The Turnbull government has agreed on more resources for ASIC

Photo: Stefan Postles/Getty Images.

The federal government could unveil its own banking changes as early as Tuesday in a bid to shut down the politically popular call by Labor to hold a royal commission into the financial services sector.

Federal cabinet met late Monday to approve a range of measures to boost the powers and resources of the Australian Securities and Investments Commissions. It is understood, however, that a previously mooted inquiry by ASIC into the banks, was not in the final package.

The changes were in response to a capability review the government commissioned in response to the findings of the financial services inquiry by David Murray.

The response has been brought forward after Labor stole the agenda with its call two weeks ago for a royal commission. A Fairfax/Ipsos poll published Monday found 65 per cent of voters supported the Royal Commission while 26 per cent were opposed.

Support is highest among Labor and Greens voters at 78 per cent and 79 per cent respectively, while just over half of Coalition voters – 53 per cent – also support such a probe.

As the issue dominated lower house debate during a special sitting of Parliament on Monday, held to determine the election debate, Labor leader Bill Shorten said boosting ASIC was no substitute for a royal commission.

“Anything less than a royal commission into misconduct in the banking and financial services industry amounts to a cover-up orchestrated by the Prime Minister and the Liberal government,” he said.

“Australia has one of the strongest banking systems in the world, but we need Australians to have confidence in their banks and financial institutions to uncover and deal with unethical behaviour that compromises such confidence.”

The changes set to be unveiled on Tuesday include restoring some or all of the $120 million ASIC lost in the Abbott government’s 2014 budget, giving ASIC product intervention powers, enforcing a product design and distribution obligation, and introducing a tougher regime of civil penalties.

Cabinet also discussed introducing a user-pays funding model, in which those that require the greatest level of regulation, such as banks, pay more to fund the regulator.

This would raise between $250 million and $300 million a year while the government will provide some base funding. The previously announced desire to privatise ASIC’s registry will also be on the agenda.

In Parliament on Monday, Prime Minister Malcolm Turnbull and Scott Morrison teamed up to reject Labor’s proposal as reckless and populist. They argued that the government’s intended course of action with ASIC was about taking action whereas a royal commission would be a two-year talk-fest.

“We are taking action to ensure that ASIC does its job,” Mr Turnbull said.

But Mr Shorten said ASIC could not replicate a royal commission, which would take a broad brush view of the sector, including the culture of banks and the adequacy or otherwise of the regulators.

He said ASIC could not look at itself or the Australian Prudential Regulation Authority, it could not examine systemic issues or recommend compensation to victims of bank swindles.

“When will the Prime Minister stop appeasing and apologising for the banks and launch a royal commission into the Australian banking sector?” he said.

Changes in line with other countries

The proposed changes to ASIC and banking laws would bring Australia in line with international jurisdictions such as the UK, better protecting customers from banks seeking to profit by selling them inappropriate products.

The banking industry supports both of the new laws in principle, but says the government needs to take care with their design to ensure excessive costs are not imposed on the industry.

A product design and distribution obligation would make banks consider the needs of their customers when they design and sell products. Banks would be required to take into account the risk/return profile of their customers and make sure a product is suitable. They would also need to “stress-test” products and determine how products should be distributed, the FSI said.

A product intervention power will allow ASIC to go into banks and amend marketing materials, insist on warnings to consumers, restrict distribution or, in extreme circumstances, ban products.

In the government’s response to the FSI last October, it agreed to both recommendations and said it would conduct “detailed consultation” with the industry “by mid-2016”. It is understood Treasury has been consulting on the powers in the past month.

The final report of the financial system inquiry, released in December 2014, pointed to contracts for difference, hybrid debt instruments, add-on insurance and consumer credit insurance as areas where product design and distribution controls were unsatisfactory.

The report also said financial planning scandals at Commonwealth Bank of Australia, Macquarie Group and UBS had demonstrated “weaknesses in processes for, and controls on, product distribution to consumers”.

It also pointed to the $5 billion in losses from the failures of Storm Financial, Opes Prime, Westpoint, Great Southern, Timbercorp and Banksia Securities as being partly related to “poor product design and distribution practices that disregarded consumer behavioural biases and information imbalances”.

In Question Time, Labor MPs raised examples of people who had lost their assets or investments in bank scandals and that their only recourse to justice and compensation was via a royal commission investigation.

Mr Turnbull noted it was the Coalition which had initiated a look at the sector when it commissioned the Murray review while Labor had only recently started talking about the banks.

“This Government has been working on it from day one. Those opposite have opposed it every step of the way. It’s rank populism,” he said.

This story first appeared in The Australian Financial Review. Read it here or follow the Financial Review on Facebook.

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