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Chapter 3

Australian Securities Investments Commission

3.1        At the committee's hearing on 21 March 2012, ASIC's evidence covered four broad areas:

• its achievements against the priority areas in ASIC's strategic framework;
• its recent initiatives in the area of enforcement and litigation;
• standards for financial advisors under the Future of Financial Advice (FOFA) legislation; and
• ASIC's role in the not-for-profit sector.

3.2        The committee also canvassed ASIC's compliance with a Senate Order in relation to organisation files following media reports claiming that ASIC had not satisfied requirements under the Order and was in contempt of the Senate. Members of the committee indicated they would explore this issue further through the Budget Estimates process in May this year.^[1]

ASIC's work towards its strategic framework priorities

3.3        Mr Greg Medcraft, Chairman of ASIC, outlined the Commission's strategic framework priorities:

Basically, our focus is on confident, informed investors and financial consumers, fair and efficient financial markets and an efficient registry and licensing system. We really have three subfocuses in the area of confident investors and financial consumers: (1) is education, (2) is gatekeepers and (3) is consumer behaviour.[2]

3.4        In relation to 'confident and informed investors and financial consumers', the committee heard that:

(a) following the committee's last oversight hearing, there had been a focus on education through various mediums including social media such as Youtube, Facebook and Twitter, ASIC's MoneySmart website and application and the ASIC website;

(b) a new financial literacy kit had been launched aimed at new migrants who come to Australia on humanitarian grounds. The kit provides 'multilingual resources to help people work with migrants to learn about the Australian financial system';[3]

(c) ASIC's shadow shopping report continued to be progressed and would be released later in March; and

(d) a consultation paper on investment platforms was recently released proposing 'new requirements to strengthen operating requirements for platform operators, ensuring they have adequate resources and appropriate corporate structures and compliance arrangements'.[4]

3.5        Under the category of 'fair and efficient financial markets', ASIC told the committee that the publication Do I need a licence to participate in the carbon markets? has been released. The publication is designed to provide guidance 'to help businesses comply with the introduction of the Australian carbon pricing mechanism'.[5]

3.6        ASIC also noted that there has been a focus on enforcement and understanding ASIC's enforcement processes:

• For the first time, ASIC issued an enforcement policy outlining the circumstances, reasons and methods in which they take action in terms of investigation and enforcement.
• Since July 2011, ASIC has taken action against 30 directors, eight auditors, insolvency practitioners and liquidators and has taken action on seven inside trading in and market manipulation matters. In relation to consumers, ASIC had 63 actions involving 'dishonesty, fraud and misleading behaviour'.[6]

3.7        In terms of ASIC's strategic priority of 'efficient registry and licensing', the Commission told the committee that a new ASIC search portal called ASIC Connect was ready to be launched. This portal will allow Australians to search across asset registers and organisations and people. ASIC also noted that the national business names project was due to be launched in May 2012.

Enforcement and litigation

3.8        In response to recent work within the enforcement area, the committee questioned ASIC on the reasons behind decisions to investigate and/or pursue litigation. Mr Medcraft explained there are four key factors within the decision-making process:

The first one is the amount of harm or loss that may have occurred if it is, say, in financial services or, if it is in the markets area, the effect in terms of the market issue. The second thing we look at is the cost versus the regulatory benefit that we get from taking an action. The third area that we look at is the availability of evidence. At times when there might be a significant amount of harm or loss and we might consider there might be a real regulatory benefit ahead of the cost but, if the evidence is not there, on balance, clearly we do not proceed. The fourth area we look at are what alternatives may be available in terms of getting an outcome in response to the particular issue that might have occurred.[7]

3.9        The committee has examined this issue of ASIC's regulatory and litigation strategy on several occasions at past oversight hearings. It reiterates the view that ASIC's approach is well founded.

Committee view

3.10      From time to time, the committee has queried ASIC's decision to use a particular enforcement power in a given case. As part of its recent report into the collapse of Trio Capital, the committee expressed concern that both ASIC and APRA's preference appeared to be for enforceable undertakings against former directors and auditors of Trio Capital, rather than disciplinary action through the Companies, Auditors and Liquidators Disciplinary Board. The Chairman of the CALDB explained in an answer to a question taken on notice:

...in recent times, very few matters have been referred to the Board. The reason for this is a matter which needs to be addressed to ASIC or APRA, although to some extent, the use of enforceable undertakings would explain the reduction in the number of matters being referred.[8]

3.11      The committee intends to follow up on these matters at future oversight hearings. It seeks ASIC's guidance as to why it has pursued enforceable undertakings as opposed to criminal action against those involved in the Trio Capital fraud. Is it possible for those individuals from whom ASIC has accepted enforceable undertakings to be referred to the CALDB? More generally, the committee is interested to know why it has not made more use of the CALDB following adverse findings from its own investigations into company directors, auditors and liquidators.

Leighton's case

3.12      Following recent media coverage, the committee questioned ASIC on the recent infringement notice issued against Leighton Holdings.[9] ASIC explained that the decision served as a message to all other Australian listed companies:

When we look at cost versus regulatory benefit, the regulatory benefit is that we were able to send a message to all Australian companies that we have taken action here in terms of the infringement notice but we have also taken forward-looking action, which I think is third point—that it is forward looking. It does not just say, 'You pay the infringement notice.' The company now has to bring in a consultant to look at their corporate governance processes. They have to make recommendations, implement them and then they are going to be reviewed each year for the next three years. So it deals with the problem but also looks forward. But I think what is important is how we leverage the result. Getting the message to Australian listed corporations—a timely reminder—to think about their governance practices to make sure that they are disclosing in a timely fashion.[10]

3.13      The committee noted that David Jones had placed itself into a trading halt as a result of the Leighton case. While ASIC would not comment on David Jones' decision, it explained to the committee situations where a trading halt is the appropriate course of action:

...once there is a leak in the market or there is discussion in the market and it looks as though the whole of the market may not be fully informed, pending making a full announcement, and it may take time to assess information, you should seek a trading halt. We and the ASX have worked together clearly to say a trading halt is an appropriate circumstance there. We work very carefully to make sure that all of the markets that trade on those stocks also go into trading halt around those stocks.[11]

Standards for Financial Advisors

3.14      The committee examined ASIC's work on standards for financial advisors in relation to the implementation of the FOFA reforms and self managed superannuation funds.

Future of Financial Advice Legislation

3.15      The committee tabled its report into the FOFA reforms on 29 February 2012 and made a series of recommendations in relation to the proposed legislation. It supported the original commencement date of 1 July 2012, although it documented the various concerns of stakeholders with this implementation date.

3.16      The committee questioned ASIC regarding its preparation for the introduction of the proposed FOFA reforms. ASIC advised the committee that in response to recommendations in the committee's report on the proposed legislation, it had met with industry stakeholders to address concerns they may have and would be publishing consultation regulatory guidance by 1 July 2012:

We have announced that we will be publishing regulatory guidance in four areas in relation to conflicted remuneration, scaled advice and how that can be effectively delivered, the best interests test and how advisers can comply with that test, and also guidance on the proposed changes to our licensing and banning powers. We will be undertaking that guidance very much through a consultative process. We will be releasing consultation documents that set out how we propose to approach these areas and seeking feedback and issuing final guidance.[12]

3.17      ASIC advised the committee that the final guidelines would be published in September this year, following an eight week period for consultation.[13]

3.18      On 14 March 2012, the Minister for Financial Services and Superannuation, the Hon. Bill Shorten MP, announced an extension of the timeframe for the introduction of the reforms.[14] Businesses can voluntarily adopt the measures from 1 July 2012, although formal compliance will not commence until 1 July 2013. ASIC encouraged those businesses wishing to comply voluntarily to contact the Commission:

Obviously, while not ideal, we have in the past applied or used policy that we have in consultation papers, as guidelines, to provide people with certainty. But certainly if anyone is looking at opting in early we would encourage them to come and speak to us.[15]

3.19      ASIC noted that while it had not received confirmation from any businesses that they would be adopting the requirements early, many had indicated they were considering voluntarily complying before 1 July 2013.

Committee view

3.20      The committee acknowledges that the government's announcement to delay compliance with the FOFA legislation by 12 months has allayed some industry concerns.

Self managed superannuation funds

3.21      Following the oversight hearing in November 2011, the committee continued its discussion of compensation for theft and fraud in relation to self managed superannuation funds (SMSFs). ASIC advised the committee that it would be placing an alert on its MoneySmart website notifying individuals setting up a SMSF that no compensation is available in the event of theft and fraud.[16]

Committee view

3.22      The committee's report on the Trio inquiry will be tabled in mid-May. The report dealt in part with the matter of compensation and the options to bolster protections from fraud and theft for investors in self managed superannuation funds.

3.23      In May 2012, the government-commissioned inquiry into a statutory scheme to compensate consumers of financial services delivered its final report. Its author, Mr Richard St John, concluded that it would be inappropriate to introduce a more comprehensive last resort compensation scheme. It argued that there would be an element of moral hazard if a last resort compensation scheme was introduced without a greater effort to put licensees in a position where they can meet compensation claims from retail clients. The report argued that this would reduce the incentive for stringent regulation of the compensation arrangements.[17]

3.24      Instead, the Richard St John report concluded that priority should be given to improve the protection of retail clients through a more rigorous approach to compliance by licensees. In particular, it noted that the regulatory platform for financial advisers and other licensees needs to be more robust and stable before a safety net, funded by all licensees, is put in place.[18]

3.25      The committee would like to examine the issues canvassed in the Richard St. John report in more detail, particularly as they relate to the issues raised in the Trio Capital collapse. Chapter 6 of St. John's report sets out some elements of how such a scheme could work if government were to decide to proceed with such a scheme. The report states that self managed superannuation funds (SMSFs) would not be included in the scheme. If the policy objections raised by Mr St. John to the operation of such a scheme can be overcome, the committee considers that it has merit.[19]

3.26      The committee's report into the Trio Capital collapse also supported an insurance scheme to which SMSFs could 'opt-in', enabling them to have protection against loss by reason of fraud or theft. The committee recommends that the government consider policy options for such an opt-in compensation scheme for SMSFs.

The Australian Charities Not-for-profits Commission

3.27      The committee also canvassed ASIC's role in relation to the not-for-profit sector. It questioned the commission on its likely role following the establishment of Australian Charities Not-for-profits Commission (ACNC) on 1 July 2012. ASIC explained that the commission's regulatory responsibility in the not-for-profit sector is quite small. Mr Medcraft noted that following the establishment of the ACNC, it is expected that ASIC 'will retain responsibility for the incorporation of these companies limited by guarantee as charities but the commission (ACNC) will take over responsibility for the governance arrangements'.[20]

 

Ms Deborah O'Neill MP
Chair

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