ASIC, APRA must be watched to avoid regulatory capture

The Government has been warned against reducing biennial reviews to five-yearly reviews because financial regulation is different from other industries and regulators are more likely to fall prey to capture.

Outspoken legal academic Dr Andy Schmulow has told the Senate Economics Legislation Committee that the proposal to change the review to five years is “wrong-headed and counter-productive and the savings achieved would be akin to penny wise, but pound foolish”.

Schmulow is associate professor of Law at the University of Wollongong and said that financial regulation is different to that of regulating other industries and that effective financial regulation is exceptionally difficult to achieve.

“Financial products and services are conceptual, not tangible. Consequently, it is far more difficult for a financial regulator to define what is being regulated, than it is for a regulator of oil and gas, for example,” Schmulow said.

“Financial products and services are ideas – most often in the form of promises. In as many ways as there are to explain an idea, so there are as many ways to define a product or service.”

“Each time a vendor changes the description of a product or service, they change the definition, and with it the laws that apply (or whether the law applies at all). As a result, financial regulators are forever stuck “fighting the last war” – playing whack-a-mole trying to keep pace with regulatory arbitrage (the practice of changing the description – and therefore definition – of a product or service).”

“Moreover, the financial industry innovates faster and at greater scale than any other industry. That further exacerbates the challenge regulators face. Consequently, financial regulation is an endeavour that is littered with failures throughout its history, and internationally. Indeed, they occur with depressing regulatory,” Schmulow’s submission said.

He said regulators fall prey to capture.

“…all regulators fall prey to capture – that is to say,subservience to the industry that they are required to police. Moreover, history has demonstrated that regulators of the financial industry are often the first to fall prey to capture, and when they do, they fall further and fall faster than regulators of other industries.”