The attack on the authority, integrity and judgement of the chairman of the Australian Securities and Investments Commission, Greg Medcraft, by the shadow minister for financial services and superannuation is as extraordinary as it is brutal.
Writing in the Australian Financial Review, Senator Mathias Cormann, dismissed Mr Medcraft as a mere “personal appointment” of Treasurer Wayne Swan, who had “hijacked the policy agenda.” In a damning assessment, he concluded that “Medcraft does not appear to fully appreciate the boundaries and responsibilities which come from the important statutory office he holds”.
He accused the ASIC chairman of a “unilateral foray” that usurped policy formulation on the efficacy of takeovers laws “through the front pages of daily newspapers.” This, according to the shadow minister (in the delicious irony of an opinion piece), was as misguided as it was dangerous.
It risked weakening the integrity of “the separation of powers and responsibilities between policy and lawmakers on the one side and regulators on the other.” He castigated the federal government of failing to exercise oversight of what he termed ‘excessive regulator activism.’ Implicitly, he called for the resignation of the market conduct regulator for conduct unbecoming: “Medcraft cannot be a regulator and a financial system commentator at the same time. That is too much of a conflict”.
It is difficult to see how an attack of this severity could have occurred without the sanction of the Liberal political hierarchy. Its placement in the nation’s premier financial newspaper raises the stakes exponentially. The stage is now set for what is likely to be an acrimonious battle. It will draw the governance of financial regulation into the political mire and do much to weaken confidence in the efficacy of the financial architecture, without any obvious potential upside. The downside, however, is obvious and far-reaching.
The timing could not be worse. The Australian regulatory system is undergoing external evaluation by the International Monetary Fund. The underpinning bipartisan narrative (until this morning) had focused on the power and authority of the twin peak model, which is (correctly) held up as talismanic of best-practice.
This was made manifest in a major conference organised by The Economist in Sydney yesterday (Disclosure: This author was also a speaker at the conference). The moderator, The Economist’s Asia Economics Editor, Simon Cox, praised Greg Medcraft and his counterpart in APRA, John Laker, for their proactive approach to market conduct regulation and intrusive approach to prudential supervision. None in the audience demurred.
While Australia has had its fair share of governance failures, the proactive approach to regulation has served it well. As John Laker pointed out to The Economist conference, APRA’s success in managing the crisis derives from the action that it took in advance. The debate on takeover rules reform should be taken in this context. ASIC is facilitating a debate rather than attempting to impose rules, something that of course the agency recognises is outside its mandate.
Closing down debate is neither in the public interest nor in the interest of market participants. By calling for a reigning in what he terms the behaviour of an errant regulator, Senator Cormann is himself running the risk of lending political support to individual corporate actors pursuing specific agendas.
The implications of the attack extend far beyond these shores, however. Next March Greg Medcraft assumes the chairmanship of the International Organisation of Securities Commissions (IOSCO). It is one of the three foundational pillars of the Financial Stability Board (along with the Basel Committee and the International Association of Insurance Superintendents). The position offers Australia the opportunity to shape the global parameters of market conduct regulation.
In mounting such a vigorous attack on Mr Medcraft’s integrity, Mr Cormann has done much to weaken the legitimacy of any attempt by the ASIC chairman to introduce an expansive definition of what constitutes fairness in the global market conduct space. Irrespective of intention, the opinion piece will provide ammunition for those determined to limit that agenda.
This is not to suggest that Mr Cormann has no grounds on which to complain.
It is certainly the case that the presentation of what might constitute a cohesive reform agenda was far from optimal. While ASIC has a right - and indeed an obligation - to comment on whether rules are appropriate, the timing and method of execution could have been managed in a manner that did not make the ASIC chairman a hostage to an increasingly bitter and polarised political climate.
Mr Medcraft has developed a reputation for straight talking. To date this has served him well. While careful not to name specific current controversial deals - involving powerful vested interests - as the rationale for a review of the takeovers regime, there could be no doubt that these informed thinking. To make matters worse, the announcement was floated before the appearance of a considered issues paper.
To that extent, ASIC has left itself vulnerable. It was a rare misstep by the normally assured former investment banker. Whether it is sufficient to derail the reputation of ASIC and its national and international legitimacy is another matter entirely.
Mr Cormann may have scored a political point but in so doing contributed to an erosion of the very authority he ostensibly wishes to protect.
How the government responds will tell us much about the nature of political debate and the collateral damage each side is prepared to countenance in the interests of securing power over policy formulation and its implementation.
Justin O'Brien writes a column for The Conversation, The ethical deal, and is director of the UNSW Centre for Law, Markets and Regulation portal, where this story also appears.