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With the UK sentencing UBS banking fraudster Tom Hayes to 14 years in gaol for his part in the Libor fixing scandal, its now time for Australian regulators to crack down on systemic fraud within the Australian banking industry, writes Andrew Schmulow from the University of Melbourne via The Conversation).

THE 14-YEAR SENTENCE handed to Thomas Hayes, the Yen trader at the centre of the Libor-fixing scandal in the UK, is the longest sentence yet in a scandal that has cost his former employer UBS – and others – US$17 billion in fines.

Apart from his obvious guilt, Hayes went out of his way to antagonise the Court and the Judge.

Hayes, described as the “Machiavelli of Libor”, will not be the last to suffer the consequences of this fraud. Unfortunately, however, it appears bank executives will not be among those punished. And this is curious. UBS either knew, turned a blind eye, or had such weak internal controls that Hayes was able to perpetrate this fraud for three some years.

UBS was no doubt motivated, in part, by the US$260 million Hayes made for it. All the while he was being courted by the usual suspects: Lehman Brothers and Goldman Sachs.

He then fell out with UBS, over pay, and joined Citibank. Within a year Citibank had discovered his fraud. What at UBS we were led to believe remained undiscovered for in excess of three years, Citi sacked him for.

Along with Libor fixing went the obligatory “Bollinger by the case” lifestyle, amply supported by a perverse incentive structure. Hayes claimed in testimony that his managers were well aware of what he was doing.

Indeed Hayes told Serious Fraud Office (SFO) investigators in 2013:

“Not even Mother Teresa wouldn’t manipulate Libor if she was setting it and trading it."

Tactically, Hayes was no genius. He gave 80 hours of sworn testimony to the SFO as part of a plea deal. He then decided to renege on that deal and plead not guilty. But he failed to make the admissibility of the testimony contingent upon the plea deal. So he was left pleading not guilty, facing 80 hours of his own testimony.

ASIC’s role

In Australia, the Australian Securities and Investments Commission (ASIC) is investigating rigging of the bank bill swap rate, as well as misconduct in the forex rate. True to form, ASIC is again taking a “light-touch” approach, appealing to bankers’ better nature, despite the gathering storm in the community and the rage sweeping the Senate select committee.

ASIC obviously cannot read the writing on the wall, or seems unable to understand its remit: to enforce the law, with prosecutions if necessary, not gentle cajoling. The result is systemic fraud taking root within the financial system. Individual investors lose. As does every trader and banker who is honest and doing the right thing.

ASIC Chairman Greg Medcraft has expressed his frustration that banks are adopting an overly legalistic approach. But he neglects to mention the very substantial power that ASIC possesses. This includes the power to search, to seize, to eavesdrop, to enter, to inspect, to compel disclosure. Nor does he mention that ASIC has substantial resources and could quite easily target one bank, or one trader, to make the point that rigging interest rates will not go unpunished.

This comes on top of a litany of failures from ASIC to enforce the law: the financial advice scandals at CBA, NAB and Macquarie, front-running and insider trading at IOOF, and now interest rates. As my colleague Pat McConnell wrote recently in The Conversation, most of the compliance being compelled in the financial industry is not thanks to ASIC, but the result of investigative journalism from 'one-woman regulator' Adele Ferguson.

Assistant Treasurer Josh Frydenberg has announced a review of ASIC. But the review will not accept submissions, so is hardly consultative.

Having worked for ASIC’s sister organisation and bank regulator APRA, I can attest to cultural impediments within government that do not take kindly to criticism and are deeply resistant to anything that challenges the prevailing orthodoxy.

Disappointingly, these were exactly some of the criticisms levelled against APRA after the collapse of HIH. On that occasion, the Royal Commission called for changes to APRA that would reform the culture of the bank regulator. For a time, APRA seemed genuinely engaged in this project. But it has long since fallen back into old habits: civil service mandarins more concerned with building personal empires than creating resilience within the financial system.

It’s time for the creation of a Financial Regulator Assessment Board, in line with a recommendation (27) from the Financial System Inquiry. Nothing short of an ongoing, independent review of the corporate cop will stop Australia’s slide into systemic corruption. A board, comprised of wise women and men not connected to government (Treasury, the RBA, APRA or ASIC), who have no skin in the game, are more likely to provide the kind of over the horizon views of financial system challenges than hand-picked bureaucrats picked by the assistant treasurer.

Some might view the establishment of such a board as duplication. Which in some ways is exactly what it is.

But in aircraft engineering duplication is called “double-redundancy”. In other words, when one system fails, a second, back-up system picks up where the first, failed system left off. This is exactly what a Financial Regulator Assessment Board could do for the financial system.

Must we wait for another financial crisis before this idea is implemented?

The ConversationAndrew Schmulow is principal at Clarity Prudential Regulatory Consulting Pty Ltd and visiting researcher at the Oliver Schreiner School of Law, University of the Witwatersrand, Johannesburg at University of Melbourne. This article was originally published on The Conversation on 7/8/15 under the title 'Lie-bore: powerful bank regulators running out of excuses'. Read the original article.

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