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ECONOMICS LEGISLATION COMMITTEE
(Senate-Thursday, 24 February 2011)
Australian Securities and Investment Commission
Department of the Treasury
Australian Taxation Office
Senator BOB BROWN
Australian Bureau of Statistics
Australian Competition and Consumer Commission
Australian Prudential Regulation Authority
Department of the Treasury
Australian Office of Financial Management
Commonwealth Grants Commission
- Australian Securities and Investment Commission
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Content WindowECONOMICS LEGISLATION COMMITTEE - 24/02/2011 - TREASURY PORTFOLIO - Australian Securities and Investment Commission
CHAIR —The committee will begin today’s proceedings of consideration of the Treasury portfolio with the Australian Securities and Investment Commission and will then follow the order as set out on the circulated program. I welcome Senator Sherry, representing the Treasurer, and officers of the department. Minister or officers, would you like to make an opening statement?
Senator Sherry —I do not, thank you.
Mr D’Aloisio —Just briefly, Chair. I appear today with deputy chairman Belinda Gibson, commissioners Medcraft and Dwyer and one of our senior leaders, Kath Morgan-Wicks. To point out some significant matters that ASIC has been involved in since we last met in October, we have commenced legal proceedings in Storm Financial to seek to recover compensation for investors and also enforcement of civil penalty proceedings. We have settled the Westpoint litigation—the main action in relation to the auditors. In that matter, we think that investors will recover $160 million to $170 million all up, with the various settlements that we have achieved with financial advisors, auditors, directors and also with what the liquidators have been able to recover. The total loss was something in the order of $388 million.
We commenced legal proceedings through the Commonwealth Director of Public Prosecution in relation to ABC Learning’s two former executives. The Fortescue decision on continuous disclosure was handed down by the Court of Appeal, which was in our favour. The defendants in that case have foreshadowed that they will seek leave to appeal to the High Court. Judgment was also received in the Court of Appeal in James Hardie. The action against the company was confirmed in ASIC’s favour, but the decision in relation to the non-executive directors was reversed. We are seeking special leave to appeal to the High Court in that case.
Overall, in terms of our enforcement activities since we last met, some 45 cases have been resolved, of which we have been successful in 41. We have been successful in 14 criminal cases, eight civil, 12 administrative, and seven enforceable undertakings and negotiated settlements. Another significant case that has been resolved more recently is Sonray, with regard to the CFDs. Scott Murray entered a guilty plea in relation to aspects of misleading and deceptive conduct. We have also had a guilty plea from Mr Shawn Richards in relation to the Astarra Trio matter. So I think our record of continuing to run successful litigation that is in the public interest continues.
Another significant thing since we last met is the takeover of the licensing of credit. That is going well. You will recall that registrations closed on 30 June 2010, and we have received some 14,700 registrants. They then have the opportunity to convert to a licence and must apply by 31 December 2010. We have had some 6,882 applications for licences. So far we have granted 4,387, and we are in the process of granting a further 1,044. Kath Morgan-Wicks and her team have carried the responsibility for this registration process and she can answer questions if the committee wishes to go into that area.
The ASX supervision is another matter that we talked about at the last meeting. That concerns the transfer of ASX supervision to ASIC. As I said at the time, that went well, as has the work that we have done since. We are pleased that we have had a seamless transition. We are undertaking enforcement and compliance activities that are certainly well in line with what was happening before we took that over.
Finally, I want to put in a plug for the ASIC summer school that was completed yesterday. This year was the 14th consecutive year that we have run the summer school. We really use it as a means of promoting discussion on very leading opinions in terms of the areas we are in. The main benefit of that for ASIC is that it keeps us in touch with what is happening in the community and what the issues of concern are out there. It had a record attendance of over 400 people. Just to be clear, the ASIC summer school is, for those non-ASIC participants, a paying event—it is paid for by the participants, with ASIC running it.
In conclusion, you can see from these results that ASIC continues to deliver results and value to the Australian business and consumer community.
CHAIR —Thank you, Mr D’Aloisio. Senator Cormann.
Senator CORMANN —Mr D’Aloisio, how often has ASIC cracked down on any bank for imposing unconscionable fees or unfair contract terms?
Mr D’Aloisio —Are we talking about exit fees or—
Senator CORMANN —No, I’m asking you how often ASIC has cracked down on any bank for imposing any unconscionable fee or unfair contract terms.
Mr D’Aloisio —There are two aspects to that: there is the unconscionable legislation under the Corporations Act and there is the unfair terms legislation, which came in on 1 July. I do not have the figures for the unconscionable conduct, but certainly the Storm Financial case is one—
Senator CORMANN —Sorry, I am asking you about the banks.
Mr D’Aloisio —Yes, well Storm Financial is against the banks. We are taking action under the unconscionable conduct provisions of the Corporations Act in relation to the Bank of Queensland—
Senator CAMERON —I am surprised you have forgotten about that one, Senator Williams!
CHAIR —Senator Cameron, I think that you are distracting the witness.
Senator Sherry —I do not think that Mr D’Aloisio had finished his answer when Senator Cormann cut in.
Senator CORMANN —It may assist you if I clarify the question. Obviously my interest is in the context of fees imposed by banks on residential mortgage holders and residential bank customers. How often, if ever—and I would be interested if you ever have taken action—have you taken action against any bank for imposing unconscionable fees or unfair contract terms on residential bank customers?
Mr D’Aloisio —I cannot answer that this morning. From memory, I do not think so, but I would have to check that for you.
Senator CORMANN —I guess the reason I am asking is that the Treasurer asserted yesterday that, if banks were to increase fees in the context of the ban on exit fees, then regulators would crack down on any banks that sought to lift other fees to make up for lost revenue. I guess what I am trying to get from you is whether you have a regulatory power to crack down on banks that might want to increase fees or interest rates other than in the circumstances where those fees are seen to be unconscionable or unfair contract terms.
Mr D’Aloisio —Our powers relate to misleading and deceptive conduct in the way that the fees may be proposed or recouped. They relate to unconscionable conduct, which we are discussing, and they relate to the unfair terms contract act. But in the end, in order to take an action we have to fit it within one of the existing regimes. So they would be the three regimes that we would look at if there was conduct that we felt needed to be examined. For it to be unconscionable, clearly there would have to be a special disadvantage that has been suffered by the borrower. For it to be an unfair term, again, legitimate interests would have had to be affected before we use the unfair terms contract legislation. In terms of the hypothetical that you are putting, in the current situation we look at our powers and at the unconscionable provisions. Where we have felt that there has indeed been special disadvantage or unconscionable conduct, and I gave you the example of Storm Financial, we have taken action against banks.
In relation to the unfair terms that recently came in, the major piece of work we have done there is to put out a regulatory guide on how we see that operating with exit and mortgage fees. That regulatory guide is being digested by the industry. We have a program over the next 12 months to see how lenders are complying with the regulatory guide that we have put out in relation to exit fees. I am sorry that I cannot be clearer than that.
Senator CORMANN —No, that is okay. I have a follow-up to question. Would it be seen as unconscionable by ASIC if a bank sought to recover their legitimate costs associated with establishing a mortgage by increasing interest rates or other fees?
Mr D’Aloisio —I cannot comment on that sort of situation. We would look at it but I would have to take that on notice and look at it as a matter of law. That is a complicated issue. We do not have an actual fact situation; it is a hypothetical. At the moment, the law does not work in that way and there is not as yet any legislation that prohibits exit fees. So we are not seeing tactics of indirectly trying to achieve what is prohibited by a piece of legislation. I would really have to look at that in the context of a particular fact situation.
Senator CORMANN —I appreciate that, but I would suggest that you have never taken action against a fee imposed on residential customers for being unconscionable or for unfair contract terms, and I doubt that you would find that easy to do in the future. How would you assess, for example, whether a fee is legitimate in terms of recovering costs?
Mr D’Aloisio —It would depend on the terms of the law that prohibits the exit fees, if there is such a law. If it prohibits it in certain circumstances and there is evidence that it is being done indirectly through another means, then clearly you would need to look at it. The broader debate is about costs incurred by lenders and how they pass those costs on. It is not really a matter of law at this point. I just do not know what the proposed legislation that you are referring to will actually contain.
Senator CORMANN —Under current legislation, unless the legislation changes, you would not be in a position to crack down on increased fees and increased interest rates unless you can prove that they are unconscionable and unfair contract terms?
Mr D’Aloisio —You would have to bring it within one of the heads of responsibility that we have. At the moment there are heads of responsibility around, as I said, misleading and deceptive conduct, around unconscionable conduct and around unfair contract terms. It may be that other provisions in the Corporations Act could apply, but they are the main ones.
Senator CORMANN —I am conscious of time, so I will quickly go through some issues because my colleagues will have questions. In relation to what I am told is an increase in the number of unregulated market participants calling themselves stockbrokers, what action, if any, are you taking in relation to that issue?
Ms Gibson —There are a number of people who have financial services licences who are in that category of non-market participants stockbrokers—that is, they are not registered with the exchange. To the extent that they have a financial services licence, we can monitor activities for compliance with that licence. To the extent that people in that category do not have a licence and operate through others who do have a licence or who are brokers, then our recourse would be, in the ordinary course, through those licensees—unless they are engaging in direct manipulative conduct or improper share trading themselves, which then gives them a direct input under our legislation. We are considering the scope of the market supervision powers and whether they should extend to these people who are not brokers and who are trading on the market. But at this stage it is just the fact that they are licensees.
Senator CORMANN —What are the regulatory requirements that do not apply to non-market participants who offer market exchange traded equities under their financial services licence?
Ms Gibson —-The non-market participants would not have the capital requirements that the ASX imposes. They would not be subject to our market integrity rules, or indeed to the ASX’s trading rules or other exchanges’ trading rules. So there is a valid question as to whether, to the extent that they operate, they should be so constrained. But to get onto the market they have to go through a broker, and the broker has some responsibility for managing their access to the market.
Senator CORMANN —Sure. But essentially people at the retail customer interface do not have the same level of protection. There is higher risk profile, I guess. If somebody calls themselves a stockbroker, the customer will expect that they have got all of the regulatory protection attached to them and all of the brand credibility of a stockbroker. While from the way that you have just described it, the risk profile is quite a bit higher, isn’t it?
Ms Gibson —-It would be a misrepresentation if they called themselves a broker. That ‘badging’ is certainly a concern to the Stockbrokers Association. I do not believe that most of these non-market participants do call themselves brokers, although they do in fact provide services that look and feel like a broker, because with electronic trading they can provide an interface under what is called a ‘white label’. They can provide access directly to a broker through their own computer shields.
Senator CORMANN —Have you got a handle on what extent this is an increasing problem or is it something that has always been there and is just sort of bubbling along?
Ms Gibson —-The number of non-market participants who are ‘brokers’ has increased in recent years. It is small groups of people, and they might think that they have a market advantage because they do not apply some of those rules. As to whether it is a particular problem, it is another area to watch in market oversight.
Senator CORMANN —Have there been any significant collapses, or have there been any significant issues, that have come to your notice from the demographic, I guess, of non-market participants offering market exchange listed shares?
Ms Gibson —-I believe Sonray was a non-market participant in that category. Its problem was CFDs rather than market participant access.
Senator CORMANN —But it does not seem to be a high priority issue in terms of your focus. You are across the issue, of course, but you do not seem to be focused on it as an operational priority.
Ms Gibson —Operationally, when we took over market supervision, and indeed before then, we were very conscious of a number of these participants. We are very much focused at the outset on the market participants but we do also look at non-market participants on a regular basis. They tend to be smaller outfits, too.
Mr D’Aloisio —It is important to emphasise that point. In looking at the whole market we are of course also looking at that segment of the market. And the work, as Belinda was saying, that our participants team does goes into that level as well. The prime obligation is on the market participant, and we want to make sure that they are ensuring that these other participants who work through them are doing things.
Senator CORMANN —Mr D’Aloisio, ASIC took over the supervisory and regulatory responsibilities for the market from the ASX. You mentioned that in your opening statement. Given that that has happened, what is the relevance of the ASX’s ownership structure on the regulation of the market in Australia? Is it relevant or would that now no longer be relevant as a result of the change that has happened?
Mr D’Aloisio —In traditional theory, ownership is separate from control, management and regulation. We take the market as it is.
Senator CORMANN —But the ASX had various regulatory functions before that you have taken over. What I am trying to find out is whether that now removes any issue in terms of potential ownership structures.
Mr D’Aloisio —The issue of who owns the ASX and what happens with SGX is a government matter; it is not an ASIC issue. To the extent that the government asks us for advice, we will provide it. It is a matter then for government. Coming to the issue of the removal of the ASX’s supervisory powers and giving them to ASIC, they were within a narrow compass of market and the operation of the market. The ASX continues to perform functions of a regulatory nature around listings and so on, and it continues to operate the Australian stock market. It is licensed and ASIC operates the licence. So all of those things will continue, irrespective of what is happening with the shareholding, each day as the market trades.
Senator CORMANN —If another stock exchange was licensed in the future, though, they would equally manage their own listing rules. There is nothing that is specific to the ASX as such, is there?
Mr D’Aloisio —Traditionally, stock exchanges manage their listings, although some jurisdictions have taken the listings to a separate entity. There does not need to be a correlation between listing and a particular exchange. You can have exchanges trading that do not have a board, as you have seen with the proposed competition of Chi-X coming in. They will be offering trading services on ASX’s board.
Senator CORMANN —Which takes me to my final issue. Chi-X lodged an application in, I think, April 2008 for a market licence. There were two others around about that time who lodged licence applications but who I understand are no longer actively pursuing them. It has been nearly three years. Is that an appropriate sort of time frame to process that sort of licence?
Mr D’Aloisio —It does sound like a long time.
Senator CORMANN —It is a long time.
Ms Gibson —-I do not think they had lodged at that time. They indicated that they lodged an indication to generate discussion about whether there should be competition. The process from then has seen a lot of discussion with government about the suitability of competition. At the time the transfer of market supervision to ASIC was announced, the possibility of competition was foreshadowed. I think it was in May last year that we started an active consultation program on what the appropriate rules should be for a competitive market of this type. We finished our formal consultation with external parties in January of this year and we are moving towards those rules. There will be some transition point there, and one of the things that we are consulting on is the amount of time that the markets themselves, both the ASX and Chi-X or others, would need to work out how they work together to run a dual market and how the market participants would come into each of those markets given our rules.
Mr D’Aloisio —This is a matter that is driven by government policy. The first key thing in relation to the Chi-X entry was whether or not the government, as a matter of principle, would admit additional operators. Once the government made that in-principle decision, the next stage was the transfer of the supervision because of the potential conflict. The third stage is the government’s consideration of whether it will grant those licences. A precondition to those licences is that we have market rules. ASIC has moved to develop those market rules. We said to the market that we would move on those rules after the transfer of supervision had been completed. To do otherwise could have endangered the market by having too much change in the market at one time. We have moved quickly to do that consultation over the last few months. That is in the process of being finished. We will advise the market of the outcome of that and we will shortly issue a final timetable for the government, if it is so minded, to then grant the licence.
Senator CORMANN —There seems to be some discrepancy between the time lines that I have been advised of and the way that you have described it. Maybe, on notice, you can review those—
Mr D’Aloisio —I think we can take you through all the steps.
Senator CORMANN —That would be really good because my understanding was that there was a formal licence application lodged with ASIC in April 2008 and that the government, Minister Bowen, announced in-principle approval of the Chi-X Australia market licence application on 31 March 2010. So that was about a year ago, and you are essentially still in the process of—
Mr D’Aloisio —It has not stood still in that year. In the year since that in-principle decision, we have been getting the ASX supervision across. That happened on 1 August 2010, and we said at the time that that needed to be a precondition to going into the market with the new rules. As soon as the transfer occurred, at the end of last year we moved on the consultation paper in terms of the rules needed for competition to operate. As I said, that process is now at the final stages, and we will be in a position to issue a timetable. But there still needs to be a final decision from government on those licence applications.
Senator CORMANN —Do you have any responsibilities in the context of regulating the provision of property investment advice?
Mr D’Aloisio —Are you talking about real estate agents?
Senator CORMANN —No, I am not talking about real estate agents, because I know that they are specifically excluded. But between real estate agents and financial advisers there is a growing category of so-called property investment advisers that seem to sort of fall between the real estate agent and investment adviser crack. I am just wondering what, if any, responsibilities you have in relation to those people who provide property investment advice but do not fall under the financial services licence provisions?
Ms Morgan-Wicks —We have seen over the years, with the rise and fall of the stock market, property investment advisers straying into the realm of giving financial product advice. If they are making comparisons to a financial product, like superannuation, we regulate. If they give advice that if you come into the scheme it is going to perform better than the stock market or it is going to be better than a managed fund et cetera, then that is when they do stray into our jurisdiction and we can have a look at them. But if they keep to property advice—so if it is in relation to making statements about the value of real estate—then it really falls outside of our jurisdiction.
Senator CORMANN —I would like to just test that a little bit. A real estate agent is essentially there to facilitate the transaction. Yes, they are there to sell the property on behalf of the person contracting them to sell it and they will sell the virtues of the property. But if they take it a step further and provide advice on how people should structure their financing arrangements to buy property, or on how to go into one property after the other and try to set them up as investments, but they do not compare it to products that you licence as such, they would not be regulated in doing so would they?
Ms Morgan-Wicks —No. It is difficult sometimes. If they are providing advice similar to setting up a self-managed super fund, for example, at the moment that still sits outside. So it depends on the structure that they are advising on or that they recommend you purchase the property through. But property and residential investment property has come into our new consumer credit regime. So we would look at advice where they are recommending certain credit products, for example, to purchase a residential investment property.
Senator CORMANN —There is potentially a lot of money at stake when people take bad advice from people who have a conflict of interest in flogging certain real estate propositions. People are losing a bit of money. But you operate within the regulatory regime that is there, so I cannot take it any further.
Mr D’Aloisio —It needs, I think, a bit of context. There are property investments in managed investment schemes. There are all sorts of property investments. ASIC does regulate those. So it is not like property is outside the advisory or the regulatory framework that ASIC runs. But there will be situations where, as you say, quite specific advice in relation to a real estate property may well fall outside the sort of structures we have.
Senator Sherry —Senator Cormann, I think you are referring to what are typically known as property spruikers. You could have a person who writes a book—and they do; there are a number of very prominent authors—on the virtues of this. Would you require them to be licensed because they have written a book on property spruiking, so to speak? It is a difficult area.
Senator CORMANN —I probably would not, no. I hear what you are saying, Minister, but it is different if you have someone who has arrangements with developers and so on and they present themselves as if they are providing independent investment advice related to property. I appreciate that things are structured to other investment vehicles like managed funds and so on. That is a separate issue altogether. But if an individual who has an arrangement with a property developer then presents himself as providing independent property investment advice, I do not think that they are captured anywhere at present. And there are people who, from time to time, deal with a lot of money in that—
Mr D’Aloisio —There are the odd syndicates. You get your mates into a group—
Senator CORMANN —Yes, that too.
Mr D’Aloisio —you buy a property, you develop it and you sell it off. They would generally be outside.
Senator CORMANN —Thank you, Chair. I might come back to that back later, but I am happy for now.
Senator CAMERON —Good morning. Have you seen the Australian Financial Review article of Tuesday 15 February headlined ‘Directors focused on risk not growth’?
Mr D’Aloisio —I think I recall the headline.
Senator CAMERON —The headline grabbed my attention because I thought, ‘What are directors focusing on risk for?’ But it was not about risk to increase wealth; it was about director’s risk. Some of the views expressed in the article were quite concerning. Firstly they say that:
Many directors of top companies believe that growing investor class actions, greater regulatory scrutiny and the failure of government to cut red tape have forced boards to become too focused on risk, at the expense of growth.
Do you believe that is a fair proposition, given that we have just come through a global financial crisis where there needs to be some regulation and checks and balances in the operation of boards?
Mr D’Aloisio —We just completed the ASIC summer school. The first session of the summer school sought to get a discussion around the issue of corporate governance, the responsibility of directors and whether the law is moving too far or not. Certainly we can make that material available. Issues about where the line lies between imposing responsibility on directors and at the same time wanting them to take risks and make decisions to grow the company are beyond ASIC. That is really a policy issue for government. Where you draw the line between the responsibility of directors and whether they are becoming too risk averse, if you like, and not engaging in activities that they otherwise should be engaging in for the benefit of the economy is really a policy issue for government. It is a big issue, but it is a policy issue and not an ASIC issue.
Senator CAMERON —The other issue here is raised by what is described as the ‘chairman of retail giant Pacific Brands, James Mackenzie’. This is the same Pacific Brands that accepted a range of government grants to buy machinery, which then ripped that machinery out and sent it overseas, sacked Australian workers and then gave their chief executive a massive pay increase. I am not quite sure that we can be lectured by people like Mr Mackenzie. Talking about the American system of AGMs, he says:
“What I like about the American AGM system is that you don’t get 250 people stacked in a room for probably not the right objectives—i.e., the free food and cup of tea afterwards, asking silly questions …
I suppose he was asked some ‘silly questions’ about why he sacked all his Australian workers, why he took government grants and then sent the machinery overseas and why he increased the executive salary. Is there a problem with AGMs that you are aware of in that directors are now saying they do not want to be subject to scrutiny? And what is the difference between our system and the American system?
Mr D’Aloisio —Again, there are a lot of major policy issues in that. In our system we have very active institutional shareholders when it comes to voting and attending AGMs—whether or not they use proxy advisers. We have very active shareholder associations and retail investor groups. We have very active retail investors. We have very active litigation funders who will also work with shareholders to take action where they feel that they have had their rights affected. So the system that we administer, from ASIC’s point of view, is working reasonably well. There has been discussion as to whether AGMs can be more effective. I think a lot of chairmen, to their credit, are trying to see how they can actually make the AGMs more effective, in the sense of getting difficult questions raised, not just more minor questions raised. We think that that is a good development. Some of the chairmen of AGMs have trialled getting questions in advance of the AGM so that they can answer them for the benefit of the broader shareholders at the AGM, or answer them through blogs and so on that are then made available to everyone. ASIC clearly monitors all of that, but we are not seeing a major regulatory issue here. One of the panels at the summer school had non-executive directors on it, and the feedback we got was that they feel they are being scrutinised by shareholders and that they welcome the sorts of questions shareholders throw up at them. So that comment does not make a lot of sense to me, given what I have said.
Senator CAMERON —A nonsensical comment?
Mr D’Aloisio —They are not my words.
Senator CAMERON —If you say it does not make a lot of sense then I am saying that you are saying that it is nonsensical. That is okay. I have been concerned about AGMs for some time, and there has been consistent reporting about problems in elections at AGMs—no rules; no regulations. For other bodies within the country, such as the trade union movement, the AEC is involved in elections. If there is a continued concern from shareholders about the operation of elections at AGMs, isn’t there a role for the Australian Electoral Commission or a more regulatory role for yourself in elections at AGMs? You hear about these things when they happen but then they disappear. There is obviously a problem there.
Ms Gibson —We did a small internal project looking at vote counting and how it works, and we are continuing a dialogue with the market, particularly the four share registry houses that do the voting. At present, the rules of conduct for meetings and for counting votes and so on are established by common law and by the boards. There is room for some more dialogue about how the counting goes. As to whether you appoint an independent scrutineer—sometimes that is the accounting firm—or whether you go to the AEC or others would be a matter of policy, I think. I have not heard that the system is so broken at this stage. We get very few complaints, and we have acted on them where the voting has needed revisiting.
Senator CAMERON —Ms Gibson, you say ‘the system’. There is no system; there are different systems, aren’t there?
Ms Gibson —The system is established by practice, I suppose. Ultimately, the general law sets the manner of conduct and so on. There are many textbooks on how meetings have to be run in accordance with the law, and there are cases where shareholders have gone to court to contest the voting and the manner of counting. So there are definitely rules. The question is just around the efficacy and the degree of checking. With the new rules coming up on executive remuneration, their approval and the consequences of what might follow from their approval or otherwise, there is room for more discussions with industry about the level of scrutiny of the quality of votes.
Senator CAMERON —But it does not only go to scrutiny; it goes to the process as well as to scrutiny. You could be a shareholder of two or three different companies, you could be participating in votes at AGMs and you could have different systems at different companies, couldn’t you?
Ms Gibson —The mechanics of the voting could be different; the general rules would be the same.
Senator CAMERON —So tell me how the mechanics would be different.
Ms Gibson —Well, it would depend on how the computer interface works in the calculation of various registers. That is what I suspect would be the major difference.
Senator CAMERON —Can you explain that to me?
Ms Gibson —Most votes would be compiled by brokerage houses. They would collate the proxy forms as they came in. They would compile them and prepare a report. It would be in their back offices as to how they receive the proxies, parcel them up and the manner of reporting through.
Senator CAMERON —What checks and balances are there against fraud at the brokerage houses?
Ms Gibson —I cannot answer that, I am afraid, Senator.
Senator CAMERON —Do you think that you should be able to answer that?
Mr D’Aloisio —Well, the companies themselves and the chairman—
Senator CAMERON —So is it self-regulation?
Mr D’Aloisio —You would appoint them to carry out the scrutiny and count the votes—and count them properly. You appoint them to perform. So the company itself would want to make sure that there has not been any vote rigging or pushing of votes. The fact that we are not aware of it being a problem, in the sense of complaints and issues to us, would indicate that, by and large, it works very well.
Senator CAMERON —What if there is a vested interest? What if there is a corrupt company director involved in establishing the process and there is corruption in the brokerage house? Is that beyond the realms of possibility?
Mr D’Aloisio —Well, it is possible, but the reality is that shareholders know. Institutional shareholders talk to each other, they put their proxies in, other shareholders vote and there is a show of hands at the meeting. I think they would be alerted to it pretty quickly if there had been any rigging. Where there are people who might have a conflict of interest, those conflicts of interest need to be disclosed. I think we could look at it further, but certainly it is not on our radar as a major problem.
Senator CAMERON —I hope that I am putting it on your radar—
Mr D’Aloisio —I am happy to put it on.
Senator CAMERON —because I intend to continue asking questions about this. You say that you are having a look at this issue within your organisation. Can you come back to me and let me know exactly what you are doing and whether you are prepared to have a look at some different processors where shareholders can be sure that there is some consistency in terms of the process, and there are some checks and balances in terms of ensuring that the votes are fair and above board?
Ms Gibson —-We can do that.
Senator BUSHBY —I thank you the officers of ASIC for helping us today. Firstly, I commend you for placing the matter of ASIC’s use of coercive powers on your summer school agenda last Monday. It is good that these issues are getting a public hearing. I am not sure, but I suspect that to some extent the questions that have been asked by this committee over the past 12 months or so may have contributed in some way to the greater degree of focus that ASIC is giving to that. I see you nodding.
Mr D’Aloisio —We were onto it just before you raised it, but you certainly brought it to our attention!
Senator BUSHBY —Okay, thank you. How did the session go? I am interested in how many attended that session, what substantive points were raised and how it was received by those who attended.
Ms Gibson —I chaired that session. We had three that afternoon and the rooms were roughly split, so I think there would have been about 150. It was a full room. Frankly, I was a little surprised when everyone filmed it and said that it was a terrific and very interesting session.
Senator BUSHBY —Quite clearly of great interest to Australians!
Ms Gibson —Indeed. It was by and large the litigators. Richard Gilbert from the Rule of Law Institute and Steve Helmich from AMP presented their views on coercive powers. We are still going through our internal review that we mentioned the last time we were here. I reported that our study showed that we are substantially compliant with all of the ARC requirements but that there is probably room for more training on a day-to-day basis.
Industry feedback for some notices is that they would like us to ring up in advance and talk about them before they arrive. But they are very happy when they find that, if it is too wide or too short a time, we will then cut it down. So there is room for more dialogue. With our surveillance notices—which are the ones that we might send to industry looking for a review of industry practices—industry would prefer that we did not serve a notice before we did that. To the extent that they can provide that voluntarily, we will look to do so. They would also like some reports about the outcomes when we do industry surveillance. We will look at how we can do that whilst maintaining confidentiality. So it was a positive discussion. There was a lot of expression of interest in working with us, and for them to get some more value from the notice process, which they all accept is a necessary duty that they have to comply with as part of our industry.
Senator COONAN —Is Richard happy now?
Ms Gibson —He said that he was. He said that he was very happy!
Senator BUSHBY —So overall that particular summer school session has assisted you in a sort of intense focused way as part of the development processes of what you are doing?
Ms Gibson —Indeed.
Senator BUSHBY —Are you intending to go further? You are still developing and examining your processes and looking at how you do that. Are you putting in place specific procedures for things like data capture and release? Will you be putting together a policy procedure manual on the use of coercive powers? What are the possibilities going forward?
Ms Gibson —Our rules on how we use the powers and so on are in place and working well. That was our review.
Senator BUSHBY —They are in place, but you mentioned that there is a need for further training. Are you looking at how you can better enable the employees at ASIC to understand what those rules are and ensure that they are on top of them, comply with them and use them in the way that they are supposed to?
Ms Gibson —We all benefit from a refresher from time to time, and in fact there are training programs always happening on notice issues.
Senator BUSHBY —Is there a policy or procedures manual in respect of this?
Ms Gibson —These issues are built into our internal manuals. What we are looking at is what we can say more publicly about how and when we use that. That was certainly one of the requests of the—
Senator BUSHBY —Which is one of the reasons I have raised it before in terms of public confidence in the use of your powers, which I acknowledge are necessary. But public confidence is also necessary for you to be able use them properly.
Ms Gibson —That is right. We are looking at what we can helpfully say, given the width of our powers. We are looking at what other regulatory bodies do in Australia and overseas and we are also looking at the question of continuing to report in annual reports or somewhere, as we did last time about historical usage. It is a data collection issue for us because it is manual data collection. There is not a central issuer of notices. We are now in train to collect that data.
Senator BUSHBY —As I mentioned, I am pleased to see that it is moving forward and I will no doubt take a greater interest in future to see how that develops. While we are still on the summer school, I note in the Australian Financial Review today there is reference to Shane Tregillis making some comments at the summer school about a number of changes to ASIC, particularly with the real time surveillance body. He says that that is a fundamental change and that rather than being the cop that comes in after the accident, ASIC’s new role as market supervisor meant it had to intervene immediately. He is talking about repositioning ASIC in a ‘post global financial crisis world’. What does that mean? What is Mr Tregillis talking about?
Mr D’Aloisio —That comment has been given more prominence than was intended. What the question related to was that, in the normal course of its work, ASIC has to be proactive but we also have to come in when collapses occur to examine and, if you like, to be the policeman to look at what has happened and so on. Our powers have traditionally been that way. Shane was pointing out that with the ASX supervisory regime that has now come across, we have moved a further step in real-time surveillance and enforcement in the markets. That is something new and different for ASIC—
Senator BUSHBY —Different for ASIC but not necessarily for oversight.
Mr D’Aloisio —but that is not a reconfiguration of the whole role of ASIC. That is simply saying that not only are we doing the traditional surveillance and compliance work—the enforcement work where we go in as the policeman et cetera—but also we now have more real-time surveillance work in the markets area.
Senator BUSHBY —Which is something that the ASX would have done.
Mr D’Aloisio —It is what the ASX would have done. This requires us to ensure that we are properly skilled to be able to do that, as well as these other things. That was the context of the comment.
Senator BUSHBY —So the editorial comment, effectively, by Mr Durkin, who wrote the article, that Mr Tregillis had broken ranks with you to argue that the regulator should take a more broad proactive approach is not really accurate?
Mr D’Aloisio —Every commissioner can take a different view to mine, Senator.
Senator BUSHBY —So he is not breaking ranks with you on the direction that ASIC is heading?
Mr D’Aloisio —No, not at all.
Senator BUSHBY —I want to ask a few follow-up questions to the questions that were taken on notice. One of them was to do with exit fees, which my colleague Senator Cormann has already touched on in terms of the broader powers. I had asked whether ASIC had used any of the new powers that you have been provided with under the national credit code. You went through and outlined what you had done with exit fees, that you had put out regulatory guide 220, and what that approach was and so forth. What types of fees under that regulatory guide do you consider are reasonable?
Mr D’Aloisio —What we have done in the guide itself is to give the principles and some examples. I do not have the guide with me. Essentially we are saying that only losses caused by early termination can be recovered, that fees cannot be a source of profit and cannot be used to pay for general marketing or product development costs and cannot be used to punish borrowers who want to shift. We say that fees cannot result in double-dipping. So costs that are recovered through establishment fees cannot be recovered again through early termination fees. We give that sort of guidance when you look at each situation. So for us this guide is very much about saying to the industry: ‘Look, this is a change in the law; this is a serious issue. You have to look at your processes’. Basically exit fees and termination fees are going to be unfair unless they meet the guidelines that I have just mentioned. Last month we commenced an industry review of early exit fees. We are writing to 20 major lenders, and we are going to assess over the coming months just how they have changed and how they are now complying with the changes. At the same time, we are working with industry, because it is a new area, to ensure that there is compliance with the new laws. Clearly, we follow up complaints that we receive. We have not received a lot as yet but we will follow them up as they come.
Senator BUSHBY —So you have not received many complaints?
Mr D’Aloisio —No. My notes say that we have not received many complaints. I do not have an exact number.
Senator BUSHBY —Would you mind taking on notice how many complaints you have received?
Mr D’Aloisio —Yes, I will.
Senator BUSHBY —You say that you are looking at the top 20 major lenders—
Mr D’Aloisio —We are just saying 20 major lenders.
Senator BUSHBY —Twenty majors, sorry.
Mr D’Aloisio —They will be both ADIs and non-ADIs. We are going to do a representative sample. It is really taking a snapshot. We have picked 20—ADIs and non-ADIs, large and medium—to look at what is happening. Of course, as you know, the industry itself has responded. Some banks have abolished exit fees and some banks have said they will pay your exit fee if you come across. We will look at that behaviour as well, in terms of how it is working and whether it is working positively. We have also put on our FIDO website a calculator for mortgage exit fees so that the borrower, the consumer, can actually plug in the relevant issues and find out when they are going to be in front by switching. So they plug in not only the switching fee but also the interest rate and the other terms. They can then work out a crossover point. Sometimes it is quite easy when you have a low exit fee or they will pay your exit fee, but not if the interest rate is much higher. What we have developed is a simple calculator to enable borrowers to do that.
Senator BUSHBY —So it enables people, if they see what looks like a better deal, to work out whether it really is?
Mr D’Aloisio —Yes. Basically, is it really a good deal when you plug in all the issues for your personal situation? That is up and running. We put that up at the same time that we released the regulatory guide because there is some complexity in the area in terms of how switching fees work, what they are and so on.
Senator BUSHBY —Absolutely, it is not a simple area. As your regulatory guide 220 demonstrate, there are some costs that are incurred by the financial institutions which are justified and are built into these things and some which quite clearly are not—in fact, quite a lot. The powers that have been given to you and the approach you are taking will hopefully address those that are unreasonable but allow banks to recover legitimate costs that are part of the process.
Mr D’Aloisio —That is our understanding of the current regulatory regime which we have been given to administer.
Senator BUSHBY —I will move on from there.
CHAIR —There are quite a lot of other senators on the list, Senator Bushby, so I might come back to you.
Senator EGGLESTON —A little while ago at a previous hearing we talked about some of the legal cases that you are pursuing—if you recall, as I am sure you do. I note that you now have won your appeal on the FMG case. But one of the issues that was raised at that time was the costs of these legal cases to ASIC and whether or not you were adequately funded for these cases. I see that you now say that you have won 41 cases. I wonder if you can comment on the financing of these cases and whether or not you feel happy with the adequacy of your funding for them.
Mr D’Aloisio —As I think I said on the last occasion, I can always use more money! Coming more seriously to the point, we fund enforcement through our general revenue allocation. Roughly 35 to 40 per cent of our budget—I can get those numbers confirmed—goes into enforcement and deterrent enforcement activity. We also have what is known as the enforcement special account, which is a fund of $30 million a year that we can draw on once the cost of a matter gets beyond $1.5 million. It comes out of general revenue and then we can access that fund. If the case gets to $20 million then we have to notify the Prime Minister. They are the controls within which we operate. It has worked well over the years; it continues to work well. Clearly there are always unforeseen issues that arise in litigation. There was, from example, the substantial loss in One.Tel and what we need to pay out. We won Fortescue and James Hardie, but James Hardie was reversed on appeal. So the cost issue is a moving target that we need to manage. We are in constant discussion with Treasury about our funding and certainly are at the moment for the next round. We review it and if we feel that we need additional funds we raise it with government. Over the years that I have been chairman, the government has responded to ASIC’s request for funding, whether it is for new activities and so on. So I have every reason to believe they will continue to do so.
Senator EGGLESTON —And you are comfortable with outcomes at the moment, quite obviously?
Mr D’Aloisio —Sorry to digress for a moment, but I will be quick, Chair. The summer school was actually ASIC’s 20th anniversary and it was one of those situations where you could do a bit of reminiscing over the years and see what ASIC has contributed to the community. We really drew a sharp contrast between where Australia was in the late eighties with the collapses and so on—where we had a very embryonic NCSC—and where we are today with the financial crisis and the response of our regulators. One of the things that clearly came through about ASIC when you look over those 20 years is that while we get a lot of criticism in relation to some of the high profile cases that we lose, when you look at the underlying statistics of major matters, ASIC in the criminal area on major matters has a success rate in excess of 60 per cent. In civil matters it has a success rate in excess of 80 per cent, and overall in litigation it has a success rate in excess of 80 per cent. It is not about winning and losing, as I keep saying; it is about spending public money properly to make a point to lift standards. Overall we do that and I think the community should be pleased with the results that we are getting, particularly as you look at those cases in a historical situation. Cumulatively, over that period there is no doubt that that the deterrence activity and other activities of ASIC has contributed to the lifting of standards of corporate governance, lifting standards around how schemes are offered and lifting standards of what is offered to retail investors. So I think there is a reasonably good story there.
Senator EGGLESTON —Are the documents that you referred to in your summer school publicly available or on the net?
Mr D’Aloisio —Yes. The opening in terms of where we did this sort of history is on our website. We put that up at the same time as we delivered it because we felt that it would have a broader public interest in terms of what ASIC has contributed. I was not just talking about this commission; I am really talking about going right back to Tony Hartnell’s era in kicking it off, Alan Cameron and so on. We looked through what had occurred over the last 20 years.
Senator EGGLESTON —There is one other issue that I would like to raise with you—the transfer of the supervision of the Australian Stock Exchange to ASIC, in terms of the implications if the Singapore takeover of the Australian Stock Exchange were to occur. What kind of regulatory issues do you see in that matter?
Mr D’Aloisio —Again, the ownership issue and acquisition are government matters. But the Australian market is being programmed to have competition at the trading level between ASX and other operators that come in. There is potential for competition at the clearing level, there is potential for competition in the data collection and dissemination area. Really, from our point of view, our rules will apply across markets irrespective of who comes into the market and who owns whom, if you like. Ownership is separate from the regulatory framework. Our emphasis is on having a regulatory framework that really promotes and supports confidence in the integrity of our markets. So we need to make sure that, if you trade on our markets, whether you are trading on securities that are listed here or listed elsewhere, you are properly regulated and so on. So the ownership issue is not about licensing and so on; we have a lot of international players in our markets and we license those. From a regulator’s point of view, from ASIC’s mandate, the ownership issue is separate from the regulatory issues.
Senator EGGLESTON —Thank you very much. Singapore’s regulations: do you wish to make any comment on the regime there, just in brief? I know that time is moving on.
Mr D’Aloisio —Senator, I have enough trouble with ours.
Senator EGGLESTON —Is it a different—
Mr D’Aloisio —In broad terms—
Senator EGGLESTON —Is it fundamentally a different system?
Mr D’Aloisio —One of our commissioners, Shane Tregillis, has worked for the MAS for a number of years. His view is that there are a lot of comparable things between the two systems, and Singapore has borrowed a few things from Australia. I think we can get you a separate opinion on that, if you need it. That is just a broad view.
Senator EGGLESTON —I would appreciate that, if you could, and thank you for those answers.
CHAIR —Senator Williams.
Senator WILLIAMS —Thank you, Chair. Thank you, ASIC representatives, for your attendance. Mr D’Aloisio, I want to take you to the issue I have raised with you before about the naming of some of the smaller companies. I have been involved in the Senate committee’s banking inquiry. I can understand where you come from—and Senator Sherry highlighted this once before—about these debenture issuing companies and commercial investments. You brought the axe down on them—perhaps that is a bit severe—or you took steps to see that people did not lose money in those directions. I want to take you back again to those secured lending investment companies.
A letter from a Mr John Price sent to the Probe Group just recently said that there is expected to be a decision in the next three to four weeks. He says in the letter: ‘We would consult publicly before making modifications to our regulatory policy.’ My first question is: is this to change a name? You know the companies that I refer to. They have LVRs of 40 or perhaps 45, conservative lending, real security—land, houses, farms et cetera. Is it solely ASIC’s decision to make this decision as to whether you make a change or does it require legislation?
Ms Gibson —I think there are some provisions in the legislation which seem to draw a distinction between just debentures and unsecured notes. So you need to vary that and, yes, it is an amendment, which we could do either by class order, regulation or statutory—
Senator WILLIAMS —I am referring to a secured note.
Ms Gibson —Yes, indeed. We are looking to consult, and I expect this to be ready by the end of the month, on whether, where the security is not, in fact, on land—with a security on land it can be called either a mortgage debenture or a debenture, depending on certain rules—but on something other than tangible property, which is by and large debts due from others, receivables, where the security is a first security, whether you could say that those are either secured notes or just notes. The concern is whether people investing in these products actually think they are investing in a bank deposit and that it has the benefits of a bank deposit which go with that.
We are looking to go to industry, and that would include banks and so forth, it would include the participants in this industry and it would include consumers and those who perhaps represent people who feel that they have lost out, about the question of naming and about the advertising question. We are looking to pull back from the current regulatory guide, which we consulted on at the time, which guides—it does not say that you have to, but it does suggest that the advertising that says, ‘You may not get your money back’, should be something that is more tied to a comparison to banks.
Senator WILLIAMS —They advertise, under the current system, ‘If you invest with us, you may lose some or all of your money,’ which is not a very good thing to put on the back of an advert when you run a TV ad, a radio ad or even put it in a newspaper. I can understand that that is for risk investments. But, as I have said, these are secured companies with conservative, secured lending. That is why I think they should be called as issuing secured notes instead of being unsecured, compared to some of the other less responsible lenders, I could say, in the past.
Ms Gibson —We are also looking at doing this in the context of some benchmarks about quality of security.
Senator WILLIAMS —Can ASIC just make that change and bring in a sector of secured investment companies or issuing secured notes? You can do that without legislation; is that correct?
Ms Gibson —We do not need legislation but it needs a class order; it is an action. So we need to consult and get an industry view on that, and we look to do that.
Senator WILLIAMS —An industry view: obviously you would talk to the banks and so on, would you?
Ms Gibson —This will be a public paper and anyone can come in and give us their—
Senator WILLIAMS —If it is a public paper, that is fine. I would be concerned if the big end of town came in and put up some argument where the little players could not have a decent advertising scheme—because I think it is very difficult at the moment.
Ms Gibson —I think we could spot that sort of vested interest.
Senator WILLIAMS —Yes, exactly. Just on another issue and a different topic: correct me if I am wrong, but I think section 420A of the Corporations Act basically says, for example, that when a bank sells someone up, they must sell their asset at or around market value. Mr Dwyer, is that the basis of that section of the act?
Mr Dwyer —Yes, 420A requires reasonable efforts to be undertaken by an external administrator to achieve market value.
Senator WILLIAMS —Does that also apply to people who are in the insolvency practitioners industry, like liquidators and receivers? Do they have to abide by that?
Mr Dwyer —I think 420A relates to liquidators.
Senator WILLIAMS —So if a business falls over, whether it be the bank, a liquidator or a receiver selling them up, that law does apply to all of those sectors? You must make all efforts to sell at or around market value; you just do not flog it off to your mates at half price or something?
Mr Dwyer —I think it is liquidators under 420A, but there obviously is case law around other areas, like receivers or administrators, that require them to achieve market value.
Senator WILLIAMS —Thank you for that issue about those smaller secured companies. It is something that has been raised in the banking inquiry and I know it drew a fair bit of attention. I personally want to see balance in competition in the finance industry. If you have the big players here and the little players here trying to compete, the little players have that bit on the advert and I do not think it is true for those secured companies. I think it is very unfair and, as I say, life is about fairness. Thank you, Chair.
Senator COONAN —I just have a couple of questions and then I will allow my colleagues to continue. I want to come back to the issue of progress of stock market competition. In particular, I am interested in how you are going with looking at what integrity rules you might put around electronic trading, algo trading and dark pools. Can someone at the table fill me in on where that is up to? As part of the consultation process, I know you have stopped short of demanding pre-trade transparency, and I am not surprised. Could you give me a bit of a walk-through as to where that is up to?
Ms Gibson —Certainly. Our consultation paper that we issued in November addressed these issues and sought people’s commentary. We are still looking to finalise where we should land on these questions, because there is no uniform view in industry about the merit or lack of merit of dark pools. As you know, with dark pools there is no pre-trade transparency but under our laws there must be post-trade transparency—it must go straight through to a market so that you can see it there. There is no question that that would continue. The issue really is: should there be some threshold so that you cannot sell orders below a certain point or should there be some requirements? The concern is that, if so much goes into dark pools, you lose proper price discovery.
To foreshadow a little, the upshot of all the consultation is that there is certainly no uniform view that dark pools are necessarily bad, particularly where the rules are such that they can trade within the central limit order book. We are still working through exactly what rules would be appropriate here and it does require an amount of foreshadowing as to where the market might go with the introduction of competition.
On high-frequency trading, high-frequency trading is a subset or a particular program that goes with algorithmic trading, so the wider question is algorithmic trading. There are a number of concerns there that were particularly raised during the so-called ‘flash crash’. The problem there would seem to be the fact that a number of algorithmic programs talked to each other without the benefit of human intervention and the market plunged and came back. We are having a lot of discussion with the exchange, with Chi-X, and with market participants about the right rules. The Americans have gone very much to some very quick circuit-breakers, and we are certainly looking at that. At the moment the ASX has some of those rules and we will look to what it should do in a developed market.
The very big focus that we have had since we took on market supervision is looking at the algorithms. There is a pre-vetting requirement on the brokers themselves and we are testing their testing, as it were, of that. My notes say that in the year to the end of December there were some 10 instances where we rang the brokers and said, ‘That program in there looks funny; what are you doing?’ That is either because it looks to be disrupting trading improperly or it might be a market manipulation problem, which is obviously an illegality issue. So we are monitoring and the attention on the industry is very much heightened. As for the detailed rules on access, the rest of the world is trying to work that out too. A system which has us checking each program before it goes in does not work.
Senator COONAN —That would not work. I think there was some suggestion, in your paper anyway, that there would be regular reporting. I think it is monthly monitoring—that there would be some sort of regular reporting?
Ms Gibson —I am sorry, I cannot recall—reporting to us?
Senator COONAN —Yes, that is right.
Ms Gibson —I think it would be.
Senator COONAN —To report to ASIC monthly on the nature of the pool, the number of Australian clients, the number of valuable trades executed et cetera.
Ms Gibson —There has been a diverse response. With many things—for instance, on best execution—there was a general consensus on what the rules should be. There is less consensus on this and I think we are still talking actively, trying to find one.
Senator COONAN —By the nature you are dealing with large institutional investors not eager to telegraph their trade, so you start, I suppose, with a fairly reluctant body of traders.
Ms Gibson —I have sat on our Market Supervision Advisory Panel, which talks about this, and there is equally a discussion about good price discovery. They all understand that if it is all in an unlit market price discovery is affected. High frequency traders tend to operate on the lit market because they are trying to look for fractional price changes on those markets. So it may be that with a lot more high-frequency trading, which you would expect with competition, the lit market is bigger and you do not have to worry about the relative volume of the dark markets. That is the nature of the discussion we have to have, but price discovery is fundamental even to the brokers so it is not quite as simple.
Senator COONAN —This is probably a difficult question but I would appreciate it if you would have a go at it. What does ASIC believe would be the impact of electronic trading, if and when it begins operation, on market integrity?
Ms Gibson —There is no reason why you would think market integrity would be any less because of the introduction of another market. When we introduced supervision, we included facilities to be able to supervise both markets. A lot of work needs to be done in an IT sense between all the markets, all the brokers and us to make sure that we have that supervision. I suppose a participant might say that it would be easier to hide it on two markets, but I do not think that would be a valid assumption.
Senator COONAN —What will it do to competition, do you think?
Mr D’Aloisio —Just on the first question of integrity, the whole point of our consultation on the new rules is in fact to ensure, as Belinda is saying, that the integrity of our markets is maintained. We are not alone in the world in having competition for trading services so we obviously have looked at what has happened overseas, particularly in Canada, which is very comparable. We have no reason to believe or to advise government that the integrity of the market would be impacted by having more than one participant in the trading services.
On the issue of competition and what impact competition will have, I think the market would say that at the moment the threat of a new entrant has impacted in terms of pricing in the market. So you would expect that that sort of price impact would occur, and the government has pointed out that that is one of the long-term benefits it sees in introducing competition. It is not in ASIC’s realm, but we would have no reason to believe that would not be the case.
Senator COONAN —Did you consider the impact of electronic trading in your report on the potential impact between the ASX and SGX merger?
Mr D’Aloisio —The ASX-SGX merger is a matter for government. We need to come back. Electronic trading is not new; it is there whether ASX operates or not. It is not new in introducing a second operator. It is where the market is moving and it is not all that relevant that you have one, two or three. So electronic trading is with us, high-frequency trading is with us, and all the variations are with us. Deep, dark pools were with us and continue to be with us. This is an evolution and instead of one with all those things, you have two. ASIC’s challenge is to bring in rules to regulate the two so that if you go to your broker and Chi-X is operating with ASX and your broker says, ‘Which market would you like to trade on? I will direct you to one market or the other. My view is that you should go to this market,’ you are given a choice at that point.
Senator COONAN —What is the time frame? I know that Shane Tregillis said 2011, when the framework is ready and the market is ready, or something very general. Minister, are you able to give us a better time frame?
Senator Sherry No. I cannot give a time frame beyond the issue that I think the chair has indicated that he will give a schematical time line over.
Mr D’Aloisio —To be fair, Minister Shorten is waiting on ASIC’s publication of a timetable, which I think I said earlier we will do shortly. We are nearly there to do that and give that to the market shortly. I am sorry; I know that you will push me on ‘shortly’. I cannot go further than that at the moment.
Senator COONAN —I used to say it myself. I understand. All right: ‘shortly’. Thank you.
Senator CORMANN —Mr D’Aloisio, you have said a number of times now that the ASX-SGX merger issue is a matter for government—and, of course, it is. But you have had some involvement in the process so far, haven’t you?
Mr D’Aloisio —The key policy issue here is that the agency is Treasury, advising government. ASIC overall is an agency of Treasury. Certainly if we are asked for input we do that. But with the policy matter, we might advise on issues, but that is advice to government, and it is a matter for Treasury and government on what it wants to do with what we may say and in running this issue. It is not an ASIC policy issue at all.
Senator CORMANN —No. I am not trying to pin you on the policy direction or the ultimate decision by government; I guess I am just trying to get an understanding of your involvement in the process from a process point of view.
Mr D’Aloisio —Our role in a process sense is that we clearly want to look at and draw to government any sorts of regulatory issues that should be considered as part of what it might be considering in a broader view. That is not unusual. That is similar if you go to competition for trading services.
Senator CORMANN —What sorts of regulatory issues are we talking about?
Mr D’Aloisio —Clearly we would have assisted government with the sorts of rules that may be needed if you go to competition. Beyond that, I am not really in a position to go further in relation to ASX-SGX.
Senator CORMANN —There has been some media coverage suggesting that the ASX-SGX merger could result in a loss of Australian regulatory sovereignty over the activities of ASX. Would that be the case, from your point of view?
Mr D’Aloisio —I think that is a matter that should be directed to Treasury rather than to us.
Senator CORMANN —So you do not have a judgment on that?
Mr D’Aloisio —No, I do not.
Senator CORMANN —Interesting. I have a series of other questions. Is it correct that your financial advice stakeholder team does not have a senior manager and has not had one for some time?
Mr Medcraft —The leader of the financial advice stakeholder team is Delia Rickard.
Senator CORMANN —So it does have a senior manager?
Mr Medcraft —She is actually a senior executive leader.
Senator CORMANN —So that is bad market intelligence, is it?
Mr D’Aloisio —The confusion may be that the financial advice area—I think they were put together.
Mr Medcraft —What we did was to put together two areas. The actual team was called ‘consumer advisers and retail investors’. We effectively merged it to create one team under Delia Rickard, basically because we saw a lot of synergies between consumer advice and retail investor literature.
Senator CORMANN —Is the effect of what you have done that the financial advice stakeholder team has essentially been downsized in recent years?
Mr Medcraft —In all of our groups, we have people leave. I cannot tell you what the numbers are currently. It is a merged team. In fact, what is interesting in that team is that many of the people who were in the consumer and financial literacy team are actually now starting to get involved in surveillance of financial advisers, and vice versa.
Senator CORMANN —Because I want to give Senator Bushby some time, I will quickly ask you, perhaps on notice, to give us some advice on what actually happened. You have said you have merged those two sections. How many staff were in those two sections before? What did they do before? How many staff are now in the merged section and what are they doing? I am just trying to get a sense of to what extent financial advice reform remains a priority in the context of what the government is doing.
Mr Medcraft —All I can say is that we will come back to you with that information. I think it is a very important priority, particularly with the initiatives announced.
Senator CORMANN —The suggestion on the street is that the whole focus has lessened somewhat. So I am giving you the opportunity to prove them wrong.
Mr Medcraft —Sure. We will come back to you.
Mr D’Aloisio —We will do that.
Senator SHERRY —We will take it on notice.
Senator BUSHBY —I want to go through some answers to questions on notice that you provided. Just looking at one question, SBT 65, about the enforcement special account, you listed the amount paid out of the ESA over the last four years. It will go from $16 million to $23 million to $23 million to $57 million in the 2009-10 year. That is a big jump. Obviously there is a lot of activity in terms of how much you are spending on enforcement. Also, you noted that you had $17.7 million in the ESA as at 31 October. Can you give me an update on where it currently stands and maybe a short explanation of why it has gone up so much?
Mr D’Aloisio —There are a couple of things. Certainly, there are major matters and where they have reached court some of them have gone up. There is also in that $57 million the $13½ million we paid in costs in OneTel. So the increase is relevant to activity, relevant to GFC, relevant to the collapses—major matters. As at the end of January or the end of December or January, it would probably have been standing at about $20 million, I think, in terms of—
Senator BUSHBY —How much have you expended?
Mr D’Aloisio —what we will have spent in this year’s allocation.
Senator BUSHBY —What is the balance?
Mr D’Aloisio —The balance gets to 30 each year; that is the balance.
Senator BUSHBY —So that is the balance of what you would expend.
Mr D’Aloisio —And, clearly, you look at that as you run your matters. As for the reason that it jumped to $57 million, it is $30 million a year but you can bring forward what you do not spend in one year to the next.
Senator BUSHBY —Do you need to pool the whole amount that you have not spent?
Mr D’Aloisio —You can bring that forward. If you average that out, you are not exceeding the $30 million.
Senator BUSHBY —Has it been $30 million every year from 2006-07?
Mr D’Aloisio —My understanding is yes. Since I have been chairman, it has been $30 million.
Senator BUSHBY —So, effectively, $120 million has gone into the ESA over that four-year period—$150 million including this year—and you are down to about $10 million left out of that.
Mr D’Aloisio —Yes.
Senator BUSHBY —If you can give me the updated figures, it would be appreciated.
Mr D’Aloisio —Sure.
Senator BUSHBY —Also, in SBT 151, I asked questions about the hospitality spend. You indicated that you were not able to provide a break-up of your hospitality spend. When I ask other agencies, they are able to provide that, and I would like to request that you look at your record keeping to see whether it is possible to do that in future.
Mr D’Aloisio —Is there an agency that we can follow—
Senator BUSHBY —I have copies of it and—
Mr D’Aloisio —I am all for transparency, so it is not an issue in giving you the—
Senator BUSHBY —We ask others and they can tell us how much they have spent—for example, how much a Takeovers Panel dinner cost. Those are the sorts of things we would get from others. It would be very useful for transparency. Similarly, at SBT 146, I asked about consultancies. Your answer referred me to the AusTender website. Other agencies actually give me the list. I went to the tenders website and had a look, and it is a quite complicated procedure to work out the answers that I want, which I imagine you probably have at your—
Mr D’Aloisio —I apologise. We will get you that information.
Senator BUSHBY —Thank you. I have some questions on staffing levels. In SBT 144, in response to my question, ‘Have any voluntary or involuntary redundancies been offered to staff; if so, how have staff been identified for such offers; are there such plans for the future?’ you say there have been voluntary and involuntary redundancies offered to staff. Then, in SBT 162, when I was asking about the efficiencies, you say that there were no voluntary or involuntary redundancies offered to staff in order to meet the 2010 MYEFO—which is more specific, I would note. How do those two answers sit with each other?
Mr D’Aloisio —Can I take that on board and give you an explanation? I am sorry if there is confusion.
Senator BUSHBY —Thank you. With respect to government payments of accounts, in answer to question on notice SBT 156, you say 91 per cent of all invoices were paid within 30 days. Most of the ones that were not were due to the receipt of incorrect invoices or differences in respect of amounts charged. The use of the word ‘most’ just struck me. With the ones that are not, what is the cause of delays?
Mr D’Aloisio —It could be disputes, but I will get you more detail.
Senator BUSHBY —Okay. In SBT 191, which talks about the challenges to the use of ASIC’s compulsory powers, you noted that, since 1 July 2007, ASIC’s use of compulsory powers has been challenged in court seven times and you also noted that in two instances ASIC’s use of powers was found to be invalid. What were those circumstances?
Ms Gibson —I cannot remember exactly. We will need to come back to you.
Senator BUSHBY —If you could, please. You also go on to note that some of these challenges are tactical actions by people or entities who are subject to investigation and they are trying to delay or do whatever. You refer to those seven court challenges and notices included actions by Firepower, two instances, and AWB, two instances. Of those four out of seven, were any of those four the two where your use was found to be invalid? If that is the case, it does not sound like they are tactical.
Mr D’Aloisio —No, I understand.
CHAIR —That brings us to the end of the ASIC section. Thank you to ASIC for coming in again.
Proceedings suspended from 10.30 am to 10.48 am