Navigation: Previous Page | Contents | Next Page

Chapter 2 - Issues raised with ASIC

2.1        The committee's hearing with Australian Securities and Investments Commission (ASIC) officials on 30 November 2006 included discussion on a number of issues relating to ASIC's regulatory responsibilities. These were as follows and form the basis of this report:

• the government's proposed reforms to corporations and financial services regulations;
• ASIC's first survey on superannuation fees and costs;
• professional indemnity insurance for financial planners;
• AMP's enforceable undertaking to ASIC to improve the quality of advice provided by its planners;
• ASIC's handling of the Westpoint matter and other high-risk mezzanine schemes generally;
• ASIC's work to better educate investors;
• the Vizard matter;
• implications for ASIC of the Cole Commission report;
• proposed prohibition on hedging executive share options;
• corporate governance standards of Australia's listed property trust sector; and
• implications for ASIC of the expansion of private equity investment in Australia.

2.2        A number of issues were briefly mentioned at the committee's hearing but do not feature in this report. They are:

• progress on Better Regulations initiatives;
• audit rotations and new auditing standards;
• managed investment scheme buybacks;
• Financial Industry Complaint Service (FICS) compensation caps;
• high fees on some 'lost' superannuation accounts;
• the Financial Planning Association's capacity to discipline its members;
• the splitting of Superannuation Guarantee payments into two default funds;
• a national regulatory framework for mortgage brokers;
• other specific individual cases.

Simpler regulatory system

2.3        In April 2006 the government released its Corporate and Financial Services Review consultation paper. It contained 56 topics including issues such as company reporting obligations, corporate governance and refinements to financial services regulation. The government sought feedback on the paper for a six week period.[1]

2.4        The feedback on these possible reform options led to the development of a package of corporate and financial services law reform proposals to be incorporated into the Simpler Regulatory System Bill, due to be introduced into the parliament in early 2007. Parliamentary Secretary to the Treasurer, Chris Pearce MP, announced that a paper inviting comment on specific proposals would be released in September 2006 to assist subsequent round table discussions on the preparation of the bill. He commented: '...[ASIC] will be closely involved in developing and refining these proposals'.[2] This proposals paper was released in November 2006 and included, among many others, the following proposals:

• amending the scope of the definitions of general and personal financial advice;
• changing the circumstances in which a Statement of Advice must be provided; and
• addressing inconsistencies between breach reporting requirements to ASIC and APRA.[3]

2.5        Falling outside this process will be other minor technical changes, mainly relating to financial services regulations, which will be implemented through regulations. Other more complex issues, such as the role of the business judgment rule and facilitating product rationalisation, will be addressed as projects with separate consultation processes.[4]

2.6        ASIC indicated to the committee that the roundtable discussions would be most likely held during February 2007, though officers could not yet confirm ASIC would be participating:

The way that we have been working with Treasury on this is to be engaged at a stage where the government or Treasury has digested the submissions made to us and is moving towards some more concrete legislative proposals. Historically, where the government has used roundtable consultations, we have been invited, and indeed some have been held in our office. I am not aware that arrangements are advanced enough at this stage for us to know that that is happening.[5]

2.7        With respect to proposed changes to the business judgment rule (BJR), ASIC informed the committee that the government had not asked it for advice on the matter and ASIC's possible involvement in consultation over BJR was not known.[6] 

ASIC report on superannuation fees and costs

2.8        On 16 November 2006 ASIC released its first report monitoring superannuation fees and costs.[7] ASIC reported:

When superannuation choice was introduced, the Government asked ASIC to monitor and report on trends in superannuation fees and costs in the five years following the introduction of Super Choice legislation.

The report collects and analyses information provided to ASIC between 1 October 2005 and 30 June 2006 on fees and costs of 1270 superannuation products offered by 191 superannuation trustees, aggregated by type of fee and type of fund. The fund categories ASIC uses are based on those defined by the Australian Prudential Regulation Authority.[8]

2.9        Overall, corporate superannuation funds as a category recorded the lowest average and median costs and non-industry public offer funds (retail funds) the highest costs. 

2.10      The information upon which the report is based comes from the product disclosure statements (PDS) issued by superannuation trustees. Fees, charges and rebates not set on in the PDS were not included. ASIC emphasised to the committee that the report recorded a snapshot only, without taking into account subsequent changes in fees or account rebates. Mr Jeremy Cooper, Deputy Chairman, explained:

The data comes effectively straight out of the PDS and is just effectively loaded. What you get is just a massive template of all the fees disclosed in all of the PDSs that are lodged over a period. The twist with the issue we are talking about is the PDS will disclose a relatively high headline—if you want to call it that—rate of fees that the fund is entitled to charge and then, through a negotiation process, a lesser fee is charged depending on the size of fund that you are in. There is some opacity; from a public point of view, it is not easy to tell exactly what fees are being paid in which funds. We see the headline fee but not the gradations on the way through.[9]

2.11      This methodology was acknowledged to reflect the very maximum that may be charged, rather than the costs that are actually incurred by financial product customers:

The obligation in the PDS is to state the most that you will charge. But we acknowledge that it is not uncommon for industry to charge less than the numbers that they talk about in the PDSs, so one ought not to take this as a reflection of market practice but more what people put in their PDSs.

...

You do not know what is actually charged; you know the average of commissions in the table in PDSs. This was not intended to reflect what actually happens necessarily in the interaction between customer and provider; it reflects only what a product disclosure issuer puts in their product disclosure document.[10]

2.12      While acknowledging its limitations, ASIC commented that the purpose of the survey is to establish a source of data to monitor trends in fees charged by the industry.[11]

Financial planners

Professional indemnity insurance

2.13      In early November 2006 Treasury released draft regulations that would legally oblige financial services licensees to take out professional indemnity (PI) insurance to cover claims by clients for losses suffered due to breaches of the Corporations Act. Professional indemnity insurance would be prescribed as the required compensation arrangement under section 912B of the Corporations Act. This proposal follows Treasury's release of an issues paper in September 2002 and a follow-up 'position paper' in December 2003, which outlined the government's preferred option of providing a compensation arrangement based on PI insurance.

2.14      The losses covered by PI insurance would not include those arising from market fluctuations or the collapse of a financial product issuer, rather applying to breaches of the Act such as misleading or deceptive conduct, false or misleading statements, inappropriate advice or failing to disclose relevant information.[12]

2.15      Presently, claims by retail clients for losses suffered because of licensee or financial planner misconduct are sometimes unable to be met. The collapse of Westpoint is looming as an example of deficiencies in this area, with many advisers who recommended Westpoint having inadequate or no insurance cover for claims against them.[13]

2.16      The committee was told that ASIC had provided advice on the draft regulations. In response to concerns that small firms may not be able to obtain sufficient cover, ASIC said that they were still exploring the issue:

We have engaged an external consultant to effectively look at both supply and demand sides of professional indemnity insurance as envisaged by the regulations. We have not received the final consultant’s report yet and we have had a couple of interim discussions with the consultant, but I really cannot say when finally that will come. But we have actually been out talking to the providers of insurance to at least some representative parts of the industry who will need, under the regulations, to purchase insurance—just to get a feel for the issues that will come forward for us as the administrator of these obligations.[14]

2.17      ASIC also emphasised that the regulations did not mandate PI insurance for financial services licensees, given the regulatory provision that adequate compensation arrangements may be established via 'an alternative arrangement approved by ASIC'. If an alternative, such as a sufficiently strong balance sheet to meet investor losses, could not be found then the provider 'would have a problem'. Chairman Mr Jeffrey Lucy indicated that in this situation the licensee had the option of restructuring their operations to align themselves with an organisation that meets the necessary requirements.[15]  

AMP enforceable undertaking

2.18      The committee's most recent ASIC oversight report outlined problems with conflicts of interest and unreasonable advice given by financial planners, as identified in ASIC's shadow shopper exercise.[16]

2.19      In July 2006, ASIC accepted an enforceable undertaking (EU) from AMP Financial Planning P/L (AMPFP) 'to modify key aspects of how it provides financial advice to its customers'.[17] This followed a period of surveillance in which 300 files from 30 AMP planners were analysed. According to ASIC's press release:

2.20      ASIC’s analysis of the files (which primarily related to superannuation switching advice) and subsequent investigations found that on many occasions, AMPFP:

• planners' files did not disclose a reasonable basis for advice;
• failed to make proper disclosures about the costs of acquiring the recommended product and the significant consequences of replacing the existing product;
• made statements on its website and in its Financial Services Guide that suggested AMPFP Planners could consider a broader range of products than permitted, which could have misled consumers; and
• may not have had adequate arrangements in place to manage conflicts of interest.[18]

2.21      ASIC reported that of the super switching files selected, '45 per cent failed to adequately disclose a reasonable basis for the advice'.[19] This usually involved AMP financial planners advising clients from rival funds to move into AMP products, which attracted a commission for the planners and extra revenue for the licensee. While not all such switches were made on the basis of unreasonable advice, many were.

2.22      The EU agreed to between ASIC and AMP provided for AMP to do the following:

• change internal procedures to improve the quality and transparency of advice given;
• contact clients who switched from industry funds on the basis of AMP advice since November 2004, offering to have that advice reviewed;
• provide redress where that advice was reviewed and found to be unreasonable;
• re-train planners on the new internal procedures; and
• appoint a compliance expert to monitor the implementation of the EU.[20]

2.23      The committee queried ASIC on whether AMP's clients were best served by having the onus put on them to request a review of the advice they received, when ASIC's shadow shopper exercise had highlighted that recipients of poor advice were mostly not aware that it was so.[21] In response to a question placed on notice, ASIC wrote:

The enforceable undertaking with AMP Financial Planning (‘AMPFP’) required AMPFP to send a letter to specified classes of clients to inform them of the issue about which ASIC was concerned and offer them an opportunity to have the advice they received reviewed.

In ASIC’s view, this letter was sufficiently explicit to put those clients on notice that the advice they received may not have been appropriate to them and gave clear guidance to the clients about what those clients should do if they wanted to have their advice reviewed.[22]

Westpoint

ASIC's preventative strategies

2.24      Since the collapse of the Westpoint companies in late 2005, the committee has been concerned that similar high risk mezzanine schemes could be placing other investors' savings at risk. Of particular concern is the potential for further exploitation of the provision allowing investment schemes to raise funds outside ASIC's jurisdiction, by issuing promissory notes of over $50,000. The WA Court of Appeal's rejection of ASIC's attempt to close this loophole means that this provision remains open to exploitation, as occurred with Westpoint. At the estimates hearing of the Senate Economics Committee on 2 November 2006 Mr Lucy stated that ASIC had been discussing the issue with Treasury. However, he also suggested that the loophole may have been less significant than was first thought, because investors primarily acted on the advice of licensed financial advisers.[23]

2.25      In response to a question on notice, ASIC stated that the government did not intend to increase the $50,000 threshold applying to promissory notes. The response also noted:

ASIC has taken action against a number of investments with this financing structure in the property sector in recent times; the reasons for our concern have varied and have often been wider than the existence of mezzanine financing alone.

...

ASIC is currently undertaking surveillances of a number of property-related investments that use a type of mezzanine financing. These surveillances may result in additional regulatory action.[24]

2.26      The committee urges ASIC to further press the government to close the loophole that currently allows Westpoint-style schemes to operate outside of ASIC's regulatory jurisdiction.

Recommendation 1

2.27      The committee recommends that ASIC continues to seek an amendment to the disclosure requirements in the Corporations Act to increase the $50,000 threshold applying to promissory notes.

Bristow matter

2.28      At the committee's previous ASIC oversight hearing, ASIC indicated that along with Westpoint directors, financial services licensees and the auditor, financial planners who recommended Westpoint to their clients were being investigated by the regulator.[25]

2.29      Mr Ian Bristow, a financial planner who advised his clients to invest in Westpoint, is one such planner under investigation by ASIC. He has sent the committee correspondence complaining about ASIC's handling of his client's files, which are being examined as part of their ongoing investigations. Mr Bristow's correspondence raised a number of issues with respect to the time ASIC has held the files and the security of the information they contain.

2.30      The first issue of concern for the committee is ASIC's retention of client files, including original documents, that are required for other purposes such as preparing tax returns. Mr Bristow has complained to the committee that ASIC had held his client's files for too long and reneged on assurances to return them within designated timeframes. ASIC indicated that, in the case of Mr Bristow, it received more material than was required and the process may be undertaken more effectively in the future:

...we seek the necessary minimum documents. We certainly do not seek for more than we require. In this case, there was no question that we did not need a lot of material that we obtained and we are expediently making it available to people as they require it. Perhaps the next time we need to undertake such an activity it might be appropriate for us to make it very clear to the adviser what we do need and, therefore, what we do not need. I think that would be the most practical way of going about it.[26]

2.31      The committee was told, however, that Mr Bristow's case is not typical and that ASIC had made clients' material available when it has been requested:

It is important to understand that the Mr Bristow issue is not typical. The volume of communications, and in particular the representation of his clients, is a fact that has been very much particular to Mr Bristow. We certainly have not found that with other advisers.

...

...we have responded to that challenge as quickly as we can. We have made available CDs for people to have a better understanding of what we have. To the extent that they request information that we do not need, we have returned it. The Bristow issue needs to be kept in perspective. There was a level of similarity between all the communications that we received. Again, when we have responded to these clients and made our position clear to them, not a single complaint has followed.[27]

2.32      The other concern for the committee is the extremely sensitive nature of some of the documents being held by financial planners. While ASIC expressed concern about Mr Bristow holding sensitive client details such as bank PINs, Mr Lucy indicated that this was not typical of the industry generally:

I do not know whether what Mr Bristow’s files disclose is representative of the industry. I think that is something that frankly is a matter for the FPA to have a closer look at and respond to as necessary. Certainly if we found it to be more widespread, I think we would go back to the government to point that fact out to them. At this stage, it is one simple example.[28]

Educating investors

Unsolicited share offers – Mr David Tweed

2.33      The committee has regularly taken an interest in ASIC's efforts to minimise investor losses by improving the public's overall financial literacy. One prominent example of the problem of financial illiteracy in the community has been the activity of Mr David Tweed. Over the past decade he has profited through his involvement with companies that purchase shares from unsophisticated investors at prices well below market value. On 2 November 2006, ASIC announced that it had permanently banned Mr Tweed from providing financial services for failing to comply with various financial services laws.[29]

2.34      However, ASIC also indicated that this will not prohibit him from continuing to make unsolicited offers to investors, which does not require an AFS licence.[30] So long as these offers state the market value of the shares on the day the offer is made and provide a minimum of one month to accept the offer, they are legally permitted under the Corporations Act.[31]

2.35      The committee sought to identify any means to curtail the unethical, if not illegal, activities of Mr Tweed. Both the committee and ASIC are in agreement that public access to shareholder registers is essential to ensure transparency and prevent target companies from blocking legitimate offers to shareholders from being made.

2.36      ASIC suggested that listed companies could play a role in educating their shareholders:

When we announced that we had banned Mr Tweed, we pushed a little bit of the responsibility onto the listed companies—after all, they have resources and a powerful message channel to communicate with their shareholders. We suggested they spend five minutes at the AGM reinforcing with shareholders that they should not sign silly things they get in the mail and that they should check share prices in the newspapers. It is very encouraging to see that public companies were already doing that and the level of knowledge about Mr Tweed seems to be increasing. We also said that we would assist listed companies who wanted to set up contemporaneous share sale facilities to compete with Mr Tweed’s offer.

One of the techniques is that, as a listed company, when you see Mr Tweed making inquiries of your share register, you might decide to send a mail-out to your shareholders in which you offer to buy back their shares at a proper price—as a lot of listed companies do. There are a few little regulatory hurdles around that, and we said we would help companies to speed that up. So that is another technique: when a Tweed offer goes out, you would get an offer from the company inviting you to sell your shares at a proper market price, rather than the low price.[32]

2.37      The committee notes, however, the cost to listed companies associated with an additional mail out to shareholders and the likely financial literacy of shareholders who make the effort to attend Annual General Meetings.

2.38      ASIC rejects outlawing low offers and making each company the 'gatekeeper' of share purchase offers to its shareholders, indicating that each measure would have detrimental public policy effects. Chairman Mr Jeffrey Lucy instead emphasised the problem of financial illiteracy:

The forms are transparent. Typically, Mr Tweed leads off by saying that the offer is manifestly lower than the marketplace.[33]

2.39      Deputy Chairman Mr Jeremy Cooper continued:

...[the share offer] regime is so stark that it illustrates graphically the problem that we have—because right next to the market price is the price that you are being offered. That rather neatly describes the problem. The very simple message we have been trying to have listed companies send to their shareholders is that they should just pick up a daily newspaper and look at the price. We have talked about education before, and there are people out there who simply do not understand the issues.[34]

2.40      The committee notes that the Corporations Act requires unsolicited offers to purchase shares to clearly outline both the value of the offer and the market value of the shares. Even in the case of Mr Tweed's offers, this condition is being met and the inadequacy of his offers when compared with market value can be clearly seen in his correspondence. The problem is not, therefore, with the regulatory regime. Only the highly financially illiterate are being seduced by Mr Tweed's offers.

2.41      The committee is not of the view that companies should be responsible for protecting shareholders from themselves; this is an expensive burden with no commercial imperative. The committee is of the view that ASIC should continue to take an active role in educating the general public on matters of financial literacy, including receiving 'low-ball' unsolicited share offers.

Other ASIC initiatives

2.42      In July 2006 ASIC announced initiatives to improve the financial literacy of Australians. One of these is a six part radio series called 'Your Money'. Each program in the series runs for between 15 and 20 minutes and is available on ASIC's consumer website, FIDO. ASIC has also indicated that it will be played on 'community and local radio stations'.[35]

2.43      Responding to questions on notice, ASIC informed the committee that the series had been visited over 6,000 times on its website. The programs had been distributed to 145 community radio stations and ASIC indicated to the committee that from 'early indications' most had played it.[36]

2.44      In an address to the Association of Superannuation Funds of Australia in September 2006, Chairman Mr Jeff Lucy outlined two superannuation-related education initiatives to be implemented in the next year:

• an online super education program for imminent school leavers; and
• a consumer education campaign aimed at those who may be transferred from their existing fund without their consent.[37]

2.45      In response to questions on notice requesting an update on progress of these initiatives, ASIC stated:

The development phase for the superannuation resource for schools will continue throughout 2007. This is to ensure a high quality product that is appealing and relevant to school students and to take account of curriculum developments in the states and territories that may take place during the year, particularly developments incorporating the National Consumer and Financial Literacy Framework. The resource is expected to be launched in early 2008.

The consumer education campaign for those who may be transferred from their existing fund without their consent will continue over the next six months.[38]

Vizard matter

2.46      In its previous oversight report, the committee discussed the ongoing issue of ASIC's assistance to the Victorian Police investigating the possibility of laying perjury charges against Mr Vizard. The committee noted that it remained unclear as to whether ASIC had considered the possible perjury implications of the agreed statement of facts filed in the Federal Court in its case against Mr Vizard differing from his earlier testimony in a committal hearing.

2.47      In September 2006, Vizard gave evidence in the Victorian Supreme Court hearing a civil claim by Westpac against Mr Roy Hilliard, Mr Vizard's former book keeper. However, he refused to answer questions on his share trading activities on the grounds he may incriminate himself. Despite this refusal, Vizard's former accountant Mr Greg Lay, who had previously refused to assist ASIC in its investigations, testified. He provided evidence that connected Mr Vizard with a shelf company used to hide trading deals.[39]

2.48      ASIC told the committee that they remained in dialogue with the DPP over this matter.[40]

Cole commission report

ASIC's future role

2.49      The Cole commission report into the UN oil-for-food bribery affair involving illicit payments by AWB to secure wheat contracts was released on 27 November 2006. In response to the committee's interest as to any role ASIC would have in pursuing action arising from the Cole recommendations, Chairman Mr Jeffrey Lucy indicated:

There have been a number of discussions and, indeed, meetings. There was a formal meeting convened yesterday by Attorney-General’s which was attended by our executive director of enforcement and a number of agencies. Following that meeting, there will be a meeting held next Tuesday where, as I understand it, the heads of Attorney’s, AFP, DPP and ASIC will be present. I expect that that meeting will be a precursor to many meetings coming forward as to the manner in which the Cole recommendations are responded to.[41]

2.50      ASIC also indicated that the issue of specific legislation to enable ASIC to access evidence relating to this matter had been discussed and is being considered by the government.[42]

Legal professional privilege

2.51      In handing down his findings, Commissioner Cole recommended that the federal government consider suspending the application of legal professional privilege to royal commission proceedings. This stemmed from AWB's efforts to frustrate the inquiry in the Federal Court by arguing that large numbers of documents were subject to privilege and not available to the Cole inquiry.[43]

2.52      Prompted by AWB's apparent abuse of claims to privilege and Commissioner Cole's recommendations, Commonwealth Attorney-General the Hon. Philip Ruddock MP announced 'an inquiry by the Australian Law Reform Commission (ALRC) into legal professional privilege as it relates to the activities of Commonwealth regulatory agencies'.[44] This will investigate the issue of privilege more broadly than its relevance to royal commissions, as initially referred to by Commissioner Cole. Consideration will be given to suspending legal professional privilege for all investigations by Commonwealth regulatory agencies. The Attorney-General's press release stated:

There are also concerns legal professional privilege is used to frustrate enforcement of Australian laws by investigatory agencies such as the Australian Securities and Investments Commission.[45]

2.53      The ALRC is due to report by 3 December 2007.[46] In response to the committee's interest as to whether the current privilege laws could also hinder any future ASIC investigation into AWB, ASIC indicated that it was too early to determine whether that scenario would eventuate.[47]

Hedging executive share options

2.54      The committee enquired into proposals to prohibit the practice of company executives hedging their remunerative share options. The ASX's proposed changes to their principles of good corporate governance in this area are as follows:

...the Principles recommend that the terms of equity-based remuneration schemes should prohibit “hedging” of unvested entitlements.[48]

Also:

Council ... recommends that where vested entitlements are hedged this should be disclosed to the company; so that the company is not in a position where it might inaccurately hold out that any entitlements are “at risk” or that the interests of shareholders and executives are aligned by reason of such holdings.[49]

2.55      As part of its ongoing review into corporate and financial services regulation, the government has also proposed a requirement for companies to disclose their policy on executives hedging options. The relevant section of the proposals paper states: 

As part of this review of the reporting framework for executive and director remuneration, it is proposed to introduce a new disclosure requirement. The proposed requirement will mandate that companies disclose the board’s policy on executives and directors entering into contracts to hedge their exposure to options or shares granted as part of their remuneration package and how the company enforces this policy. This disclosure is considered important in ensuring shareholders have all relevant information when casting their non-binding vote on the remuneration report. The Government will continue to monitor the work of the Australian Stock Exchange Corporate Governance Council on this issue to ensure that a consistent regulatory response to this issue is adopted.[50]

2.56      Noting that the intention of such remunerative arrangements is to align director and shareholder interests, the committee sought ASIC's view on these proposals. ASIC agreed that the practice of hedging share options could break this nexus, though officers emphasised that any regulatory response ought to depend on the company's knowledge of the practice:

It depends on the spectrum as to whether the company, for example, was in cahoots with the hedging. If you have a board that set up an at risk remuneration structure, take it public and tell the world that Mr or Mrs Bloggs is getting at risk remuneration, then they all knowingly let the executive go off and hedge, that is at the extreme end of bad conduct. They would all be involved, arguably, in what would be misleading behaviour. At the other end of the spectrum there could be a board that does not know at all when the director is hedging.[51]  

2.57      ASIC did not offer a view as to whether a prohibition or disclosure regime was preferable, indicating only that any corporations law and ASX guidelines changes in this area should be consistent.[52]

Listed property trusts

2.58      The committee also raised concerns over the corporate governance standards of listed property trusts (LPT) in Australia. Citing a media report suggesting that half of Australia's LPTs could not compete due to poor corporate governance standards, the committee queried ASIC on its monitoring of this sector.[53]

2.59      ASIC suggested that the criticism was unwarranted, being based on two flawed assumptions. The first is that trusteeship and management of such enterprises should be separate:

...one issue revolves around our decision in this country to effectively merge the trusteeship and custodianship with the management of the enterprise. Some foreign jurisdictions find that quite difficult to grapple with and, wrongly, assume that we have not grasped the previous regime where it was thought beneficial to separate those two functions. Jurisdictions that are still in the divided structure have some difficulty coming to grips with the direction we have moved in—as I say, somewhat wrongly, because I think our system is superior and there were good reasons for moving to it.[54]

2.60      The other relates to LPTs' not complying with ASX standards of governance:

...they have only had their first round of experience with the ASX principles and recommendations that we were just talking about. They were not included in the original introduction of that as that only applied to companies. The ASX itself put out a report in October on this issue and, not surprisingly, the trust entities were just a little bit behind in terms of their overall compliance and performance with those recommendations. That is no surprise because you would find if you did the work that it would have been relatively comparable to when companies were first exposed to it.[55]

2.61      ASIC told the committee that the article in question did not accurately reflect their view that there is an absence of 'concrete evidence' to indicate a problem with LPTs in Australia.[56] However, ASIC did acknowledge the need to maintain a watch over such entities:

In its most complex form, these trust structures do put a fair bit of strain on the management of conflicts of interest, related party transactions and so on. That may be the area of concern in those multi-role, multi-vehicle type structures that we do see being produced.[57]

Private equity

2.62      The recent expansion in private equity investment in Australia has prompted consideration of its potential effect on ASIC's regulatory responsibilities. Citing a report from the UK Financial Services Authority, which identified emerging regulatory issues from private equity investment, ASIC told the committee it was undertaking an internal review on its effect:

In its report, the FSA mentions a steady increase in the amount of leverage or borrowings that are involved in these transactions. We are asking ourselves internally whether private equity is an area on which we need to focus as a specific form of corporate activity and, if so, what regulatory tools we have and what regulatory responses, if any, we should make. We are involved in that process right at the minute.

We were talking about the issues that might be relevant in that kind of internal review. We talked about conflict, the excessive leverage that seems to be involved; valuation issues, how interest in those businesses is valued; management fees, whether they are appropriately disclosed in relation to the transactions; and a broad umbrella topic of information flow and transparency. Some of those issues are not necessarily ASIC issues. We are not a prudential regulator, so the level of gearing that a business has is not necessarily an ASIC issue per se. Pulling back closer to our patch, we have done extensive work in the area of conflicts, so that is a natural area for us to look at.[58]

2.63      The committee was informed that ASIC intended to discuss the implications of increased private equity investment at the Council of Financial Regulators.[59]

 

Senator Grant Chapman

Chairman

Navigation: Previous Page | Contents | Next Page