In a submission to the Financial System Inquiry, Professor Dimity Kingsford Smith called for a reappraisal of investor protection measures in Australia, in order to include a consideration of “fairness”.
“Fairness has been the foundation of theories of justice which argue for keeping in mind the least well off, and adjusting economy and society, consistent with liberty for all, to operate for their benefit,” Professor Kingsford Smith wrote.
“In financial markets, fairness tends to be writ smaller, and does not have the redistributive purpose of theories of justice. This submission argues for a philosophy of fairness as one important foundation of investor protection.”
Reflecting on studies that suggest “the financial citizen is at a disadvantage in using the financial markets” due to low levels of financial literacy and systemic conflicts of interest in the financial system, the UNSW professor said regulatory intervention based on “market failure” is powerless to alleviate this problem.
“Fairness would justify regulation to encourage providers not to design and sell products that benefit from consumers not overcoming mistakes, or at times, exacerbating mistakes,” the submission stated. “A fairness justification for investor protection regulation could encourage values of reciprocity and mutuality of conduct.”
Professor Kingsford Smith suggested that the FSI consider efforts made by international governments to incorporate a greater focus on fairness in financial regulation, such as the new stipulation in the United States that consumer markets are “fair, transparent and competitive”, as required by the Dodd-Frank Act.
The submission also recommends that the ‘twin peaks’ approach to regulation – i.e. the co-regulatory functions performed by ASIC and APRA – is retained.
