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Banking royal commission: Asic head told 'you are not naming enough names' – live Banking royal commission: Asic head told 'you are not naming enough names' – as it happened
(35 minutes later)
So what did we learn?
Well, Westpac isn’t too enamoured with the changes the commission has recommended so far, and doesn’t think the regulators need to be too formalised in their processes.
That Nicholas Moore seemed to have an easy go of it at the commission – one of the shortest times in the chair for a banking executive by far. It wasn’t so much that his performance was great, but the questions centred around Macquaries renumeration practices, so he didn’t have too much to answer.
And the commission is a little worried with how Asic deals with the banks, and the other institutions it is charged with regulating.
We’ll have more answers from James Shipton on that tomorrow. Keep an eye out for Gareth Hutchens’ wrap report on the days events which is coming very soon, and we will be with you when all the action begins again in the morning.
Thank you for joining us and, as always, take care of you.
The commission adjourns for the day, on that note, but James Shipton will return tomorrow morning
Rowena Orr has turned to part of an email correspondence between Kevin Foo, a senior manager in the deposit takers credit, about NAB loan fraud matters:
Further to the FSE catch-up on Thursday last week, the NAB loan fraud matters were before the enforcement committee today. The full Commission was there, including Daniel Crennan.
Although supposed to be an update on FSEs GWS - Greater western Sydney: **... banning actions, the discussion turned to the Royal Commission and what action we should or could take against NAB.
The enforcement committee asked why we have not taken action against NAB. Comments from FSE, Peter, Peter Kell and myself included.
The matter was breach reported to ASIC (in a fairly timely matter - although the Royal Commission suggested otherwise).
NAB was taken the matter seriously, were conducting a wider review, having their internal review tested by KPMG and developing a remediation program. These are the things DCI would have asked for if they were not already doing these. We have reviewed KPMGs review and are comfortable they have done a reasonable job (or not a bad job to cause us concern).
The conduct was viewed as particular employees defrauding the bank. FSE has taken action against the individuals. NAB is not the only bank that has a loan fraud problem (although Peter suggested we be careful not to relay any message the loan fraud is not a very small minority of behaviour).
FSE has taken other action that has penalised loan fraud and banks responsibilities - Esanda/ANZ.
Cathie (the enforcement committee chair) was of the view that we should seek an enforceable undertaking from NAB with a community benefit payment. What do we have to lose from doing this.
James and John were supportive on taking some action against NAB to send the message that dealing with loan fraud is important. Peter wanted to test these ideas and tempered the discussion with comments that taking no further action might be the right decision. We just need the right narrative.”
Orr asks if that is the message Asic wants to send, that by an institution following the law and raising issues of breaches or misconduct, it gets brownie points with the regulator.
James Shipton says that Asic did end up going harder on NAB
“...In my view, and I expressed this when this conversation was happening, we should be pursuing much harder, much tougher action and we ultimately did.”
Orr: It’s the antithesis of that, isn’t it, Mr Shipton, the view that’s expressed here, let’s not investigate further, let’s just ask NAB for an enforceable undertaking with a community benefit payment. We’ve got nothing to lose from doing that and we will then be seen to have publicly responded to the evidence in the Royal Commission?
Shipton: Well, that was a view - that may have been - that may have been a view expressed. Again, I cannot respond with absolute confidence as - as to what was said. All I can say is that there were, from my recollection and from what Mr Foo writes, a range of different views which were thrown around, views which were explored and tested, but ultimately we decided to pursue an investigation and an investigation has commenced in this matter.
Orr: Well, the view that I’ve directed you to was the view of the chair of your enforcement committee. Does that concern you, Mr Shipton?
Shipton It - it is a view that I do not agree with. It is a view that, clearly, that I - I - I suggested and an alternative approach. All I can say is that this was a - that’s why I used the expression premature, because there was not before the committee at that particular time a broader, more thought out, more thoughtful and more structured discussion in relation to NAB itself.
“That came later. It came too late, but it came later. I think we should just put an element of caution of reading too much into this discussion which was at a albeit late occurrence in the timetable, but, nonetheless, was not a fully informed one.”
But Rowena Orr is not having any of it.
Rowena Orr:
You oversee an organisation in which numerous people make these decisions. And you tell me that it was a reasonable decision, a reasonable regulator would have made that decision, despite NAB having given you that information in its first breach report and then lodging a second breach report with Asic on 31 August 2016, which made clear that the conduct was even more extensive than that covered by the first breach report?
James Shipton:
I do not disagree with the facts and I am disturbed and disappointed by the facts. That is why – you are right. I can’t make every decision but that is why processes and decision-making structures are so important. And that is why I was explaining to you the difference between processes and decision-making structures and strategy. Asic needs to do a better job on both.
That’s my key point here.
When I came and took up this role, that was a key part of my reform agenda, because I cannot make every single decision, so how can I look at a case study like this and do my level best to ensure that it doesn’t happen again.
And that level best is having improved processes and procedures, decision-making structures, that’s enforcement review, and some other things that we’re doing, but equally, being very clear at a commission level that we have a strategy and priorities clearly articulated so that when these decisions are being made that type of decision wouldn’t happen again.
Rowena Orr presses Shipton on NAB:
Orr: “Now, Mr Shipton, prior to the evidence that was given by NAB in the first round of hearings in the royal commission in March, had Asic contemplated investigating NAB for its conduct in overseeing its introducer program?”
Shipton: “Not – I – I do not believe that that was a decision to expand that investigation. That decision at that time, that decision was made, I believe, only in the last couple of months.”
Orr: “In the last couple of months?”
Shipton: “Yes.”
Orr: “So do I understand from your answer that Asic had not contemplated investigating NAB for its conduct in overseeing the introducer program prior to the evidence?”
Shipton: “Contemplation – let me just – let me just sort of say a decision was made so that it was – it was contemplated, but a decision was made, as I understand it, to focus in on the wrongdoing of the individuals and to investigate … the individuals, and that investigation is continuing ... that was then – that investigation was expanded to include NAB in recent times. So yes, there was a contemplation but there was a decision – again, with resource constraints in mind. Also in mind that there was a number of other things going on at that time, and that’s why I was talking about resource constraints, and the regulatory decisions that we have to make. But I will most certainly say that we should have made that decision earlier.”
Orr: “Was that a failing, Mr Shipton?”
Shipton: “That was unfortunate, and that would have been a decision that I believed should have been made otherwise. So that was – that was highly regrettable.”
Orr: “You’re reluctant to call it a failing, Mr Shipton?”
Shipton: “I’m – I’m reluctant to call it a failing for the following reason. The reason why I’m reluctant is because a reasonable – it is a reasonable – it was a reasonable held view at that particular point in time to make that decision.
“A reasonable regulator would make that decision. That doesn’t mean that I, myself, would have made the same decision, but what I am saying is that it was reasonable in the circumstances at the time but it is not something that I would have decided myself because I believe that we should be acting quicker when it comes to financial institutions.
“And that’s – looking not just at the bad apple but looking at whether the barrel is faulted itself.
Asked if Asic has failed to launch investigations into some of the banks, given the stories the royal commission has heard, James Shipton says he wouldn’t call it a “failure”.
What I would make the observation is that we get approximately 2,000 breach reports a year. We get, I think, approximately 12,000 complaints a year.
And we have approximately 240 staff in enforcement. So we have to make realtime decisions as to which matters we can investigate. I would not consider the very difficult realtime choices and very hard choices as a failure.
And to put that number – I think it’s important to give context – and this isn’t a like for like – but when I say 240, without reference, that’s probably, that doesn’t mean anything.
So, again, this isn’t a like for like reference, but we have less staff in enforcement of that 240 than there are sworn police officers in the Australian Capital Territory.
In fact, there are nearly three times as many sworn police officers in the Australian Capital Territory than we have staff members in enforcement.
Now, I just say that not because it’s a like for like reference, but to give you a context of the volumes – the tens of thousands of complaints we receive, the number of resources that we have, which means we have to make very difficult choices.
So I don’t think that’s a failure. What I do think, though, it is a very difficult process to make the right decisions. And that’s why we are reviewing the processes around our decision-making in this area.
James Shipton says Asic is now “doing things differently”.James Shipton says Asic is now “doing things differently”.
“...We are doing things differently from a - how we do a - how we handle a matter from a work basis, but we’re also applying new ideas, new methodologies, and the final point that I have said to Mr [Tim] Mulally on this, we should be thinking about sequencing our the publication of our enforcement or going live with our enforcement matters. In other words, there has been a convention or a tradition or a business practice whereby everything in relation to a matter, in relation to an entity, is gathered up and all of the different component parts are gathered together. ... We are doing things differently from … how we handle a matter from a work basis, but we’re also applying new ideas, new methodologies, and the final point that I have said to Mr [Tim] Mulally on this, we should be thinking about sequencing the publication of our enforcement or going live with our enforcement matters. In other words, there has been a convention or a tradition or a business practice whereby everything in relation to a matter, in relation to an entity, is gathered up and all of the different component parts are gathered together.
I’ve encouraged Mr Mulally and he agrees if there could be a component of the broader issue there could be an action or court action that could be separated that we wouldn’t wait for those other component parts to be finished if that investigation was complete and we were good to go.” I’ve encouraged Mr Mulally, and he agrees, if there could be a component of the broader issue – there could be an action or court action that could be separated – that we wouldn’t wait for those other component parts to be finished if that investigation was complete and we were good to go.
So how does Asic need to improve? What does it need to do better?So how does Asic need to improve? What does it need to do better?
Shipton:Shipton:
We need to do more ... enforcement actions in relation to this misconduct.We need to do more ... enforcement actions in relation to this misconduct.
... More of it and quicker and more robust, utilising court-based tools, utilising court-based tools because that would be at the apex of the enforcement pyramid, as it were, and realising that in the case of a number of financial institutions or segments of the financial institution, that we …that the previous tactics have not been as successful as they – as we hoped them to be, and, therefore, we need to up our ante and be more agile in the … deployment of that enforcement tool.... More of it and quicker and more robust, utilising court-based tools, utilising court-based tools because that would be at the apex of the enforcement pyramid, as it were, and realising that in the case of a number of financial institutions or segments of the financial institution, that we …that the previous tactics have not been as successful as they – as we hoped them to be, and, therefore, we need to up our ante and be more agile in the … deployment of that enforcement tool.
Orr follows up with: “So do I understand that answer to mean there needs to be more enforcement action taken by Asic, it needs to be taken more quickly, and it needs to involve more court-based tools?”Orr follows up with: “So do I understand that answer to mean there needs to be more enforcement action taken by Asic, it needs to be taken more quickly, and it needs to involve more court-based tools?”
Shipton: “Yes. That’s exactly right. The only limitation to that, of course, is resource constraints, but that is certainly our intent and that was the intent behind some of the structural changes that we’ve put into place in and around enforcement and enforcement decision-making.Shipton: “Yes. That’s exactly right. The only limitation to that, of course, is resource constraints, but that is certainly our intent and that was the intent behind some of the structural changes that we’ve put into place in and around enforcement and enforcement decision-making.
“That was certainly the intent of the government and myself in bringing on board a deputy chair who has a leadership role in enforcement matters.“That was certainly the intent of the government and myself in bringing on board a deputy chair who has a leadership role in enforcement matters.
Orr picks up on Shipton’s use of “timely” and asks him to consider whether Asic has been “effective” and asks him to consider it through the lens of what has been revealed at the royal commission so far.Orr picks up on Shipton’s use of “timely” and asks him to consider whether Asic has been “effective” and asks him to consider it through the lens of what has been revealed at the royal commission so far.
Shipton:Shipton:
Yes. So I think if I was looking at the word “effective” through that lens, I would anchor that – my response on deterrence, both specific and general. And I think, both through being informed by the – the work of the royal commission, but also in my observations returning to Australia, that the utilisation of tools with a particular and robust deterrent capability is something that needs to be utilised more frequently, more often, and, as I said earlier, more quickly in relation to larger financial institutions as well as others.Yes. So I think if I was looking at the word “effective” through that lens, I would anchor that – my response on deterrence, both specific and general. And I think, both through being informed by the – the work of the royal commission, but also in my observations returning to Australia, that the utilisation of tools with a particular and robust deterrent capability is something that needs to be utilised more frequently, more often, and, as I said earlier, more quickly in relation to larger financial institutions as well as others.
Rowena Orr then moves on to what the government expects from Asic:Rowena Orr then moves on to what the government expects from Asic:
The government expects Asic to use its full regulatory toolkit and to direct a substantial proportion of its resources to surveillance and enforcement. Timely and effective enforcement strategies will deter misconduct and maintain confidence in the financial system.The government expects Asic to use its full regulatory toolkit and to direct a substantial proportion of its resources to surveillance and enforcement. Timely and effective enforcement strategies will deter misconduct and maintain confidence in the financial system.
Asic should clearly articulate publicly when it will and will not take certain enforcement action, so as to manage the public’s expectations and to promote confidence in Asic.Asic should clearly articulate publicly when it will and will not take certain enforcement action, so as to manage the public’s expectations and to promote confidence in Asic.
Now, Mr Shipton, can I ask you, firstly, in the time that you have been with Asic, do you consider that Asic has used its full regulatory toolkit and directed a substantial proportion of its resources to surveillance and enforcement in the way contemplated by the statement of expectations?Now, Mr Shipton, can I ask you, firstly, in the time that you have been with Asic, do you consider that Asic has used its full regulatory toolkit and directed a substantial proportion of its resources to surveillance and enforcement in the way contemplated by the statement of expectations?
James Shipton:James Shipton:
The starting point is yes but I do believe that there could be builds and improvements.The starting point is yes but I do believe that there could be builds and improvements.
I believe that we need to be using our enforcement tools more effectively and more – on a – on a more timely basis moving forward, amongst other things, and I also believe that we should be utilising new types of regulatory tools like supervision – on-site supervision, the close and continuous monitoring program that no doubt we will speak about later.I believe that we need to be using our enforcement tools more effectively and more – on a – on a more timely basis moving forward, amongst other things, and I also believe that we should be utilising new types of regulatory tools like supervision – on-site supervision, the close and continuous monitoring program that no doubt we will speak about later.
Essentially, after some back and forth, James Shipton doesn’t concede the point – that Asic provided Westpac with its draft recommendations before releasing the report, because it wasn’t a “back and forward” conversation.Essentially, after some back and forth, James Shipton doesn’t concede the point – that Asic provided Westpac with its draft recommendations before releasing the report, because it wasn’t a “back and forward” conversation.
Shipton:Shipton:
Well, there was a discussion but what I am – the – what I am trying to make the point of is that often there is one-way discussions. Often, a matter can be put to us which we reject.Well, there was a discussion but what I am – the – what I am trying to make the point of is that often there is one-way discussions. Often, a matter can be put to us which we reject.
In fact, that happens to us in our – in our – in our existence on a very frequent matter.In fact, that happens to us in our – in our – in our existence on a very frequent matter.
There are representations and submissions made to us. I cannot – I cannot conclude with the – the documents before me that there was a back and forth discussion, a full connotation of a full back and forward discussion.There are representations and submissions made to us. I cannot – I cannot conclude with the – the documents before me that there was a back and forth discussion, a full connotation of a full back and forward discussion.
That’s why I wanted to be quite precise about the one – the apparent one-way nature of this interaction.That’s why I wanted to be quite precise about the one – the apparent one-way nature of this interaction.
James Shipton responds:James Shipton responds:
I don’t think it’s inconsistent.I don’t think it’s inconsistent.
I would point out – I point out that these are briefing notes of a meeting that I didn’t attend.I would point out – I point out that these are briefing notes of a meeting that I didn’t attend.
I point out that the conversation about that feedback was in October in 2017.I point out that the conversation about that feedback was in October in 2017.
And if there was – if there was a back and forth, I’m – I’m not aware of it, and I do not know what happened in relation to that correspondence or that interaction.And if there was – if there was a back and forth, I’m – I’m not aware of it, and I do not know what happened in relation to that correspondence or that interaction.
I would also point out that often is the time that – it’s very often the case that financial institutions put us – put to us many things that we don’t necessarily ... take on board.I would also point out that often is the time that – it’s very often the case that financial institutions put us – put to us many things that we don’t necessarily ... take on board.
Orr: But I asked you earlier if Asic ever discusses the recommendations or findings in these reports with the entities prior to publication. This shows that in this instance, that sort of discussion did occur?Orr: But I asked you earlier if Asic ever discusses the recommendations or findings in these reports with the entities prior to publication. This shows that in this instance, that sort of discussion did occur?
Shipton: Let me emphasise the point. Not that I was aware of. And I was also talking about at the time – during the time at my tenure here at Asic. So that was the context in which I was responding to your question earlier.Shipton: Let me emphasise the point. Not that I was aware of. And I was also talking about at the time – during the time at my tenure here at Asic. So that was the context in which I was responding to your question earlier.
Orr: Did you review this document before you gave evidence, Mr Shipton?Orr: Did you review this document before you gave evidence, Mr Shipton?
Shipton: Yes, I did look at this document before I gave evidence, but I reviewed - had to review thousands of pages of documents before I gave evidence ... So it’s difficult for me to know – have knowledge of each and every paragraph in each of those documents.Shipton: Yes, I did look at this document before I gave evidence, but I reviewed - had to review thousands of pages of documents before I gave evidence ... So it’s difficult for me to know – have knowledge of each and every paragraph in each of those documents.
Rowena Orr makes reference to a particular document:Rowena Orr makes reference to a particular document:
Orr: Following a review that we see under the table had been commenced in April 2017, which involved five banks, including Westpac ... Now we see the two pages as they appear in the report, Mr Shipton. And under Asic’s review and report, the second dot point we see that:Orr: Following a review that we see under the table had been commenced in April 2017, which involved five banks, including Westpac ... Now we see the two pages as they appear in the report, Mr Shipton. And under Asic’s review and report, the second dot point we see that:
**DCI met with Westpac on 18 October 2017 to discuss the practices we observed across all banks in the review.**DCI met with Westpac on 18 October 2017 to discuss the practices we observed across all banks in the review.
Following the meeting, Westpac wrote to Asic setting out its position on the findings and recommendations, and rejected some of the recommendations.Following the meeting, Westpac wrote to Asic setting out its position on the findings and recommendations, and rejected some of the recommendations.
Asic has not responded to this yet as we are finalising the report.Asic has not responded to this yet as we are finalising the report.
Shipton: Yes.Shipton: Yes.
Orr: Do you see that?Orr: Do you see that?
Orr: So this was in June this year, engagement with one of the entities who was the subject of the review about the findings and recommendations resulting in Westpac writing to Asic with its view of those findings and recommendations prior to publication?Orr: So this was in June this year, engagement with one of the entities who was the subject of the review about the findings and recommendations resulting in Westpac writing to Asic with its view of those findings and recommendations prior to publication?
Shipton: Yes.Shipton: Yes.
Orr: Do you wish to comment on that? That appears to be inconsistent with the answer you gave earlier.Orr: Do you wish to comment on that? That appears to be inconsistent with the answer you gave earlier.
But then ...But then ...
Orr follows up with a question about whether Asic discusses any of its recommendations with the banks and institutions before it makes its finding public.Orr follows up with a question about whether Asic discusses any of its recommendations with the banks and institutions before it makes its finding public.
Orr: Has Asic at times discussed the recommendations that it proposes to make in these reports with the entities involved in the review?Orr: Has Asic at times discussed the recommendations that it proposes to make in these reports with the entities involved in the review?
Shipton: Not that I’m aware of.Shipton: Not that I’m aware of.
Orr: Does Asic invite at any time the entities involved in the reviews to comment on the findings in the review before finalisation of the report?Orr: Does Asic invite at any time the entities involved in the reviews to comment on the findings in the review before finalisation of the report?
Shipton: Not that I’m aware of.Shipton: Not that I’m aware of.
So the regulator gives the institutions it is meant to be policing advance knowledge of its reports’ findings, and that the entity will be named, before it makes its finding public.
Which, and admittedly I am just a pleb, seems outrageous to me.
Rowena Orr seems to be having a little bit of trouble understanding the reasons why, as well.
Orr: Why do you need your regulated entities awareness of these matters before you release them to the public?
Shipton: I – as I said, I – I would regard it as – as a matter of fairness.
Orr: Well, I just want to try and understand this more and why you’re concerned about fairness with your regulated population, when you have brought in information that yields very disturbing results about the conduct of your regulated population, why are you concerned at that point to be fair by giving them advance notice of your findings?
Shipton: I – I do not believe that giving advance notice of our intent to publish their names in any way distracts from the importance and the impact of this particular report. And as an administrative body, I – and as an – as the administrator of an administrative body I, and I know my colleagues keep in mind, in procedural fairness type concepts in the execution of our work. I do not believe that providing notification – advance notification that we are going to publish this in any way detracts from the impact or the importance of it.
Orr: Does this come back to the relationship that you’re trying to cultivate and maintain with the entity, Mr Shipton?
Shipton: Absolutely not. Absolutely not. I see it as the exercise of professional judgment. I – I see it as ensuring that we are tough, we are resolute, we are strong, but we also apply principles of fairness and – and follow due process. I – I do not see that there is an inconsistency in those two concepts.
Now we find out that Asic lets the institutions it is regulating have advance notice of its findings. James Shipton says he does it out of “fairness”.
Rowena Orr: Does Asic discuss the findings in these sorts of reports with the entities involved before it releases the findings?
Shipton: I believe in this particular case, in the interests of fairness, we informed the financial institutions, yes.
Orr: I want to understand that. So what do you mean “in the interests of fairness”? You’ve exercised your compulsory information gathering powers to bring this information in. You have analysed it. You have prepared a report. Why is it in the interests of fairness for you to discuss the results of the report with the entity before you make those results public?
Shipton: I wouldn’t say “discuss”, I would say notify so they have an awareness so they have an awareness we’re going to publish their names.
Rowena Orr: I want to be very clear, Mr Shipton. I put to you you are not naming enough names.
James Shipton: Well, I think you made a good point, Ms Orr.
Orr is moving to reports Asic has issued, where it has detailed reviews where it has used its compulsory powers.
It details the numbers of institutions. But, in some reports, it doesn’t name names. Rowena Orr wants to know why.
Shipton: We refrained from speaking about individual cases in relation to that report because we were – this is a thematic industry-wide report. That was the intent and purpose.
And I believe that the intent and purpose of that report was duly served.
Orr: You said to me a short time ago, Mr Shipton, that you agreed that an entity that’s publicly identified in a particular way, such as being the worst performer, is likely to have a strong incentive to improve their practices?
Shipton: Yes.
Orr: So why not identify the entities, the two entities who you called out in this report as having referred to customer remediation as a distraction?
Shipton: Because, as I said before, the main purpose was to talk about systems and processes in financial institutions on a relative basis. That was the main purpose.
Orr: You don’t think that purpose would have been well served by naming names throughout the report?
Shipton: I – I don’t – I don’t – I don’t think that it would have necessarily added to the broader impact and purpose of that particular, of that important report. Again, the purpose was not to speak about case-by-case basis.
The purpose and intent of that report was to talk about themes and processes as opposed to case specific matters.
So there is a difference between the purpose. If it was a matter which was primarily aimed at case specific matters, then perhaps that would be a more appropriate forum, but this was a report about processes, procedures, systems and decision-making inside financial institutions that were found wanting.
But I am disturbed by that response. I agree with you. And I know that the team followed up directly with the institution on that.
Orr: What’s the point of having case studies then in a report of this nature?
Shipton: Case studies show – are examples of that – as I said, the purpose of this particular report was to identify systems failures, cultural failures, decision-making failures. That was the point. So having individual case studies in relation to that were examples of those failures.
I think what we’re – what we’re speaking about here is, you know, an exercise of judgment as to whether we make mention or name names of that particular incident is one that we, we exercise.
For what it’s worth, there are a number of examples also mentioned there that would trigger the same line of questioning that you mentioned, and if we were to name names on each of those individual – let’s call them triggers or catalysts – the report would probably just be far too long.
Orr: Well, it wouldn’t increase the length of the report at all to use the name of the entity in each of the case studies, would it?
Shipton: I think what we did – in fact, what I know we did was exercise judgment as to what we thought was meaningful disclosure. You are making a case, which I can certainly understand, that we should be disclosing each and every reference to incidents and observations.
That is a degree of professional judgment. I believe that the report was incredibly impactful and effective.
And, you know, usage of examples and case studies are important. You make a good point. I – I see the point that you’re trying to make.
But what I’m trying to also say is that we’re trying to exercise – let’s call it editorial judgment as to these types of reports moving forward.
So far, the line of questioning has been centred on whether or not Asic, as the regulator, risks being too buddy buddy with the groups and people it is meant to be regulating.
Now, Rowena Orr moves on to transparency.
Commissioner head Kenneth Hayne pops up during this line of questioning.
He also wants to know why there isn’t records of these meetings.
Hayne: Would not having a note-taker at these meetings ensure that there was a method of preserving the corporate memory within the organisation of what has been said, when it has been said, and what was said?
Shipton: Yes. I agree with that, commissioner, and I think, in part, that was the intent behind having one of our senior executives for the first time attend these meetings in recent times.
Hayne: But the preservation of corporate memory of contacts of this kind is itself, surely, a matter of very considerable importance to the proper governance of Asic?
Shipton: I certainly agree with that. I most certainly agree with that. And that is – that is, in part, why I initiated having a senior executive leader accompany us on these types of engagements.
Hayne: Yes. As I recall your answer to one of the questions, it was that he or she would take a note of matters of significance. What I’m talking about is a note-taker as more generally understood, a note-taker who took a note of all that was said at the meeting?
Shipton: Yes, it’s a suggestion that I think is very worthy and I am minded now to ensure that this happens from here on.
Shipton says he does most of the talking during these meetings:
These board meetings – these liaisons with the board, to be frank, the ones that I’ve attended to, I’ve done most of the talking, to be frank.
To be frank, I’ve been passing on the messages, my expectations, and it has been a bit of a one-way dialogue. So no matters of significance, at least coming from a financial institution, have been raised because I have been very forthright in using these platforms and forums to tell these people what I think.
James Shipton admits that he does not take formal minutes or record of these meetings with the banks – because the conversation should be “free flowing”.
“Formal minutes are not taken but my practice in relation to meetings, whether they be a board – meeting with a board or meeting with another senior leader, if there is a matter of significance, particularly a matter relating to an enforcement matter, for me to take a note and to brief my colleagues involved directly on that as soon as possible.”
Orr: “Wouldn’t it be better, Mr Shipton, for the sake of transparency, for there to be a formal record of the meetings that you and the commissioners have with the leaders of these organisations?”
Shipton:
It may very well be. These meetings were designed originally and have been – have been pursuing along these lines where they are meant to be a free-flowing dialogue between the board members and the commissioners of Asic. I believe that the reason why there is no formal minutes, at least from our side, is to enable that dialogue to be free-flowing.
But I will make one amendment to that, because I, after attending one or two of these board meetings, I thought it entirely appropriate to have somebody there who was not a commissioner, who is in – in the cases that we’ve had in recent times – a senior executive leader, who observes the meeting and is not a commissioner but observes the meeting, in many respects to ensure that we have a record and a witness to those discussions.
And this is something that I’ve instituted in recent times.
And it is also now correlated to the senior executive leaders who are involved in our close and continuous monitoring program.
Back to Rowena Orr’s questioning – we are getting to the nub of the issue – is James Shipton, and therefore Asic and the other commissioners, too close to the banking heads because of these meetings?
Orr: “Do you think, Mr Shipton, that there are any risks associated with frequent personal contact between regulators and the leaders of the entities that they regulate?”
Shipton: “I do, and that is why I personally exercise the highest degree I can possibly apply of professional judgment when I have these interactions, when I have these meetings.”
Orr: “What are the risks that you’re aware of, Mr Shipton?”
Shipton: “For – I think I’ve alluded to it with my clarifications earlier, that somehow this would be seen by the other side as too familial, too friendly, too social, and ensuring that these remain, as they are in my mind, professional and very much anchored in the purpose in which I do them, which is, as I said, information – information accumulation, regulatory messaging, and baseline assessment as to the – to be brutally honest and blunt, their performance as regards compliance with our laws and regulations.”
Orr: “It’s the commissioners who have the ultimate responsibility for making decisions about whether to take enforcement action against these entities, isn’t it?”
Shipton: “Ultimately that – the commission is the – the ultimate decision-making body in matters like that, yes.”
Orr: “But through these frequent meetings with the leaders of these entities, you and the other commissioners necessarily develop a relationship with the boards and the senior executives of the organisations?”
Shipton: “A professional relationship and a professional engagement, yes.”
Orr: “Well, it’s part of human nature, isn’t it, Mr Shipton, that when we have a relationship with someone, it’s usually harder for us to do something that might harm that person’s interests?”
Shipton: “That’s why I am emphasising the importance of having a professional relationship and, as I emphasised earlier, exercising the highest degree of professional judgment in relation to these interactions.”
Orr: “And what about the professional judgment of your fellow commissioners; what do you do to oversee how they exercise their professional judgment?”
Shipton: “I have mentioned to my colleagues the importance of treating carefully and with a healthy dose of scepticism some of our interactions with the regulated population. In my interactions and feedback from my colleagues, it’s very clear that they share that, that mindset, as well.”
Just a reminder.
In this year’s budget, the Turnbull government – with Scott Morrison as treasurer – decided to cut Asic’s permanent funding from $346m to $320m by 2020-21.
It also budgeted for Asic’s staff numbers to be slashed by 30 in 12 months, from 1,749 to 1,719.
That was in May, after the royal commission had already exposed some appalling behaviour by the banks.
The Coalition and Labor argue constantly about job and funding cuts at Asic, with both parties trying to blame the other for the regulator’s failings.
One thing is for certain – Asic has had to deal with a very uncertain funding environment.
Just two years ago, Morrison gave Asic an extra $121 million to try to boost its resources and ward off the royal commission. But the royal commission happened anyway, so a few months later the government cut Asic’s long-term funding. But this month, the government announced it was boosting Asic’s funding again by $70m over two years to help it deal with the royal commission.
Shipton argued in his submission to the royal commission how difficult it was dealing with such up-an-down funding.
He said Asic was woefully underfunded compared with its international peers.
In 2016–17, Asic’s actual total budgeted resources were $402.393 million.
In 2017–18, its actual total budgeted resources were $431.969 million.
In 2018–19, its total budgeted resources are $380.434 million.
The 2020–21 forward estimate-based total budgeted resources figure is substantially lower at $349.509 million.
Shipton said Asic’s staff numbers and budget have increased only modestly since 1991 (FTEs 1,492 then and 1,698 now) but there have been frequent increases in its mandate – that is, the government wants it to do more and more.
He asked: “A central question is: what level of funding and resources best enables a re-balancing of priorities, alteration of practices and implementation of decisions weighted more heavily towards litigation-based enforcement or a ‘deterrence strategy’, taking into account the real resource impacts and real resourcing risks of that those approaches?”