4 lines of defence

December 5, 2019

 

 

Many risk and compliance professionals will be familiar with the three lines of defence model, deployed with often varying degrees of rigour and success in many organisations.

 

Recently, Commissioner Karen Chester from the Australian Securities and Investments Commission (ASIC) spoke about the four lines defence to prevent consumer harm in the Australian financial sector.

 

In her address to the Australian Institute of Company Directors (AICD), Chester listed ASIC’s four lines as being:

  • Public Policy

  • The consumer

  • Conduct of the companies and their directors

  • The regulator 

To provide balance, Chester also touched on the much-discussed failing of company conduct and the ‘soft touch’ approach by regulators when it comes to the use of their enforcement powers.

 

Failing in the first line

In outlining the first line of defence, Chester began with presenting Commissioner Kenneth Hayne’s findings from the Royal Commission that highlighted ‘damaging exceptionalism that took hold of the legislative norms  of conduct for the financial system’, as well as the over-reliance on disclosure as a defence mechanism to protect consumers from harm.

 

While Chester demonstrated the weakness in the public policy as it existed before the Royal Commission, she also highlighted the ambitious move by the Government in the last 12 months to implement the recommendations from the Royal Commission’s final report.

 

The same week Chester spoke to the AICD, a statement was released by the Office of the Treasurer on the Financial Sector Reform Bill 2019, which was introduced to Parliament earlier last week and outlined the following recommendations:

 

 

 

 

 

Later in the week, the Office of the Treasurer announced a Memorandum of Understanding (MoU) between ASIC and the Australian Prudential Regulation Authority (APRA) to deal with recommendations 6.9 and 6.10 on the statutory obligation to cooperate. The MoU represents a ‘twin peaks‘ model for regulating the Australian financial sector.

 

Consumer as the second line?

Chester highlighted that one of the major weaknesses with the second line is that the regulator has been operating under the assumption that disclosure would be enough for consumers.

 

Further to this, the securities regulator has published an updated deregulatory guide on RG 97, which deals with fees and cost disclosure for superannuation and other managed investment products.

 

Last week also saw the release of ASIC’s report on financial disclosure statements and renewal notices that highlighted a large percentage of inaccurate disclosure statements that are still missing information.

 

Chester paraphrased Daniel Kahneman, stating, “Nobody has the time or the resources to fully analyse all of the available information and to fully maximise their utility with every choice. And as humans, there are limits to our cognitive capacity, and naturally-occurring and exploitable behavioural biases.”

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