Chapter 27
Unresolved matters
27.1
This chapter addresses two important but unrelated questions the
committee has encountered during this inquiry and previous inquiries. The first
question is whether the current approach of products being available to unsophisticated
retail investors regardless of the suitability of these products for those
individuals is appropriate. The second relates to the regulation of the
insolvency profession and the current laws governing corporate insolvencies; in
particular, whether Australia's framework is appropriate for restructuring a
large business and minimises value destruction.
27.2
These issues strike at fundamental aspects of Australia's financial
services and corporate law frameworks. Addressing them in detail in this report
would be beyond the scope of an inquiry focused on the performance of ASIC.
Nevertheless, ASIC's performance and perceptions about its performance are
clearly influenced by the laws in place. The submissions that have expressed
the most dissatisfaction with ASIC's performance often relate to financial
products that should not have been available
to retail clients or badly managed liquidations. Similarly, other inquiries the
committee undertakes often attract submissions that lead to these issues being discussed.
Addressing the matters raised in this chapter could potentially lead to better
outcomes for the entire economy and help protect individuals from suffering and
distress.
27.3
Another important matter considered in this chapter relates to boiler
room investment scams.
Unsafe financial products
27.4
In Chapter 20, the committee discussed some of the implications of the
low levels of financial literacy in Australia. When this is combined with
Australia's current disclosure-based regulatory approach, retail investors and
consumers may be further disadvantaged when deciding on a financial product. In
this context, the Consumer Action Law Centre cited a number of further
complicating factors that pose a risk to the consumer. These included:
-
extremely complex credit and financial products that non-experts would
frequently misunderstand (including even the most important elements);
-
people not necessarily choosing between products 'rationally',
instead making quick decisions using mental shortcuts when dealing with
unfamiliar topics or when limited by time; and
-
people typically having trouble calculating costs and risks,
especially when the cost or risk is temporally remote.[1]
27.5
The experiences of many of the investors or borrowers who wrote to the
committee indicated that they had not been properly informed of, or understood,
the complexity, or inherent high risk of their investment or loan.
27.6
The Financial Planning Association (FPA) noted that ASIC does not have
legislative obligations for regulating financial products, only for the oversight
of product providers. This responsibility focuses on 'matters of corporate
governance and disclosure, and in the main not on the design and other issues
related to the products they sell to consumers'. It suggested that:
Problems with products should be addressed through product
regulation. Legislation must enable ASIC to effectively and proactively
regulate product providers and the products they develop and sell to consumers.
Product providers should be held accountable for failing to deliver on product
benefits due to dishonest conduct, fraud or insolvency, or if there are
fundamental flaws in products.[2]
27.7
The Australian Shareholders' Association gave the example of the issuing
of prospectuses where ASIC considers whether all relevant and required
information is provided. According to the Association, it does not appear that
ASIC checks or tests the information contained in the document 'resulting in
outcomes which disadvantage investors'. It explained further:
If claims are made in a prospectus or an advertisement we
believe they should be tested and justified. ASA accepts that investors are
responsible for their decisions but have less opportunity to carry out
investigative work. It would appear that ASIC waits for complaints before it
acts. While it is difficult to measure, ASA has the impression that overseas
regulators are able to act more quickly to assess a situation, take action and
reach a conclusion than in Australia where it seems litigation, or the threat
of such, delays these steps. It appears actions such as withdrawing a product
or suspending/banning an individual take too long.[3]
27.8
The Australian Shareholders' Association argued:
If, in the view of ASIC, any matter which comes to their
attention would impact on or influence investors or intending investors then
that should be made known. Simply announcing that ASIC had asked for more
information or was investigating a product or distribution channel would aid
investors.[4]
27.9
Mr David Haynes, Australian Institute of Superannuation Trustees,
referred to low-fee, no-fee products. He believed that ASIC should step in and
be able to stop the promotion of such products. He explained:
...because they [the fees] are hidden and they are significant,
and because they involve a misrepresentation of the product to consumers, who
think that they are getting something for nothing when clearly that is not the
case.[5]
27.10
In his view, the appropriate response by ASIC to such products would be
to say, 'We do not believe that the promotion of these products is consistent
with the spirit of the law or appropriate consumer protection and should make
representations along those lines up the tree to government'.[6]
27.11
The Consumer Credit Legal Centre (NSW) would like some sort of
recognition of an essentially unsafe product. Mrs Cox explained that other
areas
of consumer protection have such recognition but not so in credit and financial
services‑type products.[7]
She stated that one matter that was particularly discouraging over the years was
the need 'to argue misleading and deceptive conduct':
...when the problem is that the actual product is so poor that
you would have to be misled to enter into it. I find it quite frustrating that
we do not have more sophisticated tools for dealing with that situation.[8]
27.12
Mr Brody of the Consumer Action Law Centre very much agreed that unsafe
products should be identified. He stated that in addition 'to having a blackout
system, there could be a system to restrict access to particular types of
challenging products'.[9]
27.13
The consumer advocacy associations agreed that unsafe products should be
identified and 'there could be a system to restrict access to particular types
of challenging products'.[10]
The Consumer Action Law Centre favoured an approach that would empower ASIC to
regulate financial and credit products, which in its view would give ASIC more
power to respond quickly to emerging problems before widespread consumer
detriment occurred. The Law Centre was of the view that investment lending has
been instrumental in facilitating some spectacular investment failures with
catastrophic results for many consumers. It suggested that ASIC could play a
role in identifying the extent to which problems in this area persist, in order
to inform any future reform program.[11]
It referred to the UK Financial Conduct Authority (FCA) model which allows the
FCA to suspend or ban potentially harmful products.
27.14
Professor Dimity Kingsford Smith cited the Westpoint and Storm collapses
and the associated investor losses from transactions that were relatively
complex when analysed in full. In her view, 'in some other countries they would
have been limited to sophisticated investors but in Australia they could be
offered to consumers'.[12] She explained further:
In particular, the Westpoint documentation contained
omissions and inferences that only detailed further investigation could have
uncovered the significance of, and which took legal training to fully understand.
The Storm Financial statements of advice were very long and contained financial
worksheets which were not easy to follow. In both cases the benefits of the
investment were given much greater prominence than the risks. In both cases, as
in the Opus [sic] Prime matter which involved a stock broker offering margin
borrowing and stock-lending services, the types of transactions involved were
traditionally seen as sophisticated or professional investor transactions, and
not those usually recommended to retail investors. The risk levels, the
complexity, the consequent opacity of the advice and the fact that investors
did not really understand the significance of the recommendations for their
longer term financial welfare, all diminished the capacity of investors to make
good investment decisions with properly informed consent.[13]
27.15
Professor Kingsford Smith also cited the FCA. She noted that ASIC's
powers were directed to regulating the conduct of licensees while the FCA was
empowered
to regulate financial and credit product themselves. In her submission,
Professor Kingsford Smith noted that:
In Britain the 'Treating Clients Fairly' program of the
Financial Conduct Authority allows the regulator to intervene in the design of
the product, not just place a stop order on disclosure. We think there is also
room for ASIC to exercise powers to prohibit the issue of certain products in
retail markets, if it is thought they are too complex, risky or leveraged to be
appropriate.[14]
27.16
With the same idea in mind, the Law Council of Australia suggested that:
...'merits' regulation of financial products for
unsophisticated investors may need to be considered in Australia. That is,
unsophisticated investors might need to have a limited range of investment
choices that are limited to investments that are appropriate to their needs and
circumstances or that have been approved by a regulator such as ASIC.[15]
27.17
The Rule of Law Institute of Australia argued that it is 'insufficient
for government regulators to tell consumers and investors to be careful and
self-educate themselves in the complex area of financial services, particularly
when the ASIC Act itself was nearly 400 pages in length'. It also referred to
the information asymmetry between vulnerable consumers and large financial corporations,
which in its view,
was 'too great for this kind of approach'.[16]
27.18
The Financial Planning Association recommended that the laws be amended
'to oblige ASIC to take a larger role in the regulatory oversight of financial
products before they are released for consumer investment'.[17]
27.19
Finally, Mr Richard St. John's report on compensation arrangements for
consumers of financial services noted the new focus by the international
regulatory community on the adequacy of conduct and disclosure regimes. He noted
the consideration being given 'to the possibility of a more interventionist
approach with product issuers'. In his words, the aim would be 'to catch
problems early on in a financial product's life cycle as a means of preventing
widespread detriment to consumers'.[18]
He stated:
More fundamentally, it may be timely to review the adequacy
of the underlying conduct and disclosure approach to the regulation of
financial product issuers as the means of protecting consumers. There has now
been some ten years' experience of the current approach which relies largely on
the disclosure of information to consumers and sets some standards for the quality
of that information. Any additional measures would be aimed at reducing the
risk to consumers that they acquire financial products that are not suited to
their needs. They would be preventative measures that aim to reduce consumer loss,
and the eventual need for consumer compensation.[19]
27.20
Mr St. John suggested that:
As a matter of strategic approach, it would be timely to
review the present light-handed regulation of certain product issuers, in
particular managed investment schemes, including the possible need, in accord
with developments at the international level, to move to a somewhat more
interventionist approach.[20]
27.21
In his view, it would make sense in the course of any such review 'to
direct more attention to the responsibilities of licensees who provide financial
products for retail clients. He recommended that as a first step, consideration
might be given to measures along the following lines by which product issuers would
be expected
to assume more responsibility for the protection of consumers of their
products:
-
Subject product issuers to more positive obligations in regard to
the suitability of their product for retail clients. Such obligations might be
applied in particular to managed investment schemes in issuing products to the
retail market, and would apply at each stage of a product's life cycle
including its distribution and marketing.
-
Among other things, the product issuer might be required to state
the particular classes of consumers for whom the product is suitable and for whom
the product is unsuitable, and the potential risks of investing in the product.
-
Consider the development of standardised product labelling so
that financial products, particularly managed investment schemes, are described
on a consistent and more meaningful basis.[21]
ASIC's response to product
regulation
27.22
Mr Medcraft recognised the problem of innovation outstripping regulation.
He noted that this innovation was in complex products that are often
manufactured overseas and then distributed worldwide.[22]
He said that ASIC would continue to take a harder line on operators that pushed
complex products onto unsophisticated retail investors. In his view, the
regulator would also be forced to take a more vigilant approach to market
regulation as the complexity of the market had increased significantly with the
advent of market competition.[23]
27.23
With regard to acting quickly to stop an unsafe product, Mr Medcraft explained
that ASIC issues stop orders on prospectuses, where it determines that: 'Look,
this isn't good enough. I'm sorry; you want to raise money but it is not good
enough until you fix it'.[24]
27.24
ASIC accepted that there were inherent limitations in a regulatory
approach that relies solely on disclosure to address some of the problems
investors face in financial markets. The effectiveness of disclosure can be
undermined because:
-
people may not read or understand mandated disclosure documents,
due to factors such as inherent behavioural biases or a lack of financial
literacy skills, motivation and time; and
-
the complexity of many financial products may mean that
disclosure for such products can also be lengthy and complex, or excessively
simplified and generalised.
27.25
ASIC noted that, internationally, regulators were looking for 'a broader
toolkit' to address problems associated with the marketing of unsafe products
to retail investors. For example, in some cases, action could involve 'merits'
regulation of financial products. In this regard, ASIC understood that the UK
FCA would continue with initiatives begun by its predecessor, the Financial
Services Authority, towards 'product intervention'. The FCA would 'periodically
review particular financial services market sectors and examine how products
are being developed, and the governance standards that firms have in place to ensure
fairness to investors in
the development and distribution of products'. To assist this process, the FCA
has a spectrum of temporary 'product intervention' powers, to address problems
seen in
a specific product. These may include rules:
-
requiring providers to issue consumer or industry warnings;
-
requiring that certain products are only sold by advisers with
additional competence requirements;
-
preventing non-advised sales or marketing of a product to some
types of consumer;
-
requiring providers to amend promotional materials;
-
requiring providers to design appropriate charging structures;
-
banning or mandating particular product features; and
-
in rare cases, banning sales of the product altogether.[25]
27.26
According to ASIC, while these tools range in degrees of intervention
and,
in serious cases, could include a ban on products or product features, it
understands that the use of the most interventionist tools is likely to be
rare. According to the FCA,
the extent and intrusiveness of the rules it would make would 'be based on
finding the type of intervention best fitted to the problem' it identified. It would
look to find
a proportionate response to the problem, based on the perceived risk to:
-
consumers;
-
competition failings; and/or
-
market integrity issues.[26]
27.27
Having access to this range of different types of regulatory approaches,
however, allows the FCA to design and implement targeted responses that are
suited to achieving a particular market outcome. In ASIC's view, having a
broader and more flexible regulatory toolkit would 'enhance its ability to
foster effective competition and promote investor and consumer protection'. It
noted that regulating product suitability was 'one type of approach that has
been adopted internationally'.
ASIC concluded:
As the FCA's regulatory approach is relatively new, at this
stage, it is difficult to draw any settled conclusions about the positive or
negative aspects of such an approach. However, the Government may wish to
consider whether such a broader regulatory toolkit would be appropriate in the
Australian financial regulatory system.[27]
27.28
ASIC cited recent reforms to the Australian system of financial
regulation, whereby the national consumer credit regime requires credit
providers and intermediaries to assess the suitability of credit for consumers
before lending takes place. A similar requirement applies under the financial
services regime to margin lending facilities. ASIC suggested that the
government may wish to consider extending such an approach more broadly, to
encompass other financial products.
Committee view
27.29
The committee fears that Australia is out of step with international
efforts
to implement measures that would address problems associated with the marketing
of unsafe products to retail investors. The evidence before the committee
suggests strongly that urgent attention should be given to providing ASIC with
the necessary toolkit that would, in Mr St John's words, 'catch problems early
on in a financial product's life cycle as a means of preventing widespread
detriment to consumers'.[28]
Recommendation 57
27.30
The committee recommends that the government give urgent consideration
to expanding ASIC's regulatory toolkit so that it is equipped
to prevent the marketing of unsafe products to retail investors.
27.31
As a first step in this staged process, the committee notes that the current
Financial System Inquiry may have a role.
Recommendation 58
27.32
The committee recommends that the Financial System Inquiry (FSI)
carefully consider the adequacy of Australia's conduct and disclosure approach
to the regulation of financial product issuers as a means of protecting
consumers. In particular, the FSI should:
-
consider the implementation of measures designed to protect
unsophisticated investors from unsafe products, including matters such as:
-
subjecting the product issuer to more positive obligations in
regard to the suitability of their product;
-
requiring the product issuer to state the particular classes of
consumers for whom the product is suitable and the potential risks of investing
in the product;
-
standardised product labelling;
-
restricting the range of investment choices to unsophisticated
investors;
-
allowing ASIC to intervene and prohibit the issue of certain
products in retail markets; and
-
assess the merits of the United Kingdom's Financial Conduct
Authority model which allows the Authority to suspend or ban potentially
harmful products.
Wholesale and retail clients
27.33
The previous discussion about unsafe financial products being available
to unsophisticated retail investors also highlights the importance of retail
investors being classified appropriately. Professor Kingsford Smith suggested
there is an 'urgent need to review the definitions of "wholesale
investor", "sophisticated investor" and "retail investor"
under the legislation, so that any changes to ASIC's toolkit in the retail area
can be directed at the right class of investor'.[29]
Professor Dimity Kingsford Smith also noted:
Using wealth as a proxy of financial literacy is suitable in
some cases but not in others. For example, individuals who suddenly acquire
inheritance money or superannuation lump sums could be placed in a position
where they might be legally classified as sophisticated clients, irrespective
of their financial experience.[30]
27.34
In April 2014, Ms Joanna Bird of ASIC told the committee that there was
'significant legal uncertainty' about what constitutes 'wholesale'.[31]
Indeed, more recently the Stockbrokers Association of Australia informed the Senate
Economics Legislation Committee that the definitions of retail and wholesale
clients are crucial to 'the whole structure of the regulation of financial services
and financial advice'.
It registered its concern that three years after submissions closed on an
options paper, no final or interim proposals from the 2011 review have been
announced.[32]
27.35
The committee sought ASIC's advice on the requirement for a consumer to
be informed of their classification as either a retail or wholesale investor
and the consumer protections that go with their classification. ASIC informed
the committee that a client's awareness of such a status was an issue raised in
Treasury's 2011 options paper Wholesale and Retail Clients Future of
Financial Advice. ASIC suggested that this issue 'should be considered in
any changes the government may make to the law in this area following the
conclusion of this review'.[33]
Recommendation 59
27.36
The committee recommends that the government clarify the definitions of
retail and wholesale investors.
Recommendation 60
27.37
The committee recommends that the government consider measures that
would ensure investors are informed of their assessment as a retail or
wholesale investor and the consumer protections that accompany the
classification.
This would require financial advisers to ensure that such information is
displayed prominently, initialled by the client and retained on file.
Insolvency laws
27.38
Concerns about various aspects of the insolvency profession have been
brought to the committee's attention during this inquiry and previous
inquiries. Issues commonly raised relate to the independence of practitioners;
their competence; the fees charged and whether they represent value for money; and
concerns about related transactions. The committee conducted a comprehensive
inquiry into the profession in 2010.[34]
Particular liquidations and receiverships were also examined in the committee's
2012 inquiry into the post-GFC banking sector. However, concerns were again
raised in this inquiry, this time coupled with concern about ASIC's approach to
investigating allegations of misconduct. For example, the submission from
Dorman Investments Pty Ltd alleged that a particular liquidator 'acted
improperly' and asserted that ASIC's investigation was inadequate:
All ASIC asked us for was correspondence between us and the
liquidator...This limited amount of correspondence could in no way highlight the
failure to follow procedure which resulted in the liquidator auctioning
property which belonged to us and giving the proceeds to creditors.[35]
27.39
Of all the various groups of gatekeepers in the financial system, in a
2013 survey of ASIC's stakeholders insolvency practitioners received the lowest
rating for perceived integrity.[36]
The survey noted that small businesses 'were particularly negative about the integrity
of insolvency practitioners'. When
asked how well ASIC is holding insolvency practitioners to account, only 26 per
cent rated ASIC positively. The survey results note that while there was a
substantial 'don't know' response to that question (30 per cent), the 'poor' or
'very poor' rating was also the second highest.[37]
27.40
The committee received evidence on developments since the 2010 inquiry.
In its main submission, ASIC outlined some of its recent activities that relate
to the insolvency profession. In 2011 and 2012, ASIC completed 180 transaction
reviews, 32 reviews of a registered liquidator's entire practice, 146 reviews
of declarations of relevant relationships and 64 reviews of remuneration
reports. An industry-wide review of professional indemnity insurance policies
held by registered liquidators was also undertaken to assess compliance against
ASIC regulatory guidance. Further, ASIC has commenced publishing a series of
annual reports on ASIC's regulation of registered liquidators.[38]
ASIC also summarised its enforcement action. During this period it has obtained
court orders prohibiting a Melbourne liquidator from being registered as a
liquidator for five years; taken action to cancel another liquidator's
registration; and has accepted four enforceable undertakings from registered
liquidators.[39]
27.41
The Australian Restructuring Insolvency and Turnaround Association
(ARITA), previously known as the Insolvency Practitioners Association (IPA),
also provided the committee with an update on the work it has undertaken since
the committee's 2010 inquiry:
...we have this year (2013) conducted a second major review of
our IPA Code of Professional Practice, which was first issued in 2008, and
which was reviewed for its second edition in 2011. This review for the 3rd edition
followed an extensive consultation with our members, AFSA and ASIC, and the
ATO, and other government and industry stakeholders. The Code continues to
provide detailed guidance on remuneration, independence, communications,
timeliness etc, which apply to all our members whether they work in corporate
or personal insolvency or both. We had particular regard to recommendation 16
of the Committee's 2010 report, and have revised our remuneration report
template and otherwise continued to refine our guidance to members on
remuneration claims.[40]
27.42
KordaMentha advised the committee that it believes there is adequate
regulation and scrutiny of registered liquidators at present. However, it added
that it would support changes to ASIC's powers to act on complaints against
registered liquidators or to enhance the registration process if there were
identified limitations to or inadequacies with these processes.[41]
27.43
The committee received submissions that called for more fundamental
changes to how large corporate insolvencies are undertaken. Levitt Robinson
Solicitors argued that Australia should adopt the US framework known as chapter 11[42]
that 'puts recovery ahead of burial'. Levitt Robinson provided the following
description of the process:
Under the US Bankruptcy legislation, using Chapter 11, the
directors of an insolvent company may submit a Plan of Reorganisation to the
unsecured creditors to be approved by the US Bankruptcy Court. The Court then
supervises compliance with the Plan. So long as the security of the secured
creditors is protected, the secured creditors (usually banks) are bound by the
Plan of Reorganisation and have to stand back.
Where the Plan of Reorganisation fails, a trustee may be
appointed in Chapter 7, to assume a role like that of a liquidator. Even then
though, the trustee is more regularly and genuinely accountable to the Courts
than an Australian liquidator is in practice.[43]
27.44
The chairman of ARITA, Mr David Lombe, noted that the previous
government considered some reforms intended to harmonise regulation and give
more powers to creditors. However, he commented that the proposal did not deal
with significant issues, such as whether a chapter 11 framework should be
considered in Australia, or ipso facto clauses in contracts that can prevent an
insolvent business from being sold or restructured.[44]
In his view, major insolvency reform proposals 'could be higher on ASIC's list
of things that they are looking at'.[45]
27.45
At a Senate estimates hearing conducted while this inquiry was underway,
ASIC was asked about the chapter 11 framework. Mr Medcraft described chapter 11
as 'a very good system':
Having lived for a decade in the United States and worked as
a banker, I will say that basically the difference between our current
regime, fundamentally, and chapter 11 is that chapter 11 retains management
with the company, as opposed to handing the management to an insolvency expert.
It also means that basically everything is frozen—labour contracts, financial
contracts—such that the company's management can go away and negotiate and try
to put the company back on a solid footing...frankly, I believe it is a very
good structure. I have always been a supporter of it, because I think it
significantly mitigates the loss of value that results from essentially going
in and just selling up whole entities. Also, I think it is far less harmful in
terms of job losses and general destruction of value...But the most important
thing is that you retain the management. Often we see with companies that the
issue is its financial structure, not necessarily its management. And I know
from my time as a banker that often the company may be being lumbered with too
much leverage or contractual commitments. This gives a chance for that to be
sorted out.[46]
27.46
Mr Medcraft added that an impediment to considering a framework based on
chapter 11 in Australia was the court system, as the courts would need judges
with 'good commercial experience to be able to undertake this'.[47]
The chairman of ARITA, however, disagreed with the assessment about the court's
expertise:
I would refer you to a matter that I was involved in. The
organisation was called United Medical Protection, which was a medical insurer
who insured about 60 per cent of Australian doctors. Basically, medical
services ceased at that particular point. In relation to that matter, it was a
chapter 11 in Australia, being run by me as a provisional liquidator using the
provisional liquidation regime and being carried out by a Supreme Court judge,
Justice Austin. That was very much a situation where, effectively, for all
intents and purposes you had a chapter 11 running in Australia...I have found
first hand, in dealing with Justice Austin, that our judges are very capable of
dealing with it. In the US they have a separate bankruptcy court, but I do not
believe that that is a major issue.[48]
27.47
ARITA outlined some of the arguments commonly made against a chapter 11
framework, with its chairman noting that chapter 11 was 'not necessarily a
popular thing' in Australia's insolvency profession. Potential problems include
that the chapter 11 process can be very expensive. Also, different
attitudes to corporate failure in Australia compared to the US may make it
difficult to leave a company in the hands of the existing management or
directors, the people clearly associated with the company's difficulties, while
restructuring occurs.[49]
However, in Mr Lombe's view, the process could work effectively in Australia
and that 'we do not need to adopt holus-bolus the situation in the US'.[50]
27.48
Possible options for improving the operation of the current regulatory
regime were also suggested. ARITA argued that inconsistencies in the approach
of the two regulators most relevant to its members, ASIC and the Australian
Financial Security Authority (AFSA), should be addressed. ARITA provided the
following insight into insolvency practitioners' experience in dealing with
ASIC and AFSA:
In daily practice, around 200 of our members are regulated by
AFSA in relation to personal insolvency, and around 600 of our members are
regulated by ASIC in relation to corporate insolvency. A significant portion of
these members are regulated by both ASIC and AFSA. Each regulator has its own
guidance and regulatory requirements, which are not necessarily consistent, or
at least which are issued without reference to the other. Our members are the
subject of separate file audits and review by each of ASIC and AFSA.
While this is to an extent dictated by the separate laws that
Australia has for personal and corporate insolvency, many of the regulatory
issues are common to both, for example remuneration, independence and
communications with creditors. It is also a regulatory burden on our members.[51]
27.49
Another issue raised was the fees charged by liquidators. Mr Medcraft
recently suggested that there is 'a lot of logic' to capping fees charged in
relation to small businesses. He explained:
At the big end of town it is about basically trying to avoid
destruction of value. I think at the small end of town it is about making sure
small creditors are protected...[I]t is a matter of policy for government...But I
think some form of scaled fees should be something that should be considered,
because, when you think about it, any bankruptcy is a function of the size of
assets, the number of employees. If you look at it, there is clearly
correlation between what should be the activity that is undertaken and what you
have to deal with. So I think there should be some analysis, and I think if you
have scaled-free arrangement, then you have swings and roundabouts for
insolvency practitioners. They might not make a lot of money on one, and they
might make money on the other. But at least that gives some certainty to
creditors that there is some form of rationale to the fee. And I think also it encourages
efficiency in terms of the process. And we have scaled fees in other areas, so
I do think it is something that is worth examining. Frankly, it is not rocket
science. You should be able to work out a scaled fee based on the main metrics
related to the work. It is sort of common sense.[52]
Committee view
27.50
Clearly, the conduct of liquidations in Australia is still subject to
strident criticism and the source of much dissatisfaction. In response to a
2010 inquiry into insolvency practitioners conducted by this committee, the
previous government prepared draft legislation aimed to modernise the current
regulatory framework.
The committee urges the current government to progress these reforms and to
consider whether further legislative changes are required.
27.51
In addition, the committee is of the view that further consideration
should be given to the overall structure and intent of Australia's corporate
insolvency laws
and whether the current laws are appropriate for encouraging turnarounds and
restructuring in large corporate insolvencies. Particular consideration should
be given to elements of the chapter 11 regime in place in the United
States that could work in the Australian environment, and whether it would be
desirable to adopt some of that framework here.
Recommendation 61
27.52
The committee recommends that the government commission a review of
Australia's corporate insolvency laws to consider amendments intended to
encourage and facilitate corporate turnarounds. The review should consider
features of the chapter 11 regime in place in the United States of America that
could be adopted in Australia.
Boiler room scams
27.53
The committee received a number of submissions from victims of boiler
room scams that operated from overseas jurisdictions. One victim, Mr Ian
Painter told the committee:
My funds were lost as part of
a scheme run by a Group known as the Brinton Group which operated very
successfully until they were subject to a raid by Thai SEC authorities on 26
July 2001. Official estimates of losses for the Brinton Group scam alone were
in excess of $100 million. Based on the work done by me the number is much
greater than this and is, in my view, probably well in excess of $200 million.[53]
27.54
The Brinton Group were cold calling victims in Australia and selling
them non‑existent shares. Payment for the shares were made to an account
in Hong Kong.[54]
Most of these victims never saw their money again.
27.55
ASIC was first made aware of the Brinton Group in 1999 and did take a
number of steps to warn the public about this and other boiler room scams.
These included issuing 18 media releases between 1999 and 2002, attending
investment expos and working with overseas authorities in Thailand, Hong Kong
and the United States to encourage them to take action against those
responsible for the scams.[55]
27.56
Despite these measures there is a perception among some victims that
ASIC could or should have done more to assist in the investigation and the
recovery of lost funds. These concerns were discussed during the committee's
public hearing on 10 April 2014:
Senator XENOPHON: What my constituent told me, and I think he
spent a lot of time on this, is that he managed with a group of private
individuals who were scammed in the Brinton scam to get the funds frozen in
Hong Kong and he ultimately received some of the lost funds back, along with
the group of people who worked together. I guess their complaint that has been
put to me, and I want to put this fairly to you, is that they managed through
their own efforts to recover some of the funds but they felt that ASIC was
unwilling or unable to do so. That is the nature of the criticism. I wanted to
put that to you so that you could have a chance to respond to it.
Mr Mullaly: I think perhaps the critical word that you used
there is 'unable' as opposed to 'unwilling'. Our view and the view on advice
that we received was that we were unable recover the funds from Hong Kong. That
has been the case in other matters as well. As I say, we investigated another
quite sophisticated cold-calling scam between January 2006 and March 2007 in
which the perpetrators opened up seven different entities to undertake the
fraud. In that matter we were able to freeze money in Australia and we were
able to get people arrested in various countries, including in Hong Kong. We
were able to recover some money from Singapore and from Malaysia but we were
not able to recover the funds that were frozen in Hong Kong.[56]
27.57
ASIC explained that a major impediment to it taking action to recover
money on behalf of the victims is the requirement that only parties to a
contract have standing to bring a civil action in Hong Kong.[57]
27.58
It is understandable that victims, particularly those of the Brinton
Group, would be frustrated to see ASIC recovering funds in some instances but
not in others. Victims were further frustrated that no attempts were made to
extradite those responsible for the fraud so that they would face criminal or
civil charges in Australia.[58]
As expressed by Mr Painter:
I have corresponded with many authorities worldwide in my
pursuit of the Brinton Group (and others) and there is a common theme that due
to the cross jurisdictional issues and a lack of desire for the authorities to
work together in the pursuit of these perpetrators, it seemed to be just too
hard for the various authorities to pursue prosecution.[59]
27.59
ASIC also told the committee 'it is very difficult to take effective
enforcement action in these matters because the acts occurred in a number of
different jurisdictions'.[60]
27.60
Victims and ASIC alike appear to be frustrated by the difficulties in
pursuing those responsible for fraud when multiple jurisdictions are involved.
However, given the increasing ease with which financial transactions can take
place between different countries, it is likely more Australians will fall
victim to scams such as the Brinton Group in the future. Mr Painter sounded
this ominous warning:
...until ASIC or some other Australian authority takes action
to pursue the perpetrators of cold calling and other scams, Australia will
continue to be ripe pickings for such criminals.[61]
Committee view
27.61
Greater consideration must be paid as to how ASIC can improve its
ability
to assist victims of international fraud by way of fund recovery and
extradition.
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