The corporate regulator is allowing consultancy firms Deloitte, EY and PwC to police its enforcement regime for the big banks while they are paid millions for other consulting work, raising conflict concerns.
The dual role raises questions about the ability of the consultants to be truly independent when there is a larger, and ongoing, commercial relationship with the client, a problem that has been raised repeatedly by the banking royal commission over “independent reports” produced by Clayton Utz and EY.
The Australian Securities and Investments Commission, whose chairman James Shipton was accused of being too cosy with the banks on Thursday at the royal commission, was slammed in an interim report by Commissioner Kenneth Hayne for failing to take legal action against corporate wrongdoers.
The regulator’s preference for “negotiated outcomes”, often hard fought over years by the banks, meant misconduct often “went unpunished“, Commissioner Hayne warned.
ASIC has also often allowed the subject of an enforceable undertaking to choose its own independent expert, to set the scope of the agreement and, as detailed in the royal commission, influence the way media releases about the agreements are worded and the size and type of any related financial penalty.
Graeme Samuel, a co-author of the Prudential Inquiry into Commonwealth Bank of Australia, said the consultants’ dual-roles raised conflict concerns because any so-called “Chinese Walls” within a firm would not prevent staffers and partners acting as statutorily appointed “independent experts” from being aware their actions might affect a client relationship worth millions.
One idea is to introduce an independence requirement for ASIC-appointed experts that limits the type of other work that can be done by the experts, in a similar way to restrictions on auditors.
EY, Deloitte or PwC at the banks
The big four consulting firms EY, Deloitte or PwC have been appointed the “independent expert” in most, eight out of 13, of the enforceable undertakings the major banks have entered into over the past five years, according to an analysis by The Australian Financial Review.
In a ninth case, CBA wants to appoint Deloitte as the independent expert for a breach involving staff giving unauthorised personal financial advice. It is waiting on ASIC’s approval of the move.
EY was ASIC’s approved “independent expert” in four cases involving Commonwealth Bank and NAB, PwC was the expert in three cases for ANZ, while Deloitte has been an expert for Westpac.
Professor Samuel said consulting firms appointed as an independent expert for ASIC needed to avoid even the perception there could be a conflict with the firm’s other work.
“In the context of checking enforceable undertakings, I must say I took a pretty tough view as [the head of the competition] regulator. It’s an issue of perception,” he said.
“You can set up Chinese Walls but it’s hard to believe that you can give objective advice that is unaffected by the fact that you happen to know on the opposite side of that ‘Chinese Wall’ sits millions in revenue that might be impacted by the objectivity of the advice you’re about to give to a regulator.”
ASIC guidelines about ‘material’ fees
ASIC, which declined to comment, has guidelines around appointing independent experts. Regulatory Guide 100 specifies that ASIC will take into account issues such as other “material” fees earned by the consultant over the past two years from the company that is the subject of the undertaking.
It’s not clear what level of fees count as material given EY last year earned $1.79 billion while Deloitte and PwC brought in more than $2 billion each in fees, according to The Australian Financial Review Top 100 Accounting Firms list.
ASIC approved EY as the independent expert for CBA four times between 2014 and 2018 for breaches by the bank, including charging fees for no service at CBA financial planning.
EY generated fees from CBA worth more than $30 million in 2017-18 and more than $15 million in 2016-17, making it the firm’s third biggest client in its financial services division.
‘Process to manage independence’
A spokeswoman for EY, which has faced other questions over the independence of ‘expert’ advice, dismissed concerns about its role as CBA’s independent expert.
“EY has rigorous processes in place to manage conflict and independence. ASIC has a guide, RG100, that details requirements on the quality and independence of independent experts,” an EY spokeswoman said.
PwC, which declined to comment, will earn $6.6 million from two of its three undertaking roles at ANZ, around the bank rigging rates and improperly sharing the details orders by foreign exchange clients.
Deloitte is ASIC’s approved independent expert for Westpac for similar breaches by its foreign exchange traders, an appointment that is worth $1.6 million. The firm is also performing other significant consulting work at Westpac.
A spokesman for Deloitte said the firm did a “detailed analysis of the firm’s objectivity” based on ASIC’s regulations before accepting an appointment.
“The relevant question is not simply whether other work has been done, but whether the firm can exercise objective and impartial judgment, and not compromise professional judgments because of bias, conflict of interest or undue influence of others,” he said.
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