The Australian Securities and Investments Commission admitted it had not even considered taking enforcement action through the courts over some banking misconduct until now.
ASIC chair James Shipton described the regulator's handling of a number of misconduct cases as mistakes, pledging to be tougher and to take court action rather than negotiating resolutions with the big banks.
He also flagged taking civil action against individual decision makers in future.
Mr Shipton said ASIC's approach to a case involving the Commonwealth Bank's CommInsure business, connected to trauma cover for heart attacks, was extremely concerning.
CommInsure faced up to $8 million in fines over misleading ads that broke the law but walked away with a $300,000 "punishment" - in the form of a community donation - with the regulator's blessing.
The royal commission heard CommInsure was uncomfortable about just making a community benefit payment without a "hook" in the form of an infringement notice, which could not be used because it was too late, or some form of action.
The concern was that just paying a community benefit payment and not having a regulatory outcome "looks like they are paying off ASIC to avoid action", the inquiry sitting in Sydney heard on Friday.
Mr Shipton, who has been ASIC chair since February, said the regulator should have sought a stronger admission of wrongdoing from CBA.
"It was a mistake not to act quicker, swifter and earlier."
He said it was also a mistake to discuss the contents of the resulting media release in 2017 with CommInsure.
Another mistake was ASIC's failure to even consider taking action against CBA over the mis-selling of consumer credit insurance until now.
Mr Shipton said the focus was on getting refunds for 156,000 customers rather than taking enforcement action against the bank, adding it was dealing with an industry-wide challenge with limited staffing.
ASIC's handling of home loan fraud connected to the National Australia Bank's 'introducer' program was another mistake, with it only now looking at enforcement action against NAB having previously focused on the individual bankers.
"Today these matters would be handled very differently," Mr Shipton said.
"I used the word mistake deliberately because mistake, in effect, constitutes a misguided decision."
He said ASIC changed its approach in the last two to three weeks so the starting point was now to ask why not take court action.
Senior counsel assisting the commission Rowena Orr QC questioned why ASIC had to get approval from the banks even for infringement notices.
"The parking inspector doesn't seek an indication from the person he's giving a parking fine to as to whether they will accept and pay it," Ms Orr said.
"He just does it. Why don't you just do that?"
Mr Shipton said ASIC was trying to be as efficient as possible with its limited resources but was adamant there were no cosy negotiations with the banks.
