Consumer financial protection and the integrity of the Australian financial system are critical to the Australian economy in many ways, including the provision of an effective banking system, and the security of Australia’s significant superannuation savings. This is especially the case in an environment where financial products have become more complex and difficult for consumers to understand. In recent years there have been several scandals in Australia’s financial sector that have undermined confidence in the financial system, and exposed regulatory failure. The authors argue that there needs to be a more effective oversight of the key regulators in the Australian financial system to maintain confidence in the system, and prevent capture of the regulators by the financial services industry. The authors contend that the recommendation of the Financial System Inquiry for the establishment of an Assessment Board to provide continuous oversight of the financial regulators is an effective solution to the poor regulatory outcomes encountered in Australia in recent years. The consequences of not having such oversight are likely to be more financial scandals, and further instability in the financial system. These deficiencies must be addressed as a matter of urgency.

Globally, financial system regulators are susceptible to deliberate and inadvertent influence by the industry that they oversee and, hence, are also susceptible to acting to benefit the industry rather than the public interest – a phenomenon known as ‘regulatory capture’. Australia, arguably, has an optimal model of financial system regulation (a ‘Twin Peaks’ model) comprising separate regulators for prudential soundness on the one hand, and market conduct and consumer protection on the other. However, the current design of the Twin Peaks model has not been sufficient to prevent and address prolonged and systemic misconduct that culminated in a public Royal Commission of Inquiry into misconduct in the industry. Subsequent to the Royal Commission and other inquiries, the Department of Treasury has proposed legislation to establish an Assessment Authority to assess the effectiveness of the Twin Peaks regulators. The proposal includes enquiries by an Assessment Authority into the regulators’ independence, so as to identify instances of, and thereby mitigate, their capture. As with all financial system regulators, the Assessment Authority itself may be susceptible to regulatory capture, either by the Twin Peaks regulators, or by the financial industry. Thus, this paper poses the question: how can the new Assessment Authority be optimally constituted by legislation, and operated, to effectively oversee the effectiveness of the regulators, but itself remain insulated from the influence of the regulators and industry? We analyse the primary sources of influence over financial system regulators that the Assessment Authority will likely face and recommend ways in which a robust design of the Assessment Authority can mitigate those sources of influence. In doing so, we adopt an inter-disciplinary approach, drawing upon not only regulatory theory but also for the first time in relation to this question, organisational psychology. Our findings address gaps in the proposed legislation currently before Federal Parliament and propose methods by which those gaps may be filled, in order to ensure that this important reform to Australia’s financial regulatory regime has the greatest chance of success.