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ECONOMICS LEGISLATION COMMITTEE
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ECONOMICS LEGISLATION COMMITTEE
ACTING CHAIR (Senator Collins)
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Senator Ian Campbell
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ECONOMICS LEGISLATION COMMITTEE
(SENATE-Thursday, 21 February 2002)
- Start of Business
ACTING CHAIR (Senator Collins)
ACTING CHAIR (Senator Watson)
Senator Ian Campbell
- Superannuation Complaints Tribunal
- Financial Reporting Council
- Australian Competition and Consumer Commission
Mr G. Smith
ACTING CHAIR (Senator Watson)
Senator Ian Campbell
- Senator CONROY
- Mr Johnston
Content WindowECONOMICS LEGISLATION COMMITTEE - 21/02/2002 - TREASURY PORTFOLIO
ACTING CHAIR (Senator Collins) —Today the committee will continue its examination of the Treasury portfolio additional estimates, commencing with the Australian Securities and Investment Commission. I remind officers that the Senate has resolved that there are no areas in connection with the expenditure of public funds where any person has a discretion to withhold details of explanations from the parliament or its committees unless the parliament has expressly provided otherwise. I also remind officers that an officer shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked to the officer to superior officers or to the minister.
Witnesses should note that the evidence given to the committee is protected by parliamentary privilege. I also remind you that the giving of false or misleading evidence to the committee may constitute a contempt of the Senate. For the benefit of officers who were not here yesterday, I advise that the committee has resolved that the date for the receipt of written responses to questions taken on notice is 30 days from the completion of this round of hearings. On that basis, the responses should be provided to the committee by Friday, 22 March 2002. I welcome the minister. Do you wish to make an opening statement?
Senator Ian Campbell —No, thank you—other than to say thanks for the promotion!
Senator CONROY —I want to ask some questions about the annual report. I understand that the financial statements included in the annual report were signed off by the Auditor-General on 29 August 2001, and that you signed off on them in August also—is that correct?
Mr Knott —Yes, that is correct. ASIC complied with the guidelines on timing for the annual report.
Senator CONROY —What date was the annual report released?
Mr Knott —The annual report was submitted by ASIC to the former minister within the required time frame. I cannot remember the precise date it was then tabled, but my recollection is that it was tabled shortly after the return of the government in November.
Senator CONROY —That covers roughly two months that the minister had the report.
Mr Knott —That is so.
Senator CONROY —Parliamentary Secretary, it appears that the minister had ASIC's report for around two months before it became a public document. Do you think that is a reasonable time to sit on a report?
Senator Ian Campbell —Sorry, Senator Conroy. I was actually reading something else while you were having an interchange with the chairman. If you could tell me the dates that are relevant?
Senator CONROY —We had established that ASIC supplied the report on or around 29 August to the minister and it was not released until after the election, which constitutes about two months. I am not sure whether any caretaker provisions override the tabling of the report.
Senator Ian Campbell —My recollection, which is a dangerous thing, is that it was one of the first things that came to me when I got into the portfolio, and I think I basically just signed it.
Senator CONROY —I know that you speedily dealt with the matter, Minister.
Senator Ian Campbell —I do not think there is anything in it. I think it is just that it would not have been at the top of the minister's file of things to do. I think we moved into an election shortly after that.
Senator CONROY —According to the guidelines on caretaker conventions—I know you flagged that—published by the Department of the Prime Minister and Cabinet, annual reports can be tabled during the election campaign unless the report contains information that is likely to be controversial. Is there anything in the report that the minister—your predecessor—thought was controversial or any reason for him to sit on it?
Senator Ian Campbell —Certainly not brought to my attention, but I am happy to—
Senator CONROY —You were happy to release it pretty much as it was when you had a look at it?
Senator Ian Campbell —Indeed. I think the whole decision making process was a matter of seconds.
Senator CONROY —Can I commend you on the speed with which you released the report. I just want to compare last year's results with this year's results, as shown in the annual report. Does this year's annual report for the year 2000-01 cover the 12-month period since the abolition of the Small Business Program due to budget cuts?
Mr Knott —Yes, that is correct.
Senator CONROY —Comparing the enforcement results in 1999-2000 when the Small Business Program was still running, there were 336 summary prosecutions completed. Can you take me through what summary prosecutions are? Do they include actions like banning company directors, misconduct by external administrators and that sort of thing?
Mr Knott —It includes that type of activity, but numerically the greater number relates to prosecutions for the failure to either maintain records or to supply them to a liquidator following the commencement of insolvency. They are usually uncontested proceedings and they are dealt with summarily before a magistrate type court.
Senator CONROY —In 2000-01, then, there were only 22 summary prosecutions completed. Can you explain why the number of summary prosecutions completed fell by 93 per cent?
Mr Knott —Yes. I think it is fairly clear from the reading of the annual report, if I can quote from that. In my report I said:
Some of the statistical information contained in this report reflects a reallocation of resources foreshadowed last year. In particular the substantial reduction in summary prosecutions reflects the diversion of enforcement resources from relatively minor offences to the more complex cases now confronting us.
Senator CONROY —So it is fair to say that the unit that was largely responsible for policing in this area was that Small Business Program, which, due to funding constraints, was closed down, and there has been a direct correlation to the number of summary prosecutions that you have been able to undertake?
Mr Knott —Yes, that is correct.
Senator CONROY —Minister, do you think it is satisfactory that there has been a 93 per cent fall in prosecutions because ASIC does not have the money to chase crooks?
Senator Ian Campbell —I think that is an overexaggeration.
Senator CONROY —A 93 per cent fall is an overexaggeration?
Senator Ian Campbell —You said they do not have the money to chase crooks. The resources for ASIC generally are budgeted in 2000-01
Senator CONROY —They were reduced again?
Senator Ian Campbell —Ultimately, what the chairman has told you is that they have to prioritise where they spend their resources, and that their assessment is that the resources being dedicated to enforcement are within a correct balance at the moment. That is a decision for them.
Senator CONROY —ASIC has actually had their funding reduced over a number of years now. I am hoping that you will be able to win an argument in your ERC to see an increase in funding. So I am barracking for you, Minister, to win an argument which seems to have been lost in the last couple of years. But what concerns me is that one of the key functions of ASIC involves prosecuting and banning company directors. ASIC has been very proactive in chasing down this bunch of spivs ripping investors off and putting them out of business, so to speak. Yet there has been a 93 per cent reduction in prosecutions and bannings in this particular area. Do you think that this affects market integrity?
Senator Ian Campbell —I am confident that ASIC's enforcement role is being fulfilled properly within its resources and we are confident that the resources are adequate. As you have said yourself, Senator, the ERC through the budget process will be considering those matters now. We are actually considering last year's budget before these estimates.
Senator CONROY —But last year's budget has led to a 93 per cent fall—
Senator Ian Campbell —I think that I noticed, actually, during the election campaign that Labor's commitment to increasing ASIC's budget worked out to $1.5 million per annum.
Senator CONROY —As opposed to yours which has been three years of cuts.
Senator Ian Campbell —Your most recent policy statement is that you will be able to fix all the problems at ASIC by putting in $1[half ] million a year.
Senator CONROY —I am happy to put up my hand and say I won the argument for some increase in funds. I am just hoping you are able, in the next round of estimates, to put up your hand and say you won the argument. I am not saying it is easy. I accept the difficulties you face, Senator.
Senator Ian Campbell —Since the election the government has actually provided ASIC with an extra $2[half ] million.
Senator CONROY —Cut it out—that is tied to HIH.
Senator Ian Campbell —Your policy statement during the election did not include $2[half ] million for HIH so we are $1 million ahead of you already.
Senator CONROY —No. We did not oppose that commitment. We were giving them some money to supplement their budget for their core functions—core functions being defined as things like banning company directors and misconduct by external administrators.
Senator Ian Campbell —But there is no money in your own expenditure forecast in the election for HIH.
Senator MURRAY —This is debating the matter. I think the questions are very good and I would rather stay with the questions than debate.
ACTING CHAIR (Senator Watson) —Can we have questions? I believe that there is growing support in the wider community about the way, Mr Knott, you and your officers are handling your regulatory responsibilities. We commend you as a parliamentarian and a former chair of the committee—
Senator SCHACHT —What you are saying is that we should put the boot into them.
ACTING CHAIR —I think that Senator Conroy will probably endorse my comments.
Senator SCHACHT —You endorse ours, too. We appreciate the point, Mr Acting Chair.
Senator Ian Campbell —I thank you for those comments, Senator.
Senator CONROY —I can only agree with Senator Watson. In your report you state at page 20—and I think that you have already made reference to it, Mr Knott:
Some statistics below reflect reallocation of resources foreshadowed last year.
Minister, I hope that you have been reading the report in your quieter moments on the plane perhaps backwards and forwards to Perth. It continues:
In particular, the substantial reduction in summary prosecutions and also, to a lesser extent, criminal and civil litigation reflects the diversion of enforcement resources from relatively minor offences to the more complex cases now confronting us.
And that is the case. The corporate white-collar fraud area is becoming more complex and the message here seems to be that as long as you are not too much of a crook, as long as you are just a small-sized crook, you can get away with it because this government does not care. Do you agree with that sentiment?
Senator Ian Campbell —No, I do not. In my previous time in the portfolio and, in fact, in my time sitting on the other side of the table, I have watched the resourcing of the ASC and ASIC and you must realise that, with all of these agencies, the priorities need to be set within the agency. No agency is capable, be it ASIC or be it the ACCC, of chasing down every single alleged misdemeanour—the resources required would be endless. But I think it is a very fair debate to have.
Senator CONROY —But this is a core function of ASIC.
Senator Ian Campbell —Yes, it is.
Senator CONROY —And they have had to close it down—
Senator Ian Campbell —No—
Senator CONROY —and there is a 93 per cent reduction. Are you sure that it is only minor offences and that this sort of diversion does not create an environment where people begin to think they can get away with breaches of the Corporations Law because ASIC are too cash strapped to chase them? Do you think that that is an impression the market would appreciate?
Senator Ian Campbell —The allocation of priorities and resources is a matter for ASIC and it has always been a matter for ASIC. You can argue about the amount of core funding—that is a matter for legitimate public debate.
Senator CONROY —The issue funding is relevant here. In the ASIC report, Mr Knott says:
We would, of course, welcome additional resources to address more comprehensively our changing, more complex environment. However, it is a matter for Government to determine the acceptable level of funding for corporate regulation and it is unrealistic to imagine that every sectoral demand can ever be fully satisfied.
This is a cry for help, Senator Campbell. Two years ago, Mr Cameron wrote in his annual report that ASIC could no longer continue to perform functions that the parliament and the community expected of it because of the cuts in funding. He makes that point. He said that staff were overstretched. I know you will have heard lots of pleading from every group telling you that, but what we are seeing here is a collapse in the number of prosecutions because all the money is having to be diverted to much more complex cases. Do you think that a 93 per cent fall in prosecuting dodgy directors and people who have been fudging in administration is a matter of concern?
Senator Ian Campbell —I think the words that the chairman has chosen and the words in the annual report accurately reflect the position within ASIC. In my relatively short time in government, I do not know of a single agency that has not come forward and put a case for more funding.
Senator CONROY —Sure.
Senator Ian Campbell —In my 11 years in parliament on both sides of this table, I have seen the same arguments made.
Senator CONROY —Here is your chance to convince them that you are in there batting for them.
Senator Ian Campbell —Having just come out of the ultimate public debate on this, where the coalition put forward its position and the opposition was able to put forward its budget position, your position was to increase their budget by $1.5 million.
Senator CONROY —And yours was to? Here is your chance to let them know that their parliamentary secretary is in there fighting for them.
Senator Ian Campbell —Since the election we have actually given them an extra $2[half ] million.
Senator CONROY —Yes, tied to the HIH royal commission, which is not part of their core funding and will not restore the small business unit.
Senator Ian Campbell —The opposition did not pledge anything for HIH—that would have had to have been an extra expenditure which you did not account for during the election. It is a very legitimate debate to have: is ASIC adequately resourced? It is not the debate for here; it is a debate for the ERC and the parliament.
ACTING CHAIR —Senate estimates questions?
Senator CONROY —Your annual report, Mr Knott, indicates that there has been a 26 per cent increase in the number of public complaints about misconduct. In what areas are you getting complaints and how are they being handled?
Mr Knott —I think the report makes it clear that the number of public complaints has been rising quite dramatically. They come from a variety of areas. Small business insolvency is a constant source of debate, where people look to us to try to help. But I should say also that, to some extent—and I hope this does not sound too immodest—this is a problem of our own success in the sense that the more the public perceives us to be doing an effective job or becomes more aware of the job we are doing, the more likely they are to pick up the phone and see if we can help them. There is no question that that has been a part of it.
Senator CONROY —I do not think you need to be immodest on that issue, Mr Knott.
Mr Knott —I would give as an example the dramatic increase in public complaints or public contacts we received after the cold calling programs that took place last year and in particular the raids which took place in Thailand. That produced a great deal of publicity about the program, and I think that people who previously had not thought of us as an agency to contact picked up the phone. So it is across a whole variety of areas.
Senator CONROY —My office is getting a disproportionate number of complaints about ASIC's performance in relation to the external administration of companies. Are you seeing that? Are extra resources being diverted into that area?
Mr Knott —The whole insolvency area is a fairly fraught one. As you would know, it is not just a question of resources; it is a question of the law and the difficulty for the regulator in achieving effective outcomes in insolvency cases, particularly insolvent trading types of actions. They are amongst the most complex types of investigations to undertake. The law is a balance between limited liability and the desire to promote capital formation particularly by small companies, on the one hand, which tends to protect directors of failed companies while, on the other hand, trying to reduce the interests of creditors. The issue could be looked at from a law reform point of view to move that balance, to look at the question of whether limited liability needs to be in some way reduced and more strict liability applied. So it is really a very complex issue, and it is one that I have spoken about publicly. I have recognised the problem, and I recognise in a public policy sense that it is a very complicated debate to have.
Senator Ian Campbell —I would add that it is an area that I will be giving a very high priority, and I will be making some announcements about it shortly.
Senator CONROY —You have teased us and tantalised us there, Senator Campbell. You don't want to make a big splash today?
Senator Ian Campbell —No, I think we will save it for tomorrow or the next day.
Senator CONROY —Mr Knott, in an interview in October or November last year on Business Sunday you said that ASIC was managing reasonably with the major financial failures `but of course it means that there is some diversion of resources from other matters'. You said:
Well that's becoming a problem because there is an increase in the level of public complaint to ASIC at the small business end and that the small insolvencies, of course, that type of thing increase where economies start to contract ...
Is that still the case? Is it still a problem which is not being met?
Mr Knott —I do not think I can add to the previous conversation. I would simply repeat the answers I have provided.
Senator CONROY —Mr Knott is indicating that they were receiving an increased number of complaints and that, because of some of the major corporate failures, resources have been further diverted, and that HIH was but one failure. There was also One.Tel and Harris Scarfe. So there has been a diversion of resources within ASIC because, as Mr Knott says, they have to make decisions about that within a budgetary context. They say the increase is at the small end of the market and that resources, by virtue of the nature of the huge collapses that took place last year, have been diverted to the big end of the market. Do you think it is satisfactory that they are unable to address the increased public requests for assistance because the funding of their core areas has been cut over the last three years?
Senator Ian Campbell —Firstly, you make the point about collapses such as HIH. We have reiterated on two occasions this morning—
Senator CONROY —And I mentioned One.Tel and Harris Scarfe.
Senator Ian Campbell —They have been given additional resources to handle those cases, for good reason. In terms of the number of requests for information and complaints they are receiving, I think it is fair to say that ASIC have been very successful at increasing public awareness of the fact that they are a port of call.
Senator CONROY —And they should be congratulated on that.
Senator Ian Campbell —Which I do. That is a program which was started by the previous chairman and continued by Mr Knott.
Senator MURRAY —My question is on the small business issue only; I will pick up other issues later. Before I start, Mr Knott, I have assessed that either your organisation has increased its ability in communications or you have increased your successful activity, judging by what I receive on my fax. My congratulations on both counts.
Mr Knott —Thank you, Senator Murray.
Senator MURRAY —I am a bit of a fan of in-your-face regulators, so I am pleased to see ASIC going in that direction. Following up on Senator Conroy's points on small business, I keep an eye on small business as part of my job. Anecdotally it has been reported to me that small business are somewhat aggrieved by what they think is a lack of attention from ASIC and from the ACCC. They think there is a bias towards big events and the big end of town. However, that is anecdotal evidence. My question is: are ASIC testing, surveying or interviewing a representative sample of small business to ascertain whether they are satisfied with the service you are providing and the resources you are applying to their sector?
Mr Knott —We do have a periodic program of surveying across a whole range of stakeholders for feedback, and that is fed into our strategic planning process. That takes place every two years and it is conducted by an external research firm. We will be undertaking that program again this year. I said in the annual report, in the context of the comments that Senator Conroy has referred to, that when stakeholders feel that other stakeholders are getting a bigger share of the pie they become disaffected and they all would rather have more resources applied to their issues. We understand that and I do understand that in particular in the insolvency area there has been feeling that the resource shift has been at their expense.
I would make the comment that I think for a securities regulator the first overriding imperative must be the publicly traded market. I say that because it is not only the broad range of investors in that market but its reputation that affect directly the national reputation and the capacity of the country to continue to attract capital. So I think it is not surprising when decisions have to be made, and particularly when financial failures of the type we saw last year occur, that the national securities regulator is very focused on that market.
Senator MURRAY —Nevertheless, without suggesting you indulge in push polling or anything of that sort, to persuade a government that a sector which reflects the kind of percentage drop in activity that Senator Conroy has outlined, the fact that the sector itself takes the view that it is badly underresourced or underserviced in particular areas would I think increase your case and the case of advocates for that sector. Really my question to you is whether you will ensure that the questions are designed to ensure that they enable you to mount a proper case to government for the application of resources.
Senator Ian Campbell —One of the other measures that ASIC take—something that, I think, flowed from the original establishment of the establishment of the ASC in 1990—is the provision of regional liaison committees. I know, from my own experience in the portfolio previously and also from my experience within the Perth business community, that there is a very high regard for that regional liaison committee process. I was aware previously that there were members of the small business community on those regional liaison committees who meet regularly with the regional commissioners. I will be undertaking in the portfolio a regular series of visits to all of those regional liaison committees and each of the capital cities. But there are small business representatives on that and I will, of course, in consultation with the chairman and the regional commissioners, be making sure that there is adequate representation.
The other point that should be made is that it is unfair to say that because of a reduction in the summary prosecutions that that represents some lack of focus on the smaller end of the market. If you actually look through pages 21-23, you will see that a lot of the successful prosecutions were, in fact, for smaller end of the market, certainly in the SME type sector.
Senator CONROY —The total number has fallen to 193 per cent.
Senator Ian Campbell —The total number of investigations commenced has increased and there has been a significant record of achievement in terms of jailing offenders, fining offenders and delicencing people. It is a distortion of ASIC's performance in their role of enforcement to pick on one area such as summary offences. It is wrong to say just because the summary offences have gone down that there is a lack of focus on the so-called smaller end of town.
Senator MURRAY —Could I get a response from Mr Knott to my question? The point of my question is this: I concur with Senator Conroy's view that there has been a reduction in activity. I am advised anecdotally by the business organisations I deal with that they are concerned about it. The only way to establish the veracity of that is by an authoritative, representative survey of small business which is properly constructed. My question is whether you will ensure that that particular direction is included in the survey you outline?
Mr Knott —Yes, I will.
Senator MURRAY —Thank you. That is all I have on the small business sector.
Senator CONROY —I wanted to continue with the issue of external administrators. A number of the constituents who have been calling my office are querying the level of remuneration of administrators and also their relationship with directors. In March 2000, when announcing the results of a review of selective voluntary administrators, you stated:
ASIC remains concerned about the need for greater transparency for administrators' remuneration. In some instances remuneration sought by administrators was open-ended and not capped as required by the IPAA guidelines and appeared excessive in some instances.
What have you been doing about that issue since then?
Mr Knott —We have been actively engaged in dialogue with the IPAA and with its membership to improve the standard of disclosure and to ensure that the guidelines that are laid down by the IPAA are observed. We have an internal project in the insolvency area that will look at this and other aspects of external administration, which will commence within the next month or so. It is in its final stages of preparation and is yet to be signed off by the commission. I have also noted the comments made by Senator Campbell and I will await with interest his announcement to see how that might impact—
Senator CONROY —Come on, you are teasing us again there. So you have had some discussions with Treasury or the minister or parliamentary secretary on the necessary reform in this area? You have drawn it to the government's attention?
Mr Knott —We have not made any law reform proposals on this matter to the government, at this time, Senator.
Senator CONROY —You do not think any law reform is necessary?
Mr Knott —I am not suggesting that it is not. I have foreshadowed to you that we are in the final stages of putting a program in place to look at that and other issues relating to external administration. It is a relatively new regime of consultancy, as you know. It has now, I think, had enough time to be road tested. There are some issues that come out of it that need to be reviewed, and we are committed to undertaking that work.
Senator CONROY —Are there any members of the Carlton Football Club board you are not investigating at the moment?
Mr Knott —I do not know the composition of the Carlton Football Club board.
Senator CONROY —Perhaps you will have to declare an interest in that one, and hand that question to someone else.
Mr Knott —I am not a member of the Carlton Football Club board.
Senator SCHACHT —What about the Collingwood Football Club? Then you would have a problem of conflict of interest with Senator Conroy!
Senator Ian Campbell —As a long-suffering fan of the West Coast Eagles, I have got no conflict.
Senator CONROY —The other area of concern for a number of constituents contacting me is the relationship between the administrator and the company directors. Can you explain what the relationship is between each type of external administrator—the receiver, the administrator and the liquidator—and the directors of the company?
Mr Knott —Under an external administration, the administrator is effectively appointed by the board, and by and large takes over the responsibilities of the board, but the board remains in office, and there are some interesting legal issues about what residual responsibilities they may have. They are some of the issues that we will be looking at. The external administration laws that were introduced I think were predicated on the basis that it would be a process to rescue companies that were at risk of insolvency and resurrect them. I think the expectation in the main was that external administration would be a relatively short process. In an insolvent company where a liquidator, for example, has clear responsibilities to pursue investigations and potentially take action on behalf of creditors, there are some issues about the potential liability of directors, as to whether in an external administration those same types of possibilities receive adequate attention. They are included in the issues that we want to look at in the program that I have mentioned.
Senator CONROY —Are you aware of cases where there has been an inappropriate relationship? What should occur in these circumstances?
Mr Knott —I am aware of sentiment that there may be. I am not aware personally of any particular case where there has been any evidence that would enable us to take action against an administrator.
Senator CONROY —This question of independence is a live issue now, right across the globe. Even the Treasurer noticed it recently, and mentioned in a speech—I am not sure if you were there; it was at cocktails the other night—that he believed that in actual fact Enron would cause more long-term damage to the world capital markets than perhaps September 11. This question of independence is a very live issue. Do you think it should be a requirement that external administrators be clearly independent of the board—in other words, no related party transactions, they are not mates, they do not have other directorships in common, and that sort of thing? Do you think there is a need to protect investors by having a requirement like that, in the light of all the circumstances in other areas?
Mr Knott —I would prefer a situation where there was no connection between the administrator and the members of the board of the company.
Senator CONROY —Minister, do you believe that in these circumstances where we are appointing an external administrator there should be no relationship, so that there is a genuine independence between an existing board and an appointed administrator? Do you think that would be good public policy in the light of the comments the Treasurer made and the issues that have arisen around the world at the moment?
Senator Ian Campbell —I do not think that it would be appropriate to make on-the-run policy snapshots like that. I have indicated that insolvency law will be one of my priorities in my new portfolio.
Senator CONROY —Do you think it would be a good principle?
Senator Ian Campbell —I do not think that this is a great place to have a debate about the principle of insolvency law.
Senator CONROY —I am not asking for it; I am just asking for your opinion. I am not asking for a debate.
Senator Ian Campbell —Yes, I know. I would like to be informed about all the issues around it before I make an announcement or a personal decision. It is an interesting debate to have—one that is very important—but I will be informing myself about the whole thing.
Senator CONROY —I am aware that you have been making comments recently on auditor independence. I think this is a parallel issue, though at a much more sensitive point in debate. Auditors are hopefully auditing companies that are still alive. These companies are going under; they have made bad business decisions. Isn't it just as critical, as it is with auditors, to have independence of these administrators?
Senator Ian Campbell —I think both issues are important. The importance of the issue will be reflected in the way I handle it. I have informed myself about the independence of auditor issues and continue to inform myself.
Senator CONROY —Have you read the Labor Party policy on it?
Senator Ian Campbell —I have read reports and have spent a lot of my time consulting on that issue, and that is something that I will be doing in relation to insolvency. It would be imprudent of me to make comments without informing myself about it. I do not know enough about it to help the public debate.
Senator MURRAY —If you look at the Hansard record of 1997-98, you will see that I first put the proposition of auditor independence to the government.
Senator Ian Campbell —And I have given you credit for that. I said that you were one of the few people who raised it before it became the hot political issue because of HIH and Enron.
Senator MURRAY —I should show a little more modesty!
Senator CONROY —Have you thought about engaging in paid political advertisements, Senator Murray?
Senator MURRAY —Sorry, Senator Conroy; I am behaving badly.
Senator SHERRY —I think we should give Senator Murray credit, because I do recall him making a couple of speeches in relation to that.
Senator SCHACHT —Put it on your CV; it is very good.
Senator MURRAY —I need it!
Senator SHERRY —On the same theme—not of selfpraise—
Senator CONROY —You have done some excellent work recently, Senator Sherry, in some areas.
ACTING CHAIR —Order!
Senator SHERRY —I have a couple of questions relating to ASIC and its actions in appointing liquidators to the legal firm Piggott Wood and Baker—to their mortgage scheme in Tasmania. Can someone answer questions in relation to this?
Mr Knott —Mr Johnston can address that question.
Senator SHERRY —I note that liquidators were appointed by ASIC on 13 December. Is that correct?
Mr Johnston —Yes, that is right.
Senator SHERRY —You would be aware both from previous conversations that we have had and I am sure from your own internal information that the issue of the liquidity of the Piggott Wood and Baker mortgage scheme has been of significant public concern for at least one year?
Mr Johnston —Yes, that is right.
Senator SHERRY —And you would be aware that Mr Kench, an employee of Piggott Wood and Baker, was the administrator of the fund for that firm?
Mr Johnston —Yes.
Senator SHERRY —Also, were you aware that Mr Kench was the administrator of the fund for a number of years prior to it becoming a matter of public note that the fund was experiencing financial difficulties?
Mr Johnston —Yes, that is my recollection.
Senator SHERRY —Was Mr Kench facing a number of charges brought by the Law Society, together with Mr Turner, a legal partner of Piggott Wood and Baker?
Mr Johnston —Yes. It is my understanding that the Law Society is taking disciplinary proceedings against members of the firm. I do not have a clear understanding of the detailed nature of those disciplinary procedures.
Senator SHERRY —What concerned me was that from the time when it was announced that Mr Kench and Mr Turner were facing disciplinary action by the legal society, Mr Kench certainly continued to administer the fund, up to the point of liquidation. Are you aware that is the case?
Mr Johnston —I do not have a detailed knowledge of that, no.
Senator SHERRY —In fact, Mr Kench, as the administrator, continued to administer Piggott Wood and Baker's fund after he was found guilty on one of the disciplinary charges. Are you aware of that?
Mr Johnston —No, I am not.
Senator SHERRY —Do you have any comment about the failure of the Law Society to remove or suspend Mr Kench from operating what was a financially suspect mortgage fund over that period?
Mr Johnston —What I can say is that there are a number of matters that are still under investigation in relation to the Piggott Wood and Baker fund, as there are with several other mortgage funds around the country, and I do not think it would be appropriate to talk about the nature of those investigations in this hearing. We did, over the course of the administration of the fund, make known to both the firm and the Law Society, concerns that we had about the administration of the fund and about how the society and the firm were dealing with people who complained to them. So we were aware of issues there, and we made our feelings known to the society and to the firm. There are matters that are still under investigation in relation to that firm's fund.
Senator SHERRY —I understand there are still matters under investigation, but you have actually touched on the issue I was going to go to in some greater detail. What strikes me as being very odd is that Mr Kench, as the administrator of the fund for many years prior to it becoming public knowledge that it was in some difficulty, was allowed to continue to administer the fund—by the Law Society, not by ASIC—despite the fact that he was facing a number of disciplinary charges and subsequently found guilty on one matter. Does ASIC have any concerns about that?
Mr Johnston —That is not something that is within my specific knowledge as to whether we touched on that issue with the society at the time. We may well have, but I do not have details of that here.
Senator SHERRY —You might be able to check on that, because it seems to me—if you could respond—quite extraordinary that a person who administered a fund for a number of years at the time when it commenced financial difficulties is allowed to continue to administer the fund when he is facing disciplinary charges and in fact found guilty of one of those charges by the Law Society of Tasmania.
Mr Johnston —As you said, I think that is a matter for the society. I can look at what our understanding of the position was, but I cannot give you a clear indication of that today.
Senator SHERRY —If you would take that on notice for me. Why did ASIC decide to appoint liquidators on 13 December? Because up to that time the Law Society and Piggott Wood and Baker were giving assurances that they could handle the run-out of the fund.
Mr Johnston —We were concerned about a number of aspects of the fund—not just the point that you mention this morning, but a number of aspects—and we had received numerous complaints. We believed that the only proper course of action was to appoint the liquidator and to take the running of the fund out of the hands of the firm. So that was the action that we took. And, as I said, there are further investigations pending that I cannot really go into.
Senator SHERRY —I understand that latter part. You referred to `numerous concerns'. Any other concerns? What sorts of complaints were you concerned about? The running out of the fund?
Mr Johnston —We were concerned about the adequacy of the fund to meet its obligation to investors.
Senator SHERRY —At that point in time I think there was up to $12 million owed to 458 investors. Do we have a more updated figure?
Mr Johnston —No, we do not today.
Senator SHERRY —Who covers the cost of the liquidator?
Mr Johnston —I would have to defer to Mr Wood on that matter.
Mr Wood —I would have to take that on notice, Senator, I am afraid.
Senator SHERRY —Could I just suggest that one of the concerns of investors is that—
Mr Johnston —Sorry, Senator, generally the fund would cover the cost of the liquidator. I am just not sure if there was another arrangement that was put in place on this occasion.
Senator SHERRY —I am led to believe that that is the case. However, in the circumstances where a fund is being run out under the auspices of the Law Society in Tasmania the cost is offset by the Solicitors Guarantee Fund?
Mr Johnston —Yes, that is why I put the caveat; I am not sure of the specific arrangement.
Senator SHERRY —Given that you have appointed a liquidator that may now not occur?
Mr Johnston —That is correct.
Senator SHERRY —And the members of the fund rather than the Solicitors Guarantee Fund will have to pay the cost?
Mr Johnston —In the normal course of events that is the case, yes.
Senator SHERRY —Are you aware whether the partners of Piggott Wood and Baker in any way benefited from the operations of the mortgage fund and, if they did benefit, how they benefited?
Mr Johnston —Other than the fact that the fund was run by the firm, and fees and commissions would therefore have been payable, I do not know what the fee arrangements were as to splitting those fees among the partners of the fund.
Senator SHERRY —Are issues relating to the fees and commissions paid to partners matters that ASIC is investigating?
Mr Johnston —Yes, they are.
Senator SHERRY —Are issues involving related partner transactions matters that ASIC is investigating?
Mr Johnston —Senator, I hesitate to be too specific about the nature of the investigation. It covers a number of issues.
Senator SHERRY —We do know it is covering the fees and commissions paid; I understand that. Can you give us a time frame of when the investigation is likely to conclude? I would not hold you to it but can you give some indication?
Mr Johnston —Again I may need to defer to our enforcement director.
Mr Wood —No, I do not think it is possible, Senator. I think it could only be misleading to put a date on it now.
Senator SHERRY —Would it be this year?
Mr Wood —I would hope so, Senator.
Senator SHERRY —I know you have your processes to go through, et cetera, but there are 458 investors, overwhelmingly retired and elderly, who are very concerned about the finality of this issue. What is the status of the investigations in other states involving solicitors mortgage funds?
Mr Johnston —There is a range of matters that we are investigating, some of which have concluded. The great majority of them are in Queensland and Tasmania. In some cases those investigations have concluded, some matters have been referred to the Director of Public Prosecutions in those states. Other matters are still under investigation and we have some six or seven funds where we are still gathering information before deciding whether to formally conduct an investigation.
Senator SHERRY —This is in Queensland?
Mr Johnston —Predominantly in Queensland, yes.
Senator SHERRY —We talked about Piggott Wood and Baker; are there any other funds in Tasmania under investigation at the present time?
Mr Johnston —Yes, there is Lewis, Driscoll and Bull and there was a charge laid in relation to someone in respect of that fund.
Senator SHERRY —Are there any other funds in Tasmania?
Mr Johnston —Yes, there are others that are under investigation. I am just not sure that I should go into detail about them in this forum.
Senator SHERRY —I respect that. I knew there were other investigations being carried out, certainly Lewis, Driscoll and Bull.
Mr Johnston —I mention that one because charges have been laid.
Senator SHERRY —Yes, it is public knowledge.
Mr Johnston —But there are others, yes.
Senator SHERRY —One of the issues of contention in Tasmania was the role of valuers. Does ASIC have any powers in respect of valuers and the role they play in mortgage funds?
Mr Johnston —It doesn't specifically, Senator. However, when we announced this investigation back in February of last year we said that the information we received in the course of this would inform our supervision of managed investments and mortgage funds generally because you would be aware that most mortgage funds are governed by the managed investments regime. The information that we have received in the conduct of this inquiry has caused us to form a view about the role that valuers ought to play and, while we do not specifically regulate valuers, we may be putting out some policy about how valuers should be appointed by funds, how those valuations can be used and what disclosures need to made, but we do not regulate valuers.
Senator SHERRY —This is an area regulated by state legislation.
Mr Johnston —Yes, that is right.
Senator MURRAY —Inadequately, I might say.
Senator SHERRY —Yes. Do we know at the moment the current amount of moneys owed to investors in Queensland?
Mr Johnston —I cannot tell you in respect of Queensland specifically; I can take that on notice.
Senator SHERRY —Yes.
Mr Johnston —You may recall when we announced the investigation that there was approximately $1 billion of funds in these types of schemes around the country. We are required to let those schemes run down their assets and either have funds repaid to investors or make other arrangements to come under the Managed Investments Act, for example. We are now down to a relatively small amount compared to the $1 billion that we started with; perhaps $100 million or $200 million across the country.
Senator SHERRY —Yes. But still, for those who have lost money, generally a part of their retirement savings, it is a very significant issue.
Mr Johnston —Yes, it is. That is why we are following through with specific action in specific funds.
Senator SCHACHT —Mr Knott, on Monday of this week at the communications estimates hearing I asked some questions about the collapse of a company called Green Phone in Mount Gambier in the lower south-east of South Australia and the western districts of Victoria. It is a sorry saga. The Networking the Nation fund put $2.5 million of Australian taxpayers' money in. Most of it has gone south, to use that phrase. There are now 88 creditors owed $4 million. It has been a raging issue now for six to nine months in the media and in the community of the south-east of South Australia—with claim and counterclaim—as members of the community blame each other for what went wrong. Have ASIC been requested to conduct an investigation into the collapse of this company and its management? If you have not, I would put in a request to you here that you take on notice the question of whether you should investigate. I think there is a very good reason and it would bring great relief in the local community if you used your authority to investigate what happened.
Mr Knott —Senator, I will certainly take that on board. I will have a look at that matter when I return to the office and we will advise you of the status of it.
Senator SCHACHT —I draw your attention to my remarks in the communications estimates committee on Monday and also the fact that today I have tabled another 80 questions on notice that have come out of the local community about it.
We raised an issue with APRA at this estimates last night which they said was an issue for you. I thought it was more their area, but they said absolutely not, that it is your responsibility. Minister, you might care to make a judgment about this too. That issue is the declaration of information on the annual return to investors or subscribers in super funds of how much is taken out of the return of their investment to pay fees. There are requirements that they have to declare how much has been taken, but you have to be somewhere between Einstein and a rocket scientist to work out as a mug punter how much you actually paid in dollars and cents.
I use my own example. Over a number of years of endless arguments with my rollover fund of a modest amount, they could never tell me that fee—except one year when they claimed they had put a special computer program into place and they could tell me in dollars and cents terms what the percentage figure was. If you read the percentage figure, it looks very modest. It is things like 0.9 per cent, 1.3 per cent, which, if added together, was around two per cent. It was not clear whether that was two per cent of the income you had earned that year or two per cent of the total amount you had invested et cetera. For consumer advice, it would be much more relevant if the funds were required to say in that report, `It is $550 or $320', so that you could make a judgment of funds in the marketplace and whether to go to a fund that charges less fees.
I raise this because I have seen stories that the fees charged by some of the funds will dramatically change over the lifetime of the investor and affect their final pension when they retire because of the compounding interest. They said that this is a question that you have the power to change, not them. I would like to hear your view on whether the mandatory disclosure of the actual amount taken out each year should be required—I do not care who it is, but I hope you have a positive view. Also, could this be done by an administrative decision or regulation, or do you have to amend an act?
Mr Knott —It might risk our relationship by saying that this is properly a matter for government, but I will not do that entirely.
Senator MURRAY —Your relationship with government or with Senator Schacht?
Mr Knott —Perhaps both. The disclosure requirements, as I understand, are prescribed by regulation. Before I pass over to Mr Johnston, who will be better informed than I on the detail, I would point out that, in fairness to APRA, it is a disclosure matter, so ultimately it is an ASIC jurisdiction.
Senator SCHACHT —So we have cleared that up. We accept that. Minister, do you accept that?
Senator Ian Campbell —Especially post 11 March.
Mr Knott —We conducted quite an extensive campaign about 18 months ago to review disclosure compliance by the superannuation industry, and in relation to a number of superannuation funds we did require additional disclosure to comply with the current regulations and law. But that would not, I think, address the type of disclosure and detail of disclosure to which you refer. With those preliminary comments, perhaps Mr Johnston can fill out the answer.
Mr Johnston —As the Chairman said, the current regulations under the SIS Act require fees and charges to be disclosed to members, and those regulations are not prescriptive as to how that should happen. The requirement is that the communication and the disclosure must be clear and effective, but there is no prescription as to the form that that has to take. Under the forthcoming Financial Services Reform Act, there are regulations that go to disclosure, and disclosure in terms of superannuation will be somewhat more detailed than as under the current regime. The other thing I would point out is that ASIC has in its policy statements in respect of disclosure taken a view that we are encouraging product manufacturers and trustees of superannuation funds to make disclosure in dollar terms rather than in percentage terms. We cannot require that, but we have said in our `Good disclosure principles and guidelines' that we believe that that is something that they ought to consider because it would be more helpful to consumers, but it is not something we can legally require them to do.
Senator SCHACHT —But if you change the regulations—
Senator CONROY —I thought you said `where possible'.
Senator SCHACHT —Minister, if ASIC said that that is a policy decision, I would therefore put it to you to take on notice that I think this is absolutely essential; otherwise consumers cannot make a fair judgment.
Senator CONROY —Can I just follow up. I think you are not quite interpreting the legislation correctly. It says `where possible'. Are you telling me the entire industry is saying it is not possible?
Mr Johnston —No.
Senator Ian Campbell —In the situation, Senator Schacht should understand—and Senator Conroy ought to understand because he would know—that FSRA is coming into force on 11 March and, obviously, the new regulations will come into force. Mr Johnston has made it clear that those new regulations will be more detailed than what is required at the moment. So, hopefully, if the new—
Senator CONROY —I am just concerned the regulations are going to be less detailed and less prescriptive than the legislation.
Senator SCHACHT —In relation to those new regulations, could you take on notice that I get a policy response on whether you will change the regulation to make it mandatory that the annual fees charged will be in dollars and cents in the annual report that the investor or the subscriber must get—
Mr Knott —Is that question directed to ASIC?
Senator SCHACHT —No, it is directed to the minister—but also to both.
Senator CONROY —I am going to be directing it to ASIC in about 10 seconds.
Senator SCHACHT —Obviously, I accept that the government makes the policy, but I cannot see why ASIC cannot make a recommendation to the minister that this is a reasonable thing to do for consumer protection, if nothing else. The minister might say, `Well, we aren't going to put the regulations in,' and we will have a blue in the Senate about that—fine; but I cannot see why—which is Senator Conroy's point—ASIC itself, as part of your own statutory responsibilities, could not recommend to the minister, `We should do this.'
Mr Rodgers —I would like to amplify a little on what Mr Johnston said. Within the legislative framework, as it will stand at 11 March, we have—as Mr Johnston has said—tried to flesh out what we are calling `good practice guidelines' for disclosure. They do not have—
Senator CONROY —So it has gone from legislation to regulation to guidelines—is that what you are telling me?
Mr Rodgers —Well, they do not have statutory force, but what we have also started is an options paper: a piece of work we are doing with industry and consumer groups at the moment to explore options for disclosure of fees and charges across the spectrum that includes superannuation—
Senator SCHACHT —And all the others, yes.
Mr Rodgers —but also includes managed funds and so on, with the intention of trying to identify clear ways that that issue can be taken forward. Our policy setting is that, within the legislative framework, the right place for the next initiative is with industry, and we are using the process that we have now put in train to try and focus industry thinking on that issue and the layout options for going forward. We have, at the same time, sent messages that, as the administrator of this regime, we are actually very concerned that results are produced in this area.
Senator SCHACHT —Mr Rodgers, if the response I got for 10 years arguing with two different super funds that had my rollover is any indication, until you make it mandatory, it will not occur. You would never have believed such obfuscation and excuse-making; for example, they said, `No, no, we can't tell you that, Mr Schacht, because we deduct the fee on a daily basis from a big pool—
Senator CONROY —Yes—`It's all too complicated'!
Senator SCHACHT —and it is too complicated.' I said, `You mean to tell me that, on a daily basis, your computer doesn't tell you how much money goes into your administrative fund to pay the wages and salaries of all your staff?'
Senator CONROY —I do not know how they even fill a tax return out at the end of each year: they have got no idea how much income they are earning!
Senator SCHACHT —Two different funds used exactly the same excuse. When I swapped from one to the other when I worked out the new one I was going to—I worked out the percentages with some difficulty—was actually cheaper, they still used the same excuse. I said, `You can't get a computer programmer to change the software, to press a button, to say how much is taken out?' They basically said, `No, we can't.' We all know that is patently stupid. The real issue is that they do not want people to know how much they are taking out. Some of the fees they are charging are outrageous; for example, the person who might have been the agent that signed the first contract to get the person in receives a fee for the life of that investment. Even though they have done one year's work, they still get a commission for 15 or 20 years and they do not lift another finger to do anything. People are not aware of that, and that will reduce the pension paid at the end of a lifetime by thousands of dollars a year.
Senator CONROY —Absolutely.
Senator SCHACHT —This is critical. My final word: what would you do if the Senate rejected the regulations and put a resolution in to say there was a majority, come back with a new set of regulations that make it mandatory for the disclosure of dollars and cents?
Mr Knott —We would administer the law.
Senator CONROY —Except if you then came back and said: `It's all too complicated. We need advice from somebody else about how you create a formula'—like a executive remuneration option. So let us not pretend we always administer the law when it is all a bit hard, Mr Knott.
Mr Knott —We would always administer the law in accordance with the law.
Senator CONROY —Except when you sit in front of Senate estimates and say, `We can't administer this law, because we haven't got the information we need from the industry.'
Mr Knott —If the law has been phrased in a way that makes it incapable of enforcement, we cannot enforce it. That is a simple fact that I am sure you do understand.
Senator SCHACHT —Just tell every insurance company that if they do not give you this information every director of the company gets two years jail. That will clarify their thinking very rapidly.
Senator CONROY —This is smelling like a cave-in to industry, can I say.
Senator SHERRY —Superannuation is an unusual product, in that it is compulsory. It is a tax being handed over SG to the private sector to invest.
Senator CONROY —Another trough for the industry.
Senator SHERRY —And it has important implications, not just for the individual but for national savings and retirement incomes policy. It is a very unusual financial—
Senator Ian Campbell —We should add that many people have no choice as to what super fund they go into.
Senator SHERRY —We will debate the issue of deregulation at some other point in time.
Senator Ian Campbell —It makes your point, though. It is compulsory, so it is a special case. And also a lot of people have no choice whatsoever as to what fund they go into.
Senator SHERRY —Yes, and in the case of the current structure of the regulation of superannuation it does provide for a range of protections in respect of fees and charges. It is the unregulated sector where people do make a choice where the fees and charges are. In some areas they are on some occasions, as Senator Schacht outlined, exorbitant, but at least very hard to detail. I am pleased, Mr Johnston, you make the point about money amounts as distinct from percentages, because from my understanding of surveys conducted many consumers do not understand the implication of percentages. However, in these consultations that are occurring the opposition has not been consulted in any formal or informal sense, but it will be expressing a view in the Senate on the regulations. Insofar as superannuation is concerned, the bottom line will be full, meaningful disclosure of all superannuation fees and charges. As the shadow minister in this area of superannuation, I certainly do not accept that it cannot be done in a meaningful way.
Mr Johnston —I have two comments. Firstly, we would certainly encourage full, meaningful disclosure of everything that can and should be disclosed; and, secondly, our policy statement, which sets out good practice principles and outcomes, makes that quite clear and gives examples.
Senator SCHACHT —But it is not mandatory; it is not mandated.
Mr Johnston —I cannot make it mandatory.
Senator SCHACHT —Yes, you can—by regulation.
Senator CONROY —Regulation actually talks about both. You have reversed the onus. The legislation wants to see dollar disclosure where possible. That is my recollection. You seem to have reversed the onus and be saying: `It's all too hard.' We accept that the legislation wants dollar disclosure. It accepts it is not completely possible in all circumstances. Your regulations seem to be walking in the other direction.
Mr Johnston —On the regulations, we just need to be clear—
Senator Ian Campbell —The regulations are the government's.
Senator SCHACHT —On advice from ASIC; this is the point I am making.
Senator Ian Campbell —No, ASIC are given the legislation, which—as Senator Conroy knows better than most—was the subject of about five years of consultation involving the industry, including the super industry. Then the regulations that will come into force as at 11 March will bring in a new regime.
What happens in this area is that you have the legislation and the regulations which are promulgated by the parliament, and then ASIC has to put forward policy statements and guidelines in these areas. Senator Schacht, we are all hoping that the new legislation and the new regulations—as they did with the managed investments act in relation to solicitor schemes, for example—will bring in a better regulatory outcome than we have had up to 11 March and that those problems will be solved.
I think that the public debate will focus very much on those fees and charges, particularly since returns are coming down to more normal levels. We have gone through a decade when there has been significant growth and people have not really worried about those fees and charges, but now that returns are coming down to lower levels there will be a lot more consumer focus on the levels of fees and charges—and that is a very healthy thing. If this regulatory regime does not achieve what the parliament intends it to, there is no doubt that parliament will revisit it.
Mr Johnston —I might make my second point, because I said there were two points. The second is that, if there are commissions which are paid in respect of someone recommending a financial product by giving financial product advice, the legislation provides, of course, that full disclosure has to be made of commissions that are payable. I think the section that Senator Conroy is referring to is that where possible commissions have to be disclosed in dollar terms. Fees and charges do not attract the same wording as in the legislation.
Senator SCHACHT —But can the regulation that parliament had in mind change it so that the fees and charges will be in dollars and cents in the annual return to the individual subscriber investor in the super fund or in the investment they have?
Mr Johnston —It is not for me to say what the legislation can provide. When I talked about ASIC policy, I was talking about that third level that Senator Campbell referred to. ASIC policy is an indication of how we will interpret the legislation, but it cannot go further than the legislation.
Senator SHERRY —However, ASIC plays a crucial role in the consultations that are occurring in respect of the proposed regulations. I am concerned when you say that you will be `encouraging', because my strong view is that it is not a matter of encouraging, in the case of superannuation, the meaningful disclosure so it is comparable et cetera; it should be mandatory. There is no argument about it.
Mr Rodgers —Can I suggest that ASIC's role in regulation needs to be qualified. We have provided advice to Treasury on administrative issues that we see in regulation, but we have been quite clear that it is not our role to provide advice on the underlying policy, which is a matter for the government. So, naturally enough, since we will have the task of administering those regulations, we welcome the opportunity to comment on them from an administrative point of view—and we do so.
Senator Ian Campbell —Can I add one thing for Senator Schacht's benefit. I have literally only just come back into the portfolio after starting off what was called the CLERP process, which ended up being called FSRA. As I understand it, and I am happy to be corrected, the disclosure of the commission in the dollar form will be a new legislative requirement. It will not have existed prior to 11 March. So there will be a significant improvement.
Senator SCHACHT —On the commissions but not on the fees and charges.
Senator Ian Campbell —And improved disclosure in relation to fees and charges.
Senator CONROY —I am surprised to hear the hair being split.
Senator Ian Campbell —There is the point that you made, Senator Schacht, about the commissions going on forever once they have sold you the product. Those commissions, as I understand it, have not been required to be disclosed before. As at 11 March, because of an act of the parliament and the government, they will be. So, regardless, there will be enhanced disclosure. There is a debate going on about just how you get better disclosure and how you compare apples with apples, and I think it is a very legitimate debate.
Senator SCHACHT —I would just ask you—in view of what Mr Rodgers has just said, that ASIC have provided advice to Treasury—as you are in the Treasury portfolio, to take on notice a response to this estimates committee. Will the government consider making it mandatory, in the regulations that they are drafting and that will come into effect, that dollars and cents have to be disclosed for fees, annual fees and charges on these investments?
Senator SHERRY —And there is one other issue relating to fees and charges. My understanding is that, whatever emerges from the final set of regulations that you will be required to administer—and I accept you are required to administer within the law and the regulations—there is no requirement currently or proposal for the fees, charges and commissions—and I am referring here to superannuation products—to be reported so that we can collate annual and representative data about the level of fees and charges in the industry on these products. There is no proposal for that at the present time, is there?
Mr Knott —No.
Senator SHERRY —I draw your attention to the discussion that we had with APRA yesterday. The Senate select committee unanimously proposed that the reporting and the gathering of data should be on an industry-wide basis to APRA. APRA seemed to argue that it should be ASIC's responsibility. I draw your attention to that debate and discussion, because it is an issue that is also of concern to us—the meaningful gathering of representative data and the reporting of that data on an industry-wide basis in respect of superannuation funds.
Mr Knott —Thank you. We will take that on board. I will just make the obvious response to it—that is, to be effective in collecting industry-wide data means the need for a significant investment in the system for the data collection to ensure that it is consistently collected and that it is like for like. Based on my knowledge of what has been happening at APRA with their statistical data collection investment, their work has been continuing for at least two years.
Senator SHERRY —Yes, they mentioned that yesterday.
Mr Knott —It involved multimillion dollars, as I understand it. So, what I am trying to impress to you is that it would not be a short-term fix. If the government mandated us to perform that type of work and resourced us to do that type of work, we could do it.
Senator SHERRY —It seemed to us that APRA were the appropriate body with respect to superannuation funds, because they receive at least annual reports from the trustees of the funds and can put together the composite fees and charges outlined in that documentation.
Mr Knott —I can see the logic in that too. APRA may have put the view that we should do it on the basis that it is essentially about disclosure of fees and charges et cetera, which broadly fall within the ASIC remit. Certainly we would not take any sort of territorial view about that. We would be very happy for them to perform that role.
Senator SCHACHT —Does ASIC have any comment to make about directors' performance bonuses being paid in companies where there has been clearly bad performance? I raised yesterday with APRA the issue of the NAB loss of $4 billion on an investment in America. It was the single biggest loss in corporate Australian history; fortunately the bank was big enough to sustain it. You can see in the annual report of the bank that the chief executives of HomeSide still got paid $7 million, which is a fair whack of dough, and the executives back in Australia got very well paid and on top of that they got millions of dollars worth of bonuses. You say that it is not directly related to companies collapsing, but in terms of public confidence about what I call `unnecessary greed' in salaries et cetera, does ASIC have a view about saying to company directors, `This is getting a bit hot?'
Mr Knott —Yes, and we have. I have publicly expressed similar sentiments. I believe that the whole issue of executive remuneration has caused very considerable public disquiet. I think it is probably the No. 1 issue on the shareholders' grievance list. It is probably the No. 1 issue on the shareholders associations' grievance list, or has been until perhaps the auditors came along. All we can do is use our suasive powers to ask government structures of this country to take into account the public attitude to this issue. In the end, it is a matter between the companies and the shareholders. I think that shareholder activism in this area is to be encouraged, and I have been pleased to see that there has been more of it.
Senator MURRAY —Mr Knott, would you consider advising the government—this is a thought in my counterpart Senator Conroy's mind and in mine—as to whether it is appropriate that the parliament of Australia add an amendment to the Corporations Law requiring the remuneration of senior executives and directors to be commensurate with true or real performance? That is the issue at hand.
Mr Knott —Clearly, Senator, that is a major policy issue that you raise. I instinctively respond by restating my belief that, fundamentally, these issues should be dealt with by the shareholders of a company. It may well be that prescription of that type by the parliament would be counterproductive to the interests of shareholders. I can see circumstances where constraints that parliament tries to impose on remuneration to company executives or boards may act as a disincentive.
Senator MURRAY —A disincentive to greed, perhaps.
Mr Knott —We all would encourage disincentive to greed, and frustration about these issues is shared as much by the regulator as by anybody else. I believe that there is a great need to carefully think through any policy initiatives of the type that you have put to me for the first time this morning. I am not prepared to state that I would support that type of initiative.
Senator SCHACHT —I have another suggestion, Mr Knott. Some of the companies—not just NAB which I have mentioned—that have institutional investors, the super funds themselves, have the block vote big enough at an annual general meeting or at a specially called meeting to remove the directors. The small shareholder with 5,000, 10,000 or 15,000 shares has, as we all know, no power at all; the management has it all against them. It is the institutional investors with five or 10 per cent of the various companies who have the power if they choose to combine together and vote. But most times they do not. They might whisper and say, `Fred, look, you have really gone overboard a bit here. We suggest you tone it down and go quiet for a while and it will all be okay,' or, `Quietly leave and we will look after you in another way.' Why can't we look at ensuring that if you are on the board of an institutional investor you are not on a board of a company that you are also involved in?
In that case you have conflicting interest. You need to have institutional investors with genuinely independent directors who, when they know they are on the big super fund, are not accepting invitations to be on the board of the companies they are investing in because the conflict of interest is obvious. In the networking—what I might call the old boys' network which is still, unfortunately, too strong in my view—the same suspects keep getting rounded up to be on the same boards across Australia. Why can't we look at encouraging at the very least that separation of directors? Then, when the board has not performed, at the next annual general meeting the five, 10 or 12 institutions—say, NAB—that have 25 per cent of the shareholding, which is big enough to make the difference, say, `We are going to vote a new board on because you have not performed.' That does not happen because the proxies are held by the same people.
Senator Ian Campbell —I think it is fair to say that they are very strict, and they were made increasingly strict by the CLERP reforms in the relation to conflicts of interest. That is a very serious issue you raise. The other significant improvement you could make to the law, and Senator Murray will not be surprised when he hears this, is not only to encourage shareholders to be active within AGMs and within their companies—and there is no doubt there has been a significant increase in shareholder activism in Australia, which we encourage; I think both parties encourage it—but also to create a much stronger market for corporate control in Australia. The takeovers regime in Australia needs to be more fluid. It is internationally documented that the level of takeover activity in Australia is low and company boards, particularly at the big end of town, do not suffer a huge threat of takeover in Australia. I continue to propose that Australia needs more takeover reform to ensure that there is a very real live threat to those people who are very comfortable in their boardrooms receiving those sorts of remuneration packages. If they know that there are other potential controllers of the company out there who can do it better, for lower remuneration, and more efficiently, the people will be more reluctant to vote themselves big remuneration and options packages. That is a very serious point I make. It is something that Australia needs and something that other jurisdictions do better than us.
Senator SCHACHT —There is another matter I want to raise, Mr Knott—it was humorously raised in a sense by my colleague—about the Carlton Football Club. I am going to declare my interest: I am the president of a national sporting federation which runs volleyball and we have had our difficulties, which has brought this into some clarity for my mind. What rules are there and what interest do you take, for example, in soccer, Australian rules or rugby league in particular where you have clubs trading when they might be technically insolvent and relying on the fact that, because they have supporters—people like you and me may barrack for them—we are a bit soft about how they should perform?
Senator CONROY —Are you thinking of the Bulldogs?
Senator SCHACHT —The Adelaide Crows are very strong at the moment but you never know. Do you have any particular interest across that area or do you leave it alone as being not a high priority or too tricky and too difficult? Everyone loves the football clubs, so do you let them just keep going until the Fitzroy situation arises where it is just too bad? There is no doubt that some football, cricket and soccer clubs trade, but if they were purely in the commercial sector, you would say, `You are insolvent. You cannot trade.'
Mr Knott —Thank you, Senator, for putting to me a serious question about football clubs. Before I deal with it I would like to add one piece—
Senator SCHACHT —I am a member of the Adelaide Crows. I declare my interest in that area as well—and the Norwood Football Club. There are three interests I have declared.
Mr Knott —Thank you, Senator. I have just one amplification on the previous discussion. You should perhaps be aware that, in order to encourage institutional shareholder activism, ASIC effectively waives the technical operation of the takeover provisions to enable, in certain circumstances, large institutional shareholders to effectively get together and decide voting intentions on important governance issues. We have done quite a number of things to try to encourage shareholder activism. On football clubs—
Senator SCHACHT —Or sporting clubs. AFL football clubs are one example; it is a matter of public controversy.
Senator CONROY —I think the Carlton Soccer Club would possibly be in the same sort of boat.
Mr Knott —The first point to make is that of course our interest would be limited to incorporated organisations, which would include most of the big ones. They do not receive any particular special attention from us in the insolvent trading area. The accounts of those companies will be audited in the normal way. The auditors have an obligation, if they believe that the directors are trading while the club is insolvent, to report that matter to us. We have not to my knowledge had any greater incidence of insolvency in the sporting area than we have had elsewhere. Anecdotally, and as a member of the public and a football supporter, I see from time to time clubs that look as though they are insolvent or would be insolvent were it not for the fact that the national institution that governs them—
Senator SCHACHT —That is the league—
Mr Knott —The league effectively, as needed, injects more funds to enable their ongoing operation.
Senator SCHACHT —I have one last point on this. North Melbourne Football Club—now called the Kangaroos—at one stage was—
Senator CONROY —Carlton owns a lot of shares in that one.
Senator SCHACHT —Carlton owns a lot of shares in it. This might be a question for Allan Fels: isn't there a conflict of interest in that they are both competitors in the same marketplace and one owns shares in the other? More importantly, on that point, does that football club, because it has a private shareholding, have to meet a higher requirement of due diligence and regulatory performance because they are listed compared with a football club still based on membership?
Mr Knott —Just on the question of whether that particular company is listed, I would need to take that on notice.
Senator SCHACHT —Sorry, it is not listed. They sell shares on a private basis.
Senator CONROY —Yes, it is a private company.
Senator SCHACHT —It is a private company, but they sell shares.
Senator CONROY —It is not like Man United.
Senator SCHACHT —That is right. It is not like the British football clubs, which are listed.
Mr Knott —There are parts of the Corporations Law that would therefore come into operation in relation to share transactions and laws governing them, including potential disclosure issues. But the notion of conflict, that somehow the cross shareholding between competitors creates conflict, I think is a much broader one than sporting clubs. It is quite common to find in the industrial and commercial sector the companies trading in a particular sector holding shares in a competitor company in the same sector. It is not at all uncommon.
Senator CONROY —I note in the additional estimates that ASIC has been appropriated an extra $4.6 million to meet the cost of ASIC's involvement with the HIH royal commission. What costs are you incurring?
Mr Knott —I wonder if we could defer answering until Mr Wood returns in one or two moments.
Senator CONROY —I am interested in a report in the weekend papers that you have been asked to prepare a proposal paper whereby ASIC would be given greater powers to police listed companies' share market disclosures, including a system of on-the-spot fines. Mr Knott, is that what you proposed in a speech to the Australian Investor Relations Association in August last year?
Mr Knott —I have on more than one occasion—and that was one, I think—made reference to the limitations under the existing law for us to respond in a flexible and speedy way to market disclosure issues. Part of the possible policy response that I have suggested is that we be given a power to fine companies which fail to make proper disclosure, whether deliberately or not, akin to similar remedies available to some offshore regulators.
Senator CONROY —Was a proposal of this type also proposed in the commentary on the draft provisions on the Financial Services Reform Bill at page 198 where it states:
... one option will be to provide ASIC with the power to impose monetary penalties where it reasonably believed a person had contravened a civil penalty or offence provision relating to market conduct. Such a power could apply to all contraventions of civil penalty or offence provisions. The penalty imposed by the notice could be set at a proportion of the penalty set out in schedule 3 of the law or otherwise specified in section 184.108.40.206.
Mr Knott —Yes, I do recollect that reference.
Senator CONROY —Were you consulted on that suggestion and, in particular, did you put a proposal to the government?
Mr Knott —Personally, no. I am not sure whether Mr Rodgers can respond to that question.
Mr Rodgers —I have no specific recollection. I suspect at the time that was drafted, and Treasury could confirm this, the Chairman's view on this issue had already been publicised and were well known.
Senator CONROY —Despite ASIC calling for it a number of years ago, nothing really has happened on this at this point in time?
Mr Knott —There has been no change to the legislation in this respect. There are some welcome initiatives coming in FRSA, as you know, in terms of market offences, but I think this issue is one that is still under policy consideration by the government.
Senator CONROY —But it was part of a discussion as part of CLERP 6. Senator Campbell proudly, with some justification, talks about his role in CLERP 6. I was just making the point that this very proposal was canvassed as part of CLERP 6. Can we expect a proposal paper or a draft, Senator Campbell?
Senator Ian Campbell —There is a report in the AFI. I cannot remember the one you are referring to. At my very first meeting with David Knott, I said that I would like to see some firm proposals, so that is the genesis of the articles. I said that we have canvassed it through the CLERP process. The regime, I think everyone agrees, will be improved by FSRA. There is no doubt that, in relation to the proposal to give ASIC the power to use fines, there are legal and constitutional issues involved, and they are things that I want more information about. Generally, as a matter of principle and policy, the government is interested in increasing disclosure to the market on a continuous basis and in the quality of that disclosure because that will empower shareholders and the marketplace to work efficiently. There is no use having a continuous disclosure regime if people just flout it, if market participants do not recognise that there is not only a severe reputation risk but also potentially financial and other penalty risks associated with not complying with the spirit and the letter of the law. A number of people, including Mr Knott, think that we should make it easier to enforce. I in principle agree with them, and I have asked Mr Knott to provide a detailed proposal.
Senator CONROY —I guess we can only lament the Prime Minister's shortsightedness in not leaving you in charge of this over the last few years. If he had, we would not now be having to play catch-up for proposals that have been on the table, effectively, for a couple of years.
Senator Ian Campbell —I do not think we are playing catch-up. I think most people—
Senator CONROY —When Mr Knott made these speeches, your predecessor actually acted fairly coolly to these proposals. So, as I said, we can only lament the Prime Minister's shortsightedness.
Mr Wood is back. I note in the additional estimates that ASIC has been appropriated an extra $4.6 million to meet the costs of ASIC's involvement with the HIH royal commission. What costs is ASIC incurring?
Mr Wood —The costs have been mainly centred on external consultants. We have needed to employ outside accountants, actuaries and other professional assistance and, as well, of course, we have had fees for counsel.
Senator CONROY —I am just surprised: isn't the royal commission employing consultants?
Mr Wood —I have no detailed knowledge of how their staff is made up.
Senator CONROY —I just would have assumed they naturally were to—
Mr Wood —One would expect so, yes.
Senator CONROY —Is there any overlap?
Mr Wood —Again, I am not in a position to comment. I am not too sure what their consultants are doing. We have dealings with them, but not on a day-to-day basis.
Senator CONROY —I will come back to that, I guess. Will $4.6 million cover all of the costs?
Mr Wood —We are tracking within the budget at the moment. We think we will certainly be okay this year.
Senator CONROY —I understand that ASIC has signed a protocol agreement with the HIH royal commission. Can you outline the details of that agreement?
Mr Wood —I cannot go to any great detail, but essentially the initiative came from the royal commission to put a public document in place which would regulate the flow of information from ASIC to the royal commission and vice versa. It provides a useful document in the sense that it provides to us notice from the royal commission of their intention to summons us and seek access to documents and so on. It also gives provides for us to be given notice of their intention to call witnesses and a very brief outline of the sort of evidence they are expecting to take from that witness.
Senator CONROY —As I am sure you will remember, I wrote previously to you asking about the extent to which ASIC's investigation into HIH will be curtailed or postponed by the royal commission. Previously, I think you responded by saying that you had not signed a protocol—you had not been able to resolve that. Can you now answer that question?
Mr Wood —Yes, I can say this: the royal commission has certainly not delayed our investigation. We have kept working on the areas that are of concern to us. Some of those are areas in which the royal commission is working—obviously, reassurance. From my point of view there have been some useful synergies from the combination of the investigations. I guess from the royal commission's point view, we have collected a lot of material, other information and reports and so on that have been useful to them.
Senator CONROY —Are you able to use the evidence—the statutory declarations or witness statements—they collect? Are you able to access those and use those in the course of your work?
Mr Wood —Depending on whether they are self-incriminatory or not. There are disadvantages there from an investigators point view. They are shared by us, I might say, in the sense that, if we conduct section 19 examinations, the same broad rules apply.
Senator CONROY —So, if someone self-incriminates themselves as part of their testimony to HIH, you are not able to use that in a criminal prosecution?
Mr Wood —We could not use that against them, no.
Senator CONROY —Would you have to seek that information independently or are you just not able to prosecute them?
Mr Wood —We could, perhaps, get it by another course. Could I just make one additional point, Senator. In terms of the synergies, from our point of view, I have seen an advantage in being able to see people whom we would perhaps look to as witnesses or perhaps even defendants publicly examined. That is an advantage you do not normally get short of a committal.
Senator CONROY —Are you jointly interviewing people behind the scenes? Do they send people to listen to your discussions? I presume there must be some interviews before the witnesses turn up.
Mr Wood —No, we do not joint-interview.
Senator CONROY —Is the HIH royal commission able to grant immunity from prosecution?
Mr Wood —No, I think that would be a function reserved to the Commonwealth Director of Public Prosecutions.
Senator CONROY —Is the DPP required to consult you before it does a deal like that?
Mr Wood —I do not know whether there would be any statutory requirement, but I would be very surprised if it considered an application without consulting us.
Senator CONROY —Have there been any applications for indemnity or immunity from prosecution yet?
Mr Wood —Not to my knowledge, Senator, but, as I have said, we do not handle those applications.
Senator CONROY —I now want to turn to the issue of auditor independence and broker independence. You announced in June 2001 that you would be conducting a survey of Australia's top 100 listed companies on audit independence. The results of that survey have now been released. If I can go back one step, what led to ASIC conducting that survey?
Mr Knott —I would ask Mr Mackintosh to respond, Senator.
Mr Mackintosh —At the time the International Federation of Accountants had an exposure draft on independence. There was quite a bit of discussion and we were involved with the professional bodies here discussing that exposure draft. It occurred to us that it would be useful in the debate to get some background on the actual situation in the Australian market. It was for that reason that the survey was promulgated.
Senator CONROY —Turning now to the results of the survey, you found, among other things, that the provision of non-audit services by audit firms to their Australian clients is widespread, at least in respect of major corporates; that audit firms are earning substantial fees for non-audit services; that processes for dealing with potential conflicts of interest will require attention; and that rotation of audit partners remains inconsistent. Can you expand on those results and also how best you think they should be addressed? For how long do think these inappropriate practices have persisted and do you think a timely response is needed?
Mr Mackintosh —I will try to remember all the questions you raised, but you can prompt me if I forget. On the other services, yes, the survey showed of the 67 companies that responded that approximately 50 per cent—just a little bit less—of the total fee paid to the audit firm came from `other services'. So it was a large proportion. The split of that was quite interesting, as well, with tax advice being the major proportion of that 50 per cent. I suspect that that is a situation that has existed for many years. I do not think that this is a new situation at all.
The debate is still open as to how appropriate it is for audit firms to give non-audit services to their audit clients. We were not trying to make a comment on whether it is appropriate to give those services or not; we were trying to find out what they were. What we did comment on was that there did not appear from the way our questions were asked to be any rigour in the way that companies approached the potential conflict of their audit firms providing other services. Very often it appeared to be just the chief financial officer who would decide to allocate work to his audit firm of a non-audit nature. It did not go through the board and it did not go through the audit committee in a lot of cases.
Senator CONROY —In a lot of cases?
Mr Mackintosh —Yes.
Senator CONROY —So it was common practice?
Mr Mackintosh —Yes, some companies had good procedures in place from the answers we were given, but a lot did not. What was your second point?
Senator CONROY —Do you think a timely response is needed, I think, was my round-up question.
Mr Mackintosh —That is part of the broader independence debate, and I think that debate needs to be had in a timely fashion and resolved. Things are happening around the world, and that will ensure that there is some sort of timely response to those questions.
Senator CONROY —As you have mentioned, there is a lot of international debate on this. Is Australia represented as part of those debates?
Mr Mackintosh —Yes, quite actively, in all the areas of this debate. Australia has a member on the International Accounting Standards Board, as the head technical person, and it has other technical people. We have two members of the Standards Advisory Council, including myself, and there is representation on what use to be called the Standards Interpretation Committee, now called IFRIC.
Senator CONROY —There does seem to be a growing willingness to try and harmonise and internationalise the accounting standards, and a subset of that is the auditor independence style issues.
Mr Mackintosh —By Australia?
Senator CONROY —Internationally. You cannot move for falling over a working group to try and harmonise something at the moment.
Mr Mackintosh —The long-term test, though, is whether the major capital markets will pick up those international standards and use them, rather than the standards they are presently using.
Mr Knott —I might be able to interject with some information in relation to that last question. The International Organisation of Securities Commissions met a fortnight ago. At the meeting of the technical committee—which is its prime policy and work program committee—the heads of most of the world's leading securities regulators addressed a number of these issues, and agreed to form a specific committee of chairmen to look at issues coming out of Enron, but other issues as well, in particular the question of auditor independence, some issues of auditor standards and gaps in standards. Underlying it all is the degree to which the profession should be allowed to continue to be largely self-regulatory, in the audit standards area in particular. It was recognised by the chairs of the securities commissions that this was a vital matter, that it ought not to be totally Enron-centric, and that it needed to take into account lessons out of Enron but also lessons that other regulators have experienced in recent years. It is important work. It is very unusual for that organisation to set up a committee—
Senator CONROY —That is that high powered.
Mr Knott —on which chairmen themselves sit.
Senator CONROY —That is welcome news. Are you on it yourself? Is it everybody or a subcommittee?
Mr Knott —No. The reason I am not on it is that I was elected as the vice-chairman of the technical committee at its last meeting. The chairmanship will become vacant in May and one lives in hope. The committee of chairmen that I have just referred to will report to the technical committee. In those circumstances it was considered best if I did not sit on that particular working party.
Senator CONROY —Congratulations on being vice-president, and good luck.
Mr Knott —Thank you.
Senator CONROY —If you need a hand with the numbers, I am sure Senator Campbell would be more than willing to give you a hand.
Senator Ian Campbell —It is worth making the point that at both the IASB level and the IOSCO level Australia is represented at the most senior levels. In terms of the government's consideration of the audit independence issues—which are obviously an incredibly high priority—David Knott's flow of information back to us from other regulators and other jurisdictions will inform us on an almost real-time basis as to our own policy considerations. I have said publicly that we will be receiving responses to the Ramsay report up until the end of this month. I was actually asked by a couple of the significant players in the last couple of days if they could have a short extension. I do not want to force them to give us their submissions by an artificial deadline. We agree that there needs to be a timely response to this issue, but it is practical and sensible to have it informed by what is happening around the world, and obviously what is happening within the HIH royal commission and Enron.
Senator CONROY —Does the Fed say that there has been a fair bit of resistance to some reforms, particularly in the auditor independence area?
Senator Ian Campbell —I think quite the opposite at the moment.
Senator CONROY —I was talking in the past. I can only agree with you at the moment. But it is not an area where it has been easy to move things forward—is that a fair comment, Mr Mackintosh?
Mr Mackintosh —I think there is, as the senator has said, a lot of debate in the market and a lot of differences as to the best way to resolve the perceived problem.
Senator Ian Campbell —It is not a new debate, though, I think it is fair to say. When we were doing the CLERP reforms to accounting standard setting, they were live issues. But they were, to use the American colloquialism, very much an `inside baseball' debate, and they had not got up above the political surface until you had HIH and Enron.
Senator CONROY —Some of us have been in there swinging, haven't we, Senator Murray?
Senator MURRAY —We sure have.
Senator Ian Campbell —But a lot of the recommendations in the Ramsay report are a solid reflection of what was put in the working party report to MINCO that came forward in 1998. For example, the building of a financial reporting framework that included greater independence from the profession was the underlying philosophy behind forming the Financial Reporting Council.
Senator CONROY —Yes, corrupting it in the same way it is in the US. It was a big win.
Senator MURRAY —Senator Conroy, if I can just stay with your previous point. Minister, you made what I thought were some important observations on the likely time lines for the introduction of correcting legislation, I guess we would call it. With your experience and background and mine, we both know how important 30 June is, and legislation which came in after that would then only have real impact, probably, for the following financial year; in other words, the financial year 2003-04. Many of us would like to see correcting legislation in 2002-03, in terms of how a financial year should be managed with regard to audit responsibilities and so on. Does the minister envisage that it is possible to get either a first set of legislation with later legislation to follow or complete legislation through by the end of this financial year?
Senator Ian Campbell —I think that would be unlikely, for a couple of reasons. Firstly, legislation will not be the only answer. Ian Mackintosh has just talked about the IFAC paper. That in fact is a worldwide process by the audit profession themselves to increase audit independence. My recollection is that that standard is out and closes for comment by 28 February.
Mr Mackintosh —The international standard is finalised, and the Australian standard is on its way.
Senator Ian Campbell —Yes, that is right. I understand that with the Australian standard the proposal is to pick up that international standard, which will be a significant improvement. But there are obviously going to be professional standards, there is going to be legislation, and of course there is potential regulation and ASIC involvement as well. I think there is a range of policy responses that Ramsay envisages, and part of that is a review of the legislation. The government is obviously undertaking a look at all that at the moment. Changes to the legislation obviously take longer than those other policy responses, just because of the parliamentary processes. Then we have to ask the question: is it sensible to wait for the royal commission? I think one of the terms of reference actually looks directly at legislative and regulatory response.
Senator MURRAY —Minister, as you know, one of the devices open to you is to have relatively generalised legislation put forward which enables the government to enact subsequent regulations which are much more prescriptive or specific in those areas which may emerge as necessary once the evaluation, consultation and royal commission process is finished. I am really asking you whether the government is going to look at ensuring it has the mechanisms for ensuring that action is as early as possible, so that we do not see real improvements delayed until the 2003-04 financial year.
Senator Ian Campbell —Firstly, I think the adoption of the IFAC standard as an Australian standard will immediately provide an improvement for 2002-03. The Ramsay recommendations in relation to legislation go to, firstly, a statement of principle in the law, just saying, `Thou shalt ensure the audit is independent.' That is obviously one of the recommendations we will closely at and just how you would go about incorporating a principle that would have some effect. Then the other recommendations that go to changing the legislation would include a change to the provisions that look at financial independence and employment independence. They are all worthy recommendations that the government has to look at closely. The question of policy and timing comes down to: would you do that very quickly? How much consultation you would do, and would it be sensible to have a close look at what is happening in United States and within our own royal commission and what is happening at the IOSCO level before you move to quickly changing legislation. Or can that wait until after those processes go through? That is an issue.
Senator MURRAY —Think you, Senator Conroy, for allowing the intrusion.
Senator CONROY —In 1997 a working paper on the regulation of company auditors was commissioned on the topic of auditor independence. It is available on the Treasury web site. Are you aware of that paper?
Senator Ian Campbell —Yes.
Senator CONROY —If so, have your views ever been sought or have you ever provided your views on the recommendations in that paper? If so, when?
Senator Ian Campbell —That paper went to MINCO, as I understand it, about 1998—
Senator CONROY —You mentioned that.
Senator Ian Campbell —and the people to effectively did the work on that paper were Les Pascoe and Veronique Ingram, who were both in the portfolio when I was last in it. At the same time as they were doing that work, they were actually working on the CLERP 1 accounting standards reform. So it is fair to say that a lot of the work that went into that paper also informed the work that went into CLERP.
Senator CONROY —But nothing ever happened; that is the point. As I said, it is disappointing that there was a change—
Senator Ian Campbell —The CLERP 1 process involves consultation across the whole of the—
Senator CONROY —This is a paper your government had in 1997; five years ago.
Senator Ian Campbell —I was just answering your question, if I could. The CLERP 1 process basically said to the entire accounting profession and business profession that we are looking at a reform of the accounting standard setting process in Australia: how should we change it to improve it? Accounting and financial reporting obviously includes auditing, so that was a process that incorporated all of that. Veronique Ingram, for example, and Les Pascoe were crucial Treasury officers that worked on building the policy that went into CLERP 1. So it is fair to say that the government was entirely cognisant of the work of the working party at the time.
Senator CONROY —It just did nothing. It was very cognisant of it, it just did nothing. I am not actually being critical of you, Senator Campbell, because I know that you were interested in these areas and you actually were working on them. But five years after your own government commissioned and received a report on auditor independence, you have had—and I do not mean you personally—to be dragged into this debate screaming and kicking. They had sat on their hands and done nothing about a report that you commissioned.
Senator Ian Campbell —Firstly, Senator, if you think it is five years later, you cannot count and you should have an auditor check your own maths. Secondly, the working party and the CLERP process and accounting reforms show that the government has actually been ahead of the game in relation to audit independence since 1996.
Senator CONROY —It is 2002, isn't it?
Senator Ian Campbell —I beg your pardon?
Senator CONROY —This is the year 2002. That would be the year 1997. I guess I cannot count. As I said, I am not actually critical of you, Parliamentary Secretary: I think you have shown commendable interest in this area. I think the problem is that the issues were identified five years ago and it is only now—
Senator Ian Campbell —To say that the issue of audit independence was recognised five years ago shows a total ignorance of the debate about audit independence. Audit independence has been an issue probably ever since the first auditor audited the first report. The reality of the situation is you cannot have an audit if it is not independent. If it is not independent, it is not an audit.
Senator CONROY —I appreciate that the Treasurer has made a few comments and that you previously had an interest in this area.
Senator Ian Campbell —I can tell you one thing, Senator: when I came into the portfolio last time, there was not a file left over from Michael Lavarch or any of the previous people who ran the business law section saying, `This is something that has to be done.' We initiated the work on accounting standards reform and processes. We initiated the work on making international harmonisation a priority. We initiated the work on making the financial reporting process more independent by the establishment of the FRC.
Senator CONROY —By nobbling it.
Senator Ian Campbell —We have done all the work.
Senator CONROY —You nobbled it.
Senator Ian Campbell —There was not anything done before 1996; the file was empty.
CHAIR —Can we get away from a history record and get to the estimates.
Senator CONROY —I am sorry, but when the government wants to stand up and beat its chest that it wants to do something when it has done nothing for five years after its own report came in, it is just a bit rich to put up with the treasurers beating their chests and saying, `We're going to move on this,' after they have done nothing for five years.
CHAIR —You have made your point. The government has made its response. We must get back to the estimates.
Senator CONROY —You say in a press release announcing the results of ASIC's auditor independence survey that ASIC will not finalise its view on potential regulatory measures until the government's position on the Ramsay report becomes known. Do you think that is appropriate, or should ASIC be signalling now what it thinks should be done so as to encourage the necessary change in behaviour?
Mr Knott —That is a difficult question to answer because there are a lot of people who would like to have ASIC publicly express views on this subject, but it is essentially a policy decision for government. The process by which the report has been produced is one that is being managed by government, and government has put a time frame in place in which it will respond. As I have thought about all that, I have thought that it may not be appropriate for me to make public comments about a fundamental policy decision which is currently under consideration by the government.
Senator CONROY —I appreciate that it is a difficult question. I guess it is a difficult balance for you. My concern would be that, if you do not put a position out before the government's position is known, you will find it even more difficult to balance the position of doing anything other than agreeing with the government's position after the government's position is known. So if you are not in the debate at the beginning and stating a position at the outset of the debate—
Senator MURRAY —Like Professor Fels is with the Trade Practices Act; he is out there.
Senator CONROY —That is a fair analogy, Senator Murray, that part of the remit of independent statutory authorities is to be in the public debate before decisions are made, not just to wait till after they have been made and then say, `Oh, we agree.'
Mr Knott —I know we have had discussions about this before, and I am generally not reticent to express my views.
Senator CONROY —We are just hoping that you are going to do that again.
Mr Knott —We have expressed views to the government as part of the process it is undertaking.
Senator CONROY —But the public would like to know what your views are as well. I would certainly like to know.
Mr Knott —In the end, they would essentially be David Knott's personal views.
Senator CONROY —I am asking for ASIC's considered views.
Mr Knott —ASIC has put considered views on certain issues, including issues arising from the Ramsay report, to the government, which is in the process of formulating its policy.
Senator CONROY —Is that submission to Mr Ramsay a public submission?
Mr Knott —It is a publicly available one.
Senator CONROY —I think that finally, after a bit of argy-bargy, all of the Ramsay submissions are public. It is just that you have done all of this good work in this area, and then you say, `We're not going to say anything more until after the government have decided.'
Mr Knott —I suppose that the question is whether our real role is to input advice to the government so that the government will take into account our views as it formulates its policy.
Senator CONROY —But there is a statutory role for you, Mr Knott.
Mr Knott —To make policy by media?
Senator CONROY —No, to put your considered view to the minister.
Senator MURRAY —To express the view of an independent statutory authority which is charged to consider issues on which you have far greater experience than we do or the government does, simply by virtue of your day-to-day interaction.
Mr Knott —I would say that we have done that. The ASIC Act give us an opportunity to provide advice to the minister. That is what it says.
Senator Ian Campbell —And it is advice that is very highly regarded by the government. One of the first organisations I had personal consultations with in relation to Ramsay was in fact ASIC. I have made it quite clear that we will be relying very heavily on the advice from within ASIC in Australia but also for advice on what other jurisdictions are looking at doing, coming through his eminent role within IOSCO. You would probably also find if you went into ASIC that there might be amongst the senior ranks of ASIC three or four different potential views on all the different policy proposals that we are looking at.
Senator CONROY —That is why I said a `considered view', which would probably be an organisational view. I know all the people at the table reasonably well, and they are all forceful and forthright people. I am sure there are lots of internal discussions, but at the end of the day there would be what you can describe as a considered ASIC position.
Senator MURRAY —Which you have put to the government.
Senator CONROY —Which you have put to the government. It is just that you are a bit shy about telling us about it. I am disappointed.
I would like to ask you about the role of the Company Auditors and Liquidators Disciplinary Board. You have previously said that auditors and liquidators must display the highest levels of personal and professional integrity in all their dealings and that ASIC will have no hesitation in referring auditors or liquidators to the CALDB if they have acted in a manner that does not uphold the standards expected of their profession. That was in a press release of 3 July 2001. What are the standards expected of the profession, and what are the standards which shareholders and others relying on financial accounts expect?
Mr Knott —The standards are essentially those that are set by the profession, and this is part of the issue that I was referring to earlier in terms of self-regulation. The CALDB, when it looks at those types of issues, primarily looks at standards as set down by the audit standards board and by the professional associations themselves.
Senator CONROY —How many referrals do you make to the CALDB each year?
Mr Knott —We have made more in the last couple of years, as you will see from the annual report, than ever before. I think this annual report disclosed that there were some 28 referrals, some 16 of which last year were on what I would call `substantive conduct matters' and some 22 of which were on lesser issues relating to proper documentary trails and the like.
Senator CONROY —Does the profession also take action against an auditor referred to the CALDB?
Mr Knott —The profession has its own internal disciplinary process. Mr Mackintosh may have other information, but I think essentially the action we take through the CALDB would be a higher level type of discipline.
Senator CONROY —I want to refer to a specific case.
Mr Knott —Yes.
Senator CONROY —Stuart Gooley, a partner at Andersen, coincidentally, was found to have breached his duty as an auditor by the CALDB, but his suspension was overturned by the AAT on appeal. In your press release on the matter you said that the AAT found Mr Gooley's actions and omissions to be seriously wanting. I believe you had alleged, as found by the CALDB and the AAT, that Mr Gooley's audit failed to identify that the Southern Cross accounts at 30 June 1992 did not give a true and fair view of the state of the company's accounts and were not in accordance with applicable accounting standards. Was this a satisfactory result as far as you were concerned?
Mr Knott —We were disappointed with that result.
Senator CONROY —That the AAT overturned the penalty?
Mr Knott —That is correct.
Senator CONROY —It is quite unusual for the AAT to say, `Yes, he was guilty as charged, but no penalty should be incurred.' Do you think that is a fair description?
Mr Knott —We were disappointed that the AAT took that approach.
Senator CONROY —Are you aware that Mr Gooley is Australia's representative on the International Auditing Practices Committee?
Mr Knott —I understand that he does hold that role and that nothing that resulted from either the CALDB hearing or certainly the Administrative Appeals Tribunal hearing would have disqualified him from that role.
Senator CONROY —Who appoints Australia's representatives on the International Auditing Practices Committee?
Mr Knott —It is not me, Senator. I might defer to Mr Mackintosh.
Mr Mackintosh —It is the two professional bodies that undertake that.
Senator CONROY —Do you think that the profession that wants to be self-regulating, has a self-regulating mechanism and has somebody found guilty as charged of failing their audit duty can be taken seriously when it then thumbs its nose at you, at your findings, at the CALDB's findings and at the AAT's findings? Do you think a body that just thumbs its nose and puts somebody in that situation onto the International Auditing Practices Committee should be taken seriously when it demands and canvasses for a self-regulating role?
Mr Knott —I do not know about being taken seriously. I am prepared to say that we have been disappointed over the last two years by some of the attitudes that come out of the profession and in particular, I would have to say, out of the institute. I find that the action we take against auditors through the CALDB carries very little support from the profession and that we are constantly fighting the profession in that respect.
Senator CONROY —Are you also aware that Mr Gooley sits on the Audit and Assurance Standards Board locally?
Mr Knott —I was aware of that.
Senator MURRAY —Maybe it is poacher turned gamekeeper.
Senator CONROY —I would like to think that was the case. It does seem disappointing that the profession views its own self-regulatory findings with such contempt that Mr Gooley continues to be not only a representative of Australia on the International Auditing Practices Committee—I am, frankly, ashamed of that fact—but is also sitting on the Audit and Assurance Standards Board. Who appoints the AASB?
Mr Mackintosh —The two professional bodies.
Senator CONROY —Again, that is disappointing. One commentator has said that the current process surrounding the CALDB is too secretive. He has also said that the inability of the profession to update their standards on auditor independence since the mid-1990s is indicative of the inability of the Australian accounting profession, more specifically the professional accounting bodies, to progress independence rules. Do you have any concerns that the profession and the professional bodies are not paying sufficient attention to the issue of auditor independence? This was probably written a little while ago. There have probably been a few developments since then.
Mr Knott —I think we have a range of issues that have been brought into high focus in recent times and which to certain senators in this room have been in focus for a longer time. I think they are broken up into the accounting standards type issues, independence type issues—quality of audit type issues—and then, finally, I think there are some issues relating to accountability and regulator's remedies. I think all of those issues are on the table at the moment and I am hopeful that all of those areas will be carefully thought through by the government.
Senator CONROY —Do you think Mr Gooley should continue to represent on these committees, given the findings of the CALDB, AAT and yourselves?
Mr Knott —I do not think it would be fair for me a to make a personal comment of that type. We took Mr Gooley to the CALDB in respect of specific—
Senator CONROY —And you were vindicated.
Mr Knott —in respect of specific conduct. The outcome there was a reprimand and that was overturned by AAT. The process of law, as it stands, has been observed—
Senator CONROY —The findings stand, though?
Mr Knott —The findings stand. Just as I would in the case of somebody who we might have charged with a more serious offence who might have been acquitted by a court, I think it is probably not appropriate for me to pursue commentary in respect of the individual.
Senator CONROY —Senator Campbell, what is your belief?
Senator Ian Campbell —As I understand it, the reprimand stands. There was originally a suspension.
Mr Knott —Correct; I am sorry.
Senator CONROY —The suspension was overturned, but the findings of fact were not contested by the AAT. They seem to believe that, yes, you can be found to have acted in the way as described but there is no penalty necessary. I find that an extraordinary ruling by the AAT. Senator Campbell, do you believe that Mr Gooley should continue to represent Australia on the international auditing practices committee, given this finding, or be on the auditing and assurance standards board? Do you think that is appropriate?
Senator Ian Campbell — I would share the chairman's view that it is not my place to comment on that, but I would make the point that one of the reasons that we established the FRC was to reduce the industry capture of these processes.
Senator MURRAY —I have a question on the same line. Do you think that either the government or the parliament should consider perhaps introducing `fit and proper person' legislation in relation to representation on international bodies which subsequently will advise our own government as to where we should be going. I am not predicting either a conclusion as to whether the person concerned would pass the test. He may, but the fact is that in legislation throughout Australia, state and federal, you do have `fit and proper person' person checks and balances.
Mr Knott —If I may attempt to answer that, I think that if we applied it to the case that has been under discussion it would be a very difficult question as to whether, if the regulator had to make that judgment in the circumstances, that the person would be ruled out. Of course, if the regulator did rule the person out, no doubt that would itself be a reviewable decision.
ACTING CHAIR —I have to express a conflict of interest in chairing this because I am a fellow of both the Institute of Chartered Accountants and the CPA.
Senator CONROY —Are you appalled?
ACTING CHAIR —Given the adverse comments, I direct the secretary that these transcripts of evidence be given to both bodies and also to Mr Gooley, given the Senate standing orders in relation to their right to respond to any adverse comments.
Senator SHERRY —I have a suggestion: let them appeal.
ACTING CHAIR —I think that in the first instance they should have the right of reply to this committee. If that is the wish of the committee, it is so ordered.
Senator CONROY —On the question of audit independence, it has been put to me that one of the problems that auditors have in their deliberations is that accounting standards are based on the principle of substance over form but the law does not recognise that. Do you think that it is legislatively possible for that principle to be enshrined in law? Do you think it is desirable, firstly?
Mr Knott —I need to be able to flesh out this response a little bit, I think Senator, because we moved from a `true and fair' view, a sort of fundamental approach, to one of quite technically constructed standards. We did that—when I say we, the world—partly because `true and fair' was seen to be too vague, too unenforceable and too subjective.
Senator CONROY —A bit like `abnormal' is currently.
Mr Knott —If one is to have accounting treatments that are comparable between like companies so that investors can make choices, one would like to think they are applying consistent methods of accounting treatment. So we have moved so far the other way that we now live in a world where accounting is rivalling law for its degree of technicality. We have a culture professionally where accounting is addressed from a technical construction. There is still in the law a requirement that the accounts provide a true and fair view of the company, but the construction is that, provided the individual accounting standards have been met, the accounts will provide a true and fair view. This is an incredibly difficult problem on the accounting standards side to resolve because, the higher level principle one employs to dominate that outcome, the more subjective is the potential for the treatment. One might be surprised at that given the amount of subjectivity that seems to be available even with highly technical standards.
Senator CONROY —The debate about `abnormal' is in the representation.
Mr Knott —That I think is the basic problem about moving one way or the other. I think this is probably the hardest issue on the accounting standards side. The auditing standards side is a different issue, with the independence and other issues. I think that our move to try to improve this through the international accounting standard setting process is right. I think it is now being resourced, and commitments are there at a level never before. The major economies have expressed a commitment to get on with this over the next couple of years. I think it is good that Australia is so strongly supporting that. In the end, we do have differences in approach around the world as to how technical or how prescriptive the standards should be, but even those countries that favour broader principles still end up with standards which in my view provide a field day for the lawyers and the accountants in their interpretations.
Senator CONROY —The Enron situation probably could not have happened here in Australia because of our standards and because we employ the control. That is a principle. What I am trying to get to is that we have principles and then we have the detail. I am looking to see whether or not it is possible to incorporate that same sort of overarching principle but still have the detail so that substance wins over form. It seems to have been able to work in that issue of control which has escaped the American regulators for some considerable time. I think consolidation was first put on the agenda in 1984. I was lucky enough to attend a speech recently by a member of FASB—I am not sure if they are attending your summer school—
Senator MURRAY —FASB?
Senator CONROY —Financial Accounting Standards Board. It is the US standard setter. Tragically, it has been nobbled in much the same way that Senator Campbell advocates and at times has become captive of the business interests. Putting aside that part of the debate—
Mr Knott —I think it is right to say that Enron in all its detail would or should be avoided here. There are differences in the accounting treatment, as you say, on consolidation. I do not think I could add a lot to my previous answer, though, about the risks of moving to principles, except this—
Senator CONROY —I was not advocating moving away from the detail as well.
Mr Knott —Okay. I think there are problems with both approaches. I think we also need to give consideration to whether we have an effective mechanism for filling the gaps, by which I mean the role of the regulator in being able to quickly respond to situations that emerge and give either definitive rulings or directions about how particular situations should be accounted. We do not have that. Other parts of the world have systems that at least provide for that, though they may not have been fully utilised. That may be something that could be considered as part of the overall framework.
Senator CONROY —There always seems to be this argument about the respective role of a company's management and a company's auditor in ensuring that the spirit and letter of an accounting standard is complied with. Have you given much thought to that?
Mr Knott —I am sure the minister will permit me to make a personal comment. ASIC has not formally given detailed attention to that issue, but the opening principle statement is that the final buck stops with the board. It is the board's responsibility. But I think the question might actually go to the hub of auditor independence and the standard of audit. I say that because, if you adopt the approach that the auditor is a delegated regulator and is the inside person to ensure that the company complies with not only the letter but the spirit of disclosure—that is why we have a system of audit—then you get to issues like the way they are appointed, which Senator Murray has spoken about at length before, but, perhaps even more importantly, the fact that, even in respect of audit services, there is a service provider-client relationship. It is this relationship that is in some respects at the heart of the problem.
One could perhaps consider in that context incentiving auditors to have a greater whistleblowing responsibility, and at the same time ensuring that they are fully indemnified in performing that role. Auditors have a very limited obligation to report suspected breaches of the law to ASIC under the current law. They are only required to report breaches of the law when they think that action by the board of directors will not rectify the problem. The number of referrals we receive is very small indeed. So, Senator, you have probably gone to the heart of the problem. Other issues about independence of audit that are being addressed through Ramsay and the like are important. We are very broadly supportive of it, and we are making the appropriate recommendations to government. I would say that this basic service provider-client relationship is a very big issue, and it is time to look at the degree to which the audit profession is self-regulatory, particularly in relation to quality of audit.
Senator CONROY —I apologise for returning to what now seems like a running gag. My attention was first drawn to the issue of the client relationship in the somewhat notorious case to do with Elders. At the time, the auditor was refusing to sign off on a particular transaction that was conducted by Mr Elliott, Mr Scanlon and a few friends at the Carlton footy club, but there was no documentation to the transaction. And it was a substantial transaction—it involved some hundreds of millions of dollars, if not a billion dollars—with a New Zealand company. The auditor, who was a relatively junior player at that time, refused to sign off because there was no documentation. She had just been assured by Mr Elliott that the transaction had taken place. Yet, by the time the final audited statements came up, the audit was signed off without any qualification. Ironically, some years later, upon winning, in a travesty of justice, Mr Elliott declared that this transaction actually did not ever take place.
I have always wondered why no-one has bothered to go back to the company that conducted that audit and say, `You accepted Mr Elliott's word back then that it did take place, even though there was no supporting paperwork. Yet now he seems to be saying that it did not take place, and he has publicly stated that this transaction never took place.' I am wondering how, in a situation like that, the auditor got lent on to pass it in the first place, when subsequently it turned out that the transaction never took place. That is what has always intrigued me about this relationship and how an auditor can be lent on; because that is clearly what happened in this case.
Senator MURRAY —Which is why you need actual independence.
Senator CONROY —I apologise for returning to Carlton footy club and John Elliott, but I have always been intrigued that that relationship, which you describe as being at the heart of this debate, has not progressed in such a long time.
Mr Knott —Nor has it really around the world. This debate came into its greatest focus when Mr Levitt, former chairman of the SEC, initiated some policy proposals—which is part of his brief—in the United States 18 months ago. The final outcome of that debate was a very much watered-down set of proposals, primarily I think as a result of the lobbying by the big five.
Senator CONROY —The big five were represented by a bloke called Harvey Pitt, weren't they? He was a key spokesman on behalf of the big five opposed to this recommendation—is that a historically accurate statement?
Mr Knott —I could not swear to it. I understand that Chairman Pitt—
Senator CONROY —He is now the chairman of the SEC, is he?
Mr Knott —has some experience—
Senator CONROY —A bit of form on it, I think is one way to describe it.
Mr Knott —in this area, which I am sure will be very valuable to the SEC.
Senator CONROY —I want to return to the issue of broker independence, which is something I have raised previously. Are you aware of questions regarding the independence of analysts' reports when the bank for whom the analyst works also provides a service to the company the subject of the report?
Mr Knott —We are conscious of issues around analyst independence. We have participated in some work that has already been carried out through IOSCO in this area, and we have that particular matter as one of the work programs to do this year, following the introduction of the FSRA.
Senator CONROY —I know that the local SIA have produced guidelines aimed at ensuring the independence of analysts, and I know there has been some work in America. Unfortunately, Enron has overshadowed what were some very entertaining testimonies about the whole question of broker analyst independence, and Mary Meeker and Mr Blodgett have become famous around the world for their contributions. Since the collapse of Enron, do you think there is anything further that needs to be done? Apparently, brokers with interests in Enron were still flogging their script a month before it went belly up; they were still recommending it to investors a month before the company went belly up. Do you think a regulatory response is warranted?
Mr Knott —I think that issue is part of the range of issues that will be looked at in Enron. It is a timely reminder that, whilst the question of audit and audit independence is clearly a big Enron issue, Enron is really a whole systemic collapse of governance across a whole range of areas. There are concerns about directors, there are concerns about self-dealing, there are concerns about possible insider trading and there are concerns about analyst conflict and whether there has been inappropriate conduct there, so I am quite certain that these issues will be examined.
Senator CONROY —You have politely avoided the one other clear systemic failing. Before Senator Murray gets a chance to jump in, I think the campaign contributions of Enron and some of the big five accounting firms in this area do deserve some attention. We are lucky enough not to have quite the same American system—although some of my colleagues recently advocated it—which has the capacity to nobble congress.
Senator MURRAY —A corrupting influence, I think it was described as.
Senator CONROY —Some of the people who are now shouting the loudest should have a good look in the mirror about why Mr Levitt was defeated. Legislation was actually going to be brought forward to defeat Mr Levitt. I think you have been kind enough not to draw that to our attention, but I think it deserves to be on the record.
Mr Knott —I have certainly read accounts of significant donations, as I understand it to both sides of congress.
Senator CONROY —This was widespread. I want to move on to an issue that Mr Mackintosh and I have chatted about a couple of times: dual listed companies.
Senator MURRAY —Mr Knott, an issue I raised in the 1997-98 parliamentary debates was the issue of mandatory reporting within the company, namely, a requirement in law that it should be mandatory for management and directors to report any suspicion of improper or unlawful conduct to the auditor. There is now that famous saying, `What did he know, and when did he know it?' For auditors, it is often, `What did they not know?' simply because they have not had the opportunity to examine that particular area. Have you had a look within ASIC at whether there are devices for ensuring that the information flow from within a company to an auditor is of maximum benefit in terms of financial and fiduciary responsibility? Have you had a look at whether the concept that I have just outlined to you could or should be a concern for changes to the Corporations Law?
Mr Knott —To date I think the primary focus in this area has been on the role of the audit committee and the type of structures that should be in place for a properly operating audit committee and for that committee to be independent as far as possible from the executive management of the company. If I could go back to my earlier personal observations about the relationships and the sort of role one would like to see audit perform in terms of whistleblowing, one certainly could conceptually extend that role into the corporate structure itself through a designated officer, such as a chief financial officer. Radical though that would be for general corporate Australia, it has its parallel in the insurance sector, where there is effectively a responsibility on the in-house actuary not just to the company but to the regulator, and I understand that that remains a feature of the proposed reform legislation in the general insurance sector.
I think that some of the evidence that we are reading about in the papers about side deals being made by senior management that are known to only a very small number of people and that are not disclosed to the auditor are things which would be very hard to legislate on. To be implemented, most of these things have to go through whoever is heading the finance function and, therefore, that is why I speculate about the possibility of having some sense of obligation on that function.
Senator MURRAY —May I give you another analogy. I am not so sure it applies as much now, but it used to be that the Attorney-General within a government exercised a role and responsibility in terms of independence and acting in the public interest which divorced his or her functions from the normal political kind of environment.
Mr Knott —I think that is a good analogy. I should add in fairness, so there is a balance in the discussion, that we have seen a dramatic increase generally in industry, and I would single out the finance sector in particular, in terms of their investment in compliance processes. Compliance is now becoming a quite standard senior function across the finance sector at least. Indeed, I know that because we are often poached by industry and lose people to that type of function. There has been a greater recognition of the role of audit committees, of the role of compliance committees and of the role of compliance officers. I just overlay that response on top of my earlier comments.
Senator MURRAY —It is quite plain to me, from the early reporting so far on the examination of the Enron issue, that one of the internal constraints which were apparent there, which we know are reflected in many companies, is a constraint against internal whistleblowing, which is in the same arena as the one we are discussing. The only way in which you can encourage responsible whistleblowing—and not frivolous or vexatious whistleblowing, which is an annoyance to everybody—is twofold. Firstly, you make it a requirement—in other words, a duty—and, secondly, you provide protection so that people do not suffer as a result of it. Would it be your view that, within the same area we are discussing, this is the kind of area which deserves greater thought and debate in terms of possibly tightening up the provision of full information to the auditor and, indeed, to the financial officer in the manner you have discussed?
Mr Knott —It follows from my previous comments that I think it is a very interesting area of discussion and possibility. I say that because of my view that we are basically confronted by the service provider-client relationship, so that is the audit from the auditor's perspective. From the company perspective, I think there is not sufficient incentive for senior company officers who want to do the right thing to do the right thing.
Senator MURRAY —The next section of the same area of discussion is to do with the depth and the breadth of audits. Some, but not all, boards and some, but not all, management teams believe that audit is a necessary evil and want as minimal and as low cost an audit as possible. That is a danger because an auditor can only do the job for which they are paid and the hours for which they can commit. It can mean in particularly complex structures and organisations that a lot is missed, and in good faith they sign off the accounts believing what they are told but without the opportunity to check what they are told.
This is a very difficult area to regulate or mandate, but it needs to enter the debate, because until such time as auditors are properly recompensed they will not be tempted to subsidise the audit from other services they provide, such as consultancies, and they will recognise that their return is as a consequence of continual employment in that function rather than in the particular year they do it. So my question to you is: is ASIC, in terms of its assessment of this area, also canvassing ways in which the depth and breadth of audit can be encouraged, incentivised and mandated in some manner? I must confess to you that I do not have the answers to this; I just know there is a problem. Are you looking at that area?
Mr Knott —Senator, if I did not have more respect for your reading, I would have sworn that you had been taking a peek at some of my speeches from last year.
Senator MURRAY —I have, but your speeches are not on the record, so I am anxious to hear.
Mr Knott —I did in fact enter the debate on this question of the cost of audit and the value of audit quite aggressively last year on I think three separate occasions. I do think such evidence as exists supports the view that less rather than more is being spent on audit. I think there are many companies who regard audit as a burden rather than as a means of enhancing shareholder wealth, and I think companies need to fundamentally reassess that as part of the general review which is now being conducted of the quality of audit, including the independence of audit. In the end, I think you cannot legislate specifically on the question of investment and cost and how seriously you take it. That is a question of culture and attitude. But we do have a culture at the moment, in my view, which is centred on technical compliance and which is in many cases using the accounting standards to produce the best possible result for those who manage the company.
Senator MURRAY —This is the second last area in this section that I want to deal with, and I will put on the record my own view, although I do not have a formula yet developed to my own satisfaction. My view, broadly stated—and I want to get your response to it—is that, in return for greater regulation and far more serious penalties for breaches of the fulfilment of the audit function in the broad sense in which we have been discussing it, auditors should be much better rewarded for the work they do and that their liability should be capped or limited in some way. The reason I put it that way is because, as you well know, there is a fear that if they continue to carry the can and then at the same time have low fees it is just not going to be a very attractive function for people to fulfil. I do not yet have the answers to that, but, bearing in mind that on the one side you want a far stricter audit and a far better done auditing process with far greater independence, the other side has to be that people are properly paid to do that job and that their liability is within the grounds of reasonableness, given the responsibilities of everybody else involved in the process. Senator Conroy rightly picked on brokers and advisers. There are valuers who I think are massive in this debate, and I have always stuck auditors and valuers together on the question of independence. There are directors and management.
Mr Knott —I find myself substantially in agreement. I think the only thing you and I have ever disagreed about in this area is your suggestion that ASIC actually appoint the auditors. I still do not favour that process. I think it follows from my comments about more investment into audit that that means that auditors need to be properly remunerated.
Senator CONROY —Hopefully we are driving up the value of audits as we speak.
Mr Knott —Thank you, Senator. We need a strong, viable, independent, honest audit profession because not only do shareholders rely strongly on audit but so does the regulatory system. It is something that many commentators just do not understand, or seem not to understand. There seems to be some belief that somehow a securities and corporate regulator can get behind the accounts, can walk into the company and go through the records and find out what has been going on and uncover side letters. This is something an official regulator simply cannot do.
Senator MURRAY —That is right. The last area I will pick up on is in fact the independence issue. If we begin with the principle that independence can only be established by nature of the appointment and the security of tenure which establishes independence, having an independent audit function needs to relate back to those two essential methods. The only two possibilities I have ever been able to see for getting auditors away from the main board which is controlled by the main financial shareholders are either internal, through the idea of a corporate governance board which is elected by shareholders, not shareholding, and which has a specific remit, or externally by a body such as ASIC. Personally, I think the ASIC route is harder and more difficult, but I have only been able to conceive of those two real possibilities. Whilst I accept Professor Ramsay's proposals of review and so on, it cannot deliver the separation of the auditor from the main board. That is where the problem of independence lies for valuers and whatever else.
I put the proposition to the parliament to put up the corporate governance board as an option—not as a mandated requirement, as an option—for listed companies, and it was rejected. But I still in my own mind have been unable to find any other way to take the appointment of auditors out of the hands of the main board. I think that is a fundamental principle. I ask you, because I know you have been digging and delving in this area, whether you have found any way that perhaps I have not.
Mr Knott —The short answer is no. The slightly longer answer is that I think we need to look at the question of independence in terms of a package of things that could be done—and I think we have talked about some those at some length this morning—and then look at whether the appointment process continues to be as important as you have historically viewed it. For example—and it is only an example—suppose there was compulsory rotation of audit firms on a mandated cycle of five years.
Senator MURRAY —In other words, where you could get a reasonable return over a period.
Mr Knott —But also breaking to some extent that nexus of appointment, because there has to be rotation.
Senator MURRAY —And breaking the relationship problem.
Mr Knott —And if the relationship were addressed by the greater incentive for whistleblowing. A number of things we have talked about are possibilities, and some of them are dealt with in Ramsay. I think it is going to be very interesting to look at the end of the process that the minister has outlined, including the royal commission, and see whether the full jigsaw has come together in a way that gives people greater confidence. I think appointment is a valid part of that jigsaw; I am not sure that I see it as central to the outcome, as perhaps you have in the past.
Senator CONROY —I will jump ahead in my script, if I can. There is one issue that I did want to discuss while Mr Knott was here. I am being lobbied currently by Combined Insurance in relation to section 9.9 (2A) of the FSR Act. I noticed that in November you released a press release stating that you had obtained additional consent orders in the Federal Court that restrict how Combined Insurance can sell insurance policies. Can you tell me why was it necessary to obtain additional consent orders?
Mr Kell —We first took enforcement action against Combined Insurance in November 2000 and obtained consent orders in the Federal Court accepting an enforceable undertaking from Combined in relation to investigations we had made about inappropriate sales of insurance policies to members of remote Aboriginal communities. We believe those may have occurred in circumstances which involved misleading and deceptive conduct and may have been unfair. That was a very serious matter, in our view. It involved the sale of these policies to Aboriginal communities across Australia, in New South Wales, Victoria, Western Australia, Tasmania and Queensland.
We obtained evidence to support claims which suggested that some of Combined's agents had failed to explain the insurance in their presentations to consumers; had represented that the insurance had benefits or uses it did not have; completed policies on behalf of some consumers without their knowledge; used unfair pressure or influence to sell the insurance; and completed policy forms for individuals on the basis of short presentations given to larger groups. We also had concerns that policies were sold in some circumstances for children where the insurance did not cover them; that consumers may not have needed the insurance as they were already entitled to other payments; and that some consumers had difficulty reading or understanding the insurance. The court orders that we obtained at that time had a number of elements that included the imposition of conditions on Combined relating to the way in which its agents sold insurance in Aboriginal communities. As a result of that action, Combined did end up refunding well over $100,000 worth of insurance premiums. Premiums were typically very low; they were typically in the order of less than $100 a year. So we were quite concerned.
Mr Johnston —Perhaps I should make the point that they were policies for children rather than being sold to children.
Mr Kell —So we were concerned to receive further complaints about the sales of these policies in Aboriginal communities. This time it was in the Northern Territory. We investigated those complaints and subsequently in November 2001 obtained additional consent orders relating to those sales practices. They imposed some additional conditions restricting Combined from selling policies to consumers whose main source of income is social security benefits. That was where the additional court orders came up. They were a follow-up action to the original action that we took in the year 2000.
It may be worth touching briefly on the point that ASIC is a more generally strong supporter of the restrictions on cold calling in the FSR legislation—the 9.9(2A) provision. We have particular concerns about cold calling generally, but the door-to-door sales practices have proven to be particularly problematic, especially when combined with a heavily commission driven sales structure. The pressure that can be applied—especially to vulnerable consumers—when those sorts of sales practices take place is well recognised. I would also make the point that, when you are selling financial products, something that may have been sold a while ago can still be having a detrimental impact today. To our knowledge, this is probably a key reason why most insurers have, by and large, abandoned the door-to-door cold calling mechanism as part of their sales tool kit. That was partly in response to widespread mis-selling that occurred in the late 1980s and early 1990s. So we are, and have been all along, strong supporters of what we think is quite an important consumer protection provision in the FSR legislation.
Senator CONROY —That seems to be two strikes for Combined. Have you received any further complaints about the conduct of Combined?
Mr Kell —We have had a complaint made to us—it does not involve sales in an Aboriginal community—alleging the mis-selling of insurance to a widow in receipt of a war veterans pension but, as we are currently actively considering that matter, I think it would be inappropriate to comment further at this point in time.
Senator CONROY —Is this widow in a nursing home?
Mr Kell —She is now, but we are still establishing through our assessment of this complaint the exact circumstances. I do not think that we could add any more detail to what I have already said.
Senator CONROY —Was she sold multiple policies?
Mr Kell —That is one of the issues that we are currently considering.
Senator CONROY —I am confused. Minister, I am intrigued to know what a widow with a war widows pension who is in a nursing home could possibly want with income protection. Do you have any thoughts?
Senator Ian Campbell —It seems incredibly surprising, and I am glad that ASIC are investigating it.
Mr Johnston —I have a comment to make, without talking about that case specifically. It was the case, in looking at the earlier conduct to which Mr Kell referred, that one of the concerns we had was that policies were being sold to people when they would not in fact be able to take a benefit because they were in receipt, or would have been in receipt, of some sort of other pension payment.
Senator CONROY —I appreciate the constraints that you are under, Mr Kell. I will not press you further. It does sound like a very disturbing case, and I hope that you are able to get to the bottom of it shortly.
Senator Ian Campbell —Mr Chair, I think Senator Conroy knows, as we all do, that one of the outcomes of the FSRA will be that that sort of practice would be basically illegal.
Senator CONROY —Yes. That is one of the many reasons why Labor joined with the government in supporting this bill. I think it is an excellent bill in both intent and, hopefully, application. Mr Mackintosh, I want to talk to you about DLCs. ASIC in October last year issued a practice note outlining financial reporting guidelines for Australian entities in a dual listed company arrangement, pending the release of an accounting standard dealing specifically with such arrangements. Have you been in consultation with the AASB on this?
Mr Mackintosh —Yes, we have. The AASB formed a subcommittee to look at this matter. That subcommittee has come to preliminary conclusions, and the matter has been taken to the board itself. It might be something that you would like to ask Mr Alfredson about this afternoon. My understanding—he will probably clarify it— is that he has done some consultation with both the UK Accounting Standards Board, which in each case is the other arm to these DLCs, and also the international board. I am continuing to encourage the AASB to deal with this matter expeditiously and that, if they cannot reach agreement with overseas boards, it should be dealt within the Australian context anyway.
Senator CONROY —Do you have a time frame on that? I appreciate that people do seem to have a genuine desire to resolve these issues but, as you would know because you are involved in some of the international standard setting issues and arguments involved in the discussions overseas, these things can drag on for some considerable time. What time frame do you envisage for this?
Mr Mackintosh —This is a difficult issue, and I agree with you that it does run that danger. I would like to see something resolved by the end of this year.
Senator CONROY —On Business Sunday last Sunday Paul Anderson was interviewed on which accounting standards BHP Billiton use—and you know this is an issue very dear to my heart. He said, `I think that the accounting standard that's consistently applied gives the best view.' Do you like that that may mean that a DLC may pick which jurisdiction has the best standard in each particular area of business, and so not uniformly use all of the standards of only one jurisdiction?
Mr Mackintosh —Our practice note has stipulated that the Australian arm of the DLC must use Australian standards and must also use Australian dollars as the currency.
Senator CONROY —I appreciate that, but the entity BHP Billiton provides a set of consolidated accounts. Are those presented to Australian investors in Australian standard form?
Mr Mackintosh —Yes, `combined accounts' we call them. And under our practice note they are a note to the consolidated accounts of the Australian entity. It is one of the debates if a new standard is set. We will probably take the view that a new reporting entity has been formed, and then you have to debate again the sorts of issues that you are raising.
Senator CONROY —Is that likely in this case, do you think?
Mr Mackintosh —It will have to be resolved before the standard comes out as to which GAP is used and which currency is used. It will be part of the new standard, I would hope.
Senator CONROY —I think ASIC are represented on the AASB—or do we have an informal observer?
Mr Mackintosh —I, through another role, am an observer on AASB, yes.
Senator CONROY —I unkindly had a bit of a quip at Mr Knott earlier about enforcement of the existing law, particularly the law revolving around executive remuneration disclosure and valuing of options. In the past I do not think you have been with us, Mr Mackintosh, when I have engaged both Mr Cameron and Mr Knott about this issue.
Mr Knott —And Ms Segal, I think.
Senator CONROY —And Ms Segal. I was not leaving her out just because she is not here. If the law is difficult to interpret or requires some supporting regulation before it can be effectively enforced, I think Mr Knott has indicated earlier that we need the Australian Accounting Standards Board to give us a standard in this area of valuation of options. As an observer on the AASB, have they completed that task yet? I will take this up with Mr Alfredson later. Unfortunately they are coming this afternoon; I would have liked to have had them at the table with you. I understand they have been doing some work. Is a standard finalised?
Mr Mackintosh —It is not finalised but it is quite close—and I am not talking the end of this year for that; I talking the next month or two, I would hope.
Senator CONROY —And does this standard include evaluation of options using a particular method?
Mr Mackintosh —Yes, it will require them to be valued. I think you might like to clarify with Mr Alfredson how they will stipulate how that will be done.
Senator CONROY —Is it that they will be valued and then we have got to wait another four years while they work out what the method is?
Mr Mackintosh —There is what is called the G4 plus 1 paper on this, and some recommendations on the valuation methodology that should be used.
Senator CONROY —What is that? Does that have a name?
Mr Mackintosh —It does, but I do not have it with me.
Senator CONROY —Is it Blake Scholes?
Mr Mackintosh —It probably is, I think.
Senator CONROY —The question of how it is accounted for and treated in the accounts: is that dealt with?
Mr Mackintosh —No, in this standard it will not be. It will be a disclosure of those within the accounts themselves. The existing law is a disclosure in the directors' report. The bigger project of taking any sort of expense up that is settled by way of stock options or share issues is being tackled by the International Accounting Standards Board.
Senator CONROY —How is that proceeding?
Mr Mackintosh —With some difficulty, I think. I have been at the table there when the matter is being debated. There is diversity of view. My understanding is that the corporate sector, for instance in the United States, are not prepared to accept a standard of that sort at all. They have been through that debate, they say.
Senator CONROY —Yes, they nobbled the accounting standards board previously—FASB over there.
Mr Mackintosh —I think everybody agrees with the concept that these are expenses under accounting concepts. The question is whether they should be taken up as expenses or just disclosed in the notes—as they are in, say, the United States at the moment.
Mr Knott —If I might interject by saying this is one of the issues that has been identified by the group of chairmen at IOSCO. I do not think the position as represented on behalf of US business is one that is shared by the SEC. It may well be that as a result of Enron, where very serious—
Senator CONROY —The question of options here and how they are accounted for is very real. I think that is a fair comment.
Mr Knott —Yes, I think there is something like $1.2 billion worth of options in the Enron case, so I expect it to receive quite a lot of attention.
Mr Mackintosh —I should say too that, despite these objections coming from various groups around the world, the Chairman of the IASB has expressed determination to pursue this matter as one of their top priorities.
Senator CONROY —Thank you for that. I want to follow up your investigation into mortgage investment schemes. I know Senator Sherry has a very healthy interest in this area as well. You announced in February that you were investigating runout mortgage schemes which were being managed by solicitors and finance brokers throughout Australia. In August you provided an update saying that you expected your investigation to finish by February this year. How is that investigation progressing?
Mr Wood —Are you speaking of one particular investigation or a whole series of investigations?
Senator CONROY —I think all the states are involved. I am just working off a press release.
Mr Knott —I think the answer was essentially given previously by Mr Johnston in the sense that, as a result of that major investigation campaign, we have a number of individual mortgage schemes that are under our particular investigation. Some liquidators have already been appointed to schemes. Some further enforcement action is under contemplation in respect of some failed schemes. Additionally, as a result of the work conducted, the policy for winding down the existing schemes that were unable or unwilling to make transition to MIA has been finalised. Those schemes are required to be fully terminated by mid next year under a process that will hopefully cause the least possible disadvantage to investors and will be at the least cost to those investors. So I think that in broad terms we have been very happy to have made very substantial progress on the issue of solicitors' mortgage schemes.
Mr Johnston —If I can go back to the question that Senator Sherry—
Senator CONROY —I was out of the room, unfortunately, when Senator Sherry asked you a couple of those questions. I am happy to read Hansard so you do not need to repeat yourself.
Mr Johnston —There was one follow-up point where Senator Sherry was inquiring about a particular investigation in Tasmania. The thing that I neglected to refer to was that I think the senator would be aware that we accepted an enforceable undertaking several months ago from a firm of financial advisers in Tasmania who had put a number of people into those schemes, so that the people would be repaid their principle and interest.
Senator SHERRY —Garrison's?
Mr Johnston —Yes. It goes to the amount of money that would be lost, of course.
Senator CONROY —In your August statement, Mr Knott, you said the investigation had confirmed that over $370 million of runout loans were in default across Australia. Is that figure still accurate? Is there an updated figure?
Mr Knott —Mr Johnston was also asked that question, and I think he undertook to provide an updated number following inquiry.
Senator CONROY —On Friday, 12 October last year ASIC advised that it had taken action in the Federal Court against six companies that had allegedly misused $3 million in superannuation funds, and that it had sought the appointment of liquidators. Did ASIC work in conjunction with APRA in respect of the legal action, which commenced on 12 October, that it took against the six funds?
Mr Knott —We are all struggling to identify that particular enforcement action. As a matter of routine, where we can we would advise APRA if we were taking enforcement action in the superannuation industry. In most cases that is possible.
Senator CONROY —This might hopefully refresh your memory. It was a press release on 12 October and Jamie Orchard was the contact officer. It lists Teilis Financial Services, Aarosonic Credits Ltd, Supatrust Finance Ltd, Pacific Petroleum Services, HBL Holdings and Texol Petroleum Services. You had obtained consent orders against three company directors. That doesn't ring a bell?
Mr Knott —It does not ring a lot of bells for me, but if you have questions in relation to it I will very happily take them on notice.
Senator CONROY —I will just quickly read them into Hansard for you to take on notice. Did you work with APRA? Which organisation identified the problems? Was APRA aware that there were problems with these particular super funds? Are you aware of whether APRA has received annual returns from these funds? If APRA had identified problems with the superannuation and acted earlier, would ASIC have required to seek the appointment of a liquidator? Was ASIC forced to mop up after APRA's failures?
Senator SHERRY —Yet again.
Senator CONROY —I appreciate that you have been the bunny or the tiger of an enforcer in that sector. You announced on 20 October your consumer education strategy for 2001-04. How much will ASIC spend on its consumer education strategy initiatives?
Mr Kell —We can take that on notice to get you an accurate figure on that. The figure is in the order this year of several hundred thousand dollars.
Senator CONROY —You have indicated that as part of your strategy you will commence a scoping study on financial service education in secondary schools. When can we expect to see the results of that study?
Mr Kell —Midyear.
Senator CONROY —Can you give us some brief details of what the scoping project would involve? I am happy for you to take it on notice.
Mr Kell —I am happy to provide some details on that now. Because we often have it put to us that consumer education on financial services really should start at the school level—that is not really something that we are able to undertake off our own bat—
Senator CONROY —You don't see yourself like in that movie The Bank: the man with the little piggy bank and the coins?
Mr Kell —I often do, Senator, but back in reality, one of the things in our early work on the sort of consumer education in financial services that currently is out there that has come up again and again is that there actually is a fair amount already available in schools but it is unevenly distributed, there are gaps in what it covers and it is not necessarily consistent across different state education departments. We want to get a clearer idea in the first instance as to what people already have before we decide whether we may want to add any more to that pot.
Senator CONROY —What about the EFT code of conduct?
Mr Kell —The new version starts 1 April.
Senator CONROY —Can you advise how many institutions have now actually signed up?
Mr Kell —I would have to take that on notice.
Senator CONROY —Is it a lot; is it a couple?
Mr Kell —A lot. I think we are expecting that it will be pretty much across-the-board coverage, but I will check that.
Senator CONROY —No worries. Can ASIC advise whether there are any results that it can report on in its investigations into Water Wheel or GO2? Have we got any progress on those two?
Mr Wood —Water Wheel of course is a civil penalty matter, and my understanding is that it has been set down for hearing in July this year. All the indications are that it will be heard at that time.
Senator CONROY —I will have to set aside July. What about GO2?
Mr Wood —I would have to take GO2 on notice. I will get back to you with precise details.
Mr Knott —I think I can answer that question by saying that the investigation into GO2 does continue. The matter is still an active matter for ASIC.
Senator CONROY —Thank you. On Monday, 27 August ASIC announced that it had commenced a formal investigation into the operations of the Westpac Mortgage and Income Fund. Has ASIC completed its investigation into that institution?
Mr Knott —It has not completed its investigation.
Senator CONROY —Any idea on the likely completion date?
Mr Knott —I would have to seek advice from my colleagues to see if we can assist.
Mr Kell —No.
Mr Wood —No-one can help with the expected date of outcome.
Senator CONROY —I know that Senator Sherry has been having discussions about this issue: in December, you announced a new project to foster better disclosure of fees and charges in the product disclosure statements for investment products. You probably discussed some of that with Senator Sherry.
Mr Johnston —To some extent we did.
Senator CONROY —I was wondering if you could tell us a bit more about the project—who has been consulted in preparing the option paper, and that sort of thing.
Mr Johnston —Mr Rogers.
Mr Rogers —That is really the first stage of our thinking on that. We do expect that part of the work to be finished by the end of March. At present, I think we have just about had all the conversations that we plan to have. There are probably a few more to be had in Melbourne. It is not intended to be complete—and I am not sure that I could give you a list of those that we are talking to—but they are the main industry bodies that cover this area, which is really managed investments and superannuation, consumer bodies and a number of individual industry players. As you may be aware, Senator, there are a variety of views within the industry about the questions that we have raised in that work and there are indeed a variety—
Senator CONROY —I have only heard one view from industry.
Mr Rogers —There are a variety of views amongst individual institutions as well, and the work that we are doing at the moment is really designed to tease out all of the issues that industry and consumers see in this and try to map out some way of taking it forward in a meaningful way.
Senator CONROY —I have a couple of questions on the FSR Act. I will quickly slip them in before you vanish on me, Mr Johnston. I have been advised that some insurers have become reluctant to enter into cross-endorsement arrangements with intermediaries—multiagents, if you like—following the passage of the FSRA Act, possibly due to their concern about potential liability arising from what may be perceived as the provision of inadequate training of intermediaries by some insurers. Are you aware of this?
Mr Johnston —It was flagged in many of the discussions taking place about the act before it was enacted that that might be an outcome for some insurers, that it would be difficult to have cross-endorsement, and that is because there is joint and separate liability in respect of the acts of the authorised representatives where they are cross-endorsed by a number of licensees.
Senator CONROY —I remember a discussion where it was agreed that if they sold a product for that one it would only be that one; they would not like it to slip off to the others.
Mr Johnston —I just want to come to the fact that, where you can identify that the conduct is in respect of one licensee only, that licensee would be responsible rather than all of the others being responsible; where that is clear. But, yes, it has been flagged that perhaps there would be a reluctance—
Senator CONROY —I remember that we did have a discussion about that.
Mr Johnston —Until we actually get into the operation of the legislation—that is, once it is actually in there and people are working under it—it is difficult to see where that will head.
Senator CONROY —Tragically, some very—I will be polite—conservative lawyers seem to be getting their hands on the legislation for the first time and drawing some very tight definitions on this issue.
Mr Johnston —We are seeing that in a number of areas.
Senator CONROY —It was not the intention of the FRSA Act to have multiagents become agents of only one company, was it? Parliamentary Secretary, was that the intent? Mr Johnston, you might be able to assist.
Mr Johnston —I do not think it is for me to talk about the intent of the act.
Senator Ian Campbell —I have to think back three years from where we started. I was very sad that the name CLERP got dropped through the process. As I understood it—and any ASIC or Treasury people, please feel free to interrupt me—we wanted to ensure there was a direct line of responsibility. I was quite keen when I was developing the policy to ensure that it did not stop their being multiagents. One of the consultations I have had since I got back in was with someone who was in that situation, and he told me that that was not a problem. It is not a problem that I have had raised with me.
Mr Johnston —Until we can see how it plays out, it is too early to comment.
Senator CONROY —At the moment it appears that the industry are just abandoning it—they are just basically saying, `No, we're not going to let you supply for us anymore.' So there seems to have been an industry response that is actually trying to blame the government. There is a group of small business people here that are being badly affected, and the excuse that is being used for the behaviour is that legislation. I am happy for you to take that on notice, Senator Campbell, and get Treasury to give us a bit of—
Senator Ian Campbell —As Ian Johnston said, obviously when you bring in these new regimes you get a lot of push-back. We have to listen carefully, particularly to the small business sector: we do not want to do things that hurt their business. But we have a responsibility to ensure that we raise the level of responsibility to consumers as well. The people I trust in the industry have said that that is not concern that they have. We are concerned during this implementation phase to make sure that it is smooth, that we maintain the integrity of the law—
Senator CONROY —I am with you 100 per cent on that.
Senator Ian Campbell —that the regulations reflect the intent and that ASIC's policies complement it. As well as audit independence, insolvency and a few other issues like continuous disclosure—
Senator CONROY —Have you been reading my speeches?
Senator Ian Campbell —I regard the implementation of SRAs is obviously being very important, and it is obviously consuming a lot of ASIC's time.
Senator CONROY —Thank you for taking that on notice. If there is any other information that you think will be helpful to the committee, that would be great. My last question: I understand the term `insurance broker' is a restricted term in the FSR Act.
Mr Johnston —Yes.
Senator CONROY —On what conditions can that term be used and what are the penalties for using a restricted term falsely?
Mr Johnston —There are several terms that are restricted and `insurance broker' is one of them. I am not sure what the penalties are. I believe you can only use it if you actually are acting as a broker. In other words, your relationship is to the client and you are broking the market rather than being the representative of a company.
Senator CONROY —Is there a test whether you are selling lots of product?? You are able to use this name because you have a licence over here, but you are selling all this product over there that is in actual fact not quite consistent with the fact that part of your business may be the insurance broker.
Mr Rogers —My recollection, which I will verify and correct if it is wrong, is that you are entitled to call yourself an insurance broker if you are a broker in the sense that you are acting for the prospective insured, not acting on behalf of the writer of the insurance. There will be circumstances where individuals who are in the insurance business actually do both from time to time.
Senator CONROY —Doesn't that imply an immediate conflict? How can you do both and be—
Mr Rogers —It may, and it is another one of those things where we will need to watch it play out in practice. If I have described the law correctly, and I want you to be aware of that hypothesis, then I think that an issue that may be there for us going forward is whether people who are otherwise entitled to call themselves insurance brokers do not use that term inappropriately in a context where it does not apply.
Mr Johnston —We would be concerned to make sure that they were in fact broking the market and not acting as an agent of a product provider.
Senator CONROY —I think that is all of my questions for ASIC.
Senator SHERRY —Mr McDonald, I understand, is here from the Superannuation Complaints Tribunal, SCT, which is part of the ASIC area. I do not have any questions for any of the other officers.