It might have arisen simply because of lax internal accounting, compliance, and reporting procedures regarding payments (larger than those approved) benefiting the chairman and deputy chairman (a bad look for a regulator).
Or it might reflect something more substantive about whether the way ASIC is set up is consistent with good governance.
The financial system inquiry set up by the Coalition after taking office examined the governance structure of ASIC in 2014. I was one of members of the inquiry.
ASIC’s governance (and also that of Australian Prudential Regulation Authority, the Australian Competition and Consumer Commission and other statutory authorities) is built around a “commission” structure.
A small group of full-time executives (appointed by the government as “commissioners” and one designated as the “chairman” or chief executive) are responsible for both the governance and management of the organisation.
This contrasts with the conventional corporate structure found in the private sector where a board (in theory appointed by the shareholder owners, but often a self-perpetuating “mates club”) is separate from the day-to-day management of the business which is undertaken by the chief executive and other full-time employees.
The board is responsible for monitoring company performance, determining strategy (including approving funding plans), and hiring and firing the chief executive.
We considered carefully the best way to run ASIC
In considering the governance structure we noted that a board structure involving part-time external directors was put in place when the Australian Prudential Regulation Authority was established in 1998 but discarded after a few years.
This reflected the recommendation of the royal commission into the collapse of HIH insurance, which concluded that the board structure had blurred accountability between management and the board.
Our inquiry (the Murray financial system inquiry) also decided that a board structure was not appropriate.
What was needed was oversight
Why not? Well, it is very hard to imagine the federal treasurer giving up the powers to appoint (and sack) the chief executive, determine the funding level, and set mandates and performance objectives. In practice the board would have little to do.
In fact all that would really be left would be monitoring the performance of the regulator.
While the regulators are required to report to the minister and are monitored in other ways (including by the audit office) we came to the view that a separate overarching Financial Regulator Assessment Board (FRAB) would be the best way to oversee the performance of all of the regulators.
Although the treasurer could do this, we came to the view that in practice things would slip under that treasurer’s radar.
Authors: Kevin Davis, Professor of Finance, University of Melbourne