Australian regulators grilled on financial misconduct

By Paulina Duran

SYDNEY (Reuters) - Australia's top financial regulators took to the stand at an inquiry into financial-sector misconduct on Friday to defend their low-key enforcement of laws designed to protect the country's A$2.6 trillion ($1.9 trillion) pension system.

Under questioning at the Royal Commission of inquiry, the Australian Prudential Regulation Authority (APRA) said its "behind-the-scenes" approach to dealing with breaches by large institutions was to limit damage to pension fund members.

The Australian Securities and Investments Commission (ASIC), the corporate regulator, was also accused by a barrister assisting the inquiry of "bluffing" rather than acting to stop malpractices by the country's top financial institutions.

The inquiry has exposed widespread wrongdoing and predatory behaviour at Australia's top financial institutions, shocking the country and piling pressure on the government to do more to check finance-sector greed.

Reserve Bank of Australia Governor Philip Lowe lambasted the country's biggest banks in comments before a parliamentary economics committee in Canberra on Friday.

"I have to say that I have been incredibly disappointed and in many, many cases appalled by what has come out from the Royal Commission," the central bank chief said.

ASIC Deputy Chairman Peter Kell told the inquiry there was a "very high likelihood" that it would soon launch proceedings against banks and other institutions which had wrongfully taken about A$1 billion from their customers without providing services, dating back to 2008.

Hodge also sought an explanation from ASIC about why the corporate regulator had only "bluffed" and not launched legal action against Australia and New Zealand Banking Group, which has sold over A$3 billion worth of complex pension products without proper advice to customers.

After an investigation that started in 2014, the regulator drafted court documents in May 2017 but the bank agreed to stop the practice and the lawsuit was never filed.

"This was a bluff was it? You weren't actually going to commence proceedings if they were going to give you an EU (enforceable undertaking)" Hodge said.

ASIC senior executive Tim Mullaly accepted that was the case, saying an undertaking would have been a faster way to stop the bank. As part of the undertaking, ANZ has promised to stop the practice from Aug. 18.

SOFT TOUCH

Under questioning, APRA Deputy Chairwoman Helen Rowell said that in the past decade, in its role as the superannuation watchdog, it had not taken court action against any entity for failing to act in the best interests of members.

"The reason we take the behind-the-scenes approach is to try and get the issue addressed ... without having that in the public domain causing more adverse impact on those members," Rowell said.

In hearings over the past two weeks the quasi-judicial inquiry has revealed several examples of major breaches, dishonorable conduct and fee-gouging by institutions that hold retirement accounts for about 12 million workers.

Rowell was pressed over APRA's light-touch approach to the Commonwealth Bank of Australia, after it found out the country's largest bank had misled members when trying to sell them high-fee products.

"Surely it is unacceptable from a regulator's perspective," said Michael Hodge, a barrister assisting the inquiry.

"It would be preferable if there was complete disclosure to the members", she answered.

Lawyers assisting the inquiry asked Rowell why APRA had not considered whether National Australia Bank Ltd, CBA and other firms that had charged excessive fees or not delivered services as charged, were breaching laws that required them to act in the best interest of its members.

Rowell said APRA did not want to intervene in an industry-wide investigation being done by corporate regulator ASIC.

Hodge responded that ASIC's responsibilities were limited to breaches of the Corporations Act and licensing of financial institutions, and not for determining whether entities like pension funds were acting in the best interest of members as required under trust law.

Commissioner Kenneth Hayne, a former High Court justice leading the inquiry, could recommend prosecutions and sweeping reform of the financial system.

The country's major banks are already preparing for change by spending more on compliance and governance, provisioning for fines, selling wealth management businesses and returning to core lending.

($1 = 1.3753 Australian dollars)

(Reporting by Paulina Duran; Editing by Stephen Coates)