry will become subject to an ex post facto liability based on the opinion of the tribunal rather than the law of contract. That may not concern the more extreme critics of financial services, but it has serious drawbacks.

Because this feature will also be obvious to a tribunal it is likely to inhibit recovery for losses - or even for an apology - in cases where the company can reasonably argue that it had no reason to suppose its incentives or marketing campaigns were unacceptable, however prejudicial in the eyes of ordinary consumers and moral philosophers.

But the proposal is also flawed in principle because the conduct in point is typically a business practice not an isolated case.  So what happens to others who suffer loss? Will the tribunal have power to order compensation for all victims (who may number in the thousands) if, for instance, they meet the criteria for parties to a class action?  No one is saying.

Better, surely, to clarify the law so everyone knows the rules in advance. But this calls for difficult judgments about the proper balance between entrepreneurial freedoms and widely accepted ideas of fairness which is a task for parliament, not for courts or tribunals or some blend of one or both with the role of an ombudsman or mediator.  

This in turn presupposes some expert understanding of the practices in contention, which may be largely hidden from the public. Even government regulators may not be aware of or understand the risks, as with the complex derivatives trading which preceded the global financial crisis. That history argues for an ongoing, expert and independent commission, with the power to compel disclosure despite predictable claims of ‘commercial in confidence’.

All of which may explain why Kelly O’Dwyer, the Minister for Financial Services, has now changed the terms of reference of the Ramsay Commission (contrary to the Prime Minister’s original advice) to pre-empt its findings by ruling out anything more ambitious than setting up another ombudsman to add to the existing Financial Ombudsman Service, Superannuation Complaints Tribunal and the Credit and Investments Ombudsman - none of which has been able to protect consumers.

Finally, while a royal commission on unfair business practices may seem an idealistic proposal, it might lessen the risk of going further down the American path, where politics is now a form of trench warfare between socio-economic groups, with little hope of arguing from shared values - even from seemingly universal values which hold that the interests of all citizens have equal importance.