With greater regulatory power comes great responsibility

Given that Australia on 18 May re-elected what could broadly be viewed as a conservative and avowedly free-market Government, there is reason to be concerned about reports suggesting our financial services regulators feel compelled to interfere in the operations of markets.

Just days after the chairman of the Australian Securities and Investments Commission (ASIC), James Shipton, acknowledged that it was not, strictly speaking, illegal for superannuation funds to under-perform relative to their peers, reports emerged of both ASIC and its sister regulator, the Australian Prudential Regulation Authority (APRA), reading the riot act to super fund executives on the issue of under-performance and delivering member value.

Given that 9.5% of most workers’ wages are compulsorily directed to superannuation, a case can certainly be made that superannuation funds and their executives should be reminded of their higher duty of care to their members, but the track-records of Australia’s financial services regulators suggest they have neither the credentials nor the expertise to force market outcomes for other than disciplinary reasons.

Thus, if a superannuation fund can be proved to have under-performed relative to its peers over an extended period because of mismanagement or a lack of diligence on the part of its executives and trustees, then APRA has never lacked the power to act. However, as any financial planner or fund manager knows, investment performance is a much more subjective issue open to a wide range of variables and past performance is no guarantee of future returns and, anyway, who are the regulators to judge?

Then, too, is investment performance the only measure upon which a superannuation fund should be judged? What about member communications and servicing? What about the quality of its insurance offering to members, particularly those working in what represent high-risk occupations? What about a particular fund’s relevance to people working in remote and regional areas?

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The problem with giving regulators extensive powers, some of which go well beyond their originally-envisaged ambit, is that they must be capable of administering those powers appropriately and not distorting or influencing markets. The Australian Competition and Consumer Commission (ACCC) has developed an excellent reputation as this nation’s competition watchdog, but ASIC now has a product intervention power within which it can make assessments as to the appropriateness or otherwise of financial products being offered to consumers. What will that mean for competition?

ASIC has not yet acted to use its product intervention power, but it should be well aware that the industry will be closely scrutinising its first move and, quite properly, its reasons for its decisions to use that power must be the subject of questioning by the relevant Parliamentary committees with a view to whether it has created broader market issues.

The reactionary responses of the Government and the regulators to the criticisms delivered by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry need to be tempered by the reality that markets operate best when they are not distorted by unreasonable and gratuitous regulatory interference.