Never Let a Financial Crisis Go to Waste. Listen Up, Australia

(Bloomberg) -- Australia's miracle economy has delivered 26 years of uninterrupted growth, a record among developed nations. So how come its financial sector is riven with scandal and deceit?

In truth, the two things are connected. 

Imagine you had two teenage children. Both have a habit of taking your credit card to spend on clothes and going out, but do it stealthily enough that they're rarely caught. Then one day one of them — let's call her Merrill — “borrows” the car keys and crashes your brand-new Audi A8. After that, she's grounded, but her brother Oz is left to carry on more or less as before.

It wouldn't be a surprise to find out a year or so later that Oz had pilfered far more from the joint account than Merrill ever did.

That's largely what's happened in the world of financial regulation. In the U.S. and Europe, tighter rules have been a more or less inevitable result of Merrill Lynch & Co., Lehman Brothers Holdings Inc. and their ilk crashing the economy in 2008, and the lawsuits and fines that followed a few years later.

Compliance officers tend to be a hated species in banks, where their job is seen as stopping the sales side from making money. Nonetheless, the post-crisis years were a boom time. Employment of compliance officers in the New York metropolitan area rose from 9,330 in 2010, when the Dodd-Frank financial reform act was passed, to 20,370 in 2016, according to the Bureau of Labor Statistics. (Under a new deregulating presidency in 2017, it slumped to 14,920.)

Australia has had a rather different decade. Government funding for the Australian Securities & Investments Commission or Asic, the main financial regulator, rose by just A$59 million ($44 million) between its 2008 and 2017 fiscal years. That 21 percent nominal increase is roughly unchanged after inflation, at a time when financial sector assets rose by about half in real terms, to A$6.1 trillion.

Asic's timidity in taking on major financial institutions is in large part a result of the way it's been starved of funds and left with an inadequate range of punishments to intimidate executives into better behavior. The moves announced last month to increase those powers are welcome, although plans to cap civil penalties at $210 million compared to the billion-dollar fines levied in the northern hemisphere (and the billion-dollar profits consistently posted by Australia's big four banks) suggest an enduring light-touch approach that may allow malfeasance to creep back in.

It's possible that the current Royal Commission into the financial sector — with its tales of fees charged to dead people and fund management businesses lying to regulators — will provide enough public outrage that Australia will take a more aggressive approach.

The fundamental problem, though, is that governments don't always believe such an attitude is warranted. A 2014 reform to stop conflicts of interest in the financial-advice industry contained loopholes big enough to drive a cart through. The amount of political capital the current government is burning trying to pass a corporate tax cut that's unpopular with voters suggests it's more likely to do the minimum necessary to quiet the storm than to carry out any root-and-branch reform that would upset the profitable status quo.

The last time Australia's growth stuttered in the early 1990s it was infamously described as “the recession we had to have.” The popular discontent that accompanies such downturns can help reverse the pendulum swing toward deregulation, and briefly rein in the worst practices in the financial sector. If only governments could deliver consumer-friendly regulation without a populist outcry. Australia shouldn't need to have another recession to fix this.

To contact the author of this story: David Fickling at dfickling@bloomberg.net.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net.

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