At the political and ideological level, the practices and rorts being exposed almost on a daily basis go to the heart of issues raised by American historian Nancy MacLean in her explosive and controversial 2017 book, Democracy in Chains: The Deep History of the Radical Right's Stealth Plan for America. The book focuses on Nobel prize-winning economist James McGill Buchanan and his work on public choice theory, which has spurred the rise of the libertarian agenda in the United States in line with Buchanan's aim to "save capitalism from democracy".

His theories, which have been taken up by the radical right and, most notably, the billionaire Koch brothers, Charles and David, have been instrumental in dismantling and sabotaging industry regulation is the US.

Australia, as seen from revelations so far in the ongoing royal commission, is by no means immune from the contagion MacLean describes. University of Western Australia legal academic Andrew Schmulow wrote earlier this year: "Australia's financial system is increasingly governed by a lawless financial sector, presided over by regulators that are at best misguided, and at worst captured."

Schmulow, a member of Australian Citizens Against Corruption, has been an outspoken critic of the state of regulatory play in Australia and a staunch advocate of a board of oversight – that is, a body monitoring the regulators.

The idea is not new; it was proposed by former Commonwealth Bank chief David Murray's financial system inquiry several years ago. The inquiry report recommended creating a financial regulator assessment board, which would oversee the governance of each financial regulator. But the proposal was the only substantive recommendation the then Abbott government rejected.

A draft report of the Productivity Commission – Competition in the Australian Financial System – released early this year added its voice to mounting concerns about the efficacy of regulation, pointing out Australia's finance regulators have become enablers of an industry that impedes the nation's economic competitiveness and exploits its most loyal customers.

Much of the problem can be traced to the prevailing orthodoxy over the past two decades that has been described as a "light touch" philosophy, according to which the market is to be protected, while at the same time seeking to ensure full disclosure, so that everyone has the same information, allowing all players to make rational decisions. Critics such as Schmulow argue this approach merely encourages regulators to look for ways to facilitate business, rather than act as punitive cops on the beat.

The "light touch" approach has been embraced by libertarians, who see it as the next best alternative to the ideal of abolishing regulation entirely.

It is actually of ancient provenance, traced back to 6th century BC Chinese philosopher Lao-Tzu, who was an early proponent of laissez-faire government, summed up in the aphorism attributed to him: "Governing a large state is like boiling a small fish." In other words, any hint of heavy-handedness will ruin the meal.

Yet there is growing, incontrovertible evidence that the light touch has failed not so much industry but the very public interest that regulation is designed to protect.

Another issue flagged by the Murray review – and one that his proposed oversight board was designed to address – was the revolving door between regulators and the regulated, a too-cosy relationship that can amount to regulatory capture.

Regulatory capture refers to the actions by interest groups in "capturing" influence with the staff or commission members of the regulatory agency, so that special-interest group's preferred policy outcomes are implemented. Much of the theory of regulatory capture is associated with Nobel laureate economist George Stigler.

In The Theory of Economic Regulation (1971), Stigler wrote that "as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit ... We propose the general hypothesis: every industry or occupation that has enough political power to utilise the state will seek to control entry. In addition, the regulatory policy will often be so fashioned as to retard the rate of growth of new firms."

Subsequent development of Stigler's work led to the identification of two basic types of regulatory capture. The first is materialist (or financial) capture, in which the captured regulator's motive is based on its material self-interest, and can result from bribery, revolving-door recruitment, political donations or the regulator's desire to maintain its government funding. These forms of capture often amount to political corruption. The second is non-materialist (or cultural) capture, in which the regulator begins to think like the regulated industry. This can result from interest-group lobbying by the industry.

While detailed knowledge of an industry is essential for a regulator, a fine line separates the regulator from an industry of which he or she has been an integral part.

Allegations of regulatory capture emerged in the financial planning scandals involving the Commonwealth Bank and the National Australia Bank. Despite receiving information from whistleblowers, ASIC was slow to act and, when it did, it issued only an enforceable undertaking. The Murray committee's report strongly criticised this practice.

A model for a regulatory oversighting body already exists. It was taken up in Britain, where deregulation was even more extensive than in Australia, with the financial policy committee, under the Bank of England. Its aim is to monitor and review the British regulators, while scanning the horizon for emerging problems.

It may well be that, in the aftermath of the banking royal commission, Lao-Tzu's small fish will be cooked a little more.

Dr Norman Abjorensen, of the ANU's Crawford school of public policy, has taught courses on anti-corruption and is the author of Combating Corruption: Implications of the G20 Action Pan for the Asia-Pacific Region (2014).