The banking regulator has defended its handling of widespread misconduct in the sector while telling the industry to step up and take responsibility for the problems.
Slammed by the banking royal commission for its lack of action, the Australian Prudential Regulation Authority backed its response to misconduct as broadly appropriate.
APRA said its enforcement actions have primarily been used as a last resort when financial promises or stability are at risk, but it is reviewing its “appetite” for taking a more public approach including through the courts.
“While historically APRA’s regulatory focus has largely been concentrated on prudential risk taking and long-term financial soundness, the evidence before the royal commission highlights the need for APRA to examine the means by which it can more actively contribute to a regulatory framework that limits the potential for misconduct to occur in the future.”
But APRA’s response to the royal commission’s interim report also argued behavioural change will only occur if boards take ownership for the actions of their organisations and its consequences.
It said there is a role for APRA and the Australian Securities and Investments Commission as regulators in setting and enforcing standards of governance, accountability and risk culture.
“However, solutions to past problems must involve industry taking more responsibility, not less, for maintaining appropriate standards of conduct and guarding against misconduct.”
Royal commissioner Kenneth Hayne QC’s interim report was scathing of the regulators for letting much of the misconduct go unpunished and failing to mark and enforce the bounds of permissible behaviour.
He said ASIC rarely went to court to seek public denunciation of and punishment for misconduct, while APRA never did.
In its response released on Wednesday, APRA said regulatory responses to conduct and compliance risk need to be appropriately tailored having regard to the circumstances of the breach.
“To take formal legal action on every occasion may result in financial institutions becoming wary of all but the most simple and low-risk transactions with a much reduced incentive to innovate,” it said.
“This would potentially limit access to, and increase costs of, all financial services.”
APRA is reviewing whether it should take more public enforcement action, including litigation, to achieve general deterrence effects in appropriate cases.
It warned it would need additional resources and funding to deal with any increases in investigation and litigation work, alongside legislative changes to improve its investigative powers.
Mr Hayne questioned whether bank staff needed to be paid incentives to do their jobs, but APRA said it would seem premature to call for the abolition of any incentives throughout an organisation.