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Parliamentary Joint Committee on Corporations and Financial Services
Oversight of the Australian Securities and Investments Commission

ARMOUR, Ms Cathie, Commissioner, Australian Securities and Investments Commission

DAY, Mr Warren, Senior Executive Leader, Stakeholder Services, Australian Securities and Investments Commission

KELL, Mr Peter, Deputy Chair, Australian Securities and Investments Commission

KIRK, Mr Greg, Senior Executive Leader, Strategy Group, Australian Securities and Investments Commission

MACAULAY, Ms Louise, Senior Executive Leader, Financial Advisers, Australian Securities and Investments Commission

MEDCRAFT, Mr Greg, Chairman, Australian Securities and Investments Commission

MULLALY, Mr Tim, Senior Executive Leader, Financial Services, Australian Securities and Investments Commission

PRICE, Mr John, Commissioner, Australian Securities and Investments Commission

SAADAT, Mr Michael, Senior Executive Leader, Deposit Takers, Credit and Insurers, Australian Securities and Investments Commission

SAVUNDRA, Mr Chris, Senior Executive Leader, Markets Enforcement, Australian Securities and Investments Commission

TANZER, Mr Greg, Commissioner, Australian Securities and Investments Commission

Committee met at 8:31

CHAIR ( Senator Fawcett ): I declare open this public hearing of the Parliamentary Joint Committee on Corporations and Financial Services. Today the committee is taking evidence as part of the committee's ongoing oversight of ASIC, the Takeovers Panel and the corporations legislation. This is a public hearing and a Hansard transcript is being made. While the committee prefers to hear evidence in public, we may agree to take evidence confidentially if it is relevant. The committee may publish confidential evidence later but we would try to ask before doing this. It is important that witnesses give the committee notice if they want to give evidence in private. In addition, if the committee has reason to believe that certain evidence may reflect badly on a person, the committee may direct that that evidence be heard in private. I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is against the law for anyone to threaten or disadvantage a witness because of evidence given to a committee. If they do, the action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to the committee. Witnesses should be aware that if they make adverse comment about another individual or organisation, that individual or organisation will be made aware of the comment and given reasonable opportunity to respond to the committee. If a witness objects to answering a question, the witness should state the grounds of the objection, and the committee will determine whether it will insist on an answer. I remind committee members that the Senate has resolved that an officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions to a superior officer or to a minister. This resolution prohibits only questions seeking opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were developed. Officers of the department are also reminded that any claim that it would be contrary to the public interest to answer a question must be made by a minister and should be accompanied by a statement setting out the basis for the claim. I welcome officers from the Australian Securities and Investments Commission. Mr Medcraft and your team, thank you for attending today's hearing. Mr Medcraft, thank you for providing a written copy of your opening statement. I invite you to deliver that now before we move to questions.

Mr Medcraft : Thank you for the opportunity to address the committee. Here with me today are the commissioners, and we are supported by senior executive leaders Warren Day, Greg Kirk, Louise Macaulay, Tim Mullaly, Michael Saadat and Chris Savundra. In this brief opening statement I will discuss three issues: (1) the capability review that was recently announced, (2) the recovery of costs of investigations and (3) culture and ASIC's strategic outlook.

Since we last met, the government has announced that ASIC will be the subject of a capability review. ASIC welcome this review. It is actually a forward-looking review. We will assess our ability to meet the government's objectives and future challenges that we face. Crucially, it is also linked to the government's consideration of the Murray inquiry recommendations that ASIC's regulatory activities be funded by the industry, as well as other recommendations that inquiry made relating to ASIC. The Murray inquiry also recommended each financial regulator undergo periodic capability reviews and recommended that, in light of the significant changes recommended for ASIC's funding, tools and powers, we be the first regulator to undergo a capability review.

In looking at our current position, we consider that we are effective and efficient within the resources that we have. Over the past few years we have undertaken significant initiatives to enhance our effectiveness. This process is continuing and will continue through the capability review process. We are currently looking at two areas where we believe there are opportunities to, perhaps, improve capabilities through a strategy called ASIC regulatory transformation. The strategy deals with, basically, how we capture data and information, how we share data and information and, most importantly, how we use data and information. We can discuss that more if you want. Secondly, the government's shared services review is something in which, we feel, there may be opportunities to achieve more efficiencies out of that. These are two areas that we think, simply, we can use in looking at our capabilities and looking at enhancing them.

We think that the review will further position ASIC to meet the needs of the Australian public in the future. Capability reviews are not unusual. Over the past three years, reviews have been undertaken for 19 federal government departments and agencies. A number of international jurisdictions have done reviews of their public sector capability in recent years, including the United Kingdom, New Zealand and Canada.

On the second point, recovery of cost of investigations, last month ASIC announced that it would now use its power to recover the expenses and costs of its investigations. Generally, ASIC, as you know, pays the expenses of the investigations it conducts. However, under section 91 of the Australian Securities and Investments Commission Act, ASIC may recover investigation costs where there has been a successful prosecution or civil proceeding. To date we have rarely looked to recover investigation expenses and costs. However, ASIC has reviewed its approach and, consistent with user-pays principles, considers that it should more frequently seek to recover the cost of investigation from those who have caused those costs to be incurred. Accordingly, ASIC will consider recovering costs in each case where the legislative requirements are met. The new approach will apply to investigations from 29 July 2015, as well as all investigation started before this date where an outcome has not been agreed with the party involved.

The final topic was the culture and ASIC strategic outlook. We will soon publish our strategic outlook for 2015-16. The core of this document will be the view that central to achieving our strategic objectives will be that, as always, understanding behavioural insights of investors and gatekeepers is critical, and ensuring that we have the right nudges to achieve these objectives. For gatekeepers, we see three key behavioural drivers: (1) culture, (2) incentives and (3) deterrents.

In respect of culture, boards and particularly management play a critical role in setting the culture of a firm. If we find culture lacking, it is a big red flag that there may be broader regulatory problems. So ASIC will be addressing culture not just in markets but in financial services more broadly, and we will be very closely looking at the link between culture and conduct.

The strategic outlook will be published in late August. Those are the three substantive issues I wanted to mention. We are now happy to take questions. An outline of what we are looking to do with our strategic framework is being circulated to the committee and perhaps could be emailed to you.

CHAIR: Terrific. Thank you, Mr Medcraft. We will first ask questions on the opening statement before we move to issues that the committee would like to address. I would like to ask some questions on the recovery of costs. You have indicated that you have rarely recovered costs in the past. I am just wondering if you could talk to the committee about circumstances in which you have chosen to recover costs and what thresholds you are looking to apply around those decisions in the future.

Mr Price : In terms of recovery of costs in the past, this is not a power that has been used regularly by ASIC. The factors we will consider when we decide whether or not to seek costs in the future and whether or not we will seek to recover the whole of our costs for an investigation on merely part of those are set out in an information sheet that ASIC released earlier this year. It is information sheet 204. I will give you an example of some of the factors that are mentioned in that information sheet. We will consider things such as whether the person has any funds. For example, if there is little or no prospect that the person will be able to pay the order for our investigation costs there would appear to be little point in pursuing them. Secondly, we would look at whether trying to pursue the costs would lead to exceptional hardship for the person.

The other things we will consider include the extent of ASIC's success in any proceedings we undertake. Obviously if there are substantial investigation costs but we are only successful in relation to part of our proceedings, we believe that is something we should take into account in how much of our investigation costs we seek to recover. We will consider the impact of any recovery of the investigation costs on victims of any misconduct. That is, if recovering our investigation costs would mean there is less money available to victims of the misconduct that clearly would be a relevant factor for us to consider.

Degree of culpability of any of the people involved that have been subject to the investigation is relevant. Very important is the degree of cooperation. Obviously if people are cooperating with our investigation that is a very relevant factor to us in whether we would seek to recover our investigation costs. Also the scope of our investigation is a relevant factor. All of those things are clearly set out in our information sheet, which goes through in some detail how and when we would use this discretion.

CHAIR: Do you anticipate that it will make a change to the number of cases you take on? If you believe you have the capacity to win and will recoup costs then it would give you more resources. So do you believe you may see an increased number of cases? If you have a fairly good idea that you will win a case, will it encourage you to bring in additional resources, such as legal support, in order to be able to take on more cases?

Mr Price : Those sorts of factors were not really key for us in deciding to use this power more frequently. The guiding principle for us is that, philosophically, the current commission believe that the people who drive the need and the costs for regulation should pay the cost of those regulations. That would be our guiding principle. I think it is also important to make the point that we think that this measure will create some quite strong incentives for faster investigations on the part of ASIC. ASIC has absolutely no incentive at all to delay its investigations. We want to get through investigations quickly because that creates a quicker deterrent message to the market, and it also enables us to look at a broader range of misconduct. Over my years at ASIC, which goes back to the late 1990s, I have on occasion been concerned that investigations were being unnecessarily drawn out. I think if the parties that are subject to investigation understand that they may not only be subject to an order for legal costs but also an order for ASIC's investigation costs, that creates a strong incentive to conduct investigations and legal proceedings in a matter that is quick and expeditious and in the interests of all parties—and indeed the general public, I would argue.

Mr Medcraft : I personally think that the positive of this is that it puts a market pricing on the use of our resources for those for whom, perhaps unnecessarily, we spend time extending investigations. They will have to weigh up a lot more in terms of whether they achieve a quick outcome or delay us, so I think it certainly should result in lower costs and more timely outcomes.

Mr RUDDOCK: Can you clarify some of the statements you made: you now recover legal costs?

Mr Price : Correct.

Mr RUDDOCK: So what we are looking at is investigation costs. What happens in other like agencies? As a matter of government policy overall, is there a view about recovery of investigation costs?

Mr Price : On the question of government policy, this is a clearly articulated provision in the legislation that sets up ASIC—that we may recover the costs of our investigation.

Mr RUDDOCK: You do not know the practices in relation to other agencies in relation to investigation costs?

Mr Price : No. We did look at some of those at a high level when we were considering a statutory provision, but I do not have those details before me.

Mr RUDDOCK: Do you expect that any funds recouped will be part of the budget of ASIC—

Mr Price : Correct.

Mr RUDDOCK: or would it go to general revenue?

Mr Price : No. As I understand it, any funds recouped come back to ASIC's budget rather than to consolidated revenue.

Mr Tanzer : In a practical sense, the fines that are recovered by ASIC go to consolidated revenue. Recovery of costs like legal costs go to ASIC. In a practical sense we have a yearly budget, so whatever comes into ASIC could only be considered in the context of that particular year's operations.

Senator O'NEILL: I noticed that you put out the release about the ASIC civil action against Astra Resources on 27 July. Could we take that as a case example of the way in which you might implement the procedure you were just talking with the chair and Mr Ruddock about?

Mr Price : Sure. What would happen is that you can use this particular existing power in the ASIC Act to make an order to recover our investigation expenses if a person has been convicted of an offence or a judgement is awarded or a declaration or other order is made against the person in a proceeding in court. So the first thing you have got to think about is: are the threshold trigger issues hit—that is, is the person convicted of the offence or has the requisite order been made? If that is the case, then ASIC would consider the various factors that are outlined in our publicly-available document information sheet 104, which sets out the relevant factors that we will consider in exercising our discretion on (a) whether to recover the costs of investigation at all; and (b) what quantum of the costs of investigation we might recover, because it is not an all-or-nothing power. It is not a power that says you recover all of the costs of your investigation or you recover none of them; we have some discretion as to the amount. Then we would go through that publicly-available document and we will consider the various factors there as to whether to recover costs and how much. We would make a decision in respect of what the quantum of the costs we wish to recover is—so ASIC makes the decision rather than the court, as in the case of legal costs. Then we would provide that to the affected party. There is a period where that party has an opportunity to make submissions—akin to natural justice, I suppose—and then either the person would pay the amount or, alternatively, we would need to think about action to recover the amount of costs that we are seeking.

Senator O'NEILL: So in the case of this particular one—

Mr Tanzer : Yes, in respect to Astra Resources in particular, that is a matter where we have sought declarations against particular companies and the directors of those companies that they breached the fundraising provisions of the Corporations Law by not following the prospectus requirements, that they have engaged effectively in a fundraising that is not authorised by the law. The stage that the proceeding has reached is that the judge has made a judgement saying that he is prepared to make declarations that the company has breached the fundraising provisions. We are also seeking declarations and orders against the directors. It is at the point, once those orders may or may not be made, at which ASIC would then make the consideration. At this stage, he has indicated an intention to make orders but actually has not made the orders.

Senator O'NEILL: This is my question: what is captured and what is not captured? There are few that are live at the moment. Mr Medcraft, you spoke about ones that have been yet agreed and settled.

Mr Price : Yes.

Mr Medcraft : For example, we are investing the banks of BBSW at the moment and clearly they would be in—

Mr Price : If I could clarify your question. There is a transitional period before when we will start to seek to recover these investigation costs. What we say, again, available in the information release is that we will use our new approach to all persons subject to an investigation commenced after 29 July this year, which is when we released this document. We also may seek to recover costs to the person who is the subject of an investigation commenced before the release of the information sheet, unless we had already commenced proceedings in court or charges had been laid against that person, or an agreement had been reached with that person to resolve that matter, the subject of the investigation. So there is a transitional period. If at the date of the release of this information sheet, 29 July 2015, court proceedings were on foot or there was an agreement to resolve the matter, then what this information sheet says is you have the benefit of that transition. So we would not seek to recover the investigation costs. We just felt that because we are starting to use this power, we needed to provide the market with an opportunity to have regard to those before we started to apply—that is all.

Senator O'NEILL: A very respectful way of dealing with the sector.

Mr Price : Yes.

Senator O'NEILL: I do want to ask some questions on the bank bill swap rate, but that will be later on. Can I go to the third point in your opening remarks regarding the culture incentives and deterrents. You say that if a firm's culture is lacking, it is a red flag. But culture has positive and negative dimensions to it. How is ASIC undertaking awareness raising about the culture that it expects to see? How transparent are the conversations about culture in ASIC's interactions with the market? Can you report to the committee on how you are leading and influencing that sort of conversation?

Mr Medcraft : We are actually doing it on a number of fronts. First of all, we are doing it at board level, particularly with the major banks. We are having very frank conversations with them to actually tell them what we are seeing on the front-line and where we see real issues of culture in particular divisions. We are at the board level and senior management level calling it out very frankly and sharing it with them, and basically saying, 'You've got a problem.' Often they do not know they have a problem. It is giving them the benefit of a constructive feedback loop. That is very important at the very top level of the largest financial institutions.

Senator O'NEILL: Could you give a couple of examples without naming any institution of the sorts of things that you are referring to there?

Mr Medcraft : I will probably pass over to some of the other commissioners, who can give you some examples. We are looking at it in financial services and markets—particularly with the banks it is their multiproduct areas.

Senator O'NEILL: I am wondering if you are hearing the same thing that we are hearing?

Mr Medcraft : I will pass to Cathie and then Greg Tanzer.

Ms Armour : One of the examples of the work we are doing is a study with a number of the investment banks. We have asked them to respond to a model that we have created which identifies a number of key elements of culture and conduct metrics that suggest whether an organisation is managing the risk of poor conduct within the organisation. We have collated the results of our information collection and provided that with benchmarking information to each of the banks who participated in the study, so they can see how their practices compare with what might be better practices in the market. That is our information collection.

Senator O'NEILL: Ms Armour, you are explaining the process; what I am really asking for are examples of the cultural practices. What is going on that is the problem? You are helping them identify it, but what are the problems?

Mr Medcraft : For those who are at the bottom end, what potential problems do we often see?

Ms Armour : There is a range of problems that we see. We see things like poor market conduct, so market manipulation practices. We are concerned that they are not just relating to an individual, but may be a function of poor supervision in an organisation. We may see things at a very basic level, like poor record keeping, which again seems to suggest some supervision issues because the organisation is not in a position to see how business is being conducted. Those are some of the things we are seeing. Obviously in the financial advice area we are seeing poor advice and that sort of thing. Does that answer your question?

Mr Kell : I can quickly give you one or two other examples. We refer explicitly to problems with culture in the enforceable undertaking of Macquarie as an example and so that is where we have taken the step to actually capture this issue in a formal enforcement document. That goes to matters including, for example, failure to breach report or to notify the regulator of problems and failure to follow up on problems internally that have been identified but where there is no follow-up action. We have seen in different entities a failure to adequately resource or empower the compliance areas, so the wrong sorts of reporting structures. Those are some of the elements of culture that we are talking about. We have talked about breach reporting before this committee quite a bit, and inconsistencies in firms, so they are also examples, and failure to provide adequately strong or realistic references for advisers who have been terminated. And of course the classic that has been a problem right across financial advice is a focus on sales at the expense of appropriate advice.

Mr Medcraft : Greg, do you want to comment on the funds management space?

Mr Tanzer : Or perhaps, a little bit more broadly, approaches to remediation where remediation processes are underway. This includes what type of communication is used and how extensive is the communication to affected customers and consumers and what sorts of remediation processes are put in place. For example, is there an opportunity to approach independent advocates, people of that sort of the nature—depending on the nature of the particular problem? Peter has mentioned breach reporting. More generally, with regard to where problems arise, if you put it under that general marker, what does the entity do both to uncover problems and, more particularly, to avoid problems coming up the chain or being dealt with. They could be complaints from staff; they could be complaints from customers. They could even be, for example, the way the entity deals with internal work reports that might raise a particular problem about process or otherwise. We also are very keen, where we find examples of this in our surveillance—increasingly we are doing this through the exercise that Cathie mentioned—on thinking about what the incentives are within the organisation for rewarding good culture or good examples of the exhibition of the behaviours that the culture is seeking to imbue and what penalties there are for examples of bad culture.

CHAIR: Thank you for that. We will move on. I am conscious that we have a fair list of items that people want to go through, so I am just going to go through the other committee members to see if there are any questions on the opening statements. Senator Williams?

Senator WILLIAMS: No, not on the opening statement, thanks, Chair.

Senator KETTER: Yes, just a couple, if I could. Just to follow up on that question of the culture—Mr Medcraft, you made a statement at the beginning of the year saying this was going to be a priority for ASIC. I understood that to mean that you would be going on the front foot and looking at the culture. I am interested in the set of criteria that you used to assess whether a culture is lacking or not. Do you wait for a misdemeanour to occur before you go and do that assessment, or is there some element of proactivity?

Mr Medcraft : No. Fundamentally, in our proactive surveillance, we look to identify patterns of poor culture, which often points to poor conduct. So if we see a pattern of poor behaviour, generally the root of it is often poor culture that is driving it. It is a bit like what is in the diagram I have given you: often poor conduct is driven by human behaviour, and often it is poor culture. Our surveillance—and whether we are doing surveillance in financial services or markets, we are looking to connect the dots and identify poor conduct and patterns of it. For example, one area we did not comment on was audit. We covered a lot of other stuff, but audit is an area where we think often it is an issue of culture—lack of scepticism, for example is big problem. It is a culture problem.

To be positive, most organisations we engage with at the top are generally always keen to try and solve the problem. There is a constructive approach. I think, if you are a proactive and forward-looking regulator, when you see a problem like that, the most important thing is to elevate it to top management to make them aware of the problem and try and work with them. If they do not do something about it, then you take really serious action. I was just wondering, John, did you want to comment on audit?

Mr Price : I can comment on both audit and perhaps even insolvency practitioners. On the audit side, where we have had significant focus through our audit surveillance program over the past number of years has been around whether auditors show a sufficient degree of professional scepticism in undertaking their work and whether they retain sufficient appropriate audit evidence to justify the conclusions they make to make sure they are not placing undue reliance on others. Those are key areas where we have worked with the profession at the individual firm level but also with key professional bodies such as Chartered Accountants Australia and New Zealand, CPA Australia and the IPA to resolve some of those issues.

On the insolvency practitioner side, similarly, I think where we see misconduct, it typically tends to cluster around issues of competence of a practitioner; whether or not they are taking too much work for the size of the firm and their expertise; around the independence of the practitioner and around what we call improper gain, which is issues around remuneration; making sure that the remuneration that insolvency practitioners recover is proportional to the amount of the administration that they are handling.

They are behavioural and cultural issues and they have been the subject of some strong surveillance programs that ASIC has conducted for many years now.

Senator KETTER: I guess my question was more of a higher level rather than granular. Is your approach ad hoc or is there a comprehensive set of criteria that you are looking at to do an assessment of a particular—

Mr Price : At the broadest level, what we say is that we focus on things like communications—so taken from the top: challenge. Is this an organisation that is receptive to challenge—for example, whistleblowers and complacency? Is this an organisation that on a regular basis is making sure that its governance arrangements are fit for purpose? That is the very highest level but then, as you go to each individual sector, there will likely be different considerations for each. A perfect example is the audit profession that I mentioned and insolvency practitioners. There is also some other internal data that ASIC has access to that might give some hints. For example, if it is a licensee, a licensee is required to report significant breaches of the legislation to ASIC. How many breach reports have been lodged with ASIC and how does that weigh up against peers or competitors?

If there is an investigation and ASIC serves notices to produce documents, what is the attitude of the firm to that? Is it legalistic? Is it very defensive? Are they constructively trying to engage with us to resolve any concerns? What are the number of investigations that we have on foot? What are the number of enforcement actions that we have on foot? What are the number of reports of misconduct that ASIC has received? What are the number of reports of misconduct if it is a financial service licensee that the relevant external ombudsman service has received? So there is a wide range.

Mr Medcraft : I think fundamentally, as I said, Senator, it is a pattern of behaviour that indicates to us that there is an issue.

Senator KETTER: We are trying to get to the mind-set of firms, as you said describe it, and sometimes there are a lot of different pieces that go to making up the picture.

Mr Medcraft : Exactly. I think there are certain elements that are probably relevant to a sector where we see a pattern that goes: they are a problem.

CHAIR: Senator Ketter, do you have other questions in this area?

Senator KETTER: I can deal with my other questions later, Chair. Thank you.

Mrs SUDMALIS: I have a couple of questions. I was concerned when you said you were looking at the possibility that you may get cost recovery. What would happen if you decided to pursue cost recovery? What is the time lag between the time you indicate to that person that you are going to recover to the time you actually do that? Does it give them the possibility of moving their assets around? And what steps are you taking to prevent that from happening?

Mr Medcraft : A good question. John.

Mr Price : In terms of what will be the typical time lag, I think it will depend a bit on all the circumstances, because you will be dealing with quite a wide range of individuals and companies who have different financial circumstances and other considerations that apply. In terms of moving assets away, it is possible that individuals or companies might try to do that. But, if that were to occur, I think it is important to highlight that ASIC, like any other legal entity, has certain rights in terms of bankruptcy, winding up or other legal processes that can be brought to bear against the individual or the company against which the order is being made. What I am saying in a roundabout way is that there are well-established legal processes for when people have a debt and they do not pay that debt. In the past, ASIC has enforced those rights in the context of legal costs where it is appropriate to do so, and I envisage we would do the same thing with investigation costs.

Mrs SUDMALIS: When you were looking at the culture of the management, some of the terms struck me as being a little bit subjective. Tick box—either they are or they are not. It occurs to me that there is quite a degree of plasticity there that is of concern.

Mr Price : Again, it is important to highlight that where we have a strong interest in culture is around informing us where we use our resources to do further surveillance, to do further looking and digging as to whether there is a problem. In a situation where we see a poor culture there may or may not be legal breaches that are associated with that. But I think what our chairman has clearly said is that, where we believe there is a poor culture, it is clearly a red flag to us that we need to be mindful of that.

You are absolutely right in raising the point that there is no algorithm or no formula that you can put a bunch of variables into and it says definitively: this firm has a bad culture. It is very much a qualitative exercise as well as looking at objective data to try and make an informed decision, a reasoned decision, based on our experience of whether or not that poses a risk in that particular firm.

Ms Armour : We would encourage firms to identify the fact that a poor culture can lead to poor conduct, which will have either a regulatory impact or a reputation impact. We do think there is a real case for trying to measure that risk, just like market risk or credit risk. We do think it should be something that is capable of being measured. We appreciate that it is probably an early days exercise, but we would like to see that measured.

Mr Medcraft : As I said, virtually every company that we have discussed it with welcomed us focusing on this at the top level, because they are saying: 'Well, at the end of the day, we want a culture where we are putting our customers interests first and foremost. If that is not happening further down the line, we do want to hear about it and we want to deal with it constructively.' I think that, frankly, if you are a business that has a culture that is not putting the customer first, it is a pretty short-term strategy. There is alignment on this.

Mrs SUDMALIS: My anecdotal evidence coming from the field is that it is too little, too late. By the time you find there is a culture of inadequacy or fraud, you usually have quite a number of dudded individuals, and I think that is incredibly sad.

CHAIR: We might move on at that point. Mr Ruddock, do you have any further questions in this area?

Mr RUDDOCK: I do on the culture issues, yes. What troubles me that, when you are dealing with firms that are in fact subsidiaries of offshore enterprises where you have executives who are remunerated through bonus systems and where you have arrangements that are designed to maximise profits immediately because it impacts upon people's bonuses. While I see you have in mind a red flag approach where you may discuss these issues, I am not convinced that customers are being put first as you suggest they should be. I suspect that executives see their tenure as maybe three, four or five years. The expectation is that they will maximise profits in that time, and they do not care how they get there. Would you like to comment?

Mr Tanzer : One of the points that we have made here is that incentives are very important. The incentives that you are talking about are exactly part of the things that we like to look at in our surveillance and to challenge exactly what you are saying. What are the indicators that the remuneration structure or other incentive structures within the firm are really aligned to what the company itself often professes is its aim? I do not see too many companies that do actually profess that all they are looking for is the short-term gain, but in their value statements and mission statements it often really is very much about putting the customer first. It is questioning the alignment between that overall value, mission or vision statement for the company, the culture that it is seeking to portray and to imbue through the behaviours that it seeks to have and the incentive structures that are actually there.

You are quite right about extent to which a regulator might be able to police this. We are only going to be able to take enforcement action in the very worst cases, but one of the things that we are very keen to confront is to say: 'Where people have a culture, where internally people believe that there is a culture that does not line up with what their professed statement is, what is the procedure within the company for challenging that? What does the board of directors do to try to assess whether that culture is being followed through? Where particular problems arise, what do you do to remediate them?' When you get to remediation, this is a very difficult area for any board of directors. When you are under attack, the natural thing is to come up with some sort of compromise where the other side gives a bit and you give a bit but then you are both happy. In financial services we have seen a significant shift in that equation over time. Maybe it is long overdue that, where customers have been dudded, they should be fully compensated, not partly compensated. That is another important indicator and something we are regularly challenging boards of directors and executives about.

Mr Medcraft : One of the things that I think is a big game changer is the power of the crowd and social media. Basically, many companies have nowhere to hide anymore if they dud their customers, because their reputations can be much more quickly dealt with through the power of the crowds. I do think that in some respects social media is quite a game changer in terms of making people accountable. This is a big issue around the world in financial services. The UK at the moment is dealing with it in terms of their responsible manager regime that the government has announced. It will actually make managers within the firm specifically responsible and accountable for key aspects of the company. In the United States the SEC is currently drafting rules that will require companies that suffer fines to look to claw back compensation from basically the whole of the management of companies, going back three to five years. It is an interesting concept because it is not just making the individual who may have made the breach accountable; it is actually holding the whole of management accountable. It is the team. So there are some interesting things happening around the world that try to focus on the issue of dealing with the right incentive.

Mr Kell : We are having this conversation in the context of having just had a financial system inquiry where ASIC highlighted and asked for powers that would help us to more effectively deal with culture. I can give you three examples. We do not have a straightforward power to hold managers to account as distinct from advisers at the front lines in, say, the financial advice industry. That should change. We do not have straightforward powers to force a disgorgement of profits that have been made as a result of misconduct, unlike many overseas regulators. We do not have a straightforward power to be able to impose a rigorous remediation program in a way that we think the community expects. These are the sorts of powers that we set out would benefit the regulator and help us to improve the culture that you are all talking about. We were very pleased to see quite a few of them picked up in David Murray's inquiry and that there is a recommendation that further examination be conducted.

CHAIR: You said most or quite a few have been picked up. Are there any key ones that you believe he has not picked up that you believe are critical?

Mr Kell : That is a good question. I suppose there is a catch-all within the inquiry that a review of penalties and enforcement powers should be undertaken. We are hoping that that will allow the range of issues we are talking about to be picked up.

CHAIR: Thank you. Mr Ruddock, we will go back to you for one last question before we move on to the broader agenda.

Mr RUDDOCK: I heard the comments about social media. I heard the comments about what is happening in the UK and the United States. I understand that there is, particularly domestically, a lot of pressure to produce changes to reflect social values. Gender equity issues are running hard here, and I know that is driven by social media. The point I am making is that I am not convinced that in the board rooms abroad, where the investors in overseas corporations are about servicing pension funds where people rely on that for their income, maximising profits in the short term is not still the most significant driver in relation to culture. I simply say that, in your analysis where you look at Australian boards and might be able to influence them and where you look at Australian management and might have some say over that, I think there are other factors that are impinging in this area which we might have to address.

Mr Medcraft : It is quite interesting. There was a seminar two weekends ago on activist hedge funds in the United States and around the world who take a short-term view. It had been demonstrated that actually they may result in what for some investors is an attractive short-term increase in profit but over the long term result in a decline in the profit of the company because the company does not invest in research and development and capital expenditure. It is a very good point to emphasise. You are quite correct that there is a bit of an issue here.

Senator WILLIAMS: Mr Kell, will you take on notice the questions I am putting to you and come back in a couple weeks time?

I want you to write to this committee and tell me what powers you need changed to allow you to do your job better. Regardless of the Murray inquiry, what do you need as a big stick to act better? Mr Medcraft has pushed for more severe fines for a long time. I agree with him totally. But what changes do we, as regulators, have to make to make you more efficient in doing your job? Take a couple of weeks, work with your team and come back to us. I will push what I can through this committee and through the government so that we can strengthen the powers that you need.

Mr Kell : We can take that on board.

CHAIR: Thank you for that. If any committee members have further questions on the opening statement, we can come back to that later in the morning, if time permits. We will move on to some of the other items that have been flagged. I would like to start off with some questions about the ANAO's report into the administration of enforceable undertakings. Mr Medcraft, it concerns me deeply that the ANAO report states:

…ASIC does not assess the effectiveness of EUs (and terms in EUs) to enable it to have a firmer basis for requiring particular terms in EUs, or to provide assurance that EUs are having the desired regulatory outcome.

Could you talk to that comment from ANAO in terms of whether you agree with it or, probably more likely, what you are doing to address it.

Mr Kell : Can I start very briefly by noting that we found the report to be very useful: the ANAO support for ASIC's approach to enforceable undertakings in the role they have to play in our enforcement work, their support for the way in which ASIC has administered EUs and that, in particular, the allegation that we were treating different sized entities differently was not supported. They did make two recommendations. You have referred to the first which was about working on better ways of assisting the effectiveness of EUs, and we do accept that recommendation. We think that it is an important recommendation and we have commenced work to look at that. First, we will provide—as I think we might have said to this committee before—public reports on compliance with enforceable undertakings, including public summaries of the independent expert's assessment of whether the EU has been appropriately adopted and the various elements have been implemented. That goes in part to effectiveness.

We are also commencing discussions with some researchers and academics to undertake more periodic assessments of the effectiveness of EUs in contributing to overall improvements in compliance. That will obviously involve talking to them about some effectiveness measures. We have upgraded our internal reporting around the progress of EUs and whether they are meeting their targets. We are also considering EUs as part of the broader development of performance measures and reporting that we are undertaking to comply with enhanced Commonwealth reporting obligations. That is our initial response to that issue, but we recognise it is an important one, and we are very keen to ensure that people understand what we are trying to achieve with EUs and to convey to the broader public whether those objectives have been achieved.

CHAIR: Can I ask you about the comment that the ANAO make about your five KPIs relating to EUs. It says that ASIC:

…does not report externally against three of these KPIs, and only reports partially against two…

Are those KPIs process focused, as in certain milestones are being achieved in what was laid out, or are they outcome focused in terms of there having been demonstrable change, either in cultural practice or consumer outcomes, as result of the EU?

Mr Kell : I will have to get back to you. I will take that on notice. I do not have that in front of us. But I can also say that we are committed to providing more information and commentary on EUs in our annual report, and that will include consideration of those KPIs. But I will have to take on notice the details of that question, if that is okay?

CHAIR: Yes, I am happy for you take it on notice. I do find it troubling, though, that if you only have five key performance indicators relating to EUs, you have just had a major audit done by ANAO and you have had a heads-up that this committee was interested in asking about part, that you are not aware of whether the KPIs relate to process or outcome. It disturbs me that outcome is not necessarily a focus.

Mr Kell : I can assure you that we are taking this report very seriously. I am very happy to get back to you with a more detailed answer to that question.

CHAIR: Moving to some other comments around the same topic about your administration, ANAO talk about the fact that there seems to be duplication, poor accessibility and, as I read it from their comments, data split across different IT systems. What steps are you taking to address some of those concerns?

Mr Kirk : Broadly, there were some questions around the consistency of record keeping and so on around the signoff process. In order to address that we have immediately reinforced with all staff the requirements about documentation and storage of all records relating to EUs. We are developing templates to ensure consistency in the recording of those approvals. There will be a standard template and you will have to use that template and that requires certain steps—so there are immediate steps to deal with that. But, you are right. Part of the problem was not so much that there were not records kept of these things; but, because of the numbers of older IT systems, records were kept in different places according to which team was handling the matter. To address that we have a longer term process to consolidate all those systems into one and have one universal system with a standard approach across the board.

Mr Medcraft : On that, as I mentioned in my opening address, we made that process as part of what we call one ASIC regulatory transformation, which is basically how we capture data, how we share data and information and how we use it. At the moment , for example, as I think you are aware, we have systems that are sometimes 30 years old and we have 250 Lotus Notes databases. We are looking essentially to have a single workflow management system. That is a project that we are working on at the moment to allow better capturing and sharing of information. I will circulate an outline of that one ASIC regulatory transformation, because it also covers data analytics and how we work better as a learning organisation.

CHAIR: We have discussed before the role of independent experts being appointed as a probity exercise in terms of making sure that there is somebody looking over the shoulder of the entity that is carrying out the EU. Clearly, in terms of assessing the efficacy of the EU and the degree of compliance of the organisation, looking at those independent expert reports would be important. I notice the ANAO note:

… 75 per cent of EUs where an independent expert had been appointed, there was evidence of ASIC assessing the reports provided by the expert …

Can you talk about that. Is that a lack of documentation on your part or does that reflect the fact that 25 per cent of reports are not even assessed?

Mr Kirk : The overall finding was that, where the EU requires an independent expert to assess compliance, ASIC was generally involved with the review process and the reports provided by their expert were satisfactory. In terms of your statistics, part of the issue is that some of the reports go to very simple matters where it really is a black-and-white question of 'Yes, they've done this,' or 'No, they haven't.' On those matters, as it does not go behind the expert's report, the steps have been taken.

CHAIR: The ANAO report is pretty clear. It says that, where an independent expert has been appointed, there is only evidence of ASIC assessing the reports from that expert in 75 per cent of cases. What has happened to the other 25 per cent? Is that an administrative error, in terms of not documenting the fact that you have assessed whether it is being effective or does that mean you have not actually looked to see whether it has been effective?

Mr Kirk : It may be best if I take that on notice so that I better understand the particular quote from the report you are referring to.

CHAIR: It is fairly clear, I would have thought. We have put in place an independent expert to provide an assurance that things are happening. That assurance is provided to ASIC. If asset is not reading 25 per cent of those reports, then potentially 25 per cent of enforceable undertakings could have issues. The feedback loop has not been closed. That seems pretty clear to me as an issue of concern.

Mr Kirk : I do not think there was a finding that ASIC was not reading 25 per cent of the reports. But, as I said, perhaps so that I can better understand the quote you are referring to, I will go back to it and provide you with an answer on notice.

CHAIR: That would be good. I will leave my questioning there for the moment.

Senator O'NEILL: Ms Armour, I take you to your comment about market manipulation as one of the things that you have seen as an expression of poor culture. In addition to market manipulation, some serious breaches were reported by whistleblowers over the years. I am keen to hear about your processes with regard to whistleblowing, your response timeliness and the culture within ASIC. We have been talking about two cultures, really: the culture of the places that you are overseeing, but, also, the culture of ASIC has been subject to some questioning with regard to timeliness of response and receptiveness to whistleblowers. I am sure these things are happening in parallel. I would be very interested, in particular with regard to ASIC, in your processes now around whistleblowing—your intentions with regard to that—and also, given you have said that you have noted market manipulation, what processes are you demanding are in place at the sites you are supervising, with regard to whistleblowing and opportunities for those things to surface quickly?

Ms Armour : On ASIC's processes, I will ask Mr Day to give you an update on the processes we have put in place since the Senate inquiry into ASIC's performance to specifically deal with whistleblowers.

Senator O'NEILL: Then I will come back to you for the market manipulation comment.

Ms Armour : Sure.

Mr Day : We value the information that we get from whistleblowers. It is something that, as Ms Armour pointed out, was raised during the Senate inquiry into ASIC's performance. In relation to that, ASIC has formed an Office of the Whistleblower. That office has been created to ensure that ASIC maintains regular contact with whistleblowers and ensure that the information we have for whistleblowers is easily accessible to the public. It also provides training and other development for our staff on dealing with whistleblowers. We also set the procedures for our staff in dealing with whistleblower information. Overseas is the reporting of the carriage and conduct of information and contact with whistleblowers as they go through. To that end, we have trained and have in place approximately 70 whistleblower liaison officers across the organisation through our stakeholder enforcement teams. All of our frontline staff who are in our Misconduct and Breach Reporting group take receipt of information from whistleblowers in the first instance and have all been trained in those procedures and those approaches.

Senator O'NEILL: Could you clarify for me these 70 people plus your front-line staff. How many are we talking about?

Mr Day : There would be 100-plus staff who have been trained in those procedures. As the matter moves through the organisation, through a surveillance phase or an enforcement phase, there is a dedicated liaison officer to speak to the whistleblower and keep them updated no later than every three months about what we are up to and what we are doing and then, at the conclusion of the matter, to keep them updated as well.

Senator O'NEILL: How many whistleblowers are you managing at the moment, Mr Day?

Mr Day : In the last quarter, I think we are talking about 40 to 50 active matters at the moment.

Senator O'NEILL: That is quite a significant number.

Mr Day : It is a significant number, but remember, in any year we may deal with 9,500 to 10,000 complaints through members of the public. So, in a greater sense, it is a small number, but it would not matter. The reality is that is specific and important information to us and we want to make sure that we value that and honour the commitment that whistleblowers made to give us that information and keep them updated as to what we are doing, and ensure that we have handled it appropriately. The other part, and the big important part of it, is transparency among the senior leadership group and the commission as to the existence of those matters, and that they are being handled in accordance with procedures and moreover that we can dig into them if we do not think that they have been handled appropriately or escalated the right way.

Senator O'NEILL: So, in terms of the sector that you are overseeing, are there clusterings of issues that are arising? How do you go about managing that information to make sure that you are really watching what is going on for any patterns that are arising? What are those things coming up?

Mr Day : It is a good question. So for every matter that we get—whether it be from a whistleblower or not—we put keyword tags against those matters. We have got about 270 of those keywords, and they are all general types of misconduct that people may come to us concerned about. So we watch it from a keyword perspective. We also then group those into the core streams of ASIC's focus, such as financial services, market conduct, corporate governance and so on. We do that analysis as that goes through. Predominantly, the most whistleblower activity is around financial services at the moment, but it is still within normal range. It is consistent with broader trends, if I can say that. To a certain extent, that does give us some information, but again it is not showing any outlier issues compared to the broader population of matters that we get from the general public.

Mr Medcraft : Within financial services, is there a particular subsector where we are seeing a lot of issues coming out with whistleblowers?

Mr Day : Most of those do pertain to sort of financial planning and financial advice in that space, but in the current environment I do not know that that would catch anyone by surprise. But again those are things we are watching to see if there is any change on those things.

Senator O'NEILL: Hopefully we get to a point where it does catch people by surprise. I do want to come back the financial planning and financial advice in a little more detail but, to continue with the whistleblowers, the culture that we have been talking about within the institutions is critical and enabling whistleblowers within their institutions in the first instance, let alone that they have to go outside to ASIC. What is going on in that space? And can I come again Ms Armour, to the comment of market manipulation. It is pretty alarming to hear that you are identifying this as an issue.

Ms Armour : We have had a number of matters where they have had market manipulation outcomes. So the natural question one has is, 'When that occurs, was that person working at a firm, and what were the firm's procedures?' My comment was made in that context. But broadly the expectation of a financial services licensee is that they do have whistleblowing policies; they do have appropriate procedures. Indeed, one of the indicators in our conduct risk model is actually: how do firms deal with whistleblowers? What are their processes? What are their procedures? What is the adequacy of them?

Mr Medcraft : How do they reward them?

Ms Armour : Do they reward them?

Mr Medcraft : Do they reward them at all?

Ms Armour : We are reporting back to firms about what we think are the better practices that we have seen in that particular area with an expectation the firms will improve practices when they are not at the appropriate levels. So how whistleblowers are treated is definitely regarded by us as a key indicator of a good culture.

Mr Day : Sorry Senator, I would like to interject. To show our further interest in exploring this on an even more in-depth basis, we have now been supporting, for some time, work done by Griffith University and Professor AJ Brown, who has an Australian Research Council grant to look further into whistleblowing. Professor Brown was a person who made submissions and representations to the Senate inquiry into ASIC's performance. We are assisting the work of Professor Brown and his compatriots who are looking at whistleblowing procedures and whistleblowing conduct within firms as well.

Senator WILLIAMS: Senator O'Neill, could we include that with the question on notice to Mr Kell about what changes they need and what weapons they need to protect whistleblowers?

Senator O'NEILL: Absolutely. I think that is a great idea. In response to the language that you have just proffered there, with regard to 'rewarding' whistleblowers: I doubt that many whistleblowers who have been in contact with any of us would describe their experience as rewarding.

Senator WILLIAMS: Destroying.

Senator O'NEILL: It is probably much more the opposite. Given that you have used that language, can I invite you to make some comments about what you are doing to reward whistleblowers and what you see the sector doing in terms of seeing these people as critical to their success in the long term, rather than as liabilities to be managed or avoided.

Mr Medcraft : We have said that companies should think about not just patting them on the back but saying to them, 'Here is some additional compensation to reflect that we reward people who tell us this type of thing.'

Senator WILLIAMS: A company will not shovel money away like that.

Mr Medcraft : Sorry?

Senator WILLIAMS: A company will not voluntarily give a financial reward to a whistleblower, in my opinion.

Ms Armour : But if a company has a culture where there are rewards for people escalating instances of poor conduct, you do not even need to get to the whistleblower stage. If there is an environment where there is encouragement to raise serious issues, even if they may be about the behaviour of your direct superior—if there is a system that encourages that—we think that solves or helps address a lot of cultural issues in a company, and we would encourage companies to reward staff for raising issues that, at one level, may not be in their interests to raise. We think that is a better practice.

Senator O'NEILL: Do you notice KPIs in the industry being changed?

Ms Armour : We have started to. One of the better practices we have noticed is that, in some organisations—and it is just some—those sorts of rewards are being built into the system. It is almost rewarding people for the deals they did not do, for the right reasons, if you like.

Senator O'NEILL: Are any of those places any of the big six?

Ms Armour : Certainly, one of banks of the United States that has operations here has a notion of—I think it is called—'responsible financing', where the idea is that you have to meet three broad tests before you can take on a new product. The tests are things like, 'Will this cause anyone harm?' and those sorts of things.

Mr Medcraft : I think that is publicly—

Ms Armour : It is publicly available.

Mr Medcraft : Citibank is the one that has responsible financing.

Senator O'NEILL: Citibank?

Mr Medcraft : I believe so, yes.

Ms Armour : And we can send you—there was a speech about this.

Mr Medcraft : I met the head of Citibank recently, and I think they are very focused on this issue of the right incentives and the right culture.

Senator O'NEILL: I am sure that the people who have been negatively impacted would be glad to hear that this change might in the wings.

Mr Medcraft : I think that it is a big issue, certainly in the United States, with banks realising that, finally and most importantly, poor culture can cost a lot of money, frankly. They are realising that, with the penalties that are being issued, that are being driven often by poor conduct, which is driven by poor culture, it is an issue about profitability, if you are being fined huge amounts of money.

Senator O'NEILL: Given the changes that you indicated in your opening remarks about recovering the investigation costs, there might be a determination to change some of the KPIs so that it is cheaper to reward somebody inside early on, rather than pay the big price at the end when ASIC comes in.

Mr Medcraft : Also, the US whistleblowing laws that pay the whistleblower compensation for doing the whistleblowing are having quite big impact as well.

Senator O'NEILL: Because it is an additional job that they take on in civic service generally.

Mr Medcraft : And you do not know who is watching.

Senator O'NEILL: In the light of that, where whistleblowing has had an impact, but sadly not the outcomes that people want, in the areas of Trio, Great Southern and Timbercorp, can I seek an update from you with regard to each of those entities? I am sure that people listening would have great interest in where matters are.

Mr Price : I am happy to speak to Trio. To bring the two issues together, Trio was a firm that we originally noted as being relatively high on the list of our risk ratings when we did a risk based surveillance. Shortly after that time, a whistleblower, a fellow by the name of John Hempton—who has publicly outed himself previously—raised concerns with ASIC about Trio. Within a day, or it might have been a couple of days, we were speaking to some of the key people involved in Trio. Shortly after, we identified misconduct and took regulatory action. Of course, as a result of that regulatory action, more than 13 people have either been jailed, been banned from providing financial services, been disqualified from being directors or agreed to remove themselves from the financial services industry for substantial periods of time. In fact, two agreed to lifetime banning.

More generally, there were some terrible losses that investors suffered as part of their investment into Trio and related companies. Most recently, the liquidators of Trio have issued final reports to creditors of Trio, the Astarra Strategic Fund and the ARP Growth Fund. With the liquidators, ASIC representatives have met with some of the representative groups of some of those investors this month. The message certainly is that we have not identified any avenues for recovery of funds for compensation, and I understand that the liquidator has exactly the same message as well. It is our strong belief, and again I understand it is the liquidator's belief as well, that further investigations will not change this position. It is a situation where there is no compensation that could be viably recovered from any of the parties that were involved in the various proceedings.

Apart from the enforcement actions that I mentioned, which are now largely complete, there is still one particular line of inquiry that ASIC has an interest in following up. Recently we became aware of some information that was presented to various overseas regulators in respect of a Mr Jack Flader, who was the alleged mastermind behind the Trio funds, and we are considering some of that information at the moment. But, to be clear, that will not impact on what I said earlier: we have come to the unfortunate conclusion that there are no viable avenues for compensation left in respect of the Trio losses.

Senator O'NEILL: In essence what you are saying there is that Mr Flader, while he continues to be pursued, has successfully made disappear any money that could possibly still be held out as an incentive for people who were affected in the Trio collapse.

Mr Price : We are following some lines of inquiry to make sure that we have followed every rabbit down every burrow to make sure that we have been incredibly thorough in terms of the job that we have done around Trio but, as I said before, we are of the belief that there are no viable compensation avenues that are left in respect of the Trio losses.

Senator O'NEILL: And the liquidator holds that view too.

Mr Price : That is my understanding.

Senator O'NEILL: How would you characterise the reception of this information by the groups that have been pursuing this?

Mr Price : Clearly, this is tragic. ASIC has said on a number of occasions that one of the very troubling things about markets is that when there are losses markets often recover but individuals do not. I suppose that the broader question around the losses raises issues for governments and law makers more generally around whether the existing framework is the right framework, whether investors bear the right amount of risk or whether there are other things that could be done. But that is really a matter of policy for governments I think.

Senator WILLIAMS: I would like to add something there. Mr Holt, a name that is thrown around here fairly often, provided a lot of advice to get people into Trio. Is that correct?

Senator O'NEILL: No, he was in Timbercorp and Great Southern.

Senator WILLIAMS: Sorry, I will come to Mr Holt later on.

Senator O'NEILL: I did ask about the three of them. Before we move off Trio, I have been involved with quite a number of these people in my former role as the member for Robertson and just being on the Central Coast not too far from North Sydney where there was a real cluster of this. I also know there was also a cluster in the Wollongong area which gathered around disreputable people. One of the things that was held out as a hope to those groups by Senator Cormann, who was formerly a member of this committee prior to the change of government, was that there would be government compensation. Have all avenues now been completed in terms of any other sort of recovery of money? Will you advise the government clearly that you are at the end of the line and that Senator Cormann might need to address this issue now?

Mr Price : I am happy to provide the government with an update. Obviously, when I talk about ASIC having exhausted all avenues in respect of compensation, what I am referring to are the areas that our jurisdiction covers. Obviously, I cannot speak to other areas. The only other thing that I would like to highlight for the committee is that, as well as dealing with the law enforcement aspects of misconduct in this matter and acting quite quickly to do so, ASIC did set out a forward plan, which it provided to a parliamentary joint committee into Trio Capital about what it could do to strengthen the regulatory framework.

We have delivered on what we said we would do to the committee. For example, we substantially increased the financial requirements that apply to managed investment schemes—so they need to be run by more well capitalised entities. We have improved the disclosure that needs to be made to retail investors by hedge funds, as the Trio investments were, so investors can hopefully make more informed decisions. We have strengthened guidance applying to research houses, some of which made recommendations around the Trio funds. We have reviewed the custodian industry that held the assets for some of these funds. In addition to that, we undertook a number of surveillance activities across broad sectors where we thought there could be a problem.

Senator O'NEILL: If I could go to the Timbercorp matter.

Mr Tanzer : I will try to deal quickly with both Timbercorp and Great Southern. It is a double-edged sword in doing that because they are quite separate schemes but there are some commonalities. Both schemes were agricultural managed investment schemes, promoted quite broadly to retail investors. Both schemes largely collapsed because they relied overly heavily on up-front fees paid by investors. When the global financial crisis hit and the prices for those assets were affected, they both fell into substantial difficulty. But this size is quite substantial. Timbercorp itself had about 18,000 investors who had invested over a billion dollars. Great Southern was the largest agribusiness managed investment scheme operating and had over $2 billion from 43,000 investors at its height.

When both of those collapsed, I think at a previous meeting of this committee, I gave you information about the investigations that ASIC had conducted at the time, in particular into the financial advice that investors had received. I outlined what we had done and said that, from our perspective, we did not find systemic issues with respect to the financial advice that had been provided. However, there are some significant pockets—and you referred to 'clusters'—there are numbers of investors who received very proper advice. Senator Williams referred to Mr Holt. Mr Holt is one of the advisers banned by ASIC because of the advice that he had provided to a number of investors.

Senator O'NEILL: Mr Holt was also a registered chartered accountant.

Mr Tanzer : As I understand, yes.

Senator O'NEILL: The committee did make some inquiries into the level of conversation between that professional body and ASIC. I would have to characterise those as limited. I am keen to understand how you might have processes that would allow you to better use the professional bodies of the people who provide these services across a range of contexts to jointly work to help with the creation of a better culture. You have talked about the auditors, custodians, trustees, and research houses—in your answer, Mr Price.

Mr Price : Yes.

Mr Tanzer : Certainly.

Senator O'NEILL: That was a problem with Mr Holt and, to my understanding, he remains qualified as an accountant—is that correct?

Mr Price : Sorry, Mr Tanzer, I will just make one point. One issue that we have faced with the professional accounting bodies is that because of various natural justice issues and legal issues they face, they actually find it very difficult to share information with us prior to them making a formal determination about misconduct on the part of members.

Senator WILLIAMS: Who is this?

Senator O'NEILL: The accounting boards.

Mr Price : The accounting boards.

Senator O'NEILL: We might need to get something from you on that letter to Senator Williams.

Senator WILLIAMS: To the committee, yes—what changes you need to do your job.

Mr Price : Yes, it is not so much a change from our end; I think it is a legal difficulty they face. My apologies for interrupting, Mr Tanzer.

Senator O'NEILL: Thank you.

Mr Tanzer : I am not sure that he remains a member of the institute! Of course, no-one can take away his initial accounting qualifications—the fact that he got a degree or an appropriate qualification at the time.

Senator O'NEILL: True.

Mr Tanzer : What we are doing more specifically with respect to Mr Holt is that we have met directly with members of the Holt Norman Action Group, as I know a number of members of the committee have. We have heard allegations from those members that they believe that Mr Holt engaged in significant fraud. We have sought further information about that, to see what further investigations we could undertake.

We are very keen to pursue any sorts of realistic avenues for investigating potential fraud. It is sometimes difficult in this area, because an investor's perception of what fraud is and what you would describe naturally as fraud committed to yourself do not necessarily meet the legal test of what fraud is as opposed to being really grossly negligent, or completely unreasonable in the circumstances, or a betrayal of trust or all those types of things. But we are in contact with the Holt Norman Action Group and we are engaged in trying to see whether there are any aspects of fraud there. But we did take action to ban Mr Holt at the time—

Senator WILLIAMS: For three years, wasn't it?

Mr Tanzer : It was for three years.

Senator WILLIAMS: Well, that is hitting him over the head with a feather!

Mr Tanzer : We took the action that we thought was appropriate at the time, Senator.

Now, with respect to the—

Senator O'NEILL: Can I ask what happens at the end of that three-year period in terms of a potential return to the sector? How do you prevent that?

Mr Tanzer : His ban would be complete. If he sought a licence we would assess that licence against what competency or other ability he had to carry out his duties efficiently, fairly and honestly. If he sought to become an authorised representative of another licensee, that licensee would take responsibility for his conduct and would need to satisfy themselves that he had the requisite ability to undertake these responsibilities.

Senator O'NEILL: Can I put it to you, Mr Tanzer, that that does not meet the public scrutiny test?

Senator WILLIAMS: No—the public are very disappointed, Deputy Chair, that it is too soft.

Senator O'NEILL: Given the damage that has been wreaked by Mr Holt so far, a three-year ban—while it might have been what was achievable for ASIC—is simply not in line with community expectations about somebody who has so devastatingly impacted on the lives of hundreds of families.

Mr Tanzer : I understand the point that you are raising. All I can say to you here today is that we assess that on the basis of the evidence that we have. We came up with a ban for three years. As you said, it might have been what was appropriate at the time, but in light of the fact that people are now subject to recovery action following the completion of various class actions in those matters there is a number of people who are directly affected by Mr Holt's behaviour who are in significant financial distress. What I was going to go on to say was that we are engaged with the relevant financiers and liquidators in those matters, particularly around the arrangements that they have in place to deal with financial hardship, to make sure that those investors are being treated fairly and have appropriate communication. That is something that we are very actively engaged in.

Senator WILLIAMS: On that very issue—

CHAIR: Okay, in final—

Senator WILLIAMS: Can you revisit your decision on Mr Holt? Are you allowed to revisit it? You are allowed to review your decision; are you allowed to change your decision on punishment? Is that possible?

Mr Tanzer : Firstly, I think—

Senator WILLIAMS: It is a yes or no answer. Can you revisit it and make another decision?

Mr Tanzer : I appreciate it is a yes or no answer. I think I would need to think about whether or not there is actually an ability to do that, because the process provides that we get together our evidence, we consider, we provide an opportunity for a hearing and then we make a decision. Then there are review rights under the legislation. So I am not sure, frankly, whether we can revisit that decision. What I have said is that, in light of the quite serious allegations that people have made about potential fraud, we have invited people to bring forward any information that they might have that goes to that, and we are definitely assessing that against the information that we knew at the time.

Senator O'NEILL: So whistleblowers might provide protection—

CHAIR: We are going to draw this to a close for now, but we will resume in 15 minutes time. Senator Williams, you can have the call and lead off questioning at that time.

Proceedings suspended from 10:00 to 10:14

CHAIR: We will resume the meeting. Senator Williams, you have the call.

Senator O'NEILL: Just before we start, we have media present, so we might need to have somebody from the committee move that we are happy for photographs to be taken.

Mrs SUDMALIS: So moved.

CHAIR: There being no objections, it is so resolved. Senator Williams.

Mr Medcraft : Senator Williams, just to finish off on your question: if we had new information on Mr Holt, we have the ability to reopen this particular issue. Is that right, Mr Price?

Mr Price : I think that is likely. I would just like to double-check, but I think that is highly likely.

Senator WILLIAMS: Thank you, Mr Medcraft, because I was talking to Senator Xenophon this morning and I think the general mood throughout the committee is that Mr Holt is being treated very softly, and people are very annoyed.

Mr Medcraft : In fairness, I think when our delegates assess that independently they are, as you know, implementing these bans, always looking to the issue of it being appealed to the AAT.

Senator WILLIAMS: You have raised that issue before.

Mr Medcraft : It is important. The AAT's fundamental issue is that if it affects somebody's earning capacity—and we can have the debate about that—that is one of the big issues they consider. You cannot ignore that. I am not defending them; I am just saying that that is the key basis upon which they look at it. Is that right, John?

Mr Price : Yes.

Senator WILLIAMS: If I were you I would have gone harder and run the risk of the AAT—but that is my opinion.

Mr Medcraft : We have actually been saying to our delegates that we are very happy for them to push the envelope and take more risk. That is very clear, and if they are listening I will remind them that we do want them to take more risk, because the community expects nothing less, and we should be doing that. I will put that on the record.

Senator WILLIAMS: Okay. We are very limited in time, so I will rush through my questions pretty quickly. Mr Tanzer, I sent an email to you via one of your staff yesterday, and this was raised with me by the AMP financial planners in Queensland, about a concern that real estate agents are advertising SMSFs on the radio and in the print media—in other words, saying to people, 'Pull your superannuation out and put it into a self-managed super fund and we'll put you into a good piece of real estate.' Can they do that legally if they are not financial planners?

Mr Tanzer : The direct answer to your question is that if the person is promoting an investment in an SMSF or promoting a person establishing an SMSF, ASIC takes the view—and it has publicly stated its view—that you need a licence, you need to do that under an authorisation from a person who holds an Australian Financial Services Licence. Property investment per se is not regulated under the Corporations Act, and that is because property per se—residential property or commercial property, for that matter—is not defined as a financial product. Even though lots of Australians invest in it, it is not a financial product. But if you are promoting investment through an SMSF and specifically targeting using your SMSF in a particular way, we take the view that that is financial advice or advice about a financial product, because it is advice about your superannuation for establishing an SMSF.

Senator WILLIAMS: Exactly. If they are doing that and they are not licensed, what can you do, what will you do and what is the penalty?

Mr Tanzer : We take a number of actions in this field to establish this specific point. Earlier this year a Federal Court judge ruled in our favour in the matter of ActiveSuper, or Royale, involving a high-profile Queensland businessman, Craig Gore, which involved the promotion to SMSF investors specifically of investments offshore and in distressed US property. In that case, unfortunately, $4 million worth of SMSF investors' money had been already achieved in the scheme and appears to be lost, although it is quite clear that ASIC got in there reasonably early, because the plans were to raise over $20 million. In that case the judge made some really helpful findings. Specifically going to this issue of whether or not targeting SMSFs was dealing in a financial product, he said that the conduct that Mr Gore engaged in:

… concerned the circumstances in which numerous Australians with relatively modest amounts of superannuation were induced, inappropriately, to establish self-managed superannuation funds (SMSFs) and to use their superannuation funds for investment in properties in the United States of America … On any view, they were highly speculative investments and inappropriate for those to whom they were marketed.

We have a number of other actions pending. There is one in a matter involving Park Trent, where judgement is reserved, which will go specifically to this topic. We have also written to all of the real estate institutes around Australia to raise it directly with their member real estate agents and put them on notice about ASIC's view about this. In respect of the material you provided to us yesterday, we are very happy to follow that up directly and assess whether or not that was targeting SMSFs—although on the face of it, on my very quick reading, it does appear to be so.

Senator WILLIAMS: That bloke's mobile number is on the bottom of that email you will probably see. I want to raise another issue—and Mr Kell, you might take this on notice as well. I have no doubt that there will be a user-pays system introduced to financial planners—an annual licence fee or whatever—to get funding into ASIC. I think that is how it will pan out, but I have been wrong before. How do we reduce the compliance costs of financial planners? If we are going to put a cost of a licence fee onto them—say, $500 or $1,000 a year; I do not know what it would be—we do not want to increase their overall cost and then find that people cannot afford to seek professional financial advice. Can you take on notice any ideas you may have—and I have asked this of Westpac and others this week—on how we can reduce their compliance costs so that their whole costs for the year are not increasing and in fact may go down?

CHAIR: Before you go ahead with that, perhaps I could just clarify something. Senator Williams, that is your desire and your planned approach, but it is not actually a decision of the government or necessarily a formal recommendation of the committee at this stage, although we can report—

Senator WILLIAMS: Thanks for clarifying that, Chair: that is my opinion. How is it all going with the CBA enforceable undertaking and their compensation scheme? We will hear more next month. Is that correct?

Mr Kell : Yes, there is a lot of work going on there with our licence conditions, with the process being undertaken by KordaMentha to assess whether the remediation process was adequate. Several thousand of the customers have been contacted who were not originally offered the $5,000 but have now been offered the $5,000. That work is underway and we will be looking for the second of the three reports within the next few months. If you want any further information I would be happy to provide it on notice.

Senator WILLIAMS: One issue came to my office, and I will take it to the Commonwealth Bank personally. Congratulations on your work on Dr Munro. We will let the court make its decision there. The IOOF inquiry: no doubt you have a full inquiry into IOOF?

Mr Tanzer : Yes, we do. I cannot really go into all the details of that—

Senator WILLIAMS: I do not want any details.

Mr Tanzer : except that we have received information from the whistleblower. We have also asked the Senate committee that if there is any further information that might have been provided to it directly then it might like to provide that. We have notices out to IOOF and we have received information from IOOF and we are looking into all of the circumstances that have been raised with us.

Senator WILLIAMS: Good. Your planners website: on the financial advisers register back on 1 June you said there had been 60,000 visits and more than 100,000 searches. Is that interest still continuing? And does the register need any further tinkering?

Mr Kell : Yes. I might take the absolute number on notice and get back to you, but we are receiving, in a way we are quite pleased about, more than 2,000 hits a day on that website, on average. We are up to more than 24,000 planners providing personal advice listed on the website. We recently added industry association memberships and professional qualifications. In terms of whether the register might benefit from additional information, ultimately that is a decision for government, because the content or the characteristics of the advisers that are included on the website are set out in the regulations. But what we are doing is seeking feedback from the community, from the industry about suggestions for additional information, and we will be talking to government about those. They range from relatively simple things, such as the location of the adviser, through to issues that might raise more significant policy matters, such as whether a complaint has been found against you through the Ombudsman scheme—whether that should be listed on the register. But we are happy to get any more feedback about issues that should be included on there so that we can talk to government about it, because it is ultimately their decision.

Senator WILLIAMS: I want to raise the issue of land banking. On the fifth of this month ASIC was successful in court action with David Ross and Richard Albarran resigning as administrators of Midland—Midland Highway, is it? Midland HWY?

Mr Tanzer : That is correct.

Senator WILLIAMS: Why did you pursue having them removed as administrators?

Mr Tanzer : We were concerned about the circumstances in which their appointment was made, and we were concerned about the potential for conflicts of interest that may be involved in their conduct of the administration.

Senator WILLIAMS: And now you are pursuing 21st Century because you claim that these are unregistered managed investment schemes. Is that correct?

Mr Tanzer : That is correct. These are land banking schemes operated by the 21st Century group and a group called Market First Global. There are 10 or so of these schemes. Basically the scheme offers investors an opportunity to buy an option on land, with the potential that the land might be developed at some stage in the future. But the concern we have around those schemes is that they are unregistered managed investment schemes, so we commenced action to stop them.

Senator WILLIAMS: I want to run something past you. I believe the DPP is severely overloaded with work. That is the impression I get. Can ASIC actually pursue criminal charges under our current laws? We are just referring it on to the DPP, is what I am saying.

Mr Tanzer : We have arrangements with the DPP to pursue a range of criminal charges—

Senator WILLIAMS: If you were to put the DPP aside, and if you had criminal lawyers in your network, could you actually lay criminal charges?

Mr Tanzer : We do have criminal lawyers and we do lay criminal charges, but they tend to be for less-significant offences. We have an MOU that specifies what types of charges we might lay. The Corporations Act actually provides that ASIC can bring prosecutions, but the DPP's legislation also provides that the DPP can undertake prosecutions and can take over any prosecution that is undertaken by a Commonwealth agency. The way it works is that the legislation provides full power for ASIC to commence and carry on prosecutions but also provides full power for the DPP to conduct them, and that is the way it is done.

Senator WILLIAMS: Mr Medcraft, we have talked before about the level of fines and punishments in Australia. I agree with you that they are too soft. Who actually sets those?

Mr Medcraft : They are set by government—by the parliament. I think we highlighted particularly civil penalties in our white paper last year—that civil penalties are generally not indexed to inflation; they are not a multiple of often the benefit that is gained compared with many other jurisdictions. And clearly, as Mr Kell said earlier, it is something the Murray inquiry has recognised. The need for a review is overdue, particularly of civil penalties.

Senator WILLIAMS: Mr Kell, with those questions I have given you on notice about what you want, if you could include that area as well—ASIC's opinion of the level of fines, where they need to go up to, what you think is a suitable level that actually inflicts punishment instead of just a smack on the hand—I would appreciate that. Mr Price, I believe that soon there will be changes to the rules for liquidators.

Mr Price : Yes.

Senator WILLIAMS: I remember distinctly your former boss, Tony D'Aloisio, making the point in Senate estimates that it is very hard to remove a liquidator once they are in there. With these propose changes—well, I believe they are still under discussion—what would you like to see as far as ASIC's power to actually remove a liquidator is concerned, if they can do that without having to go through the whole slow court process? Are there any changes you would like there?

Mr Price : The draft bill that was released for comment in I think December of last year did provide a mechanism for liquidators to be removed by a tribunal-type process, and that tribunal would be made up potentially of people from ASIC, people from industry. I think that is a helpful suggestion, although I recognise—

Senator WILLIAMS: Would it be a quicker process than going through the court system? Obviously it would be quicker if you had a tribunal, wouldn't it?

Mr Price : Usually tribunals are quicker than courts. That is one side of the equation. The other side of the equation is that a key part of that draft bill that I mentioned is really around empowering creditors to be able to remove insolvency practitioners themselves, so you do not need to get to a situation where a regulator needs to step in. I think the empowerment of creditors in that bill is, again, a positive initiative.

Senator WILLIAMS: Should it be in the number of creditors or the value of the creditors who have the vote?

Mr Price : I will take that on notice.

Senator WILLIAMS: What do you think? You might have five creditors. Four might be owed $500 and the other one might be owed 50 grand. Should it be the one with the most owed to them who has the major say or should it just be the number of people out of the five?

Mr Price : It may depend on the circumstances, so let me reflect on that a bit more.

Senator KETTER: In relation to the earlier discussion we had about the powers available to you and your wish list as to what you might need to discharge your obligations, it has been put in one of the submissions we have received in an inquiry that section 12 of the ASIC Act currently deals with unconscionable conduct and could be applied to what some might describe as predatory behaviour on the part of banks with perhaps farmers and small-to-medium enterprises. I am informed that that power has never been utilised. I am wonder whether that is true. Do you have a view about that?

Mr Day : The power has been used. It depends on what circumstance you are speaking about. We have used that in the past in relation to retail credit and others. That predates even when we took over consumer credit. In relation to commercial credit for businesses, farms, farmers, those types of things, we would have to take on notice whether or not we have used the power for any of those commercial circumstances. I am not aware of anything in recent times in that area.

Senator KETTER: Would that be a vehicle which could be used by, for example, a farmer who is finding that they are being subjected to predatory practices?

Mr Kell : Like a lot of provisions in both the Corporations Act and the ASIC Act, those provisions are not there solely for ASIC to utilise; they are there for Australians to use also in their own commercial endeavours and in other circumstances as well, just like most acts of the country. In those circumstances they can use those and we are aware of those sections being utilised and invoked in other private legal actions and to various degrees of success.

Mr Kennedy : We are planning to provide some information to the committee as part of your upcoming loan impairment inquiry, which will cover some of the matters you have just raised and will explain where we have used the unconscionable conduct provisions and also some of the distinct limitations around those provisions when it comes to dealing with some of the matters you are talking about and what some alternatives might be to address some of the issues that have come up in that context. We are looking forward to providing more information to you on this issue, but in terms of using that power, we used it most recently in the Cash Store matter where we found unconscionable conduct in relation to the provision of payday loans. I do not think that goes to some of the types of commercial arrangements you are talking about. I am happy to discuss this further as part of that inquiry.

Senator KETTER: Thank you. You have touched on the payday lending issue and in March you issued a release on the fact that you are putting the payday lending industry on notice to lift standards.

Mr Kell : Yes.

Senator KETTER: At that time, you indicated you had 70 matters before the court and 16 matters being reviewed or investigated. I am wondering could you give us an update on that.

Mr Kell : I can check on where those are up to.

Mr Saadat : Since that report was published, we have had judgement handed down in one matter involving a company called Teleloans. ASIC was found to be unsuccessful in persuading the court that the business was avoiding the obligations in the national Consumer Credit Protection Act. Teleloans structured its business in a way such that related entities were operating together and as a result they were able to avoid some of the provisions in the act. ASIC tried to persuade the court that the was conduct still within the provisions, but the court found that the conduct was outside the provisions. ASIC has decided not to appeal that decision. The government announced a week and a half ago a review of the responsible lending provisions that apply to payday lenders. The issue of payday lenders seeking to avoid the legal provisions is something that ASIC will make a submission about in its submission to that inquiry.

Senator KETTER: Do you believe there is a deficiency in the existing legislation?

Mr Saadat : It is something that we think could be potentially addressed. Given the court's finding that the company was able to arrange its business in a way to avoid the provisions, our concern is that it potentially allows other players to do a similar thing.

Mr Kell : We also have another matter still before the courts about so-called avoidance models. The reality is that it is an industry that has had a history of players who have sought to avoid provisions and thereby avoid some of the caps on interest rates—we need to make sure that the anti-avoidance measures are robust in this area. That is something that we are looking forward to discussing with the review committee.

Mr Medcraft : Let's face it, the payday lending industry, frankly, should be on notice. Their traditional business model of financing vulnerable consumers where they target vulnerable consumers and they clearly deal in terms of selling their product with key behavioural traits of people—that is an issue. The troubling thing about this sector now is that they are looking to extend their market to probably more convenience use to people that potentially should not be using payday lenders. If they really understood the true interest rate that they are paying, they would be shocked. Payday lenders use behavioural economics to sell their products—our message to them is we also can use behavioural economics to actually make sure that consumers get the right nudge as well to deal with it. We are looking at behavioural economics and thinking about how we can use that better to help educate consumers. If you look at the latest financial literacy survey from ANZ, the troubling aspect of that is the significant growth among certain demographics that you would not expect to be using payday lending. Let me be very clear, this is a high priority for us. A very, very high priority.

Senator KETTER: That is good to hear. I note that one of the three areas of misconduct that you are focusing on is unfair fees and misleading advertising.

Mr Medcraft : That goes to the point that I was saying earlier, advertising is dealing with behaviour and trying to get people to buy. Perhaps if it is misleading, the message is that we will crack down very hard.

Senator KETTER: Are you doing any investigations in this area at the moment?

Mr Medcraft : Yes, we have taken action.

Mr Saadat : We have a range of investigations underway. As you pointed out, there is a theme that we are focusing on including in relation to misleading advertising by small-amount lenders or payday lenders. One of the concerns that we have identified in the past is about consumers not being misled into thinking that a payday loan is the only option available to them. If a consumer is in financial difficulty—for example, if they are having trouble with a utility bill or they are having trouble paying back a loan that they have really have—there are a number of arrangements available to consumers in those situations. For example, all lenders are required to provide borrowers with hardship assistance and that could include, for example, repayment holidays and other similar things. One of the concerns we have is that people do not go straight to an expensive short-term loan when other options are available to them. Those options should be made available to them where they are appropriate.

Senator O'NEILL: Has any consideration been given to the government's policy-making around young unemployed people having a month, which was originally going to be six months but it is now one, without access to any payments at all? It would seem to me that they would be particularly vulnerable to the payday lending structure. Has any consideration been given to this?

Mr Saadat : I am unaware of it in our context.

Mr Medcraft : It is an interesting question. I believe the UK payday-lending laws require that you can only roll it twice—is that correct?

Mr Kell : It does not go to that issue.

Mr Medcraft : No, but it means that, essentially, you cannot keep rolling them, it gets stopped—there is a break. Is that what you are saying?

Senator O'NEILL: I am glad that there are some restrictions around it but I am just thinking that if payday-lending is an area of concern, which has clearly been indicated, if young people find themselves unemployed and they are facing one month without any payments at all from the government you would be creating a market for payday lending, in my view, amongst many young people. I would be interested to get from you, on notice perhaps, the demographic that you indicated was increasing its use of payday lending.

Mr Medcraft : The demographic is actually people who have jobs and who are taking payday loans for convenience, through mobile devices. These are actually people who could get credit in a normal fashion but because the payday lenders are so easy and convenient, they just go and get it on a mobile, and they could be paying interest rates of 50 per cent. It is essentially just convenience and often they do not realise they are paying 50 per cent, for example.

Mr Saadat : The payday lenders are required to comply with responsible lending laws. If somebody is unemployed and does not have a source of income, it would be quite remarkable if the lenders were able to meet their responsible lending obligations and provide that consumer with a loan.

Mr Medcraft : Just so that clarifies the convenience uses, people who actually have jobs using payday loans, frankly, does not make a lot of sense.

Senator O'NEILL: It is like going to the corner shop—the Weet-Bix cost a lot more.

Mr Medcraft : Part of the problem is payday lenders do not like it being called payday lending it is almost like they are reinventing the product. If people actually know that what they are getting is a payday loan then they would probably think twice about it.

Senator KETTER: I might just have few minutes left so I will quickly move onto the audit of the enforceable undertakings. I note in there that there was a comment by the ANAO acknowledging that ASIC negotiates outcomes that are not enforceable undertakings. The role of these, according to the ANAO, is less clear as there is no policy definition or register for these other negotiated outcomes. Perhaps you could comment on that, and are you going to take steps to address that?

Mr Tanzer : I understand the interest in trying to be clear about definitions, but sometimes the business of what we are engaged in means that we should use a range of tools. I think that it is very important to be able to use a range of tools. In recent times we announced that we had dealt with a group called Ausbil about a system error that resulted in compensation being paid to investors as a result of a system error dating back some 10 years. We accept that in the conduct of managed fund platforms and other things there may be system errors that come up. In fact, as you deal with legacy systems some of what the ANAO has rightly raised with us is with respect to problems with our legacy system. We expect that in industry there may well be some problems with legacy systems as well. But to suggest in every case that we should then go and get an enforced plan undertaking—

Senator KETTER: No I was not suggesting that.

Mr Tanzer : No, I am not suggesting you are. I am trying to demonstrate that, with respect to these types of things—where the entity has come forward and identified the problem and we have discussed with the entity whether it deals with the complete problem—it is often much better to, as in this particular case, have independent experts in to have a look at the problem. Some of the things that we are doing under this non-enforceable undertaking are very similar to what one might require under an enforceable undertaking, but I think it is wholly appropriate to do that, in the interests of getting a quicker, faster and more effective outcome.

Senator KETTER: I am not querying that in any way whatsoever. I think the ANAO's observation was that there was no policy definition or register for these other negotiated outcomes. They made the point that, to provide more certainty to regulated entities, ASIC should consider ways to provide greater clarity around the circumstances in which it accepts and enters into other negotiated outcomes.

Mr Tanzer : I have no problem with that, and that is why I have gone into some of the discussion here. With respect to those types of matters, we have been on record for some years saying: 'We expect that there may well be system errors in the market. We want you to bring them forward. We do not see that they would necessarily lead to licence conditions enforceable undertakings, but maybe they would.' The type of guidance that one can give in all of those circumstances is a little bit difficult. One thing we are absolutely committed to is to make that all completely transparent. We then produce six-monthly enforcement reports and we have separately published our enforcement policy and approach. So I think there is quite a degree of transparency out there. There is always room for improvement. We will certainly look at that recommendation, but I did want to give you that context.

Mrs SUDMALIS: Do you have a cooperative relationship with the ATO or the ACCC such that, if they discover a breach and report that to the consumer, there is a direct pathway from them through to you, or does the consumer have to come through to you independently?

Mr Tanzer : It depends on the circumstances. I think that if something came into our call centre, for example, and it was really a matter for the ACCC, we would invite them to contact the ACCC directly. If the matter was something that was actually under investigation and led to something that they felt was better dealt with by us or vice versa, we have got a range of mechanisms for dealing with the ACCC and the ATO at office level, and at more senior levels, and a range of liaison arrangements underpinned by MOUs.

Mrs SUDMALIS: If they have determined that there is a breach of banking behaviour, does that come back to you after they have determined that there is a breach?

Mr Tanzer : With the ACCC, there are overlapping aspects of our regulation. We deal with that through a series of cross-delegations, in some cases to make sure that, if they are investigating something and they get to a substantial stage, but there is doubt about whether the right action would involve an action under the ASIC Act or an action under the competition and consumer law for, say, 'misleading and deceptive conduct', there are delegations that will deal with that. More commonly, if it really is a matter that appears to be much better dealt with by ASIC or by the ACCC, we have arrangements in place to try to make sure that that agency deals with it. If there is concern that people are getting ping-ponged around and bounced from one agency to another, we are very keen to hear that and to try to deal with it at more senior levels, because we are very keen to avoid that.

Mrs SUDMALIS: If I have evidence presented to me from a person who has a written restriction from a financial institution saying, 'You may not go and seek assistance or take this to any media, otherwise you will lose any possible financial benefit from us closing down your mortgage,' how is that seen from ASIC's point of view?

Mr Day : We have seen that in the past between parties when they make a settlement and they mediate an outcome. In the document that records that settlement there may be clauses saying that there wouldn’t be any publication of that settlement—a confidentiality clause. I think that is what you are getting at, Ms Sudmalis; or are you saying something further than that?

Mrs SUDMALIS: No. This is actually saying that, if you do not keep your mouth shut, you will get absolutely nothing when we have sold your house out from under you. It is slightly different from a deed of settlement.

Mr Saadat : I am not aware of any examples of that at ASIC.

Mrs SUDMALIS: I have one right here. I will bring it to you.

Mr Saadat : We are happy to take a look. What you have you described sounds quite troubling.

Mr Medcraft : If you provide us with it, we will follow it up and come back to you. That should not occur. If that does happen to people, then they should report it to us, if it is in our particular area.

Mrs SUDMALIS: Thank you.

Mr Medcraft : It is not the way the system is supposed to work. It is not the right culture.

CHAIR: I am happy for you to table that, Mrs Sudmalis, but you also have more time if you wish to ask other questions.

Mrs SUDMALIS: I will sort out the tabling later, because I only got this case at half past four on Friday. I will waive my time now, thank you.

CHAIR: Senator O'Neill.

Senator O'NEILL: Can I go to the matter of licensing which Senator Williams brought up. One of the things we established in our inquiries that led to the report that we tabled in the parliament—Inquiry into proposals to lift the professional, ethical and education standards in the financial services industry—was that the big six that provide huge amounts of financial advice that across the country actually hold between them very few licences. The people who work within the industry under the banners of Westpac, National Australia Bank, Commonwealth Bank, the ANZ, Macquarie and AMP—that is the big six—the people who work in those entities and provide financial advice, operate under a limited number of licences across the top. I just wanted to put that on the record, because the cost of licensing then is perhaps not the biggest issue in terms of the provision of financial services. I am interested to find out what is happening with the RG146 licensing structure, because it was December that we tabled that report and it is now August. I know that the government is considering our report and the Murray report, but in the meantime what is going on with RG146 and licence provision? What is going on in terms of enforcement action in this space, particularly with the big banks? I notice in your releases that Macquarie and Westpac have had financial advisers recently banned or sanctioned. It is a big question.

Mr Medcraft : The government has allowed us to access more funding for surveillance and enforcement in this area, so I will pass over to Mr Kell.

Mr Kell : On the report around financial adviser professional qualifications and standards, that is still with the government to consider the response there. ASIC has signalled that we are obviously very supportive of higher standards in this area. We have been saying it for some time and talking to you for some time about it. So we are keen to see that move ahead, but it is ultimately now a response for the government. In the meantime, the current training standards still apply until a new regime is introduced. We think that one of the positives that have occurred in this area is that those qualifications now have to be up on the register, so there is more visibility about it, and that is going to help. But obviously we are all looking towards having in place a higher standard, starting with a minimum tertiary requirement. In terms of the broader question you have asked—

Senator O'NEILL: Before you go to that, at the moment how many people have acquired RG146s in the period since our report was tabled and now? Could you take that on notice?

Mr Kell : Yes. Anyone who is in the industry at present has to comply with the training standards set out in RG146, but you are interested in who has come in as a new player? Okay. We will take that on notice.

Senator O'NEILL: With the standard that was described to us as a free course that could be acquired in eight hours online. I am very concerned about the degree.

Mr Kell : We are in full agreement that it is inadequate.

Mr Medcraft : So that is still the law?

Senator O'NEILL: That is still the law. That remains the law, so the training standards are still grossly underdone.

Mr Medcraft : There is obviously a decision pending by government, but at the same time I think it is important to say that the government has allowed us to access further resources to undertake surveillance and enforcement of what we have. I think that is quite important.

Mr Kell : In that broad area of what we are doing on the enforcement and surveillance front, we have in place, as I think we signalled before to this committee and other parliamentary committees, a major wealth management project underway, which involves a focus on the six largest financial planning entities, who control a very significant part of the market—the four major banks, Macquarie and AMP. We have a number of projects under that wealth management banner, including a focus on what those entities have undertaken over the past few years in dealing with poor quality advisers—how they identified them; have they reported them to ASIC; what sort of remediation have they undertaken in relation to the customers of those advisers; is that adequate and so on. That is a major part of the work.

Another stream of work is around whether those firms have charged their customers fees for advice without actually providing the advice. That issue has come up recently with ANZ, but we are looking at that more broadly. There is a range of work under way there, but we are also continuing with our enforcement work against both licensees and individual advisers. You noted that we have had a few outcomes in the last few days: another outcome against a Westpac adviser for poor life insurance advice and misconduct in that area, and recently an outcome against a Macquarie adviser that came out of our investigation there. We are continuing our licence cancellations.

Senator O'NEILL: Can I just go to those two? Senator Williams has asked a series of questions about SMSFs. We have talked about Mr Holt, who was the people's friendly accountant down the road. You are the average Australian; maybe you were in the bottom class in maths in year 9 and you do not really understand percentages too much. You have a bit of money. If you go down to your friendly accountant you might end up with Mr Holt. That is a bit of a problem.

Senator WILLIAMS: You have worked hard to save a bit of money.

Senator O'NEILL: Exactly. You hear about Mr Holt and you think: 'I won't go to my friendly accountant, because that could be a dangerous place for me. I'll go to one of the big banks. They should give me confidence, so I'll go one of these four big banks, or AMP or Macquarie. I'll be safe there, and they'll look after me.' Yet it is only the 15th of the month and already you have these two very significant releases here that indicate that, from Macquarie:

… Mr Hickman engaged in misleading and deceptive conduct by witnessing the signature of a client he had never met in person and by creating an order sheet which falsely stated that 14 clients called him on the same day between 7.00am and 9.50am and provided him with the same execution only instructions in relation to an options transaction.

That is very alarming to hear. Let's just deal with that one. We have talked about the culture of these places. How can it be that you go to your NAB, Westpac, ANZ or Commonwealth Bank just down the road, you meet your friendly teller and you get caught up in something like this? What is going on in these places that this can still be happening?

Mr Kell : That is exactly the right question. That is an outcome that followed the major investigation and subsequent enforceable undertaking that we had with Macquarie. As part of that we have noted publicly that we had several investigations underway in relation to individual Macquarie advisers. Some of those are still continuing. That is one of the outcomes. As part of changing that business, of requiring it to undergo a major enforceable undertaking, of trying to answer the question that you have asked and get them to fix the way they do business, we have also taken individual action against some advisers. You have hit the nail on the head. That is exactly the sort of conduct we want to prevent, and that is why we have taken that action.

Mr Medcraft : And I do think, as I said earlier, that the banks are struggling to deal with a cultural problem with many of the parts of their front line. That is, frankly, a fact; they are.

Senator WILLIAMS: Mr Medcraft, have you threatened to remove their licence?

Mr Medcraft : The bank's licence to do business in Australia? In fact, we have licence conditions at the present time on the CBA, right?

Mr Kell : As to the activity undertaken, just by Mr Hickman: there is always a time lag. This was around 2009 to 2012, and it was uncovered as part of our investigation. What we have done there is: we have not removed their licence—

Senator WILLIAMS: They were never threatened—

Mr Medcraft : We have required them to undergo a major review of all their operations to remediate clients and to report to us the advisers that have engaged in this sort of conduct. So there is a whole suite of actions underway in relation to that issue. I just wanted to make sure that there was not a misunderstanding: as to that adviser—and, in fact, in most cases—it was not the case that they were undertaking that sort of activity last week; this was in relation to some activity a little while ago, and we have now achieved the outcome of taking them from the industry.

Senator O'NEILL: I just wonder, Mr Kell, if it is not like this: we can all remember a hot summer's night in Australia and hearing the sound of a mozzie buzzing around the room; it is a small thing by comparison to your great big body. Now we have these major entities dealing in, I am sure, billions of dollars in the course of a year. Is ASIC just a mozzie that is going around the body of this? What is going on here that they can continue to do this?

Mr Kell : The answer to that, as we have said on numerous occasions, is: there is not one magic solution. We have a major wealth management project underway, with surveillance and enforcement outcomes already occurring. We have licence conditions and enforceable undertakings in relation to individual firms. We have the process to establish higher standards through consideration of the PJC report. We have the establishment of the financial adviser register, which, for the first time—

Senator O'NEILL: So—

Mr Kell : Sorry; if I can just finish—

Senator O'NEILL: I appreciate, Mr Kell, that you are doing a lot, but what I want to know is: what is the scale and the speed of the big six's response? And how do they fit on an international stage with regard to probity, excellence in service, and quality assurance, by comparison to the international market? Are the Australian banks doing their bit? Are there better models elsewhere?

Mr Price : If I could go to one of Mr Kell's points earlier: an important thing, particularly with financial advice, that you have to consider when you look at these issues is the date the advice was provided, because, as you are probably aware, recently the Future of Financial Advice reforms have been introduced into Australian law, and one of the key aspects of those reforms is an obligation for advisers to act in the best interests of their clients.

Senator O'NEILL: I remember when we put that legislation through under Mr Shorten.

Mr Price : You might actually question whether it always should have been part of the cultural mindset of firms, but the fact of the matter now is: it has been passed into law, and so I think that in itself will drive a significant change within large organisations that have financial advisory arms.

Mr Kell : There are two questions you have asked there, or it is a two-part question. One is: are the large entities responding? And we would say at this stage: we are holding their feet to the fire; the responses are improving, but we still have work to do—there is no two ways around that—to make sure that those responses are improved and we work through some of these legacy issues. The second issue is: how do we compare to overseas? It is a little difficult to give a run right around the world; I am happy to take a little bit of that on notice. But this is not a problem that is unique to Australia and I would say that, without a shadow of a doubt, for example, the experience in the UK has been considerably worse—considerably worse. So we have lessons to learn from other jurisdictions.

Mr Medcraft : Even if you look at the United States, there have been massive issues as well. There is an issue globally with trust and culture in banks—it is a fact. Whether it is on the wholesale side of banks or the retail side of banks, there is a massive cultural problem. In many of the outcomes you are seeing, on the wholesale side it is the manipulation of the bank bill swap rate or LIBOR or foreign exchange; on the retail side it is what happened in the UK with the insurance. There is clearly a global problem with culture, conduct, trust and confidence in the banking sector. Clearly, at the top of banks to varying degrees they are well aware of it and trying to deal with it, but I do not think these things turn around overnight. Clearly, they have a problem with trust and confidence, and that is something that most of them recognise, frankly, and it is damaging them.

Senator O'NEILL: You have talked about incentives and disincentives to behave in particular ways, and I think Mr Ruddock's comments earlier went to that issue as well. What structures are in place to prevent senior leaders in banks and other entities from taking the money and running when they can just seek a financial advantage over a cultural change and an ethical engagement over the long term?

Mr Medcraft : I guess in many banks these days there are compensation arrangements where, often, essentially the bonus is for a number of years and, if something goes wrong, there can be a claw-back against that particular individual. That is something that often has been significantly rolled out post-crisis. That is an important, if you like, incentive to make sure that you do not just take the money and run. That, I think, is very important.

Senator O'NEILL: Is that the case in any of the big six in Australia?

Mr Medcraft : I expect most of them have deferment and recapture mechanisms. As I said earlier, in the United States they are taking that one step further and looking to expand it beyond just the individual involved to the management that was involved at the time the misbehaviour occurred. One of the issues that has been talked about is around why there is a problem with the culture in banks today versus 20 or 30 years ago. One of the issues that many comment on is that, many years ago, banks, particularly investment banks, were partnerships and there was a collective responsibility of the partners to make sure that the right thing occurred. That is why in the United States they are looking to perhaps recapture it from the group as opposed to from an individual. Again, it comes back to human behaviour.

Mr Kell : The other issue about incentives, I think, underlines the importance of reforms such as FoFA, which have directly addressed conflicted payments and which, we believe, are already starting to make an impact. The FoFA reforms have also helped to bring to the surface that issue of fees being charged without a service being provided. It is also why we have focused in on the quality of advice in the life insurance sector and highlighted the problems of very high up-front commissions creating lower quality advice in that sector as well.

Senator O'NEILL: I have singled out Macquarie and Westpac for no particular reason other than that these releases have happened in the last month, so I do not want to indicate that I am prejudicing any particular bank or entity. But I refer to the Westpac financial planner Mr Hodgetts, who was permanently banned. His job included sourcing and submitting personal insurance business for Westpac in Victoria and he submitted nine false policies between May and September in 2014. The false policies contained invented details including imaginary conversations and false signatures and none were either requested or approved by any existing or new Westpac customer—fairly outrageous behaviour at your local bank. No wonder people are a little concerned. This was not with regard to financial advice around managing your superannuation; this was with regard to life insurance. You were undertaking a life insurance investigation of six groups—is that correct?

Mr Kell : On the life insurance issue, we published a major report late last year where we looked at more than 200 files around life insurance advice and publicly released that report. We found that 37 per cent of those files—and we were very careful to select the files fairly—did not pass the legal tests around providing appropriate advice or acting in the best interests of the client.

The industry responded by commissioning its own review, looking at potential reforms. The government announced the industry's response a little while ago, and we understand that has been considered in the context of the financial system inquiry because Mr Murray also picked up on our report and made a recommendation that changes in life insurance advice remuneration should be changed to a level commission. So we are looking forward to some reform in that area because, frankly, we had grown sick and tired of finding poor quality life insurance advice whenever we took on surveillance of firms.

In relation to the individual matter you are talking about, I will highlight one issue here. The conduct we agree, that is why we took action, was outrageous. One of the key issues, though, and this goes to culture, is in large firms you will find, from time to time, that one of the questions is how you deal with that. Do you put it aside and pretend it is not happening or do you promptly breach report it to ASIC? I think, in that case, we did a breach report, which allowed us to deal with it. So one of the issues that we look for here as well is if there has been an adviser who has been engaged in misconduct, how is that being dealt with? Is it dealt with effectively, with good remediation and quickly or not particularly effectively at all or ignored? That does give us an indication of culture. So that is the individual, but we have also looked at the practices on a wider scale in life insurance.

Senator O'NEILL: Can you indicate that Westpac have changed practices as a result of this?

Mr Kell : Changed practices? Westpac, like the other financial advice firms, are very, very clearly on notice that they have to do a better job of identifying poor quality advice, that they have to do a better job of ensuring that that is reported upwards and reported to the regulator as promptly as possible and that they have to do a better job of ensuring that any customers that are affected are remediated quickly. That is at the core of our wealth management project; looking at how those practices have been taking place. We have put the industry on notice and, I think, you have put the industry on notice that we all expect a lot better in that area.

Senator WILLIAMS: Ms Armour, can you give me an update on BBY?

Ms Armour : BBY was a broking business that has gone into liquidation. Part of that business has been on-sold to another financial business.

Senator WILLIAMS: So the liquidator on-sold part of the business?

Ms Armour : Yes, actually the administrator on-sold.

Senator WILLIAMS: Then it went into liquidation—right?

Ms Armour : That is right. Critically for the customers of the business itself that is in liquidation, there are now questions about how client moneys will be returned to clients—the moneys that you lodge with your broker effectively as a security, if you like, for the transactions that he will enter into on your behalf. Will there be a deficiency in those client moneys or will there be sufficient moneys to be returned to clients? That is obviously a key issue from our perspective. Before liquidation when he was an administrator, in a public report he indicated that there is likely to be a significant shortfall in client moneys—I think around $16 million is his latest estimate. Yesterday, though, the liquidator has made an application to the New South Wales Supreme Court to have the court's assistance in determining what the appropriate client money situation is. That is probably the key issue from our perspective at the moment, to determine what the client money position is and then have moneys returned to clients appropriately.

Mr Medcraft : We have written to Treasury on a number of occasions on client moneys, right?

Ms Armour : Yes, so one of the concerns with client moneys in Australia is that client moneys can be used by firms for a range of purposes. They do not sit in a segregated account and cannot be used for other purposes. So this is an issue, potentially—obviously, looking forward to the liquidator getting to the bottom of the issue with the assistance of the court. But that is a potential issue here.

Mr Medcraft : It is not the first time that this has happened, where client moneys have been comingled and clients have lost their money. Treasury have acknowledged that something needs to be done and, frankly, we might elevate the urgency of that.

Senator WILLIAMS: Do you have enough power to do something about it?

Mr Medcraft : I think that is what we are saying, that the powers need to be changed.

Senator WILLIAMS: Please address that, Mr Kell, with the issue about what you need.

Mr Medcraft : A law needs to be amended.

Ms Armour : Once that issue is addressed, obviously, the liquidator will complete his work. If there are concerns about conduct at the firm before that led to its liquidation, the liquidator will report that to us and we will look at it. We have taken steps to ensure that the records of the firm are retained so that if there is some enforcement action we are in a position to assess that. The key point here is to get to an outcome quickly on the position of client moneys—

Senator O'NEILL: Can I return to the insurance? You mentioned a number of files that you looked at. Was it 200 and—

Mr Kell : I think it was about 202. It is in our report, but I can confirm the actual number.

Senator O'NEILL: How many entities did that cover?

Mr Kell : From memory that covered eight, but let me check on that—

Senator O'NEILL: Amongst those, were there any—

Mr Kell : Sorry, seven.

Senator O'NEILL: Seven groups—could you name those seven?

Mr Kell : We did not name the entities in our report because we chose the entities at random, if you like, to get a cross-section of the industry, both large licensees—

Senator O'NEILL: And small.

Mr Kell : and small licensees. The aim of the report was not to target a particular licensee, but rather to ensure that we had a representative sample of what the industry looked like.

Senator O'NEILL: Just to be clear about what you have done: the action at this point in time is that your report has been tabled, the government has it and is considering it, along with our report, others and the Murray report, but there has been no response from the government at this point in time?

Mr Kell : On the life insurance issue, there was a response to our report from the industry itself. They convened a working group—the Financial Services Council and the Association of Financial Advisers Ltd—

Senator O'NEILL: You called that a review, I think, in your first answer—

Mr Kell : They commissioned John Trowbridge, the former APRA member, to look at that. He came out with a series of recommendations. The industry themselves considered that and the government has announced that it is also considering the industry's proposal to reduce commission levels and to introduce what they call a 'clawback' arrangement to stop policies being churned or switched inappropriately. The development of a code has various other elements to it, which I am happy to table.

Senator O'NEILL: You could give that on notice. These are all still in the proposal stage, not enacted?

Mr Kell : That is right. They are being considered by the government and, indeed, by the industry and regulators to work out how they can reach a landing and then implement it. Because there was a recommendation in Mr Murray's report that went to remuneration for life insurance, it is also being considered in that context. In effect, the choice is: should Mr Murray's recommendation be taken up, or should the industry proposal be taken up or a combination of the two?

Senator O'NEILL: It will be interesting to see what the government comes up with. To the best of your knowledge, have there been any directives given to advisers to improve their practices in the interim period?

Mr Kell : We have given a pretty clear message that standards need to be lifted! One of the messages that we sent very clearly is that we are a bit sick and tired of insurers pointing the finger at the advisers and the advisers pointing the finger at the insurers, and each saying it is the other one's fault as to why there are poor practices in the sector. That needs to stop. There needs to be a collective rethink of how advice is provided on life insurance so that it can better meet the needs of the customer rather than this cross-industry fight.

We have also, importantly, continued—as we said we would do until there is reform—with enforcement work. That has included, for example, work against major licensees, imposing licence conditions on the Guardian, which is part of the Suncorp group, and they are primarily involved with providing life insurance advice, and also, as you have noted, taking actions against individual advisers for poor quality life insurance advice. There is more in the pipeline.

CHAIR: Senator O'Neill, your last question please.

Senator O'NEILL: There is so much more I want to ask. I want to ask about dark pools—

Mr Kell : We are happy to talk to you.

Senator O'NEILL: We will have to do that. I might have a couple more questions on that on notice, but I will switch topics. Can I ask for an update on high-frequency trading and dark pools.

Ms Armour : We are doing a review of the work we did in 2012-13, looking at dark pools and high-frequency trading, at the moment. We are planning to publish an update of our report and conclusions in a couple of months. Broadly, in 2012 we had a concern with dark pools in the market because we were concerned about the number of small trades that were occurring in the dark and whether or not that meant there was a disadvantage, if you like, to people participating in the lit markets. We introduced a rule called 'requiring minimum price improvement' for when someone trading in the dark in a small-sized trade needed to go one better, if you like, as a price level compared to the lit markets, and since that rule has been introduced we have found a significant movement back of small trades into the lit markets. It has had the desired impact. We are quite pleased about that. We introduced a number of other rules. One that has also had quite an impact is a rule that requires operators of dark pools to disclose to their clients who else is trading in the dark pool, and just the anecdotal feedback we are getting is that that has been particularly appreciated by the investor population.

On high-frequency trading, we are finding that the level of high-frequency trading in the Australian market is much the same, around 27 per cent of total turnover. We are finding that there are fewer firms operating here that you would call high-frequency trading firms but they are profitable firms so they are operating successful business models. We have found relatively minor issues with conduct that could be associated with high-frequency trading which we are addressing as we see it. For example, we saw some pinging of a particular large stock, which was just designed to see what orders might be out there, and it was persistent. Once we started speaking to the various brokers involved, that disappeared. Largely, to the extent that there is poor conduct, we feel it is conduct we are able to address on the spot. We do have tools available to deal with poor conduct in this area. It is a little bit of a watching brief on high-frequency trading. This report is looking at high-frequency trading in the futures market as well, which we have not looked at so extensively. We are finding a significant level of trading in that market, and there are a few areas of concerning conduct which we are reviewing. It is a work in progress but certainly we are still comfortable that the levels are relatively appropriate in light of the experience in overseas markets. Our order to trade ratio has fallen, so generally the steps we are taking seem to be working reasonably.

CHAIR: Thank you for that. Could I just take you back briefly, Mr Medcraft, to IOOF. I realise you have an inquiry underway and so you cannot go into too much detail. I would like to ask you to consider a private briefing for the committee to cover those aspects that you can in camera at another time. But that draws me back to a conversation we had during a previous hearing looking at governance arrangements. In particular, when we have looked at a couple of other entities, we have discussed the structure of the compliance arrangements, oversight and degree of independence. As I look at the structure of IOOF and the multiple entities within it and at who was responsible for compliance, who they reported to et cetera, it strikes me that this is another case where a benchmark or best-practice model for governance and compliance may be worthwhile, and we discussed that previously. Have you done any work to investigate the feasibility of something like that?

Mr Tanzer : On IOOF specifically, I should say that one of the issues that we are specifically looking at is the risk management and compliance arrangements, which include all of those reporting arrangements. We have a general project at the moment that is looking at conflict of interest management within vertically integrated institutions, as well as the specific issues related to financial advice within vertically integrated institutions.

On your question about a private briefing, we are happy to do that as an in camera hearing to the extent that we can.

CHAIR: Sure. The specific question we discussed last time was whether you use someone like the Institute of Company Directors or someone else to come up with a best-practice model that companies essentially should comply with. If they had a commercial reason to do otherwise then they would need to demonstrate to the satisfaction of their board that they were meeting the same outcomes. Have you done any work toward looking at putting up a best-practice model?

Mr Tanzer : Not very advanced work. We have regular interactions with the AICD but also the Bankers' Association and the Financial Services Council. It is something about which I have talked at senior level about what they thought might be interesting or how that might work, but I cannot say that we have significantly advanced that piece of work at this stage such that we could have a useful discussion right now.

CHAIR: Could I ask you to take it on notice, then, to perhaps firm up a plan for that engagement and come back to the committee with whether it is a feasible and worthwhile investment of your time, because it appears as though this governance space is essential in terms of driving culture and holding people to account for outcomes.

Mr Medcraft : I agree. Cathie Armour was reminding me—do you want to just—

Ms Armour : It does not answer your question fully, but I was just reflecting on the fact that there is an Australian and an international compliance standard which does provide a framework, at least, on base expectations for organisations. But it does not deal with your specific governance aspect.

CHAIR: Sure. The other aspect that the IOOF case raises in my mind is the issue of trust, where you do not even have, in many cases—or in some cases—a living client who is actively monitoring what their financial adviser is doing. In the case of trusts, are you applying any different standards or any different approaches to ensure that the products that are pushed or emphasised are actually in the best interest of the trust, as opposed to the best interests of the firm who is managing the trust?

Mr Price : There are various safe law overlays in terms of the regulation of trusts. But, from a Corporations Act point of view, the law applies equally, if you like, across the various parts of the financial economy.

CHAIR: So if a trustee was encouraging advisers within that trustee to use its own products, as opposed to something that was going to maximise benefit for the trust, that would be illegal?

Mr Price : If you are talking about financial advice, then personal financial advice that is provided to any person needs to be in the best interests of the client.

CHAIR: What if the client is a trust?

Mr Price : It would relate to whoever the legal entity, the client, is.

CHAIR: I am encouraged to see your innovation hub, and I have had very good feedback from industry about that. I notice on your website talking about it that you have the Digital Finance Advisory Committee, who obviously interacts with industry, but the purpose of the group as described appears to be to help start-ups in the fintech space navigate ASIC's regulations. Given the time to market in this innovative space is very important, are you also using this advisory committee to look at refining or modifying your regulation to specifically suit the market requirements of innovators in that fintech space?

Mr Price : Yes, one of the specific aims of the innovation hub is to streamline ASIC's regulatory interaction with these bodies, and that may include looking at regulatory requirements; however, what we have clearly said is that we will not compromise on fundamental consumer protection objectives.

CHAIR: In some of the early stage venture capital schemes, are you actively working with people like the department of industry?

Mr Price : We have had discussions with various venture capitalists. In fact people who have been involved in the provision of venture capital are represented on ASIC's Digital Financial Advisory Committee, which incidentally met in Sydney this week for the first time.

Mr Medcraft : And there are also representatives from Prime Minister and Cabinet or other government agencies.

Mr Price : Yes. Treasury attend the Digital Finance Advisory Committee as an observer, as do AUSTRAC. APRA have indicated some interest in having representatives attend as well. Clearly, what we are trying to do as far as possible is to make the interaction between these innovative businesses and government as a whole easier. Clearly that is most deliverable in terms of our own regulatory requirements, but to the extent that we can involve other government agencies who may have an interest in these developers we will do so.

CHAIR: Thank you for your participation today. I believe you have tabled two documents, and if there is no objection the committee will accept them. Mr Medcraft, if you could consult with the committee secretariat about a date for providing answers on notice, that would be appreciated. I thank Hansard, Broadcasting and committee members.

Committee adjourned at 11 : 32