In most jurisdictions the embedding of regulatory staff at a bank is one step away from treating that bank as though it is on day release from prison. This, however, is what the Australian Government has resolved to do to the five largest financial institutions in the country in the face of evidence thrown up at the Banking Royal Commission in Melbourne.

Kelly O'Dwyer, the minister for revenue and financial services, has announced that the Australian Government is going to give the Australian Securities and Investments Commission an extra A$70.1 million (US$51.3 million) in the next year, of which A$8 million (US$5.85 million) will pay "for the first time" for regulatory on-site surveillance by 20 'officers' at the Commonwealth Bank of Australia, Westpac, National Australia Bank, Australia and New Zealand Bank and the investment management giant AMP Capital. This is expected to happen this month. Coincidentally, the Government has finished consulting interested parties about its Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Power) Bill, which promises ASIC new product intervention powers to help it protect consumers.

This follows hard on the heels of a budget cut that the Government was going to impose on ASIC before it was compelled to do otherwise. This will be doubly welcome at ASIC because in May (also in response to the Royal Commission's revelations) the regulator promised to ramp up its Wealth Management Project, which it began in 2014 with the aim of weeding out bad financial advisors.

Apart from the surveillance part of the budget, the package includes: A$26.2 million to accelerate and increase the intensity of ASIC's enforcement activities and enhance its capacity to pursue actions for serious misconduct against well-funded litigants, through the Enforcement Special Account; A$9.4 million towards the supervision (specifically, audit and enforcement) of the pensions/superannuation sector; A$6.8 million for a thematic review of corporate governance at large listed companies, with some going towards fresh on-site surveillance and investigations; A$6.6 million to implement the Government's reforms to whistle-blower protection laws; and – seemingly irrelevantly but interestingly – A$6 million to promote Australia as a world leader in the development and adoption of regulatory technology or 'regtech' for the financial services industry. The remaining funds will go towards improving consumers' access to the Financial Advisers Register, protecting small businesses and forcing financial institutions and advisors to obey the Future of Financial Advice (FOFA) amendments to the Corporations Act, which ASIC enforces.

'Fees for no service' and other revelations

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which began its work late last year and moved into high gear in April, has uncovered countless abuses at banks and investment firms alike. The 'fees for no service' scandal at AMP, the wealth management firm, and the banks has led all five to pay or offer customers A$222.3 million so far in refunds and interest for failing to provide advice to customers while charging them continuing advice fees. ASIC is overseeing 'fees for no service' remediation programmes by other financial firms that have owned up to potential failings, including Bendigo Financial Planning Ltd, Police Financial Services Ltd (trading as BankVic), State Super Financial Services Australia Ltd (trading as StatePlus) and Yellow Brick Road Wealth Management Pty Ltd. The total amount now paid or offered to customers across both groups of licensees is A$259.6 million and ASIC has stated that five financial institutions have made provisions for future remediation payments, with four of these to date having given ASIC their figures. If all of these provisions are paid in full, the regulator believes, 'fees for no service' remediation may exceed A$850 million. Indeed, Peter Kell, ASIC's deputy chairman, has just told the Royal Commission that this official estimate might be too low.

Earlier this month, Colonial First State, the Commonwealth Bank’s wealth management division, confessed to more than 15,000 offences that it committed by failing to move thousands of members from high-fee funds into the Government's low-fee MySuper (pensions/superannuation) regime, introduced in 2014, in the time alloted. The commission heard that such irregularities did not cease until August 2016. Suncorp Portfolio Services, it was revealed this month also, left it until the last minute to transfer its customers over, even though this was not in their best interests - a regulatory requirement. Regulatory Guide 175, entitled Licensing: Financial product advisors – conduct and disclosure, is the place to go for guidelines about ASIC's expectations for meeting the "best interests duty." Michael Hodge QC, counsel assisting the commission, said of one email that the bank sent its customers late in the day: "The only purpose of this email...seems to be to encourage an advisor to take steps that will maintain grandfathered commission."

Truculence in the face of the Royal Commission's demands for data has done the institutions no favours either. NAB's lawyers took as long as they could to produce the necessary documents, sending the commission only 30 of them until the last minute when they finally submitted the remaining 3,000, trying repeatedly even then to prevent the commission from showing them to the public. The authorities, moreover, are investigating the bank in respect of more than 100 potential criminal breaches of the Corporations Act in which it might have attempted to keep ASIC in the dark about its contraventions of regulations. In April it emerged that NAB had been charging fees to dead superannuation customers. It has recently issued a public apology. Its most recent humiliation to spring from the revelations at the Royal Commission has been the need for it to pay A$5 million to 50,000 superannuation customers as compensation for various transgressions.

Staying in bed with the banks

An ambivalent history surrounds the long-term 'embedding' of regulators at banks. The most harrowing example in recent times has been that of the US Office of the Comptroller of the Currency, which embedded two people at HSBC during that bank's rip-roaring money-laundering period between 2002 and 2012. By the time HSBC was fined US$1.9 billion by the US authorities in December 2012, the bank had already received two cease-and-desist letters. The second cease-and-desist order came in 2010, after the OCC determined HSBC’s money-laundering controls to be weak. Instead of prosecuting bank staff after they had ignored countless warnings from the two OCC people embedded there, the regulator gave HSBC a second chance. The fact that the OCC survived this scandal at all is testament to the virtual immortality of all US federal programmes, good or bad. It could also be a harbinger of things to come in Australia.

The people who are planning and conducting the Australian investigations are not popularly perceived as the champions of consumers either. The chairman of ASIC is an alumnus of Goldman Sachs, which in itself represents a public relations problem. Prime Minister Malcolm Turnbull spent one-and-a-half years bitterly opposing the establishment of a Royal Commission, before giving in to parliamentary pressure only 48 hours after his last vehement statement against it. Treasurer Scott Morrison, who with Kelly O'Dwyer announced recently that ASIC was to have new powers to embed people at banks and new funding as well, also struggled mightily against the prospect of such an inquiry last year. By April this year, all three were claiming incorrectly that the terms of reference for a commission that the opposition had proposed were narrower that the terms eventually set by the Government, an assertion that led to more public opprobrium rather than less.

As late as April, Kelly O'Dwyer refused to answer an ABC Insiders interviewer's question about whether the Government had been wrong to stand in the commission's way. She also declined to say why she had previously stated that a Royal Commission would be "very dangerous," "reckless and ill-conceived" and "of no benefit to consumers." Her reticence - interspersed with diversionary sallies into irrelevant topics - caused another unwelcome media storm. In an interview with Ben Fordham of 2GB earlier this month, however, she attempted to dress up ASIC's new on-site surveillance exercise as a species of 'brand new bright tomorrow' rather than a tardy and unwelcome concession: "It means that instead of the regulator simply being reactive, and there has been some criticism in the past that the regulator has been reactive and when it finally does react it has not always been in a very timely manner, this will allow them to be very proactive in ensuring that misconduct doesn’t happen."

ASIC chairman James Shipton has also been not entirely straightforward when answering questions. When the presenter of an ABC programme asked him on 7 August to present some concrete evidence that the embedding of officers at banks worked, he said: "There's a range of different precedents that I have personally have experienced overseas. I have seen how embedding a team for a couple of months can have a demonstrable effect. When I was in business and finance I have also been in the business line that was subject to these supervisory inspections. I found that a really, really helpful experience. My own mindset and the mindset of the men and women who worked there changed because we realised that the business we were in was a focus of the regulator. That made sure that when we were making decisions and acting on behalf of the financial institution that we had the regulator in mind. That we also had the consumer or the user in mind. We've been looking across the globe...how these supervisory approaches are utilised and deployed. We're going to take what we believe is the best combination, learning from the experiences overseas."

The fact that the Turnbull Government is still trying to limit the damage of the Royal Commission might yet be of help to financial institutions in Australia, although if world trends are anything to go by it will be the largest and most politically active firms that suffer the least in the long run.