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Twin Peaks 2.0: Avoiding Influence Over an Australian Financial Regulator Assessment Authority

Published online by Cambridge University Press:  01 January 2025

Andrew Schmulow Open the ORCID record for Andrew Schmulow [Opens in a new window] ,
Paul Mazzola  and
Daniel de Zilva
Andrew Schmulow*
Affiliation:
Supreme Court of Victoria; High Court of South Africa; School of Law, The University of Wollongong; Oliver Schreiner School of Law, University of the Witwatersrand, Johannesburg; Centre for International Trade, Sungkyunkwan University, Seoul
Paul Mazzola
Affiliation:
Banking and Finance, School of Business, The University of Wollongong
Daniel de Zilva
Affiliation:
Department of Psychology, Macquarie University
*
The author may be contacted at andys@uow.edu.au.
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Abstract

Globally, financial system regulators are susceptible to deliberate and inadvertent influence by the industry that they oversee and, hence, are also susceptible to acting to benefit the industry rather than the public interest – a phenomenon known as ‘regulatory capture’. Australia, arguably, has an optimal model of financial system regulation (a ‘Twin Peaks’ model) comprising separate regulators for prudential soundness on the one hand, and market conduct and consumer protection on the other. However, the current design of the Twin Peaks model has not been sufficient to prevent and address prolonged and systemic misconduct that culminated in a public Royal Commission of Inquiry into misconduct in the industry. Subsequent to the Royal Commission and other inquiries, the Department of Treasury has proposed legislation to establish an Assessment Authority to assess the effectiveness of the Twin Peaks regulators. The proposal includes enquiries by an Assessment Authority into the regulators’ independence, so as to identify instances of, and thereby mitigate, their capture. As with all financial system regulators, the Assessment Authority itself may be susceptible to regulatory capture, either by the Twin Peaks regulators, or by the financial industry. Thus, this paper poses the question: how can the new Assessment Authority be optimally constituted by legislation, and operated, to effectively oversee the effectiveness of the regulators, but itself remain insulated from the influence of the regulators and industry? We analyse the primary sources of influence over financial system regulators that the Assessment Authority will likely face and recommend ways in which a robust design of the Assessment Authority can mitigate those sources of influence. In doing so, we adopt an inter-disciplinary approach, drawing upon not only regulatory theory but also for the first time in relation to this question, organisational psychology. Our findings address gaps in the proposed legislation currently before Federal Parliament and propose methods by which those gaps may be filled, in order to ensure that this important reform to Australia’s financial regulatory regime has the greatest chance of success.

Keywords

regulatory captureregulatory theoryorganisational theoryorganisational psychologyfinancial system regulationTwin Peaks regulationBanking Royal CommissionFinancial System InquiryFinancial Regulator Assessment AuthorityHayne Royal CommissionFinancial Regulator Assessment Authority ActFinancial Services Royal CommissionAustralian Securities and Investments CommissionAustralian Prudential Regulation Authorityregulator efficacyRoyal Commission into Misconduct in the BankingSuperannuation and Financial Services Industry
Type
Articles
Information
Federal Law Review , Volume 49 , Issue 4 , December 2021 , pp. 505 - 527
Copyright
Copyright © 2021 The Author(s)

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References

1 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Final Report, 1 February 2019) vol 1, 41.

2 The terms ‘Board of Oversight’, ‘Financial Regulator Assessment Board’ and ‘Financial Regulator Assessment Authority’ are synonymous, reflecting the nomenclature chosen by various inquiries and proposed reforms. Henceforth ‘Assessment Authority’ will be used as this reflects the proposed legislation.

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6 For more on the other three models of financial system regulation currently deployed around the world see: Andrew D Schmulow, ‘The Four Methods of Financial System Regulation: An International Comparative Survey’ (2015) 26(3) Journal of Banking and Finance Law and Practice 151.

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103 Ibid.

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108 Ibid.

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113 Leana (n 99).

114 Section 25.

115 Levine (n 26) 2.

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117 Bernstein (n 102).