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Thursday, 26 June 2014
Page: 78


Senator MARK BISHOP (Western Australia) (15:36): I present the report of the Economics References Committee on the performance of the Australian Securities and Investments Commission, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

Senator MARK BISHOP: by leave—I move:

That the Senate take note of the report.

The tabling of this report represents the end of a year-long review of the Australian Securities and Investments Commission, Australia's corporate, markets and financial services regulator, ASIC. The inquiry into the performance of ASIC was an important inquiry and, in my opinion, long overdue.

In essence, the report consists of a number of smaller reports that sit within a wider comprehensive examination of the performance of ASIC. It draws on the personal accounts of hundreds of Australians who shared a common experience.

Generally, the submitters were hardworking, honest Australians—many approaching or already in retirement who, through no fault of their own, lost significant amounts of money and, in some cases, their nest eggs. Their loss and suffering was the result of irresponsible and self-serving advisers, brokers or other financial service providers who, for their own gain, peddled bad advice or unsafe products. Many of the submitters asked us: where was ASIC? Where was the corporate watchdog?

The committee understands that ASIC has limited resources but, even allowing for that constraint, ASIC appears to miss or ignore clear and persistent early warning signs of corporate wrongdoing or troubling trends that place the interests of consumers or investors at great risk. To be blunt, the committee found ASIC wanting. It was unable to connect the dots with information in its possession. It allowed itself to be lulled into compliancy while corporate wrongdoers continued to abuse their clients' trust.

The committee has reviewed many cases of ASIC responding slowly to misconduct reports or an emerging problem. I want to focus on one case study—Commonwealth Financial Planning, a subsidiary of the Commonwealth Bank. Between 2006 and 2010 several of its financial advisers and other staff exploited clients and engaged in serious misconduct. Advisers deliberately neglected their duties and placed their personal interests far above the interests of their clients.

Assets were allocated into high-risk products without the clients' knowledge and to the financial benefit of the planner. These actions were facilitated by a reckless sales-based culture and a negligent management, who ignored or disregarded non-compliance and unlawful activity as long as profits were being made.

In summary, the committee found that the conduct of a number of rogue advisers working in CFPL was unethical, dishonest, well below professional standards and a grievous breach of their duties—in particular, the advisers targeted vulnerable, trusting people. Both ASIC and CBA seemed to place reports of fraud in the 'too hard basket', ensuring the malfeasance escaped scrutiny and hence no-one was held to account. The CBA's compliance regime failed, which not only allowed unscrupulous advisers to continue operating but also saw the promotion of one adviser, thus exposing unsuspecting clients to further losses.

There was an inordinate delay in CBA recognising that advisers in its CFPL business were providing bad advice or acting improperly and when this conduct became apparent, the CBA failed to act promptly on that knowledge and inform clients and ASIC. ASIC was too slow in realising the seriousness of the problems in CFPL, instead allowing itself to be lulled into complacency and placing too much trust in an institution that sought to gloss over its problems. ASIC did not pay sufficient attention to the whistleblowers who raised serious concerns about the conduct of one of the most serious offenders and the actions of CFPL.

The committee's doubts about the handling of the CFPL matter only grew as the inquiry drew to a close. Recent developments, whereby both ASIC and the CBA have corrected their testimony about the compensation process for affected CFPL clients have intensified the committee's misgivings about the integrity and fairness of this process. It is concerned that many clients may not have received adequate compensation.

The committee is now of the view that the CBA deliberately played down the seriousness and extent of problems in CFPL in an attempt to avoid ASIC's scrutiny, limit adverse publicity and minimise compensation payments.

In effect, the CBA managed, for some considerable time, to keep the committee, ASIC and its clients in the dark. This case highlights how trusting the regulator is of big business. ASIC either did not understand or did not demonstrate sufficient scepticism of the information put to it by the Commonwealth Bank. It was only since May this year that ASIC has begun to understand how the compensation schemes were being implemented.

Clearly, there were fundamental and widespread problems within the Commonwealth Bank. It is essential that all rogue advisers are identified and that any conduct that may amount to a breach of any law or professional standard is pursued. Further, all affected clients must receive just compensation. As noted earlier, the current compensation arrangements are far from adequate.

At this stage, the committee's confidence in ASIC's ability to monitor the CBA's implementation of its new undertaking regarding the compensation process is severely undermined. Furthermore, the CBA's credibility in the CFPL matter is so compromised that, to my mind, responsibility for the compensation process should be taken away from the bank. The time is well overdue for full, frank and open disclosure on the CFPL business.

Given the seriousness of the matter, the egregious nature of the conduct, the potential number of clients affected, and the lack of transparency surrounding the compensation process, I believe that a royal commission should be established. This is not a recommendation that the committee has made lightly. However, the evidence is so compelling that a royal commission is warranted. This scandal needs to stand as a lesson for the entire financial services sector.

Firms need to know that they cannot turn a blind eye to unscrupulous employees who do whatever it takes to profit at the expense of vulnerable clients.

This inquiry underlined the critical importance of ensuring that Australia has a robust corporate regulatory system under the stewardship of a strong and effective regulator.

The committee's recommendations are designed to help ASIC become a self-evaluating and self-correcting organisation—to be a proactive regulator with teeth that acts decisively, but also fairly.

The recommendations recognise the need for ASIC to be alert to emerging business models or new financial products and to match the inventiveness and resourcefulness of those in the industry who seek to circumvent the law. The committee's recommendations go to matters such as:

improving or strengthening ASIC's understanding and appreciation of Australia's corporate environment and those it regulates;

building ASIC's analytical and investigative skills so it is able to discern early warning signs of unhealthy trends or troubling behaviour;

ASIC working more effectively with other industry and professional bodies—to ensure it has strong, constructive and cooperative relationships with all the financial system gatekeepers;

a review of penalties currently available for contraventions of the legislation ASIC administers; and

making enforceable undertakings far more robust, transparent and effective in bringing about the desired changes.

As I said at the outset, this was an important inquiry. I regard it as a wake-up call for ASIC. One of the best outcomes of this inquiry so far is that ASIC itself has begun to examine its performance and consider how it can do things better. The regulatory system will be stronger and more resilient if ASIC keeps this up.

I commend this report to the Senate.