Introduction
2.1
One aspect of the remit of the Australian Securities and Investments Commission (ASIC) is to regulate the corporate governance of entities in the financial services sector. However, during part of the 46th Parliament, ASIC was distracted from the performance of its duties as a regulator as ASIC’s own standards of governance were subject to investigation and review because of its handling of two questionable decisions related to the remuneration of its then Chair and one of its then Deputy Chairs.
2.2
These investigations and reviews led to changes in ASIC’s governance framework, as well as changes at the Commission level, including the appointment of a new Chair and Deputy Chair. While ASIC is subject to several accountability mechanisms, as well as internal and external governance structures and processes, questions have arisen, both historically and more recently, about the effectiveness of these checks and balances, and whether alternative governance frameworks and processes (including an independent external board) should be established.
2.3
The committee considered it timely to consider these matters. The chapter begins by outlining ASIC’s current governance framework and then summarises the findings and recommendations of various reviews that have examined—either wholly or in part—corporate governance for public sector statutory authorities. Next, it presents the views of several independent experts the committee invited as witnesses to discuss financial regulator governance. The chapter then sets out recent changes to ASIC’s internal and external governance arrangements and concludes with the committee’s views on ASIC’s governance structure.
ASIC’s governance structure
2.4
ASIC is an independent statutory authority, established by the Australian Securities and Investments Commission Act 2001 (ASIC Act) to administer the Corporations Act. While ASIC is a corporate entity, for the purposes of the Public Governance, Performance and Accountability Act 2013 (PGPA Act), ASIC is taken to be a non-corporate Commonwealth entity.
2.5
In practice, this means ASIC has a non-corporate governance structure with a Commission. Mr Grant Hehir, Auditor-General at the Australian National Audit Office (ANAO), pointed out that most non-corporate Commonwealth entities like ASIC are accountable to the Minister and Parliament.
2.6
ASIC is currently led by a six-person Commission consisting of the Chair, two Deputy Chairs, and three commissioners, appointed by the Governor-General on the nomination of the Minister.
2.7
The Commission is the governing body of ASIC, responsible for achieving its statutory objectives and overseeing the delivery of ASIC’s strategy:
The commission acts as a strategic non-executive body, focusing on high-level regulatory and statutory decision making and stakeholder management. It provides support to the Chair on organisational oversight.
2.8
The Commission is led by the ASIC Chair, who is the sole accountable authority under the PGPA Act. As the accountable authority, the ASIC Chair is responsible for, and has control over, ASIC's operations. The Auditor-General, Mr Hehir, noted this is a normal governance structure for a non-corporate government entity.
2.9
ASIC’s annual report describes the role of the Chair:
Our Chair has sole executive management responsibility and relies on and uses our key senior executives to carry out day-to-day management activities and deal with operational issues.
2.10
Under the ASIC Act, the Chair is not subject to direction by ASIC, including by the Commission.
2.11
ASIC informed the committee that its current governance was established in 2019, following the Financial Services Royal Commission. ASIC stated that its governance structure ‘is consistent with ASIC being an independent Commonwealth agency that is a statutory body corporate and reflects the legislative framework within which ASIC operates’.
2.12
The committee notes the current structure illustrated in Figure 2.1. below is the most recent iteration. ASIC’s governance structure and recent changes are discussed in a later section.
Reviews of corporate governance
2.13
Over the last two decades, several reviews have considered the issue of corporate governance. The reviews outlined in this section have been selected because they either examined, in whole or in part:
the corporate governance of statutory authorities (such as ASIC) and considered whether a board structure was appropriate for such entities (the 2003 Uhrig Review and the 2014 Financial System Inquiry); or
the operation and performance of ASIC (the 2014 Senate Economic References Committee Inquiry, the 2015 Capability Review of ASIC, the 2019 Hayne Royal Commission, and the 2020 Thom Review).
2.14
It is important to note that some of these reviews focused on broader issues of corporate governance (for example, the 2003 Uhrig Review, the 2014 Financial System Inquiry, and the 2015 Capability Review of ASIC), whereas others considered the narrower issue of internal controls (for example, the 2020 Thom Review).
The Uhrig Review (2003)
2.15
In 2003, the Commonwealth Government commissioned the Review of corporate governance of statutory authorities and office holders, led by the former Chair of Rio Tinto and Westpac, Mr John Uhrig AO.
2.16
The Uhrig Review argued that effective boards require the freedom to determine an organisation’s strategy and direction. However, the Review noted that the nature of statutory authorities means it is ‘impractical to delegate full power to act in governance terms, particularly to individuals who are neither accountable through elections nor through employment in the public service’.
2.17
Further, the Uhrig Review recognised the central role of the Minister in governing statutory authorities and the inherent conflict that would arise between the freedom of action required by an effective board and the accountability of Ministers for statutory authorities.
2.18
Given the central role of the Minister in governing statutory authorities, the review found that not only are the opportunities for a board to add value limited, but a board might also weaken governance frameworks:
Boards can only provide effective governance when they have full power to act. When a board is created and not given adequate power, not only will it be unable to provide effective governance, but it will introduce an additional layer of participation in the governance framework, potentially clouding accountabilities.
2.19
Therefore, the Review concluded that ‘boards are not an appropriate form of governance for many statutory authorities, especially those whose functions are to regulate or are largely “non-commercial”’.
2.20
Nevertheless, the Review did find that statutory authorities may require an oversight body to support the portfolio department, the appropriate Minister, and Parliament.
Senate Economic References Committee (2014)
2.21
In June 2014, the Senate Economics References Committee finalised its inquiry into the performance of ASIC. One chapter of the final report focused specifically on ASIC’s accountability and governance structures.
2.22
The Economics References Committee concluded that the existing mechanisms for external ASIC oversight appeared to be adequate. However, it expressed concerns about ASIC’s internal governance arrangements:
In theory, a commission-structure of governance such as that applied to ASIC by the ASIC Act appears sound. A commission approach to governance encourages collective decision-making and responsibility. It can lead to better decision-making by drawing in the opinions and scrutiny of others and limiting the power of individuals. It potentially filters from the decision-making process the inclinations, peculiarities and flaws that an individual decision-maker could possess. However, the committee is concerned that the current governance framework has led to ASIC operating in silos with individual commissioners performing executive functions. ASIC’s commission sets ASIC’s priorities and strategic objectives, but the same commission, and individual commissioners, are also responsible for exercising ASIC’s powers. As a result, any internal monitoring of ASIC’s performance or challenge to how ASIC operates relies on the willingness and ability of the commissioners to scrutinise the decisions they have made.
2.23
The Economics References Committee concluded that ‘ASIC’s governance structure is not serving the agency well’ and suggested:
ASIC’s performance may well be improved by replacing its commission structure of governance with an executive and non-executive board to which management would report. Introducing a board as the governing body for ASIC would create a stronger foundation for internal oversight. The board would provide leadership to the agency and assess management’s performance. A board could provide ASIC’s management with access to a range of experienced individuals and allow this informed group to scrutinise cases where things went wrong, particularly if they had access to ASIC’s employees and internal policies.
2.24
The committee therefore recommended the Government undertake a review of ASIC’s governance arrangements within two years and consider whether a board comprised of executive and non-executive members should be established to oversee the Commission.
The Financial System Inquiry (2014)
2.25
On 20 November 2013, then-Treasurer, the Hon Joe Hockey MP, released draft terms of reference for a Financial System Inquiry (FSI) to examine how the system could be better positioned to support Australia’s economy and future growth.
2.26
Among the recommendations made in the FSI final report in late 2014 was the creation of an external assessment board to conduct periodic reviews of the performance of ASIC and other financial regulators. The inquiry recommended the assessment board have diverse membership to ensure broad representation with the support of a secretariat within the Department of the Treasury. The FSI concluded a new assessment board would ‘facilitate improved scrutiny of regulator performance without creating new agencies or compromising existing accountability relationships’.
2.27
The FSI rejected proposals to have the Council of Financial Regulators (CFR), the coordinating body of Australia’s main financial regulators, perform this role as it would ‘fundamentally change the current regulatory system’ by turning the CFR into a separate agency with overlapping responsibilities.
2.28
The FSI also considered whether both ASIC and the Australian Prudential Regulation Authority (APRA), the authority that supervises financial institutions and promotes financial system stability, should be placed under the control of boards, as explored by the Senate Economic References Committee earlier that year. The FSI ultimately rejected this proposal, concluding such an arrangement would blur ‘accountability for regulatory outcomes’.
The ASIC Capability Review (2015)
2.29
On 24 July 2015, then-Assistant Treasurer, the Hon Josh Frydenberg MP, announced a review into the capabilities of ASIC as part of the FSI. The review explored governance and leadership as one of three areas.
2.30
Among its findings, the Capability Review argued that ‘those relating to Governance and Leadership are the most critical and enduring and therefore matter most’, and pointed to the need for urgent improvements to ‘ASIC’s governance model and leadership related processes’.
2.31
The Capability Review observed that under the arrangements in place at ASIC at that time, commissioners had both an executive (management) role and a non-executive (governance) role. In their executive roles, commissioners had responsibility for a particular line of business, with direct reporting lines from Senior Executive Leaders (SELs) to individual commissioners, and commissioners were involved in the management of day-to-day operations. In their non-executive roles, commissioners provided strategic oversight across the organisation, ensured internal accountability and made decisions (including strategic and material regulatory ones) on a collective basis.
2.32
The Capability Review concluded that the dual governance and executive line management roles performed by ASIC commissioners ‘inherently undermines accountability’ and eroded the ability of commissioners to focus on strategic issues or external engagement.
2.33
The Capability Review argued these dual responsibilities were unlike models used by regulators in other jurisdictions and differed significantly from the models deployed by other Australian regulators, including APRA and the Australian Competition and Consumer Commission (ACCC)—which, it noted, operate under similar legal frameworks to ASIC.
2.34
The Capability Review further concluded that ASIC’s governance issues could be addressed ‘without changing the structure or needing an external board’.
2.35
Among the Review’s 34 recommendations, three related specifically to ASIC’s internal governance:
recommendation 3: ASIC to realign internal governance arrangements by elevating the current Commission role to that of a full time non-executive function (not an external board), with a commensurate strategic and accountability focus free from executive line management responsibilities;
recommendation 4: ASIC to establish a new role of Head of Office, with delegated responsibility and accountability for executive line management functions; and
recommendation 5: Senior Executive Levels to be delegated executive line management functions, reporting to the Head of Office.
2.36
In sum, the Capability Review argued that the governance model it proposed was consistent with the findings of the Uhrig Review, in that it did not recommend structural change such as an external board, but rather recommended that ‘ASIC realign its internal governance structure to achieve a clear separation of the non-executive (governance) and executive line management roles’. This would allow commissioners to focus on setting strategy, supervising overall delivery and performance against the strategy, and making and taking ultimate responsibility for key regulatory decisions. As such, the recommended model would elevate the existing commissioner roles to a full-time non-executive internal ‘board of the Commission’ like the internal governance model of the ACCC.
2.37
Further, operational decision-making and execution of operational matters would be ‘delegated to the Senior Executive Level, reporting directly into a new Head of Office of ASIC role’. While the Head of Office would be selected by the Chair and the Commission, and would be delegated executive responsibility from the Chair, the Chair would retain ultimate accountability, and thus the model would be consistent with legislative requirements.
The Hayne Royal Commission (2019)
2.38
In 2017, the Commonwealth Government established a Royal Commission to investigate misconduct in the banking, superannuation, and financial services sectors. The Royal Commission was led by the Hon Kenneth Hayne AC QC, a former Justice of the High Court of Australia.
2.39
The Hayne Royal Commission final report was released in February 2019 and made four recommendations directly related to the governance and performance of financial regulators:
recommendation 6.11: the ASIC Act be amended to formalise ASIC’s meeting procedures;
recommendation 6.12: ASIC and APRA to formulate and apply their own management accountability principles along the lines of the Banking Executive Accountability Regime (that is, accountability obligations for authorised deposit-taking institutions, their senior executives, and directors);
recommendation 6.13: ASIC and APRA to undergo capability reviews at least every four years; and
recommendation 6.14: a new and independent oversight authority be established to assess the effectiveness of APRA and ASIC.
The Thom Review (2020)
2.40
On 23 October 2020, the Treasurer announced the Department of the Treasury (Treasury) would ‘undertake an independent review’ of the findings of the ANAO related to payments made on behalf of senior officials at ASIC. Former Inspector-General of Intelligence and Security, Dr Vivienne Thom, was appointed to lead the review.
Background to the Thom review
2.41
In February 2018, Mr James Shipton was appointed Chair of ASIC and relocated from the United States. In addition to a salary and other benefits, ASIC made payments totalling $118 537 for tax advice on Mr Shipton’s behalf, on which ASIC paid an additional $78 266 in fringe benefit tax.
2.42
ASIC’s 2016 relocation policy (which applied at the time of Mr Shipton’s appointment) committed ASIC to meet ‘reasonable costs arising from the relocation’ and provided for international relocations to be ‘negotiated on a case-by-case basis’.
2.43
In July 2018, Mr Daniel Crennan QC was appointed Deputy Chair of ASIC. In addition to a salary and other benefits, over a period of two years, ASIC made relocation payments of $750 a week on Mr Crennan’s behalf. The payments, classified as rental assistance, totalled $69 621.
2.44
ASIC’s 2018 Relocation Policy (which applied at the time of Mr Crennan’s appointment) committed ASIC to ‘meet reasonable costs arising from [a team member’s] relocation and if appropriate, their family’s relocation’.
2.45
In August 2019, the ANAO’s 2018-19 financial audit of ASIC recommended that ASIC seek advice from the Remuneration Tribunal (the independent statutory body that handles the remuneration of key Commonwealth offices) on the appropriateness of the payments made on Mr Crennan’s behalf.
2.46
On 5 August 2019, ASIC sought internal legal advice regarding Mr Crennan’s rental allowance. The legal advice suggested these payments were likely to be consistent with the expectations of the Remuneration Tribunal.
2.47
On 26 May 2020, ASIC prepared internal advice on the payments made on Mr Crennan’s behalf and informally consulted with the Remuneration Tribunal on the issue. ASIC did not formally seek advice from the Tribunal at that time.
2.48
In August 2020, the ANAO’s 2019–20 financial audit of ASIC reiterated concerns about the appropriateness of Mr Crennan’s rental allowance. The ANAO also raised questions with ASIC’s audit committee about payments made for tax advice on behalf of Mr Shipton. The Auditor-General, Mr Hehir, told the committee ASIC had failed to take ‘significant action’ in response to these concerns.
2.49
On 4 September 2020, ASIC sought external legal advice from the Australian Government Solicitor regarding the payments made on behalf of Mr Crennan.
2.50
On 15 October 2020, ASIC declined to raise the issue of payments made on behalf of Mr Crennan with the Remuneration Tribunal after Mr Crennan offered to repay the amount in question. Then-Acting ASIC Chair, Ms Karen Chester, told the committee she understood this decision to have been influenced by legal advice suggesting the payments in question were appropriate, as well as an understanding that the Remuneration Tribunal could not make retrospective determinations. Ms Chester nevertheless asserted the issue had not been put to the Commission for a decision.
2.51
On 22 October 2020, Mr Hehir drew the Treasurer’s attention to payments made on behalf of both the ASIC Chair and Deputy Chair that ‘may exceed the limits set in the Remuneration Determination made by the Remuneration Tribunal’. The Auditor-General also pointed to instances identified by the ANAO in which ‘Commonwealth Procurement Rules were not followed’ and ‘appropriate governance mechanisms were lacking’.
2.52
The ANAO did not reach a conclusion as to whether these issues constituted breaches by ASIC or the officers in question.
2.53
On 23 October 2020 (the day the Treasurer announced the Thom Review), Mr Shipton stepped aside as Chair of ASIC pending the outcome of the review.
2.54
On 26 October 2020, Mr Crennan resigned from his role at ASIC.
2.55
On 17 December 2020, the report of the Thom Review was provided to Treasury. Treasury released an abridged version of the report on 29 January 2021.
2.56
On 1 February 2021, Mr Shipton temporarily resumed his position as ASIC Chair until he was replaced by Mr Joe Longo on 1 June 2021.
2.57
Both Mr Shipton and Mr Crennan repaid the full amount of the payments in question.
Findings and outcomes of the Thom review
2.58
The investigation led by Dr Thom found no wrongdoing on either Mr Shipton’s part or that of Mr Crennan.
2.59
The Treasurer stated at the conclusion of the investigation:
I am satisfied that there have been no instances of misconduct by Mr Shipton concerning his relocation arrangements, including ASIC’s payment for tax advice resulting from his relocation to Australia in early 2018, nor have there been any breaches of applicable codes of conduct.
2.60
The Thom Review nevertheless recommended ASIC undertake the following reforms to its internal governance structures and processes:
Recommendation 1: develop a central risk and breach register under the oversight of the Executive Risk Committee and report regularly to the Audit Committee.
Recommendation 2: progress reforms in relation to Commission oversight of audit findings and actions, form an Executive Integrity Committee under the oversight of the Audit Committee, and review the effectiveness of these arrangements within eighteen months.
Recommendation 6: consider whether the matters identified in the report are indicative of a possible lack of quality assurance and investigate whether additional controls should be introduced to ensure accuracy in their legal advising processes.
Recommendation 8: ASIC should:
develop policies in relation to the payment of expenses for Commission members setting threshold amounts and defining sensitive expenses that require additional controls;
require the endorsement of the Commission for expenses beyond a threshold and for sensitive expenses;
require the Chair’s approval for the expenses of Commission members; and
require a Deputy Chair’s approval for the Chair’s expenses.
2.61
ASIC’s responses to the Thom review are summarised below in a sub-section under recent changes to ASIC’s internal governance.
Recent changes to ASIC internal governance
2.62
This section sets out some of the changes made to ASIC’s internal governance structure over the last five years.
ASIC’s Implementation Plan for the Capability Review
2.63
In April 2016, ASIC released its Implementation Plan in response to the Capability Review. The Plan outlined the following actions in relation to internal governance (recommendations 3 to 5 of the Capability Review):
implement enhanced management information and performance reporting to the Commission;
develop new guidance around strategic use of Commission input;
review commissioners’ stakeholder engagement; and
review the mandate, membership, effectiveness, and role of Committees.
2.64
The committee notes that in November 2020, then-Acting ASIC Chair, Ms Chester, told the committee that ASIC had not ‘fully implemented the governance arrangements’ recommended in the 2015 ASIC Capability Review. She claimed that this may have ‘indirectly contributed’ to the issues that gave rise to the Thom Review.
2.65
Indeed, the establishment of a Head of Office function, called the Chief Operating Officer, was not part of the 2016 ASIC Implementation Plan. It only occurred in March 2021, over five years after it was recommended in the Capability Review (see below).
ASIC’s response to the Thom review
2.66
Dr Thom’s final report noted several revised internal governance arrangements implemented by ASIC during the Thom review, including the following:
all outstanding internal audit items would be reported to the Commission Risk Committee, extending Commission oversight;
the formation of an Executive Integrity Committee to oversee policies, procedures, and other matters related to internal integrity; and
revisiting the Capability Review’s recommendation to establish a Head of Office role (see earlier section).
2.67
ASIC also advised it would introduce the following arrangements to mitigate the risk of non-compliance with applicable procedures and determinations:
expenses related to the relocation of statutory appointees would be endorsed by the Commission and approved by the Accountable Authority (or in the case of the appointment of a Chair, endorsement would be required from the Commission);
consideration would be given to whether a payment requires a determination by the Remuneration Tribunal; and
remuneration and benefit arrangements for new statutory appointees would be clearly documented and incorporate any arrangements agreed by Treasury.
2.68
ASIC subsequently completed a review of potential breaches of legislation and policy and launched a revised technology-based compliance incident management (notification) system.
2.69
ASIC’s 2020–21 Annual Report outlined the following changes to internal governance made throughout the financial year:
established the role of Chief Risk Officer (July 2020);
enhanced the risk management framework;
established an Executive Integrity Committee;
established a Head of Office function, called the Chief Operating Officer (March 2021); and
established the Office of the Chair (July 2021).
2.70
ASIC’s 2020–21 Annual Report described the duties and responsibilities of the Chief Operating Officer, and its impact on internal governance:
[The Chief Operating Officer] is responsible for operational strategy and management and for delivery to the Commission of cross-group outcomes, including budget development and resource allocation, Commission legislative and policy obligations relating to this, and capability and systems build.
The implementation of this new function has increased internal oversight and executive accountability and enabled the Commission to give greater focus to strategic matters, regulatory decision making, external engagement and communication.
2.71
However, in November 2020, then-Acting ASIC Chair, Ms Chester, noted that the former accountable authority, Mr Shipton, did not implement the Capability Review recommendation regarding the establishment of a Head of Office function.
2.72
That said, Ms Chester pointed out that recent changes to ASIC’s internal governance had clearly delineated the role of the Commission from the executive. She described the new role of the Commission as follows:
While we have external engagement roles, so that entities know who to come to on particular issues, internally we are all responsible for all the regulatory decisions that are made, be they enforcement, guidance, supervisory or licensing. We take a whole-of-ASIC perspective now, and that is the critical difference from the past.
2.73
She further claimed:
Our current governance arrangements have clear separation between the operation and implementation of the ASIC strategy, the policies and governance arrangements of the commission and the implementation of our regulatory decisions. The executive directors are responsible for operation and implementation of ASIC’s strategy, regulatory decisions and governance, and the commissioners are responsible for the setting of that strategy.
External accountability and oversight of ASIC
2.74
A range of accountability mechanisms apply to ASIC. The following (non-exhaustive) list outlines key entities which provide external accountability and oversight of ASIC:
ministerial oversight from the Treasurer;
the Parliament of Australia, including through:
the Parliamentary Joint Committee on Corporations and Financial Services;
the Senate Standing Committee on Economics; and
the House of Representatives Standing Committee on Economics.
the Financial Regulator Assessment Authority (see below);
annual financial statement audits by the ANAO;
one-off performance audits by the ANAO on particular matters;
the Australian Commission for Law Enforcement Integrity; and
the preparation of a corporate plan, budget statement, annual report, and self-assessments of performance.
2.75
In addition, the Government influences ASIC’s operations and strategy through a statement of expectations, to which ASIC responds through a statement of intent. Many of ASIC’s decisions are also subject to administrative or judicial review, including by courts, tribunals, the Commonwealth Ombudsman, the Australian Information Commissioner, and the Privacy Commissioner. ASIC is also bound by the Freedom of Information Act 1982, the Legal Services Directions 2005, Commonwealth Procurement Rules, and the ASIC Code of Conduct. The ASIC Commission is subject to the PGPA Act.
2.76
Until July 2019, ASIC staff were employed under the Public Service Act 1999. Subsequently, ASIC staff have been employed under the ASIC Act. This was in response to a recommendation made in the Capability Review that sought to enable the regulator to be more competitive in the ways in which it attracts and retains staff.
Recent changes to external oversight of ASIC: Financial Regulator Assessment Authority
2.77
Responding to recommendations 6.13 and particularly 6.14 of the Hayne Royal Commission (and by extension, recommendation 27 of the FSI), the Government introduced the Financial Regulator Assessment Authority Bill 2021. The bill was passed on 23 June 2021, establishing an independent statutory body to regularly review and report on the effectiveness and capability of Australia’s financial regulators, APRA and ASIC.
2.78
The new body, known as the Financial Regulator Assessment Authority (FRAA), is comprised of three part-time appointees as well as the Secretary of the Department of the Treasury (or their nominee). The three board members appointed on 15 September 2021 for five-year terms were Mr Nicholas Moore (Chair), Ms Gina Cass-Gottlieb, and Mr Craig Drummond.
2.79
FRAA reports to the Treasurer (but is not subject to directions from the Minister) and is required to issue a separate report on each regulated entity to the Minister and to Parliament every two years. ASIC and APRA are required to cooperate with and provide information to FRAA.
2.80
FRAA is expected to deliver its first assessment report on ASIC by July 2022, which it described as ‘a targeted assessment of ASIC’s effectiveness and capability in strategic prioritisation, planning and decision-making’. The report will also assess ASIC’s surveillance and licensing functions.
2.81
FRAA does not have the power to ‘direct, make, assess or comment on’ specific cases, actions, decisions, or complaints related to ASIC.
Views on ASIC governance
2.82
The committee invited witness testimony on the most appropriate form of governance for independent statutory regulators, such as ASIC, from the following:
Mr Grant Hehir, Auditor-General, ANAO;
Emeritus Professor Fred Hilmer AO;
Professor Graeme Samuel, a former Chair of the ACCC; and
2.83
The committee was particularly keen to explore the structural and cultural issues that could contribute to or hinder good governance, including the potential advantages and limitations of a non-executive board structure.
2.84
Mr Hehir pointed out that ASIC’s governance structure is both ‘usual’ and ‘unusual’:
Having a single individual accountable authority is a normal governance framework for a non-corporate government entity. ASIC and a number of other regulators are slightly different because they're corporate entities with a non-corporate governance structure, so they have a commission where the commissioners aren't the accountable authority under the PGPA Act. That's unusual, being a corporate with that structure; but having a single accountable authority isn't unusual in the sector.
2.85
Mr Hehir observed that greater guidance could be given to entities governed by a single accountable authority when the expenses requiring authorisation were those of the accountable authority. Mr Hehir pointed out that ‘in most corporate Commonwealth entities, the accountable authority is the board’. In circumstances where the expenses were those of the Chair, they would arrange for someone else on the board to sign off on the expenses.
2.86
Emeritus Professor Fred Hilmer told the committee there were many variations in the types of governance structures that could work for public sector organisations. He cited the contrasting examples of the ACCC under Graeme Samuel, and the Reserve Bank of Australia (RBA) where the Governor is the Chair and effectively the chief executive, but with a majority of independent non-executive board members. Professor Hilmer stressed two points. First, the importance of separating a non-executive chair from the head of an organisation to allow for the separation of governance. And second, the combined importance of structure, culture, personnel, and transparent systems.
2.87
Professor Samuel noted that the role of commissioners was to administer the act, make decisions in relation to the act, and enforce the law, and that they are appointed on that basis. He emphasised the importance of separating that role from administrative or organisational matters
2.88
Professor Samuel argued that even though it may appear appropriate for the Chair of ASIC or the ACCC, as the accountable authority, to run the organisation, it is ‘significantly undesirable’ in practical, cultural and organisational terms. Rather, the administration and running of the organisation was best carried out by an organisational director holding ‘a very senior position’. In Professor Samuel’s view, the level of seniority was fundamentally important because the position needed to be respected by all commissioners.
2.89
Professor Samuel acknowledged that it was hard to know what had changed within ASIC since the 2015 Capability Review. However, it appeared that the separation of organisational governance from the determinative and enforcement roles had not occurred. He also drew an important distinction between the role of commissioners and senior management, and noted that, as at November 2020, it appeared that individual ASIC commissioners were still ‘adopting a senior role or an executive role in respect of individual specific responsibilities’.
2.90
Professor Samuel considered it inappropriate to have individual commissioners directing or sponsoring individual areas. Rather, it was preferable to have committees, chaired by a commissioner, to hear all the relevant information and make decisions. The relevant executive managers and their staff would ‘provide the intellectual input into the determinations of the commission’. The commission would need to meet every week, and every enforcement decision and determination must be made by the full commission, with its full diversity of views. This might include overturning a decision of a commission committee.
2.91
Professor Samuel also addressed the question of non-executive boards and associate commissioners. He acknowledged alternative views the value that might be added by non-executive boards and part-time directors. However, Professor Samuel was firmly of the view that getting organisational culture right was of over-arching importance. In his view, getting the culture right meant that organisational issues were dealt with separately by a senior organisational manager (in conjunction with the Chair) and then discussed at quarterly management committee meetings involving all the commissioners and the management team. In these circumstances, a board or associate commissioners would have little to contribute and might even impede the important enforcement responsibilities of the organisation.
2.92
By contrast, Professor Ian Harper AO, a member of the 1996–97 Wallis Inquiry into the Australian financial system, and lead author of the 2015 Harper Competition Policy Review, expressed a strong preference for the financial regulators to ‘have a structure with an independent board, chaired by one of the independent members of that board’, with the board being separate from the management. He told the committee that the separation of governance and management ‘is an essential principle of good corporate governance’.
2.93
Professor Harper argued that the board should set policies and ensure that the overarching performance of the management fulfilled the objectives set by the Parliament. A board should not become too involved in the daily operations (management) because that would likely cause a loss of perspective. Likewise, management should not become involved in governance because of the resulting loss of independence that occurs when managers are responsible for oversighting their own performance.
2.94
Professor Harper took a different view to that expressed by Professor Samuel with respect to the value of a non-executive board and part-time directors. Drawing on his experience as a board member of the RBA as well as his work on the Competition Policy Review, Professor Harper pointed out that it was precisely because part-time directors were not overly familiar with the running of an organisation that their independent viewpoint was valuable. This outside perspective allowed them to ask seemingly ‘naïve’ or ‘ill-informed’ (but vitally important) questions about why an organisation was doing something.
2.95
Professor Harper made four further points. First, the Harper Review recommended this structure for the ACCC. Second, this recommendation reflected the structure of the equivalent competition regulator in the United Kingdom which has a Chief Executive Officer, a separate board and Chair, and part-time directors. Third, Professor Harper argued that if you can successfully run a private sector organisation such as BHP with part-time directors, then why could you not run ASIC and the ACCC on the same basis. And fourth, if a different model was used, such as at the RBA (where the Governor is also the Chair), then the majority of directors should be non-executive so they can, if the need arises, outvote the executive members of the board.
2.96
With respect to conflicts of interest that might arise with part-time directors on the board of the financial regulators, Professor Harper made two points. First, conflicts of interest need to be carefully managed and there are appropriate protocols for how this might happen—as occurs at the RBA. Further, where a conflict of interest is not able to be managed, the person needs to be stood down, or the relevant Minister needs to take the position away. Second, a conflict of interest is an indication that part-time directors are bringing relevant perspectives that ‘can be instructive to the decisions that are made by the regulator’. And the directors would only be providing input to decisions rather than enforcing the law which would be a matter for the executive of the regulator. In summary:
The very same phenomenon that we're describing here as potentially giving rise to conflict––which it does––also brings perspective and difference of view, which brings balance to the types of decisions that are made.
2.97
The committee subsequently discussed these matters with ASIC on 11 February 2022.
2.98
ASIC acknowledged there is no perfect governance model for a statutory regulator. That said, the ASIC Chair, Mr Joe Longo, pointed out that ASIC is an independent law enforcement agency with a broad remit and it already has various accountability mechanisms, including to the Minister, three parliamentary committees, and an external body, the Financial Regulator Assessment Authority.
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ASIC Deputy Chair, Ms Sarah Court, also noted that ASIC has transitioned from executive to non-executive commissioners and now operates in the same way as the ACCC with respect to its division between the commissioners and the executives.
2.100
Similarly, ASIC Deputy Chair, Ms Karen Chester, emphasised that the commissioners now apply a whole-of-ASIC lens to everything they do, which is akin to what a board would do. She also pointed out that has occurred because of the separation that now exists between the roles of the commissioners and the roles of the executives, and because commissioners are no longer dedicated to particular streams of work. Because of this new approach, both Ms Chester and Ms Court noted that the commission now operate as a collective. With input from the executive, the commission deliberates on, for example, regulatory approaches and possible enforcement action, ensures any decisions are consistent with approaches in other areas of ASIC’s work, and, when necessary, pushes back against executive recommendations.
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Mr Longo and Ms Chester also emphasised that ASIC was outward-facing and already engaged in substantial amounts of stakeholder consultation. To that extent, the ASIC Chair considered the idea of an advisory board was somewhat redundant and would introduce possible conflicts of interest which could harm ASIC’s independence.
2.102
Finally, ASIC addressed the idea of an external board and suggested it would create more problems than it would solve, including the potential for conflicts of interest to undermine ASIC’s fundamental role as an independent law enforcement agency.
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Further, ASIC noted that the idea of an external board had been rejected by the HIH Royal Commission, the Uhrig Review and the ASIC Capability Review. ASIC also pointed out that in 2003, in response to one of the findings of the HIH Royal Commission, the then Government amended the APRA Act to enable APRA to replace its external board with a governance structure like that currently used at ASIC.
Committee view
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The independence of ASIC, as well as its significant powers and law enforcement responsibilities, require it to have a robust, efficient, and effective governance framework. An effective governance framework is fundamentally important in enabling ASIC to have its own house in order as well as to perform its duties satisfactorily as an independent financial regulator.
2.105
The impetus for the committee considering ASIC’s governance framework arose from the apparent failures at ASIC raised by the ANAO and investigated by the Thom Review. The committee considers ASIC’s internal audit and accountability processes were inadequate with respect to those matters. Further, ASIC’s governance framework at that time was ineffective. While the committee distinguishes between the adequacy of ASIC’s internal controls and its governance framework, ASIC’s governance framework is relevant to the effectiveness of its internal controls. Since the committee invited testimony from several independent experts in late 2020, the committee acknowledges that ASIC has implemented major reforms to its governance and accountability framework. These reforms essentially amounted to ASIC finally implementing some of the most important recommendations from the 2015 ASIC Capability Review.
ASIC’s new governance framework
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The committee welcomes ASIC’s new governance framework, including the steps ASIC has taken to clearly delineate the role of the Commission from the executive. ASIC appears to have empowered senior executive leaders to take ownership and control of day-to-day organisational and operational matters. Meanwhile, the Commission has relinquished its executive roles and can now focus on decision-making and setting and maintaining ASIC’s strategic direction. The committee agrees that organisational and operational matters should be the responsibility of the Chief Operating Officer, and that the Commission should not be involved in day to day operational matters. Instead, its primary focus should be setting ASIC’s strategy, supervising overall delivery and performance against the strategy, as well as making, and taking ultimate responsibility for, key regulatory decisions.
2.107
The committee notes that the Commission has now moved to a whole-of-ASIC approach where the executives bring regulatory and enforcement matters for the Commission as a whole to make decisions on. This is different to the previous governance model where commissioners were overly invested in certain areas of work and endeavour. The committee welcomes the view put by both ASIC Deputy Chairs that the Commission now considers regulatory and enforcement matters as a collective. The committee considers this to be a necessary, substantial, and long-overdue improvement on the siloed approach that previously afflicted ASIC’s decision-making.
2.108
The committee recognises that within the legislative framework of the Public Governance, Performance and Accountability Act, the ASIC Chair is the accountable authority. Ultimately, financial responsibility and accountability rests with the ASIC Chair. However, the delegation of financial powers to the Chief Operating Officer means the Chief Operating Officer and the executive directors can deal with most operational matters from a financial perspective.
2.109
In this regard, the committee expects the recent establishment of a Head of Office (as the Chief Operating Officer) will insulate the Commission from day-to-day operational and management decisions. To that end, the committee considers it vital that ASIC accords the role of Chief Operating Officer sufficient seniority to enable that person to carry out the requirements of the role, as well as ensure ASIC adheres to the separation of the Commission from executive and organisational responsibilities, and the separation of commissioners from directing or sponsoring individual executive groups within ASIC.
The idea of an external governance board for a statutory authority
2.110
In addressing the idea of an external governance board for ASIC, the committee notes this idea has been considered on numerous occasions.
2.111
In terms of external accountability, the committee notes that ASIC is already accountable to the Treasurer, and to the Parliament through this committee, the House Economics Committee, and the Senate Economics Committee. Beyond this, ASIC is also accountable to the newly established Financial Regulator Assessment Authority. In sum, substantial external accountability mechanisms now exist.
2.112
The committee recognises the unique position of a statutory authority that is already accountable to both the Minister and Parliament. In the case of a statutory authority, the Minister makes the appointments. For example, the Treasurer appoints the ASIC Chair, Deputy Chair(s), and commissioners. Further, the Treasurer plays a key role in determining ASIC’s policy and setting expectations. In the private sector, the board appoints, and may remove, the CEO. Yet, given it would hardly be appropriate or feasible for an external governance board to have that same power at ASIC because of the primary accountability role occupied by the responsible Minister in relation to ASIC, the power of a board would be automatically curtailed from the beginning.
2.113
In this respect, the committee notes several previous reviews, including the 2003 HIH Royal Commission, the 2003 Uhrig Review, the 2014 Financial System Inquiry, and the 2015 ASIC Capability Review all concluded that an external governance board in a statutory authority would blur responsibility and accountability. Given the central role of the Treasurer with respect to ASIC, the committee is firmly of the view that an external governance board would not only be essentially redundant but would also create unnecessary confusion and blur responsibilities.
2.114
One exception to this principle is the Reserve Bank of Australia. The committee agrees with the finding of the Uhrig Review that while the RBA board does not have the power to appoint and terminate the CEO, it provides effective governance in determination of RBA policies. However, it is important to understand that the RBA sets interest rates. To that extent, it makes policy. This is significantly different to ASIC (or the ACCC) which are law enforcement agencies acting in circumstances where the Treasurer and the Parliament make the law. Therefore, the committee does not consider the RBA and its board to be analogous to the idea of an external governance board for the financial regulators or the ACCC.
2.115
The committee also acknowledges that there are examples of financial regulators overseas that operate with an external governance board. However, there was little in the evidence provided to the committee to suggest those models would be appropriate in Australia. By contrast, the committee received substantial evidence on the dangers of an external governance board. Agencies such as ASIC and the ACCC are invested with serious and significant responsibilities and exist to regulate and enforce the law. As such, Commission meetings should deal with fundamental law enforcement matters. Professor Graeme Samuel, a former Chair of the ACCC, warned the committee that a form of governance that allowed for non-executive board members or associate commissioners to participate in such meetings was unsatisfactory because they would possess no, or very limited, understanding of the fundamental issues.
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Further, it was widely acknowledged in evidence to the committee that conflicts of interest would inevitably occur with the appointment of stakeholder representatives to a public sector board. In this regard, the committee concurs with the Uhrig Review finding that representative boards fail to produce independent, critical, and objective thinking, and would not provide the best form of governance for an authority due to the potential for directors to be primarily concerned with the interests of those they represent, rather than the success of the entity they are responsible for governing. The committee does not see any way to manage these conflicts of interest efficiently and effectively.
2.117
With respect to the idea of an advisory board for ASIC, the committee notes the evidence of the ASIC Chair and Deputy Chairs that an advisory board would be of no value to ASIC. First, ASIC is already a very outward-facing consultative agency that engages widely with stakeholders. In that sense, the benefits of an advisory board are already captured by the consultation programs that ASIC runs. Beyond that, however, ASIC is an independent agency, and appointing a formal advisory board would again open ASIC to potential conflicts of interest. Further, such a structure could be unwieldy as it would likely require including the entire range of ASIC’s regulated community from bankers to financial advisers and community groups. The committee can see no value in such a proposal but can see many drawbacks. Accordingly, the committee is firmly of the view that an advisory board for ASIC is inappropriate and unnecessary.
2.118
Finally, the committee is cognisant of the considerable recently implemented changes to ASIC’s governance framework. The ASIC Commission now effectively operates as a full-time non-executive board of the Commission. This is akin to what a board would do. While no governance model or framework for a statutory authority is perfect, ASIC’s current governance framework appears appropriate and fit-for-purpose. Apart from noting its concern about the position of Chief Operating Officer having sufficient seniority and authority within ASIC’s current governance framework, the committee considers it important for there to be a period of stability at ASIC. While the idea of an external board may be superficially attractive, it is manifestly inappropriate for an independent statutory authority such as ASIC and would create far more problems than those it purports to solve. The committee is firmly of the view that the issue of an external governance board does not need to be revisited in the future.