Sounds as if this Royal Commission might take up from where the HIH RC left off when a regulatory doom loop was created....this from a collection of 2003 articles oh HIH . Costello’s shocking failure of regulation ........Turnbulls’ penchant for failing to verify....

Costello's abdication of responsibility compounds this shocking failure of regulation

By Geoff Kitney
April 17 2003

http://www.smh.com.au/articles/2003/04/16/1050172656680.html

Anyone who suffered losses and anguish as a result of the HIH Insurance collapse should get a copy of the royal commission report, read the chapter on the regulators and weep.  It reveals a travesty of a system that was meant to protect them.

It exposes the industry regulator, the Australian Prudential Regulatory Authority, as being about as ineffectual as the Iraqi Republican Guard's defence of Saddam Hussein's regime.  The 81-page section shows massive failings at all levels of the regulatory process.

While the commission makes not one specific criticism of the Federal Government over what is accepted as the nation's largest corporate collapse, this chapter traces the regulatory failure right back to the doorstep of the Treasurer.

It was as a result of the report by the Wallace committee into financial regulation, commissioned by Peter Costello, that the Government completely overhauled the processes for regulating the Australian insurance industry.

The commission report shows how the main regulatory body shed its corporate history and almost its entire insurance industry expertise as a result.   In this weakened state, it then adopted an approach to its regulatory task which so soft it made virtually no impact.

Mr Costello reacted to this yesterday by noting that the commission had concluded that the regulator had not "contributed to nor caused" the collapse of HIH.  However, this was totally disingenuous.

The role of the regulator was to protect the policy holders' interests and to defend the credibility of the industry by early detection of potential problems in the companies it supervised, and by requiring action from the managers of those companies to deal with them. It failed dismally to do this.

The commission notes that the authority interpreted its brief after the Wallace committee report as being to supervise the industry on a basis which "discouraged intrusive activity", meaning it relied on information from the people with most to gain from misleading it.

It also notes that, as a result of the Government accepting the Wallace committee's recommendation that the authority be moved to Sydney, there were mass resignations among its Canberra-based insurance experts.  The commission notes that for almost a year until August 1999, the industry enjoyed "supervisory redemption" because of the chaos caused by the move from Canberra to Sydney. In the process, the regulator's "corporate memory" of the FAI and HIH groups "all but vanished" along with the departing staff.

The authority told the commission that to have made any meaningful difference to the outcome for HIH's policy holders, it would have been necessary for there to have been intervention in HIH's affairs as early as mid-1999.  Given what had happened to the regulator and regulation, the policyholders never stood a chance of any such action being taken.

Harsh words but advisers avoid court

By Elisabeth Sexton
April 17 2003

http://www.smh.com.au/articles/2003/04/16/1050172656674.html

No recommendations for court action against the professional advisers to HIH and FAI have been made, but the bankers and lawyers do not emerge unscathed from the royal commission.

It was "regrettable" that when investment bank Goldman Sachs Australia was appointed to advise the FAI board about HIH's takeover bid in September 1998, it did not reveal that it had already spent considerable time analysing the insurer's finances on its own account, said Justice Neville Owen.

In closing submissions in January, counsel assisting the commission said Goldman had failed in its legal and ethical duties by not disclosing its earlier work to FAI's directors.

The judge did not repeat that view yesterday, but said it would have been "of assistance" if the FAI directors had known that Goldman had decided against investing its own money in FAI.

"Such information should have been revealed to the FAI board by a financial or corporate adviser like Goldman because it would have assisted the directors to decide whether to appoint Goldman as their financial adviser on the takeover," the judge said.

The then chairman of Goldman, Malcolm Turnbull, gave evidence that he relied on the word of FAI chief executive Rodney Adler that the board had been informed about Goldman's work.

This was not unreasonable, the judge said, although "it would have been preferable for Turnbull to have personally and directly verified that the non-executive directors of FAI were fully aware" of the work.

HIH's financial adviser Deutsche Bank was criticised for its advice in late 2000 on HIH's sale of much of its business to rival insurer Allianz.

Deutsche director Colin Richardson "failed to ensure that the board had all relevant facts and issues relating to the transaction before its consideration", the judge said.

Mr Richardson gave evidence that Deutsche was not retained to give "comprehensive" advice, but the report said this was inconsistent with the work carried out, the expectations of the board and the magnitude of the fee.

The judge found it "surprising" that in late 2000 HIH's longstanding lawyers Minter Ellison agreed to advise HIH about HIH's transfer of $10 million into an investment trust run by Mr Adler, a director of HIH. In June 2000 the firm had advised Mr Adler in relation to the trust.

"The potential for a conflict of interest was obvious," said Justice Owen, and accepting the work was "inappropriate" without clear disclosure of the firm's previous involvement.

He rejected the explanation given by Minter partner Leigh Brown that rather than a conflict there was a "mutuality of interest" between HIH and Mr Adler that the trust's structure be legal.

"The existence of a conflict does not depend upon what the parties want," the judge said.

In relation to Blake Dawson Waldron, which replaced Minter as HIH's chief legal adviser in January 2001, the judge concluded there was "no legitimate basis" for receiving a $1 million fee the day before HIH collapsed.

In closing submissions, counsel assisting recommended referring the matter to the corporate watchdog.

The judge did not do so, but said it was "disappointing that lawyers were among those involved in what I call the 'dash for cash' in the days leading up to March 15, 2001".  Blake Dawson Waldron repaid the sum in October 2002.