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Parliamentary Joint Committee on Corporations and Financial Services
Oversight of the Australian Securities and Investments Commission and the Takeovers Panel
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Parliamentary Joint Committee on Corporations and Financial Services
CHAIR (Senator Fawcett)
O'Neill, Sen Deb
Smith, Tony, MP
Williams, Sen John
Owens, Julie, MP
Smith, Sen Dean
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Content WindowParliamentary Joint Committee on Corporations and Financial Services - 28/11/2014 - Oversight of the Australian Securities and Investments Commission and the Takeovers Panel
ARMOUR, Ms Cathie, Commissioner, Australian Securities and Investments Commission
BROWN, Mr Adrian, Senior Executive Leader, Insolvency Practitioners, Australian Securities and Investments Commission
DAY, Mr Warren, Senior Executive Leader, Assessment & Intelligence, Australian Securities and Investments Commission
KELL, Mr Peter, Deputy Chairman, Australian Securities and Investments Commission
KIRK, Mr Greg, Senior Executive Leader, Strategy Group, Australian Securities and Investments Commission
MACAULAY, Ms Louise, Senior Executive Leader, Financial Advisers, Australian Securities and Investments Commission
MEDCRAFT, Mr Greg, Chairman, Australian Securities and Investments Commission
MULLALY, Mr Tim, Senior Executive Leader, Financial Services, Australian Securities and Investments Commission
PRICE, Mr John, Commissioner, Australian Securities and Investments Commission
SAVUNDRA, Mr Chris, Senior Executive Leader, Markets Enforcement, Australian Securities and Investments Commission
TANZER, Mr Greg, Commissioner, Australian Securities and Investments Commission
Committee met at 10:48.
CHAIR ( Senator Fawcett ): I declare open this public hearing of the Parliamentary Joint Committee on Corporations and Financial Services. Today the committee is taking evidence as part of the committee's ongoing oversight of ASIC, the Takeovers Panel and corporations legislation. This is a public hearing and a Hansard transcript is being made. The committee prefers to hear evidence in public. We may agree to take evidence confidentially if it is relevant. The committee may publish confidential evidence later, but we would try to ask before doing this. It is important that the witnesses give the committee notice if they wish to give evidence in private. In addition, if the committee has reason to believe that certain evidence may reflect badly on a person, the committee may direct that the evidence be heard in private. I remind witnesses, in giving evidence to the committee, they are protected by parliamentary privilege. It is against the law for anyone to threaten or disadvantage a witness because of the evidence given to a committee. If they did, the action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to the committee. Witnesses should be aware if they make adverse comment about another individual or organisation that individual or organisation will be made aware of the comment and given a reasonable opportunity to respond to the committee. If a witness objects to answering a question, the witness should state the grounds of the objection and the committee will determine whether it will insist on an answer.
I remind committee members that the Senate has resolved that an officer of a department of the Commonwealth or of a state should not be asked for opinions on a matter of policy, and shall be given reasonable opportunity to refer questions to a superior officer or to a minister. The resolution prohibits only questions seeking opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Officers of the department are also reminded that any claim that it would be contrary to the public interest to answer a question must be made by a minister, and should be accompanied by a statement setting out the basis of the claim.
On behalf of the committee I would like to thank Mr Medcraft and officers of ASIC for their time and cooperation. I welcome you to today's hearing. The committee has received a copy of your opening statement, which is commendably short and focused. Would you like to make any opening remarks before the committee asks questions?
Mr Medcraft : May I read out my brief statement?
CHAIR: Given that it is very brief and focused, you may certainly proceed, Mr Medcraft.
Mr Medcraft : Thank you. Since we appeared last before the PJC there has been a lot of activity in the financial advice space, particularly—importantly—on lifting adviser standards. For example, your committee has been conducting an inquiry into the standards and training for advisers. There has been a working group established by the government on adviser standards, and it recently finalised a report on this issue. ASIC was an active participant in that group. Also, there has been a number of announcements from individual firms on initiatives to lift financial adviser confidence.
We applaud the momentum of these—we think they are great initiatives. However, they do not guarantee a consistent, national standard that everyone in Australia can be assured by—a national assurance. We are passionate about lifting standards. But most importantly, what we are concerned about is making sure that every Australian can have a consistent level of trust and confidence in financial advice. They deserve to have a consistent national level of trust and confidence as a minimum in financial advisers.
For that reason, we believe—as in many countries around the world—that what we need is a level playing field; what we need is a national exam for financial advisers that will help deliver this. As I said, this is similar to the approach that is taken in many jurisdictions—developed jurisdictions—around the world: a minimum level of assurance about financial adviser competence, such as the Series 7 exam in the United States of America.
We actually want a co-regulatory model, where industry sets the minimum competency levels for financial advisers and then ASIC oversees the exam and assures that those competencies are tested in a secure environment. At the end of the day, we do not want to micromanage education. We want to focus on outcomes—in this case, a national assurance that financial advisers do meet a minimum level of competence based on a national degree-level exam which takes place in a secure environment. We believe today that this is what we need as a country to underpin trust and confidence in the financial advice sector. It sets a minimum; it does not set the maximum, and that is what industry can set above that.
Our early thinking is that an exam should be based on modules that take into account the different skill sets that different types of advisers need. There should be a compulsory core exam that every financial adviser needs to sit that particularly includes ethics. It should be the cornerstone of any core module. The exam should be conducted in a secure environment to maintain the exam's integrity and to avoid any cheating.
We would like a system not unlike the one CASA—the Civil Aviation Safety Authority—uses to test pilots. I understand that pilots sit an exam set by CASA to test their skill and knowledge acquired from both training and experience. CASA controls the exam standards and approves exam providers who conduct the exam in accordance with the CASA framework in a secure environment. Only one in five Australians get financial advice. I think we would all agree that more Australians need to get financial advice. We believe that often they do not get that advice because they do not have the right level of trust and confidence. I think the recent high profile cases of mis-selling by financial advisers, sadly, does not contribute to that trust and confidence. The industry certainly needs to get its house in order, and we think it could be assisted by having a national exam that provides a level playing field for those who want to provide financial advice, no matter where they got their training from, whether it may be digital or anywhere else, and it sets a minimum level of assurance for those who use financial advisers. We are happy to take your questions.
CHAIR: Thank you, Mr Medcraft. We have two sessions, one before lunch and one after, before an in-camera session. The way I propose to deal with issues is to look at some current issues before lunch as well as following up open items from previous hearings. After lunch I propose to look more fully at your annual report and the outcomes of the Senate economics committee inquiry into the performance of ASIC. Clearly, if members have questions that span those things and want to ask questions before, feel free, but that is where I would like to put the focus. I am happy to look at current issues, and I would like to lead off with one before I go to Senator O'Neill, the deputy chair.
You are obviously aware of the outcome of the vote in the Senate recently with FoFA regulations and the position that has placed industry in. There is a deal of concern in industry in terms of the costs they have been put to, the fact that their IT infrastructure, their training systems, et cetera, have all been oriented in one particular direction and now has been a step change. I would like you to talk to the committee about how you plan to work with industry in the next few months such that they are not disadvantaged but likewise the consumer continues to get the best possible advice.
Mr Medcraft : Before Mr Kell answers, I will say that the minister was very proactive on the day, and virtually the night of the vote we did come out with an announcement on that. I will say that it was very good liaison with the minister's office on the day the vote went through.
Mr Kell : We have announced, as you are no doubt, aware, Mr Chairman, that we will be taking a facilitative approach in light of the changes. I should clarify, of course, that that applies to the actual provisions that have been changed, not the pre-existing provisions that remain unchanged and that are important in terms of protecting consumers. But in relation to some of those provisions that have been changed, yes, there are certainly systems changes that firms are going to have to undertake and compliance alterations that licensees are going to have to undertake. We are already in dialogue with both industry associations and individual firms to, in the first instance, identify where they are experiencing the most immediate problems in terms of changing their systems and compliance arrangements to fit in with the law as it now stands. If we have to provide targeted no-action letters, then we will do so once we have got a good understanding of where that will be most needed. We will be working with industry to ensure that we can assist them as far as possible and provide guidance about how to comply with the law over the months leading up to the middle of next year, which is when our facilitative approach runs up to.
On your consumer protection point, because I think that is very important, as we have said before in relation to our facilitative approach to major new reform initiatives, it does not mean that ASIC will not take enforcement action. If we see deliberately misleading or problematic conduct, we will step in. In fact, during the facilitative compliance approach between mid-2013 and 2014 we took quite a lot of action against financial advisers. Anything that harms consumers or is flouting the law, as distinct from people moving to compliance, we do not have any tolerance for.
We already have a series of meetings this week and next week with firms who have approached us saying, 'Can you help us move through this period as smoothly as possible?' If we have to issue more information, we will do so very quickly.
CHAIR: You talked about some of the industry associations. When you talk about firms, are you talking about the larger licence holders, or is the option for a face-to-face meeting available for any licensee?
Mr Kell : Any licensee who has a particular concern. As with the original implementation of FoFA, we are happy to have those discussions.
CHAIR: Is there a dedicated point of contact within ASIC so that, if an AFS licence holder wishes to ring up and ask a specific question, there is a dedicated line they can get help from?
Mr Kell : There are a couple of points there. There is a FoFA email address. The details of that are on our FoFA implementation page on our website. Louise Macaulay and Joanna Bird, as the heads of our financial advisers team, have a particularly significant role in this period. They are a key point of contact. We certainly found that email address and our ability to manage issues through that, through our FoFA implementation page, worked really quite well last time around.
CHAIR: From the consumer perspective, people are obviously concerned that not only have we had a step change, but because there is now a discussion about potential further compromise—the subset of the regulations that have just been disallowed. Are you getting any inquiries from consumers seeking more information about the situation for their rights?
Mr Kell : I am unaware that we have been getting any inquiries at this stage from consumers, but we will be monitoring that. We have regular dialogue with some of the consumer representative groups, and we will be talking to them as to whether they are picking up any issues around this. They are often a very good canary in a coalmine for us in terms of any issues coming up. But at this stage, no, we have not had a lot of direct queries.
Senator O'NEILL: Could you just take me through the time line with the FoFA implementation—the changes that the former government made to improve the quality of financial advice; the timing of that; how that fits in with the election; the timing of the next change; then the time line here; and what you have had to do in the interim since the government has come to power.
Mr Kell : So that I do not get something wrong, I would probably prefer to provide a written time line that sets that out very clearly. I can provide that to you quite quickly and am happy to do that. The key provisions came in on 1 July 2013. We had that facilitative approach for the 12 months. There were obviously changes in the middle of this year and then changes again last week. Rather than get the dates wrong, if it is okay with you, I would prefer to provide a document that sets it out very clearly and is easy to understand.
Senator O'NEILL: If you could get that, that would be great, but essentially what we have had now is a period of chaos, concern and alarm around Timbercorp, Storm Financial and Trio; a significant policy response by the former government; implementation on 1 July 2013; an election on 7 September; and then, not so long after, a change. That is pretty alarming for the industry already, particularly with the nature of it being made by regulation, which has facilitated us reaching this point. I know it is a facilitative approach you are taking. That facilitation of the government by putting their set of changes to FoFA through as regulation rather than legislation has added incredible alarm in the industry, and I am sure there are some costs involved. Can you express a view about the sector's response to the risk that was taken by the government in pushing through their change by regulation instead of by legislation?
Mr Kell : I do not think I can comment on the costs that industry incurred. We have not sought to collect that sort of information as part of this very broad package of reforms. I would make one observation: with a very broad and complex package of reforms, it is not unusual to get some changes as the implementation occurs. But we have not collected that information, no.
Senator O'NEILL: What does it mean for you as the regulator? You talked this morning in response to the chair's questions about any licensee now being able to contact you. How many are there?
Mr Kell : There are several thousand licensees.
Senator O'NEILL: Ten? Twenty?
Mr Day : It is below 5,000.
Mr Kell : What we aim to do—this is why we have, for example, a separate section of our website dedicated to this issue—is to provide information through that and also through the regulatory guides that we have issued in relation to the various conduct requirements in the financial advice industry to provide information that will be applicable across the sector and will as far as possible avoid the need for individual firms to approach us on every issue. It is a key part of ASIC's role and a key part of our approach to these sorts of reforms that we provide that guidance so the industry has as clear a picture as possible of what they have to do to make sure they are operating within the law and doing the best thing for their clients.
Mr Medcraft : I think the most important thing is business wants certainty.
Senator O'NEILL: I am sure they do not feel like they have had that for awhile.
Mr Medcraft : Basically, they want certainty, and that is why on the day this happened we worked very closely with the minister's office. When the change was made, we were able to respond very quickly to reassure business that we would take a facilitative approach. Our objective is to provide as much certainty and to have a facilitative approach. We are very much focused on that.
Senator O'NEILL: For the record, could you explain exactly what a facilitative approach means and the process by which it is triggered?
Mr Kell : A facilitative approach has a couple of points. One that is particularly relevant in this instance is that we are not taking a different approach to those elements of the law that have not changed. Most of the best interest duty is the same this week as it was last week. Nothing changes there in terms of the way we apply that. The approach applies to those elements of the law that have changed. When we talk about a facilitative approach we are talking about taking a sensible and measured approach where industry participants are unable to comply in the short term with some of the requirements of the law but are making reasonable efforts and endeavours. They have plans in place to ensure that they can comply. It is not in our interest to go out and take an inflexible and hard line in those cases. That is where we seek to be facilitative. Also part of it is issuing that guidance that I talked about and pointing licensees to where they can get information about how to comply with the law.
Another aspect of the approach that is quite important is looking to identify whether there are particular issues where we may need to signal even more clearly that we are not going to be taking enforcement action in the short term. So if there are particular issues where industry would like the reassurance that ASIC are, if you like, operating under a no-action position, we will identify those as well.
I want to be very clear about what a facilitative approach does not involve—and we have been very clear about this in the past. If people are acting in ways that harm consumers and if they are simply ignoring their obligations and making no efforts to comply, then we will certainly step in. We do not have tolerance for that sort of approach to compliance with the law.
So some aspects will take potentially a little bit longer for firms to get in place than other elements. We take that into account as well. We have set a deadline, if you like, as well for the middle of next year.
Senator O'NEILL: You just mentioned the best interests duty now has come back. What has come back?
Mr Kell : Subsection (g), which has been colloquially referred to as the catch-all phrase, that is the additional element in the best interests duty. The other elements of the best interests duty that were there two weeks ago and that ASIC were applying are still there, so industry should already be complying with those as a matter of course.
Mr Medcraft : And (g) is any other matter that you should have taken into account.
Senator O'NEILL: So does that increase the protection for consumers?
Mr Kell : There will be some additional elements that may have to be taken into account as a result of that change. We actually included some potential examples in the original guidance we offered to industry on this issue. To give you one example: it might assist in instances where there is inappropriate scaling of advice in ways that harms the interests of the consumer.
Senator O'NEILL: Can you give me an example of that?
Mr Kell : In effect it might be a situation where someone goes to a financial adviser and they clearly have a range of financial issues that they need dealt with, including significant debts, insurance issues and so on, and in ways that the consumer does not understand the advice is scaled down to one small issue. That may be an example of something that that provision picks up.
Senator O'NEILL: So does paragraph (g) coming back mean that you cannot do that to your client?
Mr Kell : We would hope that you would not do that anyway, but it would potentially assist us in a situation like that.
Senator O'NEILL: That sounds like a pretty important thing.
Ms Macaulay : So the reintroduction of subsection (g) is part of the safe harbour that is provided by the provision. There is the duty to act in the best interests of the client—and that has always been there and it has not changed—and then there is the safe harbour, which is a number of steps. If you comply with them you are taken to have provided advice in the best interests of the client, and that is where the change has arisen. So the actual duty has remained the same.
Mr Kell : It is not an uncommon requirement in relation to these sorts of duties for other professions as well.
Mr Price : Perhaps if I could make one point because I think it is pretty important. The facilitative approach that ASIC has adopted is not unique to FoFA. This is something that we do commonly where there is major legislative change. I am aware of at least three other instances over the past five years or so where we have adopted a similar approach—for the MySuper reforms, for the shorter PDS regime and for some reforms around CFDs and margin and foreign exchange lending.
Mr Kell : The other major reform process where we took a facilitative approach during the implementation period was the major credit reforms.
Mr Price : It is simply a recognition of where there are major reforms, particularly where there are systems changes. Sometimes the regulator does need to adopt a balanced approach in how it is administering the law.
Senator O'NEILL: In your view, is this a politicisation of ASIC—in the context of carrying out work for the government when there is considerable concern around financial advice? In your opening remarks you indicated that only five per cent of Australians are seeking financial advice. There are already concerns. It is pedal to the floor, let us go hard with enforcement and make sure we get the standards set and everything right—and then take it off in a facilitative approach.
CHAIR: I just remind you that it is not really appropriate to ask for opinions.
Senator O'NEILL: Okay. Is it difficult for ASIC to manage both being the policeman on the beat and having to make these facilitative arrangements simultaneously? What challenges does that present you with?
Mr Price : The Australian Securities and Investments Commission Act actually requires us to both enforce the law and facilitate business. That legislation has been governing ASIC since it was introduced in 1991. It can be challenging at times but it is not something that is foreign to us or new to us. We have a dual role and we have always recognised that dual role of both enforcing the law and facilitating business.
Mr Kell : I think Mr Price is spot on. It is a role we have carried out in relation to a range of other major reform processes. In practice it is not difficult to distinguish between, if you like, an industry-wide systems problem that we need to address through a facilitative approach versus someone engaging in serious noncompliance and breaking the law in a way that we need to crack down on. It is pretty straightforward in practice to be able to distinguish between those two different scenarios.
Senator O'NEILL: I am sure the consumers will be very happy to hear that.
Mr TONY SMITH: I just want to move to another area altogether and take you back to some questions and a discussion regarding penalties that we had back in Melbourne on 5 September. I asked some questions about the penalty regime and the example of Mr Peter Holt. I might start with you, Mr Medcraft, on the generalities, because I really want to get some clarity here. You have provided some answers to the questions that Senator Williams and I asked on notice back at that time. If we take Mr Holt, who was banned for three years—and you can correct me if you think I have misinterpreted anything—I think you made a number of points back then about the reasons for the three-year ban. There were a range of factors. They were (1) that it was appellable to the AAT; (2) that—and you have confirmed this in the answers—amongst other things, the intent of your banning powers is to protect the public, not to punish the person for past misconduct; (3) that—and I am just putting the numbers on it, Mr Medcraft—you take into account the person's reputation and livelihood; and (4) that you look at precedents. Is that a fair summary of the approach?
Mr Medcraft : That is absolutely correct. I will ask Mr Kell if he would like to comment.
Mr Kell : I think that is, in brief, a good summary. I note that we actually have a public regulatory guide that sets out some of these factors that inform the decisions around banning in some detail.
Mr Tanzer : That these decisions are appellable to the AAT is not a factor in the sense that we are afraid of being appealed to the AAT.
Mr TONY SMITH: That is good to hear.
Mr Tanzer : Because it is a reviewable decision, in setting our framework for what we believe reasonable penalties to be, we take into account not just our own opinions but what we have heard when the AAT has come to review these types of matters.
Mr Kell : Or indeed the Federal Court.
Mr Medcraft : The AAT does very much consider the person's reputation and livelihood.
Mr TONY SMITH: Let us leave that to one side. If we take the precedents issue—do you think it is fair for the public to be concerned that, if you are looking at precedents and all the precedents are what they would consider to be very lenient decisions, you are going to perpetuate a cycle of leniency? Is that a fair proposition?
Mr Day : It is a fair criticism. You could make the same argument in relation to judges passing sentence in criminal matters and those types of things. I am sure the AAT can speak for themselves, but in those respects, what you would find is that community views, community tolerances and community expectations start to inform their decisions. We have found this at ASIC over the period—that the more matters are brought before certain tribunals and courts, the more those courts and tribunals start to realise that these are increasingly serious problems. You then find that the penalties they impose—within the range they are able; within the limits of the law—do start to increase over time. The point I am making is that, in respect of these types of matters—banning—if the AAT start to see more of these and start to worry about that, they will also be wanting to send a message about the appropriate banning length.
Mr Medcraft : It comes back to that discussion we had on Trio with the current financial licence system—that it is a right not a privilege. With that fundamental, that it is somebody's right to do it—if you take that away—
Mr TONY SMITH: We do not have that principle in lots of other professions, do we?
Mr Medcraft : No, but it does come down to that issue again. As in the UK, it is a privilege not a right and that is bound up in the system—which is what the AAT reflects: it is somebody's right to do this and you should not necessarily be entitled to take away that right. It is a very important difference from it being a privilege to do this thing. That is where we come back to in implementing this.
Mr TONY SMITH: I have had a look at some of the categories—you are an expert in this, I know. Is it right to say that there are really three categories? You will ban someone for a period of less than three years, you will ban someone for a period of between three years and 10 years, and then you have that top category of 10 to life. You have Mr Holt in the three-to-10 category and you put him right on three. Is that accurate?
Mr Day : Yes.
Mr TONY SMITH: I asked what he would have had to have done to get life. Let us go back a step. What would he have had to have done to get four, five, six, seven, eight, nine or 10 years?
Mr Day : The best place to start with that type of analysis is to ask what the ASIC delegate found that he did—before you ask what else would he need to have done on top of that. That is not a bad place to start. We have a circumstance where the ASIC delegate found a failure to disclose certain commissions, a lack of reasonable basis for advice and a lack of certain other information and detail. This was not a circumstance, if you like, where the allegation was that Mr Holt was taking money out of trust accounts and using it for his own purposes.
Mr TONY SMITH: How much did Mr Holt make through Timbercorp? You might be able to help me, Senator Williams.
Senator WILLIAMS: According to reports, it was about $7 million.
Mr Kell : At the time the regime was of course perfectly legal. ASIC had warned about this and had raised the issue in some public reports, including around law reform, but at the time those commission payments and high-risk schemes were perfectly legal.
Mr Medcraft : I was going to say that we have actually got the head of financial service and enforcement, Tim Mullaly. He wanted to make a comment on this.
Mr Mullaly : I support a couple of comments in relation to the discussion. The first is in terms of setting that bar, you need to recognise that we ban a lot of people on a permanent basis and we ban a lot of people for extended periods of time, so we are not setting a low standard. The second thing to understand is that we have a panel of delegates that in a sense are independent of the investigators, certainly independent of the enforcement area that make these decisions. So, while it is an ASIC decision, it is done by an independent panel of delegates or an independent delegate and as our—
Mr TONY SMITH: With respect, I think we covered that last time and I think we all understand that. Can I cut to one last area of questioning. Let's look forward and I know you cannot prejudge things and all the rest of it. I want to be very clear, you did not suspend Mr Holt, you banned him—that is right? Which means that it is not like a footy suspension where you get a couple of weeks and you automatically come back.
Mr Kell : Correct.
Mr TONY SMITH: Let me just jump forward to where you will not want to prejudge things—let's just say anyone who has been banned for three years—that might help. They do not automatically come back. If Mr Holt wants to get a licence again he has to apply to you, doesn't he? Who is in charge of that?
Mr Medcraft : That is Warren.
Mr Day : I am in charge of that.
Senator WILLIAMS: Just one question, can he operate under someone else's licence?
Mr Day : He can seek to become an authorised representative or an employee of another licensee.
Senator WILLIAMS: They would have to go through you then?
Mr Day : Well, they—
Senator WILLIAMS: What I am saying is this: if Holt came to me and I was running a financial planning business, can he just start work with me without you having to tick off on that?
Mr Day : Yes, he can. However—
Senator WILLIAMS: There is problem No. 1.
Mr Day : Not during the ban—
Senator WILLIAMS: No, let's take it steadily. Holt has been banned for three years and in 12 months' time his ban is concluded—
Mr Day : September next year.
Senator WILLIAMS: He can come to the hypothetical John Williams financial planning business; I can put him on; and he can start giving financial advice.
Mr Day : Yes.
Senator WILLIAMS: And he can collect money and he does not have to go near ASIC to be ticked off.
Mr TONY SMITH: That is exactly the point I wanted to get to.
Senator WILLIAMS: The point I want to make on that is: does that add strength that each and every financial planner should be licensed?
Mr TONY SMITH: Let me go back a step, because it is an important point Senator Williams has made. You are in charge, Mr Day, if Mr Holt was to reapply, what is the likelihood of you giving him a licence?
Mr Day : Extremely low.
Mr TONY SMITH: Extremely low, as in the same chance as me being called in for the Carlton Football Club—
Mr Day : As you said yourself before, Mr Smith, I cannot prejudge that. We need to see what he comes to. There is a period of banning and, when the banning ends, he is free to apply. We would need to look at and if nothing else—
Mr TONY SMITH: Maybe this will help. If I said to you, 'I will ring up the Carlton Football Club that I barrack for and say I am available for pre-season training.' Would you put my chances of being picked sort of on—
CHAIR: Mr Smith, that is probably an unfair question to be putting—
Senator WILLIAMS: You know you have got no hope of playing for Carlton anyway.
Mr Day : By the sounds of it your friend mentioned that himself.
Mr Kell : One point I would like to make here that will also help in this area is the new adviser register, which will be very easy to search for any consumer and which will have the full set of advisors on it for the first time.
Mr TONY SMITH: Just clarify this—you have answered as much you can and I appreciate that as well. Is it fair to say, you have said it is extremely unlikely, but his capacity to go—and as Senator Williams said—
Senator WILLIAMS: Work under my company.
Mr Day : The point I would make is: if the company that Senator Williams has a licence in—in your hypothetical—were of a mind to put him on, they then assume the responsibility and any liability that flows. A licensee in those circumstances would have to think twice about that. That is about them giving adequate supervision—appropriate supervision—to their representatives. That is the way the system has been set up. They absorb all of that. Senator Williams, being an upstanding member of society, would probably say 'no', I would expect—to put words in his mouth.
The other point I would like to make, and it is an important point, is that he is on our register of banned persons. Infrequently, what we find is that people who have been banned go and do things themselves. They do not hang up a shingle; they have quiet conversations with people and start to represent that they can provide certain advice in what, quite frankly, turn out to be fraudulent affairs. Unfortunately, the public do not often go and check our registers to see what is available at the moment—this is even before we talk about this new register. They do not even go and have a look at our website to check out if a person has ever been banned. If they did that, the self-protection mechanism would kick in and they would quite sensibly say, 'Sorry'.
Mr TONY SMITH: The point you are making there, which is a reasonable one, is that, if anyone who has been banned sought to operate through another licence holder, there would be two things. One would be the legal liability.
Mr Day : Yes.
Mr TONY SMITH: The other—certainly in high-profile cases—would be the public opprobrium that would go with it.
Mr Medcraft : I will add one point. The person who applies for a licence again has a right to a licence.
Mr Day : They have a right to apply.
Mr Medcraft : The only basis, normally, on which we can reject that would be if they are—I think the benchmark is—'not of good fame and character'. Again, that is challengeable at the AAT, so we are possibly back to where we started in this discussion, which is: it is a right and it is challengeable, so we can be challenged in our decision. It is not black and white. That is the point I am making.
Ms OWENS: I want to ask you a few questions about ASIC's reputation at the moment. Australia weathered the global financial crisis very well. People said, at the time, that it was because of our regulators—ASIC, APRA, RBA. You got a great deal of credit for doing incredibly good work that kept our country on an even keel in some very bad times. I will start with that. Then we had the Storm Financial, Timbercorp, Trio Capital and some very bad behaviour. There seems to be in the community—and you see it through emails at various times—this perception that ASIC is not strong enough in pursuing that kind of behaviour and does not respond quickly enough. In a very short period of time we have two views of ASIC: as a strong regulator that kept us safe and as a regulator that does not. I am wanting to work that through. Is that fairly accurate, would you say?
Mr Medcraft : People lose money—we empathise with them. It happened with all of those examples you mentioned. We really feel for them. The two areas that are the highest risk areas for us in what we do are managed investment schemes and financial advisers. There is no doubt about it; they are the highest risk areas. At the end of the day, there is an expectation gap. We are not a prudential regulator. We do not guarantee the outcome. We do not guarantee that if you invest you will get your money back. We want to make sure, though, that people have trust and confidence in the system. But, at the end of the day, we oversee markets and we make sure that people who participate in those markets can have trust and confidence—holding the gatekeepers to account.
If you invest in markets, you can make a lot of money and you can lose a lot of money. There are three elements in the system. There is the law which sets out the rights and obligations you have when you participate in the financial system. We oversee that law. But, equally, there are the gatekeepers that are in the system—the financial advisers, responsible entities, directors and market operators. They are important and they have a job to do, and part of what we do is really focusing our surveillance and enforcement on that group.
Then you have the individuals themselves. It is a free enterprise system. They have a job to do in taking responsibility for themselves and doing their own due diligence. That is important. So it is a three-way equation. Sometimes there is an expectation gap, when people perhaps make investments and do not really understand what we do or do not do. That is really sad because sometimes you will have a responsible entity approved by ASIC, which means they might have a licence that they have had a right to get, but it does not mean to say that we approve their business model or we have approved their scheme. There is an expectation gap. It is often a matter of thinking that we are more like an APRA prudential regulator. They often see us together. We are so different. APRA are probably, at a minimum, getting round to a financial institution once every six months. We cover thousands and thousands of people in the financial system. We basically do the best we can with the resources and powers we have. It is not an easy job. It is not an easy job for market regulators around the world, because what we regulate are markets: we do not provide guarantees of an outcome. We want to make sure that those who have a job to do in the system do their job.
At the end of the day, what goes to the core of what we do is making sure that there is trust and confidence. The examples that you mentioned ruptured trust and confidence. Then we have had Senate hearings and inquiries and whatever since. But at the end of the day we all collectively want to make sure that people can have trust and confidence, particularly, as I said, in relation to financial advisers and some parts of managed investment schemes. We know that they are areas that we need to work harder on to assure trust and confidence.
Mr Day : It is a very limited analysis in its own way. What you have just put is a very limited analysis.
Ms OWENS: Of course it was, I know that.
Mr Day : There are a lot of things that happen every day that, I will not say go unnoticed, but really add to the regime itself.
Ms OWENS: The question was asked to give you an opportunity to say what was said. The question was not a statement of fact.
Mr Medcraft : I will say that one of the things we have tried to do following the Senate inquiry is to release this document, which is our strategic outlook, which you may have seen already. We are pushing this out more to explain a bit more about what we do, what we do not do and what we see as the risks. It is important in terms of communicating more and encouraging people to take action and empower themselves—at the end of the day, to be a bit more sceptical of whomever you are dealing with. Be sceptical, whether you are dealing with a financial adviser or an investor. An element of scepticism is sometimes hard. You have to be a bit defensive, frankly, when it comes down to dealing with your finances.
Mr Price : I think that is very important. If you go back to the inquiry that set ASIC and APRA up, which was the Wallis inquiry, it relied very heavily on a theory called the efficient markets hypothesis, which was basically that if you disclose all the information to an investor they would read it, understand it and act rationally in making financial decisions. Experience has shown over time that that theory has some flaws. Equally, if you are relying—
Mr TONY SMITH: Sorry to cut you off—but particularly when there has been a strong market for a long period of time.
Mr Price : Absolutely. The difficult thing for policymakers and governments is that, if you are not going to rely on a purely disclosure based solution, what interventions are you talking about? What impact may that have on the market? What unintended consequences may flow from that? It is quite difficult issue, and one that I think the financial system inquiry being conducted by David Murray may well pick up on in the report that—
Mr Medcraft : If you look at the first thing that was proposed as a challenge to us in the strategic outlook, it is getting that balance right between a free market system, an investor, an issuer, and trust and confidence. Getting that balance right is always difficult, whether it is policy makers or ourselves. If there is not trust and confidence from investors you do not have a market, so there should be an alignment here, right? We are seeing this with the financial advisers: lack of trust and confidence so people do not go to advisers, and you do not have a business. Trust and confidence are core, frankly.
Ms OWENS: Could I ask about what I think are probably changes in the Australian market? We have $1.85 trillion in super funds growing at between eight per cent and 15 per cent a year. A large number of those people will receive large amounts of money with zero experience in managing money. I would assume that, in the past, people who had large amounts of money got it, somehow, so they probably had some skill. It is a honey pot for people who will be attracted to that very large amount of money that is flowing through inexperienced hands. It is easier to reach them through the internet. There is a growing complexity in products, and Australia is probably ahead of the curve, because our super funds are so much bigger. So we are going to be going through something that probably no other country has gone through, and we are probably starting to see the beginning of that now.
I am just asking whether ASIC and our regulatory system—and the resources that ASIC has—is ready for what will be a tidal wave of possible opportunities and problems.
Mr Medcraft : Again if you look at our strategic outlook, we have identified superannuation as the massive challenge for ASIC—because, at the end of the day, what does super invest in? Debt capital markets, equity capital markets, funds management. It is a huge challenge to us, and it is growing. As I said, at the end of the day, the amount of our budget is a matter for government. We do the best we can with the resources we have got.
To your point, we are very focused on the issue at hand, particularly in terms of empowering Australians to understand their finances better—and that starts even at school. I think it is important that we make sure that tomorrow's adults actually can understand how to manage their finances, because if they have a job they all will have super. That is why what we are doing in Australian schools, rolling out the teaching of financial literacy from kindergarten to year 10, ASIC's MoneySmart teaching program is very important. We are now reaching 3,000 or 4,000 schools, but we want to get to all schools, right through the curriculum, embedded in the national curriculum. Then even when we move up higher, when we move into vocational education and teaching tradies how to manage their money—again hoping that they have superannuation and that they can manage it—is equally important. Then when we move into the adults, having things like our MoneySmart website—the number of unique hits to it last year grew 40 per cent to five million unique hits. That is a significant part of the Australian population. The reason that is so popular is that it is a trusted source of information.
Ms OWENS: I am smiling because I have tracked my spend on my phone. I am responsible for a lot of those increases in hits, by the way!
Mr Medcraft : Keep it going! People are looking for trust. It is all about trust, and our MoneySmart is really trusted. We now have nearly 200 videos on YouTube dealing with a whole range of issues in 16 different languages. We have Facebook and Twitter. Multichannel is important, so empowering people to get information is really important if you are thinking about how you manage super. Equally, what we recommended to the financial system inquiry is that we have really got to start focusing on retirement income products. As you said, more and more people are now moving into retirement, and retirement income is an area really is important to think about. We focus too much on assets. We should be focusing more on income because that is what people need. So we do a fair bit of work educating even in our MoneySmart about retirement income. Think about what income you need to retire. We do the best we can with what we have. Hopefully that answers your questions.
Ms OWENS: Yes, and I just have one more general one, which is: as my colleague said, you are at the end of a boom time. There will be people who made decisions that will not sustain a bad time. How does Australia's performance in relation to things like Timbercorp compare with the rest of the world? Do you have comparisons?
Mr Price : In many parts of the world you cannot have investment structures like Timbercorp.
Mr Tanzer : It is difficult to make comparisons for those types of reasons. You mentioned our superannuation system, which I think is the envy of many countries in the world. But John makes a good point, that Australia's investment regulatory regime is quite permissive in terms of the investments that can be offered to retail investors.
We have seen significant problems with mortgage funds, with property funds and with agribusiness funds, all three of which—perhaps to a lesser degree, property funds—have been characterised as high-return investments but which have had some structural difficulties. We have been quite active in trying to address a number of those structural difficulties: improving benchmark disclosure, jacking up financial resource requirements for the responsibilities and so on. But the fact is that Australia's regime in that managed investments rate area is quite permissive about what can be offered to a person and then with them being able to make their own decisions about the risks.
Funnily enough, in other parts of the world where significant losses have occurred—if you look at the US, that is in a much more basic direct financial need of housing finance. It was people aspiring to and having access to housing finance that actually turned out to be beyond their means and, when the property bubble started to burst, that caused very significant problems for them. In the UK, there is a longer history of more direct related retail insurance-type concerns, or very poor small 'c' consumer financial products—commercial credit insurance and a range of other insurances, and somewhat investment-related products—that got broad currency within the retail markets, not through a managed investment-type regime but through more broadscale investment practices. They have had a series of really major scandals that have severely undermined confidence in products like basic add-on insurance products.
It does differ from jurisdiction to jurisdiction. I think the general assessment, at least at this stage, is that Australia weathered the financial crisis better than others, partly due to the strength of its banking system and investment infrastructure, and to the degree of the underpinning of its superannuation regime. I think those strengths remain.
Mr Medcraft : To Greg's point: you are asking about better-off countries. Where we did have problems, interestingly, some of those—like mortgage trusts and debenture issuers—were forms of retail shadow banking, and the one issue that happened globally was retail shadow banking. For example, in money market trusts in the United States. So if you think about where we did have some problems in retail shadow banking, mortgage trusts were an example and also the debenture issuers where, basically, you have entities that people often treat like banks when in fact they are not. They are not banks and they run mismatches. We did have an element of that in terms of where we had problems—which was interesting, actually: shadow banking. We had it, but not to the same extent.
It is just an area which, again, we need to be very conscious of. It is one where we have highlighted that we are dealing with those areas.
Ms Armour : Just a slight balance to that: one of the reasons that we weathered the crisis well was that we had a very viable equities market, which meant that post crisis we had an alternative for companies to raise money to repair their balance sheets. I think that has really been important, that we actually had a mix of sources of liquidity.
Mr Medcraft : We had a national savings system called 'super' that could invest in those equities.
Senator WILLIAMS: You can suspend licences. If I own a financial planning business and I have three people who work under my licence, when ASIC goes to ban one of those three who work for me for doing the wrong thing, do you ban my whole licence or do you just ban the individual?
Mr Kell : If it was the individual doing the wrong thing then we would ban the individual, but one of the first things we would look at is whether it is just that individual, has he gone off the reservation, so to speak, or is there a broader problem in the firm. If that is the case, then we will look at removing the licence more generally.
Senator WILLIAMS: Let us say I have three people employed in my business and everyone is doing the right thing except one. Can you ban that person immediately you see the evidence of wrongdoing or do you have to go to a court? What is the process?
Ms Macaulay : You can, I believe, get a banning order through a court. We do banning most commonly through an administrative decision. We were talking earlier about delegates—
Senator WILLIAMS: So you can do it without going to a court?
Ms Macaulay : Yes.
Senator WILLIAMS: Hence if each individual adviser is licensed you could suspend their licence but you would need to have the same power to do it instantly as well.
Ms Macaulay : Currently our delegates also have the power to suspend licences and licensees, and we have certainly done that in the last few years.
Mr Medcraft : But they are appealable.
Senator WILLIAMS: Everyone has to have a right to appeal—everyone.
Ms Macaulay : Of course.
Mr Medcraft : I just wanted to point that out.
Mr Mullaly : It is not an immediate thing—a person needs to be given an appropriate amount of time to look at what the claims are against him or her.
Senator WILLIAMS: That is justified—you cannot just go banning people from earning a living because you do not like them. I realise you have to do the research.
Mr Medcraft : Due process.
Senator WILLIAMS: Back to Mr Holt, I see in the media today, and I have heard about this before, the liquidators of Timbercorp, KordaMentha, are seeking to remove the trustee in bankruptcy of Mr Holt, one Andrew Wily. Mr Price, you would be well aware of that?
Mr Price : I am aware of Mr Wily. ASIC has an investigation under way in relation to Mr Wily, although I should note that the actions taken in respect of Mr Wily are through a separate regulator, the Australian Financial Security Authority, or AFSA.
Senator WILLIAMS: Has Mr Wily been banned or suspended before as a practising liquidator?
Mr Price : That is my understanding, yes.
Senator WILLIAMS: In 2003?
Mr Price : Yes.
Senator WILLIAMS: When you investigate liquidators like Mr Wily, can you go back right through his past, through his files—there is no limit to how far you can look back?
Mr Price : You can look back at previous conduct but bannings are really a protective type of regulatory activity. They are not a punishment, they are something to protect the public in the future. So, while past conduct can be relevant, the more relevant question is what degree of confidence do we have in this person acting in the right way in the future.
Senator WILLIAMS: I see in the media that KordaMentha, the liquidators of Timbercorp, will also seek an inquiry into Wily's conduct as Holt's bankruptcy trustee.
Mr Price : Certainly we are aware of those reports and they are of interest to us.
Senator WILLIAMS: Are you aware of a speech I made in the Senate on 21 September 2011?
Mr Price : Regrettably, no.
Senator WILLIAMS: I will email it to you. In that speech I said:
Documents filed with ASIC and to creditors reveal that the liquidator, Andrew Wily of Armstrong Wily, took an estimated $1.6 million in fees between 2005 and September 2008, law firm Nikolaidis & Company—
Nikolaidis went to gaol for a couple of years—
was paid $2.1 million at September 29, 2007, a litigation funder that was set up in a tax haven in Vanuatu with no visible directors was paid $3.1 million in commission, and $1 million was paid to a Lazar-related company …
Ian Lazar is currently being held in custody.
Mr Price : We are aware of those circumstances. Sometimes when activities occur in offshore jurisdictions it is difficult to get documents and a true understanding of what has gone on. Certainly Mr Wily is a person of interest as far as ASIC is concerned and I would welcome any material that you might want to put to us.
Senator WILLIAMS: Have you also seen that Constantinidis? Big Al, I think they refer to him as. He introduced Wily to Kevin Jacobsen. As I said in my speech, within one hour of arriving to meet Jacobsen at the Entertainment Centre, Wily's staff had emptied all the cash out of the ATMs, and the cash appears not to have been seen again. Wily then charged $250,000 in fees for six days work. It was estimated that $150,000 in cash was taken and never seen again. I think you will read my speech with interest, Mr Price.
Mr Price : I would welcome the opportunity to read it, Senator.
Senator WILLIAMS: You would not be able to give the committee the details you are looking into in your inquiry. I would expect that to be confidential, but no doubt we will hear more later on.
Mr Price : Yes.
Senator WILLIAMS: Could we get an update on the Trio Capital matter? Have the liquidators finalised their report?
Mr Price : No. The liquidators are due to release a couple of reports, particularly those relating to some of the investments in what is known as the ARP Growth Fund. ASIC has been told by the liquidator that those reports should be provided by the end of the year. We are certainly awaiting those with a keen interest.
Senator WILLIAMS: In summary, I am just thinking about that liquidators inquiry. Lazar, Wily, Nikolaidis, Constantinidis—a wild-sounding shandy, isn't it, Mr Medcraft?
Mr Medcraft : Yes.
Mr Price : I think it is important to note that, as far as the insolvency practitioner goes, we have taken a deliberate approach to being far more proactive since a quite helpful Senate inquiry a few years ago. If you look at our enforcement record, I think over the past 4½ years we have obtained 29 enforcement outcomes, which is roughly double the figure during a comparable period immediately preceding that.
Senator WILLIAMS: That is a very good point you make, because you would be well aware that changes to the liquidation industry are not far in front of us. I think it is essential that we have each liquidator registered and that you have the power, just like your financial planners have, to suspend their registration. Mr D'Aloisio, your predecessor, Mr Medcraft, told me at Senate estimates that it is very difficult to deregister a liquidator. Is that the situation now, Mr Price?
Mr Price : Yes. At the moment, when liquidators are registered they are generally registered for an indefinite period, so they are registered for life. Removing someone's registration can be a difficult process. Notwithstanding that, we have been quite successful in removing a number of people from the industry over the past few years.
Senator WILLIAMS: But that would be costly and time-consuming too, wouldn't it, to remove—
Mr Price : It is a costly and time-consuming process. What I would say is that the recent legislation that has been put out for consultation, the Insolvency Law Reform Bill 2014, does contain a number of things that I think are quite positive in terms of empowering consumers—for example, to have an independent expert review the remuneration that a liquidator is being paid. There may be some real merit in those provisions. The bill also proposes that in some circumstances ASIC might be able to prohibit a liquidator taking on future jobs if, for example, they are not providing us with documents or assistance on key points.
Senator WILLIAMS: One that comes to mind is CarLovers—the Malaysian car wash company in Australia. When it fell over I remember how it cost them $1.8 million to have the then liquidator, Stuart Ariff, who is now serving time behind bars. What company that goes belly up has cash of $1.8 million to get rid of the liquidators? I think it is totally unacceptable that you do not have the power to have that suspension, like you do with your financial planners. Of course, they have the right of appeal, and I will certainly pursue that. That would be a case that would strengthen your powers and make ASIC more active and hopefully beneficial to the creditors, wouldn't it?
Mr Price : Yes. One very important factor that is listed in that bill which is out for discussion at the moment is that creditors would have new powers enabling them to remove a poorly performing liquidator by resolution and without court approval. So there is a strong focus in that bill, as I read it, to empower consumers in the decisions they might make to help them take control of these sorts of situations, and there are also some quite useful powers for ASIC if the bill is passed in its current form. That is not to say that there are not other suggestions we might have, and we will take those up with Treasury—
Mr Medcraft : I do think, to your point, Senator: lifting trust and confidence that creditors can have when something goes wrong is really important—both what we are doing with enforcement and with these new powers, and I think this will further strengthen that.
Senator WILLIAMS: Just one quick question, Mr Price. When it comes to the fees of liquidators, they must be agreed to by the creditors, but disbursements do not have to be agreed to by the creditors. When I say 'disbursements' I mean costs like photocopying—and I hear that some of those disbursements are outrageously expensive.
Mr Medcraft : They can be challenged, can't they?
Mr Price : There is an ability to challenge remuneration through the courts, but again that can be quite expensive—
Senator WILLIAMS: Like spending a million to chase 200,000?
Mr Price : I am not quite sure what the position is under this new bill—whether disbursements can be challenged as well—but I am happy to take that on notice.
Senator WILLIAMS: I just think disbursements should be agreed to by the creditor as well. I hear of $2 a page for photocopying. Sorry, Chair: back to you.
CHAIR: Speaking of confidence in the market, Mr Medcraft, could I take you to your Bloomberg address. There have been a number of media articles following that. We have expressed concern about the government's metadata bill that is coming in. Could you clarify you are aware that you will continue to have access to data for six months after the passage of that bill and that the bill already contains provisions whereby an agency such as yours can make application to the Attorney-General so that you can continue to access the data?
Mr Tanzer : Certainly. The position with the bill is that the bill as it is drafted does two things. The first is: it defines the agencies which have access to telecommunications data, which is call information, and stored data, which might be the contents of text messages or emails that might be stored by a telecommunications provider. The third part of the bill deals with interceptions of material. The key purpose of the bill was to require that telecommunications providers keep that information for a period of two years because various telecommunications providers, for a whole range of different reasons, were not needing to keep that information for as long, and that was causing difficulty for law enforcement authorities.
ASIC has always had the power under the existing act to access telecommunications data and, under warrant, stored data. Under the bill, that access is removed. What it is replaced with is a power for the minister—in this case, the Attorney-General—to make a declaration that an agency can access that information. My understanding from subsequent discussions with the department is that the intention is that the bill would not be brought into effect for a period of six months after it was passed, during which time there would be an ability for agencies such as ours to make an application to the Attorney-General for a declaration of that kind.
What is not very clear—and it is difficult to be clear, because the Attorney cannot prejudge his position on this, in the same way as Mr Day cannot prejudge what would happen if a licence application came before him—is whether that declaration might be limited by time or to particular types of offences. But yes, the ability is there in the bill for an agency such as ours to make a case. The point that the chairman made in his Bloomberg speech is: the access to that data is absolutely essential for the discharge of our law enforcement responsibilities, particularly with respect to insider trading and market manipulation, superannuation fraud and the like. We had made the point, indeed publicly, that, for example, the actions that we took in Trio were facilitated by access to that information, and the actions that were recently taken in relation to some insider trading involving a National Australia Bank employee and an ABS employee also were facilitated by—more than facilitated by—access to that information.
CHAIR: Mr Tanzer and Mr Medcraft, I do not think anyone doubts the points you have made about the importance of the data. Coming back to your comment before about due process, my point is there is a process. The Parliamentary Joint Committee on Intelligence and Security will be holding hearings into this bill and taking evidence from government departments, agencies and the public about things that need to be considered, points that need to be made. I trust ASIC is planning to put a submission into that.
Mr Tanzer : Yes we are.
CHAIR: That is a far more appropriate body than using the media to make a point. Given the importance of continuing market confidence and consumer confidence that you do have the powers, they are not going to evaporate the day that bill is passed—I am not prejudging the fact that it will pass but I am assuming it will. They will be there for six months. You will still have the access to the data, and the bill provides a process whereby you can, for all the reasons you have stated, secure ongoing access to the data. So I think it is really important to get on the public record that you are not losing the data that overnight. There is a process. You have the opportunity to continue that, as opposed to what the media appears to be representing, which is the case that you might lose it overnight.
Mr Tanzer : I take your point. I also say that the chairman's comments were in response to a question, not something that was part of his prepared speech. ASIC's comments in relation to this came out after we were informed that ASIC did not have, under the bill, the same right to access that information as it currently has. This was not something that we set out to do.
Mr Medcraft : I will say, Chair, what I am disappointed about is that—frankly, I think we are a law enforcement agency. I do appreciate that under that bill many parties have been carved out of that for whom probably it is reasonable they are not accessing the data. But I think we are law enforcement agency of white-collar crime just like the police—we should be classified as a law enforcement agency. It is as simple as that. The concern I have is that it is left up to the Attorney-General. A future Attorney-General could remove that power. I think it is critical to us to actually have the ability to get that data, and it has to be unquestionable. But it is a really genuine concern on that—
CHAIR: In that case, Mr Medcraft, as I also sit on the Parliamentary Joint Committee on Intelligence and Security, I will look forward to your very well-reasoned and substantiated case for an amendment to the bill—
Mr Medcraft : That would be great.
CHAIR: if you believe that needs to be the case.
Mr Medcraft : I really appreciate those comments. As you know 70 per cent of what we do is surveillance. We are a law enforcement agency. I think it is a real issue, so—
CHAIR: Sure. We have six minutes remaining before lunch.
Senator O'NEILL: I have six minutes for my four questions. I do not think we are going to get through them. Can I just say how significant that language shift is just in that last couple of moments. 'ASIC is a law enforcement agency'. Being called a regulator, which is the language that is wrapped around it most of the time, I think changes how the public perceive it. I know that you have put concerns on the record about the capacity to be a law enforcement agency with funding that is not based on licensing fees coming to you. There are a number of other issues around it. But it is important to make a bit of a song and dance about that—
Mr Medcraft : And we are a law enforcement agency, first and foremost.
Senator O'NEILL: I am watching that piece of legislation develop with interest. Could I ask you to talk to the Holt Norman matter with regard to questions I asked at the last hearing? There is a bond that people were hoping was a very substantial amount of money but it turns out to be only $20,000. Could I get an update for those people as to where that matter is up to?
Mr Day : Thank you. We have called for claims on the bond. That period is finished. There have been a certain number of claims on the bond. We have been working through, in the last few months, with those claimants. We have been supporting them and encouraging them to provide us with sufficient detail so that under the act we can make a decision as to what percentage, what fraction of the bond, should be provided to each of the claimants. That is based on pecuniary loss that they have suffered. We have to take into account the regime that existed at the time. In the circumstances here, there was a certain amount of loans provided for investments. At the time, those things were not considered as financial products. We have to take a whole lot of information into account.
We have had some difficulties with a couple of claimants who we have been supporting and speaking to for a long period of time, and giving them other options to give us the sort of information that we need to base a decision upon. We are trying to now wrap that up by the end of next week. We are keen to finalise the decision, inform the claimants of that decision and then move to distributing the proceeds of the bond on the basis of that decision ASAP.
Senator O'NEILL: Do you think by the end of next week you will be able to reach a conclusion of this matter and distribute those funds?
Mr Day : The process is that we would indicate our decision to the claimants and indicate on what basis we intend—what the distribution looks like. It is a reviewable decision. So there will be a period of time then that the claimants could appeal that decision if they wanted to.
Senator O'NEILL: How long is that normally, Mr Day?
Mr Day : I think it is 21 to 28 days—I cannot remember exactly what it is. We will give them that opportunity. If there are no appeals, we will then look to distribute the proceeds.
Senator O'NEILL: You are just waiting for some paperwork from a couple of people to finish it off, give your decision next week and then appealable periods—so towards the end of January, perhaps, we should see this matter completely resolved.
Mr Day : Absolutely. We want to be clear: if we do not receive the relevant material within that time frame we have no choice,—for the sake of fairness to the other parties, to the other claimants, who have given us that material—but to move towards making that decision.
Senator O'NEILL: Could I—
Mr Kell : We should of course note, as I think as we have, that the claims are considerably in excess, unfortunately, of the actual amount of the bond. It is going to be on a pro rata basis. But that was the inadequacy of the regime. It is simply going to be the case that people will get considerably less out that bond than they may actually wish for. That is the reality of the bond regime that did apply.
Senator O'NEILL: What has replaced it, Mr Kell?
Mr Kell : What has replaced it is largely a scheme based around a requirement to have adequate professional indemnity insurance. That has been in place now since about 2004.
Mr Day : Since 2008.
Mr Day : Sorry, 2008. Licensees must have adequate professional indemnity insurance. I hasten to add that, while that is a considerable improvement over the previous security bond regime, ASIC does have some concerns about the adequacy of the PI insurance regime. We are just commencing a review of the PI insurance market for the financial advice industry, because we have seen that in some cases PI insurance is not proving to be sufficient to ensure—so the payout of successful matters that go before the Financial Ombudsman Service. We did argue before the financial system inquiry that a last resort compensation scheme would be a very useful supplement to PI insurance. Nonetheless, I would say it has been a significant step forward from the previous security bond regime.
Senator O'NEILL: I would like to ask you some more about that and how things are going in relation to FOS when we come to the recommendations out of the economics committee report—I will foreshadow that. In the little bit of time that remains in this part, I invite you to give us as fulsome an explanation as you can on the public record about what is happening with Trio. I have consistently asked about this over a number of years. I know it matters a great deal to those who are, sadly, too heavily affected by the Trio collapse.
Mr Price : Firstly, if I perhaps turn to what enforcement action has been undertaken by a second respective Trio. Since ASIC's investigation into the failure of Trio Capital and related entities started on 2 October 2009, more than 11 people have been jailed, banned from providing financial services, disqualified from managing companies or have agreed to remove themselves from the financial services industry for a total of more than 50 years. In fact, two have agreed to lifetime bannings.
Two people did go to jail. Shawn Richard was sentenced to three years and nine months jail with a minimum of two years and six months. Tony Maher, also known as Paul Gresham, was sentenced to 25 months jail with a non-parole period of 15 months. There are a number of bannings or other regulatory actions taken in relation to financial advisers. That is largely finalised, but some of those activities are continuing on because of various appeals. There is a fellow called Ross Tarrant, for example. He currently has an appeal under way against a ban that ASIC put in place in relation to him.
More generally, in relation to a gentleman called Jack Flader, who was allegedly the mastermind behind the Trio Capital collapse, ASIC indicated some time ago that we did not feel we had sufficient information to identify any breach of an Australian law by Mr Flader. Having said that, as with all enforcement matters we have an open mind. If any information comes to our attention—we do not close our books and put them away—there is always an opportunity to reopen matters. If you wanted to discuss that further, we might discuss it in camera.
Senator O'NEILL: I think they call those 'cold cases' on television, don't they?
Mr Price : I think they do. It is probably also timely to talk about much of the policy work that ASIC has done, because I think the failure of Trio Capital did really focus attention on the regulatory framework and whether there might be improvements that could be made there. Of course, some elements of change to the regulatory framework that the Trio inquiry recommended would require law reform. But there are some initiatives that ASIC has undertaken where it can to try to improve the framework. These include, for example, increasing the financial requirements that are needed to operate managed investment schemes, quite substantially; improving the disclosure that is given by hedge funds like Trio so investors can, hopefully, better understand what they are investing in and the risks that might apply; strengthening the guidance that applies to research houses, which effectively provide often a rating or an opinion on the worth of particular investments—financial advisers often rely on those research houses, so they play an important role; reviewing the custodian industry; and reviewing how compliance plans for managed investment schemes are reviewed. Compliance plans are a very important part of the governance framework of those schemes.
Finally, we have issued a consultation document around disclosure that advisers might make to people thinking about setting up a self-managed superannuation fund so that they understand that, in the event of theft or fraud, they will not be covered by compensation arrangements that are set out in statutes which are discretionary. That is a brief snapshot of some of the work that we have done.
Senator O'NEILL: Chair, I know we have to stop now. In my next questions, I really want to go to that SMF sector. Could we pick that up when we come back?
CHAIR: Sure. Indeed, Mr Smith has some questions in the same area, so we will deal with that when we resume at one o'clock.
Pr oceedings suspended from 12:18 to 13:02
CHAIR: The committee will resume the oversight hearing for ASIC. In this section we are going to deal with both the annual report and the Senate Economics References Committee inquiry into ASIC. I am going to kick off with a few questions, starting with the information that ASIC have provided to the committee in terms of their response to the recommendations. Before I do that, I need somebody from the committee to move that we accept as evidence both the opening statement and this additional documentation.
Senator WILLIAMS: So moved.
CHAIR: There being no objection, it is so resolved.
I will go first to recommendation 24, dealing with enforceable undertakings. One of the calls for transparency that has been made—and it came out during the Senate review—you have addressed in part in terms of public reporting, and you have talked about issuing a media release and possibly making available a summary of the content and putting within the terms of the standard clauses the fact that you are going to do that. Could I ask you all to consider putting in the standard clauses that you will provide to this committee on a regular basis a confidential copy of reporting from the independent expert, such that it would not be made public? It would add to transparency, and the role that this committee plays in its oversight, to understand exactly what the independent experts are finding.
Mr Tanzer : I think we can take that on board.
Mr Medcraft : I do not think that is a problem; done.
CHAIR: Thank you. Can I take you to recommendation 10. This goes to internal compliance arrangements. Very much the thrust of the committee's investigation was about the fact that many companies appeared to have processes which looked good when you looked at them as a system, but, whether it was at the level of director, manager or down to the line manager, actually requiring and enforcing compliance with those internal processes was often lacking, which led to the errant behaviour by individuals.
Looking at the response that you have put down here, it talks a lot about ASIC's internal practices and reviews of your internal practices. But what I am interested in specifically—because I do not see an answer here—is, within your reviews of your internal practices, what specifically are you doing to enhance your staff's competence to assess the efficacy of the internal compliance of a licence holder in the industry?
Mr Tanzer : I am happy to start with that. It is a fair point that you make and one that we are acutely aware of. Within the surveillance programs that we run, the reference here to risk based surveillance goes to the point that you are making. The risk based surveillance approach relies very much not just on checking the broad compliance arrangements or frameworks but also on trying to consider what particular factors might drive us to have concerns about a particular entity. This varies depending on which part of ASIC's business or stakeholder team you might be dealing with.
In the investment banks area, for example, our red flags approach in that area will look at things such as the approach that the entities are taking with respect to conduct risk. To take conduct risk as an example, this has been a major factor that has affected a number of international investment banks but has not been so much a feature within Australia. But what you see in the compliance arrangements is the reaction of the banks to conduct issues—that is, poor performance with respect to their entry; to benchmarks; to the BBSW matter; and perhaps to foreign exchange and so on.
These sorts of issues have given rise to multimillion or billion dollar fines in other jurisdictions. Those types of banks have focused very much on conduct writ more generally to determine where that conduct can affect their reputation and therefore where it poses a risk to their organisation as a whole. And then those organisations step through where the behaviours and values that they put in place to try to guard against that as an example of part of the framework are not being borne out by results that they are achieving—for example, outlier results in terms of a particular trader's activity or something of that nature—and tie it back to issues such as the remuneration policies.
So our red flags approach tries to home in on what we see as an area of concern to see how the entity might be dealing with it not just from a framework perspective. What they are really drilling down to try to diagnose is whether they have that problem and then how they are acting with respect to that.
In another area—in the investment management and superannuation area, for example—we take a more thematic approach with respect to different segments of the industry. For example, we recently hosted a round table with the property funds industry. But that was to report to them on the outcome of our surveillance of their efforts to pick up the disclosure benchmarks, which was not just about disclosure but also about the extent to which they were really understanding that it is not just good enough to disclose that you have a particularly great exposure to or great concentration in a particular property but that, in disclosing that, the question arises whether that is the right approach—from a point of view of diversification—or what your business model is really saying to your investors. Obviously, if you have a very undiversified property fund, the liquidity of that property fund comes very greatly into question, and that causes us to start to delve in our surveillance program into how that fund might be dealing with its liquidity arrangements. So on the words that you are reading here, where it refers to risk-based surveillance, perhaps we could give you some more information about how that plays out with respect to particular stakeholder populations in terms of these red flags.
CHAIR: That would be useful Mr Tanzer. My concern is when I see a risk-based approach, and I understand particularly in a resource constrained environment that that is appropriate, but I go back to my aviation roots. I look at risk-based approaches of companies where they have looked at a safety management system and said, 'That's great.' After a subsequent accident, they have done a deep dive and interviewed the line people on maintenance or aircrew, and have realised that, in terms of individual adherence to the system, it just was not existent.
What I am concerned about is making sure that the ASIC is putting in place processes, training and resourcing for its staff so that, rather than after an incident but in a targeted manner before incidents, you can actually do those deep dives to look at how that system translates to action and culture within the working population of any licence holder.
Mr Medcraft : To add to what Greg said in response to what you have asked: one of the things that we have initiated, and Cathie Armour can talk about it a little bit more, is actually looking at competencies that we need to do the job as an organisation—both core competencies and specialist competencies. We are doing that at the moment, taking our markets area as the first part of it, and then—I think this is actually quite important—working out competencies and then actually looking at what people you have and what their competencies are and identifying any gaps in that. I think that process is really important, and that is something that we are doing at the present time. Cathie, would you like to comment on that? It is quite a good project.
Ms Armour : It is a process that is underway. We have identified areas of core competencies that pick up much of the surveillance focus that you are talking about and the deep dive competencies. We are doing a stock take of our current level of competency in those areas, assessing the areas in which our staff could benefit from additional training and where we could benefit from some additional resources or very focused resources. We are in that process, and it is very useful in identifying the things we need to do those sorts of deep dives.
Mr Medcraft : I am very happy to share that with you if it interests you.
CHAIR: That would be good. I have a particular focus on this area of competence, and that segues into recommendation 19.
Mr Medcraft : I think we can share that. We will. I think you would find it very interesting, because I looked at it myself this week, in particular the focus on analytical capabilities is really important—not just legal capabilities. That is one of the things that we need that is coming through more strongly now.
CHAIR: I commend you for doing the work, but I am concerned when I read, for example, recommendation 19, which looking at the triage system to equip your officers and talks about having the skills and experience—which is all about people and about competence. But when I look through to the ASIC's actions, it talks about the ASIC undertaking a review of the process and data rates, and about systemic things as opposed to the competence of people. That just flags to me a focus on process and systems, when the actual recommendation went to the issue of competence of people. I will look forward to seeing that additional information. You talk about your red flags; these are red flags for me, as I see from your responses, to make sure that we are dealing with getting the right people to make informed decisions as opposed to just having process.
Mr Medcraft : That is exactly why I wanted to add that comment, because I believe that goes to the heart of what you are saying in terms of what we are doing on the competencies at the present time. That is a process that is currently happening, and it is happening in markets and it will happen in financial circles.
Mr Kell : I think it is very good point. Just to give one example: it is happening as part of our hiring process at the moment, and it has been the case for some time. We are looking particularly for people who have had experience in the industry in licensees, as well as people who have had experience in some of the consultancy firms that do the deep dives to come and work for us as well. There is an internal sort of training-up and skilling piece, which you have mentioned. There is also bringing in some people with that sort of expertise.
Mr Medcraft : Let's share that information.
Mr Kirk : I thought it would be useful, in conjunction with that, if we provided you with a briefing on our internal learning framework and all the components of that, which is very much targeted at those sorts of issues.
CHAIR: I will ask Matulick to follow-up with you, and we can look at arranging a time for that. Recommendation 13: the Office of the Whistleblower.
Mr Medcraft : What is the question?
CHAIR: That is the topic; I have not got to the question yet.
Mr Kell : I took it is a question.
Mr Medcraft : Wait for the question.
CHAIR: Thank you, Mr Medcraft.
Senator WILLIAMS: Well answered!
CHAIR: I read through everything here and it is fantastic that you have established it. You have established a robust process for the reporting and handling of complaints. What I am interested in is: who are the people in the office and what are you doing about their culture so that you are actually shaping the culture of ASIC towards whistleblowers, as opposed to just having a process? Can you talk to me about what you were doing specifically in that area?
Mr Day : Even prior to the Senate inquiry, we have done work over a number of years in trying to change the culture in the organisation's approach, from inception, in relation to how we deal with, communicate with, and even refer to people who come to us to report misconduct. A perfect example is that one of the things that we have changed is that we do not like to refer to the people who come to us as 'complainants'; we like to refer to them as, for example, 'Mr Fawcett', or 'Mr Williams', or 'the director', or 'the creditor'. We want to see who they are and see what their role is. We do not want to give them this, quite frankly, pejorative label of someone who might be a whinger and might just be trouble. That is a cultural change. It is a very direct and conscious decision that we will look at the people who come to us—what are their concerns?—and take them on face value. We then explore issues with them. That has been on the go now for three years. That was something we referred to in our submission to the Senate inquiry.
With the work around whistleblowers, we have continued that. We have given the staff who will be communicating with whistleblowers training from external providers in relation to the sensitivities in dealing with those people, including understanding, having empathetic conversations and eliciting more information from them. Because, often, whistleblowers may have a whole lot of other things distracting their minds about what information they might have, and therefore they may not give that to us. Part of that training is also trying to make sure we elicit all of the information that will be relevant to us, so that we can make a better informed decision about what we need to do. That is something we have started in light of the Senate inquiry and we are continuing that further on.
We now have, outside of our original receipt group—the group on misconduct and breach reporting, which I manage—35 dedicated whistleblower liaison officers embedded in our operational teams. That was a conscious decision to ensure that the people who are doing the work are taking the matter forward and investigating it, and that the people within those teams are communicating with the person. Moreover, those persons effectively act as champions for increasing the understanding in those teams about the plight of that whistleblower and what we need to do to address it. So there has been a lot of work done in relation to addressing that cultural issue.
CHAIR: Can I move onto recommendation 15. This is one of the recommendations to government, because it is about changing the approach to whistleblowers and remedies available to them, et cetera. ASIC have said they are supportive of the amendments. This applies to recommendation 16 as well. I would be keen to know: in your engagement with government—and you have a role in suggesting and advising on policy—what specific actions are you taking in regard to specific recommendations for whistleblower protection, rewards for whistleblowers et cetera? As opposed to your just saying that you support it, what are you doing to put an action behind that support?
Mr Kirk : In our submission to the Senate inquiry itself, and we provided a copy of that to the financial system inquiry, we set out—over a number of pages—the problems we saw in terms of the inadequacy of the current protections for whistleblowers and proposals to resolve them. We have also provided that to government. I guess the question is open as to what the financial system inquiry might say about that at the moment, and, I think, we are not doing anything beyond that currently, partly because we are waiting to see what they say about it.
CHAIR: We will probably come back to that, then, after that report has become public. Recommendation 21 includes that there should be a 'panel of independent, experienced and highly regarded people' to supplement your internal reviews. I am aware that in a number of cases you already do use external reviews. You made the comment in another recommendation that to have external reviews with access to evidence across all of ASIC's work would be too resource intensive, but would you talk to the committee about exactly when you currently do use external experts. What are the thresholds at which you would consider it important enough? Do you have a panel of people that you use regularly? Do you go to the marketplace every time you have a new case?
Mr Kirk : I do not have with me chapter and verse on whether we have a documented set of thresholds. I could give you an example of the sort of matter where we have gone in the past—
CHAIR: Given the time, if you do not have the information here, I would rather you take that on notice, and that will allow other people to get through questions.
Mr Medcraft : We will take it on notice.
CHAIR: I am not satisfied that the current answer actually addresses what the recommendation was getting at, so I am keen to understand what it is you already do and whether or not we need to push a bit further to get that external view of it.
Coming back to recommendation 24, you have talked about public reporting and the compliance of enforceable undertakings. Is your intent that that is going to be an end of undertaking report, or are you doing periodic reports for that?
Mr Kirk : I think, as a general matter, the intention is that that would be the case, once we were satisfied that it had been implemented. There may be occasions where we feel it necessary—and in our standard clauses we are going to reserve a right to do this—where it was breached, so there had been a failure to implement, to make that public as well. I guess that probably would not be the conclusion of the process, but it would be something that we thought necessary to make public. So generally it would be the end but with allowance for exceptions in those sorts of circumstances.
Mr Medcraft : We will be releasing a new public document on our approach to public reporting—
Mr Kirk : Yes, all of the changes will be documented in an updated version of our regulatory guide on enforceable undertakings.
Mr Medcraft : We adopted at the commission this week a new approach to public reporting of EU outcomes, which should be getting published in the early new year.
Mr Kirk : Yes.
CHAIR: I would like to go to the independent experts and your process to appointment. This goes to recommendation 28. You have a number of provisions here that you look at: whether the expert's firm is the auditor of the entity, whether it has done enforceable undertaking work in the past and whether the expert has accepted any retainers for the entity in the two years following appointment. I presume you mean preceding appointment.
Mr Kirk : That relates to if we have appointed them to do another EU previously, to monitor that, and, in the two years subsequent to that, they took retainers from that entity. That would be taken into account in a decision looking forward.
Mr Medcraft : That will be in our new policy.
CHAIR: You talk about whether the fees and remuneration for the entity in the two years prior are material to their revenue. Clearly, some of the independent experts you are using are very large firms and, in a global sense, probably any one customer relationship is not going to be material, but when it comes down to the reporting line of a profit centre in a region, a state or a city, how do you assess that?
Are you assessing that on a business unit basis or a whole entity basis?
Mr Kirk : That is probably something to be worked out in practice, but I think we should take on board the concern you have raised.
Mr Medcraft : Chair, you make a good point and we will clarify that. I think it probably should be on a local business basis, because otherwise the conflict will occur at the local level.
CHAIR: I have had letters from constituents, for example, flagging the fact that with CBA, I think, KordaMentha is the firm you have engaged, but KordaMentha was the firm engaged by CBA to be their administrators in the case of the Bankstown airport, so clearly there is a fairly substantial interest the Commonwealth had there, that they have engaged this firm to look after their interests. So I am just wondering, in addition to those three thresholds, how do you ensure that there is sufficient due diligence done, and probity, to make sure that the independent expert really is independent?
Mr Medcraft : Okay. We will come back on that.
Mr Kell : It is a good point, Chair, in that there is a limited pool of experts, especially for larger matters, so these sorts of situations will arise. They will not necessarily rule people out. It might be that we, for example, insist on very clear delineations or walls between different parts of the business or that we assess some of these fee arrangements, but we will come back to you with the details.
Mr Medcraft : I will say that, in looking at establishing these conflict-of-interest guidelines, we did look both locally—comparisons with how other agencies deal with conflict of interest—and also internationally. What we have tried to do is combine the criteria to reflect what we see as best practice. But the questions you have raised are good questions, so we will come back on each of them.
CHAIR: I have more questions, but I have taken half an hour, so I am going to take a break and go to Senator O'Neill.
Mr Medcraft : That is why I made the answer short!
Senator O'NEILL: Can I just indicate to you that I appreciate receiving this document this morning, but it was only this morning. There are a number of items that you have followed up that have tweaked my interest, but there are a considerable number more. I just want to indicate that I will have questions on notice with regard to most of them. I would like to work up proper probing questions, rather than just make them up here on the day. Obviously this report is very, very significant. I do want to note and commend you, though, today on the evident action that you are taking, because, when we see these next to one another—the recommendations, the government response and ASIC's actions—a lot of the responses from the government are simply noting the report, whereas I see that you are acting ahead of that. You are actively going and engaging with the recommendations. I think that is a really good sign for the future. Clearly we want to scrutinise this as we move forward. I think also your new policy will probably inform some of the questions that I will want to develop. What is the date on the new policy that you have been referring to?
Mr Kell : Early in the New Year.
Mr Medcraft : We make a decision on it this week. It is just a matter of—
Mr Kirk : Documenting.
Mr Medcraft : Documenting it and publishing it. When do we think we will publish? We think sometime February.
Mr Tanzer : The questions that have been given and the questions that you ask we will certainly respond to, but the way we tend to draft these things is broad enough that it should be able to deal with this. For example, whether the fees and revenue are material to the expert's revenue—that is something that, if we wanted to take that on a local basis, or a more global basis or whatever, you would not expect to see a whole stack of chapter and verse with a lot of worked examples in the policy itself. So these sorts of comments and clarifications will be useful. It is always possible for us also to revise the policy in any case. But the commission did, only this week, make the decisions which are reflected in the document that is before you today.
Senator O'NEILL: Excellent.
Mr Medcraft : Questions actually help us in flushing out—
Senator O'NEILL: We will have some good ones, and I have got a few letters—
Mr Medcraft : The questions from the chair potentially flush out things that we should be thinking about, so we welcome them.
Senator O'NEILL: I want echo the chair's comments around the culture change that involves people in much more sophisticated conversations than system conversations might allow. In the time that I have, I want to go back and pursue a few more broad matters. We were hearing about Trio when time cut us short. If there is anything further that you can or would like to add to the record, please do. We will take evidence on Trio in camera, I understand, later in the day. The reason for that, for those who might be listening or watching for the first time, is that in camera hearings allow us to hear what is going on and not compromise any investigations that ASIC is undertaking or agencies that are related to them are undertaking.
Mr Price : We did not have any further comments in relation to Trio for this session.
Senator O'NEILL: Okay. Could I then go to Timbercorp. I expect you have been closely watching the developments of recent times. I am interested in what ASIC is taking from what is playing out in the public place at the moment. Are there any matters of note from ASIC with regard to the Timbercorp process, ANZ's engagement, the liquidators, the whistleblowers? Could you provide us with a bit of a brief on where you are up to that.
Mr Medcraft : Tim Mullaly is leading our efforts in this area as well.
Mr Tanzer : The position in which a number of investors find themselves is obviously very harrowing. That comes through very clearly in the sorts of communications that we have been having with them. It also came through quite clearly in the Senate forestry inquiry held with respect to Timbercorp just a week or two ago. We are very sympathetic to the position of investors. Obviously, a number of them have suffered losses and some are now facing the prospect of significant financial distress through the recovery actions that are flowing, particularly where they borrowed or geared to take out their investment. So the first point I want to make is to acknowledge the obviously difficult circumstances in which a number of those investors find themselves.
The second point I want to make is that ASIC did move to investigate this matter at the time of the two collapses in 2009. When I refer to two collapses—you mentioned Timbercorp—there were also current activities and a lot of interest in the Great Southern matter. These two matters, while unrelated, bear some similarities. They were both forestry schemes. They have both collapsed. Although there are some differences, they both adopted similar times types of business models, but otherwise they are unrelated collapses. But all the same, between Timbercorp and Great Southern, there is a very large number of investors and a very large amount of loss. In both cases also, these were schemes that were offering quite high returns and, therefore, carried quite high risks.
ASIC's initial response was to set up a task force into both matters, and part of that was driven by the fact that there were a group advisers who advised on both schemes. Our initial focus was looking at the advice that was given with respect to investments into Great Southern and Timbercorp. We did a high-level review of over 12,000 pieces of advice, focusing on the top 20 advisers to both schemes and them slimming that down to a more detailed review of over 1,000 pieces of advice. Through that exercise, while there were some examples of very poor advice and inappropriate advice, we discerned that we did not see a systemic issue with respect to the provision of advice at the time. By that I mean that, in the general sense, it appeared that people had been pointed to the risks as well as the returns, that it was pointed out to them that diversification was important in those types of things.
Senator O'NEILL: Mr Tanzer, can I just stop you there—I appreciate the fullness of your explanation and I want you to continue, but I was at those hearings in Melbourne and I heard from the Timbercorp victims. We heard, for example, that there were documents that were signed in their absence. Is there a risk when you do these audits of documents that the reality is, documents can be tampered with, and you actually need to talk to real people?
Mr Tanzer : Yes.
Senator O'NEILL: Was talking to real people part of your process of audit?
Mr Tanzer : Yes, it was.
Senator O'NEILL: And despite that, you still were not able to pick up the scale of what has actually now been revealed at Timbercorp?
Mr Tanzer : Well, I should say that the scale of what we are seeing now is the fallout of the collapse of the investment. And the concern that people have about facing this financial loss is completely understandable. But that does not easily translate, or immediately translate, into ASIC being able to take action, on a systemic level, for some widespread wrong in the way that the disclosure was made to them or in the way that the advice was given. Now, that is not to say that there are not individual cases where very poor advice was given—and we did find that, and we did go on to take some action with respect to that. We also made sure, with respect to a much broader range of investors, that they were informed about their rights: firstly, to raise their individual concerns with either the provider or the external dispute resolution scheme. And of course, that can only go as far as the solvency of the particular advice from Mr Holt that we have referred to, which is an example of that—where there was some inappropriate advice given. But people will not necessarily be able to get compensation as result of that, because his firm has failed.
Senator O'NEILL: Does—
Mr Tanzer : If I may complete that, we also looked at the actions of the directors of the schemes themselves. Once again, we were looking to see whether the schemes had not been operated appropriately, and some of the evidence that was given at the Timbercorp inquiry went to this, and also we had heard reports—either from liquidators or from some insiders or others—about aspects of the operation of the scheme. I should say that we went through that in really quite some detail. I would be happy to go through more detail on that, if you would like. Once again, while there may have been some issues at the margin, we did not see a sound basis for bringing an action using public funds—as we do—in the public interest in these particular cases. Part of that was because there were class actions on foot in respect of both matters. Part of that also went to our assessment of the available evidence, and whether or not there was a reasonable case that we thought could be made out. But certainly, part of it was the fact that there were class actions—which now have run through: almost to finality, in the case of Great Southern; and to finality, in the case of Timbercorp—that covered many or most of the issues that have been raised about the governance of those schemes.
CHAIR: Senator O'Neill, Mr Smith has to leave in ten minutes' time, so we are going to go to him for ten minutes, and then I will come back to you.
Senator O'NEILL: Sure; thank you, Chair.
Senator SMITH: Thank you Chair; and I appreciate it, Senator O'Neill.
I would like to get an update on an entirely separate topic that I know has been very much in your focus and is something that I know a number of us have been looking at—that is, taking these issues we have been talking about and looking forward to future risks. I allude particularly to self-managed super funds and, —without in any way suggesting that people should not have a right to have a self-managed super fund—I suppose it is more the concern around the regulation, or lack thereof, and the knowledge. Could we perhaps just a general update first, from whoever is relevant? And then I will ask a couple of questions.
Mr Medcraft : Sure. I will make one comment to start with, which is that self-managed super funds are a really good example where those people who have them have to take personal responsibility for themselves; it is an even higher level of personal responsibility for themselves than they do in a regulated fund, because it is self-managed. The big thing I would like to emphasise is the level of personal responsibility: when you become a self-managed super fund, you take personal responsibility for managing that fund. And that is important.
Mr TONY SMITH: That is a very important point to emphasise. The point you are making, Mr Medcraft, is: it has got to be crystal clear and reinforced that, if you go down this path, you are going off-road.
Mr Medcraft : Yes, you are going off-road. You have to think about: do you have the time to invest to make sure that you can focus on your investment yourself, to attend to the administration related to the self-managed super funds? Again, back to that scepticism: you should not just do it, because you can think about relying on someone else to do it for you.
Mr TONY SMITH: What about if banks are encouraging people to—
Mr Medcraft : As we said, we live in a free enterprise system and that comes with right and responsibilities. This is a really good example of where, if you want to do it, the system allows you to do it, and many are doing it. That is fine. But it is really important that you understand that you are actually taking on board—I closed down my own self-managed super fund because, frankly, I did not have the time to focus on it. So it was not because I do not think it is good; I just did not have the time.
It is really important that Australians appreciate that, when they set up a self-managed super fund, the time and the responsibility that they are taking on to manage their own finances is their own individual responsibility. I do not think I can underline that more strongly: it is really, really important. Comments—
Mr TONY SMITH: Is there anything more that should be done to put that up in flashing lights?
Mr Medcraft : What I was trying to do is say: it is about individual responsibility. You are going, as you suggested, off-road. You are taking yourselves outside of the regulated protection. Regulation comes with protection because, if the money is lost because of fraud, there is compensation; that is the deal. If you go off-road, then it is individual responsibility. That is our system. I cannot put it up in brighter lights, but it is important—especially, we have a third of our savings system in self-managed super—that people understand that when you go off-road that it is their personal responsibility.
I probably could not emphasise that any more. I think it is really concerning that people do not often understand what they are taking on board and that they need to think about the time. They need to think about their own skills in taking it on. That is really important.
Mr Kell : That is indeed one of the issues that we have been looking at as part of a self-managed super fund task force that we established in ASIC that is co-chaired by Mr Tanzer and me as to what sort of up-front warning would be appropriate when people are looking at entering or being advised to enter a self-managed super fund. Something we have been consulting about is ensuring that people understand that they do not have the same types of protections that they do in regulated funds.
In that area more broadly, I am happy to give a couple of snapshots of some things that we have been doing recently. Mr Smith, we had a particular focus and we identified in our strategic outlook on licensed or inappropriate advice and misleading advertising. We have taken a range of enforcement actions, especially in the online space around people promoting self-managed super funds—free establishment and those sorts of claims—when it is clearly the case that they are not free and they are trying to tempt people into setting up these funds for the wrong reasons. You should not be setting up a self-managed super fund just because it is free to do so. We have had a focus on advertising and we have had some public outcomes there.
We are also looking at the advice that is being offered and we have some actions, including quite recently what we think is an important test case involving a firm ParkTrent and looking at whether advice to invest in direct property through an SMSF is in effect financial advice that requires a licence and all that that implies. You may understand that, more generally, ASIC does not regulate investment in direct property. Our view is that, if it is done through an SMSF, then that requires that whoever is providing that advice to be licensed. We have been communicating, for example, with the real estate industry about this issue to try and address some of that aggressive property spruiking that is occurring at the margins of the SMSF industry.
We also have some actions underway. In fact, we are waiting for a decision in relation to one major matter where there has been fraud in this area at the low end—the Royale matter in Queensland where people were encouraged to set up SMSFs and then their funds were allegedly sent to invest in distressed US properties and other such arrangements. But it is a very large pool. We do not have the ability to touch everyone in that space, but we are sending a clear message that we are going to be looking at the advice and the advertising there so we can help to minimise losses but also alert consumers.
Mr Medcraft : Equally, what I would say to the public is that if you are thinking about setting one up, go to ASIC's MoneySmart—it is trusted advice; all about it. Equally, if you have an SMSF and you want to get out of it, there is information both on our website and on the ATO's website about how to shut down your SMSF. Many people have an SMSF, but they are not sure how to actually get out of it. There is access information if you want to get out of SMSF, so I think it is important that people are aware of their rights but also their responsibilities.
Senator O'NEILL: It was a good connection with the SMSF being set up, because it is being advocated to many people by accountants. We heard in the Timbercorp evidence about Peter Holt, who was an accountant with professional qualifications who took a lot at risk by doing the wrong things, and he set people into a system that has taken away life savings. He made several million dollars out of doing just that. He declared himself bankrupt. SMSFs advocated by your account are not always going to be the best thing for you.
On the back of that series of questions, I am thinking of people like myself who become an owner-builder. There was a period in time when people would put an application in to be an owner-builder. But we thought there was some risk involved in that and we moved to a point where, rather than cleaning up after, we had a series of educational moments before you go to be an owner-builder. I notice that we have ramped up the surveillance and the requirements around SMSF reporting and audit. Has any consideration been given, at the top of the cliff rather than the bottom of the cliff, to a preventive education option for people to understand exactly what they are getting themselves into.
Mr Tanzer : A lot of the projects that Peter mentioned a little earlier relate to a consultation that we did around being more specific about the requirements for disclosing to a person who is thinking of establishing an SMSF and the sorts of key aspects they really should be made aware of. This is only in the case that they get advice to enter into an SMSF and we are consulted on a range of specific things that really should be covered off. The chairman has covered them in his earlier representation about the sorts of things that you should consider. We put out a consultation paper about 12 months ago and we are expecting to finalise the results of that and put that out very shortly.
The other thing that was just skipped over, and I do not think it was because you were skipping over it, and is an important part of these reforms which goes partly to your issue is that the requirements for audit of SMSFs have substantially ramped up. To implement a change in the first six months of 2013, all SMSFs have now to be audited by a registered SMSF auditor. ASIC has some parallels to the financial advisory exam. Together with the accounting associations and the tax office, ASIC has come up with an exam which is applied to anyone who wants to become an SMSF registered auditor. They have to meet that minimum standards in order to be registered. Part of the intention was to raise the standards of SMSF auditors and also to try to get people to do more of them rather than just to do the odd one or two. Because, when you are dealing with that, they are not as likely to pick up the warning signs that come up in your Trios and so on.
Senator O'NEILL : So you need to develop that expertise.
Mr Tanzer : That exercise has resulted in the number of people who used to do SMSF audits dropping, from what the tax office estimated was about 11,000 to 12,000, to now about 7½ thousand registered SMSF auditors.
CHAIR: Can I just follow up on that, because I noticed that in your annual report you said the current figure is 7,073. Last year it was 5,935, but there were 7,194 applications. Does that imply that you have not approved quite a number of people who applied, or does that imply that you are still processing a large number of applications?
Mr Tanzer : As at that point, there were a number that were being processed, because the transition period ended on 30 June 2013. I think the numbers were that by the end of June 2013 we had got through 5,000 or so and managed to register them. There was another rump that were registered in the next little period. Actually, the number of those that were withdrawn or for which we rejected registration was relatively low. It would have been in the hundreds or so—definitely not the thousands. What we found was that, because people understood that they either had to sit an exam or meet a threshold requirement about a number of SMSF audits that they had done, they did not apply.
Mr Price : Perhaps there is one further thing I could just make clear, about the framework for regulation of self-managed super funds. Previously, to advise on establishing a self-managed super fund, an ASIC licence was not required. One of the changes made through the FoFA legislation is that a licence will be required if you are advising.
Senator O'NEILL: I see that it is absolutely strengthened, but the question of the sociological term 'agency' is what I am thinking about here. When somebody is being advised, they are still positioned as the receiver of information. Mr Medcraft has made the point, very clearly, that you are in charge—it is not the person who is giving you advice that is in charge. You are the one who is going to lose everything, and they have not really got anything at risk. So on that question, again, I want to put on the record a consideration of the prevention—the fence at the top of the cliff rather than the ambulance at the bottom cleaning up the mess afterwards. It is great to have those smoke signals going up after it has happened, and obviously the auditing will do that. But five per cent are getting information. They are more and more concerned about financial advisers. My colleague here, with the 1.85—
Ms OWENS: Trillion.
Senator O'NEILL: I thought it was 1.8—
Ms OWENS: It is growing so fast, it could be 1.9 by now.
Senator O'NEILL: There is a lot of money there. The scepticism that people are exercising, Mr Medcraft, is that they are not engaging. And they are going to SMSFs. So my concern, and I am flagging it today, is that there will be a continuing ramp-up there, because at least people say, 'Well, no-one else has got their hand on my money except for me.' But what skill level do I have, and how can I be better empowered? Where is the education moment for me as I take this step?
Mr Medcraft : I guess this goes back to my comment earlier—it is that trade-off of free market versus an appropriate level of investor trust and confidence, and that balance. It is never an easy thing, and at the moment the settings are that anyone is free to do this and there is limited restriction. All we can say to people is: 'You should be sceptical. Be sceptical; know what you are doing.' Because, at the end of the day, self-managed super—
Senator O'NEILL: It could be very, very effective.
Mr Medcraft : It is a good vehicle if you know what you are doing and you have the time. It is fine. And also if you know that it is going to cost you a reasonable amount, so you have to have a reasonable amount of money invested to make it work. But all we are saying is just—
Senator O'NEILL: Be careful.
Mr Medcraft : Be careful. As I said before, scepticism is a really good thing; it is about taking responsibility.
Senator O'NEILL: Can I clean up two things and move on. Mr Tanzer, we were in full flight on Timbercorp. Rather than continuing that, I wonder if you might provide me with a document that updates the things that you were telling me about; what you are noticing at the moment; how that is impacting your decision making, going forward; and what you are learning from it, in terms of adjusting processes.
We have heard the word 'fraud' mentioned here. I know that people who are engaged now with the ANZ Bank are really concerned about fraud not being considered an element of hardship. I would like something from you about the practices across the sector with regard to fraud being an element of consideration in cases of hardship, because I understand it is very variant across the sector. I would like to know more about that. Could you provide an update on the number of SMSFs that have been established and reveal to us, in writing, any patterns that you see emerging.
Mr Tanzer : It is about 550,000—a very high level of concentration in pretty bog standard investments. Property is growing and gearing is growing but at the moment it is quite a small amount. But we will provide you some information—
Senator O'NEILL: Some documentation would be wonderful. The other thing that I would like to go to is the education matter that you mentioned earlier on. Then I want to go to some stuff around ethics and our inquiry.
CHAIR: This will be your last one.
Senator O'NEILL: Yes. Regarding the national exam for financial advisers, you indicated that you did not want to be an education body, but rather to secure a standard and make an examination available.
Mr Medcraft : We want to focus on the outcome.
Senator O'NEILL: If such an exam were possible, would that ameliorate some of the concerns of the industry about people who have been working in the industry for a long time who claim they have very high levels of skill? If you were a degree student or you did not have a degree and had those skills, you would sit the same exam. If you passed that exam, then we could pretty quickly be sure that the standard would be reached.
Mr Medcraft : Remember: we should set the minimum standard. We would hope that industry goes beyond the minimum. At the end of the day, our objective to make sure that Australians have trust and confidence. It is all about trust, confidence and having a national assurance, a level playing field not captured by any particular group. A level playing field is where anyone can sit the national exam and pass it. How you get there is not prejudged. It is just a level playing field.
Senator O'NEILL: The curriculum would be made very clear—
Mr Medcraft : It is at a degree level and it can be sat anywhere in the country. you can study online; you do not need a degree. Pass the national exam, so it is democratic and a level playing field. But, most importantly, it is about providing assurance to Australians that there is a government overseeing the minimum standard that the person in front of you has actually reached. I think that is important. As I said, like pilots, at the moment this works very well, as I understand it.
CHAIR: I will say though, Mr Medcraft, in the aviation space there are commercial enterprises set up now particularly to school people to pass multiple-choice exams. The only reason that CASA allowed that to continue is that they then have the oversight, particularly in the commercial and airline transport areas, of a safety management system that sets a culture of ongoing professional development and competency training. So those two elements have to go together.
Mr Medcraft : I think we can learn a lot from the way CASA operates.
Senator O'NEILL: I have to agree. As an educator, I understand the power of really very well-constructed tests. They can cost a lot of money to prepare but can provide a very high standard and a degree level standard as a tick-off before people move on to further scrutiny. I think that that is vital, plus upskilling and continuing professional development.
I only have a minute so I am going to ask about the review of training standards for financial advisers. I understand that a letter has been provided to ASIC from a number of industry associations. I wonder if you might have a copy of that that you might table today. The other thing is I know that you are engaged in standards and ethics for financial advisers. We had a little bit of misfortune in getting some ethicists to come before us recently. That was one of the things I hoped we might be able to do before we put our report to government. I think that that document from you could be very helpful.
Mr Medcraft : I am happy to table the letter of 11 October 2013 from the industry on ASIC's review of training standards for financial product advisers. Also, we delivered the advisory panel on the standards and ethics for financial advisers report to government on October 2011. The members of the advisory panel, again, included all the key stakeholders of the financial advice industry.
Senator O'NEILL: Is your review of training standards available on your website?
Mr Medcraft : This advisory panel report?
Senator O'NEILL: This is it—great.
Mr Medcraft : You have that and a summary of our recommendations.
Senator O'NEILL: Thank you very much.
Mr Medcraft : Hopefully that will help the committee.
Senator WILLIAMS: I do not wish to harp on liquidators, Mr Price, but I instigated the inquiry and I want to see it is done right with that discussion paper out there. If public indemnity insurance does lapse—is that mentioned in the papers; I have not read the 600 pages but I believe you have—
Mr Price : Yes.
Senator WILLIAMS: will that lead to suspension of registration?
Mr Price : Yes, my recollection is that will lead to a suspension of registration. I will check that, but that is my recollection.
Senator WILLIAMS: I raised an issue with you at Senate estimates in relation to Mr Levi where you cancelled his registration. Did you cancel that for life?
Mr Price : Yes. My recollection is that that was for life.
Senator WILLIAMS: I raised a point with you that two companies—what are the names of the companies—Shark People and Queens Park Terrace. He is a members voluntary liquidator. He is still liquidating. Is that correct?
Mr Price : That is my understanding.
Senator WILLIAMS: Okay. In those new rules that are being proposed by the government—the changes—I believe that has got to be squashed out. If you are banned from liquidation, you should be banned from all liquidations—not banned from 90 per cent and then allowed to do the other 10 per cent. Is that mentioned in those recommendations?
Mr Price : It is not specifically mentioned. I think it would probably be something that would need to be dealt with in the regulations that are still to be made under that legislation.
Senator WILLIAMS: I will raise that very issue with Senator Cormann.
Mr Price : Yes.
Senator WILLIAMS: Mr Medcraft—you can both bounce off this question, if you like—has said for a long time now that the level of fines are far too low. Do the liquidator changes mention levels of fines?
Mr Price : Yes, the level of fines is mentioned. In some cases, some in the community might think that some of the penalties are low. For example, there is a requirement under the new draft bill that liquidators lodge an annual administration return, which is an important document that the regulator can rely on in terms of the work of the liquidator, and potentially others could rely on as well. The maximum fine for failing to lodge that document, as I understand it, under the bill at the moment is $850.
Senator WILLIAMS: You can seek exemption from lodging those documents, can't you?
Mr Price : If people cannot lodge documents, they can approach us and seek extra time.
Senator WILLIAMS: I knew that KordaMentha did seek exemptions in, I think, seven out of 10 years of liquidation of Ansett airlines.
Mr Price : That is slightly different. That is an issue around the preparation of financial reports. That is a specific issue around whether there is something specific in the legislation that says when the external administrators of a company need to lodge financial reports. That again is not dealt with in the current bill.
Senator WILLIAMS: Should it be a case—and I do not want to ask your opinion here—in relation to the fine you just mentioned, between a minimum of $850 and a maximum of $10,000, that ASIC makes a judgement on the issue depending on how slack the person has been?
Mr Price : Typically, the fines are levied not by ASIC but by the courts, or through some of the body. I think it is important—
Senator WILLIAMS: Just hold it there. You are telling me that if the liquidator fails to lodge the appropriate paperwork, you have to go through a court to fine them?
Mr Price : Yes. It is the case with most offences in the act.
Senator WILLIAMS: You do not if you are late putting your company register in each year.
Mr Tanzer : That is because there is a regulation that says that we can levy that fine.
Mr Price : That is right.
Senator WILLIAMS: I want to go to this point. If I was a liquidator and I was late lodging those papers with you and you want to charge me an $850 fine, you would have to go to the court to get that fine approved?
Mr Price : I will check what the situation is under the new bill but, for most offences in the Corporations Act, it is not simply a case of ASIC determining what the fine is. You need to go through a court process or another process.
Senator WILLIAMS: That is outrageous. If you were to go to court to charge me $850, it would probably cost you that much to go to court.
Mr Price : This is an issue where I think it is important that people think carefully about community expectations in terms of penalties for offences.
Senator WILLIAMS: You have read that white paper. You are obviously giving feedback to Minister Cormann on those issues?
Mr Price : The material that has been put out in the insolvency bill is quite extensive. It does run to around 600 pages, as you say. We are in the process of providing some comments and feedback to Treasury.
Senator WILLIAMS: That is my question to you. You will give feedback to Treasury?
Mr Price : We will give feedback to Treasury.
Senator WILLIAMS: Good. That is about it from me, thanks.
Ms OWENS: Going back to the recommendations of the Senate Economics References Committee, I noticed that of the first 20—and that is as far as I went with my analysis—10 of them are actually about the internal operations and administration of ASIC. They involve skills, reporting, KPIs—internally, not externally—which is an extraordinary number out of 20. When I look at the response from ASIC and actually read how many you do, it does appear that you review and report yourselves to a standstill almost. Can I convert those questions as a group into a cultural one. I notice that the culture of the whole MoneySmart financial literacy thing is quite different to the rest of the organisation. There is now a financial ombudsman, there is a credit ombudsman and there is a whistleblower section. Is ASIC effectively starting to move elements of your work into different cultural spaces?
Mr Kell : Just to clarify, the financial ombudsman scheme is a different scheme.
Ms OWENS: I know.
Mr Kell : The credit ombudsman scheme is a different scheme. I think one of the points you picked up there, and one of the themes that we took from the inquiry, was very much around how ASIC communicates with the public, industry and other stakeholders about the way we work, how we make decisions and how we explain those decisions. The inquiry's report also noted the need for ASIC to ensure that consumers understood our role and purpose. We have been doing a lot of work in that area. One of the key ways we do that is through MoneySmart, which quite deliberately has a different look and feel because it is very much designed to engage consumers online; it is not necessarily providing a regulatory guide, for example.
We have also improved website information about how to report misconduct to ASIC, how we will respond to those reports, how our enforcement policy works—we publish a six-monthly report on what enforcement outcomes we have achieved—what we are looking forward to doing in the next period and our strategic outlook, just to give you some examples. We have taken quite a few steps, and we have more in train coming out of the report, to lift the culture of communication and transparency around the organisation, both in terms of how we deal with consumers and how we deal with the entities we regulate. I am not sure whether that is picking up on some of the points that you are making, but that is a very deliberate and very significant bit of work we are doing across a couple of different areas at the moment.
Mr Kirk : One other thing is that I think it is probably true that there is a very big difference in the skills and background needed to manage the consumer information website—the MoneySmart website—from someone who is managing an investigation, appearances in court or whatever and, to a degree, a different culture. We think tremendous strength also comes from integrating those different tasks together so that the information and messages we are giving out on MoneySmart can be informed by all of the things we know about the markets through the surveillance and enforcement action. And the surveillance and enforcement action can be informed by all of the things we know about consumers and the way they work from our financial literacy work. That understanding of how consumers operate, how they make decisions, is taken into account in the work of the other areas of ASIC. There is a lot of effort in terms of integrating all of those different things, as well as recognising the different skills and, to some degree, culture involved.
Ms OWENS: I guess that the missing element in that, which you talked about briefly, is the way in which you communicate with the sector itself. How has that changed? Have you adopted any of the MoneySmart kind of attractiveness into that at all? What is the culture in that space?
Mr Kell : I have a couple of points. One is that we find with the sector, the people we regulate, that MoneySmart is actually very popular. We find that a lot of them use MoneySmart as a communication tool with their own clients. But with that level of transparency I talked about—for example, in the last few years we started to publish a six-monthly enforcement report. So instead of just having our enforcement work out there, published by way of media releases, we gather those together, provide some themes around that as to what we have been trying to achieve, some lessons for the firms in the sectors that we regulate coming out of that enforcement work and also a flag of where we are going to be looking to take action in the next six to 12 months. So it is a much greater focus on explaining what we do and what we are trying to achieve, and also on helping them to avoid stepping over the line. It is not necessarily with the same graphics and whatnot as MoneySmart, but the underlying objective is the same.
Ms OWENS: Can I go on to your strategic outlook. It is on a similar theme—page 3, 'Achieving our priorities' under 'Detect' and 'Respond'. Again, drawn very much from the perspective of a law enforcement agency, which you are—
Mr Medcraft : We are!
Ms OWENS: I understand. When I turn the page then, what I start to get is a look at what might be coming, which is digital disruption and things that will come very fast. I wonder where keeping ahead of that curve, if you like, is in your priorities?
Mr Medcraft : If you go to page 4 and if you also go to page 6 you will see that our number 2 challenge as part of this is actually digital disruption and how we are dealing with that. Clearly, at the moment we are dealing with crowdfunding, peer-to-peer lending, robo-advice models and digital currencies, which I think is the next thing on the horizon; they have an enormous opportunity for challenge, so we are looking very closely at digital currencies. I think there is a Senate inquiry happening on that at the moment—
Senator O'NEILL: I think it was this week.
Mr Medcraft : Then if you go to page 6 you will see there that we talk about financial-innovation-driven technology—basically, we talk about cyber-resilience. Clearly, one of the things that I have actually highlighted is that we really need to think about cyber-resilience. I talk about cyber-resilience and cybersecurity, because you can never be completely secure. You can have a level of resilience. Practically, what we are looking at there are two aspects. One is that we need to think about where companies do have critical infrastructure—even disclosing what their level of cyber resilience is, because that could be important to investors. Also, a key aspect of financial services licensing is risk management, or even for market licensees—risk management is very important. One of the things we are looking at is how we approach it—the methodology for how we approach looking at risk management of cyber-resilience. That is just an example.
In relation to digital disruption: really what we are saying to companies is, You need to think about it when you're valuing your assets. How vulnerable is your company?' When you look at the value of an asset if you are basing it against long-term cash flows, but if it is disrupted the cash flow is not there. In our next surveillance of financial reports we actually highlight that we are going to focus on digital disruption and the extent to which companies are thinking about this.
Mr Price : That is absolutely right. I think it is also important for committee members to know that we do have a process to identify emerging risks as they come down the channel. I am happy to speak to that, if you would like me to.
Ms OWENS: Yes, that is actually my question: 'detects' as in 'detects wrongdoing'. None of these things you are talking about are actually wrongdoing at this point.
Mr Medcraft : It is detecting—you have to keep ahead of the game. To be a good regulator, you have to be about what is on the horizon.
Ms OWENS: I would just like to hear from Mr Price about what you are doing on that risk identification and then—
Mr Price : We have a structured process around considering emerging risks within ASIC. That is a formal process. The committee meets every six weeks, roughly. The committee members are: each of the commissioners; our senior executive for strategy and policy; our senior executive who oversees misconduct and breach reporting, so we can get information from that point of view; our senior executive from our research area; our senior executive from our international area, because often regulatory issues may occur in other jurisdictions before they occur in Australia and we can learn a lot from what is happening internationally; people from our chief legal office; and people from our enforcement areas. It is meant to bring together people from within ASIC with a diverse range of skills and expertise to look at where particular regulatory problems might be emerging in the future.
We also use the opportunity to have people with external expertise present to us so we can build on their perspectives. Recently, for example, we discussed some of the emerging regulatory issues that were coming through from the cyber-resilience issues that our chairman just mentioned. We were fortunate enough to have someone senior from the Defence Signals Directorate to come and present to us about some of the issues that they were seeing, the Defence Signals Directorate being quite senior and important in this area of cybersecurity within government.
We have a formal risk rating system, so risks are rated on a consistent basis. We have a mechanism to follow through on actions that the committee thinks should be followed through. We have a system whereby the commissioners and others within ASIC will try and identify those emerging risks on an ongoing basis so that, every six weeks, we have a new topic that we can discuss, find out where critical issues are, and put in place things to try and mitigate those issues or, alternatively, if ASIC does not have any regulatory responsibility, think about whether we should let anyone else know that we think there is an issue in this particular area. So it is quite a structured process we have in place.
CHAIR: Can I take you to your annual report and enforcement outcomes on page 7. In most of the areas there has been an increase of five to 10 or maybe 20 per cent, but, for example, with your criminal and civil litigation completed successfully, there is a decrease from 95 per cent to 90 per cent. But, only having two years, it is very hard to understand whether that is just a natural variation or a trend. Next year, would you give us a much longer time frame in some of those key outcomes so we can look at longitudinal data as opposed to—
Mr Tanzer : We can certainly do that. You are quite right about that particular statistic, and we caution in the same way in our six-monthly enforcement reports that you have to be very careful about drawing conclusions just over those periods because they tend to have a longer gestation.
CHAIR: Where there is quite a step change, though, is in illegal schemes shut down or other action taken—39 in the previous report and zero in this report. Is that because you have already got them all? Or have you got actions underway?
Mr Tanzer : I would be very surprised if we got them all, but we have not seen anything like the same sort of number of illegal managed investment schemes, and that does have to do with the business cycle.
Mr Medcraft : Chair, I think the suggestion you make is a good one. If we could get the 10-year period, it would be quite good.
Mr Day : It is being reflected also in the reports of misconduct or alleged misconduct we are getting. In that space, they are dropping quite significantly and have been now for three years. That seems to have followed since the GFC. As Commissioner Tanzer has just said, we think that is a business cycle thing, where we are coming into a much lower return environment, and we think that has driven a number of these schemes out of existence.
Mr Medcraft : One of the things we might look at is a 10-year period, because it would take you through a business cycle. We might see if we have the data.
Mr Kell : The jurisdiction has changed significantly, so you would have to allow for that, but I think in some of the areas—
Mr Medcraft : You want to try and get through a cycle—and I actually agree with you, Chair.
CHAIR: I am very pleased to hear that.
Mr Medcraft : No, it is something I have discussed before, and I agree, so it is good.
CHAIR: Can I take you to page 34 of your report, still dealing with enforcement. In paragraph 2.1.5 you state that in this reporting period you completed 95 civil and criminal litigation and administrative actions and 113 investigations and secured 15 criminal convictions and eight imprisonments. From reading that I have no idea—and, in fact, I cannot find a breakdown anywhere in your report that indicates this—how many of your investigations or actions or successful outcomes are against individuals, against SMEs, against large corporations or employees of large corporations. Do you have that data?
Mr Tanzer : We do. In our six-monthly enforcement report we do not carve it up exactly in that way, but we give a lot more detail and tables from time to time about, for example, whether it is directed at directors and their offices, it was a market manipulation or it was an insider trading or those types of things. I will get together what we have got from those reports and provide that to the secretariat, but I will take into account your particular comments about how that might break up. Certainly, the big point of the enforcement report was to say that there was a demand for more granularity about our actual enforcement outcomes.
CHAIR: You have made the comment in the past that the penalties available in the act are not sufficient and you believe they need to be increased. Of those convictions that you have achieved, how many times did the authority award the maximum penalty that was available? How many times did they give less than what was available? When they did give the maximum, can you clearly show the committee how many times that was inadequate to actually deter future behaviour?
Mr Tanzer : It is very, very seldom that a court awards the maximum—very seldom.
Mr Medcraft : Let's come back with the information, because I would be quite interested as well.
CHAIR: On the same page, in the paragraph talking about protecting investors, it says that ASIC cancelled or suspended 23 licences, and six additional licensees agreed to have conditions imposed on them. Was that a result of whistleblowers, was it a result of consumer complaints or was it as a result of your active oversight of the sector?
Mr Medcraft : That is a good question. We will come back to you on that. It is a mixture, but I would be interested to see the break-up, I agree.
Mr Kell : We would just obviously have to be careful about the level of granularity around matters relating to whistleblowers, from the confidentially aspect.
CHAIR: That is fine, and I am happy for you to give it to us in confidence if need be, but I think it is an important element for you to understand, in terms of being a learning organisation, so that you understand what is effective, what is working and how you build on that.
Mr Medcraft : I am happy to provide that information.
CHAIR: You mention further down that you cancelled the licence of a broker. I assume it was a small firm, based on what is written here, but you talk about the fact that it failed to comply with its licence obligations to provide its services honestly and efficiently because of, among other things, dishonest dealings. It sounds remarkably like some of the larger things that we have been talking about. I am interested to know, if you apply that threshold to a small licence holder, has ASIC ever considered applying that to a larger licence holder and, if not, why not?
Mr Tanzer : In these cases, I cannot say absolutely uniformly but the normal process is that, particularly with respect to dishonesty matters, we would have considered first whether a criminal approach was appropriate. You can see in the immediately following dot points two cases of dishonest dealing or fraud which led to a criminal approach. Obviously that all depends on the particular evidence that might be involved. If we are satisfied that we do not have the evidence to go criminally, we may well proceed down the banning route, and that is still necessary for us to satisfy one of our independent delegates that there is a reasonable basis for making that finding. But typically, when the matter involves some dishonesty, that is where we will look at a ban at the permanent end, as set out in the regulatory guide that we referred to earlier.
CHAIR: The reason that I am interested to pursue this is that it comes back to this issue of the responsibilities of the licence holder, in that if they are supposed to be taking on the obligation to ensure the good conduct then it means that they need to have systems in place to make sure that they identify—which means you can identify—whether the misconduct has been an error or a violation, whether they are one-offs or whether it is indicative of a culture and a continued practice. If you are applying these kinds of thresholds to small companies, where it is not clear whether that has been an error or a violation, whether it has been a one-off or whether it has been a systemic practice—and what we are seeing are systemic practices in some of the larger licence holders in Australia—I just think that, in terms of confidence in the market for consumers, it is important that there is consistency. I would invite you to consider how you apply those thresholds, regardless of the size of the organisation, because that sends a powerful message to the board level, as well as the management level, of every single licence holder that they have an obligation, not just to pay lip-service, but to put that culture and that internal compliance regime in place. They could lose their business model if they do not do it. If is good enough for the small guy in town then it is something we should be applying consistently.
Mr Kirk : We do apply the same sorts of thresholds across the different sizes, but in practice if there is dishonesty in a licensee that only has one person in it, it is at a 100 per cent rate. It is much easier to convince a court to sustain a licence removal in that situation, compared to a situation where a place that has 500 advisers has 10 dishonest people in it. And we have certainly had experiences where we have removed licences and, on appeal, they have been reinstated not on the basis that the bad conduct did not occur but on the basis that the firm now has put procedures in place so that it will not happen in the future. That harks back to something that was discussed before lunch: the purpose of removing the licence is protective under the law; it is not a punishment. So, even if a firm has engaged in serious misconduct, if they can establish at the hearing that they have now engaged experts and they have put in procedures such that this is unlikely to happen again, they will get their licence back.
CHAIR: Mr Kirk, I understand. I actually completely concur: so they should. But there is one important discriminator that I think should come into that. Again, on the same page, page 35, you say that in January this year the ANZ group announced that it would refund a whole bunch of money, and it looks like they self-reported. They found an error and they self-reported. My question to you is: how do you encourage that behaviour, whether it is an SME or a corporate, of self-reporting or self-fixing, versus those who you have caught out, or where there has been a whistleblower or a consumer complaint? Even if they then put in remedial processes, if they were aware of it and they did not self-report, to my mind that is a significant breach of trust that should have penalties brought against it.
Mr Kirk : I totally agree.
Mr Medcraft : Chair, it is very good that you raise this, because one of the things we have highlighted is that, with fewer resources at ASIC, we have to rely more on misconduct and breach reporting, which is required by law. What we have said is that we are going to focus on large institutions and on their misconduct and breach reporting. We have said to them that we want it to be more timely and there is a requirement to report to us on a very timely basis. We are going to focus on that, and we are also going to focus on where they draw the line, because it is very uneven. That is something that we are very much going to be focused on, because we have got to make the system work harder. Equally, we are actually saying to them, 'Look, if we go in and find something that should have been reported and you didn't report it, we are going to go in a hell of a lot harder than we would have had you actually come and reported to us'. So it is important that we say we are going to focus on this, but equally it is important that we send the message that, when we do go in and find something has not been reported, we intend to take harsh action.
I don't know whether you wanted to comment—
Mr Price : No; I think that sums it up perfectly.
Mr Medcraft : But I think this is really important, because you have got to make the system work better.
Senator O'NEILL: I have a couple of questions around what you have just said. In terms of 'timely', what do you mean?
Mr Kell : The requirement under the law is that significant breaches are reported within ten days. But there is some inconsistency—in terms of when people establish that there has been a breach, and whether the nature of the breach is significant, so we are commencing a project looking at how that is done across firms, because we have found that there are inconsistencies, even within firms. The other issue here, which I think we raised during the Senate inquiry, and it has been the subject of some discussions, is that we do not have a lot of flexibility around our penalties for failure to breach report. At the moment it is a criminal—
Senator O'NEILL: That was my next question.
Mr Kell : We only have the criminal option. We think it would be much better if we had an infringement notice regime for failures to breach report, which would allow us to take action much faster, but in a public way, and to send the right messages. It is something that we have put the industry on notice about. The timeliness just has not been up to scratch, in that it has been very inconsistent, and we want to make sure there is consistency in what people say is, or how they judge, 'significant'—it almost went to your earlier report, Chair, about making sure that it is not judged within the framework of a massive organisation; 'Oh well, this small matter over here is not significant, therefore we do not have to report it.' It may be very significant for those investors involved.
Mr Medcraft : Chair, I have communicated to the chief executives of a number of key financial institutions as to how we see their culture around this. As Peter said, it is very uneven. I have actually said—to the surprise of some of them—even though the way you talked about it, we see it being very different between you and others. So on a number of levels, we are actually making it very clear that there has got to be proof.
CHAIR: I would be interested, not now but perhaps in the other briefing we are having, to get some feedback from you about how you are looking to get that more uniform approach. My last comment on that topic—I am very conscious of time—is that, whilst clearly the decision to impose penalties or not is your role, to my mind, the spirit of co-regulation is that if an entity realises they have erred, whether it is a violation or an error, they self-report, and they willingly make appropriate payment to people have been affected—that should be encouraged.
Mr Medcraft : You are absolutely right. That is the essence of a co-regulatory model. And if it is not being respected, that is a problem.
Mr Kell : And we go out of our way to acknowledge cooperation publicly.
CHAIR: Okay. Just two more quick things—and I will ask you to take these on notice, because I am conscious of the time. Under consumer credit, you talked about the fact that there were four criminal convictions for credit offences, and there was $122 million that was refunded—so a significant amount of money.
Mr Kell : Yes.
CHAIR: And yet—I am assuming when you say there are four infringement notices in the next bullet point that that refers to those four cases—the total—
Mr Kell : No.
Mr Kell : No. They are separate cases. The infringement notices would primarily be around advertising matters. There are different aspects—we have had a focus on loan fraud, which would be the convictions. But infringement notices are typically around our targeting of advertising.
CHAIR: My question then, going back to the previous dot point: if this one talks about $77,000 for those four infringement notices, and if you had successful convictions, over the $122 million, what were the penalties that were imposed upon the people who were convicted? Was it jail time, or was it a fine? And if it was a fine, how does it relate to $122 million?
Mr Kirk : There is not a relationship between the four convictions and the refunds; they could be from entirely separate matters, including the sorts of matters where we had a lot of cooperation—in the self-regulatory spirit you were talking about—and there was no action taken.
Mr Kell : We are happy to come back to you with more information about that picture, because I think it is a very important area.
CHAIR: It goes to the heart of this issue: is the penalty regime related to the amount? I think you talked before, Mr Medcraft, about insider trading; if the penalty is $50,000 but you stand to make $1 million, what would some people do—putting the ethics aside?
The last question I have is one that I would like you to take on notice, as we are out of time. In terms of development of the market infrastructure, you said on page 43 that you recommended to the RBA that a new licence be given to LCH.Clearnet to operate a clearing service for over-the-counter derivatives. You would be aware of the G20 commitments to shift over-the-counter derivatives to centralised clearing platforms to increase transparency and decrease risk. There is a fairly strong case that the ASX makes that when you get fragmentation in that clearing area you start inducing risks, and obviously they have an interest in that, being the sole provider at the moment. I would be interested to get from you why you made that recommendation given some of the concerns that have been placed out there by the ASX and others about fragmentation of the market and particularly how that opens up.
Ms Armour : Yes, we will be happy to give you that. There was a paper by the Council of Financial Regulators that dealt with clearing of over-the-counter derivatives.
Mr Medcraft : It goes into the reasons why we supported LCH's—it would probably be better to give you that paper and we can discuss that.
Ms Armour : One of the particular issues—
CHAIR: If you could take it on notice; we are out of time for now.
Mr Medcraft : Just before you go in camera, in relation to the report I gave you before, I should add that a further part of that was the cognitive task analysis that we had undertaken in respect of financial advisers. I think that would interest your committee. It was done by an independent party with 21 selected financial planners from the industry. I think it would be very useful for you to have a copy of that report. We will table that as well, together with the summary.
CHAIR: Just to clarify, I notice this report is dated October 2011, but it still has 'in confidence' on it. Are you happy for us to publish this?
Mr Medcraft : We are happy for that to be tabled, yes.
Senator O'NEILL: I move that the documents provided by ASIC today—the letter and the advisory panel on standards and ethics for financial advisers, October 2011—be tabled.
Mr Medcraft : And also if you could add the cognitive task analysis and the summary.
Senator O'NEILL: That would be great. I also have asked the secretariat to get us these papers—the consultation paper 215 and 212. I think it would be very helpful to have them here amongst our papers as well on the day. I seek to table those as well.
Mr Medcraft : Hopefully that helps.
CHAIR: We will now go to the in camera session.
Pro ceedings suspended from 14:37 to 14:59
CHAIR: We will open the doors and let the light shine in. Senator O'Neill, you have the call, very briefly.
Senator O'NEILL: Firstly, can I indicate that I will be putting questions on notice with regard to the annual report. Time has beaten us on that one. Can I also thank you very much for the assistance you have given in providing the documentation around the standards and ethics for financial advisers. It is very timely. But I am very interested in this letter of 11 October. Mr Medcraft, I wonder if you might speak to this, because this is of great concern. In terms of an industry that is operating in the context of FoFA changes, regulations, increasing anxiety about adviser standards, Timbercorp—all of the things we been talking about today—this letter is particularly concerning.
Mr Medcraft : We received this letter from the industry, and this was copied to the minister at the time. Subsequently the minister convened the standards review. Is that correct?
Senator O'NEILL: The letter is dated 11 October 2013.
Mr Kell : That was in response to a consultation paper that ASIC had issued around lifting standards in the financial advice sector.
Mr Medcraft : When did we issue that consultation paper?
Mr Kell : I cannot remember the exact date but it was late—
Senator O'NEILL: 'October 2011' it says here. Is that right?
Mr Kell : No. It was after that. It was later, in 2013. We were consulting around raising the standards in the area of financial advice. There was some contention around our propositions, as you can see from some of the industry organisations, but I think what has happened subsequently is that the level of community concern about this issue has grown significantly, so, interestingly, I think many of those groups have recognised that there does have to be a focus on higher standards. It was just, I suppose, unfortunate that we did not get that commitment at the time. But we are working through it now.
Mr Medcraft : The consultation report 215—we did that in 2012, didn't we? That consultation paper we put out in 2012, I think. It was out a very long time. We will come back to you with the exact dates of the consultation papers. These reports have been out for a long time.
Senator O'NEILL: If you could give me a very clear time line about what happened when and correspondence with the minister's office around this, because, frankly, people are alarmed about the standards. I know that RG146, in the evidence that we took in Sydney, is absolutely frightening. There are many issues around licensing that we need to discuss more, and I am hoping that there might be some recommendations around that very soon, to provide people with a whole new paradigm in terms of their certainty about accountability in the sector.
Mr Kell : We can do that. Those consultation papers came out in June and August 2013—
Mr Medcraft : 2013, was it?
Mr Kell : Yes—with the idea of covering these sorts of issues.
Senator O'NEILL: This is 212 and 215?
Mr Kell : Yes. We can provide the dates.
Senator O'NEILL: Great. If you can give me that time line, that would be very good. You indicated you communicated with the minister at the time that you received this feedback.
Mr Medcraft : Yes, and the minister reacted. I think he convened a roundtable, or was going to. I cannot recall what—
Mr Kell : Let us get back.
Mr Medcraft : We will come back, but I think he talked about convening a roundtable. He basically took it on himself to—
Mr Kell : The government has clearly had a strong interest in this area.
Senator O'NEILL: But we have not had any action.
Mr Medcraft : They responded very constructively.
Senator O'NEILL: But there was a bit of a time lag between the constructive response and action on this.
Mr Medcraft : I will come back with the action time frame on that.
Senator O'NEILL: All right. I will certainly have more questions on this. I will send correspondence. If we put some on notice, I might have to send correspondence even more quickly than that. Thank you.
CHAIR: That concludes the hearing today. I thank you, Mr Medcraft and your officers, for your evidence and your ongoing work. If you been asked to provide evidence on notice, which you have, could you coordinate with the secretariat in terms of a date for that. Thank you to broadcasting for your support today.
Mr Medcraft : Merry Christmas!
Senator O'NEILL: Merry Christmas to you too, and apologies; I understand you missed your Christmas party.
Committee adjourned at 15:05