Bank police need to get back on the beat

There is nothing more disconcerting in financial services markets than a regulator who is treated as a sacred cow – or indeed a bank regulator that is too close to those it must police.

The term 'world class supervision' is now used as the default term for Australia's bank regulator APRA while its chairman, John Laker, could be seen earlier this week jesting with key members of the big banks at a financial services forum.

But no regulator is perfect and an immediate item on the agenda is APRA's activity, or rather its apparent lack of activity, in the run-up to the collapse of finance company Banksia. The ill-fated finance company was mistaken for a bank by many of its unfortunate customers thanks to a profusion of bank-like products such as 'deposits' and 'at call' accounts.

Finance minister Bill Shorten is currently examining what went wrong at Banksia. At issue is the question of which regulator – the banking regulator APRA (Australian Prudential Regulation Authority) or the financial services watchdog ASIC (Australian Securities and Investments Commission) – failed to fully protect Australian investors.

Under the strict terms of the Banking Act APRA is covered if it turns out it did absolutely nothing to prevent the Banksia failure, because the Victorian finance company never used the word "bank".

But this is a highly defensive reading of the law. As Professor Ian Harper, a member of the original Wallis Inquiry which designed today's financial regulation system explains, APRA had the right to intervene and examine what Banksia was doing if the finance company was presenting itself as a bank. APRA's role is to prudentially supervise ADIs (Approved Deposit-Taking Institutions), namely banks, credit unions and building societies.

"This is not ASIC's area," says Harper. "If an institution is out there and it looks like a deposit taking institution it is up to APRA to move... it may be asking itself if it acted sufficiently in this case. If it was offering something very like deposits ... did APRA ask if this finance company wished to acquire an ADI licence? ...I don't know," Harper suggests.

APRA will not comment on its specific activities around finance companies; the regulator simply sticks to a hard line that it regulates banks only.

The issue of course is that while APRA and its well-regarded chairman Laker bask in its undeniably robust role as a bank regulator over the course of the GFC, time moves on and a succession of finance companies, most lately Banksia, have gone to the wall.

If consumers are interpreting a finance company as a bank-style enterprise and if that finance company in turn is actively promoting the illusion it is a bank-like enterprise – regardless of what is disclosed in the fine print on their website – APRA appears to have dropped the ball.

Moreover, bank regulators should restrict their social interactions with bank leaders to a minimum. The relationship should be tense and adversarial, not collegiate. The notorious fraternisation between Ireland's central bank and that nation's rogue lenders, which accelerated the Irish financial collapse some years ago, springs to mind.

We are very far from that type of cronyism in Australia today, but it's time APRA came down off the medals podium and got out into the community, where people are losing money in poorly regulated finance companies that look for all the world like banks.