The era of "co-regulation" in the financial services industry that was hatched by the Wallis Committee in 1997 now looks a dead duck after the release of the interim findings of the Hayne royal commission.
Former AMP chairman Stan Wallis, who led the 1997 financial system inquiry, argued for a fresh way of regulating that included new forms of self-regulation and a hybrid model, known as "co-regulation".
The hybrid model involved statutory agencies such as ASIC working cooperatively with banks and other industry providers to facilitate self-regulation through voluntary codes of conduct.
Wallis' clear preference was for financial regulation to be placed on a "supervisory" footing and away from its traditionally didactic modus operandi that relied exclusively on statutory control of financial institutions.
The Wallis Committee's re-conception of financial regulation was articulated in its final report presented to former federal treasurer Peter Costello in March 1997.
The formation of a new super regulator - the "Corporations and Financial Services Commission" that Costello later renamed to ASIC - was the centrepiece of Wallis' light-touch regulatory regime.
"The CFSC (ASIC) should adopt a flexible approach to regulation. No one model of regulation should be imposed on the whole system. Where industry standards and performance suggest that the most practicable method involves self-regulation or co-regulation, such methods should be preferred," the Wallis panel wrote in their final report.
"In other areas, where good conduct is not so well established, a stronger statutory style should prevail. In all cases, the cost effectiveness of regulation should be subject to ongoing stringent assessment."
The Wallis reforms tilted the purpose of financial regulation in favour of achieving industry efficiency over effective outcomes for consumers.
Wallis' mandate for the new consumer watchdog, which was written into the enabling legislation that created ASIC, required it to balance effective regulation against the need to reduce the compliance costs of service providers.
The Wallis panel also subjected ASIC to a form of review by the entities it regulated - through a Financial Sector Advisory Council - that would advise governments on "developments in the financial system and their implications for regulatory arrangements and on the cost effectiveness and compliance costs of regulation."
The advisory council, comprised exclusively of executive leaders from banks, insurers and wealth management providers, has since played an influential role in shaping how their own businesses are regulated.
Under a former chairman, Maurice Newman, the council conducted its own inquiries and regularly reported its concerns to government on what it usually described as 'over-regulation' in the financial services industry.
Its importance was underlined in 2015 when the government extended its terms of reference so it could provide annual "report cards" on the performance of regulators.
This was a curious move given that it coincided with the eruption of public scandals over how the major banks were delivering financial advice to Australian consumers.
At no time since 1997 did any government establish an institutionalized channel for consumer advocates to give annual assessments on the performance of ASIC and other regulators.
One of the bottom lines was that successive governments fostered a systemic blind spot in their methods for setting regulatory policy.
The advice they chose to receive was heavily skewed to the interests of financial services retailers, not those who bought services.
This environment helped to maximize industry efficiency by creating four of the world's most profitable banks, reinforcing the oligopoly conduct defining banking in Australia.
From the moment of its creation ASIC was mandated with what, in practice, became a cross-purpose: to protect consumers without getting in the way of the entities it regulated.
While Hayne has, for now, not addressed how ASIC's original remit might have contributed to its vacillating culture and timidity as a watchdog, the ambiguous mandate bestowed on the agency by Wallis partly explains why Commissioner Hayne is now questioning its enforcement record.
Hayne's interim report includes scathing findings on ASIC's performance and comprehensively pans its approach to regulating misconduct:
"When deciding what to do in response to misconduct, ASIC's starting point appears to have been: How can this be resolved by agreement?"
Frustrated, Hayne wrote: "This cannot be the starting point for a conduct regulator. When contravening conduct comes to its attention, the regulator must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach. Laws are to be obeyed. Penalties are prescribed for failure to obey the law because society expects and requires obedience to the law."
Given such assessments, it is hard to see how ASIC in its current form is likely to survive the fallout of Commissioner Hayne's final report next year.
Hayne's disdain for ASIC's conciliatory approach to policing misconduct is a clear signal that he considers the agency an ineffective protector of consumers in the financial services sector.
The royal commission's interim findings suggest that Hayne is likely to recommend a carve-up of ASIC's multi-faceted and messy remit as Australia's "integrated corporate, markets, financial services and consumer credit regulator".
Such a recommendation would constitute a rejection of the Wallis inquiry's experiment of mingling consumer protection with other regulatory functions under a super regulator.