The Australian, June 6, 2018
Lawyers, judges and legal institutions shine at some things and are dismal at others. The banking royal commission risks falling into the latter category. Using a simple scorecard of the three Ps — process, policy and populism — so far it’s not so good.
Courts, judges and barristers following the rules of evidence excel at finding the facts and applying the law to individual cases. They are good at adjudicating the rights and wrongs of past behaviour according to the law of the land.
Royal commissions, manned by judges and lawyers too, are a different beast. They are expected to set policy using inferior processes and lacking the necessary skills. No matter how clever they sound in court, judges and barristers frequently know little or nothing about commerce and even less about economics. This means their judgments and recommendations about future public policy can be ill-informed, even dangerous.
Worse, because barristers and former judges often have spent a lifetime toiling in quiet obscurity, the intoxication of front-page media and celebrity can lead them into temptation. That is especially true where they are allowed to diverge from the discipline imposed by court rules of evidence and procedure.
There are signs the royal commission is a show trial for “gotcha” interrogations and sob stories made for TV cameras and newspaper headlines, rather than a forum for procedural fairness and sober policymaking. We’ve been here before with that permanent royal commission in NSW known as the Independent Commission Against Corruption. Recall the heady days of ICAC when media darling Geoffrey Watson SC was exposing corruption to the applause of journalists and the horror of the public? Predictably, ICAC overreached with an ill-fated and inappropriate attempt to put prominent prosecutor Margaret Cunneen SC into the stocks over a trivial matter. Soon enough, ICAC started to unravel, its methodology and processes condemned, its hubris exposed.
Two issues will determine whether the banking royal commission goes the way of ICAC or earns long-term respect: whether the commission continues its style of gotcha inquisition; and, if it does, the conclusions it draws from the testimony of witnesses it has humiliated.
In normal court hearings, defendants get plenty of notice of substantive allegations to be put to them. The banking royal commission, by contrast, seems to delight in blindsiding and shaming witnesses, and in extracting grovelling confessions and apologies. Counsel assisting the commission have frequently won, to use the terminology of one of them, gold-medal admissions of wickedness. But some have been of dubious value.
The interrogation of AMP’s Jack Regan is a case of the latter.
The celebrated attack on the AMP board for “interfering” with an “independent” report by its law firm, Clayton Utz, was misconceived and wreaked havoc on AMP. Whatever the significant failings of former AMP chairwoman Catherine Brenner and her colleagues in other areas — and those are significant — allegations that she and the board tampered with an “independent” report are risible. When counsel assisting put questions about the independence of the legal report to Regan, he clearly was confused, unprepared and had no idea of the significance or meaning of the legal concept of independence. But Regan became the commission’s biggest “gotcha” victim. And the myth of interference was born.
Some even made the silly schoolboy error of comparing the Clayton Utz report with the independent expert’s report used in takeovers and governed by the Australian Securities & Investments Commission’s Regulatory Guide 112.
The royal commission had access to documents making it patently clear that the report by Clayton Utz was commissioned by the AMP board for use by the board. The report was to be prepared under direct instruction, from and in consultation with AMP’s general counsel, and was independent of the advice business being reviewed, but not independent of AMP itself or its board.
Perhaps, in his final report, commissioner Ken Hayne will correct for the enthusiasm of his counsel assisting. But it is something to watch out for.
Of more concern has been the banking royal commission’s sloppy methodology in hearings into small business lending, which concluded last week. The story of blind pensioner Carolyn Flanagan almost losing her house to Westpac as a result of her guaranteeing her daughter’s business debts is heart-wrenching. It makes for great newspaper copy but not good policymaking.
Given the commission’s choice of witnesses, some experts predict more red tape governing lending to small business. While counsel assisting seems to have accepted that responsible lending laws that already apply to residential lending should not extend further, some tightening of SME lending laws — for small and medium-sized enterprises — seems inevitable.
If so, that could be an economic fiasco for small businesses, driving up the cost of lending and restricting its availability. Analysts and even the Reserve Bank hint at a credit crunch if this happens. Jobs will be lost, businesses destroyed. And from the banks’ position, why become the public boxing bag when a borrower can’t repay?
Moreover, bad behaviour by lenders won’t end — it will just shift to the non-banking sector, eager to fill the vacuum. Fintech start-ups already are licking their lips, according to reports about Prospa, a soon-to-be-floated fintech lender, at potential 40 per cent-plus interest rates.
Before drafting its final recommendations, Hayne should remember this precedent for the old adage that hard cases make bad laws. The compulsory imposition of limited recourse mortgage lending in the US was a legislative reaction to Americans losing their homes during the Depression. New laws, pitched as socially progressive by making borrowing easier and with limited liability, became the single biggest contributor to the subprime lending crisis that triggered the global financial crisis in 2009. Those post-Depression laws meant borrowers didn’t care if they borrowed too much, so borrowers punted on ever-increasing house prices and when prices went south they simply sent the keys to the house back to the bank. It was so common it was called jingle mail. Wrong regulation, rather than deregulation, caused that mess.
So far, the signs from the banking royal commission aren’t good. The commission hasn’t called for evidence from dry economists, the RBA and other equally boring but knowledgeable experts about the economic implications of policy changes. Maybe that kind of evidence is too dreary.
When it comes to sound policymaking, compare the Financial System Inquiry, which reported in 2014. The panel, chaired by former Future Fund chairman and former bank boss David Murray, included other serious financial services experts, too, from finance professor Kevin Davis to highly regarded former investment banker Carolyn Hewson. Compare, too, the Productivity Commission and the painstaking work behind its recent 570-page draft report on how to reform Australia’s superannuation industry.
Policy should be settled like this. In the first instance, by experts giving careful consideration to, and hearing from, a range of stakeholders, far away from television cameras. Informed by that expertise, parliament then makes the final decisions.
By contrast, the banking royal commission is showing worrying signs of being a public show trial for people to funnel their antipathy towards banks. These concerns are, of course, anticipatory. They may come to nothing. But populism is at least as rampant in the legal fraternity as it is among politicians. Fingers crossed that Hayne, a wily old fellow, is aware of the traps that await him.