—I welcome to the table officers of the Australian Securities and Investments Commission. Mr Lucy, do you have an opening statement?

Mr Lucy —I do not.

CHAIR —Thank you. We will proceed to questioning.

Senator SHERRY —I want to congratulate you, Mr Lucy. I believe you have been appointed the inaugural chairman of International Forum of Independent Audit Regulators.

Mr Lucy —That is correct. Thank you for your observation.

Senator SHERRY —That is a very impressive title.

CHAIR —On behalf of other senators, we wish to join in those expressions of good wishes to you, Mr Lucy.

Mr Lucy —Thank you.

Senator BERNARDI —Mr D’Aloisio is not here today?

Mr Lucy —No, he is not. He has not taken office yet.

Senator SHERRY —Okay. When will that occur?

Mr Lucy —That commences on 22 November.

Senator SHERRY —If you could pass on our congratulations.

Mr Lucy —Thank you.

Senator WONG —Good morning. The indications over recent months are that there is a strong possibility of private equity starting to occupy a rather different position in the market, potentially in relation to some fairly large Australian companies. I am not particularly interested in talking about the detail of proposed takeovers that may or may not be on foot. I am interested in whether ASIC has turned its mind to any governance and accountability implications which might flow from private equity taking a different position in the marketplace?

Mr Lucy —That is an astute observation. Certainly we support the fact that there has been a lot of activity from the private equity market—in particular the international equity market. It is a complex issue. In the first instance, one needs to reflect on why they might be looking to Australia in particular, and I think there are a number of factors to that. Firstly, there is the success of many Australian companies in the international marketplace. To the extent that Australia is regarded as a destination that is politically stable, there is strong financial growth and it is well-regulated—and that is regarded internationally as being the case. So I think there are good ingredients for people to seek to invest into Australia.

There are a number of observations that I think are potentially superficial as to whether or not, for example, some of these people are looking to avoid some of the requirements that might otherwise be applied to listed public companies. I think that is a superficial observation. I think more so it is to do with some of the parties looking for opportunities where perhaps they are less accountable. For example, in the remuneration area, they do not have the same level of accountability regarding levels of remuneration than they would if they were a listed public company. So it is a broader area. It is a complex area. Yes, we have turned our minds to this and we are in the process of further developing some thoughts on this.

Senator WONG —As you correctly pointed out, you picked disclosure around remuneration as one example—

Mr Lucy —But one example.

Senator WONG —Yes, there are a range of other accountability mechanisms—to use a generic term—which are predicated in terms of their application on the assumption that these sorts of companies where there is a public interest in requiring a certain level of disclosure and accountability in relation to governance et cetera are going to be publicly listed companies. How might you deal with private equity firms, for example, taking over companies which were previously large Australian publicly listed companies?

Mr Lucy —I think the first instance—which has already been in the press—is that we are looking at the level of disclosure that needs to be made by the companies that are in receipt of such offers. Again, that is a very complex issue because some of these offers are accompanied by very significant conditions. Therefore, they are not automatically offers that need to be communicated to the market. You also have the motives of the offer as to whether or not they are looking for material to be in the marketplace or not. Conversely, you have the motives of the company, the receipt of such an offer, as to whether or not they want to disclose it and adjust the share price. Right throughout it is very complex. We are looking at it closely. At this stage all parties have a responsibility to comply with the Corporations Law and we will make sure that they do so.

Senator WONG —It is not an anti-private equity position. Clearly, private equity interest can regenerate companies and can increase the efficiency of the market.

Mr Lucy —Quite so.

Senator WONG —But, as you point out, it might be suggested by some that the current regulatory framework does not encompass private equity in the way that might be warranted to some extent if they occupied a different position in the market.

Mr Lucy —The regulatory environment is a matter for the government and ultimately the parliament.

Senator WONG —Yes.

Mr Lucy —Certainly from our perspective, having regard to the laws which we administer, we are watching it closely. We are trying to understand, firstly, the motives, but secondly, the issues that may come out of some of these activities, and we are doing that diligently.

Senator WONG —From a publicly listed director’s perspective, is there perhaps a little inequity in terms of the relative accountability requirements which apply to them but which do not apply to directors of private equity companies.

Mr Lucy —I think this needs to be looked at in the context of an international financial market. These activities are undertaken on the basis of where in the world one might identify opportunities. In this case, Australia is being seen as such a destination. Australian companies have substantial investments and undertakings throughout the rest of the world. So people come to Australia. They need to comply with our laws of course, and to the extent that there is arbitrage between laws in Australia and the United States, the UK or whatever, that is just a fact of international markets.

Senator WONG —I was not so much referring to that as to how the publicly listed director might perceive the relative requirements which apply to somebody who is a competitor, but because of the different mechanism or corporate vehicle they are utilising obviously does not have the same sort of requirements.

Mr Lucy —For our part we would certainly not be canvassing with the government any diminution or reduction of the responsibilities of the directors as they exist at the moment. We are comfortable with the laws. Going forward, as to whether the government wishes to look at any other changes for these parties, that is a smatter for the government.

Senator WONG —Just to clarify, you have indicated that you are looking at this issue.

Mr Lucy —Yes, we are.

Senator WONG —I presume you have not been asked by government for advice on this as yet?

Mr Lucy —Not as yet.

Senator WONG —What is the process whereby you will look at it? Is there some internal consideration? Are you looking to perhaps prepare some sort of discussion paper?

Mr Lucy —Potentially. I am not in a position to indicate what sort of a paper we are going to come up with because at this stage we are not quite sure of the issues that might be contained within such a paper. If in the end we form a view that we should be communicating with the government then we certainly will.

Senator WONG —I am sure we will have a further discussion about this over the coming months. I think you described as superficial analysis a suggestion that any move to private equity is driven by a perception or reality around the regulatory environment for public companies.

Mr Lucy —Yes.

Senator WONG —Are you aware of the CSA—Chartered Secretaries Australia—report?

Mr Lucy —Yes, I read that.

Senator WONG —It suggested that publicly listed companies were not having difficulty in placing or finding directors. Is that your recollection of that report?

Mr Lucy —Yes.

Senator WONG —Do you have any views about it?

Mr Lucy —From my own observations, I would support it. I think there continues to be a pool of outstanding people who are capable of serving on Australian boards.

Senator WONG —I turn now to the issue of listed property trusts. I presume you would be aware of the ASX report in relation to reporting and disclosure requirements applying to listed property trusts.

Mr Lucy —Yes.

Senator WONG —In that report a number of concerns were raised about the consistency of reporting of governance practice, the structure of the board and independence or otherwise of directors and a lack of consistency in remuneration reporting. What is ASIC’s response to these issues being raised?

Mr Lucy —I will ask Jeremy Cooper to respond to that.

Mr Cooper —We are certainly alive to the issue. A managed investment scheme and a public company are different entities and regulated in different ways. So I guess we see the issue, but ultimately it is a matter of what the law and the accounting standards prescribe.

Senator WONG —There is the legal framework, but we have what you call a co-regulatory framework. The government, supported by the opposition, has taken a view that it is beneficial for a portion of our regulatory framework to be undertaken by the ASX, through its listing rules essentially. It appears from the report that I have had regard to that there are a number of listing rules or corporate governance principles which some of these trusts are not observing. Does the ASIC have a view about that?

Mr Cooper —Not as such in the sense that, as you have already mentioned, the way corporate governance is handled in this country is a blend of principles and law in the Corporations Act. We are not necessarily the dominant player when those sorts of issues are raised.

Senator WONG —Have you read the report, Mr Cooper?

Mr Cooper —No, I am afraid I haven’t.

Senator WONG —I will just read you some things:

• Lack of clarity as to which entity should be reporting.
• Not differentiating between obligations under the Managed Investments legislation and obligations in relation to Listing Rule 4.10.3 and the Guidelines.
• Independence of directors - Principle 2.
• Director and executive remuneration disclosure - Principle 9.

There is such a conflation of identity between two different corporate vehicles. I accept that they may be branded the same way or bear the same brand, but certainly in terms of their listing vehicles they are different corporate entities. As I understand the report, they are not even reporting as such and sufficiently on every occasion.

Mr Cooper —This is a rapidly evolving area. We started off with what you might call the ‘vanilla’ listed property trust, or the REIT, as they are called globally.

Senator WONG —The ‘vanilla’ listed property trust’—that is a good term. I understand what you are saying.

Mr Cooper —A single entity, not in a group. That structure has evolved at a very great speed into other types of assets, into multi-trust structures, into global multi-trust structures. Inevitably, those sorts of developments and the complexity involved sometimes put a strain on the system. It is a bit difficult to talk right across the board because a few of those issues you are talking about are more relevant to the multi-asset, infrastructure style vehicle and not necessarily the more traditional property trustee.

Senator WONG —I think that is correct. In terms of the former—I don’t know how you described them, the multilisted property trust infrastructure or something—have ASIC had any discussions with ASX, or do you intend to, resulting from this report? I should just also remind you—since you have not had an opportunity to read it yet, Mr Cooper—that there were issues raised in the ASX report in relation to independence of directors, because the responsible entity might actually appoint directors who are frequently employees or otherwise linked, and there was a lack of consistency in terms of the remuneration reporting. I am wondering whether ASIC is in dialogue with the ASX about how to deal with those issues. I accept what you say, that the architecture of this sector is changing, so obviously this may not have been something we would have been alive to, say, 10 years ago.

Mr Lucy —I might introduce Acting Commissioner Malcolm Rodgers at this point.

Senator WONG —I know Mr Rodgers.

Mr Lucy —Malcolm is involved with regular liaison with the ASX and, indeed, he and I also meet at CEO level with them quarterly. But this particular issue has been raised at that liaison meeting, so I will invite Malcolm to respond.

Senator WONG —Sure.

Mr Rodgers —I will begin by saying that not only in the ASX context but more generally we are often invited quite strongly by parts of the capital market to fully equate the rules that apply to listed companies to listed trusts. We have generally resisted that as a broad proposition, and said, ‘We do not see that in the scheme of the law that we administer.’

The parliament has gone to some trouble to make some rules for managed investment schemes, and we are not inclined to accept the argument that once you are listed you can behave in all respects as a company. There are arguments put to us saying, ‘You should treat us as a company.’

On things like the independence of directors, you might remember that the rules that apply to managed investment schemes require either a majority of independent directors or a compliance committee composed of independents. If you look at that, you say, ‘Those rules in the law are intended to do the same kind of work that ASX corporate governance rules do about the independence of directors of listed companies.’

So there is actually a lively debate with the market as a whole about the extent to which the rules for listed companies and listed trusts should be brought together. We have a fairly continuous dialogue. The independence of directors is one area where we would, I think, start from the proposition that we would not allow the rules that apply to responsible entities of a listed trust to be displaced merely because it is listed.

The remuneration is complicated because, as the accounting rules apply, the remuneration disclosures that apply at the responsible entity level—that is, effectively, the manager of the trusts—will apply in the reporting to every trust. That is not as clear an accountability mechanism as applied to a listed company, because the sum of all of the remunerations will appear in the accounts of all the individual trusts without being differentiated to that trust.

I think, as Jeremy Cooper has said, this issue has become a more important issue. There are now 120-odd listed trusts, some of them of real economic significance. So we are an active participant in the debate. We have generally brought to that a willingness to adapt where we can see a good reason for that without giving away the rules that the parliament has decided should apply to all managed investment schemes.

Senator WONG —I will move on from this, but I understand the ASX is considering this issue, which I welcome; I think it is obviously much better if it is dealt with there than you having to deal with it or the parliament having to deal with it. So we welcome that. I suppose I flag that it is an issue that has, as you correctly pointed out, Mr Rodgers, received a bit of airplay and discussion. It is an expanding section or aspect of the market. I presume that ASIC’s view at this stage would be to let ASX deal with it; is that right?

Mr Lucy —Yes.

Mr Rodgers —To a certain degree the ASX has no power to adapt the rules. It can add to the rules through the listing rule process, but in the end where people want to end up is to, as it were, disapply rules that applied to a listed trust in its capacity as a managed investment scheme and replace them with listing rules. That can be done by us modifying the law. As you know, the ASX Corporate Governance Council has just considered where it has got to over the last two or three years, and we are beginning quite a dialogue with the ASX about a number of the positions that they—

Senator WONG —I presume this will be one of the issues raised. Can I just make the point, Mr Rodgers, I think there are two issues. One is the issue you have correctly pointed out, which is not substituting the listing rule requirements to obviate some of the legal requirements which exist in relation to managed investment vehicles. The second issue is about to what extent compliance with listing rules is desirable once these entities are listed. I accept they are probably a different component of the market than was had in mind to some extent as the front and centre focus in terms of listing rules and other requirements. It may be that some alteration is required. I do not know. But certainly if you read the report—and I am not sure if you have—it does raise some issues that might need to be addressed. I turn now to the Cowra abattoir. Is ASIC conducting an investigation into the circumstances surrounding the administration and liquidation of the Cowra abattoir?

Mr Cooper —Not a formal investigation. We have certainly been in contact with the administrators. We have requested to be kept in touch with their ongoing investigations. We are certainly aware of the allegations concerning employee entitlements in connection with that insolvency. We have received a preliminary report from those administrators, but we have not received any formal complaints. I guess this is an issue that has been quite widely covered in the media, which has prompted us to be in contact with the administrators, but we have not received any complaints through our normal complaints channel. We have not had any objections from creditors about how the administration is proceeding. So I suppose the matter sits with many other insolvencies that we have on our books from time to time, so to speak, as something that we are on notice of. We have decided not to commit our precious resources in this direction until we receive something tangible from the administrators who are really on the ground and dealing with all the normal issues that administrators deal with: where has the money gone and so on.

Senator WONG —So you say you are not in formal investigation but you are in contact with the administrators. When was first contact made between ASIC and the administrators?

Mr Cooper —The entity went into administration in August of this year and the first creditors meeting was held at that time. We received a preliminary report from those administrators in September.

Senator WONG —Was that the first contact between ASIC and the administrators?

Mr Cooper —As far as I know, yes.

Senator WONG —Are you able to provide us with a preliminary report?

Mr Cooper —We have not received a finalised report. The administrator’s indication is that it will take at least several months to complete that.

Senator WONG —You indicated that you have received a written preliminary report. I am asking you to provide that to the committee.

Mr Cooper —We would have to take that on notice. We do not have that report here, naturally enough. The report will be with us, so we would have to take that on notice.

Senator WONG —Did you make any contact with the administrators or did the administrators make any contact with ASIC prior to this issue being raised in the media?

Mr Cooper —Not as far as I am aware of, no.

Senator WONG —Was the contact initiated by ASIC or by the administrator?

Mr Cooper —It was initiated by us. Again, we have to be careful; sometimes the media is a very useful way for us to become informed of matters, but, as I have already stressed, that is the only input that we received. We have not received complaints from employees or from creditors.

Senator WONG —Was ASIC prompted to make contact with the administrators by virtue of the media coverage?

Mr Cooper —As far as I am aware, yes.

Senator WONG —Has any contact or discussion occurred between ASIC and any minister’s office in relation to this issue?

Mr Cooper —Not as far as I am aware, no.

Senator WONG —Has ASIC ever had any discussions with the Office of Workplace Services regarding its investigation of the Cowra abattoirs?

Mr Cooper —Not as far as I am aware, no.

Senator WONG —Have you ever seen the OWS report in relation to the Cowra abattoir?

Mr Cooper —No, Senator, I have not.

Senator WONG —The government has indicated that the Office of Workplace Services conducted a thorough investigation in relation to Cowra abattoirs. Has ASIC been apprised of that investigation?

Mr Cooper —Not as far as I am aware, Senator. I suppose—

Senator WONG —Are you concerned, Mr Cooper, that what is on the public record is the government saying that OWS conducted a thorough investigation, and then we have in the media a report—and I am happy if you want to tell me this is not the case—of the administrator suggesting that there was a million dollar transfer, which would have been within the purview of the OWS investigation. Is ASIC concerned that one arm of government is failing to pick up something which subsequently arises in an administrator’s report to you?

Mr Cooper —I suppose we are a corporate and securities regulator. We do—

Senator WONG —You have responsibility for considering an administrator’s report, Mr Cooper.

Mr Cooper —I was going to go on to that.

Senator WONG —Yes.

Mr Cooper —We do have an interest in this area through part 5.A of chapter 5, where we specifically, by parliament, have been given the responsibility to have an interest, but only in situations where there has been specific and deliberate transactions engaged in to deprive employees of their entitlements. We do have an interest. We do not have an overarching interest to follow every governmental inquiry and every activity in relation to allegations that have been in the press. We are in communication with the administrators, we are alive to the issue and this is just one of many external administrations that we are looking into.

Senator WONG —Isn’t the normal process that, if an administrator believes there has been an improper or potentially improper avoidable transaction, they would indicate that in the administrator’s report which goes to ASIC?

Mr Cooper —As I have already explained, we have received a draft report from them.

Senator WONG —That is the usual process, isn’t it?

Mr Cooper —Yes.

Senator WONG —I just find it somewhat odd that we have an entity of government—the Office of Workplace Services—which investigates, supposedly thoroughly, according to the government, the financial situation and operations of Cowra abattoirs but which at no point advises ASIC, which is responsible for the issues you raise, about a potential suspect transaction of a million dollars.

Mr Cooper —I cannot speak for that agency and I could not categorically say that they had not been in contact with ASIC. If you like, we can take that particular question on notice. I am certainly not aware of contact.

Senator WONG —You are not able to tell me that today? This issue has been raised in the parliament; I am sure you are aware of that, because ASIC is always aware when we ask questions in question time.

Mr Cooper —I am certain that we can answer that today.

Senator WONG —I would appreciate that.

Mr Cooper —We will make inquiries on that. I would stress that this is a very short time frame. This company only went into administration in August, and in the scheme of—

Senator WONG —I am sure the employees who are without entitlements would agree with you! I am being ironic, Mr Cooper.

Mr Cooper —I do not take that as a trivial matter. Certainly that is nearly always the case in administrations.

Senator WONG —Would you agree with the statement that the Cowra abattoir had a clean bill of health at the time that the employees’ employment was terminated?

Mr Cooper —I could not comment on that.

Senator WONG —Does the preliminary report from the administrator concur with that view?

Mr Cooper —As far as I am aware it does not deal with that issue. I would stress also the Cowra abattoir is not in liquidation but in administration, which is a different species—the belief is that the underlying business is capable of being resuscitated, unlike a liquidation, where it is in termination.

Senator WONG —Yes, I understand the difference. My recollection of part 5A though is that the fact that it is in administration does not preclude consideration of whether there has been an improper transaction.

Mr Cooper —Certainly not.

Senator WONG —Why is it the case that ASIC has determined not to investigate that transaction?

Mr Cooper —I guess we have not really made a decision one way or another. This is a matter of interest to us. We have been in contact with the administrators, but we have various mechanisms and risk ratings for determining how we apply our resources.

Senator WONG —How often has there been contact with the administrators; are we talking about one phone call or is there some active discussion?

Mr Cooper —I could not comment on the specific number of interactions, but the normal situation is that the administrators have their job to do under the fairly—

Senator WONG —Perhaps on notice you can indicate to me what contact has been made between the administrators and ASIC. The minister representing your minister in the Senate has indicated that ASIC is working closely with the administration. I would like to know what that comprises.

Mr Cooper —We will take that on notice.

Senator WONG —Is ASIC aware that Minister Coonan has said that it is entirely appropriate that this matter be investigated—this matter being the possible improper transaction?

Mr Cooper —No, I am not aware of that.

Senator WONG —You are not aware of that?

Mr Cooper —No.

Senator WONG —You have not received any instruction from government or suggestion that this matter should be investigated?

Mr Cooper —Certainly not as far as I am aware.

Senator WONG —Has there been any contact with any minister’s office regarding this?

Mr Cooper —Not as far as I am aware.

Senator WONG —So there is really nothing being done by ASIC in relation to Cowra?

Mr Cooper —No, no—

Mr Lucy —If I could interrupt: the point is, to the extent that we need to mount an investigation, we will. We are not at the point of having reached that conclusion. The administrator is doing their work and we are in contact. The process being undertaken is entirely typical and normal and to the extent that there is anything to investigate we will.

Senator WONG —When will you come to that view, Mr Lucy?

Mr Lucy —In a perfect environment, when the administrator provides their report. We are in contact with the administrator, keeping them under pressure as to when they are going to provide it. We are not aware of the complexities as to the background as to how long it is going to take them. But if, for example, we reach the point where their time line is unreasonable, then we will take our own action. In the meantime, quite appropriately, we will wait for them to do their work.

Senator WONG —Although, as we have pointed out, the fact of a potentially improper transaction is not dependent on whether the administrator finalises its work. ASIC could look at the issue now, couldn’t it?

Mr Lucy —It is not a matter—

Senator WONG —There is nothing to prevent ASIC considering this issue now?

Mr Lucy —No.

Senator WONG —But you have chosen not to?

Mr Lucy —Yes, because in the normal course we would wait for the administrator to do their work and to provide a report to us.

Senator WONG —Can I turn to the last issue I have, which is in relation to an article which appeared in the Financial Review on Thursday, 26 October regarding the granting of shares to directors without the seeking of shareholder approval. This is the purchase of shares on market. You are aware of this, Mr Cooper; you are nodding?

Mr Cooper —Yes.

Senator WONG —As I understand this, a company can buy a share on market and then, via some mechanism which I am not necessarily au fait with the detail of, can transfer the interest in the shares to a director or an executive, presumably?

Mr Cooper —Yes.

Senator WONG —I will ask this first, because it has been running in the media as a loophole: do the current requirements under 300A of the Corporations Law capture this type of remuneration, in your view?

Mr Cooper —I imagine it would.

Senator WONG —You imagine it would

Mr Cooper —Yes, but of course that is an annual accounting obligation.

Senator WONG —Are you aware of this practice?

Mr Cooper —Yes.

Senator WONG —In your view, is it remuneration that should fall within the purview of the requirement for a nonbinding vote in relation to remuneration of directors and executives?

Mr Cooper —The way the nonbinding vote work is it relates to the remuneration report in general that is tabled at the annual general meeting. So in a sense, collectively the nonbinding vote would relate to all forms of remuneration whether it is shares allotted to the director, shares brought on the market or what have you. It is all supposed to be in the remuneration report.

Senator WONG —Have you taken any action or considered what might be the next step as a result of what has been in the media?

Mr Cooper —I suppose, as I understand it, it follows listing rule amendments that enabled companies to do this. It seemed to me that the objection being made in the press was more of a judgement from a corporate governance or from an ethical point of view as to whether this was appropriate and not an allegation in the sense that they are referring to a loophole. It is a loophole that seems to be expressly catered for in the listing rules.

Senator WONG —In ASIC’s view is that appropriate?

Mr Cooper —I guess we do not pass judgement on that. We are part of the listing rule process, but it is not for us to comment on whether or not—

Senator WONG —Come on, Mr Cooper. You are the regulator in this area. You have indicated to me that you imagine that this type of remuneration would fall within the purview of the Corporations Law. There is a suggestion, and appears to be a practice as well, that the listing rules do not require disclosure of this particular practice. Are you saying to me the regulator does not have a view about that?

Mr Cooper —There are a number of different themes running here. We have talked about the annual disclosure in 300A. That is one thing. It seemed to me that the substance of the articles was more about whether shareholder approval was being bypassed. That seemed to me to be the substance—there was not so much a disclosure problem.

Senator WONG —I would have thought it is twofold: disclosure and then, therefore, that shareholder approval was required—at least in process.

Mr Cooper —There is a fairly clear disclosure regime around director’s interests in securities and that is supported in the listing rules. So I do not think there is a leakage or an issue there. We have talked about 300A. It seemed to me that disclosure was pretty well covered and that the sort of complaint and allegation of loophole was one that went more to ‘how come some companies issue shares to directors and seek to express shareholder approval to do that while other companies will buy shares on market without seeking shareholder approval’. That seemed to be the thing.

Senator WONG —The principal is that remuneration should be transparent. I do not have an issue with this being part of someone’s remuneration package; it is a matter for them to negotiate with their employer or the company. But if the policy direction taken by parliament and the ASX has been for transparency remuneration, would you agree that nondisclosure of these transactions is problematic?

Mr Cooper —I would in a hypothetical sense, but I am not sure that that is a problem. There is a very clear regime in the listing rules where directors are required to notify their interests in securities in the company, and I was not sure that that was what was being complained of.

Senator WONG —But not shareholder approval for this type of share transaction?

Mr Cooper —I believe that was the substance.

Senator WONG —You do not have any concerns about that?

Mr Cooper —It depends how many layers of approval you want, I suppose. We have the nonbinding vote. We also have a regime in chapter 2E that requires shareholder approval other than for reasonable remuneration. That is sort of putting it around the wrong way. If you are remunerating directors beyond what is reasonable—whether it be by way of cash, shares or what have you—then you are required to seek shareholder approval. So it is a question of how many layers of approval is thought to be appropriate.

Senator WONG —So you do not have a view about it?

Mr Cooper —Not strictly, because I think the disclosure system works.

Senator WONG —Is ASIC engaged, through its regular liaison with ASX, in discussions about this potential anomaly?

Mr Cooper —I might pass that question to Mr Rodgers. He is in close contact with the ASX.

Mr Rodgers —We have had some preliminary discussions about it, driven by the kind of reportage that has been going on. I think we have not yet made up our mind whether this is a problem, because one of the things that it replaces is—it is true that shareholder approval attaches to it—the common practice of issuing shares at a discount. Some companies have taken the view that if they want to divide director remuneration into cash and shares, which is open to them to do, the fair thing to do is for those shares to be acquired on the market at current market value and not be subject to the kinds of valuation questions that would arise if they were on issue. In other words, I think there are balanced arguments—

Senator WONG —Yes, but that is not a problem. I agree with what you are suggesting there. The issue, as I understand it, is that there is no shareholder approval process when the shares are transferred then for that transaction. So they are bought and then transferred through some mechanisms to the relevant executive.

Mr Rodgers —Because the approval process applies to the issue of shares—

Senator WONG —Correct.

Mr Rodgers —At least normally it has an impact. It has, potentially, a diluting effect on other shareholders when you are issuing new shares. There is no diluting effect here.

Senator WONG —So there is not that policy imperative?

Mr Rodgers —Yes. In short there are a number of policy issues in play. There is a good, robust dialogue emerging about this and we will stay in touch with those—

Senator WONG —No doubt you will be part of that dialogue, or ASIC will be.

Mr Rodgers —We will.

Senator WONG —Mr Cooper, in answer to my 300A question, where you said, ‘I would imagine so,’ I would invite you on notice to clarify the imagination a little further.

Mr Cooper —Certainly.

Senator MURRAY —Mr Rodgers, on the not-for-profit sector, I think you will need to take my first question on notice. I wonder if you would mind asking someone to add up the total number of press releases ASIC have issued since 1 July 2005, and then let the committee know how many of those were directly related to not-for-profit entities and how many were indirectly related. That will help me get some sense of how much emphasis you have got on that sector.

Mr Rodgers —As you predicted, I will need to take that question on notice.

Senator MURRAY —I did not think even the amazing ASIC could pop that one out just out of its head. My next question to you relates to attitude and focus. I am cognisant that all regulators have to pick their priorities to an extent. My sense of things is that ASIC has not had the not-for-profit sector in its sights. We have had some correspondence on that which has been between us, so let us get it on the record. I have the view that you are a bit light handed in that respect. Perhaps you would like to rebut my sense that you are not paying enough attention to that area.

Mr Rodgers —There are two things in response. One, we have followed the debate about the extent to which there are good governance practices that accord with the law in the non-profit sector. There has been work done, as I am sure you are aware, in one of the Victorian academies over the last few years and there is the work in which you have been involved. The normal way in which we choose priorities is through the emergence of systemic evidence of failure of governance, the reliability of financial reporting, the complaints that come to us or evidence that there is a significant failure to comply that ought to cause us to give that regulatory priority. You are in fact right: we have not over the last little while had enough in front of us that would justify the decision that effectively we have to make, which is to take resources that we have decided should sit with one priority to that as a priority. I think that that probably is a fair description. It is not a rebuttal but, for our part, we have been aware of a level of debate about the quality of governance of parts of the not-for-profit sector and about the extent of compliance of Corporations Act entities. There are many entities that are not Corporations Act entities in the non-profit sector. In other words, we are aware of the issue, but not enough has come to us to say that we should make that kind of resource transfer decision.

Senator MURRAY —My interest has arisen because of many aspects, but from a good governance point of view entities which fall under ASIC that can be described as not-for-profit matter because of the huge provision of public services, which is now made through not-for-profit entities—health, education, job and employment services and so on. The areas where I would like you to indicate whether you are taking a professional interest in contributing to improved standards are these. Accounting standards is the first one. As you know, there is considerable international and national interest in improving the accounting standards that apply to this sector. The second is the issue of capital raising. Not for profits are as much in the capital market as anybody else. They have to build infrastructure and raise funds. What are you doing about the prospectus side of things? The third area is reporting—namely, that the annual reports that are produced are covered by you in the same detail, I suppose, as you would cover those reports in the for profit sector. So please answer on those three sectors.

Mr Rodgers —I have learned from long experience to never speak in front of my chairman on accounting issues, so I might pass that one to him and I will come back to the fundraising part.

Mr Lucy —Indeed, this whole area came up at our most recent business consultative panel, but it came up from a slightly different direction. The point that was put there was that, as you correctly identified, there are some issues of governance and accountability more generally. On the other hand, the point has been made to us that there are a number of people who are formal office bearers of some of these not-for-profit organisations who are, frankly, looking at whether they should continue in those roles because of the responsibilities. These people are desperately needed to be involved because of their expertise. The not for profits play an extraordinarily valuable part in the Australian fabric. So you are quite right to raise this as an issue and, indeed, we are looking at it very closely, both from the perspective of making sure that there is not an inappropriate regulatory burden on one hand but on the other hand an appropriate level of regulatory accountability, both in fundraising accounting standards and the actual reporting itself. It needs to be looked at from 360 degrees and we are in the process of looking at it.

Senator MURRAY —Could you be more specific on the accounting standards area as to whether you are providing any input into the FRC and AASB’s examination of these issues and the way in which it interrelates with the international standards body?

Mr Lucy —Yes. Indeed I am seeing over 20 within a fortnight and I certainly intend to raise this as one of the issues. The difficulty internationally is that there is an agenda that is being driven, as you would expect, from an international perspective. So there are a few areas in which Australia I think has a particular interest—namely, the smaller business and the accounting for the smaller business but also the not for profits. So therefore we will be restating our interest in that area.

Senator MURRAY —I would distinguish with not for profits, as you would with for profits, between the small business sector and the large business sector.

Mr Lucy —But there are both, aren’t there, in that sector? That is the issue for us.

Senator MURRAY —Yes. My main concern is not the soccer mums kind of entity but the very large business, which is providing services on a not-for-profit basis but which nevertheless is very much a part of your aegis, if I may describe it as such. There is a question of course as to how it links through into the public sector. The Auditor-General, from whom moneys are provided, which they mostly are, from government to not-for-profit entities, has a requirement of oversight—so the whole question of accounting standards and good governance practice matters vitally. Are you going to be exploring this in any particular manner or just a general manner?

Mr Lucy —I think comprehensively is the correct response, in that there is no point looking at a particular area without looking at it in its entirety. You are quite right that some of these businesses that are operating, albeit not-for-profit, are very significant businesses, with large numbers of staff and high levels of turnover, exposure and community benefits. Therefore, we need to look at it very maturely so that, on one hand, we have some interest in trying to make it easier for the cake stall operators and, on the other hand, we have to make sure that we do not inadvertently trigger something which would be quite inappropriate at the bigger end of town. So it does need to be looked at comprehensively and that is the process we are undertaking.

Senator MURRAY —Talk to me then about capital raising and prospectuses—if that is the proper plural for that; I will never forget the time I decided that mongooses was wrong but it was right, so I am a bit wary of the plurals. Are you applying the same prudential oversight to not-for-profit prospectuses as you are to for-profit prospectuses?

Mr Rodgers —Historically we adopted and have maintained a policy where we try to distinguish between, in a narrow sense, charitable fund-raising which may trigger the Corporations Act and fundraising by a company that happens to be a not-for-profit company. We apply the policy that, if you are in that genuine fund-raising category, the ordinary rules ought to apply to you. I hope I did not give the impression that we have paid no notice to this issue. We have had some regulatory interactions with some who we think have overstepped the line and who, in our view, should be raising funds via prospectus. In some cases it is actually a financial product, so there should be a PDS. We have pulled a couple of major institutions into line in that area and made clear that our policy is intended to apply only to a charitable transaction that might formally trigger the Corporations Act but is not genuinely a fund-raising or other thing that needs a prospectus or a product disclosure statement. So, with that small exception, we have applied the law to charitable or not-for-profit companies in the same way as we would apply it elsewhere. Where we have seen that some have stepped over the line we ensured that they actually comply with the rules.

Senator MURRAY —Your practice with prospectus matters for for-profit companies is generally that when you have taken an action you announce the action and the view you have taken with respect to a particular company and a particular prospectus—not, I gather, in the naming and shaming sense but as an indication to the market that you are active and these are the things you are looking for. It is a kind of precautionary warning advice. Do you adopt the same principle with not-for-profits? Do you publicise the work you have done on that prospectus?

Mr Rodgers —Just to clarify what the policy is, as you know we have the right to intervene with a document. Ordinarily we will begin by an interim stop order, simply saying: ‘We have a problem with that document; please fix it up. You are not allowed to raise any money on it until it is fixed.’ We would not ordinarily publicise that intervention. We would, and we do, either on a quarterly or six-monthly basis—our timing has changed a bit and I cannot remember which one is applying at the moment—reflect back to the market what we have done over the previous six months to say, ‘We have had a problem with this kind of disclosure in a prospectus.’ That is just to keep the market informed about what is on our minds and what we think product issuers should be careful about. I cannot recall that we have singled out not-for-profit fundraisings in that way, remembering that we do not examine in detail every prospectus or disclosure document and no disclosure document carries our tick or sanction. I am not close enough to reflect on our actual experience in looking at these documents, but there would be no difference in the policy that I have just described or the way of regulatory intervention.

Senator MURRAY —There might not be any difference in the policy, but there is a difference in the publicity. Again, you can rebut this if I am wrong, but my sense of things is that you are quite happy—and I support it, I must say—to expose prospectus weaknesses in the for-profit sector as a way of educating and encouraging changed behaviour in the market as a whole. But I have not seen you do that in the not-for-profit sector, which I think needs it as much as does the profit sector.

Mr Rodgers —I would need to talk in detail.

Mr Lucy —Perhaps we can just look retrospectively at what we have reviewed over the last 12 months and see how we have actually dealt with any not-for-profit issues which we might regard as deserving of publicity. We will see how we responded and come back to you.

Senator MURRAY —Perhaps you would indicate whether I am wrong in my feeling.

Mr Lucy —Absolutely.

Senator MURRAY —The third area I want you to comment on is the annual reports area. I think some of the work you have done across corporate annual reports and financial statements has really been excellent. The cost comparison and the critical analysis have been instructive and helpful to better market behaviour. I have not seen you do that, but you might have, with large not-for-profit entities that fall under your aegis. Perhaps you could indicate your attitude there.

Mr Rodgers —What we committed ourselves to, I think now four years ago, was to make sure that, over a four-year period, we had examined in detail the financial reports of all listed companies; and we will have completed that exercise this year. Ordinarily that review contains, as it were, a sort of random set. We intended to make sure that every listed company’s annual report was looked at over that four-year period. Probably about 20 per cent of what we look at we put there because we think it is an area where particular problems might occur in that particular year. So of the about 400-odd that we look at each year at least 50 or 60 are there because we have been keeping an eye on an issue or a particular company. That has been confined to the listed company sector.

We do engage with accounts in other areas, but only when we have a specific reason to believe that there is a problem—a complaint has been made to us or something comes to our attention that says there might be something awkward. At the end of this four-year cycle, I think it is our intention to step back from that and say, ‘We do think we’ve done good work there. Do we need to expand the thinking around that into other potential risk areas?’ Of course we receive about 25,000 formal financial reports each year, and a great number of them are from the not-for-profit sector.

Senator MURRAY —From the perspective of a listed market analysis, what you have there is public moneys at risk through the share market and you have a mechanism whereby you can identify those who you should analyse and so on. We do not have that advantage in the not-for-profit sector, and yet the taxpayer is at risk because millions of dollars go to individual large entities in education, health, employment services or other areas. So my interest is that you are cognisant of that difference and need and that you are not reactive in the sense of responding to complaints but proactive in the sense of trying to lift good governance standards in the area.

I am not all that sympathetic to those who run these things because the chief executives of the large organisations are extremely well paid in the not-for-profit sector and they have the resources and ability to report, and they do report. I am extremely sympathetic to the small organisations. My question to you, in closing off this section from me, is: when you step back and look at a future program of action, will you take into account whether you should do a sample evaluative kind of exercise in the not-for-profit sector which matches what you have been doing in the for-profit sector?

Mr Rodgers —I think I can say that that will be in the mix as we have that discussion.

Mr Lucy —Yes, we will.

Senator MURRAY —I appreciate that.

Senator SHERRY —Just following on from the line of questioning from Senator Murray, APRA has a major role to play in respect of not-for-profit licensing in this general examination of the not-for-profit area, doesn’t it

Mr Cooper —Some of them; for example, friendly societies.

Senator SHERRY —Superannuation not-for-profit funds, which have just been through a re-licensing together with the general superannuation sector. They have a role and indeed can examine vigorously. There are issues I will be taking up with APRA in regard to that.

Mr Lucy —But that is a specific segment that you have identified.

Senator SHERRY —Yes. As an avid reader of your publications, guidance notes and press releases on the not-for-profit sector, I notice that one of your press releases dated 11 October refers to the jailing of a former CEO of the Queensland Teachers’ Union Health Fund and the actions that ASIC took in regard to that. There was one count under the Friendly Societies (Queensland) Code. Presumably that came under the not-for-profit sector. That is one example I could find specifically of activity in the not-for-profit sector in the last three months.

Mr Lucy —Without restating what was addressed to Senator Murray, I think the point is that, as far as any complaints or issues that are brought to our attention, whether or not they are for-profit or not-for-profit is not an issue for us. It is more about where we decide, in the absence of any particular concern, how we allocate our priorities. In reviewing financial accounts, in the first instance it is to do with when there were issues with the United States and income recognition, for example. We clearly focused on that. With the adoption of international accounting standards we have been focusing on that. Our next cycle is to say, ‘Okay, we’ve done that. We have a good feeling as to where the issues are. Now let’s broaden it.’ Not-for-profits will be part of that focus.

Senator SHERRY —Certainly, I do not have any concerns at the moment with your balance, given the understandable pressure on your resources and time. That brings me to a number of aspects of Westpoint that I want to take up. Firstly, I am being utterly bombarded with emails from clients of a planner by the name of a Mr Ian Bristow; I do not know whether any of my parliamentary colleagues are receiving the same emails.

Mr Lucy —I expect they are.

Senator SHERRY —So you are aware of the issues being raised by the clients of Mr Bristow, demanding the return of the files?

Mr Lucy —I am. Indeed, you will find that I am also on the addressee list of those emails.

Senator SHERRY —I will give you a list of those who have communicated with me. Is ASIC considering a response, some sort of information to these specific clients in view of the specific communications, albeit I suspect as part of a coordinated campaign of emails, that have been sent to us?

Mr Lucy —We are. We have received some 20 complaints today, but we get each more each day.

Senator SHERRY —Yes, I am in the same position.

Mr Lucy —There are some issues within that that are frankly somewhat concerning because a number of the parties that are writing to me at least are indicating that they have provided pin numbers, original wills and so on. That superficially causes us an issue because we wonder why those sorts of pieces of information in documents would be in a client adviser’s file. We have certainly sought that under notices information from Mr Bristow. He chose to provide the information in a potentially lot broader segment of information than we required. We are fully entitled to seek the information that we have sought and so therefore the emails are factually incorrect as to what our entitlements are. We are in the process of scanning the documents and, as soon as we can identify which documents are simply of no interest to us, we will return them. Within a week—indeed, I hope before the end of the week—we will be writing to those complainants just to let them know that this is the process. I guess it is also fair to say, particularly because of these levels of inquiries, we can advise that we are investigating Mr Bristow.

Senator SHERRY —Certainly he seems to admit himself that he is under investigation.

Mr Lucy —The world ‘investigation’ can be used loosely. I am not using it loosely.

Senator SHERRY —Investigating his file, certainly.

Mr Lucy —Yes.

Senator SHERRY —Thank you for that. That is appreciated. I notice that in some of the emails you are copied in along with Mr Cooper and my colleagues Senator Wong, Senator Murray, Mr Kevin Andrews, Mr Chris Pearce. On other emails you and Mr Cooper are not copied in.

Mr Lucy —Okay.

Senator SHERRY —Thank you, if you could have a look at that.

Mr Lucy —Thank you for that. From our perspective, we can do it as soon as you like, because we are in the process of writing and it would be good to catch all the people who are expressing an interest.

Senator SHERRY —Yes. I have about 35 or 40 at this stage. A few seem to keep coming in each day. I will get my office to provide you with a list.

Mr Lucy —Thank you.

Senator SHERRY —But I suspect that it is largely common, if not totally common.

Mr Lucy —Yes.

Senator SHERRY —Thank you for that. On the issue of the promissory note and the $50,000 exclusion zone, or the $50,000 figure which we have touched on on other occasions, I refer to your public statement in the Australian Financial Review that, whilst any change was up to government, adding an extra zero or two to the $50,000 benchmark could be a simple way to give unsophisticated investors more protection from any copycat schemes. Where is this at? I have to say that, surprisingly, I have heard of no action from the government in this regard.

Mr Lucy —I am not able to speak on behalf of the government.

Senator SHERRY —I understand that, but have you had liaisons with them? Given your public statements, you must have had some communication with the government or the department on this issue.

Mr Lucy —We have with the department.

Senator SHERRY —Can you indicate to me approximately when you raised this issue of the promissory note exclusion?

Mr Lucy —We have had discussions more than once. It really has been an ongoing dialogue. But certainly to the best of my knowledge the most recent would be perhaps a month ago.

Senator SHERRY —Can you recall—again I do not want the exact date—when you first raised this issue with the department?

Mr Lucy —Around the time of that press comment that you refer to.

Senator SHERRY —One of the reasons I raise this is that in Senate question time Senator Coonan, representing in the Senate, claimed in her response—in terms of the issue of the $50,000 and increasing it—there was no loophole.

Mr Lucy —I am aware of that. The truth is that this is an extraordinarily complex legal issue, frankly. I guess the discussions and the matters which we have had before the court really identify just how complex it is. I do not think that the $50,000 or some greater figure could ever be described as a loophole, and I think that the government is correct to say that there is no legislative loophole. My observation regarding the increase to the cap, as I said, is not under the heading of a loophole or otherwise; it is just simply a mechanism of addressing one part of it—that is, the sophisticated or investor part.

Senator SHERRY —Senator Coonan claimed in question time that ASIC has always had sufficient power to deal with promissory notes under chapter 5C of the Corporations Act.

Mr Lucy —I guess that again has been before the court and, indeed, this week it is again before the court in a matter regarding FICS.

Senator SHERRY —I understand that that will be handed down today.

Mr Lucy —Certainly this week. I cannot say that it will be today, to be honest. But this is an area that is extremely complex. For our part, we are anxious not to get into too much dialogue about the interpretations of some of these legal issues because we do not want to be in a position that will prejudice some of the actions that we are now taking.

Senator SHERRY —But you have expressed general concern on a number of occasions about at least potential limits to your power to act early in respect of Westpoint.

Mr Lucy —That was more to do with the issue of the intelligence we were getting regarding whether or not the business was insolvent and/or having financial difficulties as far as their business model is concerned. The issue was regarding the promissory notes we took to the courts in 2004, from recollection. It was before the Western Australian Supreme Court and then went on to appeal, and we heard the outcome of that appeal earlier this year.

Senator SHERRY —But that was part of it. Part of your general difficulties with Westpoint, certainly as you have argued, has been this issue of the $50,000 promissory note.

Mr Lucy —Because of the complexity of it; that is quite so.

Senator SHERRY —Yes.

Mr Lucy —But the complexity has not gone away; it still exists.

Senator SHERRY —I know. I want to get to some other complex issues or new issues I have been made aware of. Do you consider this issue—the $50,000 level—as part of the overall difficulties of Westpoint, an important issue and one that does need to be dealt with?

Mr Lucy —Frankly, I think that as time has gone on it has become less crucial. Initially, we thought that many of the investors might have been involved because of direct marketing and/or being advised by unlicensed advisors. We are now in a position to know that the overwhelming majority of investors went in through licensed advisers. So in that sort of an environment the $50,000 and/or the issues to do with the promissory note probably are not quite so relevant.

Senator SHERRY —But they are still an issue.

Mr Lucy —They certainly are not so acute.

Senator SHERRY —But they are still an issue.

Mr Lucy —They are an issue as far as ultimate enforcement action goes. But as for the decisions by people to invest, they are probably not so relevant.

Senator SHERRY —How do you justify then the appeal in respect of the WA Supreme Court decision on this matter?

Mr Lucy —Do you mean the first appeal?

Senator SHERRY —Yes.

Mr Lucy —It was because we disagreed with the decision.

Senator SHERRY —You mentioned FICS in an earlier response. I understand that you met with some members of the Westpoint investors group and indicated to them that the issue of lifting the cap—it is $100,000—that FICS has in respect of its ability to award compensation was under consideration by FICS.

Mr Lucy —I do recall that discussion. I think that it was more of a recommendation to FICS that they might seek from the advisers an increase in the amount.

Senator SHERRY —Did you specifically mention any figure?

Mr Lucy —Not to my recollection.

Senator SHERRY —Are you aware that FICS has released its new rules?

Mr Lucy —I am not.

Senator SHERRY —Are you aware of the special edition, issue 41, from 26 October?

Mr Lucy —My office almost certainly is, but I am not.

Senator SHERRY —Are you aware of that, Mr Cooper?

Mr Cooper —No.

Senator SHERRY —Unfortunately the Westpoint people are in for a bit of a disappointment because, right at the end of it, it says:

albeit that this issue had been part of the consultations that led to this.

Mr Lucy —Yes.

Senator SHERRY —It continues:

Mr Lucy —I note that you referred to the fact that they have deferred it. I am obviously not able to talk about the reasons that they have deferred it as distinct from making a decision. It can, of course, still be increased with the consent of the parties. So, to the extent that the parties agree to extend it, they can.

Senator SHERRY —But I think that is hardly likely the way things are going.

Mr Lucy —It is still early days. One of the consequences of our investigations is that the level of tension being applied to a number of these parties is certainly increasing, and it may well be that in the fullness of time some those parties therefore, because of that tension, decide that FICS might still be the appropriate mechanism for dealing with these issues.

Senator SHERRY —But the fact is that there is $100,000 limit.

Mr Lucy —Yes.

Senator SHERRY —You believe it should be increased.

Mr Lucy —We have suggested that, where parties have amounts greater than $100,000, they should seek an increase. So, yes, we are certainly on the record for saying so.

Senator SHERRY —FICS carried out a review of their rules, including the $100,000 limit. They have finished the consultation, published new rules, amendments to FICS rules, but they have decided to defer this decision of the $100,000 limit. Can you—not necessarily you personally—take this issue up with them?

Mr Lucy —I will.

Senator SHERRY —It is certainly causing concern amongst some of those people who would wish to apply for compensation through FICS and are unable to do so. Do you have any specific regulatory power over FICS other than giving the general authorisation for it to be a dispute resolution process?

Mr Rodgers —No.

Senator SHERRY —You can withdraw recognition of it if you do not believe it is operating adequately, can’t you?

Mr Rodgers —Theoretically we could.

Senator SHERRY —It seems to me you are in a position to apply some guidance to FICS.

Mr Rodgers —I think ‘encouragement’ would at least be a fair description.

Senator SHERRY —I use the word ‘guidance’. ‘Thumbscrew’ might be another.

Mr Lucy —Our dialogue with FICS has been constructive and helpful. We will take the point that you raise on notice and go back to them.

Senator SHERRY —One of the problems that has been drawn to my attention with this $100,000 limit is the example of a Ms Lawrence, who, through Brighton Hall Financial Services, sought financial advice. She invested $102,000 in Cinema City and then went back to Brighton hall and was convinced to invest $85,272 in Ann Street. One amount was over $100,000.

Mr Lucy —Yes, $102,000.

Senator SHERRY —The other amount was under $100,000. Clearly there are two separate transactions, though, and not contrived in any sense. But FICS are taking the view that they cannot deal with the transaction under $100,000. Is that your understanding of the way FICS operates?

Mr Lucy —That specific example I would have to take on board because, again, many of these issues are quite complex because the description of that matter for that lady that you referred to is not uncommon in that we have a number of people who have multiple investments, but it is not automatic as to whether or not they are separate advances and so therefore should be treated separately by FICS. I will certainly take on board that particular example.

Senator SHERRY —Yes, because there are, as you say, a number of people in these circumstances with clearly two separate occasions, two separate investments and two separate entities, but—

Mr Lucy —Indeed many go well beyond two.

Senator SHERRY —Yes, but in this case they argue that they cannot deal with the one that is under $100,000. There is another issue with respect to FICS’s jurisdiction—and I must say I was surprised to hear this. I understand that, if ASIC bans a financial adviser with respect to Westpoint, or anything for that matter, and the issue and the compensation has not been determined by FICS at that point, FICS no longer has legal authority to handle the dispute because the planner has been banned. Is that correct?

Mr Lucy —I will ask Mr Rodgers to respond to that.

Mr Rodgers —I think that is correct in the sense that the obligation to remain a member of FICS flows from the holding of a licence or being a representative. So that obligation drops away once they cease effectively to be a person regulated through the Corporations Act.

Senator SHERRY —Doesn’t that present FICS and you with somewhat of a dilemma if you justifiably remove the licence from a planner before FICS has determined compensation for these Westpoint victims?

Mr Rodgers —The case you are talking about will apply where you have an individual planner who holds a licence in their own right. It is the obligation of the licensee—and, of course, a banning order applies against an individual rather than a licensee. So taking a large firm with 100 advisers, the fact that we ban one of those advisers will not disable FICS from making compensation orders in relation to the licensee, because the licensee, of course, is responsible for the conduct of all of its then advisers.

Senator SHERRY —Unless, as you say, it is an individual, not paid under licence.

Mr Rodgers —Yes. It is being a licensee that commits you to being a member of a dispute resolution scheme like FICS and it is true that we understand that removing a licence has the potential to disconnect that compensation route. You can be confident that we are well aware that consequence.

Senator SHERRY —So this matter has been discussed with FICS?

Mr Rodgers —It is an operation of the Corporations Act rather than FICS, I think.

Senator SHERRY —Yes, but I understand from the concerns that I have had referred to me that it is an issue of concern in FICS.

Mr Lucy —If it has not been discussed with FICS, I will ensure that it will be.

Senator SHERRY —But it is almost a catch-22 here.

Mr Rodgers —It is the voluntary surrender of a licence that creates the problem area.

Senator SHERRY —At least some of the Westpoint victims have raised this issue—naturally, where it is found to be appropriate by ASIC wanting action taken against a particular planner, if that is found to be appropriate after you have completed your investigation. But the difficulty for some at least is that that then removes their ability to receive compensation. That is causing them some concern and distress. But you seem to be aware of the issue and presumably you will be able to take that into account, at least in your timing on these matters.

Mr Rodgers —We are well aware of the issue.

Senator SHERRY —Another difficulty about compensation and FICS is the issue of PI insurance. Are you aware of some of the issues concerning lack of or insufficient PI insurance?

Mr Lucy —That is on compensation more generally, so again I will ask Malcolm to respond to that.

Mr Rodgers —There is no current obligation under the act for people to hold PI insurance. I do not speak as an expert on this, but my understanding of the information that we have gathered through Westpoint is that it is not universally true that all advisers hold PI insurance. It is true that the terms of some of the PI insurance that advisers currently hold look problematic if you are looking for PI as a source of investor compensation.

Senator SHERRY —We could end up in the situation where, because of lack of PI insurance—whether it is not sufficient or, in fact, does not apply at all—even if fault is found and even if you do take action and withdraw their licence, some of the investors may not end up with anything.

Mr Lucy —I think that is a big assumption. Before one looks at the levels of insurance, for example, there is a question of what is returned by the administrators, liquidators and so on. Therefore, in the final analysis, which is the point you are raising, quite so; it may well be that in the end that top-up that people are looking for to be provided under the PI cover may not be available.

Senator SHERRY —It may not be there, yes.

Mr Lucy —Correct.

Senator SHERRY —I thought the issue was that PI insurance was to be a requirement. What has happened?

Mr Rodgers —The general provision in the Corporations Act that requires a licensee to have arrangements for compensation came into effect on the enactment of the financial services regime.

Senator SHERRY —Which was when? Can you remind me of the date?

Mr Rodgers —It was 11 March 2002, I think. At that stage, as you would be aware, the market for general insurance products in Australia was in some disarray following the collapse of HIH. As I understand it the government undertook to examine in more detail the use of a requirement that contemplated rather than necessarily expressly required that the obligation would be met by PI insurance. The government issued consultation papers a couple of times, but the final form of the obligation—in effect, the regulations that sit under the Corporations Act provision—is not yet settled.

Senator SHERRY —Here we are in November 2006 and PI insurance has not been finalised for, in this case, planners. And again this is potentially a difficulty in respect of Westpoint, and other people for that matter, because they have either insufficient PI insurance or none at all. Is ASIC concerned about this lack of PI insurance, given that it was supposed to apply from March 2002? I accept the difficulties with HIH and the fallout and all that, but here we are in November 2006 and the PI insurance still has not been settled. This will be an issue for other investors in terms of any difficulties they have outside the Westpoint matter.

Mr Lucy —Potentially.

Senator SHERRY —Yes, potentially it will, won’t it? So are you concerned that this matter has not been settled yet?

Mr Rodgers —I think it would be fair to say that we would welcome the finalisation of what has been a difficult area to develop.

Senator SHERRY —Yes, I understand that it has been difficult, but it seems to me that, in the case of at least some of the Westpoint investors, when all this is concluded, the lack of PI insurance will be an issue for at least some of them.

Mr Lucy —That is likely.

Senator SHERRY —If this matter of PI insurance were settled tomorrow—I know that it is not going to happen tomorrow, even though we are more than four years on and it should have been settled—would that have any effectively retrospective application to the cases currently before FICS? When would it effectively apply from?

Mr Lucy —My understanding with PI insurance is that, firstly, it is an extraordinarily complex area because it requires people to give undertakings and to give full disclosure. It is also a question of whether or not it is on a claims-made basis. So one could imagine that, if I was taking out PI insurance with a prospect of being sued, on a claims-made basis I am not going to get insurance cover.

Senator SHERRY —Or you will get it at some extraordinary cost.

Mr Lucy —Precisely. So it is a very difficult area and it is also made difficult when you seek to cover illegal acts, because any act that is within the capability of the insured to trigger—that is, trigger essentially the collapse of the cover or make the cover void—is very difficult to manage. For example, even the most basic obligation of the insured to give notice of when a claim is likely can just simply be set aside either deliberately or inadvertently by the insured.

Senator SHERRY —Indeed, I am told, not just by people who are claimants in respect of Westpoint but also by at least some of the compliance people who operate in this area, that this is a significant difficulty—the lack of PI insurance in settling or at least attempting to settle some of these issues.

Mr Lucy —Our observations would be that it is too early for us to form that view because we are not at that point, frankly, so I could not support that comment at this stage.

Senator SHERRY —Let me take the converse. Where a person has PI insurance, isn’t it generally true that they cannot settle a dispute with a client, Westpoint or not Westpoint, without the agreement of the PI insurer and, if they do settle, it is highly likely that they will not receive the PI insurance from that company?

Mr Lucy —You are talking generally. Certainly it is my experience that, when an insurer is obliged to, in essence, stand behind their cover and they look as to whether or not there are opportunities to step aside from the obligations, they often stand in the shoes of the party to see whether or not they can mitigate or reduce any such responsibilities and negotiate. So I think that is likely down the track.

Senator SHERRY —Are you also aware that on 12 September FICS sought a declaration in the Federal Court regarding its ability to deal with complaints and hence financial advisers in respect to Westpoint?

Mr Lucy —I believe that is the matter before the court at the moment.

Senator SHERRY —Does ASIC believe FICS have sufficient powers to deal with issues on promissory notes?

Mr Lucy —I do not think we should comment on that because that is before the court and that is very much the heart of the issue.

Senator SHERRY —Did you make any submission at the hearing?

Mr Lucy —I understand that we did take an intervening role in that proceeding, yes.

Senator SHERRY —Can you indicate in what way?

Mr Lucy —Supportive of FICS.

Senator SHERRY —I understand that to date FICS have now received 240 complaints, so a substantial number are now entities before FICS in respect to Westpoint.

Mr Lucy —I cannot verify that number, but it is consistent with my expectation.

Senator SHERRY —On another matter—and I have raised this with you before on at least two occasions—have you kept the tax office informed in respect to self-managed superannuation funds where there was a Westpoint investment?

Mr Lucy —Yes, we have. Indeed that liaison and discussion is literally ongoing. I am aware of further discussions held this week.

Senator SHERRY —I will pursue it with the ATO. I accept what you say, but when I have gone to the tax office and raised this matter with them there has been no action—nothing.

Mr Lucy —I am personally aware of ongoing discussions, again including this week.

Senator SHERRY —The discussion is fine, but I have asked the ATO, ‘What have you done about investigating the self-managed superannuation funds structures?’ They have regulatory responsibility for this. Certainly as at the last estimates, which was the second time I raised it with them, nothing had been done.

Mr Lucy —That is a matter for them of course.

Senator SHERRY —I accept that it is a matter for them.

Mr Lucy —All I am saying is that there is very effective dialogue in all sorts of areas between ASIC and ATO.

Senator SHERRY —Okay. In terms of alternative disputes, are there any other dispute mechanism that exist if FICS did not exist?

Mr Lucy —Are you talking about the Westpoint environment?

Senator SHERRY —No, generally.

Mr Rodgers —There is the statutory dispute mechanism, the Superannuation Complaint Tribunal. I cannot be certain of the exact number, but there are four or five, perhaps six schemes that we have approved under our powers under the act.

Senator SHERRY —Could you take that on notice and provide me with just a brief overview of them?

Mr Rodgers —Yes.

Senator SHERRY —In terms of super, for example, that is fine, but a lot of the FICS is nonsuper.

Mr Rodgers —That is correct.

Senator SHERRY —Probably the majority, I think from our previous discussions.

Mr Lucy —I am not sure about that. I think you are right in saying that a significant amount is from super.

Senator SHERRY —I think you have given us a figure of approximately a third.

Mr Lucy —Again, I am not sure whether that is referring to the dollars or the actual transactions.

Senator SHERRY —Whatever it is.

Mr Lucy —Whatever it is, it is a lot.

Senator SHERRY —It is a lot, but there is a lot nonsuper as well.

Mr Lucy —Correct.

Senator SHERRY —I will return briefly to the issue of PI insurance. Have ASIC been in dialogue with the department on the matter of the lack of PI insurance?

Mr Lucy —The whole issue of PI insurance is part of the ongoing dialogue, and I am aware that certainly the insurance industry has also been involved in those sort of discussions.

Senator SHERRY —What should investors do at the moment? Is there any formal disclosure to investors that when they go to a licensed planner they do not have sufficient PI insurance at the present time?

Mr Lucy —It is a broad question.

Senator SHERRY —I know it is.

Mr Lucy —Step one is whether or not the adviser is licensed.

Senator SHERRY —Yes.

Mr Lucy —I think whether or not the adviser has forms of compensation in place, and the nature of those forms and what that compensation might be, might be quite a legitimate question. Again, advice regarding PI insurance does not automatically mean that there is a level of cover that, at the end of the day, is going to be there to provide.

Senator SHERRY —I accept that.

Mr Lucy —So therefore right now, without this formal platform being in place, one has got to be very careful that you do not mandate it because otherwise an investor might quickly conclude a level of comfort that may indeed be unreliable.

Senator SHERRY —Sure, but at least there is a possibility of something. If there is no cover, there is nothing.

Mr Lucy —Yes.

Senator SHERRY —If there is cover, there is at least a possibility of cover.

Mr Lucy —That is true, but then again that is a question of the quantum of the cover and the level of claims. It is a very complex area.

Senator SHERRY —I accept that it is complex. It is intended that PI insurance should be provided.

Mr Lucy —That is one alternative.

Senator SHERRY —So you are suggesting that perhaps there may be no PI insurance coverage at all after all these consultations are finished.

Mr Lucy —It is not for us to make that observation. All we are saying is that PI cover by itself may not be the total answer. It may be that it is a very key plank of any response, but it may not be the entire answer.

Senator SHERRY —I accept that it is not the entire answer and that it is complex. Are consumers being informed at the moment that there is no PI coverage requirement? What are they being informed about in this area, if anything?

Mr Lucy —I think it is a matter that is generally known in the community.

Senator SHERRY —Do you think so?

Mr Lucy —Yes. The licensed advisers—

Senator SHERRY —In the adviser community?

Mr Lucy —Yes.

Senator SHERRY —Yes, I am sure that is the case.

Mr Lucy —They are the people who are giving the advice.

Senator SHERRY —I am sorry; when you said the community, I thought you were referring to the general consumer.

Mr Lucy —I think that it has received a fair level of press in any event but, in particular, the licensed adviser community would be very well aware of it.

Senator SHERRY —I accept that the licensed provider community would; there is no doubt about that. But you certainly would not contend that the average punter on the street is aware that financial planners do not have PI insurance.

Mr Lucy —I think the likelihood is that the average punter, as you refer to them, would not understand the issue of compensation, frankly, at all, let alone whether or not it is provided by PI or any other form.

Senator SHERRY —I think that is probably right. But, given that more than four years ago it was indicated that PI insurance would be required and there is no requirement as of today, some consumers would at least expect that there is insurance coverage of financial planners in this country.

Mr Lucy —I cannot speak on behalf of those consumers but the facts are that this is a matter that is before the government and I am sure that they are working on it.

Senator SHERRY —Yes, they have been working on it for more than four years and it is still not concluded. As you say, that is not your fault.

Mr Lucy —It is not our responsibility.

Senator SHERRY —But you are responsible for consumer protection information generally; you have significant responsibilities in that area.

Mr Lucy —Quite so, but this is not an issue that people are blind to. This is an issue that is very complex. There has been a high level of stakeholder engagement on it and at this stage the government is still yet to conclude their position.

CHAIR —Senator Sherry, I was going to take the morning break about now. Is this a convenient time for you?

Senator SHERRY —Yes.

CHAIR —Can you give us some idea of how much longer you will be with ASIC?

Senator SHERRY —What time is lunch break?

CHAIR —It is at 12.30.

Senator SHERRY —Certainly through to 12.30.

CHAIR —Assuming that we resume with APRA at 1.30—and under the current arrangements we have APRA, then the Productivity Commission and then the ATO—can we send the ATO away until after dinner now?

Senator SHERRY —We certainly will not have as much in APRA as in ASIC.

CHAIR —Can we send the ATO away until, say, after 3.30?

Senator SHERRY —Yes.

CHAIR —What about the Productivity Commission?

Senator SHERRY —The same with the PC.

Senator Minchin —Mr Chair, could I respond to a question that Senator Sherry raised?

CHAIR —Yes, Minister.

Senator Minchin —Senator Sherry just asked in the context of the government’s proposed changes to superannuation taxation the question of what might or might not appear in MYEFO with respect to those decisions. I am advised that, indeed, MYEFO will reflect the government’s decisions as announced in, I think, September in respect of that legislation and that measures dealing with both the expenditure and revenue effects of those proposals will be reflected in MYEFO.

CHAIR —I should have asked you too, Senator Sherry, about the fiscal group of Treasury. I do not think we sent them away until after dinner. Are they still likely to be reached later this afternoon, or should we send them away until after eight?

Senator SHERRY —After dinner, because the tax office will take us through to dinner.

CHAIR —That is what we will do. Officers of APRA will not be required before 1.30; officers of the Productivity Commission and of the ATO will not be required before 3.30 and officers of Treasury in output groups 2, 4 and 1 will not be required before 8 pm.

Proceedings suspended from 10.49 am to 11.05 am

Senator SHERRY —Just returning briefly to the issue of self-managed superannuation funds—not in the context of Westpoint—when I go through your press releases, which I do read almost every day because there is almost one issued every day, what strikes me about the level of activity of ASIC is that a significant proportion seems to be around issues to do with self-managed super funds, either illegal contrived schemes and actions taken in respect of promotion thereof et cetera. That would be a fair description, wouldn’t it—a significant amount of activity?

Mr Lucy —Yes, it would be.

Senator SHERRY —When you become aware of a difficulty involving a self-managed superannuation fund, do you pass that identification on to the tax office?

Mr Lucy —It depends upon the nature of it but, yes, our MOU between the Taxation Office and ourselves requires that there is regular liaison and communication. So, yes, we meet that.

Senator SHERRY —Given that the tax office are responsible for regulation of the SMSF sector, do they come back to you? If you pick something up and inform them—because, frankly, they do not pick much up at all in this area—do they come back and liaise with you about what their investigations have revealed, if anything?

Mr Lucy —No, invariably not. They may well come back and ask for further information. But as far as their own activities go, again, they have their own secrecy provisions, so they are very careful to make sure that they do not breach those secrecy provisions.

Senator SHERRY —You have a working relationship with APRA, obviously.

Mr Lucy —Yes.

Senator SHERRY —They are the regulator of other superannuation funds.

Mr Lucy —Yes, the big end of town, so to speak.

Senator SHERRY —Yes, that is broadly true. So, in a sense, the secrecy provision may be a greater deterrent than the tax office coming back to you. I do find that rather strange.

Mr Lucy —I am not sure whether ‘deterrent’ is perhaps the right word, but it certainly is a restriction in that the Australian Taxation Office is quite severely curtailed as to information they can provide regarding taxpayers.

Senator SHERRY —Even to another regulator such as you, where there is an issue that you may jointly hold?

Mr Lucy —Yes.

Senator SHERRY —You would not have the same constraint in your relationship with APRA?

Mr Lucy —Correct.

Senator SHERRY —That is interesting. Is there any consideration of this difficulty at present?

Mr Lucy —Yes, in particular in Wickenby, and there is likely to be legislation considered regarding communication of information from the Australian Taxation Office to ASIC under Project Wickenby.

Senator SHERRY —So it is an issue in other areas of oversight and regulation.

Mr Lucy —Yes.

Senator SHERRY —Wickenby is the high-wealth individual investor?

Mr Lucy —Not necessarily high wealth but I guess aggressive tax avoidance and evasion schemes.

Senator SHERRY —Whilst we are dealing with the issue of coordination with other regulatory authorities, there was the recent report on so-called red tape, if we could dub it that—a review which identified a number of issues, certainly 19 or 20, regarding coordination between APRA and ASIC. Can you give me an update as to the progress that has been made in dealing with those recommendations?

Mr Lucy —Are you referring to the Banks report?

Senator SHERRY —Yes.

Mr Lucy —I will ask Mr Rodgers to provide additional detail, but firstly ASIC very strongly welcomed the Banks report. We felt that it was a very useful and constructive exercise. We also are very pleased that the government has picked up the overwhelming majority of the recommendations. For our part, ASIC had already commenced a lot of work in respect of better regulation—that is our description, ‘better regulation’—and part of that is to recognise that we need to work closely with APRA to ensure that there is no inappropriate or unnecessary duplication. So we formally formed a working group of both APRA and ASIC to look at this and Malcolm Rodgers is leading that from an ASIC perspective, so perhaps I can invite him to speak to it further.

Mr Rodgers —The work that we are doing in that working group builds on an already close relationship, if you like, in ordinary operational matters between ourselves and APRA where we have connections at our compliance level, at the enforcement level and to some extent at the policy level as well. The joint working group is looking at whether there are opportunities for removing duplication or rationalising in areas where we are talking about a commonly regulated population. Each regulator’s legislation requires something that looks as if it serves the same purpose as the other regulators’ legislation. We are looking at the moment at whether we can streamline some of the standardised reporting that comes to both APRA and ASIC. We have been looking at the regime about breach notifications, because there is, as you will be aware, I think, some noise amongst the regulated population about effectively different rules.

Senator SHERRY —Yes, a different approach.

Mr Rodgers —That may require a legislative solution. The other area we are looking at is the extent to which we can streamline the licensing process for entities, particularly superannuation entities that require a licence from both of us.

Senator SHERRY —Do you have any indicative time frame when you think these issues will be concluded one way or the other?

Mr Rodgers —We made what at this stage of the year looks like a slightly aggressive promise that we would actually bring that phase of the work to a conclusion by 31 December and at least be clear about the conclusion that we had reached. I say it is aggressive, but it is still doable and I think we are on track to do that.

Senator SHERRY —Maybe we can explore this matter again in February next year. Coming to a case that did involve joint ASIC-APRA activity, I want to go to the case of the enforceable undertaking that ASIC received in respect of AXA and their superannuation fund. I do not think we discussed this with ASIC; it was raised with APRA. It is my understanding that you did receive an enforceable undertaking from AXA—I think it involved seven officials—regarding decisions in respect of a defined benefits superannuation fund that AXA operated for some of its staff?

Mr Lucy —We are not prepared for a discussion on AXA because AXA happened quite a long time ago. So I expect the best thing for us to do is to take your questions on notice and respond more comprehensively.

Senator SHERRY —Okay. The issue of the defined benefit fund and the changes made and the notification of the changes to the affected employees—that would have been the area of ASIC’s concern, wouldn’t it?

Mr Lucy —Yes.

Senator SHERRY —Then my understanding is that, when the enforceable undertaking was entered into, ASIC did not proceed any further.

Mr Lucy —That is my understanding.

Senator SHERRY —That is my understanding, yes. However, APRA had another action—

Mr Lucy —Quite so.

Senator SHERRY —which has just concluded, which I will be going to them about.

Mr Lucy —Yes, that is for APRA.

Senator SHERRY —In respect of those seven individuals with AXA, ASIC, once the EU was entered into, determined to take no further action against those particular individuals.

Mr Lucy —That is my understanding.

Senator SHERRY —What action would be open? Potentially, could you take banning action against those individuals if you wished?

Mr Lucy —I guess the key point is that we chose not to.

Senator SHERRY —Exactly. But you had the power. I am not suggesting that it should have been used in those circumstances, but you had potentially the power to utilise.

Mr Lucy —I think we should take that on notice because we are identifying seven individuals and we should be very clear, very precise, in that response.

Senator SHERRY —In asking these questions I am making the point that I do not believe you should have gone any further. I actually agree with the conclusion you entered into with the enforceable undertaking. I am not criticising or suggesting criticism in any way, shape or form of ASIC’s role.

Mr Lucy —Yes, I understand your approach.

Senator SHERRY —On a somewhat related matter, a defined benefits superannuation fund, are you aware of the issues facing some 1,800 Telstra employees in respect of the cessation of membership of the current superannuation defined benefit fund arrangements?

Mr Lucy —No.

Senator SHERRY —Are you aware of the notices that have been issued to these employees by Telstra in respect of them being required to cease their membership of the CSS superannuation fund?

Mr Lucy —Still no.

Senator SHERRY —So you have had nothing referred to you at all on this matter to date?

Mr Lucy —I cannot speak for the agency, but I have not. To the extent that we have, I will come back to you.

Senator SHERRY —Good. I will provide you with a copy of a notice that Telstra has issued to approximately 1,800 employees—I do not have it here now, but I will send it on—which I would think requires examination on this issue, because I suspect prima facie it does breach FSR requirements. There are a range of other issues about disadvantage to be suffered et cetera. So I will send you a copy of that notice that Telstra has issued to the employees and ask that you examine whether or not in fact it is a legal document in the form that it has been issued, and I will also ask you to investigate other issues surrounding this matter. I will be in communication with you on the matter.

Mr Lucy —Again, you understand our use of the word ‘investigate’ is not necessarily the way that it is widely described, but we will have a very close look at what you send to us.

Senator SHERRY —‘Examine’?

Mr Lucy —Examine, certainly.

Senator SHERRY —APRA are certainly aware of the matter because I have referred it to them—not the notice specifically but the general issue of the disadvantage to be suffered by those employees. But I note that in the AXA case you did take action and got an enforceable undertaking, so I have every confidence that ASIC will act very vigilantly in respect of the Telstra employees—the 1,800 of them.

Mr Lucy —Without fear or favour I think is the response.

Senator SHERRY —Yes. I am pleased to note your activity in this regard, and I will refer some documentation on to you about the matter.

Senator Minchin —Chair, can I for the record—seeing as Senator Sherry has raised the issue of superannuation with respect to Telstra employees—just make the point that the government has followed long established practice in regard to this matter in that employees of an entity that is no longer owned or controlled by the federal government should no longer be members of the government’s superannuation schemes. This is the policy adopted by the former Labor government with respect to entities it privatised, and it is long-established practice that that is the case. Once the government ceases to own more than 50 per cent of Telstra, it is appropriate and proper—with great respect to the taxpayers—that those employees in superannuation for the projected forward be the responsibility of the company. We of course will honour the obligations that involve the accrued superannuation entitlements of those employees while they have been in the CSS and PSS ,and they will be honoured in full. The matter of Telstra informing its employees who remain in the CSS and the PSS of the arrangements going forward is a matter for Telstra. I think a certain amount of partisan politics is involved in Senator Sherry using this committee to seek to assert, without any evidence or any justification, that Telstra is somehow possibly in breach of some rules with respect to that. It is a wild assertion, and one that I have no evidence of and he has not produced any evidence to support.

Senator SHERRY —I have a document.

CHAIR —Thank you, Minister.

Senator SHERRY —Can I just conclude on this matter of Telstra, Chair?

CHAIR —Yes.

Senator SHERRY —I think there are two issues here, Mr Lucy. One is the disclosure document issued by Telstra to its employees in regard to this matter. That is one issue—and I do get a lot of secret documents or documents that some people try to keep secret on this matter. So there is that issue, and I will send you the document. I certainly believe prima facie—I do not believe that I am making a wild accusation—that the document that Telstra have issued prima facie does not comply with FSR.

But there is the second and I think much more important issue about the legal capacity of either the government or Telstra to effectively breach the promise made in respect of a defined benefit superannuation scheme and effectively force the employees to leave that scheme without adequate compensation. That was a central issue in the AXA case. But I will refer the documentation on to you.

Senator Minchin —Again, Mr Chairman, I cannot let that accusation go without some response. As I said before, it is long-established practice and properly so—and as practised by the former Labor government—that, when employees cease to be employed by a government owned or controlled entity, their membership of the CSS/PSS ceases. That is clear to all members when they enter these schemes. It is well known. It has always been telegraphed that, at the point at which the government’s ownership of Telstra drops below 50 per cent, their membership of the CSS/PSS would cease, while all their benefits accrued to that point would, of course, be honoured in full well into the future at taxpayers’ expense. But to suggest that there is any improper activity on our part is, again, a partisan political assertion which totally contradicts the behaviour of the Labor government on this matter, which is entirely consistent with ours.

Senator SHERRY —There is one point of inconsistency, and this relates to the specific example.

CHAIR —Senator Sherry, I am not going to limit you, but this is not really a forum to debate the issue; it is a forum for questions. If you want to put propositions to Mr Lucy and the officers and ask them to comment on those, you can do that of course. But I would rather avoid a debate on this issue, and I invite you to proceed with questions.

Senator SHERRY —Sure. As part of your investigation, Mr Lucy, and the issue of removal of individuals from a defined benefit fund, in this context, as you will note from my previous comment—and this is a question—in the Qantas case, which the minister has referred to on frequent occasions, a comparable alternative offer was made in respect of the pension promise, which is not occurring in respect of the Telstra matter. You might care to investigate that aspect of it as well. But I will refer that matter to you in writing. I have already made the referral to APRA.

Mr Lucy —We will look forward to receiving it; thank you.

Senator Minchin —Just for the record: as I understand it, it should not be believed or asserted out of this hearing that ASIC has agreed to investigate this matter, which is no doubt what Senator Sherry will put in his press release. I understand that Mr Lucy has indicated that he acknowledges that Senator Sherry will be sending him something, but I would hope that there is no suggestion that ASIC has agreed to any sort of investigation at this point.

CHAIR —It was perfectly clear to me, Senator Minchin, that what Mr Lucy politely agreed to do was to receive a document that is going to be sent to him and nothing more.

Senator Minchin —Thank you, Mr Chairman.

CHAIR —That is right, isn’t it, Mr Lucy?

Mr Lucy —That is quite so.

CHAIR —Senator Joyce, were you looking for the call on anything?

Senator JOYCE —No, I am here to give moral support today.

Senator CONROY —I want to talk about prospectuses, and I am looking at your fido page on your website, under the prospectus section, as to why you must read them. It says:

And further it states:

I wonder whether you could just outline for me in general what ASIC’s role is in relation to prospectuses.

Mr Lucy —You will recall that before March 2000 the approach required parties to lodge or register a prospectus with ASIC. Parliament changed that in March 2000, so prospectus are lodged with ASIC to an extent on a random basis but also, to the extent where we believe that the prospectus itself has a significantly higher level of public interest, we will consider the prospectus. In considering the prospectus, there are three options. The first is to have regard to what is contained in the prospectus. Bearing in mind that we are relying entirely on what is contained in it and presented to us—we do not make our own independent inquiries—if we form a view that what is contained within that prospectus is satisfactory, we take no action at all. The second is, to the extent that we form a view that there are matters in the prospectus that require clarification, elaboration or adjustment, then we might extend the period of seven days and allow the company or the parties to make corrections. The third action available to us is to stop the prospectus.

Senator CONROY —So, in terms of this lady who says you have approved it, that is not an accurate reflection of the role of ASIC? I am just quoting from your own website at the moment.

Mr Lucy —Correct.

Senator CONROY —So just because something has been lodged with you and has gone forward, it does not mean that ASIC have approved it?

Mr Lucy —Quite so.

Senator CONROY —There is not some kind of sign-off or tick? People should not think that, because it has gone through your process, it has been approved or ticked off or anything at all like that, should they?

Mr Lucy —That is correct.

Senator CONROY —On 9 October this year, the Minister for Communications, Information Technology and the Arts, in response to a question without notice, told the Senate:

Is that an accurate description of ASIC’s role in the development of the Telstra prospectus?

Mr Lucy —I think there was quite a level of discussion in that series of general discussions.

Senator CONROY —I want to come back to that particular issue but, when the minister said that ASIC had signed off on the prospectus—‘Clearly, the prospectus complies with ASIC’s view’—I just want to understand what that means.

Mr Lucy —There was a lot of what I would describe as sort of colloquial discussion as to what was being dealt with by ASIC. I think the minister and a number of other parties referred to—to use your description—‘signed off’. But you are quite right. Indeed, ASIC’s role is not to sign off on any prospectus.

Senator CONROY —That is essentially what I want to confirm—that, notwithstanding that the minister said it was signed off, as you say on your own ASIC website, ‘Beware, this is a dangerous misunderstanding.’

Mr Lucy —That is correct.

Senator CONROY —You did mention that you were involved in some discussions. At what stage were you called in?

Mr Lucy —The parliament was involved in a number of discussions; I did not mention that I was.

Senator CONROY —It was reported widely in newspapers—and this is not about the content, Senator Minchin, so in no way am I seeking to go to the content; I just want to know what ASIC’s role was in the preparation—that ASIC had been called in for discussions around the prospectus. Did you initiate those? Did Telstra initiate those? Did Senator Minchin initiate those? Is it correct that you were called in for discussions on the Telstra prospectus?

Mr Lucy —No, it is not correct.

Senator CONROY —You would have seen, I am sure, those media reports?

Mr Lucy —Yes. There were a number of discussions in the media about that matter, but the facts are that we were not called in to any such meeting.

Senator CONROY —Were you involved in discussions?

Mr Lucy —With the government, no.

Senator CONROY —With Telstra?

Mr Lucy —Yes.

Senator CONROY —I am being careful not to transgress. I am just thinking of how to phrase the next question. Did Telstra contact you or did you contact Telstra?

Mr Lucy —I think it is perhaps better if I just provide a broader explanation—that is, because of the nature of the Telstra prospectus, this clearly falls into an area where we did take an interest in the prospectus generally, as we have undertaken in a number of significant public offerings. So our engagement is an entirely normal and consistent matter in that we looked and we had dialogue with the solicitors acting for both the vendor, the government and also Telstra. During that dialogue we were engaged with, as I said, the solicitors and representatives of the company and representatives of the department.

Senator JOYCE —Contingent legal issues that were going around in the background—you would be aware of them though, wouldn’t you, with Telstra?

Mr Lucy —Almost certainly, but our role is very much to deal with what is presented to us. Our role is not to make inquiry; our role is to deal with what is presented to us. To the extent that we have information that is presented to us where we feel there could be a better manner of disclosure or whatever, we would communicate that.

Senator JOYCE —I am referring to those COTS cases that just go on and on. Do you get to a point in time where you say, ‘Well, that issue is past,’ or does it always have to be declared?

Senator Minchin —Mr Chairman, this has nothing to do with the question of the process by which the Telstra prospectus is dealt with by ASIC. With great respect to Senator Joyce, the matter that is now raised really has nothing to do with the subject matter we are dealing with—which is, as I understand from Senator Conroy, the interaction between those responsible for the production of the Telstra prospectus and ASIC. I would ask Senator Joyce that, if he wants to pursue other matters, they be dealt with in another forum. They really do not have anything to do with this particular question.

CHAIR —I was not sure, I must say, Senator Minchin, where Senator Joyce was going. It is my practice generally to allow other senators to come in on the line of questioning of a senator who has the call if they have some germane point to make or want to elaborate on it. Without, I must confess, listening very carefully, I was not sure where Senator Joyce was going with that.

Senator JOYCE —It was in reference to ASIC and knowledge of contingent issues that are floating around in the background because the Telstra issue had been brought up.

CHAIR —Have you finished with that line of questioning?

Senator JOYCE —Yes.

Senator CONROY —Thank you for that before, Mr Lucy. Did you contact Telstra or did Telstra or the government contact you?

Mr Lucy —In respect of what?

Senator CONROY —Of the prospectus. I think you were involved in discussions. Now I am just trying to ascertain how those discussions came about.

Mr Lucy —At officer level there was, as you would expect in a situation like this, open dialogue between the solicitors acting for both parties and our officers were involved in that dialogue from time to time.

Senator CONROY —I am asking whether they contacted you. Who contacted you? Did Telstra contact you, did the government contact you, or did ASIC contact them? Who initiated the contact?

Mr Lucy —There has been no communication from the government, so we can eliminate that. But there was communication backwards and forwards between ourselves and Telstra.

Senator CONROY —Who initiate the contact?

Mr Rodgers —Perhaps I can assist here. At quite an early stage—and I cannot remember the month; it would have been in the early months of this year—in the planning work in the areas for which I am responsible, we needed to understand how much work might be involved for us in dealing with the float of Telstra. I am not absolutely certain who initiated the phone call, but we had been in preliminary dialogue with the legal firms we knew were acting for the parties and at some stage, perhaps at our initiative—but those who deal in these things reasonably regularly know that, if it is not our initiative, it will be theirs—we said, ‘We should actually sit around a table and talk about what work might be involved.’ There were a number of those conversations throughout this year. I cannot tell you exactly who initiated the phone call.

Senator CONROY —Could you get back to me on who initiated the very first contact that then led to that process you are talking about. I understand that ASIC would normally, with something that is going to be the biggest float of the year, have initiated it themselves. I accept all of that, which is all general. I want to move to the specific though. Who contacted whom? Who initiated contact over the dispute over the form of words in the Telstra prospectus to do with the regulatory issues, the ones that were contentious in those last few days? I would like to know who contacted ASIC or whether ASIC contacted the parties when that dispute appeared to be flaring around those issues. Who initiated that contact?

Senator Minchin —Chair, I am getting increasingly concerned about the line of questioning being pursued by Senator Conroy and this goes to the issue we discussed last night. I take seriously Senator Conroy’s assertion of last night that he did not want to create any circumstances in which there could be any damage done to the current T3 process and I hope that he is serious—

Senator CONROY —I am trying to combine my questions—

CHAIR —Let the minister finish. Stop interrupting.

Senator Minchin —I accept that the Labor Party does not support this sale, but I would have thought, given the parliament has now approved it and that the executive government has initiated a sale process and much is at stake, that the opposition would not seek to use this estimates process to do anything to disrupt or damage that process. I think this line of questioning is now beginning to become partisan and political and it does risk the potential for inadvertent comment that could affect the sale process. I would again raise the process that was agreed to last night—if opposition senators have questions they want to raise about the mechanism of the creation and final production of the Telstra prospectus, that is a matter that they can ask any questions they like about once this very significant float has been completed. I seek the indulgence of the committee to ensure that such a line of questioning is conducted after this float and I think Senator Conroy is now starting to go down the path of issues that could affect this float. I hope this committee would not allow that to happen.

CHAIR —Thank you, Senator Minchin. I was listening with care to what Senator Conroy was saying. I think in the circumstances what we might do is what we did yesterday. I will convene a quick private meeting of the committee with a view to resolving this with ASIC as we resolved it yesterday with the ACCC, particularly now that we know that there is going to be an adjourned hearing of these estimates concerning what I might broadly call Telstra related issues. The hearing is suspended momentarily and I will ask the secretary to convene a short private meeting.

Senator CONROY —Given that it takes a little bit of time to round up the senators, you might want to keep going because I would like to say something on the record before—

CHAIR —I think Senator Conroy is entitled to do that. If you want to say something on the record to clarify your position, I think you can do that. But, in the meantime, would the secretary please convene a private meeting.

Senator CONROY —Thanks for that, Minister. As I indicated last night, I think that is a reasonable compromise. I thank you for the offer and I trust that the committee will take up the offer. I thank Senator Brandis for convening the meeting because, quite genuinely, I am not interested in causing any impact on the Telstra share float.

But I do have a generic concern about what happened yesterday and now. There are many companies involved in fundraising all the time, which is essentially what Telstra and you are doing; it is fundraising. The precedent that is being created here today and was being created late yesterday is that apparently we cannot now ask the regulatory authorities questions about matters if there is a prospectus issued or if there is an issue around the content of a prospectus while it is happening. This is a patently absurd position to put the regulators and the parliament in, where just because there is a capital raising taking place all of a sudden Mr Lucy will be able to say: ‘As with the Telstra example, there’s a capital raising taking place at the moment. We can’t possibly comment on it.’ This is a patently absurd position.

Capital raisings take place right across the economy all the time, and we have one that we are banned from asking questions about just because it is live. Many issues arise about live prospectuses that are in the marketplace at the time and we have never been stopped previously. I think it is a very dangerous precedent.

I accept the point you are making and I am wholeheartedly happy with the offer of your compromise, but as a precedent it actually cannot stand. The parliament cannot not be allowed to ask the ACCC, ASIC or APRA about a company involved in a capital raising just because it is in the middle of the capital raising. It is actually a patently absurd position.

CHAIR —Senator Conroy—

Senator CONROY —Having said, that I defer now back to you, Chair. I have made the point. I appreciate it.

CHAIR —You have made your point. Since the decision to convene the private meeting was mine, can I simply say that, if my memory serves me correctly, the decision to postpone Telstra related questions to the ACCC yesterday afternoon was arrived at by the mutual agreement of all. If my memory serves me correctly, the motion was actually, at least in form, moved by an opposition senator, Senator Stephens, at the private meeting.

Senator CONROY —I accepted that the government had gagged Mr Samuel and refused to allow questions, and I accept that they are about to do the same to Mr Lucy. I simply make the point.

CHAIR —You can say that—you can say anything you like—but the record reveals what happened.

Senator CONROY —I am not denying it.

CHAIR —That is, Mr Samuel declined to answer questions. He took questions on notice. The minister suggested a compromise.

Senator CONROY —I actually suggested the compromise and the minister kindly took up the offer. I am on the record as having suggested the compromise and I accept that it was a reasonable offer.

CHAIR —Senator Conroy, a fortiori the position is one of consensus between government and opposition senators.

Senator CONROY —It is. As I say, I was just make being the general point.

Senator Minchin —I accept the integrity of Senator Conroy’s position. He has legitimately raised a significant issue and perhaps it might well be that the government and opposition should seek to discuss this general question. I think parliamentary committees do need to act with great care when there are significant floats in train. I think the parliament should be very careful and parliamentary committees should be very careful not to do anything untoward that could affect the commercial life of this country. Nevertheless, parliamentary committees have work to do and, as a general statement on behalf of myself and my portfolio, I would be happy to discuss separately with the opposition a mechanism by which proper parliamentary inquiry can be conducted consistent with common sense with respect to the commercial life of this country.

CHAIR —Indeed.

Senator BERNARDI —In relation to this, I would regard the public float or capital raising of a government or a quasi-government organisation as significantly different to that of an external entity. I think we have to tread with great caution when we are quizzing government agencies about their role in a government float that is currently under way.

Senator CONROY —A government may want to tread very carefully; the parliament is an entirely different matter. But I accept the offer, I accept the compromise.

CHAIR —Everybody has made their views on this matter abundantly clear.

Senator CONROY —Senator Murray has not.

CHAIR —Those who have had something to say could not have been more unambiguous. I understand that Senator Stephens is on her way.

Senator SHERRY —I am sorry, Chair, while the senators are gathering, could I go on with a couple of other matters?

CHAIR —I was just going to say that Senator Stephens is literally on her way and I think we will suspend now because it will only be a matter of a couple of minutes.

Proceedings suspended from 11.44 am to 11.49 am

CHAIR —The hearing is resumed. Can I advise those present that the committee in private session has unanimously resolved that questions directed to ASIC in relation to Telstra should be postponed to an adjourned hearing of these estimates in the next parliamentary sitting fortnight, but after 20 November.

Senator MURRAY —Chair, I just want to put on the record that I was not present for yesterday’s private meeting and the consequent agreement and motion that emerged from that, but I was present today and I do agree with the opposition and the government with respect to the motion to adjourn consideration of these issues of ASIC. I want to make the point on record that I consider these matters a response to specific, unusual circumstances and therefore do not reflect a general view that either this committee or the parliament should take with respect to prospectus issues.

CHAIR —This matter was raised briefly in the private meeting. Can I also put on the record the view, which I think was shared by all of us after some discussion, that this is a special case. I suppose there may in the future be other special cases, but the decision we have made not to have questions in relation to Telstra because there is a capital raising or a share issue in the market at the moment ought not to be regarded as establishing a general rule. I think I will leave it at that.

Senator SHERRY —Can I just turn to the outcome of the shadow shopping exercise and some related issues on the EU with respect to AMP? Firstly, where are we up to with concluding outcomes for the non-AMP institutions that were identified with respect to the shadow shopping exercise?

Mr Cooper —When the shadow shopping work was concluded in April of this year, ASIC wrote to all of the 104 licensees that had been involved in the survey, informing them of the results of the survey as it related to them. Of that group there were 14 licensees for whom we had fairly significant concerns about their compliance arrangements. One of those was AMP and another was the first capital matter, which I think we have discussed in this venue on previous occasions. We got into discussions with two of the 14 licensees and decided that their systems were adequate.

Senator SHERRY —In respect of those two, was there any follow-up action with any individuals who had purchased superannuation?

Mr Cooper —Not that I am aware of, no.

Senator SHERRY —You used the term ‘adequate’, which seems to me to indicate there may still have been a few individuals who were adversely impacted on.

Mr Cooper —No, I do not think you can necessarily draw that conclusion. In many of the cases the failures were failures to give statements of advice, for example, where the consumer was advised to maintain existing superannuation. So the failure was really—

Senator SHERRY —It was a failure to document—

Mr Cooper —Correct.

Senator SHERRY —not of inappropriate advice.

Mr Cooper —Not in all cases, but in these two cases we felt satisfied with the way things stood. In a further seven cases, the licensees undertook a range of improvements to their systems and they were able to satisfy us that that was going to be sufficient. That left us with five matters. That five includes AMP and no doubt we will talk about that. The end result there is the EU and the first capital matter that we discussed. The other three matters are confidential because they are ongoing matters. We are dealing with the remaining three.

Senator SHERRY —Is there any indicative time line on when the remaining three matters will be concluded?

Mr Cooper —They are all large organisations. The way we are heading in general terms with those three is that we are undertaking major surveillances right across the board. We have already commenced one in relation to one of them.

Senator SHERRY —Arising from the shadow shopping outcome?

Mr Cooper —Yes.

Senator SHERRY —So it is a major surveillance and it is three large organisations?

Mr Cooper —Yes.

Senator SHERRY —I understand that AMP have appointed an ‘independent arbiter’, if I could use that term.

Mr Cooper —They have indeed, in terms of the EU, and that is Deloitte.

Senator SHERRY —Are Deloitte to report to ASIC about their independent oversight of the matters that were raised?

Mr Cooper —Yes, they are.

Senator SHERRY —Have they reported back as yet?

Mr Cooper —No, they have not. It is going to take some time. I say that because the date by which AMP is required to write to the 7,000-odd clients is 21 November. That is quite an involved process. Those letters will go out and the number of people is relevant to how long it is going to take Deloitte.

Senator SHERRY —Will Deloitte be directly liaising with any or all of those 7,000 individuals?

Mr Cooper —I would imagine not.

Senator SHERRY —Could I suggest to you that they should. The reason I raise it is the outcome of your own shadow shopping exercise. AMP will write to the approximately 7,000 people, but your own shadow shopping exercise showed that a very high proportion of individuals—I think it was 80 per cent plus who effectively had been inappropriately advised, for whatever reasons—were not aware of the potentially adverse outcome. It seems to me that AMP writing to those 7,000—I do not know what the right language would be—drawing attention to the fact that they have been required to write following your enforcement, would not, given the outcome of the shadow shopping exercise, adequately resolve the matters for those individuals.

Mr Cooper —I think it is different from the conclusions that came out of shadow shopping. The reason for that is that people were asked generically, ‘Were you satisfied with the advice that was given?’ When you ask an open-ended question like that of a nonexpert, it is a bit like—and I think we have used this before—the analogy of the dentist. If a person has a sore tooth and when they come out of the dentist the pain has gone, the average person would say that they were satisfied with the work that had been done. However, in this case, the letters that will be going to these clients will actually tell the clients what the circumstances are and will ask them what they want to do.

Senator SHERRY —What concerns me is the general issue of inertia in superannuation. We have discussed the issue and the problems around inertia default compulsory system. If you place an onus on people to be proactive then necessarily, due to inertia and default, they are not proactive; they will not change.

Mr Cooper —You asked me whether the expert was going to get in contact with the clients and I said that I did not think they would, but they will do pretty well everything else. In other words, they will assess the clients that AMP identifies as being affected, what is on the file, the rectifications, any decisions made, whether or not to award compensation to those clients and so on. All of that will be assessed by the independent expert.

Senator SHERRY —I do not recall this in the EU, but is there any provision for some form of contribution for non-AMP related independent financial advice for these individuals?

Mr Cooper —I can answer that by saying that part of the relief involved, if they wanted it, their being transferred to a non-AMP fund.

Senator SHERRY —Without loss?

Mr Cooper —Yes.

Senator SHERRY —But presumably that involves at least some of them going and getting another set of advice and paying for it—hopefully not on a commission—in order to make a decision.

Mr Cooper —Yes, I understand the question you are asking me. The EU is some 30 pages long. Perhaps we could just take that specific question.

Senator SHERRY —I have read the EU and I cannot recall there being anything in there about it, but please take it on notice. There is one other matter I want to raise on the AMP issue. As you know and as I have publicly said, I fully support your activity and your conclusions et cetera in your EU. But I was a little surprised with your annual report—not at the outline of the promoting compliance on pages 26 and 27; I think that is fair enough. I cannot recall seeing this in a report before: you have a collage of headlines at the bottom of page 27. Do you think that is wise? As I say, I am all for vigilant crackdowns on AMP and anyone else with an enforceable undertaking where it is appropriate, but isn’t it really a little excessive putting those sorts of collages in an annual report?

Mr Lucy —No, I think is the short answer. I think the annual report is a document where we are communicating to interested parties and key stakeholders. I guess any annual report, in aspects, tries to get a message over as best it can and that was our attempt to do exactly that.

Senator SHERRY —I expected you to say something like that. I have long learned in politics that you never hang anyone on the basis of a headline, despite the fact that in politics headlines are often used. Has this happened before? Have you placed collages of headlines from newspapers in the annual report before? I cannot recall it having been done.

Mr Lucy —I cannot recall. I think you will certainly observe that the style of our annual report for the 2005-06 year is different from the style of previous reports, in that we are trying to communicate in a manner that people are going to find perhaps more interesting so that they will be more inclined to read it and pick up some of the key messages that are contained therein. The use of references—and there are several quotes we have extracted out of the media and also the one you referred to regarding AMP—is all part of our approach to try to make this document one which people are more likely to engage with.

Senator SHERRY —I certainly engaged with it with or without the headlines and collages.

Mr Lucy —True—but, with respect, I would hope that you would. But it is more the wider population, the wider community, that we are trying to reach.

Senator SHERRY —All I can say is that I am a little concerned about it. As I say, you know my attitude to planners and commissions and the industry knows it, but I am a bit concerned about effectively rubbing it in in an annual report in this way.

Mr Lucy —All I can do is respect your observation and take it on board. We obviously thought about it. We felt that it was appropriate. The AMP issue was a serious issue.

Senator SHERRY —Let us say that you failed in a compliance action and there were big headlines, ‘ASIC fails: done over in court, wasted $10 million in legal fees’. Would you put a collage like that in your annual report to highlight your activity?

Mr Lucy —You are now talking hypothetically.

Senator SHERRY —Yes, I am.

Mr Lucy —I guess we would deal with that hypothetical situation when we were confronted with it.

Senator SHERRY —I think we have had those situations in the past.

Mr Lucy —Not that I can recall.

Senator SHERRY —There is one in respect to APRA that I can think of, and we will get to that with APRA.

Mr Lucy —I think your point is well made. I think, in our attempt to try to make this a document that the man and woman in the street is looking to engage with, we have used that level of licence in reference to the media and we will take care of such an approach going forward.

Senator SHERRY —Sure, there is the issue of balance in making the community aware, but the community is aware of the AMP EU through the newspaper headlines that occurred at the time and the ongoing reporting of it. I just wonder about the difficulties that can arise. AMP is a reality, a substantial financial organisation, and whilst I have my significant concerns with their activity, there has to be some sort of degree of cooperation in an ongoing working relationship. That is what I worry about, I suppose, in this context.

Mr Lucy —Again I thank you for your observation. We are aware of our ongoing dialogue in relation to the AMP, and we continue to make sure that that is at the appropriate level.

Senator SHERRY —There is one other issue that I want to raise in respect of shadow shopping, which I do not think was identified, let alone examined. A number of people have raised with me the issue of a corporate master trust arrangement with an employer. In a corporate master trust, there is generally a bulk purchase fee involved. I think you would be aware that that is generally the case. When the employee ceases employment with that employer, with whom there is a bulk master trust arrangement, in some cases at least that I am aware of they are no longer eligible to be a member of that arrangement. They have ceased employment and have moved to another employer who obviously does not have the same arrangement. Are you aware that that can happen?

Mr Lucy —Yes.

Senator SHERRY —The former employee then is still a member of the master trust but is moved either to a separate section of the master trust, the retail section, or to within the same financial entity from the wholesale master trust or group master trust to a retail master trust arrangement. Are you aware that that can happen?

Mr Lucy —Yes.

Senator SHERRY —Again it has been brought to my attention that, generally, there is a higher fee when they move from the wholesale master trust to the retail master trust arrangement, whatever that may be. Are you aware of that?

Mr Lucy —Yes.

Senator SHERRY —Have you examined this issue in the context of shadow shopping?

Mr Cooper —No, we have not, but for some time we have certainly been aware of the relative lack of transparency, if you like, of the fees that are charged in this sector because, in effect, they are by negotiation. The headline fee rate might be some number of per cent but, depending upon the scale of the employer—which is the issue that you are directly referring to—those fees are negotiated down in some cases to be competitive with the industry fund sector. That is where the debate has centred but, because of the relative lack of transparency in finding out exactly what fees are charged, it has been somewhat stymied. But I do understand the question that you are putting and it really comes down to the fact that, if you are unlucky enough to move from a very large employer to a smaller one, unfortunately you lose the buying power that is able to negotiate those fees down.

Senator SHERRY —I understand that. My concern really focuses around disclosure when the person enters the wholesale area. The wholesale bulk purchase is generally at a lower fee. They cease to be eligible to be a part of that arrangement when they change jobs. What is the disclosure process in their being shifted from the wholesale to the retail arrangement? What authorisations are required? Does the individual formally have to be given a new disclosure product at that time about what the newer, higher fees will be? In addition, what is the process of authorisation, if any? There are a significant number of people in this situation who move from a lower fee to a higher fee. I just put that series of questions on notice and ask you to come back and explain to me what the current requirement is in this area. You are obviously aware of the issue. Perhaps we can explore on the next occasion how these issues can be dealt with.

Mr Cooper —Yes, I think we can do that. You would appreciate, of course, that with the expression ‘corporate master trust’ we are talking about numerous, different arrangements.

Senator SHERRY —Yes.

Mr Cooper —I am sure that we can give you generic information based on a certain number of assumptions—for example, that the member is not moved outside the trust. We can paint a landscape, but there are some millions of employees in these arrangements and they are all different.

Senator SHERRY —Yes. The wholesale corporate arrangement is generally negotiated by the employer. They have not negotiated it and often have had no choice because it is a binding arrangement; that is perfectly possible under the choice of fund legislation. When they move out of that environment, I do not think they are generally aware that they will end up with a higher fee as a consequence of moving out of that environment. I can go to a website and look at some of these arrangements, in terms of the wholesale fee and the master trust—I have done this in response to a number of individuals who have approached me—and then look at where they have ended up in the retail environment in terms of the cost. At this time I am particularly interested in what the disclosure requirements are, what the requirements are at the time of shift and what authorisation is required.

It seems to me that it is fundamentally a very different arrangement and I do have concern about the way in which this is operating, certainly—from the individuals who have spoken to me about it—with the apparent lack of awareness, lack of knowledge, lack of disclosure to them and, indeed, lack of authorisation that is going on in these circumstances. We can explore it at the next estimates hearings if you can provide me with some basic information.

I will not go to the individual cases referred to me. Perhaps I could put on notice that there are a number of complaints about pistachio investments and Perpetual Plantations of Australia, as I am sure you are aware. Please give me some response on notice about what is happening in this area, as best you are able. Likewise, again as best you are able, issues have been referred to me about firms Paramount Financial Services and Tax Express Pty Ltd. Perhaps you could examine those and give me something back on notice there.

Mr Lucy —Agreed.

Senator SHERRY —Another issue I want to explore in a little more detail is the complaints handling processes within banks. Before I get to any detail, would it be of concern to ASIC if a bank manager discussed the financial details of a customer in a public place?

Mr Lucy —I expect that it would certainly be of concern to the client, but I doubt very much that it is a matter that is relative to our legislation. With the manner in which you described that example, I think it would be more to do with privacy requirements.

Senator SHERRY —But would that seem to indicate a lack of compliance activity by the bank?

Mr Lucy —It would certainly be the indicator of that.

Senator SHERRY —Other than the privacy legislation, you do not know of any specific area of financial regulatory law that that would breach?

Mr Lucy —Let us take that on notice and I will also look at the extent to which we have received any inquiry about that issue.

Senator SHERRY —Please take it on notice and perhaps identify, in areas of your responsibility, where a bank manager discussing in a public place the details of a client of the bank would be a breach of any law that you are responsible for.

Mr Lucy —We will undertake to do that.

Senator SHERRY —The provision of bank statements has been raised with me and the issues around the lack of provision by a number of banking authorities in this regard. Are you aware of the issue and do you have any current complaints before you?

Mr Lucy —This general matter came up in a question on notice, so we are aware of the issue.

Senator SHERRY —As a general principle, isn’t it true that banks are required to provide basic bank statements to their customers?

Mr Rodgers —The short answer to that is yes. My own banking experience suggests to me that at least my bank delivers statements to me far more often than the regulation requires them to.

Senator SHERRY —I suspect the couple of banks that I am thinking about are not the bank you are with. One of the reasons I am raising this is that at least one of the banks I have had details of—and I understand that complaints have gone to ASIC—primarily operates in the rural and regional sector. At a time of spreading drought, the non-provision of bank statements to people in these circumstances is just another additional difficulty they have to deal with. Are you concerned about the non-provision of bank statements in any circumstances but particularly in the current circumstances of drought and increased financial pressure on farmers?

Mr Lucy —‘Concerned’ would not be the right word. We would certainly seek that they meet their obligations and, to the extent that there were any complaints in that area, we would follow them up very vigorously. Absolutely, as it involves people who are suffering hardship with the drought, that would be a matter we would look at very promptly.

Senator SHERRY —I am sure you have had a number of cases in this regard drawn to your attention and I am not going to mention the banks here today—certainly the two that I have in mind. But I would ask that you examine those cases as expeditiously as possible, understanding the pressures there are on your resources.

I turn to the general issue of the internal disputes procedures within banks and the way they are operating—and I think I touched on this at the last estimates. Do you have any further update on examination of the operational processes and procedures of banks’ internal dispute processes?

Mr Rodgers —Generally, we have an articulated position regarding internal dispute resolution schemes. I do not think we assert this as a matter of law, but in terms of whether we ask licensees to measure their internal dispute resolution systems against the applicable standard, that is a really useful benchmark for people to be able to work out whether they have something that meets those kinds of benchmarks. This is an area where internal disputes have a mechanism to go external as well, through the Australian Banking Industry Ombudsman. As I recollect, the last ABIO report suggested a decline in complaints to that office from the banking sector.

Senator SHERRY —I draw a distinction between a bank or, for example, any financial institution having an internal disputes procedure and whether it is actually operating reasonably, fairly and effectively. I will not speculate as to why there is a decline in internal bank disputes procedures; there might be a whole number of reasons for that. But APRA licensing requires—and obviously APRA are appearing later—an internal disputes procedure, doesn’t it? That is my understanding.

Mr Rodgers —That is a question that I think is much safer for APRA to answer.

Senator SHERRY —But ASIC is responsible for consumer protection; therefore the outcome, the actions and the activities of these internal dispute procedures seem to me to fall within your bailiwick.

Mr Rodgers —There is an obligation on a licensee to have internal dispute resolution procedures under our legislation as well as under any APRA rules.

Senator SHERRY —But whether they are operating reasonably and fairly surely requires some analysis of the consideration of the cases and the way they are being considered.

Mr Lucy —Let us take that on notice and provide a more complete response. The point you raise is an interesting one, and we should respond more comprehensively.

Senator SHERRY —I have received complaints claiming that the internal procedures of some banks are not operating reasonably and fairly. On the basis of examining some of the matters in this area, I think there is at least an arguable case that, in the case of some banks, the internal disputes procedures are not working reasonably and fairly in terms of time and issues relating to their operation. I would have thought that this is a matter that ASIC should keep under some sort of examination.

Mr Lucy —We certainly do, but again we would be very much dependent upon complaints. I will take that on notice and have a look at what sorts of complaints we are getting in respect of that area.

Senator SHERRY —Without going to the individuals who have raised the issues with me, some of them have been referred to ASIC.

Mr Lucy —Good.

Senator SHERRY —If you could, I would like you to have an examination of those cases in the context of whether those bank dispute procedures are working reasonably and fairly in the interests of consumers.

Mr Lucy —We will respond.

Senator SHERRY —Thank you. There has been some commentary in the media that Queensland—I have not had it confirmed yet—have announced they intend to go it alone in respect of mortgage brokers. My understanding is that this area was to be co-regulated by some joint approach by the states. Does ASIC have any interest in this area of the attempt to regulate mortgage brokers?

Mr Cooper —Certainly we have been involved in the lengthy discussions that the states have been having at the ministerial council for consumer affairs level by way of being an interested observer. But we also, of course, regulate certain aspects of what mortgage brokers do, because they advise about credit. When we become aware of matters that we think require our enforcement or intervention, we do so. Very recently we took action that you probably saw—

Senator SHERRY —Yes, I did.

Mr Cooper —in relation to a case in the ACT which, because it is before the court, we cannot talk too much about. So we are there in that sense, but it is a matter for government as to whether, for example, they wish to give us jurisdiction to license mortgage brokers or whatever. It is really a matter for the government.

Senator SHERRY —I understand that. From a federal level, it is a matter for the Commonwealth to act if they decide.

Mr Cooper —It is a little more complicated than that, I suppose, because the states would have to agree to refer power, so that is why there have been lengthy—

Senator SHERRY —But my general concern is the lack of progress or the lack of a final outcome, as was agreed at the ministerial council. Are you aware that Queensland decided to go it alone?

Mr Cooper —I have seen press reports to that effect.

Senator SHERRY —I have too and I have not had it confirmed. But that means that, almost inevitably, if Queensland does one thing in its jurisdiction, we will end up with—at least in non-Queensland jurisdictions—a different set of rules, no matter how minor. That will be the outcome, won’t it?

Mr Lucy —Yes. But I think, just to clarify the point that Jeremy made, it is governments. It is not something which is in the sole jurisdiction or the power of the federal government; it requires the participation of the states and the territories. Without that, there is nothing that the federal government can do.

Senator SHERRY —Sure. But do you see the problem that potentially can arise when Queensland has its own regulatory regime?

Mr Lucy —Certainly.

Senator SHERRY —The other states might all have a common regime at the end, whenever that happens.

Mr Cooper —It repeats the current situation where you have certain states that have laws about finance brokers and others who do not.

Senator SHERRY —So we do not have a uniform national outcome and, therefore, for example, brokers operating across state borders have different regulatory regimes to comply with.

Mr Lucy —Correct.

Senator SHERRY —You do see that there are some difficulties with that?

Mr Lucy —ASIC has participated fully in this debate.

Senator SHERRY —I am not criticising ASIC for it in any way, shape or form.

Mr Lucy —No.

Senator SHERRY —I will raise two issues again just to put them on notice and ask whether you could have a look at them. You may be able to inform me whether you have carried out an examination or are contemplating any action. The issue of default funds under superannuation choice I have raised before and touched on it as a potential problem area. The employer is now able to select the default fund. Have you considered the consumer protection issues in those circumstances?

Mr Cooper —We have and I am sure we have spoken about this before. Unfortunately, some time has elapsed between then and now. I would have to take that one on notice and find out in more detail what our people have done in that area.

Senator SHERRY —Have you issued any guidelines at all in this area?

Mr Cooper —I would have to take that on notice as well.

Senator SHERRY —I regularly look at the APRA list of licensed entities—I do not want to name names at this stage—and I have noticed a couple of new superannuation entities and then tried to find, behind the name, some details of their creation. They would be a default fund arrangement; it may even be a monopoly arrangement because they preclude choice, depending on the industrial provision applied. I suppose my concern was that I was not able to identify what the particular fee structures were and other elements of these newly created arrangements—they are a default fund in large part. It seems to me that there is potential for abuse here, given the new provisions that now act, both federally and state. Perhaps you could give me something on notice and we could discuss it in more detail.

Mr Lucy —Yes.

Senator SHERRY —The issue of clearing houses again I have raised in the context of superannuation choice. Clearing houses obviously have become yet another intermediary in the superannuation chain, if we could describe it that way. Have you been examining issues and potential guidance for clearing house operations?

Mr Cooper —We have.

Mr Rodgers —I should know the answer to exactly where it is, but I am afraid that I do not. We will have to take that on notice. Yes, we have been looking at it and we have a fairly active dialogue going with the industry as well.

Mr Cooper —I think we have formed the view that they need to be licensed.

Senator SHERRY —But as yet there is no formal directive regulation guidance?

Mr Rodgers —It embarrasses me to say this, but I will have to take that on notice. I do not know whether it is actually publicly released or not.

Mr Cooper —We have issued a release. You must have missed it.

Senator SHERRY —I must have done. I do go through them. I read them every day. I must have missed that one.

Mr Cooper —We do put out a lot.

Senator SHERRY —You do; a couple a day—and I am not criticising that.

Mr Cooper —Obviously too many for us to remember as well.

Senator SHERRY —Part of the difficulty is that I end up with my night-time bed reading being guidance notes from APRA and ASIC, annual reports from financial institutions and your press releases. It does get a little tiring at the end of the night to wade through all this.

Mr Lucy —Chairman, might I provide a clarification to a response I gave to Senator Sherry earlier regarding self-managed superannuation funds and our dialogue with the Australian Taxation Office?

ACTING CHAIRMAN (Senator Chapman) —Certainly, Mr Lucy.

Mr Lucy —I confirm that we are in dialogue with the Australian Taxation Office. But perhaps there is an expectation that you might have, Senator, that I did not respond to—namely, that we sought communication from a number of investors by providing them with a questionnaire. A significant number of investors have responded to us through that questionnaire process. We have treated that information at this point as being confidential between the investor and ASIC. At this point we have not passed on the information we obtained through that process to the Australian Taxation Office.

Senator SHERRY —Why haven’t you passed that on?

Mr Lucy —The view that we take at the moment is that it is confidential—that, when we sought that information from the investors, we did not flag to them that we might pass it on to the tax office. We are looking at it, but I want to make it clear that you did not have an expectation that, when I referred earlier to the dialogue backwards and forwards with the tax office, that included that material.

Senator SHERRY —I did have that expectation, but thank you for clarifying it. It is difficult for the tax office to act on these entities without knowing their names, isn’t it?

Mr Lucy —From our perspective, our default is that we would like to communicate with the tax office, but we need to respect obviously the level of confidentiality and that is a matter of work in progress with ourselves and that office.

Senator SHERRY —Is that going to be a matter of work in progress for the individuals to at least—

Mr Lucy —We will need to at least test back to a number of individuals to see how they would respond.

Senator SHERRY —Will that be done?

Mr Lucy —Yes.

Senator SHERRY —There has been an advertisement, I think partly in response to the ‘compare the pair’ advertisement. I never think it is a good idea to form your defence on the basis of your opponent’s theme if it is working. Have you seen the new you ‘compare the pair’ ads in the newspaper?

Mr Lucy —Yes, we have had those advertisements brought to our attention.

Senator SHERRY —Have you examined them and given them a tick of approval in terms of their accuracy?

Mr Lucy —We are comfortable. I think there is a level of competitive tension out there and there have already been some responses to those advertisements. We have chosen to not to take any action.

Senator SHERRY —I am happy for the area of competitive tension, if you want to call it that, but I was a little concerned. Under the title ‘Industry Superannuation Fund’ it just has ‘Superannuation’, but at least the majority—if not the overwhelming majority—of superannuation funds do provide financial advice, as I understand it, in either a direct or contracted form in a number of areas.

Mr Lucy —I think that is right. We have had dialogue with a number of parties about those advertisements but, as I have said, on balance, we have decided to not take any particular action.

Senator SHERRY —In the context of superannuation, I must say that I was a little puzzled at some of the activities that certainly can be implied related to superannuation under the financial planner list. I accept they are all things that financial planners do or hope to do. But, in that context, did you examine the list of claims made in respect of a financial planner and the sole purpose test of superannuation?

Mr Lucy —We looked at that list and it is a broad and extensive list.

Senator SHERRY —Do you think some of these activities fit the sole purpose test of superannuation?

Mr Lucy —I think that is going to a level of specifics, frankly. The activities and levels of expertise listed are appropriate for the FPA to list. They are not necessarily contrary to the sole purpose test.

Senator SHERRY —Is state planning appropriate? My concern is not that a financial planner cannot do those activities; my concern is whether it is legitimate to claim that they can be done within the context of the superannuation sole purpose test.

Mr Lucy —We certainly did not read it in that manner.

Mr Rodgers —I can see how you might place an interpretation on that. I did not read the ad as claiming that all of those services provided by planners were to be provided strictly in the superannuation context. As you will no doubt know, the interpretation of advertisements generally is a difficult issue, including for regulators. I can see how you can read that into the ad, but equally I have looked at the ad and I have not seen assertions about the ability of a financial planner to do things in accordance with the single purpose test. My reading of the ad is quite different from that—and there is exactly that potential for a variety of reasons.

Senator SHERRY —The parliamentary superannuation scheme does not provide any of these particular advices; there are about a dozen of them.

Mr Rodgers —The advertisement fundamentally is inviting you to go to a financial planner if you wanted any of those things.

Senator SHERRY —Yes. I question whether, in a superannuation context, issues such as general budgeting, savings and investment—outside of a superannuation context, trust structuring, estate planning, redundancy planning—are all issues to be paid for from the superannuation system in the context of the sole purpose test.

Mr Rodgers —As my chairman has said, these advertisements are part of a series of competitive assertions. It is equally open to those who might be on the other side of that set of advertisements to respond in kind, I suspect.

ACTING CHAIRMAN —Is it being suggested in those ads that that advice is being provided through superannuation funds? I think it is being suggested it is being provided by financial planners, isn’t it?

Mr Lucy —Yes, that is how we read it.

Senator SHERRY —One of my concern is that, if you add all these things up that the planner is doing, there is not going to be much of your superannuation left by the time you have paid for it all.

Mr Lucy —We cannot respond to that.

Senator SHERRY —That in the context of the sole purpose test begs some questions. Did you see the ads before they were placed?

ACTING CHAIRMAN —You can pursue these issues in a separate inquiry, Senator Sherry.

Mr Lucy —Yes.

Mr Rodgers —We saw the ads but only after they had appeared publicly for the first time. I think we saw them at a stage when they were not in the general press, in the way they have become in the last couple of weeks. We had not seen or otherwise engaged with them until they were public.

Senator SHERRY —Having seen them, did you suggest any changes?

Mr Lucy —No.

Senator SHERRY —You may want to take this question on notice. Hedge funds have been in the media a lot recently—the issue surrounding hedge fund activity. Perhaps you could let us know whether you have some information about any ASIC concerns, regular industry compliance issues in that area.

Mr Lucy —We will take that on notice.

Senator JOYCE —Potential liabilities: what process does ASIC now use for disclosure or the expectation of disclosure for contingent liabilities in regard to prospectuses generally?

Mr Rodgers —I am not sure that I understand the question. But generally, if a prospectus is to contain information of a financial kind that would ordinarily be prepared in accordance with accounting standards, our expectation is that those standards are what apply to the way in which the disclosure is made.

Senator JOYCE —So it has not jumped the hurdle for international accountancy standards?

Mr Rodgers —As I have said, that is the beginning point expectation. I think we are aware of a couple of other issues with disclosure of contingent liabilities in the formal financial reporting sense. I am not aware of them having come up in a prospectus issue to this point.

Senator JOYCE —Secondly, related entities: with the advent or the greater exposure of Australia to overseas equity funds, those funds having no register of interest, what are our control mechanisms for dealing with related entities being able to mask their appearance by involvement of overseas equity funds?

Mr Rodgers —The obligations that apply under Australian law, including disclosure of related party interests, will generally only apply to an Australian incorporated entity; they will not apply to a Cayman Islands company of their own force. Once a private equity firm is active in this market—for example, one making a takeover bid—it is bound by all the disclosure obligations that apply to any entity, wherever it is incorporated, that is making a takeover bid. So in some cases the Australian rules will not apply, but in other cases they will apply in full. As far as access to share registers and so on is concerned, this committee has heard from us before about some of the difficulties of access to information about ultimate shareholders in other jurisdictions.

Senator JOYCE —What power of disclosure do you have over those overseas equity firms? Using a case example, if we have two overseas private equity companies and one invests and in media in Australia, how do we know that they are not ultimately the same controlling entity in both if they do it through an overseas equity fund without a register of interests?

Mr Rodgers —They will not be obliged to maintain a share register in Australia, which is ordinarily where all this information sits. The ordinary operation of the Australian law that we administer will not produce that result. Depending on whether there are other rules about who may own shares in a particular sector, those responsible for that legislation might need to make sure. But the Corporations Act will not produce that result, unless you are talking about Australian corporations.

Senator JOYCE —That is what I am saying. The Corporations Act will not be able to lift the veil, so to speak, to get greater disclosure of who those participating parties and overseas equity funds are.

Mr Rodgers —It is open to an entity and to us to seek information about the underlying shareholding. But, as I said, we have not always been successful in having our requests for that information met because we have no power under our own laws to compel a company in a foreign jurisdiction to comply with our law or our requests.

Senator JOYCE —Has this issue been discussed back and forth with the government? Have you conveyed these concerns to the government?

Mr Rodgers —We are in pretty much the same position as most other jurisdictions. Where this works well is in jurisdictions that are interested in maintaining relations with us. For example, if it became a matter of some importance for us to find the underlying shareholders of a US company and we were not being given any cooperation by the company with that, the ordinary arrangements we have with our counterparts in the US would be likely to result in their using their own compulsory powers to get that information and pass it to us. So this is not, as it were, a mainstream problem for us. These issues arise where we are dealing with what are politely called ‘less regulated’ jurisdictions. There are some notorious ones—which I think are well-known to this committee. It is sometimes difficult to get information out of Switzerland, for example, because of bank secrecy and other rules. In the ordinary course of events for US or UK companies, this is not a practical problem if there is a real regulatory need to get hold of that information.

Senator JOYCE —So the issue would be a cautionary one if the equity fund were based in Switzerland or the Cayman Islands.

Mr Rodgers —I would not want to be on the record as saying that. I am saying that, in practice, it is sometimes more difficult to get the information.

Senator MURRAY —I have a very brief question. I will forward you a question on notice I have to the government with respect to private equity funds and who might lie behind them. I would like you to examine that question on notice and respond to this question on notice—you do not have to respond to it now: will you take a heightened interest in any private equity fund which is investing in a sector which is officially described as ‘sensitive’? Under the Foreign Investment Review Act, there is a list of the sensitive sector—I think it is section 17H, although I might be wrong. That includes media, so you will understand why I am interested.

Mr Lucy —We will take that on notice.

ACTING CHAIRMAN —As there are no further questions, we will excuse the Australian Securities Investment Commission and thank the witnesses for their attendance.

Proceedings suspended from 12.46 pm to 1.32 pm