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Chapter 5
Further topics of discussion at the gatekeeper roundtable
5.1
This chapter presents a range of other topics that were considered
during the roundtable, including:
- regulation of the self-managed superannuation fund (SMSF) sector;
- integrated reporting;
- the granting of an Australian Financial Services Licence (AFSL);
- detecting fraud;
- the challenges and opportunities of new communications technology;
- the merits and disadvantages of passive index funds versus active
asset management; and
- the balance between market efficiency and investor protection in
the financial services system.
Self-managed super funds
Regulatory frameworks for
self-managed superannuation
5.2
There are crucial differences in the levels of responsibility and risk between
the registrable superannuation entities (RSEs) regulated by the Australian
Prudential Regulation Authority (APRA) and SMSFs that are regulated by the
Australian Taxation Office (ATO). An APRA-regulated superannuation fund has a
board of trustees and the members are eligible for compensation in the event of
fraud or theft. This is not the case for an SMSF where the members are the
trustees and must take personal responsibility for the management and protection
of their assets.
5.3
van Eyk argued there was a discrepancy between the regulation in the
financial planning sector which operates under model portfolios, platforms
overseen by responsible entities (REs), and boards of directors in the case of
the regulated superannuation sector, and the minimal regulation of advice
provided to SMSFs:
if you compare the regulation required around providing
advice in the self-managed space, it is far less than it is for the financial
planning industry, which operates under this model portfolio approved
investment list, which is typically off platforms that have responsible
entities and which have higher levels of governance, if it is superannuation.
There are independent boards that sit for products to come on and off. There
are limitations around single-purpose hedge funds. There are limitations around
leverage et cetera.
If you are looking for gaps in the system, I would say that
the largest gap that you have at the moment would be around the regulation of
self-managed super funds.[1]
5.4
The Financial Services Council (FSC) gave a comprehensive update on the
state of regulation in the SMSF sector, including recent changes pertaining to
recognised accountants. It stressed that the essential differences in levels of
responsibility, risk and protection between APRA-regulated and self-managed
superannuation funds need to be communicated clearly in order to avoid an
expectation gap regarding the level of oversight in the SMSF sector:
The SMSF regulatory regime, primarily overseen by the ATO, is
largely distinct from the regime that applies to APRA regulated funds. This
reflects the nature of the two types of funds – one where a third-party trustee
is responsible for members' monies and the other where the member takes personal
responsibility for the management of their own money.
As a result, the respective regulatory frameworks are also
very different – as are the dynamics of each sector, most obviously in terms of
the number of each type of fund. There are only a few hundred funds overseen by
APRA versus over 470,000 SMSFs overseen primarily by the ATO.
It is not possible for there to be the same level of
oversight of over 470,000 funds as there is over only a few hundred. It is
arguably also not appropriate for there to be the same level of oversight given
the key distinction between these funds – self managed versus third-party
managed. Nevertheless, this may in itself give rise to an expectations gap if
there is an assumption that the same level of oversight exists.
The FSC believes that this is the central distinction that
should be conveyed to individuals who seek to establish or are advised to
establish a SMSF. The key differences in levels of responsibility, risk and
protection between self-managing your superannuation via an SMSF or relying on
a third-party APRA regulated trustee to oversee your superannuation.
Beyond this, the most commonly cited regulatory gap in
relation to SMSFs has traditionally been the carve-out for accountants under
the Corporations Act which allowed them to provide SMSF establishment advice
without being subject to the relevant protections under Chapter 7 of that Act.
However, as part of the Future of Financial Advice (FoFA)
reforms, the Corporations Amendment Regulation 2013 (No. 3) Select Legislative
Instrument No. 101, 2013 requires recognised accountants to be Licensed to
provide financial services such as advice on financial products. The regulation
now brings recognised accountants within the Corporations Act (and FoFA),
closing the regulatory gap and improving the quality of advice that SMSF
trustees will receive in the future.
In addition, the FoFA reforms impose a number of higher
conduct requirements on all Australian Financial Services License holders who
provide financial services including the provision of financial advice. The
reforms include a statutory best interest duty and a ban on conflicted
remuneration along with various new disclosure requirements.
Finally, a further strengthening of the regulatory framework
in relation to SMSFs was the recent introduction of a requirement for SMSF
auditors to register with ASIC. To be successfully registered, auditors are
required to pass a competency exam, have certain educational qualifications and
supervised experience.
Notwithstanding the perceptions and/or expectations gaps, the
FSC is of the view that it is important to analyse the impact all of these
reforms will have on the uptake of SMSFs, and the types of individuals who
decide to establish SMSFs, before determining that further regulatory change is
required.[2]
5.5
Ms Volpato from the Australian Institute of Superannuation Trustees
(AIST) said that the most effective way to communicate with investors about the
risks involved with SMSFs would be for financial planners and financial
advisers to have an official leaflet to hand to investors clearly stating that
people setting up an SMSF do so at their own risk. She argued that placing the
same information on the ATO website would not be as useful because there is no
guarantee that investors would receive the information.[3]
5.6
The committee believes that both options are important. It recommended
in its report into the collapse of Trio Capital that the ATO include a warning
on its website that SMSFs are not covered in the event of theft. The committee notes
that the ATO has posted information on its website explaining that 'SMSF
trustees have fewer avenues of recourse against fraud and theft compared with
trustees of APRA-regulated super funds'.[4]
However, the warning is not prominently placed on the website.
5.7
Ms Nerida Cole, Managing Director of Financial Advisory at Dixon
Advisory pointed out that SMSF trustees must sign an ATO declaration
acknowledging the SMSF sector has limited access to compensation arrangements:
...my understanding is that it is a requirement of the ATO for
trustees to sign a declaration upon commencing a self-managed super fund, which
lists a number of specific risks including the limitations for the compensation
scheme arrangements that they have access to and that must be signed before
they can commence a self-managed super fund. That is certainly a process
amongst other disclosure and education requirements that we try to go through
with our trustees before they commence the self-managed super fund.[5]
5.8
One Investment Group thought that public expectations around SMSFs may
be unrealistic. Mr Epstein questioned the ability of the average Australian to
run an SMSF, emphasised the need for portfolio diversity, and suggested the
requirements to establish an SMSF should be set higher:
We have to question whether the hurdles for an individual to
run a SMSF are high enough. I do not think that an investor can invest in any
product without reading anything and assume that the product is going to be a
good product. I do not think it is reasonable to expect that an average Australian
can actually run an SMSF. If we relate it back to the property comment and
expect that they are going to only invest in property, I do not think that that
is a diversified portfolio that warrants the investor investing on that basis.[6]
5.9
Ms Cole said that as a financial planner, she would be very concerned
that any SMSF would place all their funds into one asset:
any SMSF that would have 100 per cent of their funds in one
single asset is taking on an extreme amount of risk and would not be something
that a prudent investor or adviser would be normally recommending.[7]
5.10
CPA Australia agreed that the best interest duty required a financial
planner or adviser to recommend a structure that is appropriate for the client
and their desires. Mr Amir Ghandar, Policy Adviser at CPA, noted that
SMSFs will likely be a key vehicle for many investors, but also noted that
APRA-regulated funds are now offering greater flexibility for people to choose
their investment portfolios:
So, if the client is interested in property—and as we know,
that is a large part of Australian culture—and wants to invest in direct
property, then SMSF is probably the only vehicle that provides them with that
capability.
With regard to the question around the desire to invest in
direct equities, that again, probably, has traditionally been the domain of the
self-managed super fund, although it is interesting to see APRA-regulated funds
now moving into that capability. To me it boils down to the point that, as long
as the adviser is acting in the best interest of the client, the SMSF has a
valuable part to play, if that is the desire of the client in terms of the way
they want to invest.[8]
5.11
Ms Volpato agreed with the Future of Financial Advice (FOFA) process and
the best interest duty as it relates to SMSFs, but argued that a key deficiency
in the current process is the lack of understanding that a client has about
what is actually recommended in the statement of advice. She proposed that
advice should be formatted in a manner that people could easily understand, and
that this approach should be tested on the end-users.[9]
5.12
Ernst & Young agreed 'that the overall framework associated with
self-managed super is not as robust' as the APRA-regulated sector, but he noted
(as mentioned earlier by the FSC) that ASIC has introduced a registration
requirement for external auditors of SMSFs that operates from 1 July 2013. Mr
McKenzie said that standards for SMSF auditors have risen, and that the
registration requirement appears to have significantly reduced the number of
auditors qualified to sign off on SMSFs.[10]
5.13
The AIST raised a series of concerns about the SMSF sector. It
emphasised the importance of the safety of superannuation savings, noted that
rigorous governance is required for all superannuation monies, and stated that:
Expectations of and behaviours within SMSFs should, so far as
possible, be placed on a level playing field with the rigorously governed APRA regulated
funds.[11]
5.14
In support of this, the AIST made a series of recommendations for both
the decision-making stage of establishing an SMSF, and for when an SMSF is
operating:
Stage 1—Decision making phase of establishing an SMSF
- The current accountant's licensing
exemption of 3 years to 1 July 2016 to provide advice regarding SMSFs should be
removed, or at a minimum brought back to 6 months;
- AIST welcomes the Moneysmart Self
Managed Super June 2013 fact sheet. AIST recommends investigating how to ensure
that distribution of this fact sheet to a client is a requirement where an
accountant or financial planner is recommending establishment of an SMSF. AIST
notes that the current requirement that potential SMSF new trustees must sign a
form saying they are aware of their responsibilities insufficiently highlights
the lack of regulator coverage. A warning from the regulator would have more
weight; and
- SMSF trustees must be required to
have accredited training prior to establishing an SMSF.
Stage 2—SMSF up and running
- SMSFs will be a major recipient of
the efficiency reforms which SuperStream will bring. While AIST believes that
these efficiencies will be forthcoming, it is estimated that the cost of
implementing these reforms is $467 million. However, it is APRA regulated funds
which will bear these costs. AIST recommends that SMSFs should also be required
to bear some of these costs, since they participate in the system; and
-
SMSF trustees must be required to
continue accredited training each year while managing.[12]
Integrated reporting
5.15
The usefulness of audits and company reports has been a key challenge
for investors in deciding on their investment strategies. The committee notes
that on 20 February 2013 in the Australian Financial Review, Luke
Sayers, Chief Executive Officer of PricewaterhouseCoopers Australia, said that
as the complexity of issues facing business grows, an expectation gap has
arisen between what auditors do and what market participants assume or expect
from an audit. Mr Sayers said that in order to 'maintain its relevance, the
audit profession needs to acknowledge this expectation gap and look for ways to
formally adapt the scope of what we do'.[13]
5.16
One initiative intended to address the challenge of meaningful
information is integrated reporting (IR). IR is a new corporate reporting model
being developed at a global level by businesses and investors. CPA Australia
has indicated that the instigation of integrated reporting on a global scale
offers the prospect of presenting relevant information including 'increasingly
complex business models and systems' to the investor in an easily digestible
format.[14]
5.17
IR is designed to support 'better decision-making by providers of
financial capital'.[15]
According to Mr Paul Druckman, Chief Executive Officer of the International
Integrated Reporting Council (IIRC):
IR is the essential next step in the corporate reporting
journey. It anchors the reporting process in a more meaningful expression of
how value is created which is helpful in attracting investment. It also focuses
businesses and investors on the short, medium and long term factors that are
vital to achieving the macro aims of financial stability and sustainability.[16]
5.18
IR and the benefits that it offers to investors were explained by CPA
Australia as follows:
Integrated reporting or IR is a comprehensive framework to
concisely communicate varied and often complex aspects of organisations,
normally contained within multiple reports and other sources, in a unified and
holistic way that investors can understand, and that is practically useful in
informing their decision making. Importantly, IR responds to the growing need
for insight into business models, risks and future prospects which have been
highlighted in discussions of expectation gaps of the Committee and more
broadly.
An integrated report is defined in the Consultation Draft of
the International IR Framework as a concise communication about how an
organisation's strategy, governance, performance and prospects lead to the
creation of value over the short, medium and long term.
The advantages of IR for both professional and
non-professional investors include:
- a deeper and wider
understanding of organisational practices, performance and prospects
and improved long-term allocation of capital in potential or
existing investments;
- more concise and
accessible insights into material factors that create value over the
short, medium and long term - of particular value to non-professional
investors;
- concise and accessible
answers to important questions including:
- What does the organisation do and
what are the circumstances under which it operates?
- How does the organisation's
governance structure support its ability to create value in the short, medium
and long term?
- What are the specific
opportunities and risks that affect the organisation’s ability to create value
over the short, medium and long term, and how is the organisation dealing with
them?
- Where does the organisation want
to go and how does it intend to get there?
- What is the organisation’s
business model and to what extent is it resilient?
- To what extent has the
organisation achieved its strategic objectives and what are its outcomes?
- What challenges and uncertainties
is the organisation likely to encounter in pursuing its strategy, and what are
the potential implications for its business model and future performance?
- enhanced performance through the
promotion of 'integrated thinking' across organisations implementing IR.[17]
5.19
Mr Alex Malley, Chief Executive Officer of CPA Australia, is a member of
the IIRC and his organisation has been extensively involved in the development
of IR. In terms of the suggestion by Mr Sayers about adapting the scope of an
audit, CPA Australia proposed two developments that would respond to changes in
capital markets, the business environment and stakeholder needs:
1. reporting
needs to evolve in order to give a holistic picture of business impact across
the full range of dimensions, including financial, non-financial, governance,
management discussion and analysis to provide for a deeper understanding of
company practices, performance and prospects and improved long-term allocation
of capital;
2. auditing
will be critical in the reliability and hence usefulness of enhanced reporting.
In turn, an established framework for reporting on business models and risks
would provide a valid grounding for auditors to fulfil an enhanced role in
respect to assurance around these aspects that are central to expectation gaps
in regard to the work of auditors.[18]
5.20
CPA Australia notes that the first recommendation above would be
substantially addressed by IR and that this could address many of the
expectation gaps around the role of auditing. To this end, CPA Australia is
pursuing several initiatives including the following:
CPA Australia has initiated an Australian Research Council
linkage project working together with the University of New South Wales and the
Institute of Chartered Accountants in Australia which is intended to make a
substantial contribution toward the development of assurance in respect to (IR),
and hence enable progress regarding this enhanced role.
CPA Australia has incorporated (IR) and a broad range of
relevant topics including sustainability and governance into the CPA Program
(CPA Australia’s core professional qualification) and continued professional
development courses for members. CPA Australia is also working with several
Australian universities to incorporate such content into undergraduate
programs.[19]
Granting of an AFSL
5.21
In its report into the collapse of Trio Capital, the committee noted
that ASIC stated that its ability to restrict the entry of a participant into
the financial services industry is limited. ASIC drew attention to the low
threshold for obtaining an AFSL and the high threshold for it to cancel an
AFSL.[20]
5.22
One Investment Group disagreed with this view. It noted that sections 913B,
913B(3), and 914A(1) of the Corporations Act appear to grant ASIC sufficient
powers to restrict and revoke the granting of an AFSL. One Investment Group
therefore argued that investors rightly have an expectation that ASIC will act
to keep out or remove undesirable participants from the financial services
system in Australia:
Accordingly, the expectation of investors in relation to the
issuance of an AFSL is justified. That is, the expectation that undesirable
individuals or entities are restricted by ASIC from being involved in the financial
services sector is a reasonable and appropriate one. In this regard, it would
appear that ASIC’s interpretation of the Act and specifically the exercise of
its powers for issuing and restricting licences falls short of investors'
expectations and arguably the intention of the financial services laws.[21]
Fraud
5.23
Many of the participants at the roundtable made several points in
relation to fraud:
- it is very rare and is the exception to the rule;[22]
- it is very difficult to detect;[23]
- different gatekeepers perform checks at various points in the
system;[24]
-
it affects only a tiny fraction of the total funds under
management;[25]
- it does not necessarily constitute a gap in the system, but
rather a case of illegality which needs to be dealt with through the legal system;[26]
- most people that have lost everything were in undiversified self
managed superannuation funds;[27]
and
- the RE has the capacity to scrutinise the investment managers and
custodians, and select appropriate auditors.[28]
5.24
The FSC noted that Australia has a $2 trillion funds management industry
and that the level of regulation and oversight by gatekeepers was an important
factor in the low incidence of fraud.
5.25
Lonsec observed out that research houses do not have the capacity to
consistently detect fraud or predict market failure:
Lonsec does not believe that research houses have either the
knowledge or the expertise or the resources to accurately and consistently
identify fraudulent conduct which may lead to financial product failure. Nor
can research houses accurately and consistently predict extraordinary market
events which may cause market failure.[29]
5.26
BT Financial Group provided some statistics on the extent of identified
fraud within its business and emphasised the gatekeeper responsibilities
exercised by the RE:
In the last four years we have checked this, we have $80
billion of Australian assets looked after under our responsible entity, as well
as 1,100 investment funds and 170 investment managers. We have self-identified
within all our scrutiny only one evidence of fraud which we were then able to
bring to the regulator's attention. It does give it a sense of scale, but I do
think it is very important that the responsibility entity has the capacity to
scrutinise its service providers to a high degree—and those are the
custodians—but they are also responsible for selecting an auditor with
sufficient capacity and expertise to understand the nature of the investments
that are being audited and so on.[30]
5.27
Fraud involves deliberately deceptive conduct that is by its very nature
difficult to detect. This raises several important points. Firstly, auditors
and REs play a crucial role in detecting fraud. However, in a situation such as
Trio where the directors of the RE are complicit in fraud, the gatekeeper role
of the RE can be rendered impotent. This makes it even harder for an external
auditor to uncover a well-concealed fraud. This scenario implies that
whistleblowers play a very important role in the system by exposing fraud (and
other forms of misconduct or illegal activity). Consequently, there needs to be
an effective response by regulators to evidence provided by whistleblowers.
Furthermore, despite regulations, it is not necessarily possible to prevent
illegal activity. Therefore, deterrence is crucial. This means having effective
legal and policing mechanisms in place to apprehend, convict, and punish
offenders.
Challenges and opportunities of new
communication technology
5.28
The committee was keen to see if developments in communication
technology were seen as a tool for overcoming literacy issues and possibly for
presenting information in multiple languages.[31]
5.29
Ms Cole replied that new technology presented both opportunities and
challenges. She drew particular attention to the difficulty that some people
may have in distinguishing between information and advice, and that fact that
gatekeepers and regulators are looking at this as an issue of concern:
With regard to accessing advice in different ways, at the
moment that is an exciting but also challenging space for advisers. I think FSC
has been working, perhaps with ASIC, on some additional guidance around this.
The amount of information and the format of what is available on the internet,
via YouTube and different web seminars and webinars, for everyday investors to
access is incredible. Some of that information goes quite a way along the
process to what may be perceived by many investors as giving them advice. That
differentiation between what is information and what is advice can be quite
hard for them to gather. That will be a very interesting space to watch as
well.[32]
5.30
Ms Deborah O'Neill MP, Chair of the Corporations and Financial Services
Committee, emphasised the importance of quality advice by pointing out that an
investor may not always understand what is being advised at the time it is
given:
As a former teacher, I know that there can be a very big gap
between the delivery of information and the receipt of the same. Often we do
not pay attention until we have to, and sometimes that can be long after the
money is invested, hence the importance of the quality of the advice.[33]
Index funds versus active
management
5.31
As noted in chapter 2, the committee questioned the fund managers at the
hearing about an American economist's claim that over the last 30 years,
passively-held index funds had substantially out-performed the average active
fund manager. BT Financial Group gave a comprehensive response, which is provided
in Appendix 2. It noted that unlike a passive approach, an active approach can
enhance risk adjusted returns, exploit pricing anomalies, pursue value
investing strategies, engage in downside risk management, pursue different
strategies at different periods in the market cycle, and consider the specific
outcomes required by the investor. An active managed, it argued, 'needs to be
good at picking stocks and also ensure the portfolio is appropriately
diversified'.[34]
BT noted that its active investment strategy has out-performed a passive
benchmark over the last ten years.
The balance between market
efficiency and investor protection
5.32
Australia's financial services regulatory system aims for efficiency,
flexibility, competition, innovation and a low cost of capital. Retail
investors have access to a wide range of products, including high-risk
products. The system aims to prevent regulatory failure, rather than the
failure of financial products. Indeed, as ASIC observed, the failure of a
high-risk business strategy and consequent investor loss is an essential part
of an efficient market.[35]
5.33
Since the Trio inquiry, ASIC has suggested moving the balance between
market efficiency and investor protection more in favour of retail investors.
The committee sought the views of business and industry representatives on
whether they considered that the balance in Australia between market efficiency
and adequate protection for retail investors is right.
5.34
van Eyk observed that excessive regulation and an over-aversion to risk
could undermine the end objective which was to ensure that compounded annual
returns beat inflation, thereby ensuring that people's superannuation was
sufficient to fund their retirement:
In respect of the comments I made previously around how the
retail part of the industry gave advice—and that was a model-driven
approach—typically in that there are balanced asset allocations varying in
terms of exposure to shares and other risky assets and exposures to bonds,
which are supposedly defensive assets and have performed very well in the last
five years. There is an issue, though, that presents itself at the moment, and
this touches on risk. I was interested in the comments made around trustees
having to put their risk profiles in. The superannuation system is essentially
unfunded for a lot of Australians. If you step back and you look at what is the
issue here that we are trying to drive, it is about a lifestyle in retirement.
There are some rogue investments, if I could categorise them in that space, and
some of them have actually been in the conservative space. Look at some of
those hedge fund strategies: they had very low volatility, which is one measure
of risk. The question I would put is that we do not want to let the risk
management cruel the end objective and make us take too little risk to meet our
compounded annual return in excess of inflation. If we were to look at the
current investments, a lot of the exposure is in bond markets, which are
yielding one or two per cent, which is very unlikely to beat inflation, which
is the real enemy in this whole process. So I would think that the major issue
is: what are we doing around the defensive assets? A lot of these hedge fund
strategies, which are difficult to look at, do operate in that low-risk space.
Are we actually over-regulating in some spaces and not letting the natural
course of the markets take its effect?[36]
5.35
CPA Australia said that regardless of how the market is regulated, the
key factor is the risk reward balance and supporting investors with the right
information that is communicated in an easily understood format:
However you calibrate the market, investing is still going to
be a matter of balancing up risks and rewards. We start with a belief that
Australian investors, whether they are retail investors or professional
investors, are focused on weighing up those risks and rewards in whatever way.
What we can do to support them, what is really critical to do, is provide them
with information that they can understand and use in order to make those kinds
of decisions. We got onto the topic of too much information versus not enough
information. What we need to be focused on, and what I think this forum is
really fantastic in highlighting, is the right type of information and the
right way of communicating with those stakeholders in a way that actually
recognises their needs broadly and also in a way that they can calibrate
individually.[37]
5.36
The FSC argued that in fact the pendulum has already swung towards
greater investor protection with the raft of legislation and reforms that have
been enacted in recent years.[38]
5.37
BT Financial Group argued that the fundamental factor was risk appetite
and getting the correct balance between risk and reward appropriate to the
various stages of life. While asset allocation can be done at the individual or
household level, Mr Brennan pointed out that BT Financial Group builds
cohorts within their superannuation portfolios designed to match various age
profiles of client groups. BT Financial Group trustees review the asset
allocations within the portfolios on a regular basis, thereby relieving the
individual of the need to check their asset allocation. Like Mr Thomas,
however, he expressed concern that removing higher risk products may be
counter-productive:
I do believe that the risk appetite is almost pertinent to
the individual and the household. It really depends on whether you are at the
beginning of life and just starting to build the pot to buy a house before you
have got married, before you have got children, or you are at the end and the
children have all left and you are about to start drawing down your pension. I
think the fundamental to hitting that balance is actually the mix of assets
that you hold, which is high-risk assets and low-risk assets. My fear, in the
event of trying to go to a higher degree of investor protection, is you remove
higher risk assets, which are actually an important part of a youngster's
portfolio, perhaps. Then that turns you around to: how does one hit that
balance? Unless you are highly versed in the financial markets, it is actually
difficult.
One of the ways we do it in our superannuation product, our
Super for Life, is we build cohorts within the portfolio so that if you are
born in the 2000s, and therefore relatively young, the asset allocation is
struck accordingly. Then as you get older the asset allocation is adjusted
until you are approaching retirement and has much more lower risk assets. The
trustees overview that asset allocation every six months to every year to
ensure that it is operating as designed. By that method we try to glide people
through to retirement in the best possible way. It also means that they can
pretty much switch off that responsibility for how their assets are mixed. But
for us to do that we actually need high-risk assets in the system. Does that
make sense? There are two ways you can do it. You can do it as a household, or
you can do it as a trustee on behalf of people who have gone into default—they
have actually checked out of the decision.[39]
Committee view
5.38
This report has presented evidence on a range of issues relating to the
role of the 'gatekeepers' in Australia's financial system—financial planners,
research houses, RSE trustees, custodians, auditors and REs. The gatekeepers
play a crucial role within this system to meet the overarching objective of
protecting consumers, investors and creditors. ASIC enforces the Corporations
Act and provides regulatory guidance to market participants. It is also
responsible for maintaining gatekeepers' standards. In recent times, it has
told research houses, auditors and some financial advisory firms that they need
to improve their standards.
5.39
The gatekeepers are expected to self-regulate; to perform their
respective functions according to the statutory requirements and in so doing
provide investors and creditors with confidence that their interests are
protected. It was of concern, therefore, that a consistent theme of the committee's
inquiry into the collapse of Trio Capital was the gap in expectation between
what was legally required of the gatekeepers and what investors and creditors thought
was the gatekeepers' role.
5.40
The purpose of the committee's roundtable in June 2013 was to examine
what each of the six gatekeepers viewed as their role, how they perceive the
role and responsibilities of other gatekeepers, and how they interact. Chapters
3 and 4 of this report provided two angles to examine these complex
interactions. Chapter 3 focused on the business model of research houses, and
their interactions with financial planners / financial advisers and fund
managers. Chapter 4 looked at how assets are valued and verified and the portfolio
disclosure of managed investment schemes. Here, the focus was on the
interactions between custodians, REs, trustees, and the auditors of RSEs and
REs.
5.41
There is considerable evidence in both chapters 3 and 4 that the
committee found very useful. It identifies the different business models used within
gatekeeper groups (such as research houses) and areas of potential tension and
misunderstanding between gatekeepers. Above all, the committee hopes that the
roundtable and the information it has provided on the public record has
generated interest—and areas for further discussion—among the various
gatekeepers, their professional bodies and the wider investment community. It
is important that there are future deliberative opportunities for the
gatekeepers to engage with ASIC and the parliamentary process.
5.42
Over the term of this parliament, the committee has increased its ASIC
oversight hearings from two to four per year. It has also used the oversight
process to take evidence from a range of other stakeholders including the
AUASB, the Financial Reporting Council and the Australian Stock Exchange, as
well as the gatekeepers at the June 2013 roundtable. The greater focus on the committee's
oversight process has been very useful: it has raised the committee's profile;
allowed it to monitor ASIC's progress during a period of significant reform in
the financial advice sector; focussed attention on gaps between what is
expected of gatekeepers and ASIC and what they are actually required to do; and
developed the committee's understanding of emerging regulatory issues such as
high-frequency trading and dark pools, and events such as the collapses of
Banksia and Wickham Securities.
Recommendation 5.1
5.43
The committee recommends that the Parliamentary Joint Committee on
Corporations and Financial Services in the next parliament continues to use the
ASIC oversight process to monitor ASIC's activities regularly and closely, and
raise the public's awareness of the roles and performance of the gatekeepers
and statutory bodies in Australia's financial system. The committee believes
that this forum is ideal for ASIC itself to clarify publicly what it does and
does not do, and explain areas of emerging and ongoing regulatory concern.
Ms Deborah O'Neill MP
Chair
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