Additional Comments (Dissenting Report) by
Deputy Chair, Senator David Bushby
1.1
I recognise that the complaints, misconduct and policy issues raised in
the course of the inquiry are serious matters of public importance and warrant
detailed analysis and response.
1.2
The confidence in Australia's corporate, markets and financial services
regulator—ASIC—is vital to the economic wellbeing of the nation. ASIC's key
role is to make certain Australian financial markets are fair and transparent,
and that Australian investors and consumers are kept well informed so as to
support investor decision making and to maintain confidence in those markets.
1.3
The balance for government and parliament is to ensure regulation is
sufficient to protect consumers and maintain confidence in the market but not
so onerous as to deter informed risk-taking investment and thereby harm
economic activity.
1.4
On balance, I do not agree that the majority report has got this balance
right and the conclusion drawn cannot be supported in full.
1.5
Whilst some of the recommendations are sensible—indeed corresponding
improvements have already been undertaken independently by ASIC or are under
contemplation—some of the recommendations cannot be supported or require
significant further consideration.
1.6
These additional comments (dissenting comments) do not seek to address
every recommendation in the main report. It will address three central areas
where I consider that the recommendations of the majority cannot be
supported in part, or in full, in their current form.
General recommendations surrounding the operation of ASIC
1.7
The report makes a number of recommendations regarding the operation of
ASIC. I believe that these recommendations should be informed by the wider
inquiry that has been announced by government into the financial market
system—the Financial System Inquiry (FSI). The FSI will have the resources of
government, will be able to consider the impact of regulation in a holistic
fashion, will be able to look at the interaction of regulators and any
weaknesses revealed since the last significant inquiry in 1997.
1.8
The FSI terms of reference are comprehensive:
The Inquiry is charged with examining how the financial
system could be positioned to best meet Australia's evolving needs and support
Australia's economic growth.
Recommendations will be made that foster an efficient,
competitive and flexible financial system, consistent with financial stability,
prudence, public confidence and capacity to meet the needs of users.[1]
1.9
In particular the terms of reference deal directly with the question of
regulation:
- The Inquiry will refresh the philosophy, principles and
objectives underpinning the development of a well-functioning financial system,
including:
-
balancing competition, innovation, efficiency, stability and consumer
protection;
-
how financial risk is allocated and systemic risk is managed;
-
assessing the effectiveness and need for financial regulation, including
its impact on costs, flexibility, innovation, industry and among users;
-
the role of Government; and
-
the role, objectives, funding and performance of financial regulators
including an international comparison.[2]
1.10
In addition it was clear from the evidence given by ASIC that some of
the changes recommended by the committee majority have already been commenced
or are being considered.
1.11
In these circumstances, I believe it is prudent to examine the further changes
already underway within ASIC in the context of the wider FSI, and for
parliament to consider changes presented by the government following the FSI.
Cost recovery charging by ASIC
1.12
Considerable thought needs to be given to any changes to the manner in
which ASIC is funded, noting that changes potentially have broader consequences
and could vary significantly from current practices. Despite this, there are
clear advantages in considering change as canvassed in the majority report,
from two key perspectives.
1.13
First, enabling ASIC to levy its fees to reflect the effort involved by
ASIC in performing its regulatory functions is good practice, more equitable
and fosters appropriate rational responses from regulated entities consistent
with regulatory aims.
1.14
Secondly, if changes to ASIC's funding extended to enabling it to set
its fees to cover its costs, without the need for it to rely on the government's
annual budgetary process, it would introduce a degree of independence from
government that could also deliver various desirable outcomes, helping ensure
that the executive of the day could not utilise funding ties to influence
corporate regulatory outcomes for political reasons.
1.15
However, for these advantages to be realised, careful consideration is
required to address a number of challenges.
1.16
The government—through the parliament—is currently responsible for
setting the budget for agencies funded through taxes or levies.
1.17
If the government were simply to adopt a cost recovery model for ASIC,
its appropriation would continue to be determined by the government and be
subject to government budget policies and processes, including NPPs, efficiency
dividends, and gross spending limits.
1.18
Cost recovery would merely facilitate the way in which revenues are
determined to match the appropriation.
1.19
If an agency were possibly able to self-determine its own funding
envelope through another funding mechanism, it could act on self-interest to
expand its own regulatory reach and would be less accountable for its level of
intrusion into community life and the economy. For that reason, any such
approach would of necessity require appropriate third party assessment and
approval of ASIC budgets.
1.20
Such an approach would also conflict with the long-accepted right of the
government, acting under the scrutiny of parliament, to determine the scale and
scope of an agency and its activities, in this case the costs incurred by business
as a result of interactions with that agency.
1.21
As such, I consider any movement to a full cost-recovery model should be
considered as part of the FSI.
1.22
The funding model of ASIC is in scope for review in the Financial System
Inquiry.
Whistleblower protections
1.23
It is clear that the current protections afforded to private sector
whistleblowers can be improved.
1.24
ASIC has stated that it could have responded better to whistleblowers
who came forward in relation to the Commonwealth Financial Planning Limited
matter, and has since taken action to update its procedures to improve the way
it identifies and communicates with potential whistleblowers.
1.25
The Corporations Act protects employees, officers and contractors where
they report suspected breaches of the corporations legislation to either ASIC,
the company's auditor, or internally within the company.
1.26
ASIC has undertaken an internal review and updated its existing approach
to dealing with whistleblowers in order to improve the way it identifies and
communicates with potential whistleblowers:
...in particular I would like to mention our plans for dealing
with whistleblowers. We have been working on dealing with our whistleblowers.
Changes we are implementing include: establishing whistleblower liaison
officers within all ASIC teams; staff will soon be receiving training in
misconduct and breach recording and on awareness, whistleblower protections and
handling whistleblower complaints; providing better, clearer and more regular
communication to whistleblowers during investigations; and conducting a
stocktake of matters involving whistleblowers to ensure they are getting
appropriate priority.[3]
* * *
Yes, we certainly do recognise that whistleblowers may be
vulnerable in certain situations and that there are some protections for them
under the law. Our submission advocates an expansion of who qualifies for
protection as a corporate whistleblower and also when we must produce documents
in court revealing whistleblowers' identities. We are advocating additional
protections there, in part because we do recognise the particular difficulties
that whistleblowers face. We have also just announced some changes to our
internal processes that are clearly aimed at improving the sort of interaction,
communication and support that we can provide whistleblowers.[4]
1.27
ASIC's enhanced approach to whistleblowers encompasses its dealings with
'insiders' who seek to provide information to ASIC but who are not corporate
whistleblowers (e.g. because they are no longer an employee of the company
involved at the time they make the disclosure, or because they do so
anonymously).
1.28
Given that the approach of ASIC has changed, but that specific
protections may be required, I specifically endorse recommendation 14 of the
report, whilst noting that recommendations 12, 13, 15, 16 should be considered
as part of a government initiated review of whistleblower protections.
Further Inquiry, Judicial Inquiry or Royal Commission
1.29
There is no doubt that there was a failure of governance when it came to
operations of certain advisors related to the Commonwealth Bank of Australia
(CBA).
1.30
In fact CBA in its evidence clearly made such an admission:
Commonwealth Financial Planning Limited acknowledges that in
the past a small number of its Advisers, none of whom remain with CFP, provided
inappropriate advice to some customers.
CFP deeply regrets that some of its customers were impacted
in the past by poor advice they received from those Advisers.
CFP has no tolerance for behaviour that prejudices the
financial wellbeing of its customers.
CFP acknowledges that a number of customers suffered
financial losses as a result of inappropriate advice they received from certain
Advisers.
These regrettable events are firmly in the past and CFP has
taken decisive action to:
- Investigate
the quality of advice provided to customers;
- Compensate
customers who were adversely affected commencing in 2010;
- Work
closely with the Australian Securities and Investment Commission (ASIC) to
remediate customers;
- Have
the remediation verified by an independent accounting firm;
- Assist
in funding independent legal or qualified financial advice for affected
customers with respect to compensation;
- Co-operate
with ASIC, which took action to ban seven Advisers;
- Enter
into an enforceable undertaking with ASIC; and
- Fundamentally
transform its financial advice business.[5]
1.31
In response to its acknowledged problems CBA has made significant
restitution:
Compensation payments totalling $51 million have been paid to
1,127 customers. The remaining customers reviewed either received
appropriate advice or suffered no loss from the inappropriate advice they
received.[6]
1.32
Compensation payments totalling $51 million have been paid to
1,127 customers. The remaining customers reviewed either received
appropriate advice or suffered no loss from the inappropriate advice they
received.
1.33
The governance failures linked to CBA were exacerbated by the fact that
ASIC did not apply two important aspects of the compensation arrangements
relating to Commonwealth Financial Planning Limited (CFPL) and Financial Wisdom
Limited (FWL) to all affected clients.
The specific aspects related to:
-
not all clients being initially consulted regarding compensation;
and
-
not all clients being offered $5,000 to obtain independent
advice.
1.34
As a result, ASIC has announced that it will impose specific license
conditions on CFPL and FWL to address concerns around these issues.
1.35
A Royal Commission is primarily intended to undertake a fact-finding
mission, however, the issues proposed to be examined here have already been
extensively reviewed—including by ASIC, the CBA, the police and the committee.
1.36
Although a Royal Commission might recommend improved practices, existing
institutions have already been at work exploring and driving wide-scale reform
in the financial sector. ASIC's investigation into CFPL also predates the
substantial changes to the regulation of financial advice under the Future of
Financial Advice (FOFA) reforms, which have imposed strong obligations on
advisers to prioritise their clients' interests over their own and to act in
their clients' best interests. In addition, ASIC's actions have greatly
transformed the practices, culture, compliance and quality of advice provided
through CFPL as well as delivering $51 million in compensation to date, with
the potential for additional compensation to over 4,000 people under the
new license conditions.
1.37
Given these circumstances, and given that the law has changed and will
possible change again following the FSI, a Royal Commission or any other
inquiry will incur significant cost to taxpayers without delivering any greater
level of understanding or financial restitution. A fresh review of files and
individual cases could protract the emotional strains on victims of malpractice
over a longer time period, without the advantage of offering additional
remedies beyond those that are already being worked through.
1.38
In fact it could raise false hopes that further compensation may become
available.
1.39
On this basis I do not support recommendation 7 of the report.
Senator David Bushby
Deputy Chair
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