MELBOURNE: 8 August 2013: Now that Prime Minister Kevin Rudd has nominated 7 September 2013 as the date for the federal election, a real election campaign gets under way after what seems like years of phoney campaigning under the Labor-led minority government.   At this stage of the campaign one of the points of differentiation between the current Government and the Opposition Coalition is that for some time now Shadow Treasurer Mr Joe Hockey has pledged that if the Coalition does become the next federal Government after the 7 September election there will be a ‘root and branch inquiry’ into Australia’s financial services sector.  

Such an inquiry has been described as the son of Wallis inquiry, in reference to the highly influential Wallis Inquiry of 1996-1997 which laid out the framework for Australia’s largely successful (in comparison to many overseas counterparts), Twin Peaks approach to financial regulation.   Indeed more recently Shadow minister for small business, competition policy and consumer affairs Bruce Billson MP has stated that if the Coalition wins the election Mr Hockey’s son of Wallis inquiry will be accompanied by ‘a root and branch competition review….a son of Hilmer inquiry.’   The Hilmer inquiry was the influential 1992-1993 Independent Committee of Inquiry (chaired by Professor Fred Hilmer), into Australia’s national competition policy which had substantial policy impact.

At the present time the Opposition Coalition seems to be more proactive than the current federal Government in promising to establish inquiries.  However as Uren notes in its first six months the Rudd Government of 2007 established no less than 40 inquiries and: ‘Governments call inquiries for several reasons. Sometimes they simply want the qualification of an independent rubber stamp for their preferred policy. Sometimes they genuinely don't know what to do and are seeking direction. Often, they are seeking to defer a difficult political decision. 

Even when bound by very restrictive terms of reference, there is a risk that an independent inquiry will produce unpalatable recommendations. Although governments may imagine they can deflect attacks by declaring they are implementing the independent recommendations, there is no escaping the political weight of difficult policy.’   These are sanguine observations indeed and there is no guarantee that a son of Wallis or a son of Hilmer inquiry would take up Ramsay’s challenge that such inquiries: ‘..should look at how to create the right sort of culture - one that encourages innovation but not at the cost of mis-selling financial products.’   It is hard to argue against the innate good sense and truth in such a statement but even if an inquiry does grapple with this thorny issue of bank culture as part of its activities, what are the prospects of any cultural reform recommendations that an inquiry might make gaining political and pragmatic traction?  If we consider the recent and past history of this issue in the UK the portents are not positive unfortunately.

In July 2012, in the midst of the growing scandal that surrounded revelations of systematic manipulation of the London Inter-Bank Offered Rate (Libor) by major UK and other international banks, the UK House of Commons and House of Lords appointed The Parliamentary Commission on Banking Standards.  The Commission was appointed by both Houses of Parliament to consider and report on: professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the Libor rate-setting process; lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy; and to make recommendations for legislative and other action.  The Commission had powers to examine witnesses on oath, to invite specialist advisers (including Counsel appointed as specialist advisers) to examine witnesses and to appoint sub-committees to consider matters specified by the Commission.  

The Commission had a wide-ranging remit, wide powers, and there was a widespread hope, indeed expectation, that following the carnage of the Global Financial Crisis (GFC), which grew out of poor cultural standards within banking, that the Commission could act as a springboard to promote a better operational culture within banking.  The Commission did indeed use its powers to examine witnesses, appoint advisers and sub-committees, and be prominent in public discourse about improving standards in banking.  For example, the Commission’s Fourth Report which examined the collapse of UK bank HBOS, describing it as ‘..a story of catastrophic failures of management, governance and regulatory oversight.’   The Commission released its Final Report Changing banking for good on 19 June 2013.  When launching the Report, Commission Chairman Mr Andrew Tyree noted that it catalogued: ‘..shocking and widespread malpractice… A lack of personal responsibility has been commonplace throughout the industry. Senior figures have continued to shelter behind an accountability firewall.  Risks and rewards in banking have been out of kilter. Given the misalignment of incentives, it should be no surprise that deep lapses in banking standards have been commonplace…Prudential and conduct failings have many shared causes but there is no single solution that can restore trust in the industry. The Final Report contains a package of recommendations that, together, change banking for good.’  

So, one might assume that given this was a Parliamentary Joint Committee, that the scale of systemic abuse had been so damaging, so pervasive and indeed so obvious, not just to parliamentarians, media, industry professionals and direct victims, but also to the general community (who are of course voters), that the Government, (itself a coalition of the Conservative and Liberal Democrat parties), facing substantial post-GFC induced structural economic challenges would eagerly take on board The Commission’s reform recommendations and indeed change banking for good.  Well, erm, maybe not…The UK Government did officially respond to the Commission’s Final Report.   However, as my colleague Justin O’Brien has noted in an opinion piece on this CLMR portal, following Chancellor of the Exchequer, George Osborne’s statement accompanying the Government’s response: ‘Throughout the response the Government welcomes the diligence and thoughtfulness that accompanied the Commission’s deliberations. Many of the specific measures designed to improve accountability have, however, been rejected, in particular the relationship between regulators and parliament itself.’

Should we be surprised by the temerity of the UK Government’s response?  The lessons of history suggest that we should not.  For example, following a series of scandalous promotional frauds during the 1870s, Lord Penzance was appointed in March 1877 to inquire into the administration and operation of the London Stock Exchange.  His major recommendations were: (i) that enforcement against fraud relating to financial markets should be vested in some public functionary; (ii) that all transactions on the Stock Exchange should be individually recorded; and (iii) that the Stock Exchange should be constituted in statute and be regulated by that statute.  

Lord Penzance argued that only increased public accountability on an external level could justify the restrictive practices operated by the London Stock Exchange regarding membership and fixed minimum commissions.  Unsurprisingly, the lobbying power of the City of London ensured that Penzance's recommendations were not put into practice by the Government and it took over a century for some of them to seep into the regulatory structure of Britain`s financial markets.  Penzance was a predictor of several of the central reforms of the Financial Services Act 1986, and sections 1-3 of the Criminal Justice Act 1987 which created a statutory authority in the Serious Fraud Office that has responsibility to act against major frauds.  Recommendations by subsequent inquiries on the financial services sector, such as the Bodkin Committee of 1936,  and the Wilson Committee of 1980,  met a similar fate.  The regulatory authority of the City of London enabled it to marshal sufficient political influence to deflect or defeat negative assessments of its traditional self-regulatory systems by such inquiries.

The financial sector lobby in the UK is a powerful one, traditionally resistant to external regulatory innovation and this scenario is repeated in other jurisdictions, not only here in Australia but also more recently in the US with the trench warfare surrounding continuing attempts to embed the Dodd Frank Act into accepted regulatory practice.   The finance industry is not the only industry or government to act in such a manner because when the reputation of a particular industry, structure or process is threatened, state agents or those with influence with state agents may activate any of a range of responses intended to engender a sense of reassurance and the promotion of social harmony. 

The most symbolically valuable, (and therefore amongst the most attractive), responses for the state, are those that are popularly perceived to be objective, politically independent and of high status, such as, official inquiries.  These characteristics combine to provide official inquiries with an aura of authority in the public consciousness, regarding their interpretations of facts and issues.  This aura can at certain times be extremely seductive to the state, and at times can be used seductively by the state. 

Some official inquiries may be seen more clearly to act as a legitimation device for the state than others.  When governments in their responses to official inquiries neglect to be reflexive regarding structural and/or habitual weaknesses of state agencies then they are failing in what one might reasonably assume should be a core public interest duty – a commitment to the improvement of public services.  But, viewed from another perspective turning a Nelsonian eye to problematic situations, or being overly gentle in lines of inquiry may sometimes not only be politically helpful, but also provide a boost in legitimacy to state actors under pressure. 

This is perhaps the lens which should be used to view the UK Government’s response to the Parliamentary Joint Commission on Banking Standards.  Also, it should be borne in mind if, and when, official inquiries are launched into Australia’s financial sector, especially regarding the prevailing culture of that sector, by which ever political party is in government post 7 September 2013.