Dr David Millhouse, a director of Trio Capital from November 2003 and October 2005, has penned a thesis that earned him a PhD from Bond University’s law faculty. Titled “Systemic and Cyclical Failure in Australian Financial Products and Financial Services Sectors”, the paper argues that Australian law regulating non-bank financial entities (NBFEs) has failed those it purports to protect: the investing public.
“Systemic failure manifests in extraordinary loss of investor funds and nationwide economic damage,” said Dr Millhouse.
“Without substantial law reform, this thesis predicts systemic deficiencies in regulation will remain, repeating their cyclical manifestations.”
The paper goes on to highlight that Australia has a history of subsuming fiduciary principles behind statutory and contractual frameworks facilitating grudging disclosure and “creeping corruption”.
“Community expectations of what each market participant should do is often different from what they actually do,” Dr Millhouse said.
“Australia’s plight is not unique but no other nation with a sophisticated economy now suffers comparatively. Blame is being attached to the basic policy framework whereas in fact it is policy implementation and enforcement that has allowed systemic failures to manifest.”
The thesis tallies the financial losses incurred by non-bank financial entities between 1980 and 2018, which collectively saw investors lose close to $40 billion.
Dr Millhouse drew particular attention to managed investment schemes, through which investors lost over $17 billion over the 38-year period.
“Inherent tensions between entrepreneurship and investor risk, optimal investor outcomes balanced with compliance, are not of themselves contradictory in a market-based system, but they rely upon defining objectives, eliminating conflicts of objectives and conflicts of interest, significantly enhanced behavioural standards of market participants, and the de-politicisation of the regulatory environment,” he said.
The paper is particularly timely as the government prepares to deliver the royal commission final report later today.
As a legal practitioner, Commissioner Hayne has been tasked with giving his final judgement on the widespread misconduct the inquiry uncovered over the last 12 months. Whether not he makes any recommendations around the laws, which Dr Millhouse believes have failed Australian investors, remains to be seen.
In his interim report, Commissioner Hayne was largely critical of APRA and ASIC for what he saw as a lacklustre approach to regulating the financial services sector. It is highly likely that the final report will make recommend government increase the enforcement powers of the regulatory agencies.