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Chapter 4

ASIC's 2013–14 Annual Report

4.1        This chapter discusses the 2013–14 annual report of ASIC. Under Senate Standing Order 25(20),[1] annual reports of bodies established under the ASIC Act are subject to scrutiny by the Senate Economics Legislation Committee which commented on:

• a six per cent increase in the revenue that ASIC raised for the Commonwealth in 2013–14;
• a 12 per cent reduction in ASIC's operating budget and associated staffing reductions for 2014–15;
• the allocation of ASIC's resources to enforcement (35 per cent), registry (25 per cent), surveillance (20 per cent) and the remainder on engagement with industry and stakeholders, education, policy advice and guidance; and
• ASIC's outcomes for the year, including:
• reviews of companies financial reports leading to material changes in four per cent of financial reports;
• regulatory guidance on over-the-counter derivatives trading; and
• over 54 litigation actions and 125 investigations leading to 15 criminal convictions, six imprisonments and seven insider-trading convictions.[2]

4.2        The Senate Economics Legislation Committee reported that:

The committee considers ASIC to have met its reporting obligations and the annual report is 'apparently satisfactory'.

The annual report of ASIC is well-presented, with easy to reference information and good use of relevant graphs, tables and pictures to enhance the information contained.[3]

4.3        Therefore, in conducting its review of the 2013–14 ASIC annual report, this section of the report will focus on the statutory requirements under the ASIC Act and other operational matters.

Statutory requirements

4.4        Statutory requirements for the ASIC annual report are set out in section 136 of the ASIC Act and cover tabling, distribution and the contents of the annual report.[4]

Tabling and distribution

4.5        The 2013–14 ASIC annual report was provided to the Minister on 10 October 2014, and tabled in the Senate and the House of Representatives on 29 October 2014.[5] As a result, the legislative requirements as set out below were satisfied:

• Section 136(1), ASIC Act: the ASIC Chairperson, must as soon as practicable after 30 June in each financial year, prepare and give to the Minister a report on ASIC’s operations during that financial year; and
• Section 136(3), ASIC Act: the Minister must cause a copy of each annual report to be tabled in each House within 15 sitting days of that House after the day on which the Minister receives the report.[6]

4.6        Section 136(4) of the ASIC Act requires that 'the Minister must cause a copy of each annual report to be sent to the Attorney-General of each State and Territory as soon as practical after the Minister receives the report.' ASIC advised the committee that copies were provided to the Attorney-General of each State and Territory.[7]

Contents of the annual report

4.7        The statutory requirements for the contents of the ASIC annual report are set out in sections 136(2)(a–k) and 136(2A) of the ASIC Act. Table 1 lists where in the 2013–14 ASIC annual report the requirements are met.

Operational matters identified in the annual report

4.8        At the ASIC oversight hearing on Friday 20 March 2015, the committee inquired into several matters arising in the annual report as discussed below. The committee has previously recommended that ASIC provide more longitudinal data on its performance in its annual report, however the committee notes that this recommendation was made after ASIC tabled its 2013–14 annual report.[8] The committee welcomes the 10 years of data on major enforcement outcomes shown in Table 4.2 that ASIC provided. The committee looks forward to more longitudinal data in ASIC's 2014–15 annual report on matters such as the use of ASIC's powers.

Table 4.1: Statutory requirements for the ASIC annual report

Section	Reporting requirement (ASIC Act)	Coverage in the 2012–13 Annual Report (page numbers)
136(2)(a)	Specific goals and priorities pursued by ASIC in performing its functions and exercising its powers.	Chairman's report (pages 2–3)
136(2)(b)	Progress that ASIC has made towards achieving its goals	Chairman's report (pages 5–7)
136(2)(c)	Matters that adversely affected ASIC or hindered pursuit of its goals	Chairman's report (pages 2–4)
136(2)(d)	Performance against performance indicators	Chairman's report and performance against service charter (pages 5–7, 65–66)
136(2)(e)	Exercise of ASIC's powers under Part 15 of the Retirement Savings Accounts Act 1997 and under Part 29 of the Superannuation Industry (Supervision) Act 1993	ASIC received 16 applications to grant relief under the Retirement Savings Accounts Act 1997 exercising its power three times. ASIC issued one legislative instrument under the Superannuation Industry (Supervision) Act 1993 to exempt licensees from the disclosure-related obligation in s29QC of that Act until 1 July 2015 (page 163).
136(2)(f)	ASIC's monitoring and promotion of market integrity and consumer protection	ASIC's surveillance coverage of investors, financial consumers and markets is detailed on pages 22–23.
136(2)(g)	Joint audit firm inspections with US and Canadian bodies	ASIC conducted inspections of three Australian audit firms jointly with the United States Public Company Accounting Oversight Board (PCAOB). ASIC did not conduct any inspections with the Canadian Public Accountability Board (page 163).
136(2)(h) 136(2)(i)	Financial statements required by section 49 of the Financial Management and Accountability Act 1997 (FMA Act). Audit report on those statements under section 57 of the Financial Management and  Accountability Act 1997	The financial statements are provided in the annual report (pages 88–148). The delegate of the Auditor-General indicates that ASIC's financial statements have been prepared in accordance with the FMA Act (pages 85–86).
136(2)(j)	Operation of the Business Names Registration Act 2011	Business name registry services are covered on pages 50–56.
136(2)(k), 136(2A)	Information relating to the exercise, by ASIC, members of ASIC, or staff members, of prescribed information-gathering powers.	ASIC's powers are listed on pages 168–169, along with information on how the powers were used, including the amount of times they were exercised this year and in the prior year.

ASIC Act and the ASIC 2013 – 14 Annual Report (section and page numbers are shown in the table above)

4.9        The annual report indicates that the number of illegal schemes shut down during 2013–14 dropped from 39 in the previous year, to zero.[9] The 10-year major enforcement outcome data in Table 4.2 shows that the number of illegal schemes shut down was significantly higher 10 years ago and has been trending downwards. ASIC informed the committee that ASIC's jurisdiction had changed[10] and that:

A number of the illegal schemes that we shut down in the previous financial year were related to illegal boiler room-type operations and Ponzi scheme-type operations.[11]

It is being reflected also in the reports of misconduct or alleged misconduct we are getting. In that space, they are dropping quite significantly and have been now for three years. That seems to have followed since the GFC...we think that is a business cycle thing, where we are coming into a much lower return environment, and we think that has driven a number of these schemes out of existence.[12]

4.10      The 10-year major enforcement outcome data in Table 4.2 also shows significant decreases in:

• the total number of litigations completed; and
• the number of civil proceedings completed.

4.11      In contrast, the 10-year major enforcement outcome data in Table 4.2 shows a steady growth in the number of people and/or companies being banned from financial services. The committee will continue to monitor these trends.

Table 4.2: Major Enforcement Outcomes

	2013 - 2014	2012 - 2013	2011 - 2012	2010 - 2011	2009 - 2010	2008 - 2009	2007 - 2008	2006 - 2007	2005 - 2006	2004 - 2005	2003 - 2004
Litigation completed (total)	149	144	179	202	156	186	280	479	386		291
Litigation completed successfully	90%	95%	92%	90%	91%	90%	94%	97%	94%	93%	93%
New litigation commenced	163	149	134	130	217	145	234	340	426	406	326
Investigations commenced	224	193	173	175	180	133	154	205	233	252	347
Investigations completed	238	187	183	184	133	140	150	221	230	336	316
Criminal proceedings completed	31	25	28	26	23	39	52	51	50	52	75
No. of people convicted	30	21	27	25	22	34	49	42	27	49	67
No. of people jailed	14	8	20	16	12	19	23	21	17	27	28
Non-custodial sentences/fines	16	13	8	9	11	19	26	21	10	22	39
Civil proceedings completed	13	15	24	34	30	35	44	76	102	53	51
Illegal schemes shut down or other action taken	-	39	1	30	50	20	80	105	102	76	60
People removed from directing companies	62	72	84	72	90	49	66	110	44	33	22
People / companies banned from financial services or cons. credit	103	88	54	64	41	42	49	35	27	25	42
Action against auditors and liquidators	13	7	7	5	5	5	3	12	14	12	13
Enforceable undertakings	26	20	22	14	8	14	11	10	22	30	34
Negotiated outcomes	15	17	17	24	6	10	19	20	9	1

ASIC, Answer to Question on Notice, taken on 28 November 2014, received on 30 January 2015.

4.12      The committee also noted that the ASIC annual report indicates that the number of authorised financial markets operating in Australia doubled from 2012–13 to 2013–14.[13] ASIC informed the committee that:

Partially, there are some new market entrants in the established market; ...But I think the most significant thing is that technological change has meant that there are now more facilities which allow various types of financial products to be exchanged electronically.

It is an interesting issue, because the market licensing framework is set up to assume an Australian Securities Exchange, an ASX-style entity. In fact the new markets are becoming less formally structured, and so the licensing regime and the requirements that attach to them are really not necessarily ideal for those sorts of markets.[14]

4.13      The ASIC annual report indicates that the number of consultations with industry stakeholders has also increased, with the number of meetings with industry groups increasing to 685, up from 281 in 2012–13.[15] ASIC indicated that whilst it has attempted to increase its engagement with small business over the last two years, this was also influenced by the implementation of the Stronger Super reforms. ASIC also noted that part of the consultations relate to the problems of phoenix companies: 'Much of our engagement with small-business entities is to make the point that small businesses tend to be both the victims of and the conductors of phoenix company type activity.'[16]

4.14      The ASIC annual report notes that in 2013–14 there was a dramatic drop in the application for Self-Managed Super Fund (SMSF) auditor registration, which reached a total of 240 down from 7,194 in the previous year.[17] ASIC attributed this to the last six months of 2013, when people had to register as an SMSF auditor for the first time and noted that:

We think that is the more likely standard state. The last six months of 2013 were the period when people had to register as an SMSF auditor for the first time, and there were of the order of 7,000 applications that needed to be processed over that time, but we think the steady state year on year is probably more of the nature of 200 to 300.[18]

Committee view

4.15      The committee notes that the recommendations it made in its examination of  ASIC's 2012–13 annual report relating to the compliance index and provision of more longitudinal data were made after ASIC tabled its 2013–14 annual report.[19] The committee therefore looks forward to those recommendations being implemented in ASIC's 2014–15 annual report.

4.16      The committee considers that ASIC has fulfilled its annual reporting responsibilities during the 2013–14 financial year. The committee notes that ASIC is continuing to address significant changes to its mandate and the environment in which it operates as a result of global trends, emerging issues and recent reviews and inquiries. The committee will continue to use annual reports and other mechanisms to monitor ASIC's performance and ability to adapt appropriately.

4.17      The committee thanks ASIC for its contributions at hearings and the timely provision of information to the committee.

Senator David Fawcett
Chair

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