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Older people and the law

CHAIRMAN —Welcome. Although the committee does not require you to give evidence under oath, I should advise you that the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House itself. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. We have received a submission from ASIC and it has been authorised for publication. We have only half an hour for you, and we do have a lot of questions. We will ask you some questions and then we wonder whether you would be kind enough to take the balance of the questions on notice and come back to the secretariat after you have been able to deliberate on answers.

Mr Tanzer —Certainly.

CHAIRMAN —Would one of you like to give a brief opening statement and then we will proceed.

Mr Tanzer —Thank you, Mr Chairman. I will try to make this brief. Firstly, thank you for the opportunity to appear before the inquiry. We welcome the chance to contribute our views and experiences on the important issue of older people and the law. ASIC, as I am sure the members of this committee are aware, is Australia’s corporate and financial services consumer protection regulator, and we strive to meet the needs of all consumers and investors, including older Australians. As we noted in our submission, older Australians are a diverse group with differing needs and backgrounds. From where ASIC sits, perhaps the most important distinguishing feature of older Australians, however, is that, where they do suffer financial misfortune—whether through fraud or other causes—it is often much more difficult for them to recover their previous position, and thus the consequences can be far more devastating.

Our submission focused on those parts of the committee’s terms of reference that relate to fraud and financial abuse as well as some more general issues associated with the interaction between older Australians and the financial services sector. In particular, we discussed the need for adequate financial planning for retirement, avoiding high-risk or illegal investment strategies which may result in significant, irrevocable financial losses, equity release products and scams, such as cold-calling and unsolicited share offers—to which a significant number of older Australians fall victim. ASIC has an ongoing focus on each of these issues and seeks to address them through a range of means, including continually monitoring the marketplace, working with industry to improve practices, taking enforcement action, undertaking research so that we better understand the decision making process of consumers and investors and educating consumers and investors through our ongoing financial literacy work.

As ASIC’s Chairman, Tony D’Aloisio, recently announced before a Senate estimates committee hearing, one of our six top priorities in the coming year will be to develop initiatives to assist retail investors to better manage and protect their investment’s wealth, with a particular focus on the needs of retirees and baby boomers who are soon to become retirees—a topic dear to my heart. Those initiatives will include work to better educate consumers about the importance of diversification and what this involves and the issue of the risk-return premium.

To get a flavour of our current education work directed at retirees I would recommend that members visit ASIC’s consumer website FIDO at There you will find a specific section focusing on financial services issues of particular relevance to older Australians under the tab ‘Retirees’. Topics covered include planning for retirement, retirement incomes products, reverse mortgages and equity release products, and warnings about such issues such as pressure sales, cold-calling, unsolicited share offers and early superannuation release frauds. In mentioning FIDO I should also note that we do of course recognise that not all older Australians have access to the internet, so we also disseminate messages through a raft of other channels, including our call centre, radio programs, stalls at retirement and lifestyle expos and articles in publications particularly targeted at older Australians—for example, Centrelink’s seniors publication. We are also currently talking to Australian Seniors Magazine about having a regular column in their publication.

In recent years we have put considerable resources into monitoring early equity release products, looking at the advertising of these products, working with industry to ensure that their offerings do not have some of the negative features that we have seen overseas, and educating consumers about the important issues to consider before deciding whether an equity release product is right for them.

As much of the work that we are doing to help protect the interests of older Australians is already detailed in our submission, I will not recanvass those details in this opening address. I am happy to address your questions.

CHAIRMAN —It might seem an odd thing to say but, during the course of this inquiry, I have developed some sympathy for ASIC insofar as it almost seems that you get criticised whenever people lose money—and maybe someone is yet to write a leading article to say that you should have warned of the share market reduction over the last couple of weeks! We have had evidence that you could have done more to protect older investors from recent collapses of, say, the Australian Capital Reserve, Fincorp and Westpoint. It has also been claimed—in fact, over and over again—that ASIC’s prosecution rate of corporate defence is too low. I know those statements will not come as any surprise to you. What is your response?

Mr Tanzer —We have not sought in the submission to deal with the second part of that, although that is a claim that we hear and we do respond to quite regularly through estimates committees and through our parliamentary oversight committee—the Parliamentary Joint Committee on Corporations and Financial Services—and our annual report seeks to address issues around our enforcement record, in particular by pointing to the very large number of enforcement matters that we do take.

Also, having been an ASIC officer for some years—and without wishing to take anything for granted by any means because one always needs to look at these sorts of criticisms through fresh eyes—you do tend to hear the criticism from both sides. You often hear that we are taking too much action at the big end of town and you also hear that we are taking too much action at the small end of town—that we are focusing only on the smaller fish or that we are interested only in the bigger scalps. To some degree when you hear both ends of the criticism that gives you some comfort as long as you feel—and reasonably we do—that we are taking substantial amounts of enforcement action.

In terms of ACR, Fincorp and the other more recent collapses, your point is well made. It is criticism that we have heard and we are taking very seriously. The chairman outlined in a statement to the Senate estimates committee on 30 May a range of measures that we were taking specifically in relation to the unlisted, unrated debenture area, which is a relatively small sector of the Australian investment market and certainly not related to a number of the issues that we have seen on the share market in recent days. But it is an issue that we take very seriously. We are not a regulator that undertakes prudential functions so we do not exist to prevent failure occurring. But we do exist to make sure that there is appropriate disclosure to investors of the risks of the investment products that they are investing in. We are concerned about that particular sector and whether or not people properly understand the risks of investment in those particular types of products. The three-point plan involves looking at existing debenture issuers and whether there should be any additional disclosure and other related mechanisms that should be applied to them, looking at new rules for further or new debenture issuers, and looking at investor education in particular so that people can properly—if you like—process and understand the information they are given.

CHAIRMAN —There are some people who seem to consider that ASIC should take over the carriage of a legal action they might have against someone who has done the wrong thing. You would obviously say that that is not the case. Constituents have put to me that you should have done this or that. ASIC on occasion, particularly in relation to Ponzi schemes, has come back and said that you only have resources to do certain things—and I imagine you could be four times your size and still be prosecuting away. Would you say that you are adequately resourced?

Mr Tanzer —Yes, I would. We have seen substantial increases in our resourcing over the last three to five years. I think you are right that any enforcement agency always needs to make decisions about where it is going to apply its resources—even within our own sphere, whether it is better to put more emphasis on education or on earlier surveillance of schemes compared to mopping up after collapses of schemes. I think there are always those sorts of tensions involved. It is relevant though to understand that in this area of the Corporations Act and investments, while I understand that individual legal action is very expensive and hardly available to individual investors in their own right, the law does make provision for civil actions. Class actions are available for individuals and, more importantly, the law makes provision for internal dispute resolution and then external dispute resolution for claims that would fall within the general ambit or definition of consumer claims, if you like—the smaller level claims. I grant that there are criticisms of that sector. ASIC’s enforcement role is part of that whole framework but it is not the only part of the framework.

Mr MURPHY —I would like to continue on with that because I have had firsthand experience with people communicating with my office on the collapse of One.Tel, Australian Capital Reserve, Fincorp and Westpoint. In particular, Mr Graham McCauley and his group, who are well known to ASIC, have regularly visited my office and the offices of other MPs to highlight not only their frustration with ASIC but their perception that the Treasurer and the government have not done enough.

CHAIRMAN —But it is an independent statutory authority.

Mr MURPHY —I am aware of that. I suppose the message that has come to me personally is that someone like Norm Carey and his nefarious mezzanine activities should have been picked up earlier or brought to the attention of people like Mr McCauley and all those people. I have about six constituents in my electorate of Lowe who have lost amounts varying from about $50,000 to $300,000. One lady has had to sell her father’s house to survive, which is pretty sad.

That is a long introduction. We will have a lot of questions for you and, as Mr Slipper said, we will probably give you a list of questions to take away. We are not here to crucify you; we are here to ask you what perhaps the parliament could do better. Do we need to strengthen some of the laws for people like you? As Mr Slipper said, we could make you four times the size you are. You would be a bigger bureaucracy, but that might not get the desired results. No-one likes to read in the newspapers about people like Norm Carey getting away with what they have got away with. It is good that you are all going after him, because I see—like my colleagues—the shattered remains of constituents coming to my door and pleading that they have lost everything.

An old auditor said to me years ago when I was an audit manager that for every one per cent interest increase you get from an investment so increases the risk. Most reasonable people understand that, but I think the way that these mezzanine company arrangements were set up by Carey, the people did not understand it. When you get people who have standing in the community, like Alan Jones, reinforcing the attractiveness of these investments for elderly people to get a bit more when the returns of bank interest is so low these days, people accept that.

I would like to think that out of this something good could come and we could strengthen your laws and you could get stuck into these sharks, because we all hate this. Sorry for that to be so long. Could you give me some feedback to take back to people like Mr McCauley and my constituents on whether the present government or an alternative government in the future could do something to stamp this out? I know caveat emptor applies, but sometimes you have got to do things to protect people against themselves. Enough said.

Mr Tanzer —Thank you for the comment. Many of the comments you have made resonate very much with us. Certainly the concerns of Mr McCauley and the group that he represents are well known to us. We meet with him on reasonably regular occasions at the most senior level—at the chairman’s level and down. I think there are a couple of general comments that I might be able to make. Of the people who beat their path to your door, the most tragic stories I imagine that you have heard, and certainly the most tragic stories that we have heard, are of those people who have invested sums but not only invested sums but invested all of their worth in a scheme that then fails.

We make the point in our submission that older Australians often have been successful business people, successful public servants—successful in all walks of life building up their wealth. It is not because people are necessarily greedy or anything of that nature. The key concern for older Australians is that if you are in a position where you have suffered a loss you do not have time—you do not have the extra 20 years or whatever of earning capacity—to be able to make up for that. So for older Australians in particular, one of the principles of wise investment is about diversification of your own investment portfolio. The most tragic stories are where people have not diversified and have put all of their eggs in the one basket, as it were. So one of the things we are looking very closely at is how we can properly get the message out to people that diversification is a very good idea in any sort of circumstance.

Mr MURPHY —I could not agree more that you should not put all your eggs in one basket. I suppose more particularly my question is: do you have any creative ideas about how there might be some changes to the laws as they presently exist—changes which take place here where you are today—to better protect the elderly and of course give your organisation greater teeth and powers?

I know we do not have a lot of time. Perhaps you could take that on notice. It would be very valuable for our report. This has been a major issue with elderly people—from my experience right at the coalface in an electorate office—and I would like to think something good could come out of it, because people like Mr McCauley and my constituents have lost everything. I feel very sad for them because I did not detect that any of them were greedy people seeking a really absurd return on their investment, particularly when they had people like Alan Jones saying this was a good thing.

Mr Tanzer —I am happy to take that on notice. I can certainly assure you that we have been giving a lot of thought to that and have been spending a lot of time on work on those issues. This has been not just in light of Westpoint but in light of some of the more recent collapses that you have referred to, Fincorp and so on, with a view to looking at issues around diversification and better understanding the level of risk that is being offered compared to the reward that is being put forward here. Certainly, in these more recent collapses, trying to understand how it is that this investment opportunity is going to make you money so that you can try to understand what the likely risks are and whether it is likely that in the longer term it will deliver those sorts of returns.

Mr KELVIN THOMSON —Like John, I have had constituents who have lost significant amounts of money or life savings on Fincorp and Westpoint. There is a related problem that I have seen where older people will invest in property developments and hand over their money to either solicitors or property developers and the developments seem to fail or there is borderline theft and fraud and they lose their money. You said they have civil remedies available to them. You can be in the situation where you are small and the outfit you are dealing with is large, in terms of legal resources they will outlast you, and so you cannot effectively exercise your legal remedy for lack of an ability to compete. In the worst situation, people have been bankrupted as a result of the losses and therefore may have what looks like an excellent legal case but no financial capacity or even a legal capacity to pursue it. I wonder whether in these sorts of cases ASIC steps in and pursues these things. Is there any vehicle by which people can get out of what looks like a nasty little catch 22: ‘I could recover money if I had the legal capacity to sue if I had not been bankrupted.’

Mr Tanzer —Certainly the considerations that you mention are things that we take into account in determining what regulatory response we take. We have quite often taken action. You mentioned the Westpoint case. We took action initially to stop the fundraising, because we were concerned that it did not meet the obligations of the law, and to then freeze what available assets there were to preserve those in case of further civil action. There have been a number of class actions that have since been commenced.

ASIC also has a power, under section 50 of the ASIC Act, to take representative actions on behalf of other people. So it is possible for ASIC to undertake representative actions, and it does happen. As to the circumstances in which we do that, the legislation actually refers to being satisfied that it is in the public interest to do so. As you have mentioned, when we consider those types of actions, we have to take in a range of factors, including the capacity of people to fund that sort of action themselves. As to what the action actually is or what the allegation might be, you have mentioned the issues of fraud. Obviously, that is something that we take very seriously from a criminal perspective as well. There are a series of criminal actions that we take against promoters of illegal investment schemes or collapsed investment schemes. We can also provide detail on those. I think you are quite right about the capacity of the individual to take action, though obviously for many people that is often out of reach.

The other point is that people who have dealt with a licensed financial adviser or a representative of a licensed financial adviser may have had advice to go into one of these particular schemes, and that appears to have been the case for some with Westpoint, though not everyone by any means. There is the availability of external dispute resolution and the relevant external dispute resolution scheme, FICS, the Financial Industry Complaints Service, accepts complaints of claims up to $100,000. They are currently working on whether that monetary limit should be raised. The advantage of that particular avenue is that that service is free to consumers, and FICS has the ability to determine claims and to make compensatory orders against their members, and they do. They currently have, I think, 350 or so claims that have been made by Westpoint investors.

Mr KELVIN THOMSON —How many of those representative actions would ASIC have taken?

Mr Tanzer —There would not be a large amount. I cannot give you the exact number now, but we take them from time to time.

Mr KELVIN THOMSON —In terms of the philosophy in this whole area, I can see that it is difficult. On the one hand, the better ASIC does its job the more there will be a public expectation that there is an implied guarantee, and, therefore, if any company or investment scheme goes belly up there ought to be some compensation available. I think that the implied government guarantee is wrong. It is not a defensible piece of public policy. On the other hand, it is very much in the interests of investors and older people, who are the subject of this inquiry, that outfits like ASIC are going as hard as they can to send appropriate warning signals. Schemes that are dodgy and masquerading as if they are not should be outed and exposed. There is clearly a need to have that going on.

Mr Tanzer —I agree with your point. I think the other thing that we have tried hard to do is to head off market developments early on where we see them occurring. In the submission we talk about equity release products and reverse mortgage products in particular. The work that we have done there has really been around trying to influence the product design, although our jurisdiction is relatively limited with respect to credit products. We are responsible for misleading and deceptive conduct or unconscionable conduct. We have been seeking to deal with product design so that the products do not contain consumer unfriendly terms. The particular example in our submission is about the no-negative equity guarantee. There are still some issues around that but, as a way of heading off problems before they occur, quite often we look at a problem which might be an emerging issue. Reverse mortgages are really not very widely sold, but they are growing very quickly in number.

Mr MURPHY —What initiatives do you take to educate the elderly, in particular, in relation to the risks of those products?

Mr Tanzer —The report we issued in 2005, which is referred to in our submission, is a good example of that. In producing the report, we also produced a number of fact sheets, some specialised parts of our web page and some scripts for our call centre staff and so on which are specifically around what you should look for in relation to a reverse mortgage. On top of that, we have worked fairly hard with the relevant industry association, which is called SEQUAL.

You need to bear in mind that most of the lenders in this area do not tend to be the mainstream banks; they tend to be other sorts of lenders—mortgage originators and so on. We have worked with them to, if you like, institute a code for that industry association and its members that includes no negative equity guarantees. My point is that, as well as trying to be reactive, trying to deal with problems properly when they occur, and close down dodgy schemes or illegal schemes, you cannot always do that because a scheme may not in any way be contravening the law; it might just be a scheme that has struggled along and the risks have overwhelmed it eventually. We also try to identify issues early on and the reverse mortgage area is an example of that.

ACTING CHAIRMAN (Mr Murphy) —Ms Rickard, do you have anything you want to say to the committee or has Mr Tanzer covered it?

Ms Rickard —I think Mr Tanzer has covered it all most adequately.

ACTING CHAIR —I would like to thank you both for attending today. I will get the secretariat to send you some further specific questions, because we had quite a few and I think we could keep you here until lunchtime quite easily today just asking questions in light of the recent events we have been discussing. So, if you do not mind, we will give you some questions in addition to your comprehensive submission and we can take those into account when we finalise our report. Is that okay?

Mr Tanzer —We would be happy to do that.

ACTING CHAIR —Thank you very much for that.

[10.31 am]