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Economics Legislation Committee
Abetz, Sen Eric
Williams, Sen John
Cameron, Sen Doug
Cormann, Sen Mathias
Urquhart, Sen Anne
Bushby, Sen David
Wong, Sen Penny
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Economics Legislation Committee
(Senate-Wednesday, 13 February 2013)
INDUSTRY, INNOVATION, SCIENCE, RESEARCH AND TERTIARY EDUCATION PORTFOLIO
Australian Nuclear Science and Technology Organisation
Commonwealth Scientific and Industrial Research Organisation
Australian Research Council
Office of the Chief Scientist
Australian Small Business Commissioner
Mr de Carvalho
Australian Workforce and Productivity Agency
Tertiary Education Quality and Standards Agency
Australian Skills Quality Authority
Mr C Robinson
- Australian Nuclear Science and Technology Organisation
Australian Securities and Investments Commission
Australian Competition and Consumer Commission
Australian Office of Financial Management
Commonwealth Grants Commission
- Australian Securities and Investments Commission
- INDUSTRY, INNOVATION, SCIENCE, RESEARCH AND TERTIARY EDUCATION PORTFOLIO
Content WindowEconomics Legislation Committee - 13/02/2013 - Estimates - TREASURY PORTFOLIO - Australian Securities and Investments Commission
Australian Securities and Investments Commission
CHAIR: I ask photographers and cameramen to follow the established media guidelines and the instructions of the committee secretariat. Please ensure that senators' and witnesses' laptops and personal papers are not filmed. I remind members of the public and everyone in the gallery that they are not permitted to interfere with the proceedings. The committee will first hear from the Australian Securities and Investments Commission and will then follow the order as set out in the circulated program. I welcome Senator the Hon. Penny Wong, Minister for Finance and Deregulation, and officers of ASIC. Minister, do you want to make an opening statement?
Senator Wong: No, thank you, Chair.
CHAIR: Mr Medcraft, do you care to make an opening statement?
Mr Medcraft : I have actually lodged an opening statement to be read rather than delay proceedings.
CHAIR: Very good. We will circulate that. Thank you, Mr Medcraft.
Senator ABETZ: I want to ask a brief bracket of questions relating to the Whitehaven coal hoax. First of all, is somebody able to update me on whether or not Jonathan Moylan has been charged, because if he has been it will undoubtedly curtail any further questioning I might have?
Ms Gibson : No, he has not been charged.
Senator ABETZ: All right. Is ASIC concerned about distortion or manipulation of the stock market by hoaxes such as Jonathan Moylan's hoax press release about Whitehaven's finance facility with ANZ Bank?
Ms Gibson : Obviously I do not want to comment on that case in particular. It is public that we have an investigation going on into those events. In principle we are concerned about statements made that affect a share price where those statements are false.
Senator ABETZ: And the fact that you are undertaking an investigation would indicate that you treat this sort of behaviour very seriously.
Ms Gibson : The principle of misleading the market we treat very seriously, yes.
Senator ABETZ: Do such hoaxes give the impression of a disorderly market and risk overseas investors becoming nervous?
Ms Gibson : I would not have thought that these incidents that happen on an infrequent basis lead to a general loss of confidence. Our discussions overseas lead to the view that our market is well regulated and well respected, but it is not a matter ever to be relaxed about.
Senator ABETZ: All right. These events do not enhance its reputation.
Ms Gibson : Anything disorderly like that cannot enhance the reputation.
Senator ABETZ: I assume ASIC is examining section 1041E of the Corporations Act, which covers misleading and deceptive statements.
Ms Gibson : I prefer not to comment about specific cases if it is possible. I do not want to prejudice the work that has happened.
Senator ABETZ: All right, but can you confirm that, if somebody were to offend in relation to these types of matters, the penalties regime is up to 10 years jail or fines of $495,000?
Ms Gibson : I would have to take that on notice. I do not have the act.
Senator ABETZ: I think Mr Tanzer might.
Mr Tanzer : The penalty term of imprisonment is up to 10 years. I think the actual fine has increased from 31 December with an increase in the value of the penalty units.
Senator ABETZ: It is now over $500,000?
Mr Tanzer : Yes.
Mr Medcraft : I think it is $750,000, 10 years or both.
Senator ABETZ: In general principles, of course, Ms Gibson, is the corporations law adequate to deal with this sort of malfeasance of putting out false statements to the stock market through hoaxes?
Ms Gibson : I would have thought so. Those penalties are among the heaviest penalties under the Corporations Act if the market is misled.
Senator ABETZ: All right. Do you believe there is a need for deceptive and misleading statements of this kind to be made offences under the Crimes Act? Have you given any thought or consideration to that in ASIC?
Ms Gibson : I do not believe we have. I think we feel that the criminal penalties provided for in the act, having been increased in 2010, are substantial.
Senator ABETZ: But do you think a conviction under the Crimes Act might potentially be more of a disincentive.
Senator Wong: That is the same question. She has answered it.
Senator ABETZ: I am not sure she has.
Ms Gibson : I am not aware there is any work being done in ASIC. I certainly have not turned my mind to it.
Senator ABETZ: All right. Take it on notice to see if you have and, if you have not, whether it is something you might turn your mind to in the future. Clearly, if this behaviour has occurred, we may need a stronger disincentive. Thank you.
Senator WILLIAMS: Ms Gibson, I asked you last Senate estimates about section 420A and whether ASIC has ever taken any action under that rule. I do not think we got an answer back, though I will stand corrected.
Ms Gibson : We have responded to that, but it may not have reached your office yet. I am sorry, but I am struggling to recollect exactly what it was.
Senator WILLIAMS: I asked you if you have ever pursued any receivers, banks or anyone who has control of assets under section 420A for selling what would be way below market value. We got that evidence with one particular person in the bank inquiry, and that is why I asked you the question. Do you know if you ever have?
Ms Gibson : I cannot remember the answer to the question that we responded to, and I am sorry that we do not have that with us this afternoon.
Senator WILLIAMS: My staff just informed me that we have never got a response on that.
Ms Gibson : We have answered it. I cannot understand why it has not come through to you.
Senator WILLIAMS: Would it be at the minister's office? You answer to the minister's office, don't you? You give your answers to Senator Wong?
Mr Medcraft : Why don't we take that on notice, and we can come back with where it stands.
Senator WILLIAMS: Thank you for that.
I want to raise another issue that is a problem I am seeing. I got very involved in one case where a receiver was sent into a family farm. The farm was removed. Of course, the receiver has no idea how to manage stock—care for them, keep them healthy et cetera. I know the sheep were flyblown when they went to market, dying in the yards et cetera. I had another case come to my office today. Do the receivers or liquidators have some sort of obligation to look after and care for animals when they are put in charge of a farm? It is not such a problem with a corporate farm, because the management is retained, but in a family farm they go in, kick the farmers off and then have animals in real trouble because the receiver has no idea about caring for animals. Is there a regulation involving that?
Mr Medcraft : There are two parts to the answer. The care of animals is a matter of state legislation, so the RSPCAs in relevant states would be involved in those types of things. That is a general obligation for all parties in relation to the care of animals. In relation to duties of the receiver, they are acting under the control of a secured creditor who has exercised their charge. Clearly it would not be in the interest of that secured creditor for stock to diminish in those ways, but there is nothing in our legislation about that. It is clearly a matter that the secured creditor would be concerned about in relation to the conduct of the receiver.
Senator WILLIAMS: Good. I will look further into it as far as the regulations go. I take you to the Storm Financial settlement. There was a first figure of $132 million from CBA and then another $136 million. Is that correct?
Mr Medcraft : That is correct, yes.
Senator WILLIAMS: Can those who settled under the first round apply for settlement under the second round?
Mr Medcraft : Yes. In fact, rather than apply, they will receiver offers from CBA in line with the settlement which we signed last September that provided that all those who will receive an offer or will not receive an offer will have to be sent an offer or indication of their position within seven months of that settlement, which is by the end of April. The first of those offers went out today, and another 500 will go out in the remainder of February. A thousand will go out in March, and the remainder will go out by around mid-April. To remind you, it was 2,000 that were involved. There are roughly 1,400 who are entitled to additional compensation. There are about 600 who are entitled to no additional compensation under the agreement. It is up to them to decide whether they want to accept the offer.
Senator WILLIAMS: And I will go to my grave believing, as I said to you last time, that I do not think it is ASIC's job to seek settlements. I think it is your job to see whether or not the law has been broken. In the case of Storm Financial, Commonwealth Bank, Macquarie Bank, Westpac and any other bank that is involved in it, you pursue them in the court for an unregistered managed investment scheme, and I believe it is your job to see that that is the case. If the judge rules your way and there is an appeal or whatever happens then it is up to them to have a class action if it falls their way. If it falls the banks' way then they are clean. But I believe it is not your job to pursue settlements as you said it was last estimates; it is your job to enforce the law. I imagine we will just have to disagree on that.
Mr Medcraft : All I can say is that 2,000 investors are getting an extra $136 million.
Senator WILLIAMS: Which works out to how much each?
Senator CAMERON: Let's get Barnaby on this!
Senator WILLIAMS: I'm a bookmaker's clerk and usually pretty good at figures!
Mr Medcraft : But I will say to you that I am a strong believer in class actions as a form of recovery. I certainly think they are now so developed that they are a good source of recovery for investors, so I do not disagree with that at all.
Senator WILLIAMS: Time will restrict me looking at banks here and so on—
Mr Medcraft : We did announce the new proposals for debenture-issuing companies today. You may have seen that.
Senator WILLIAMS: No, I have not yet.
Mr Medcraft : We are happy to comment on it if you like.
Senator WILLIAMS: I just know that the emails I am getting show many of the Storm victims are very annoyed with the settlement and will remain that way. They were hoping for a judgement and then, whichever way the mop flopped, they would pursue it from there.
Mr Medcraft : The option is available for them to not accept the offer.
Senator WILLIAMS: It is, and there is a class action.
Mr Medcraft : There is a class action. I think the issue is that it is up to them to accept the offer. They can decide to go through the courts, and it is probably going to take quite a long time.
Senator WILLIAMS: I want to go to insurance and the troubles especially in Queensland with its many flooded areas. Do you think the government should require insurers to provide flood cover to customers and give customers a choice to opt out of flood cover if they cannot afford it so that they can still obtain affordable insurance for all the other risks they face—storm, tempest, fire, burglary or whatever? Including flood insurance is very expensive, and many cannot afford it. Should there be the option for them to opt in or out of flood insurance?
Mr Kell : In many cases they have the option to incorporate flood cover as part of their home and contents or property insurance.
Senator WILLIAMS: I thought there were only a couple of companies doing that.
Mr Kell : The number of people that now have the ability to access flood cover as part of their insurance has increased substantially. I think it is now around 80 per cent. I would have to check on the exact number, but that has gone up from well below 50 per cent a few years ago. This is obviously still a matter that is being worked through with the insurance industry; but, from ASIC's perspective, having a clear disclosure to the consumer about whether flood cover is available and how much it might cost so that you have the ability to make that choice has been a good development. We would like to see it continue to roll out to the minority that still does not have access.
Senator WILLIAMS: Mr Day, you have changed your complaints section?
Mr Day : We have changed our approach.
Senator WILLIAMS: Could you briefly explain?
Mr Day : Our approach in the past had been to write an acknowledgement letter—a very distant approach via snail mail. Our approach now is, in every case where we have that information, ASIC will endeavour to have a staff member call the person, ask them a few more details, identify what documents we would need to better assess the information they are giving us on the initial assessment of their concerns—
Senator WILLIAMS: So if I am Joe Blow and send you an email of complaint saying something has gone wrong, you will get that email and phone me?
Mr Day : If they provided their phone number with the email, yes, we will call them. We will ask them questions about the circumstances mostly so that we can better understand what their concerns are, because they may not have been able to express that appropriately in writing. So we will be able to better understand what their concerns are and then go away and assess and consider that. During that phone conversation, if the best way for them to resolve their issue is through approaching the financial ombudsman's scheme or it is not in ASIC' jurisdiction but a matter for the ATO or the ACCC, we can at least give them a prompt piece of information to remove them from having to wait with us to work it out and so they can go to where they need to get help initially.
Senator WILLIAMS: If you are ringing people sending emails, that obviously takes resources. How are your resources panning out, Mr Medcraft? You obviously could do with some more; but, if I were to phone ASIC, how long would I wait for someone to answer the phone? I had a bloke who came to my office just recently, and he said he waited up to two hours.
Mr Tanzer : We are suffering some delays in our call centre.
Senator WILLIAMS: How big a delay?
Mr Tanzer : Significant delays. You have just spoken about one constituent who was waiting over an hour. The reason for that is that we have implemented a new service called business names registration, and that is leading to a very large spike in the number of calls we are getting. The average waiting time before Christmas was—while not from ASIC's perspective very happy—about six to eight minutes, and that has blown out since Christmas to, on average last week, 27 minutes. But that is the average; some people are obviously waiting substantially longer.
Mr Medcraft : Do you want to comment pre business names what our response time was?
Mr Tanzer : Up until we undertook the business names service our standard of service that we strived for was 90 per cent of calls answered within 60 seconds, which is a very high quality of service.
Senator WILLIAMS: Were you meeting that?
Mr Tanzer : We were up to that stage, but the service itself has led to a very high demand as people deal with registering new business names and, in particular, renewing their business names and coming to terms with the fact that this is an online service that is now being offered when previously the service was offered by the states and territories and tended to be either paper based or just local. The advantage of the system, of course, is that you get national registration. With the online service that we have, about 90 per cent of those registrations take place online without the need for any sort of intervention. However, because it is a new service, a large number of people want some explanation for it, and we are working through trying to improve the number of lines and number of staff we have devoted to that and also working on some process efficiencies.
Senator WILLIAMS: Wonderful. Mr Medcraft, $140 million for 1,400 Storm victims is $10,000 each. I am sure they all lost a lot more than $10,000.
Mr Medcraft : It does depend how that is allocated.
Senator WILLIAMS: That is the average.
Senator CAMERON: Mr Medcraft, I have been asking some questions about discretionary trusts. I am interested in whether ASIC has any role or concerns about the use of discretionary trusts to shift money around within companies and provide loans that are never paid back. You are about promoting informed investors and financial consumers. Some of these trusts are a pretty dark and dense type of mechanism within some companies. Do you have any role in that or none at all?
Ms Gibson : Regulation of trusts is not a matter for us. It is a state matter through the courts. To the extent that a corporation would have a trust and use that trust to distribute monies—which, from my experience as a corporate lawyer, is pretty rare in significant corporations—we would look at directors' duties if we thought there was some conduct to make sure that those actions were in the best interests of the company and not for some improper purpose.
Senator CAMERON: So theoretically you could get involved but not in practical, day-to-day operation.
Ms Gibson : Absolutely. It would be at the most extreme end of disruption, I would have thought.
Senator CAMERON: Thank you.
Senator CORMANN: Mr Medcraft, good to see you again.
Mr Medcraft : Good to see you.
Senator CAMERON: In relation to ASIC guidance on FOFA—
Senator CAMERON: You must have something going on that I don't know about; this is really friendly!
Mr Medcraft : It's the chemistry!
Senator CORMANN: Or maybe the times are changing, Senator Cameron!
Senator CAMERON: You voted against that legislation.
Senator CORMANN: Which legislation was that? I haven't even asked my question yet! ASIC released guidance on fee disclosure statements but you have publicly stated that you would take a 'facilitated approach' on FOFA reforms for the first 12 months. I just read that into the Hansard. I hope you do not mind. Can you just talk us through how you would see a facilitated approach?
Mr Medcraft : Sure.
Mr Kell : To give you an example, you mentioned the guidance we have just released on the fee disclosure statement. As part of that guidance we have agreed on the first 12 months and where necessary. Beyond that we will provide no action position on a range of matters that might otherwise raise concerns.
Senator CORMANN: Is that after 1 July 2014?
Mr Kell : That is right, in general, for these sorts of matters. For example, where there is a transfer of a book of clients from one advisor to another and that means that it is difficult for the new advisor to work out exactly how some of those arrangements have worked and fees have been structured in the past. If they make best endeavours to establish that so they can inform their clients about how fees are charged, then we will not take a technical approach to compliance. We will take into account that they are making best endeavours.
Similarly, if there is uncertainty around the date on which the client commenced back some time in the past, we will allow the advisor to reset the clock to get clarity around when that date is set so that they can have certainty about how often and when they have to provide fee disclosure statements to their clients. That is an example of us modifying our approach to enable greater flexibility around how the industry deals with the implementation of FOFA. We have also made a general offer to firms that, if there are particular issues where they are facing some difficulties, we will be open to hearing from them as to what efforts they are putting in place and whether we need to accommodate that in the early stages.
Senator CORMANN: How does that fit within the legislation on FOFA that was passed because initially the implementation date was going to be 1 July 2012 but then that was soft implementation with a hard implementation at 1 July 2013? It sounds to me as if ASIC is now exercising discretion to keep it medium soft until 1 July 2014. On what basis are you able to do that?
Mr Kell : I would preface my remarks by saying that for most of the FOFA requirements it appears to us that industry participants are going to be able to comply but in some areas there are major systems changes that have to take place. We do not have formal relief powers in relation to the FOFA provisions but we are able to indicate a no action position or issue a no action letter which sets out that we will not take regularity action in respect of that particular issue.
Senator CORMANN: Is there a general power that you have?
Mr Kell : Our decision to issue no action letters is one that we do take in relation to a range of other regulatory requirements as well if there is flexibility needed in terms of how we administer the law at particular points in time. So it is not novel when it comes to FOFA. It is something that ASIC has done over many years. We do not do it willy-nilly. There has to be a serious case put to us as to why it is needed and we undertake a careful assessment in those situations.
Mr Medcraft : Just to add, we took a very similar facilitative approach with the introduction of credit in the first 12 months.
Mr Price : It is simply a reflection of the fact that there normally is a bedding-down period when new legislation comes in. Obviously we are keen to adopt an even-handed approach, unless it is clear that people are acting wilfully or recklessly in terms of their compliance with the law.
Senator CORMANN: Just looking at the guidance you have issued, you have said that you will take a measured approach where inadvertent breaches arise. Have you got a working definition for what an inadvertent breach is, or is that really just a case-by-case assessment?
Mr Kell : It is a case-by-case assessment. However, we do take into account whether the firm or the adviser in question is making reasonable efforts to comply with the law when we make a judgement about whether some action by ASIC is required. That is one general principle that we apply in those situations.
Senator CORMANN: How do you make sure, though, that all industry participants are treated in a similar way in similar circumstances? Obviously, when you have an element of discretion, different people exercise discretion in different ways.
Mr Kell : That is a good question and it is an important question. That issue around consistency is key to how we approach this. That is one of the reasons why, with the fee disclosure statement, we have sought to apply an industry-wide no-action position around a few issues.
Senator CORMANN: Thank you for that; it is very useful. A series of questions have been raised with me by industry participants around the more difficult market conditions now in the context of obtaining professional indemnity insurance. Is that an issue that you are aware of? From your reaction it looks to me as if you are. Can you just talk us through your assessment of that as an issue and whether you have any concerns from what you are observing in relation to that?
Mr Kell : The issue of ensuring that licensees have effective professional indemnity insurance is an issue that is important, particular in the advisory sector, and it is raised with us from time to time by industry associations. I would note that the recent Richard St John reports raised various issues around professional indemnity insurance and the possibility of ensuring clearer standards around the issues that that insurance should cover. That is obviously still under consideration by the government, but we are looking at that closely. There is also the question of the way in which professional indemnity insurance covers decisions or outcomes from, say, the Financial Ombudsman Service as well. We have a strong interest in ensuring that professional indemnity insurance is available and covers the right sorts of issues for the advisory sector, and we are in fairly regular dialogue with them with how that is going.
Senator CORMANN: Looking at your regulatory guides, RG 126—I am looking at 25 and 28—says:
The compensation requirements are not a mechanism for providing compensation directly to consumers. Rather, they are a means of reducing the risk that a licensee cannot pay claims because of insufficient financial resources.
It sort of goes on in a similar vein. There seems to be a perception that ASIC is going beyond that and is now requiring insurance that goes down the indemnity insurance for retail consumer compensation purposes. Is that something you are aware of as a complaint? Has there been some sort of change in the way that ASIC approaches this in recent times, or is this something that you reject out of hand?
Mr Kell : That has not come up as a major issue from any of the professional associations in the financial advisory sector in recent times. Again, because of the significance of PI cover, we are certainly happy to have conversations around any difficulties that advisers are having in obtaining that cover at a reasonable price. But it has not come up as a big issue recently.
Senator CORMANN: So no advisers have raised that?
Mr Kell : I cannot say off the top of my head that no advisors have raised it with any person in ASIC recently, but it certainly has not come up as a major issue.
Senator CORMANN: Obviously, the consequences if you cannot get professional indemnity insurance are pretty significant because, as I understand it, you would close that business down in those circumstances.
Mr Medcraft : When you spoke about it, I knew getting PI cover was a problem a few years ago but I have not actually heard that—do you remember Belinda?
Senator CORMANN: Here are some of the—
Mr Medcraft : This is a perennial challenge, but we are very happy to take it on notice.
Senator CORMANN: things that I have been told. The contention is that there are four underwriters remaining and premiums have gone up by 170 per cent over four years, even for firms with clean claims records, and by a lot more for others. When compulsory PI was designed in 2007 the market was soft, but now it is getting harder and harder to get appropriate cover. You have not come across this?
Mr Kell : We are very much aware that it remains an ongoing challenge for the advisory community. In relation to the particular issue that you are talking about, it has not been front and centre recently. Now that you have raised it, I am very happy to take it up with those groups because I think we need to understand it.
Senator CORMANN: Taking a more general perspective: something that we have seen in recent times—and that I think the forfeit changes will push further—is a concentration in the market into the larger groups, where the independents are finding it harder and harder to survive and compete. I happen to think that it is not a bad idea, to have a vibrant independent sector too. Obviously, regulatory requirements that big businesses can comply with are not necessarily regulatory requirements that work for small- and medium-sized businesses. This is just one other area with that sort of pressure.
Mr Medcraft : John Price wants to add to that.
Mr Price : That regulatory guide that you mentioned, regulatory guide 126, does set out in some detail the sorts of requirements that we are after in PI cover. We certainly, to my knowledge, have not increased those requirements.
Senator CORMANN: You stick to those requirements?
Mr Price : Yes, those requirements are publicly available, publicly published and, to my knowledge, have not been amended recently.
Senator CORMANN: I have one more issue to raise before I hand over to Senator Bushby. I have raised this with you, not in the recent times, but certainly in the past—it might have been before your time; I cannot remember—the issue of property investment advice, particularly targeting the self-managed super sector. Can you just talk us through what ASIC's role and powers are and what your current initiatives are in that space?
Mr Kell : Yes, it is a timely question. ASIC does not have a direct regulatory responsibility for direct property investments. However, given that it is becoming an increasingly popular investment choice in the self-managed super fund space, we are looking closely at what regulatory powers we would have in relation to that sort of investment through SMSFs. We do have concerns that less reputable property spruikers are targeting SMSFs to encourage them to invest, perhaps inappropriately, in direct property. That is one of the issues that we are currently considering as part of an SMSF task force that we have established, and we will be coming out with a report in April that will set out how we are going to approach that issue.
We are warning investors at the moment about some of the more aggressive spruiking that we are seeing in this area, because it would cause us a lot of concern if this became the preferred vehicle for dodgy property spruikers to get back on the radar.
Senator CORMANN: Mr Medcraft, you floated the idea of investors having to pass exams or reach certain qualifications before they can invest in certain ways. Can you just talk us through where you are heading with that and what the current status of those sorts of ideas is?
Mr Medcraft : I very much appreciate the question, Senator.
Senator CORMANN: I thought you might.
Mr Medcraft : Yes, I do appreciate it, because my view on that is that it is certainly something that should not be mandatory. I wrote an opinion piece after that was published because I was quite annoyed that I was misquoted and misunderstood. What I was really saying—which was in the opinion piece—is that product manufacturers need to think about tools that are available to them to try to make sure that investors understand what they are buying and, frankly, recognise the limits of simply paper-based disclosure. They should think about new media, YouTube and e-learning modules where you can actually provide an e-learning module and assess whether the investor understands what they are going to buy. What I was saying was very much within that frame. I was also saying, as a former banker and fund manager, that around the world at the moment we are seeing that you should be concerned about this issue because the courts are often holding the product manufacturer responsible for selling a product that is deemed to be completely unsuitable. Frankly, I see it not just as good for consumers but as very good risk management from a business perspective. Certainly, at the global level of IOSCO—which, as you know, I am about to take over the chairmanship of—these are the sorts of tools that we need to be thinking about globally in relation to financial products.
Senator CORMANN: Thank you for that, Mr Medcraft.
Mr Medcraft : Thank you for the question.
Senator URQUHART: I was just looking at your website and I noticed there are a number of topics and information about some of the enforcements and investigations that have been going on and what the outcomes have been. How many enforcement actions or investigations does ASIC have underway currently?
Ms Gibson : Our enforcement teams are in two parts. One is the enforcement of our financial economy side, and there are 269 investigations there. There is a separate branch that deals with actions to enforce compliance with registration and director qualifications. I do not have those statistics.
Senator URQUHART: Are you able to get those and provide them to us?
Ms Gibson : We can.
Senator URQUHART: That would be great. So there are 269 investigations?
Ms Gibson : As at 31 December.
Senator URQUHART: When are they likely to be finalised? Do they all have different time frames?
Ms Gibson : They all have different time frames. Some of them would be a number of years old and some of them would have just been started. That would include cases that go to trial, because they remain investigations until the trial is all done, and that can be five or six years in some instances.
Senator BUSHBY: I have a few questions about some specific matters. One thing I have asked regularly about is the enforcement special account. Can you provide an update on the current balance and how that is looking for the current financial year?
Ms Gibson : We can do that.
Mr Medcraft : I will take it on notice.
Senator BUSHBY: You do not have any details of that here?
Mr Medcraft : It is probably easier to give it to you on notice because it is quite detailed.
Senator BUSHBY: Have you been dipping into it a bit this year?
Mr Medcraft : As you know, my strategy on that has been to try and build a buffer in it—that is the reason it was originally established. We do have a buffer built into it now.
Senator BUSHBY: Is it still $30 million a year that is allocated?
Ms Gibson : Yes, that is correct. We did have a buffer built from last year. We took the view that cases can be multi year and if you do not win one then you have to deal with funding it. So we have been building a buffer by not using it all in a single year. We currently have a forecast for this year, and we are looking at a reasonable buffer. I am very happy to provide the details on notice.
Senator BUSHBY: Is the ESA available to use if costs are awarded against ASIC in a case?
Mr Medcraft : Yes.
Senator BUSHBY: So it is not just to cover the cost of—
Mr Medcraft : That is why it is important to build a buffer. The strategy that I have is that we can never be reluctant to take on a big case. The only way that you can do that is to have the financial strength to do so.
Senator BUSHBY: To be prepared to lose.
Ms Gibson : I would say that we do win a number of cases also and in civil jurisdictions those cases do come to us also.
Senator BUSHBY: I understand that. You do something that I am sure ASIC struggles with, as do I. I am going to ask some specific questions about potential consequences. Obviously when considering whether to proceed with court action, particularly potentially expensive court action, you are considering the deterrent value of ensuring that the laws as they apply are upheld, as is highlighted by the fact that you do not always win. There are often defendants on the other side who, probably the way they see it, are vindicated or who are not successfully prosecuted by ASIC and who are subjected to a lot of reputational and financial damages as a result of the action being taken in the first place. To what extent does ASIC consider that potential damage to defendants as part of the decision making process when you are deciding to proceed?
Ms Gibson : I think that—
Senator BUSHBY: I struggle with this. Clearly the deterrent value is important as is making sure you uphold it, but people can get hurt as a result when they may well be innocent or found innocent.
Ms Gibson : The modern litigant rules direct us as to considerations when we commence a litigation and one of those aspects is public interest but another element is reasonable prospects of success and criminal prosecutions. You know the DPP conducts those cases and they are an independent authority. I can assure you that they do not take proceedings unless they are definitely seeing reasonable prospects of success. So we do not take criminal proceedings where there is a question mark. In civil proceedings we do not have the DPP as that check but we do not commence significant civil proceedings without independent legal advice from our CLO that there are reasonable prospects of success. We do not commence speculative cases. We would not ordinarily expect to lose.
Senator BUSHBY: I understand you do not go in it to lose.
Mr Medcraft : To expand on that, for the first time—as you know—we published our whole approach to enforcement last year and it set out in detail and in particular the three peer criteria that I mentioned before. The amount of harm or loss or the severity of what has occurred is the first key criteria. The second and third are the cost versus the public benefit and, most importantly, the availability of evidence. Those three key criteria are really integrated through our whole approach and that are expanded publicly now in our approach to enforcement for the first time.
Mr Price : The only other comment I would make is another consideration is ASIC's public comment policy. Prior to the start of court proceedings, normally it is our practice not to comment on particular investigations unless we think it is in the public interest to do so. We do weigh up those sorts of issues.
Senator BUSHBY: I understand that. I am raising the issue because I am aware that there are at times defendants who win or alternatively in some cases ASIC just commences actions and does not proceed for a number of reasons. It does from time to time happen that you have taken it to a certain point but then you do not proceed but nonetheless it is publicly known or the defendant involved has had to spend significant amounts of money with legal fees to defend themselves to that point. Does ASIC feel that there is any obligation in those circumstances to a defendant that has suffered reputational or financial loss as a result of actions you have taken which you have not actually succeeded with for one reason or the other?
Ms Gibson : I would not have thought so. I think that is not the regime that has been established and it would not be the regime that would apply in most countries of the world that we would see ourselves appear in a criminal proposition. It is absolutely imperative that you do not bring those cases lightly in civil propositions.
Senator BUSHBY: Absolutely.
Ms Gibson : There are cost orders as in any civil proceedings.
Senator BUSHBY: I will not pursue that any further at this point; it is just something that has—
Mr Medcraft : And we follow those model litigant rules.
Senator BUSHBY: I am aware of those, and hopefully they do deal with some of these issues to a sufficient extent, but I am aware of some cases where people feel aggrieved at the end of one of these types of things, and their perspective is that it was unjustified in the first place and has cost them a lot of time, money and reputation and they are just wondering why it all happened. There are two sides to all stories, but that is the perspective they hold.
Mr Medcraft : We know that you can get into court in a civil action and, basically, you cannot agree on an outcome.
Senator BUSHBY: That is right.
Mr Medcraft : That is the reason you go to court, but the court system tries to encourage you to not go to court.
Senator BUSHBY: I note that the Treasurer has recently decided to allow the ASX to retain its monopoly over clearing. I am going to ask the ACCC a few questions about that as well, but I understand the main reason that the Treasurer has put forward for that is that, although stakeholders were strongly in favour of competition, there was a general concern that significant costs could be imposed across the industry if it were opened up to competition. Would you care to explain to me what those costs might be if competition were introduced in clearing in Australia?
Ms Gibson : The significant costs are infrastructure costs—that you have to hook your data pipe up to another clearing house—and that is very significant. The substantial one would be the IT cost. The second set of costs would be that for clearing you need margining. While you have got two clearing operations, you need to have two sets of margining for trades and so on.
Senator BUSHBY: Surely you would not have to connect to the second clearing house. That would be a matter for a competing clearing house to go off and market to traders that they have a better product and they can offer a better price, and it will be a commercial decision by traders as to whether they signed up for it on the basis that they thought they would be doing better out of it.
Ms Gibson : Down the track that might well be the proposition. I think that, with the current exchanges, it was more likely than not that an exchange and a clearing house would tie up. Seeing that we force—for best execution—people to go to two exchanges, one might find that if one dealt on one exchange they would have to deal with another clearer. So as a practical matter there would be that dual tie.
Senator BUSHBY: But these are issues that have been worked through in other jurisdictions where there are multiple clearing houses. I would imagine that there would be information technology platforms that would be available to be modified to suit here. It is not like you would be starting from scratch; all of these issues could have been worked through, and in the end, as I mentioned, individual traders would not be forced to sign up to more than one clearing house.
Ms Gibson : I think that this was a recommendation of the Council of Financial Regulators—so it was a number of bodies—and there was very extensive discussion with exchanges, with the broking entities and with their clients, and I think that the recommendation reflected the views of many that right now, at a time when the stock market has up until recently been very low in trading, it was not an opportune moment to incur costs.
Senator BUSHBY: I acknowledge that it was based on a recommendation of the council, but I also note that Mr Swan himself said that stakeholders were strongly in favour of competition. I am just trying to get my head around it. I have not had a chance to look into this closely since the announcement was made.
Mr Medcraft : The bottom line, I know, as a member of the council and as a strong supporter of competition, is that to me it was an issue of 'not right now', given where we are in the market—and there is so much change occurring in the market infrastructure at the present time. I think that is why we saw the debate that was going on in the community. The recommendation was 'at the moment, but—'. It was not status quo, because the recommendation was to put in place some mechanisms to basically ensure that—with the monopoly position—we mitigated detriment to the consumer. It is not a zero-sum game.
Senator BUSHBY: What measures are going to be in place to deal with that issue?
Ms Gibson : The ASX has agreed to work with its stakeholders, and that includes the COFA agencies, to put in place a code of conduct that will give the stakeholders greater visibility of the mechanism for clearing, settlement and access. That will be reviewed after two years to revisit the question of whether the ASX should continue its privileged position.
Senator BUSHBY: As I say, I have not spent an awful lot of time looking into that, since it was only announced a couple of days ago. I will look at that one and maybe ask questions at the nextestimates.
Mr Medcraft : It is a two-year window, and we will also see how things develop globally in this sector.
Mr Price : The other thing was that that recommendation from COFA was made in collaboration with the ACCC; they were involved.
Senator BUSHBY: Thank you. How is ASIC travelling with its budget at the moment? I have asked questions in the past about this.
Mr Medcraft : We will not exceed our budget this year. I have three performance criteria of leaders in ASIC, they are the three Bs: their business plan, their budget and their behaviour. It is fairly well integrated in the performance and people probably tend to focus very much on that, and we are very much on budget.
Senator BUSHBY: I am quite confident that you will be, Mr Medcraft.
Mr Medcraft : I can assure you that we will be.
Senator BUSHBY: As you said before:
… you can have an ASIC at $350 million, you can have one at $250 million and you can have one at $450 million;
but essentially you cut your cloth to suit. What I am interested in is, what cloth you have had to cut in order to ensure that you will come in on budget?
Mr Medcraft : For the first time, we have published the surveillance levels that we undertake and how often we get around to see various stakeholder groups. We have published how often we get around in terms of engagement. We now publish enforcement, what we do, and that really reflects the level of activity that the Australian public gets for their $350 million. How we allocate resources is based on three things. Firstly, clearly, the priorities of government; secondly, stakeholder expectations; thirdly, and most importantly, risk, particularly emerging risk in the economy. They are the three most important criteria. Risk is a very important one, and that can change. We have indicated that you can see from where we look, what we consider to be high-risk areas in the sector. The last criterion is systemic and regulatory risk. Our legislative responsibilities, which we have to do—
Senator BUSHBY: They take priority.
Mr Medcraft : and is non-discretionary, and we have got a register, et cetera, but then there might be discretionary aspects as driven by government policy, systemic and regulatory risk and stakeholder expectations. They are the drivers. To be more transparent, if you look at each of the key tools—engagement, surveillance, guidance, enforcement and policy—we have quite clear activity indicators now in those areas. They are in our annual report as well.
Senator BUSHBY: Clearly, if you had $450 million, you could increase the level of activity, and if you had $250 million you would have to wind that back.
Mr Medcraft : It is a matter of determining what level of resilience you really want in the financial system.
Senator BUSHBY: One further question on your budget. You are also a revenue raiser for consolidated revenue through the fees that you charge, and we have gone through that before. Is the level of fees that you are raising and contributing to consolidated revenue on track for previous years? Is it up or down?
Mr Medcraft : I might take that on notice. I do not have the number.
Senator BUSHBY: It might actually be quite an interesting figure in terms of the numbers.
Mr Medcraft : We will come back to you, unless somebody here has the number.
Mr Tanzer : I think the revenue this year will be up because we have taken on the business service. It is a detailed question. The nature of the period has changed and the nature of the activity for which we raise revenue is significant, so we would need to strip that out and look at it. I was not aware that there was a very significant difference, but it does cycle.
Senator BUSHBY: It could be quite an interesting indicator, if you can strip that out, of the trends in corporate activity.
Mr Medcraft : I think the company registrations pretty well follow the activity in the economy, don't they?
Mr Tanzer : The vast majority of the revenue that ASIC collects for the government is annual fees from companies. So the revenue is not so much driven by major fund raising; that is not a big contributor to the revenue. The revenue is much more driven by a number of companies paying annual returns.
CHAIR: Thank you, Mr Medcraft, and your officers for your attendance this evening and for your assistance to the committee.
Mr Medcraft : Chairman, this is Deputy Chairman Gibson's last appearance in front of parliament, and so I thank her for her contribution and wish her well in her next phase.
CHAIR: Ms Gibson, thank you for your assistance over the years, and we wish you all the best in the future as well.
Ms Gibson : Thank you very much.