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Economics Legislation Committee
31/05/2017
Estimates
TREASURY PORTFOLIO
Australian Securities and Investments Commission

Australian Securities and Investments Commission

[09:01]

CHAIR: I welcome the Assistant Minister to the Prime Minister, Senator the Hon. James McGrath, representing the Treasurer, and officers of the Australian Securities and Investments Commission, ASIC. Minister or officers, would you like to make an opening statement?

Mr Medcraft : Good morning. I am pleased to appear before the committee today. With me are Deputy Chair Peter Kell and commissioners Cathie Armour and John Price. Also appearing are our senior executive leaders: Sharon Concisom, Warren Day, Gerard Fitzpatrick, Greg Kirk, Jo Bird and Michael Saadat. I want to quickly focus on enforcement outcomes. In the last 12 months to May 2017, ASIC has secured 240 enforcement results. In this period, we obtained over $804 million in compensation, remediation or return of investor funds, and over $9.7 million in fines, penalties and infringement notices. Also in the 12 months to May 2017, ASIC counsel suspended or placed conditions on 25 AFS licences and six additional licensees voluntarily handed in their licence, and 22 people were actually banned permanently.

In the three months since we last testified, some specific outcomes in May include: the Queensland Supreme Court ordered ex-officers of the former fund managers MFS to pay $205 million in compensation and banned them from managing companies, and Motor Finance Wizard refunded over $11 million to more than 1,500 consumer lease customers after an ASIC probe revealed the company failed to meet responsible lending obligations. Also this month, ASIC accepted an enforcement undertaking from Macquarie Bank in relation to the bank's wholesale foreign exchange businesses, following an ASIC investigation.

Last month in April, the former managing director Steven Noske was jailed for 18 months and fined $20,000 for insider training. A Queensland businessman Craig Gore was arrested and charged with 15 offences, following a long ASIC investigation. Mr Gore faces 12 counts of fraud relating to obtaining $800,000 from self-managed fund investors. The Federal Court fined Mr Lindsay Kobelt $167,000 for engaging in unconscionable and unlicensed conduct, very importantly, in providing book up to Indigenous people in remote South Australia—a case that we had been pursuing for a number of years. Also in April, we are very pleased to say, again for the Indigenous community, Queensland car-yard lender Channic was ordered to pay over $1.2 million after breaching consumer credit laws and dealing unjustly with vulnerable Indigenous consumers.

In March, Citibank refunded $5 million to around 230,000 customers for failing to properly disclose information on international credit card fees, again, following an ASIC investigation. Also, Dr Roger Munro was arrested and formally charged with five counts of fraud, following an ASIC investigation. Each charge carries a maximum of 12 years jail. Also in March, ASIC accepted enforceable undertakings from Westpac and ANZ in relation to the banks' wholesale foreign exchange businesses, again, following a long investigation. This also resulted in both firms making community benefit payments of $3 million each to Financial Literacy Australia. Also in March, we started civil penalty proceedings against Westpac for contraventions of home loan responsible lending laws and its failure to assess if borrowers could repay their loans.

Chair, these are a lot of enforcement outcomes but they do not always go our way. Our cases are decided by judges, juries and magistrates, and in the criminal area are prosecuted by the Commonwealth Director of Public Prosecutions. Last week, a Sydney magistrate rejected ASIC's 11 charges of procuring insider trading against former investment banker Darren Thompson. Win or lose, these outcomes show that we are and have a continued commitment to market integrity and to ensuring that consumers actually have trust and confidence in our financial system. The actual outcomes demonstrate that we are on the job and where we see misconduct we will look to take action no matter who it is. No-one is beyond the law and the public would expect nothing less.

ASIC is primarily a law enforcement agency. Seventy per cent of our resources go to surveillance and enforcement. As the committee knows, following the recommendations of the Murray inquiry there is currently a review commissioned by the government into ASIC's enforcement regime, including the issue of ASIC being able to ban people from managing firms providing financial services. At the moment, we can only ban people from directly providing service not from managing that process—this is very important. At the moment, we can only deal with the bad apples, but this new power will allow us to deal with the problems with the tree. As we know, often it is a problem with the tree more than just the apples—bad tree, always bad apples. We welcome this aspect of the review.

We note the draft proposal has not been issued yet, and we very much look forward to it. ASIC see this power as being vitally important, and it is crucial to our effectiveness of such a banning power that triggers allowing us to ban management that is inappropriate. It will not be affective if we can only ban those who themselves have directly committed breaches of law because we largely have that at the moment. The role of managers should be about taking reasonable steps to ensure compliance with the law by the people they are managing. We need to be able to remove managers who fall seriously short of that standard and whose management failings have contributed to misconduct in a firm and thus losses to investors and consumers and, therefore, loss of trust and confidence. Chair, I am happy to take your questions.

CHAIR: Thank you very much for that. Would you be able to circulate your opening statement?

Mr Medcraft : Yes, it is available, I believe.

CHAIR: We will open questions.

Senator KETTER: Perhaps I could start with the issue of the bank tax and, more specifically, the investigation you are conducting in respect of what has been described as a leak. I see you are about to jump in on me there, but let me ask the first question. When did you first become aware of the leak?

Mr Medcraft : I read the papers the following morning and I then asked Cathie Armour, who is overseeing markets enforcement, to have a look at what was happening in this area. We initiated something I think early the following day, and then I had a call from John Fraser. We had already launched something in respect of it, frankly. I had a call from Andrew Colvin as well, the following day. So we were working with the AFP.

Ms Armour : We did notice changes to the share price of the banks on the morning of 9 May, so we were looking at that as part of our normal surveillance.

Mr Medcraft : It came up on our monitoring system.

Senator KETTER: Did you suspect at that point that there had been a—

Ms Armour : Not at that point, although there were numerous press reports around that time.

Senator WHISH-WILSON: You said that you noticed a change in the morning. Were there any changes in the ADR markets in New York that night?

Ms Armour : Not that drew our attention. In fact, despite some of the reporting, the changes in the share price were not, in percentage terms, really significant.

Senator WHISH-WILSON: No, it was three per cent or something like that, wasn't it?

Ms Armour : Yes. And the volumes, basically—when the banks opened on 10 May, once the information was definite, the share price fell initially between 2.3 and three per cent but recovered to be flat that day on all markets.

Senator KETTER: Mr Medcraft, when did you become aware of the comments by Mr Shanahan on Sky Business the evening before the budget?

Ms Armour : I am not sure about Greg, but I personally was not aware of those comments until 10 May, although others in the market obviously had, and they have told us since that they had seen those comments.

Mr Medcraft : I had not. I think I discovered them the next morning.

Senator KETTER: So, you did not put two and two together at that point and—

Mr Medcraft : Sorry: we did not see the comments of Shanahan.

Senator KETTER: You did not see the comments? No, but—

Mr Medcraft : My view was that I was concerned, really, based on the article in the AFR of Tony Boyd, because it was quite well informed—the fact that he knew the meeting was occurring at six o'clock—and it was before the lockup. So, it sort of rang an alarm bell in me, actually, because, the night before, the information Shanahan had was not that accurate, whereas the information Tony Boyd had was far more detailed.

Senator KETTER: On the morning of 9 May?

Mr Medcraft : At one o'clock, I think it was.

Ms Armour : It was about 12.20.

Senator KETTER: Mr Medcraft, you mentioned that that rang alarm bells for you—but not sufficiently loudly, I take it, to initiate investigation?

Mr Medcraft : Sorry—I saw the article the next morning, I think, wasn't it?

Ms Armour : Yes.

Mr Medcraft : Yes, the next morning. I do not actually monitor the press by the minute. But the next morning, I said to Cathie, 'I think we'd better have a look at this,' and we started. And then we went back and looked at market movement the day before. We had seen the movement, but the movement, as Cathie said—three per cent for the bank stocks in a day—is not out of line.

Ms Armour : No. Exactly. The movements, over that day on 9 May, actually were not all that significant. Obviously these are large stocks, so their normal volume is a significant amount. But the movements were not significant. For example, we saw the price change from the opening to the time of Mr Boyd's article. For all of the banks, the most significant movement was a two per cent movement. So, it was from zero to two per cent, so there were not huge movements. Obviously if they were caused by rumours then that is not desirable.

Senator KETTER: If I understand this correctly, you were concerned on the night of 9 May that there had been—

Ms Armour : The opening price was lower than the night before. It was not, again, a significant reduction, but it was a reduction—the sort of reduction that we would look at and look to explain.

Senator KETTER: How serious do you view this? Do you accept that there was a leak?

Mr Medcraft : We are investigating. We do a lot of investigations and that is what we will do. We think this is quite important to market integrity. As I say, we launched an action before anyone asked us about it. We were already on the job.

Senator KETTER: And you consider it quite serious?

Mr Medcraft : Well, yes. It is market integrity. Market integrity goes to the heart of the Australian market. That is what we do. If there is a problem, we want to try and find it. Also, we want to learn from it as well. There are aspects to this. There is the aspect of looking at the investigation and there is the aspect of thinking about, 'What can we learn from what has happened?' frankly.

Senator KETTER: Can you take us through what happened since? You read the papers on Wednesday morning and you took steps to initiate—

Mr Medcraft : An investigation, yes.

Senator KETTER: investigation with Ms Armour. Could you take us through what has happened in that investigation?

Mr Medcraft : Can we comment much on investigation beyond—

Ms Armour : We are a little bit reluctant to go into details, but obviously, we have been examining accounts that traded in the five stocks in the period before the rumours commenced. We are looking to see if anyone did profit in a way that is unexplained or unusual. We are talking with Treasury and are gaining information about who knew about the proposal and the processes that we use, and we are working with the AFP in connection with that.

Senator KETTER: Are you looking at whether there was any short-selling trading of bank stocks?

Ms Armour : Yes, that is part of our inquiries.

Senator GALLAGHER: Are you also speaking with the Treasurer's office?

Ms Armour : We will be speaking with all the parties that may be relevant, but we have not decided exactly who we need to speak to in a degree of detail quite yet.

Mr Medcraft : You can draw your own conclusions. It is anyone who had access to that information; everyone who was in the circle who knew that information is obviously relevant.

Senator GALLAGHER: Do you have any idea how long the investigation may take?

Ms Armour : We do not at this stage. It is something that we are working on right now, but we will need to see where our inquiries take us to get a sense.

Mr Medcraft : As I said, there is the backward-looking step, but then there is the forward-looking step to think about what we could learn about this and perhaps what we may want to do in the future. I think that is important.

Senator KETTER: Can you tell us about the involvement of the AFP when that referral occurred?

Mr Medcraft : I think the morning after. Was it on the 11th that I got a call from Andrew—

Ms Armour : We coordinated with them over the course of the day on 10 May, as we normally would do in these sorts of matters. We are coordinating our work with them.

Senator KETTER: You made contact with them, but, as to the actual referral to the AFP, did that occur on the 10th?

Mr Medcraft : We created a joint investigation on the day after, didn’t we?

Ms Armour : Yes, we are making inquiries jointly.

Mr Medcraft : I had already been in contact the day before, and the following morning Andrew and I spoke and we created a joint investigation.

Senator KETTER: It was the 11th, then? Would I be correct in saying that?

Mr Medcraft : We can come back and confirm. I think that is correct, isn’t it?

Ms Armour : Yes, it is the 10th or the 11th that we started speaking. There is nothing—

Mr Medcraft : Straightaway. We have a pretty close relationship with the AFP.

Senator KETTER: Which is the lead agency in relation to the investigation?

Ms Armour : We both have different roles. We are certainly the lead agency in respect of the market outcomes.

Senator KETTER: Have you interviewed or sought telecommunications records with Treasury officials?

Ms Armour : Because this is an investigation we are going to go through our normal process whenever we make inquiries. We will of course look at all the material that we need to look at to follow up. If you do not mind, I think at this stage it is possibly not all that constructive for our inquiries to go through exactly what we have looked at because we are at early stages. There are some things that we have done and other things that we have not done but will do at the right time from a tactical perspective.

Senator KETTER: I appreciate it is a very sensitive situation.

Mr Medcraft : We are really in that gathering and interviewing process.

Senator KETTER: I think there is public interest in having some degree of visibility of what is happening.

Mr Medcraft : As I said, from my point of view market integrity is golden and we will hunt this down as much as we can, frankly.

Senator KETTER: I take it that the Treasurer's office is not excluded from this investigation?

Mr Medcraft : No-one is excluded.

Ms Armour : I do not think there is and there has been no suggestion that anyone ought to be excluded either. I think there is the same degree of interest from everyone.

Mr Medcraft : I think everyone is concerned with finding out where the leak came from, frankly. It is not good for Australia.

Senator GALLAGHER: Ms Armour, can I just ask one thing. Earlier in your evidence you said that you had noticed some movement in bank stocks that had come up on your system in that morning. But then you said—and I do not want to verbal you—but I think you said it was not really that unusual or significant move. Could you just explain those two—

Ms Armour : It is always hard to define what is a significant move. Lots of things go into that price of stocks. But we did notice the prices fell on the opening on Tuesday morning.

Senator GALLAGHER: Because there was an article, in the Fairfax press I think, speculating about a bank levy that morning.

Ms Armour : Yes, and this was an interesting area because there were a number of rumours or questions or queries generally in the media about this potential aspect of the budget. One of the issues for markets is that there are often rumours about a whole range of things. So whether they are a serious issue that is going to cause some sort of market instability or a market trade-in in a way that is unfair is another thing. In the morning there was a fall in the prices of the bank stocks, but not a significant fall. One of the stocks had just gone ex-dividend so again it is hard to differentiate if the fall related to that factor as distinct from some of the rumours.

Senator GALLAGHER: But you have obviously got a system in place that alerts you to when there is—

Ms Armour : Absolutely.

Senator GALLAGHER: And so that was triggered that morning.

Ms Armour : That is right. The surveillance staff looked at that, that morning, considered whether it was a concerning movement, formed a view that it was not at the proportion that would have concerns from their perspective, and just continued to monitor.

Senator KETTER: Is there a designated group within your office that makes this determination?

Ms Armour : Yes, absolutely. There is a designated group and their job is, all day every day, to surveil the movements in both the equities and the futures market.

Senator KETTER: Can you tell us who that group is?

Ms Armour : We call it our market surveillance team. They are headed by a gentleman who has been doing this job for quite a number of years and is very experienced. They are the team that is looking routinely to see if there is unusual trading. It analyses our market data and extracts patterns of poor behaviour. That is sort of the bread and butter of what they do.

Mr Medcraft : This is the team that actually uses our advanced analytics tool, algorithms that detect patterns in markets and can actually go down to individual trading accounts. We have a pretty sophisticated system we installed a few years ago. It is developed by a group that writes for high-frequency traders. It is pretty sophisticated.

Senator KETTER: I am finding it a little bit hard to hear. I am not sure if your microphone needs to be turned up.

Mr Medcraft : I was just saying the system we use is actually a system that we bought a few years ago. It is flexible algorithms that detect trading patterns and can actually drill down into individual accounts. So we can actually go down and detect whether somebody's trades were inconsistent with their normal trading pattern. Essentially, it is a way of analysing big data and then drilling down into individual accounts. If we see unusual patterns at the top of the market, that system then allows us to drill down into individual accounts to look at who traded in that day and then go back and look at their trading patterns to see whether, in fact, it was irregular trading. That is basically one of the aspects of our system.

Senator GALLAGHER: Just to wrap this area up, in terms of your investigation, can you just confirm the period of time that you are looking at that is of interest to you?

Ms Armour : Without perhaps getting into specifics that may not be helpful for our inquiries, we are looking at trading that occurred before the budget announcement. It is not necessarily limited to trading that occurred on 9 May.

Senator GALLAGHER: Okay, because some of the evidence from the Treasury secretary was in response to steps that he was taking about what occurred from the lockup forward.

Ms Armour : Yes.

Senator GALLAGHER: I am just inquiring about how your investigation aligns with that. I think what you are saying to me is that yours starts before that time—

Mr Medcraft : Correct.

Senator GALLAGHER: which is actually the period that is of most interest.

Mr Medcraft : I am not sure it was in the lockup. I think the leak happened before the lockup.

Ms Armour : One of the things we are interested in is whether there was a dissemination of information that was not public or was not the subject of rumours and whether or not someone traded based on that dissemination. So that is an earlier time.

Senator ABETZ: I have some quick and discrete areas of inquiry. The first one relates to the Union Education Fund, and I am assuming that you do not have those records with you, so could you take on notice when was the last time an annual report was filed with ASIC. I understand from my searching that it was in 2009, but could you please confirm that. If that is the case, what, if any, follow-up action has ASIC taken in relation to this matter? Part of my concern is that, if I am understanding this correctly, this body is still administering some taxpayer funds. So can I leave that with you.

Mr Medcraft : We will take that on notice.

Senator ABETZ: Thank you. The second line of inquiry is whether ASIC has read that opinion piece article by Robin Speed, who I think is the president or director of the Rule of Law Institute. He wrote an article for The Australian on 19 May 2017. Is anybody at the table aware of that?

Mr Medcraft : No.

Ms Armour : No, I am not.

Senator ABETZ: Could I draw that to your attention.

Mr Medcraft : In which paper?

Senator ABETZ: The Australian. It is entitled: 'Directors can't expend public company money for just any purpose'. They rely on the case of Cowan v Scargill, but you will find that from the article. He then asserts or opines:

Investors invest in particular companies because of the business carried on by the company. They should not have to first check on the social or political views of the directors.

It is suggested that where the expenditure of money or restriction on business activities has no reasonable connection with the business of the company, the directors have breached their duties and have not acted for a proper purpose as required by the Corporation Act.

Mr Medcraft : Thank you for raising that. We will have a look at it, and we will come back with an answer on notice.

Senator ABETZ: Thank you.

Mr Medcraft : It raises an interesting issue.

Senator ABETZ: Yes, as to whether or not that is an appropriate representation of the law as ASIC understands it. Then I understand you have RG 52, rules and guidelines 52. You are aware of that?

Mr Medcraft : RG 52?

Senator ABETZ: It is RG 52, 'Enforcement action submissions'. It is ASIC regulatory guide 52. I draw that to your attention as well. Could you have a look at that for us, please. It is in the context of this article written by Mr Speed.

Mr Medcraft : Whether we are consistent or disagree? Whether RG 52 is consistent with that?

Senator ABETZ: No, whether, in the past five years, ASIC has received any submissions under its RG 52 policy—I will use that as a term to encapsulate these matters—and whether you have received any complaints from people as to companies behaving in a particular manner, which is inconsistent with a thesis of Mr Speed's—

Mr Medcraft : I see. We get it.

Senator ABETZ: And then what are the procedures if an RG 52 complaint—if I can use that term—were made? Which officer would be assigned to that task? What assurances do we have that that particular officer is not engaged in or of a particular political or social persuasion in making that determination? I think there are some fairly important issues here.

Mr Medcraft : How we manage conflicts of interest?

Senator ABETZ: Yes, and whether public companies are now engaging for environmental reasons or social reasons which seem to be against the shareholder interest, possibly to make certain company directors and others feel warm-hearted within themselves and give them a public profile but at the expense of the shareholders and the commercial interests of the company.

Mr Medcraft : It is generally around the issue of corporate governance.

Senator ABETZ: Yes.

Mr Day : Are you asking for us as part of that answer to say how we deal with the conflicts or how we ensure that we have announced, if you like, the conflicts of our own staff in dealing with any complaints we might receive and that, to take your example, they declare their own political persuasions when they are receiving any complaints of that nature? Is that we are asking?

Senator ABETZ: Yes, and how you manage that. I think we can all very easily think of examples where somebody might have a particular environmental, religious or social persuasion and a particular company might be advocating in a different manner. If a complaint comes along, how do you ensure that that is treated—

Mr Medcraft : I understand.

Mr Day : We will take that on notice.

Mr Medcraft : We will take that on notice.

Senator ABETZ: Thank you very much.

Senator DASTYARI: It is good to you see you again, Mr Medcraft. It is good to see you all once again. I just want to ask for a bit of an update regarding the current proceedings—I know you have to be careful because some of these matters are before the court—regarding the bank bill swap rate and where that is up to. More specifically, Mr Medcraft or Ms Armour, there has been a lot of interest around the issue of the bank bill swap rate, largely because so many banks have been implicated and because of the size of it, but I think a lot of people have a bit of difficulty understanding what it actually is and why it is important. I was wondering if you could just take a minute at Senate estimates to just explain, on the record, what the bank bill swap rate is, why it is important and, obviously, whether or not there has been a decision on whether there has been collusion or tampering—whatever you want to call it. That is a matter for the courts, but why, if that has happened, is that important?

Mr Medcraft : Maybe I will start—as an ex-banker who used the bank bill swap rate. What it is, basically, is a benchmark rate that is established by quotes given around 10 am from participating banks. It establishes a benchmark by which loans are based on. It is a reference rate for many things, not just loans but investors. In fact, we did produce a diagram for that. I think we have available copies.

Senator DASTYARI: With the consent of the chair, can we table a diagram of what the bank bill swap rate is?

CHAIR: I would be very interested in it.

Mr Medcraft : Maybe we could come back to your question when we have the diagram. I would rather speak to the diagram, if that is okay with the chair. We can move on to the—

Ms Armour : Specifically, the bank bill swap rate is a financial benchmark. It is important because it is directly the financial benchmark on interest rate settings in Australia. So it is the financial benchmark that most lending to Australian businesses is based on.

Senator DASTYARI: We will go to the diagram and into specifics. The point, obviously, is that—

Mr Medcraft : Sorry. It affects, really, almost everyone. Either indirectly or directly, it almost affects, really—it is sort of, almost, the wiring of the house. It is the benchmark for so much in the economy.

Senator DASTYARI: Part of the commentary that has—

Mr Medcraft : I guess the issue with the benchmark is it is incorporated into documents. Basically, people rely on it and trust it as, essentially, something they can refer to.

Senator DASTYARI: Is it fair enough to say that, indirectly, home loan interest rates, credit card rates, business lending rates—all of these—relate to, or have a relationship with, what the bank bill swap rate is?

Mr Medcraft : With housing rates, mortgage rates are more correlated to the cash rate for most of the banks. I think we have raised that before. It is almost completely correlated to the cash rate. That is shown by the Reserve Bank research. Where it impacts is where, potentially—say if a lender is actually borrowing money against the bank bill rate and then lending to others. In fact, say in the securitised market where, essentially, they issue securities referenced on the bank bill rate—that is their cost of funds—that then potentially impacts their cost of mortgages.

Ms Armour : It is directly relevant to business borrowers.

Mr Medcraft : To business borrowing, most business borrowings are referenced on the bank bill rate.

Ms Armour : And it is directly relevant to the way Australian businesses manage their financial affairs, because it is the rate that is used for interest rate swaps, cross-currency swaps—all the sorts of things that deal with managing your financial risk.

Mr Medcraft : But, equally, on the other side, it also affects investments because it is actually the benchmark for floating rate securities. So it affects savings.

Senator DASTYARI: The argument that gets put, and it is done more on background than on the record, is: firstly, what has or has not happened is, obviously, now a matter for the courts, and so the courts will determine that now; secondly, even if it has happened, all of this is victimless. I am sure you have heard this argument before: 'There are no victims here. It's just a bunch of banks trading with one another on this or that. There are no victims here. It's a victimless act.'

Mr Medcraft : That is not correct because, depending on which way you manipulate the rate, there are winners and losers. If the rate is moved up or down, you could be on the borrowing side or the lending side. So there are winners and losers. It depends on whether you are receiving the rate or paying the rate. Whether it has gone up or down, you have lost out or you have gained. So there are winners and losers, and those winners and losers move around depending on whether the rate was moved up or down artificially. So it is incorrect to say that there are not winners and losers. That is absolutely—it is ridiculous, frankly. That is what market integrity is about—it is about a fair rate.

Senator DASTYARI: And where at the moment are the court proceedings up to?

Ms Armour : The hearing of the liability questions has been set down for 23 October. ASIC has delivered its evidence to the defendants. The three defendants have to file their evidence by 14 August, so—

Senator DASTYARI: They have until 14 August to file?

Ms Armour : Yes.

Senator DASTYARI: The three defendants at the moment are three of what we call the 'big banks'?

Ms Armour : Yes.

Senator DASTYARI: Which three banks are they?

Ms Armour : ANZ, Westpac and the National Australia Bank.

Senator DASTYARI: At this stage, the Commonwealth Bank has not been—

Ms Armour : That is right.

Senator DASTYARI: Mr Medcraft, in the past in this committee in this room, you have said that, frankly, court is often the worst option because it is an inefficient, expensive way of resolving issues. Your view was that you were very open to working out a solution with the banks but that it required them to take responsibility—

Mr Medcraft : We need a court based outcome.

Senator DASTYARI: Is that still the case?

Mr Medcraft : Yes. I am not sure what has changed.

Ms Armour : Before you move off the topic, and we have raised the question of how important BBSW is—

Senator DASTYARI: Yes, before.

Ms Armour : it is really critical to recognise that our case relates to how the BBSW was constructed before.

Senator DASTYARI: Yes.

Ms Armour : It has been changed. There have been some significant changes this year, and also the government has announced changes to the regulatory framework for financial benchmarks generally.

Senator DASTYARI: Mr Medcraft, one thing you have done, which I thought was a fantastic move under your leadership, is put together the fighting fund—I think that is the colloquial term. I am sure it has a proper name other than the fighting fund but some of us here are unionists. I think with the fighting fund you were trying to capitalise up to $50 million, is that correct?

Mr Medcraft : It was more than that. I think it was up to about $80 million at one stage.

Senator DASTYARI: Last time you were here, you made it very clear—and I think you made quite a strong message to the banks—that that is what it is there for. That you are not going to let ASIC be swamped by anyone. Let's face it, a strategy that has been used in the past by larger organisation, not necessarily against ASIC but against anyone, is, 'We will just swamp them with legal fees until they back down.' Your position last time was quite clearly that you have built a fund for that purpose and you are prepared to use it.

Mr Medcraft : Yes.

Senator DASTYARI: I do not know if you want to elaborate on that a bit more?

Mr Medcraft : No. Nothing has change. As I have said before, no-one in this country, no matter who they are, should be beyond the law. Australians would expect nothing less. No-one should be too powerful to be beyond the law and to intimidate anybody. Certainly, we will not be intimidated. Basically, again I think that all Australians would back that. Everyone deserves a fair go.

Senator DASTYARI: Finally, I note that we are going to table this graph at some point. Perhaps Mr Medcraft and Ms Armour, you could take this on notice: I am sure the information exists of a layman's explanation of the bank bill swap rate. Of why it is important, how it interacts—perhaps the graph will answer a lot of this—with the market. the consequences and significance of whether or not it has been manipulated and the winners and losers if such a thing happens.

Ms Armour : We will need to be a little bit circumspect. I am happy to give a layman's explanation, but this is a matter that is before the courts so we cannot go into some of the—

Senator DASTYARI: I understand that, but I want to take it to a different level. I see the significance of the bank bill swap rate but I feel that some of the debate around it, unfortunately, because of the technical nature of what we are dealing with, has become very easy to try and push aside. I have seen larger organisations treating the whole thing as: 'This is just a complicated internal bank matter. It does not mean anything to anybody.' I think there is a public interest in bringing that back to an explanation and an understanding of its relevance.

Ms Armour : One way that might be of assistance is if people think about the issue in terms of conduct and whether this was conduct that was acceptable for financial institutions to be engaged in. The difficulty though, of course, is that it is hard to go beyond that.

Senator DASTYARI: Once you start with the conduct of major financial institutions then it does not stop.

Mr Medcraft : As always, these things really come back to trust. We are concerned that perhaps trust was breached.

Senator DASTYARI: Thank you so much.

Mr Medcraft : I would like to go through that diagram if I may, Chair, when it comes in.

Senator BUSHBY: Back in 2011 when the LIBOR manipulation issue first broke, I asked in a number of forums—estimates and also during the banking competition inquiry—whether the BBSW was also open to similar manipulation. I got answers, I am pretty sure, from ASIC and also from the RBA that there were different characteristics in the way the BBSW was set compared to the LIBOR, which meant that it was not open to manipulation. Obviously since then we have found that it was. I am curious as to what the manipulation was and why it was thought by our regulators of the time that it was not open to manipulation.

Mr Medcraft : I am not sure I was the one that was telling you that.

Senator BUSHBY: I do not think it was you.

Mr Medcraft : I was not saying that because I was actually quite sceptical for some time as an ex-banker. But it is differently calculated to LIBOR and was less prone to manipulation.

Senator BUSHBY: Perhaps I am paraphrasing incorrectly but there was less of a concern when LIBOR broke about the BBSW because of characteristics it did have in its own right.

Mr Medcraft : Yes, that is correct.

Ms Armour : Absolutely. At the time, BBSW was based on submissions made by banks, as was LIBOR, but the difference was BBSW made submissions about their observations of a traded rate whereas LIBOR made submissions by banks about their costs of funds so it was something they knew about.

Senator BUSHBY: Was there a higher element of trust of LIBOR?

Mr Medcraft : One was market based and the other one was not, so there was a big difference between the two. I guess you had to be very smart to learn how to manipulate it.

Senator BUSHBY: But they found a way to do so.

Mr Medcraft : I guess so. It was alleged.

Senator BUSHBY: Was it ASIC that uncovered the manipulation or the alleged manipulation?

Ms Armour : Yes. The concerns about conduct in relation to BBSW were uncovered by ASIC as part of our investigations that followed up from the LIBOR matters. We conducted a series of investigations to see if allowing for the differences in the construct, whether we had any issues with past conduct and BBSW. You might recall, in 2013 and 2014, we accepted enforceable undertakings from three institutions whose submissions, we were concerned, had not been produced in an accurate way.

Mr Medcraft : As you may recall, one of the things I said at the time was that we got very slow cooperation as well. We were quite frustrated.

Senator BUSHBY: But the avenue that led to you uncovering the alleged manipulation. was that when you decided to do a deep dive following LIBOR? Was that an accurate description?

Ms Armour : I think that is an accurate description. I am sorry, I was not here.

Mr Medcraft : That is correct.

Senator WHISH-WILSON: I have two lines of questioning before I go into that. In terms of what was discussed earlier about the leak around the budget in relation to the bank levy, I did write to ASIC on the date asking whether you would look into this. I was also interested if you would be looking into the weeks leading up to the budget.

Ms Armour : As I mentioned before, we are looking at trading before that time, yes.

Senator WHISH-WILSON: I understand it is quite difficult to differentiate between speculating and hedging your risk going into a budget versus someone actually capitalising and potentially benefiting.

Mr Medcraft : That is the benefit of the system we have because we can detect unusual patterns of trading so we can go: 'That is not consistent with the normal pattern.' With the algorithms, we have that ability.

Senator WHISH-WILSON: I have heard in recent days a lot of people across different departments had access to some kind of information around this. It is always going to be very price sensitive considering it was going to be a policy that was going to affect the valuation of banks. I thought it was particularly acute.

Could I ask a couple of questions, starting first with some other budget measures—power over executives. There are some measures in the budget that will provide APRA with powers over bank executives. I think it was in Budget Paper No. 2, 'A more accountable and competitive banking system':

The Government will provide $4.2 million over four years from 2017-18 to the Australian Prudential Regulation Authority (APRA) to assist with the introduction and administration of legislation to make Authorised Deposit-taking Institutions (ADIs) and their executives more accountable.

Will ASIC have a role in developing or administering those laws?

Mr Medcraft : No, their laws will be administered by APRA for prudential purposes, which I think was outlined yesterday.

Senator WHISH-WILSON: Will these laws improve ASIC's abilities to identify and prevent misconduct?

Mr Medcraft : They are laws that will be administered by APRA. We have been discussing with APRA how we will cooperate if they do identify something. From ASIC's point of view what is interesting for us, as I said in my opening statement, is the proposed banning power for managers in respect of conduct that actually results in poor consumer outcomes as opposed to prudential purposes. They are very different, right—we are a conduct regulator, APRA is a prudential regulator. Prudential, as you know, is about the entity. We are about the consumer, so different objectives.

Senator WHISH-WILSON: It would not be useful for you to be given similar powers in relation to the wider financial sector, because you already have those? Would that be correct?

Mr Medcraft : Clearly, the power that is really important to us that the government has announced—that they are looking at—is the banning of management. And not just management; they are looking at our whole enforcement regime at the moment in terms of penalties, et cetera. It is the whole toolbox being looked at—strengthening that toolbox.

Senator WHISH-WILSON: And how would similar powers in relation to the wider financial sector improve your abilities to identify and prevent misconduct?

Mr Medcraft : What is being looked at in terms of our enforcement powers, as you know, is the issue of penalties.

Senator WHISH-WILSON: Yes, we have had a whole inquiry on this.

Mr Medcraft : We know that there is a real shortcoming in penalties. Would somebody else like to talk more about what is happening with the enforcement review?

Ms Armour : We can talk about that. But on these additional powers for APRA: we do not work in isolation—

Mr Medcraft : No, we cooperate on everything.

Ms Armour : So, obviously, APRA having additional powers opens opportunities for us to speak to APRA about particular aspects of poor conduct that we might see, and for them to consider if it is a situation where they should use their powers.

Mr Medcraft : One of the issues with APRA that we are exploring—we are still trying to get a landing on that—is where they see poor conduct that potentially is not a prudential issue but which might be an issue from a conduct perspective and how that information can flow to us. That is something we are discussing with them at the moment. They may see things that are conduct issues but which are not prudential issues, and which may be something for us. It is something we are still working on, how we can—

Mr Day : What the task force is reviewing is not just about penalties. Its terms of reference are wider and also include licensing. One of my groups looks after licensing at ASIC—financial services licenses. There are a number of things that have been discussed with the task force presently about that. What are the things that we can take into account in terms of their skills, their abilities, their past experiences and their past misconduct? Whether the relevant responsible managers would be allowed to be responsible managers because of past conduct—those things. Those are things that are very much being discussed at the task force. Breach reporting is being discussed at the task force—

Mr Kell : Do you want a run-through of the issues?

Senator WHISH-WILSON: If you could, very quickly.

Mr Kell : Okay. Strengthening the breach-reporting framework, which I think we have discussed before this committee, as being inadequate; types, levels and consistencies of penalties; a disgorgement power to enable us to seek disgorgement of profits that have been generated as a result of misconduct; a directions power which could be used to require firms to undertake a remediation or compensation or so on; the power to ban individuals from managing services, as we have talked about; and extending our infringement notice regime. This set of powers is being analysed under this review. Some of those propositions are already out for consultation; others are yet to come.

Mr Medcraft : The other one we have already mentioned is product intervention or product governance obligations. That will be very powerful in the future.

Senator WHISH-WILSON: So just to be clear, APRA has been given these new powers to remove and disqualify senior executives—as you mention, penalty provisions and deferral of remuneration for senior executives—

Mr Medcraft : For prudential purposes. It is basically where it has considered that that conduct would put the entity at threat.

Senator WHISH-WILSON: But that would only apply to those organisations—

Mr Medcraft : Correct—it is for prudential purposes.

Senator WHISH-WILSON: Would you like to see similar powers for ASIC outside of APRA's direct supervision?

Mr Medcraft : To be honest, we just want to get done what is already in the pipeline. There is a lot in the pipeline, with product governance, distribution powers, the issues that Peter just mentioned and a whole swathe of stuff on enforcement. I think we would be very happy to improve the toolbox that is proposed.

Senator KETTER: Given that we have ASIC and APRA perhaps potentially looking at similar types of administering—

Mr Medcraft : And coordinating.

Senator KETTER: How would you divide responsibility between the two organisations in respect of this?

Mr Medcraft : They are focused on conduct that could have an effect on the entity's viability, which is a big problem.

Mr Kell : We have an MOU with APRA; we have very regular structured meetings between the teams to discuss, amongst other things, enforcement. We have regular meetings at the commissioner and member level, so there is quite a close degree of interaction. I think it is hard to draw up a strict dividing line in advance of seeing where those issues play out in this new legislation. Once we have seen it we will sit down and look at whether, for example, we need to modify elements of our existing MOU and the referral of matters between the two agencies. We realise there is a fair bit to do to ensure we work together well on this issue.

Mr Medcraft : But there are clear objectives. Theirs is the entity, ours is the consumer.

Senator GALLAGHER: One of the concerns I have is that what might constitute a very poor customer outcome or consumer outcome might not be a poor prudential outcome, and the government's intention, as I read it, is that this banking executive accountability regime is about ensuring that misconduct that has affected consumers—this is the perception of what they are trying to achieve with the BEAR—is managed whereas what we have heard from APRA and indeed yourselves this morning is that the BEAR is limited. The accountability regime as prescribed so far, although we will wait to see the legislation, is solely focused on prudential outcomes. When I think of some of the scandals that we have seen in recent times, nothing under the BEAR, it appears, would have prevented or allowed redress for some of those scandals. Do you have a view on that?

Mr Price : We probably do need to wait to see the drafting. Our clear understanding is that it is directed towards prudential outcomes.

Mr Medcraft : Correct.

Senator GALLAGHER: In fact sometimes a very poor customer outcome is a very good prudential outcome. That is the issue.

Mr Medcraft : The BEAR is about a prudential purpose, and, as we have said, we are certainly already talking to APRA about where there may be opportunities to work together. As Peter said, we work together at all levels continually. So, there is that aspect. But the important aspect for us will be the 'manager banning' power. It is essential that it not be simply about having to prove that the manager actually breached the law, because that is nothing more than we have today. It has got to be about saying that they fell well short of what were reasonable expectations of a manager managing people who are supposed to comply with the law. That will be critical. It is really important that that actually occur. That will then complement, very nicely perhaps, what the BEAR is trying to do. The thing for APRA is that, regulating the entity, there is a level of trust that they have to have with their entity—and we need to manage with them on that.

Senator WHISH-WILSON: An example might be predatory lending practices that have prudential implications for stability but also have customer implications. You could haul a CEO over the coals for not doing the right thing and signing up—

Mr Medcraft : Unfortunately, I always cite the example of my old bank, Societe Generale, and Jerome Kurvial, who lost $1½ billion. That potentially is a conduct issue and potentially a prudential issue. There is a really good example—or not so good!

Senator WHISH-WILSON: I want to go to your focus on consumer outcomes. You talked about product intervention powers, which is obviously a very significant new addition to your arsenal. You have made some fairly strong comments—and I would expect that from you as a regulator—about using product intervention powers within banks. Would you care to expand on how you might see it working?

Mr Medcraft : Peter, do you want to comment on this?

Mr Kell : Yes. We strongly supported a product intervention power during the financial system inquiry, so we are obviously pleased to see that proposal move forward. And there has recently been consultation around a particular model for the product intervention power that has been put out by Treasury.

Senator WHISH-WILSON: How far away do you think we are from getting some legislation on this—or potentially regulations?

Mr Kell : I would have to take that on notice and get that to government in terms of the time frame. But I know it is a priority area. The first issue is about how we might use it. We see it as being a valuable addition to our toolkit that would allow us to step in where there is significant risk or detriment to consumers as a result of the design of products right across the areas we regulate. At times, it has been suggested that this would be about banning products. I think that would be an exceptional and relatively unusual use of the power. In many other cases, it might be just requiring a modification to the way the product is sold, or to aspects of its design, to ensure that risks are reduced for consumers. So we see it as being quite valuable. An example is that we have recently been looking at flex commissions through car dealerships, where the finance company pays a higher rate to the dealer if they manage to convince the consumer to pay a higher interest rate—which obviously results in significantly poor outcomes for the most vulnerable and least financially experienced consumers. It took us a very long time to deal with that—

Senator WHISH-WILSON: Senator Macdonald might have some questions for you on that. Thank you for those examples, but I have limited time. Mr Medcraft, you have said product intervention powers could be used to stop banks from selling their own products within a vertically integrated business system. I know that Mr Murray came out very strongly swinging against that, saying you had overstepped your mandate as a regulator. Would you like to comment on that?

Mr Medcraft : What I said was not really about product governance and distribution. I was really saying that, in the future, given the issues that have come out of America—like Wells Fargo and the cross-selling of products—cross-selling is now not seen as a good thing. If you think about product governance and distribution, basically the obligation is there to make sure you issue products that are in the best interests of your customers. If you put those two things together and, on top of that, think about the future world, which is social media, basically what banks should be thinking about for the future is that the best asset they have is the trust of their customers. So, basically, they should be thinking about being an ecosystem that has the best products for the customers—and that may not necessarily be their own products but the best products. That is the main point I was making. If you think about it, if cross-selling is something you cannot do any more, you then need to go: 'Why do I need to own you if I cannot force your products to be sold through my network?' So the point is to say: 'I do not necessarily need to own you, as long as I have the best products; I just want to make sure I have the right incentives. It is not necessarily about ownership; often remuneration and incentives are the problem with selling the wrong product.

Senator WHISH-WILSON: So Mr Murray's characterisation of that as being an attack by you on the banks was unfair or out of context?

Mr Medcraft : I think it is very forward-looking of me to think about how banks might be in the future. As you know, I am a member of the IMF's advisory group on FinTech, so I am seeing what innovations are happening around the world.

Senator WHISH-WILSON: There was a lot of speculation before the Murray inquiry was released that he was going to have to look at the elephant in the room, being vertical integration. I am not saying anything bad about Mr Murray, but he was probably the architect of that over his time at the Commonwealth Bank. Do you think it went far enough in terms of its recommendations on vertical integration?

Mr Medcraft : We are delighted by Mr Murray's recommendations. For ASIC, so many aspects that we have talked about already this morning have come from Murray. We welcome the Murray inquiry. If you remember, the Murray inquiry was done a few years ago now. As I have said previously, with FinTech disruption I think the massive game changer is digital currency, fiat currency, being issued in the future. I think the banking model is probably going to change quite dramatically in the next decade.

Senator WHISH-WILSON: And that is why some, like the ANZ, are selling their wealth management businesses?

Mr Medcraft : Things are moving much faster. You are already seeing the sale of wealth management. The point is that, these days, I do not necessarily need to own something to actually offer the best product to my customer. I think banks are starting to realise that owning something and cross-selling it is probably not a viable business strategy anymore. I think the market will reshape banking—and the market includes things like the crowd and digital disruption.

Senator WHISH-WILSON: Mr Murray went further in that interview and said that the powers should now be rescinded because of your speech. But you are making it very clear today that they are critically important to your role at ASIC.

Mr Medcraft : I think there was a very important framework that was established there. The government is acting on many of those recommendations, which we have welcomed—including the industry funding model for ASIC, taking ASIC out of the public service, product intervention and governance review. There is a lot of stuff there. As I said earlier, what we want to see is that being implemented and let's see where we go from there. Things are going to change in the next few years, but at least we are moving forward. That is certainly my objective. Again, I think the banks are going to be subject to intense competition anyway from what is happening. At the end of the day, all is this is going to end up with a better outcome for consumers—a combination of forces underway at the moment, frankly.

Senator GALLAGHER: I have a couple of questions that follow on from Senator Whish-Wilson about product intervention, and you have touched on it, but I am coming at it another way. We are waiting for the outcomes of the consultations that closed in mid-March, I think. It was quite a long consultation process. If the product intervention powers are not able to deal with high-risk pay structures or remuneration incentives, what limitations would there be on the effectiveness of those powers?

Mr Kell : As I said, ASIC very much welcomed the movement on implementing the product intervention power, but we saw the proposed model that was released for consultation as having a couple of limitations, and we have made that clear in our submission to the process.

Senator GALLAGHER: Yes.

Mr Kell : Perhaps the most significant one from our perspective was that it does not envisage that, as part of the scope of interventions that would be allowed, the regulator would be able to take action in regard to problematic remuneration arrangements. We think that that is a significant limitation when you consider that many of the most damaging problems and market failures that have arisen in financial services have arisen because of conflicts of interest and other poorly designed and misaligned incentives that generate adverse outcomes. That, I think, would be something that would at times allow us to, if you like, approach the problem by way of changing the way a product is sold, rather than necessarily changing the product itself, to ensure that it actually gets to the people that understand it rather than being sold to people who do not have an understanding of what they are getting, because of the wrong sort of incentive. That is probably the main area where we think the model that has been out there could be improved.

We also have some concerns—although lesser concerns—around the coverage. We think there are a few products that are not included at the moment that ought to be included, such as some funeral insurance products and small business loans. The other area where we think there is a reason to at least open the debate is around the time frame that is envisaged for the intervention. It is 18 months without an ability to extend, and we think in some instances it would be useful to have an intervention extend beyond 18 months, or have the ability to do that. So we are very pleased that it is out there, but we see some areas where we think that improvements need to be made to the model that is currently on the table, because otherwise we do not think it is necessarily going to meet some of the expectations of the community.

Mr Medcraft : The other mandate that we are looking forward to is the competition mandate for ASIC. We think that, combined with product intervention, will be very important for the future, because often we see sectors that actually would like some changes to be made to remuneration arrangements, but they cannot do it because there is a 'first mover' disadvantage. We see that so often. There is almost an industry welcoming in some cases, I think, of that power. Is that right, Peter?

Mr Kell : Yes.

Mr Medcraft : That is critical.

Senator GALLAGHER: I guess we will wait and see what the result of the consultation is when the government releases that. Thank you very much for bringing us up to speed on that.

Just in relation to ASIC's statement of expectations, the government committed, as part of its response to the FSI, to updating and enhancing the statement of expectations for ASIC in the first half of 2016. My understanding is that the current one is an April 2014 document. Is that right?

Mr Kell : Correct.

Senator GALLAGHER: You answered a question on notice by saying that a draft statement of expectations has been provided, most recently in November 2016. Has there been any progress on this?

Mr Medcraft : No, not that I am aware of.

Senator GALLAGHER: Whose responsibility is that?

Mr Medcraft : It sits with Treasury.

Senator GALLAGHER: So they have provided you with a draft statement. You have provided—

Mr Medcraft : We have made comments on the draft statement.

Senator GALLAGHER: And then you just wait to hear back?

Mr Medcraft : Yes.

Mr Kirk : Once we have the final version then we make a statement in response about our intent.

Senator GALLAGHER: It seems to be taking a long time. You are telling me that that is a matter for Treasury?

Mr Kirk : Yes.

Mr Medcraft : Yes.

Senator GALLAGHER: In relation to phoenix activity costs, has the government commissioned ASIC to provide an update on estimates of the economic cost of phoenixing?

Mr Price : Not that I am aware of.

Senator GALLAGHER: Are you aware of any work being done? There is the Phoenix Taskforce—

Mr Price : Correct.

Mr Day : I am one of ASIC's representatives on the Phoenix Taskforce. It is something that is being discussed. We think that having a more recent idea about the economic cost of phoenix activity is important. The Phoenix Taskforce is discussing that at the moment.

Senator GALLAGHER: I understand that in the minutes of the Phoenix Taskforce meeting it mentions that PwC spoke about the quantification of the Phoenix risk modelling that has been undertaken on behalf of the Fair Work Ombudsman, ASIC and the ATO. This is an update to the paper prepared in 2012, which I think spoke of a cost to the economy of $3.2 billion annually. Can you update the committee on those figures.

Mr Day : As I said, the discussion among the members of the task force is that we are looking at the opportunity to provide an updated view on that. Some of the discussions are around methodology, with the assistance of PwC, but we really cannot say much more than that at this time.

Senator GALLAGHER: So there is not a figure at the moment—

Mr Day : There is the figure from the 2012—

Senator GALLAGHER: Yes, I have that one.

Mr Day : Is there an up-to-date figure?

Senator GALLAGHER: Yes.

Mr Day : No, there is not.

Senator GALLAGHER: But through the Phoenix Taskforce you are looking at the appropriate way of measuring that in—

Mr Day : Yes. As you will appreciate, it is a difficult exercise. As we and academics have said, there is no offence for phoenix activity. There are a couple of definitions of phoenix activity. There are things that are illegal as phoenix activity. There are other things that potentially you might say are legitimate in terms of businesses transferring legitimately through deeds of company arrangements and others. So to get an accurate estimate is very difficult. I might say that it is with great relish that economists would take on a question like that because it has a certain degree of complexity about it. These are not easy things to do. It also requires, obviously, a great deal of data from a number of places to try to triangulate, for want of a better expression, those types of numbers. One of the things the task force is very keen on is making sure there is some degree of reliability and accuracy on that figure but also that the work that the task force does can be seen through measurement that it is having an impact. That is difficult to do, so there is a bit of work to do. But the task force are, as I say, reviewing the way we do that so that we can give a meaningful number to the public and also, for our own purposes, see how well we are going.

Senator GALLAGHER: I am interested in whether we will get an updated number and when that might be likely.

Mr Day : We are working towards that. We would hope that would be within the next 12 months but hopefully even earlier than that.

Mr Medcraft : If you have a look at an academic who writes prominently on phoenix issues, Helen Anderson, she has pointed out in a publication that getting point estimates on the sorts of things is inherently difficult for all the reasons that Mr Day has set out. Questions about methodology are critical if you are going to have a useful base from which to make policy decisions.

Senator GALLAGHER: Yes. We want the figures to be robust, that is for sure. Can I turn to the Financial advice: fees for no service report. You released an update a couple of weeks ago on this report. My reading of it is that it broadens the scope of customers affected quite considerably by another 100,000 or so and the amount to be repaid to $205 million plus interest. I have a few questions about this, so I might have to come back to it if my time runs out. According to my reading of the update you have provided, looking at the various institutions paying back moneys, there seems to be one that is quite far behind. Has an explanation been provided around that? I am talking specifically about the Commonwealth Bank. They have paid $5 million and have $99 million in compensation pending. I know they have a lot more to pay, but that did seem out of step with the other banks.

Ms Bird : I can get the figures from the Commonwealth Bank. My understanding is that they have repaid significantly more than the $5 million as of today. That media release we put out was dated 21 April. It is a bit old. In fairness, it might be best if I take that on notice to get from them their figures as of today.

Senator GALLAGHER: It might have given them a shove on, one might suggest!

Mr Kell : Emphasising that all of the banks need to get their skates on around this issue.

Senator GALLAGHER: They can certainly take money pretty quickly! But when it comes to repaying it—

Mr Medcraft : It is not a good look.

Senator GALLAGHER: That is interesting.

Mr Medcraft : It is not a good look, and I would encourage them to be fair.

Senator GALLAGHER: There is quite a significant amount of money involved. I am pleased to hear that you are pushing them to repay it. Have there been any penalties, actions or prosecutions for any of the entities or people involved in the 'fees for no service' inquiry?

Ms Bird : Not as of yet, but we do have a number of active investigations.

Mr Medcraft : We do.

Senator GALLAGHER: So watch this space?

Mr Medcraft : Yes.

Senator GALLAGHER: In terms of remediation, the report indicates that fees are repaid with interest. Can you explain why so many interest repayments occur for the lost earnings on the fees had they stayed in the clients' accounts rather than being incorrectly deducted?

Ms Bird : That is how the interest will be calculated. There is one issue—whether they have some consequential loss. If anyone has a belief that that they have suffered some consequential loss then our view would be they still have the right to go to FOS to make a claim in relation to that, and the banks understand that.

Senator GALLAGHER: In a hearing of the House Standing Committee on Economics the Commonwealth Bank was asked why it had the biggest amount to pay. Apart from the fact that they had more advisers, they suggested that they may be more advanced in identifying the issue than others. In fact, Mr Narev said:

Number two is that we should probably revisit that question once everyone has finished paying, because it may well be that we have been further through the work to identify the number than others, although I do not know that for a fact today.

Do you think that has contributed?

Ms Bird : I do not know that to be the fact today either. But all of the institutions are still doing further work which we are supervising to figure out whether they have broader problems. So the figures we reported on in that media release relate to breaches they have already found and have breach-reported to us. Given the extent of those breaches, we have asked all of those institutions to do further work to see whether they have other fees-for-no-service problems in their institutions. That is still ongoing. That is another matter that we would really like to get a push on with. Just like Mr Narev, I cannot know when we get the final figures whether the CBA will be the highest one or not.

Senator GALLAGHER: There was a report on the weekend—I think it was an Alan Kohler article—that was mainly about superannuation and bank fees or bank super. It alluded to a reference in that article—I just cannot seem to find it in my pack at the moment. Here it is. It says:

The banks have been internally investigating their wealth management businesses lately, inspecting individual advice files and trying to head off more PR problems. The whisper is that, on average, eight out of 10 files are “disastrous” — the advice inappropriate.

Whether that is eventually confirmed officially, or it only turns out to be half of them, or the whole exercise is kept quiet, it’s clear that the big four banks’ wealth management acquisitions about 15 years ago were ruinous.

Does ASIC have any comment on the claims in this article? Or are you aware of what this article may be alluding to for inspecting the advice files?

Mr Kell : We have undertaken a quite extensive exercise with the large banks and AMP under our broader wealth management work called the Advice Compliance Review project. We did publish a report on that a little earlier this year.

Ms Bird : It was report 515.

Mr Kell : Report 515. That looked at how the large financial advice firms, the big banks and AMP had identified and dealt with noncompliant conduct by their advisers. We required them to go back and look through that. That also involved the development and implementation of large-scale review and remediation frameworks. Well over $30 million has been paid back as a result of that particular project. It also looked at the processes used to monitor and supervise the firms' advisers.

One of issues that we found there was that the bank's own internal final audit processes were not nearly as strong as we would have liked. We have been engaging with them quite thoroughly around that in recent times. It also identified problems with breach reporting in the past. That is an issue that we have raised with them, and also reference checking and bad advisers moving from one firm to another. That is something which we are talking to the banks about and which we hope the new reference-checking protocol that has been introduced by the ABA will help address.

Have there been widescale problems in this sector? Absolutely. We have highlighted some of those in that report and also in Financial advice: fees for no service. We are working actively to ensure that those sorts of issues are minimised.

I would add one point here, and that is that various reforms have been introduced in the past few years and those that are still in play are making a difference: FOFA and the provisions on commissions going forward; the financial advisers register helps us track where advisers move within the industry; the reforms to life insurance remuneration and advice; the recently announced professional standards reforms; and the requirement to provide an annual fee statement. Those reforms are also helping to lift standards, but there is clearly a significant legacy issue.

Senator GALLAGHER: It is probably worth a longer conversation, which I know I am not allowed at this point. It does seem to me that poor record management and information gathering remains a problem, and has been so for some time. It also surprises me that banks seem quite good at how they take money and where that money goes, but actually tracking the other side of the equation—what that was for or the arrangements that customers entered into—has not had the same emphasis as the financial systems side of banks. That is worthy of a long conversation.

Ms Bird : You are right that recordkeeping has been a significant problem in this industry. It has made all of the remediation programs extremely challenging—

Senator GALLAGHER: And lengthy.

Ms Bird : In response to that we have really clarified what the record-keeping obligations are in this industry. So we hope to see improvements going forward. At least in the large institutions, they are moving to a much more electronic based record-keeping system, which should make things easier.

Mr Kell : I am positive about that prospect of technology helping to improve record keeping. It is antiquated, or was, in some of the firms and that will help going forward.

Mr Medcraft : A fair comment. We are very sceptical where we see poor record keeping because, clearly, we all know that poor record keeping is also a good way of actually hiding your trail. We know that, and they should know that we know that. Frankly, it just makes us very, very, sceptical.

Senator GALLAGHER: Electronic record keeping isn't a new thing.

Mr Medcraft : Frankly, it is quite ridiculous that they actually go, 'We're just poor at record keeping.' We know that poor record keeping is often to hide things or not allow a trail. It does actually help their reputation.

Senator GALLAGHER: Especially when other systems seem very well put in place.

Mr Medcraft : Yes, very much.

CHAIR: Thank you, Senator Gallagher. We will be breaking at 10.45 so, Senator Williams, perhaps you could take us to the break.

Senator WILLIAMS: Welcome, ASIC. You would be particularly familiar, Mr Medcraft and Mr Kell et cetera, with the emails that were FOIed by Ben Butler. Who is the expert on them?

Mr Kell : I am happy to start.

Senator WILLIAMS: I find it concerning because, if we look at correspondence with the Commonwealth Bank on 15 May 2014 from Greg Kirk:

Hi all,

I have spoken to David Cohen—informed him of imperative to release by midday tomorrow.

…   .   

Further draft of our media release attached.

Andre do you want to come up to work on it

Michael we will ring you.

It goes on—from Greg Kirk on 15 May—at a later hour:

Hi all. I spoke to David Cohen.

Their comments on the draft media release will come back through their media people but at this stage they are sounding more like detail than very significant.

I can go on—as far as Westpac goes. In emails to Westpac, from David McGuinness to Michael Saadat:

Thanks Michael

I am comfortable enough with the edits by Westpac. The key message is still that we want to get out.

What we are seeing, Mr Kell, is that your media team is preparing media releases and corresponding with the very people, whether it be Westpac or Commonwealth Bank—that is like me preparing a media release to attack the Labor Party, and I ring up Mr Bill Shorten and say, 'Bill, are you happy with this? Regards, Wacka.'

Senator GALLAGHER: You can send it to me, Wacka!

Senator WILLIAMS: Thank you, Senator Gallagher. I have strived and hoped that you have become a feared watchdog, so why are you corresponding with the very people you are putting out in the public arena for their wrongdoings? Why the correspondence with the banks to agree with your media releases?

Mr Kell : So that story was based on emails covering a period between 2006 and 2015. Just to be clear: at that time, we clarified our policy—in fact, I am happy, if it helps again, to provide the statement that we provided to the parliamentary joint committee in March 2015 about this issue. It set out our policy in relation to allowing checking of media releases.

Just to run through it very quickly: we do provide for a short window in which to check media releases in relation to negotiated outcomes, not to court based outcomes. It only occurs after the outcome has been decided and determined, and our primary aim in doing this is to ensure accuracy so to allow checking of things like dates, the number of affected consumers and the amount of compensation that may have been paid. That focus on accuracy is very important. As some of you may recall, the Financial Conduct Authority in the UK a few years back had an incident where the information about one of their actions was released in such a way that there was significant misunderstanding in the market that led to a 2.4 billion pound wipe-off of the value of some UK insurers based on a lack of understanding about what the regulator was actually doing in a subsequent parliamentary inquiry and a review by a UK law form. With large entities, in particular, if there is the prospect at times that the action we are taking may have a material impact for negotiated outcomes, we allow a short window of up to 24 hours for checking the accuracy. We clarified that because—I have to say, Senator, you are correct—prior to that date our policy was not as clear and consistent as it should have been. We very much conceded that and it is now contained in one of our information sheets. That is not just in relation to banks but any entity that is the subject of a potential negotiated outcome where there are facts and figures that are important—

Senator WILLIAMS: Mr Kerr, time is very short so I will move you along, please.

Senator KETTER: Could I ask a quick follow-up question?

Senator WILLIAMS: If you are quick.

Senator KETTER: Mr Kell, I understand that you insisted on charging a fee for this particular release even though, in the case before the Information Commissioner, you accepted the provision of the documents was in the public interest. Can you explain why you insisted on the charge?

Mr Kell : I will just run through, very quickly, what we did there. When the request came in for those documents the FOI Act, as I am sure you are aware, allows an agency to impose a charge for providing access to a document. This can sometimes, especially if they are very broad ranging requests, involve quite a lot of resources. That is what we did in this case. It is meant to fairly reflect the work involved. I think the request came in in March 2015 and on 17 April ASIC advised The Australian that we wanted to impose a charge of around $4,000. The Australian asked ASIC to waive that and we declined. The Australian then went to ask the Australian Information Commissioner in May 2015. On 21 February 2017 the Information Commissioner decided to waive the charges and we then provided the documents consistent with the requirements in the FOI Act.

Senator KETTER: That does not answer my question, but—

Senator WILLIAMS: Back to these media releases and the preparation of them. We mentioned Mr Cohen being involved and having an input into them. In one press release the initial draft said, 'CBA misled ASIC', but this was deleted from the final release. Are you familiar with what I am saying? Who authorised its deletion and why?

Mr Kell : I would have to take that on notice.

Senator WILLIAMS: One of a series of draft releases bears the handwritten heading, 'Version 15D Cohen', and the date, '15 May 2014', the day before the press release was issued. Can you explain why it has got 'Version 15D Cohen'?

Mr Kell : I will have to take that on notice.

Senator WILLIAMS: Please do, and I will just continue on with some Macquarie Bank questions. In January 2013 ASIC accepted an enforceable undertaking from Macquarie regarding compliance failings in its financial planning arm. These failures have since resulted in $20 million in compensation being paid. At the time your senior investigator Adrian Borchok described the review of Macquarie Group's financial planning arm, which was conducted by an Ernst & Young, as a 'sham'. In an internal email to senior executive Louise Macaulay with regard to a draft press release on the issues sent on 25 January 2013, Mr Borchok wrote:

I think the use of 'superficial' is appropriate because it reflects the situation. Further, the EY review was a sham therefore they are getting off easy with 'superficial'.

Do you agree, Mr Kell, that the Ernst &Young review was a sham, given that one of your team has described it as a 'sham'?

Mr Kell : ASIC ultimately entered into a very wide-reaching, enforceable undertaking with Macquarie due to number of reasons, but one of them was because we did not think their own internal compliance was adequate and that the way in which their own reviews were dealt with was adequate. Can I make a more general point here?

Senator WILLIAMS: Make it quick, please.

Mr Kell : It is a very important point. I hope that you would understand and expect that, within an agency such as ASIC, there will be robust debate between officers about the best ways to deal with enforcement and regulatory matters. That is one of the ways that we ensure that our approach to getting the right sorts of outcomes is tested. So there will be differences of opinion and there will be different views expressed as part of—

Senator WILLIAMS: You can make that point. Sorry to cut you off, but time is of the essence. Mr Borchok also complained that 'Macquarie Bank were not particularly cooperative, despite their repeated attempts to tell us they are'. Do you agree with Mr Borchok's assessment or do you have an of opinion on Macquarie?

Mr Kell : I think the key point that I would make is to point to the outcome that we got—an enforceable undertaking that completely changed—

Senator WILLIAMS: You gave that answer once before, in the course of the inquiry into ASIC.

Mr Kell : the way that business operated, which resulted in the identification and banning of a number of advisers, which, as you just said, resulted in the payment of more than $20 million in compensation. So, for us, there will inevitably be along the way arguments, disagreements, around how to get the right outcome, but I think in that case we clearly got to a very positive outcome for the consumers and for the bank.

Mr Medcraft : On this issue, as you know, we have learnt from that and we have tightened up our procedures considerably.

Senator WILLIAMS: On another issue, Mr Medcraft, for years now your predecessor Mr D'Aloisio and his team and you and your team have come into my office often before Senate estimates; we have discussed things in confidence et cetera and worked on issues, chased a few crooks et cetera. To the best of your knowledge, have I ever leaked any of that to the media?

Mr Medcraft : No, I do not believe so.

Senator WILLIAMS: I do not believe so either. In relation to David St Pierre, the Westpac bank manager who is now in jail, I worked with David Purcell, a solicitor who was employed by Westpac, to solve these problems, like the 97-year-old lady who received a 30-year loan and she was actually in an aged-care facility. Of course, it was a Ponzi scheme and they went broke and it all ended in tears. I am interested in an email from Mr Saadat to Media Unit, which says:

Hi Media Unit - attached is the updated draft media release for the Westpac/St Pierre matter. Can you please review this asap as we may have to release it either this week or next week. We want to be on the front foot before John Williams potentially leaks the matter to the media.

Mr Kell : I think my response, which I think you are very aware of, was that I did have concerns about that, and I suggested that it would not be wise for Westpac to assume that the material would necessarily remain private. I think a bit of context there: this was a serious—

Senator WILLIAMS: Hang on. Just for committee—

Mr Kell : No, no, sorry—

Senator WILLIAMS: No, no. I am just going to put on record the true response from Peter Kell to Michael Saadat:

Given the good Senator's current practices we should expect it to be leaked very quickly. I assume Westpac understands this?

Mr Kell : Yes, and—

Senator WILLIAMS: So my question is: please explain.

Mr Kell : As you know, Senator, I have already apologised to you for my inappropriate words there, and I do so again.

Senator WILLIAMS: Look, there is no need to apologise. I think you probably said it tongue in cheek, and, frankly, after Paul Hogan calling me a boofhead last night on 2GB, it does not really matter—it is water off a duck's back to me.

Mr Kell : And we enjoy our conversations and we have a productive relationship—

Senator WILLIAMS: We do.

Mr Kell : and I think that is important. My concern though—I just might make this one point—is not so much around, Senator, your activities, but a criminal investigation that the banks are going around and talking about is unhelpful, in our opinion.

Senator WILLIAMS: Well, history will show that I worked with Westpac and David Purcell, a solicitor. No media found out. We solved the problems of most of them, got them satisfied. Media, if they are up in the second floor of this building now watching this, know they are wasting their time sending me a text message or a phone call after a party room meeting—

Mr Kell : They know it now.

Senator WILLIAMS: because I do not leak, and they all know that. I think we are mature adults, Mr Kell. We will have a bit of a giggle about it and put it behind us and get on with the job.

Mr Kell : We will. I am accepting my flogging in public with as good a grace as I can muster!

Senator WILLIAMS: Yours is a minor flogging! In politics, we cop it most of the time!

Mr Kell : Can I also congratulate you, because I think the main issue on that was that we obtained this year a three-year prison sentence for Mr St Pierre—

Senator WILLIAMS: Yes—non-parole of six months!

Mr Kell : for false loan applications. The judge described his conduct as 'calculated, elaborate, determined and not a fleeting mistake', and the customers in question were compensated several million dollars, and that is a very good outcome, thanks to you.

Senator WILLIAMS: I have one more question before we wind up. Mr Day, you might be able to help me, please, briefly: the tax commissioner, Mr Jordan—he was also called a boofhead by Paul Hogan last night!—made a point yesterday about how easy it is to become a director of a company. You have got to show 100 points to open a bank account, but you can become the director of a company so easily, and, consequently, there are the allegations with the ATO and the Cranston situation. Mr Day, what do we have to do to make it a little bit more difficult to become a director of a company? What can we do to help you? Mr Medcraft?

Mr Medcraft : It is an interesting issue because it used to be that this was the ease of doing business in Australia: it was so easy to create a company and create directors. It was very easy. We would often compete about the ease of doing business in Australia. That is interesting if you think of social licence and the changes—

Senator WILLIAMS: In some countries they have to have a police record search.

Mr Medcraft : Yes.

Senator WILLIAMS: In Australia you just put your name on—you probably do it online—and you are there.

Mr Medcraft : It is very interesting, this discussion, because a few years ago we were actually all about making it easier and easier and easier, and now, because of issues, we are going, 'Hold on—this is a problem.' So it is interesting. But I will pass over to John.

Mr Price : The chairman is right. The policy thinking that you are balancing here is as to ease of doing business as opposed to people being nominated as directors who might not exist or be using false names, or other sort of phoenix activity. The issue of a director identity number was mooted recently, if my memory is right, in the David Murray inquiry. It was also mentioned by the Productivity Commission in a report into business set-up—

Senator WILLIAMS: So you are saying: give every director a number?

Mr Price : Yes. It is referred to as a DIN—a director identification number.

Senator WILLIAMS: What about a tax file number?

Mr Price : I was going to say, the real question is how you do it. If you do a 100 point check then I suppose there is quite a delay for many people in getting that done. It depends how you get it done, but if ASIC, for example, were going to do an analysis on a 100 point check, you could see that that might take a little bit of time. You could think about—

Senator WILLIAMS: Can I just stop you there, Mr Price. If we use a tax file number then you have already got a 100 point check. So it would save you the time to have to go through the 100 point check, but at least you would be identified instead of just throwing some Ponzi name on a piece of paper.

Mr Price : Ultimately, any change in this area is a matter for government, but certainly the vast majority of company directors would already have a tax file number, you would expect.

Mr Medcraft : If they are tax residents.

Mr Price : So, from that point of view, from a speed point of view, from a cost point of view, that would seem to make some sense. The other point I just want to make quickly is that a director identification number strengthens your confidence that you know who really is a director of a company. It does not solve all issues relating to phoenix.

Senator WILLIAMS: No.

Mr Price : We have previously made suggestions to a Senate inquiry into phoenix activity in the construction industry that set out a number of possible law reform options, although obviously all of this is a matter for government. But things like the ability for ASIC to issue a notice challenging transactions that may be phoenix would be very useful. Introducing a cab-rank rule for appointing regulators would be very useful. This is set out publicly in submissions we made to that earlier inquiry.

The other thing that I did want to mention is: even if you have a director identification number, that does not directly deal with the potential for what I would refer to as shadow directors—that is: you are or someone else is the actual controlling mind of the company, but you appoint someone who is a patsy to be a director who has no real understanding of what is going on. That is a different enforcement type problem and one that is quite difficult to prove because, if there is no documentary evidence that shows that that other person is the mind and will of the company, all you have got is a circumstantial case, at best.

Senator WILLIAMS: Let us hope we can clean it up a bit better and make it a bit stronger. Thanks, Chair.

CHAIR: Thank you very much, Senator Williams. That seems like a good point to break on.

Proceedings suspended from 10:49 to 11 : 07

CHAIR: Welcome back. We will resume. Mr Medcraft, we all have a copy of your opening statement, but would you mind if we table that so that the secretariat can publish it?

Mr Medcraft : Sure.

CHAIR: Thank you very much. And you tabled a document earlier, on the BBSW. Would you go through that document briefly and explain it to us.

Mr Medcraft : Yes, and I emphasise this is for illustrative purposes only. If you go to the bottom of the diagram, it basically describes what BBSW is—that it is the rate based on the rates for bills issued by the four prime banks. That rate, prior to September 2013, was based on submissions from a panel of 14 banks, including the four prime banks. After that date it was only the four prime banks. At the present time, that rate setting for BBSW is actually about to be changed again.

Ms Armour : The methodology—

Mr Medcraft : is about to be changed again. That is the definition. Looking at the diagram, if we start in the middle, you have the four prime banks, which is BBSW. They interface then with other banks, which is the grey circle outside of that. If we then go to loans and bonds, which we were talking about earlier, you have the direct impact. As we said, we look at governments and corporates, where, basically, they use BBSW as a reference rate, against the bank bill rate, for borrowing or for where the government may issue bonds. On the other side there are groups like finance companies that are actually financed by banks, that borrow against BBSW. If you go to the next column, which is the secondary impact, they then provide loans to small business, for example, if it is a finance company; so it is funded on one side by the banks against BBSW; it then provides financing to small business, which may be based on BBSW or may be based on their own variable rate. Then if you go up the top there, where it says 'retail borrowers, credit cards, personal loans and mortgages', this is in the situation where a finance company may be then providing a credit card or personal loan or even a mortgage. For example, it could be a finance company or securitiser providing a mortgage that is actually funded against BBSW. You see that impact.

Then, if you go around further, under 'investors', which is bills and bonds on the other side, and hybrids, which, as you know, a lot of retail investors invest in, here you can see the retail impact, which is investors who are buying, for example, hybrids, which are referenced on BBSW, then BBSW impacts them directly, again with government or corporates buying bonds as investors. Then there are sophisticated investors, and we know that is a very large part of the market. Then further round you have fund managers basically have direct investments in bonds that are referenced on the BBSW, as do super funds, but then the secondary impact is clearly that those funds often act on behalf of retail investors, so it flows back to retail investors.

Then the final quadrant or third of the diagram is really derivative counterparties. Here we start with the one related to contracts for difference. Providers of contract for difference that are interest rate derivatives—obviously contracts for difference are clearly detailing with retail investors. Then for interest rate derivatives, super funds or fund managers may often hedge exposures against BBSW in exchange for fixed rates, for example. Often those super funds or fund managers then flow through to retail investors. Finally, when interest rate derivatives are entered in by corporates or governments or sophisticated individuals. Hopefully this gives you an overall view of the impact of BBSW.

CHAIR: Thank you very much, Mr Medcraft. That is an excellent diagram and does clarify things. I think Senator Dastyari will be upset to have missed that explanation.

Senator IAN MACDONALD: I have two relatively quick questions. I will mention them both and you can answer them at leisure. What can you tell me about QNI? And can you update me on Storm? I think you were talking about Mr Palmer before, not by name but by description.

Mr Price : I can confirm, and have done so previously, that we do have an active investigation in respect of the various entities within the Palmer group of companies. In particular, the sort of issues that we are looking at are issues around whether there has been a breach of directors' duties in relation to the use of company funds by Queensland Nickel to fund other companies within the Palmer group and the use of funds for other purposes. We are also looking at the transfer of assets to Mr Palmer without payment of due consideration. We are also considering a variety of related-party loans by Queensland Nickel to other companies within the Palmer group.

Senator IAN MACDONALD: In response to a previous question you mentioned about shadow directors. Is that something you are looking at? I do not want to ask questions that might in any way interfere with your ongoing investigations, so obviously you will only tell me what you can tell me.

Mr Price : Mr Palmer is a person of interest in our investigation, but, as I say, our investigation is ongoing.

Senator IAN MACDONALD: Are you involved in any way in the liquidation and the attempt to recover moneys that the government or taxpayers have paid to employees? Is that something you are involved in as well?

Mr Price : We are not directly involved, but we are certainly in regular contact with the special-purpose liquidators. We are in contact with the other administrators of various companies within that group as well. As you may appreciate, there are various obligations on liquidators and administrators broadly to report certain matters to ASIC. Obviously we are taking a great interest in the various information that we are being provided.

Senator IAN MACDONALD: What can you tell me about the wash-up on the ongoing prosecutions with Storm?

Mr Kell : If you are referring to the Cassimatis's—

Senator IAN MACDONALD: And the banks that are implicated.

Mr Kell : It might be useful if we provide you with a structured report on each of those issues. In terms of matters that are still on foot, in August last year the Federal Court found that the Cassimatis's breached their duties as directors of Storm Financial. Earlier this year the court heard submissions on penalties and costs. We are still awaiting the decision on that. That has taken some time. There have been outcomes in relation to compensation against various of the banks, including CBA and Macquarie. Because I do not have all the figures off the top of my head, I would probably prefer to provide you with a brief structured run-through of all of those outcomes. There are quite a few of them, as I am sure you can appreciate. It has possibly been one of the biggest things we have ever done.

Senator IAN MACDONALD: That would be helpful and useful. Thank you for that. Are there still investors who are not satisfied, or who have lost money and have not been adequately—compensated is not the right word—adequately dealt with by banks and others, that you are aware of? Is this still ongoing, or is this all finished now as far as you are concerned?

Mr Kell : Most of that is concluded. As to whether every investor is satisfied with the outcome, I am not sure I can comment on that.

Mr Day : It is a difficult question to answer in that form. In any matter, and it is certainly the case with Storm, there are still investors who believe that they have not been adequately compensated by the arrangements and outcomes.

Senator IAN MACDONALD: Have they been in touch with you?

Mr Day : From time to time they are, yes. There are a number of parties who are still in touch with us about that. At the end of the day, as with other such matters of compensation, there will be people who always believe—and I am not in any way saying that they are not entitled to those beliefs—that they will never be adequately compensated for the rack and ruin that it has caused them and their families. That is always part of the landscape of these types of issues. We have had some contact in that regard.

Senator IAN MACDONALD: Obviously individual investors have their own individual legal rights.

Mr Kell : Yes.

Senator IAN MACDONALD: I am just asking, from ASIC, whether you are still involved in whatever way at the behest of or on the complaint of individual investors.

Mr Kell : No, not at this time. Up until recently we have had some contact where investors were saying that they did not believe the calculation of the compensation was adequately taken into account. We have worked with those investors and worked with the relevant institutions to make sure and get response that the appropriate approach to that calculation has taken place. That is as good as we can do in that space, so we have resolved that. In terms of anything ongoing, the answer is no.

Senator IAN MACDONALD: Without asking for the treaties on the law that you administer, you mentioned, Mr Kell, that you are awaiting the decision of the court on penalties. Is the law such that the penalty can include an order to compensate, pay back, repay or refund those who have proved some misfeasance?

Mr Kell : I do not think that is a feature of this case, but I will double-check that and come back to you. We are seeking pecuniary penalties, disqualifications, and restraint from providing financial services. Compensation has primarily been around the role of the banks where we have obtained a series of settlements.

Senator IAN MACDONALD: Do pecuniary penalties, whether they are substantial or not, go to consolidated revenue, or are they used in some way to refund individual investors who claim to not have been properly looked after?

Mr Kell : Consolidated revenue.

Mr Price : There is also an additional practical consideration to bear in mind in many cases, and that is the question of whether or not an entity has the financial wherewithal to pay any moneys that might be awarded against it.

Senator IAN MACDONALD: Is that something that ASIC would look into, if respondents in these court cases who appear to have had a lot of money in the past suddenly have no money?

Mr Price : It is relevant when you consider what sort of actions you are thinking about. If the object of the exercise is compensation, then, clearly, understanding the asset position of the various persons of interest is a pretty key thing to do.

Senator IAN MACDONALD: And finally: if there are monetary penalties in criminal cases, the criminal laws of various states provide that the victim can sometimes be awarded some part of any monetary penalty—

Mr Price : Proceeds of crime actions.

Senator IAN MACDONALD: Yes. Is that relevant to the legislation under which you or the actions before the courts have related to?

Mr Price : Typically, it would not be ASIC that takes a criminal action. We might refer a brief of evidence to the Commonwealth Director of Public Prosecutions. I will need to check, but my memory is that ASIC itself does not bring proceeds of crime actions. That is done by other regulatory agencies.

Mr Day : Proceeds of crime actions are brought by the Australian Federal Police. In circumstances where we believe at an early stage, even before charges are laid, that there is a possibility, we will liaise with the Australian Federal Police. Sometimes we have had proactive requests from the federal police about matters themselves. They are the party that takes those actions, and they are then able to take the appropriate steps.

Senator IAN MACDONALD: Are you able to tell me in this instance whether you have been in touch with the federal police, and, if you are able to tell me that, can you tell me what has happened?

Mr Day : We would have to take that on notice.

Senator IAN MACDONALD: All right. I look forward to getting that summary from Mr Kell of what has happened. That will be a public document, of course?

Mr Kell : Yes.

Senator IAN MACDONALD: Thank you.

Senator McALLISTER: I want to ask quickly about the new Australian Financial Complaints Authority. Were you consulted in the development of the proposal to integrate these three entities?

Mr Medcraft : Yes, we were. I will pass over to Mr Kell.

Mr Kell : Yes, first and foremost because we were an active participant in the Ramsay review of the dispute resolution arrangements, and it ultimately recommended the bringing together of the schemes, and we ourselves thought that was the right direction to go in. We had dealings with Treasury during that time, in part because we have a particular role to play when it comes to external dispute resolution schemes. It is a licence condition that, if you are a participant in the finance sector, you have to belong to a scheme that is approved by ASIC against standards that we publicly issue through our regulatory guide. So, yes, we certainly had discussions with Treasury during the Ramsay process, and we helped provide information to Ramsay.

Senator McALLISTER: In terms of the powers of this new entity, is it correct to say that it is simply an amalgam of the existing powers that sat with those schemes?

Mr Kell : Obviously we are still analysing the draft legislation. There are a couple of points. There are some important additional components to the scheme and the overall EDR—external dispute resolution—regime that we think will be positive improvements on the current regime. I will give you a couple of examples. One is that ASIC itself will have some important additional powers in this area—for example, to direct a scheme to undertake certain activities. It might be to review its monetary limit in relation to certain products or to examine how it is deciding on certain types of disputes. There will be additional requirements around publishing dispute resolution statistics, both internal statistics within the firm and statistics around complaints that go to the ombudsman. So there are ways in which the current regime is being built upon that we think are very important. Bringing the schemes together does require—I think it is recognised—a mix of both industry-type schemes and the statutory type of arrangement that underpins the SCT.

Senator McALLISTER: Yes. I suppose that is an interesting question in itself about how those two different baselines or authorities are going to be managed within the new body. Is it the case that the statutory basis for the Superannuation Complaints Tribunal will just allow it to still continue to do its work essentially as it did before?

Mr Kell : Ramsay recognised that there are some elements to the way that the SCT operates that will be important to look at for how they can be maintained. They are things like the ability to join third parties to disputes, which is particularly important in insurance disputes, and the unlimited jurisdiction in monetary terms, which is particularly important in a field such as super. One of the questions will be: you do not want to lose those elements necessarily going forward; how do you best maintain them under a new scheme?

Senator McALLISTER: You pointed earlier to some new powers for ASIC as part of the overall architecture. Are there any new powers for this complaints authority that go beyond the powers presently vested in the three authorities that are being merged?

Mr Kirk : Because those superannuation disputes were previously dealt with in a tribunal, that tribunal had powers which the industry based schemes did not previously have to summon witnesses and the like, and for superannuation disputes it is envisaged that this new body would be given those powers, just like the tribunal had for superannuation disputes—but only for superannuation.

Senator McALLISTER: Yes, but my question is: are there are additional powers you can point to beyond those that are already vested in the three schemes that are being merged? I understand that you are not seeking to diminish the powers available to the Superannuation Complaints Tribunal. Are there additional powers?

Mr Kirk : We could take it on notice. Nothing comes to mind as an additional power.

Senator McALLISTER: Thank you. Can I quickly ask about the status of CAMAC. Is the committee still meeting?

Mr Medcraft : CAMAC, no. CAMAC was abandoned a couple of years ago. It still exists: I am the only officer of CAMAC now. So, yes.

Senator McALLISTER: So you are personally a member—

Mr Medcraft : I am it!

Senator McALLISTER: in your role as the head of ASIC?

Mr Medcraft : Basically, as you know, it was abolished several years ago.

Senator McALLISTER: Has it discharged its legal obligation to provide an annual report for the 2015-16 financial year?

Mr Medcraft : I will take that on notice, but I think that the 2015-16—we rely on Treasury to provide those reports. But we will take that on notice.

Senator McALLISTER: If you could make a copy available, if one has been provided, I would appreciate it.

Mr Medcraft : Yes.

Senator McALLISTER: Am I correct in my understanding that you are the only current member of the committee?

Mr Medcraft : Yes, that is correct. That is what I understand.

Senator McALLISTER: Is there any intention that you are aware of to make any additional appointments to CAMAC?

Mr Medcraft : No, I am not aware of any additional appointments. No.

Senator McALLISTER: All right. May I ask about the add-on insurance. I know, Mr Kell, that you have spoken about that here in this forum. Can you just give us an update on progress, particularly in relation to the delayed opt-in sales model?

Mr Kell : Sure. I might ask Mr Saadat to update us on where that is up to.

Mr Saadat : ASIC has been doing a range of things on add-on insurance. One of the things we are looking to do next month is release a consultation paper which will propose a range of potential measures to improve consumer outcomes for add-on insurance sold through car dealerships. One of those proposals will include the introduction of a deferred sales model, or a deferred opt-in model, for add-on insurance products. So we are looking to consult on those proposals at this stage, and, depending on how that consultation goes, we will then look to finalise our position and announce the outcome of that.

Senator McALLISTER: Is there a time frame for finalising that?

Mr Saadat : The consultation will commence, we are hoping, by the end of next month. We normally consult for a couple of months. Depending on the feedback we get from stakeholders and the option we decide to proceed with, it will probably take several months to implement any proposal, as we will need to follow the government's best practice regulation framework in doing so.

Senator McALLISTER: So, by the end of July, consultation will be complete, with a two-month consultation window, and then it will take several months—should we understand that to be three?

Mr Saadat : I think within three months we should probably have a settled position on what we are proceeding with, but we may not have the implementation of that position done within three months.

Senator McALLISTER: Okay. Two months for consultation gets us to the end of July. Another three months gets us to the end of October. That is the best guess about when we will have a settled position?

Mr Saadat : Potentially.

Mr Kell : On a deferred sales model. There is other activity—

Senator McALLISTER: On the narrower question of a deferred sales model?

Mr Saadat : That is one of the options we will be consulting on. We will be consulting on, potentially, some other measures as well, including the design of the deferred sales model, because there are a number of different factors that can be taken into consideration.

Senator GALLAGHER: What are you going to go out with and consult on, in terms of the delay?

Mr Kell : How long is the deferral?

Senator GALLAGHER: Yes.

Mr Saadat : That is something we are thinking about at the moment. There are a range of options, and one of them is the model that the UK has implemented for gap insurance, which includes a four-day delay between the sale of the car and the sale of the insurance. So that is something we are likely to include within the consultation paper, but it may not be the only option we include, and we will certainly be inviting stakeholder views on what the length of the delay should be.

Senator McALLISTER: Senator Gallagher might want to come back to prospective actions to improve the industry overall. I am wondering about what the status is of plans to remediate people who have experienced problems under the existing regime?

Mr Saadat : There is quite a lot of work going on at the moment, where we are talking to several insurers directly about remediation programs that need to be put in place to compensate consumers in circumstances where they have been sold add-on insurance products—where, for example, they were not eligible to claim on those products. We are looking to put out media releases for those outcomes as soon as those outcomes are finalised, and we are expecting to have public announcements about that in the next couple of months.

Senator McALLISTER: In terms of who you are negotiating with, it is the insurance companies themselves rather than the intermediaries who may have sold the product?

Mr Saadat : That is right. The insurance companies are the companies that create the products, and then appoint the distributors for these products. So they are responsible for the sale and distribution of those products.

Senator McALLISTER: I think you said, 'Action fairly shortly.' Is that within two months?

Mr Saadat : I would expect, potentially, a media release within two months and then ongoing releases as we continue to progress and finalise those public outcomes.

Senator McALLISTER: Is there any enforcement action being contemplated against insurers or distributors in relation to add-on insurance?

Mr Saadat : Yes.

Senator McALLISTER: I understand it is sensitive to talk about, once we get into the realm of investigations, but can you give us information about these investigations?

Mr Saadat : We are considering to what extent the conduct that relates to the sale of these add-on insurance products involves contraventions of the legal provisions that we are responsible for, including consumer protection provisions that exist under the ASIC Act, prohibitions on false and misleading conduct, unconscionable conduct and that sort of thing.

Senator McALLISTER: We might seek another update on that next time we meet.

Mr Kell : Very quickly, I have a couple of other things. As several of the insurers have now unilaterally moved to adjust their commission payments downwards, that is one thing we have been looking at closely. We do not want to see some insurers trying to gain by taking advantage of that. Another issue that we are also looking at as part of the reform package is publishing information about claims payout ratios and those sorts of things, to make sure that that is very transparent, because I think it came as a bit of a shock to everyone to see how extraordinarily poor they were.

Senator GALLAGHER: They are very low.

Mr Kell : Having some transparency around that would be a good thing. So it is a package of reforms.

Senator McALLISTER: How many market participants are we talking about.

Mr Kell : There were eight that represented 90 per cent of the industry.

Senator McALLISTER: Right, so it is easy to get one's arms around it. That is good. I think you said a number of those are already taking steps to improve their practices by reducing commissions. Should we understand that that is one or two out of the eight, all of them, or—

Mr Saadat : Not all of them, but many of them have taken steps to already reduce, or have plans to reduce commissions in the next few months.

Senator McALLISTER: Are there other actions you would like to see them taking prior to any enforcement action or policy changes from ASIC?

Mr Saadat : Absolutely, and we have written to all of the insurers in the last couple of weeks to highlight our expectations in relation to the future conduct, including around commission payments and the design of the products themselves. One of the problem is that, the way they are designed the moment, consumers are often provided with very narrow cover and it is a product that, even where the consumer claims, the benefit that can be received is very, very small. So the design of the products is quite important, and then the distribution practices, including around making sure that the conduct of the person who is selling the product is consistent with the insurer's expectations.

Senator McALLISTER: Can you table a copy of that letter, Mr Saadat?

Mr Saadat : I think we probably could. I will take that on notice. I do not have it with me right now but, yes, we can come back to you.

Mr Kell : I think I should emphasise that this is an area where you can imagine the proposed product intervention power would actually make our ability to arrive at some constructive cross-industry outcomes much easier and much more efficient. It is a good example of how that power might allow you to fix these sorts of market problems much more effectively.

Senator GALLAGHER: I am not sure if I have asked you this before: have you looked at funeral insurance?

Mr Medcraft : Yes.

Senator GALLAGHER: Is there anything you would like to say about that product and how it is sold and claimed?

Mr Saadat : We put out a public report on funeral insurance last year following an industry review we did of that product. We have certainly got concerns around the marketing and distribution of that product and the design of that product. Insurers have taken a number of steps to address those concerns.

Senator GALLAGHER: Have they?

Mr Saadat : Including around the issue of having somebody pay premiums over a very long period.

Senator GALLAGHER: Funeral insurance sold to children, for example.

Mr Saadat : There is certainly that issue, but even when the product is sold to someone in their 30s or 40s, if they pay premiums for 20 or 30 years, they end up paying more in premiums than they are ever likely to receive by way of a payout. So insurers have taken steps to design their products in a way that prevents that from happening, which is a good thing. Part of the problem with the product is that, depending on your circumstances, insurance is not the right product for a consumer if they are looking to provide protection and coverage for a funeral, because as soon as you stop paying your insurance premiums—you might have paid for 10 or 20 years—you lose coverage, and there is no accumulated benefit over that period. So for many consumers a savings product is probably a much more suitable product, and we have put a lot of consumer messaging out about that issue. We are also quite concerned about the sale of funeral insurance to Aboriginal communities, and we have been doing a range of things on that front as well.

Senator GALLAGHER: There is quite a lot of advertising of that product, I have noticed. One day I was at home and—

Mr Kell : You would get quite depressed if you watch the television.

Senator GALLAGHER: But it was specifically targeted to Indigenous people or sold as a product for Indigenous people quite heavily throughout the day.

Mr Medcraft : It is extremely distressing.

Senator GALLAGHER: Yes.

Mr Medcraft : It is shocking—absolutely shocking.

Senator GALLAGHER: So again, with your product intervention powers, you could take stronger action than you could take now?

Mr Kell : There are clearly both some product design issues and some distribution issues that I think require, in some ways, almost an industry-wide or collective response. It is far less efficient, for example, to take action against one player in the market. Another example that has come to our attention recently that I think we are going to need to address is older people who may be suffering from some early onset dementia and who end up signing up to three or four funeral insurance plans without even quite being aware that that has happened. So some of these issues, I think, need to be addressed. We have taken some steps, as Michael Saadat has indicated, to deal with some of the issues, but in effect that was a voluntary move by the industry, rather than something we were able to legally require in some straightforward sense.

Mr Medcraft : But the point you make, Senator, is quite correct. I think a combination of product governance and distribution—is it a product that is in the best interests of their customers?—combined with product intervention will considerably strengthen our ability to act against this type of product. Is that right, Peter?

Mr Kell : Yes—the badly designed.

Mr Medcraft : Badly designed and badly distributed.

CHAIR: I should just acknowledge that we are probably going to run over time. We have a number of senators still with questions with ASIC, so I would imagine that we will probably have you here for another 45 minutes or so at least.

Mr Medcraft : That is fine.

CHAIR: But we will have a hard finish at 12.45 today.

Senator BUSHBY: Thank you again to ASIC for assisting us today. I understand ASIC is conducting research into the relationship between employers, superannuation funds and related third parties. I have a couple of questions about that. Do union owned industry superannuation funds have to report to ASIC on their status in industrial awards?

Mr Fitzpatrick : First of all, regarding the employers and the super work, we are at a very early stage in that work. We are planning to issue an early report on some of the areas that we are looking at shortly about member experience. We will be conducting the work throughout this year and looking to completion towards the end of this year or early next year.

Senator BUSHBY: If you are at an early stage, are you still determining where you are looking and the focus that you will have?

Mr Fitzpatrick : Absolutely.

Senator BUSHBY: My questions might assist you in that regard or at least give you something to think about.

Mr Fitzpatrick : Absolutely. We have issued a notice to a number of funds across the sector—not just industry funds but retail funds as well—to try and get a picture of their relationship with employers and the types of engagement that they have, including the marketing that is undertaken, the advice that is provided et cetera. They are the types of questions, but we are also interested in the types of services that are being provided to employees, a few questions around some of those services and a bit more detail, particularly around insurance and superannuation.

Senator BUSHBY: I will ask a few questions, but it might be too early for you to be able to answer them and some of them might not be in your knowledge yet. But, once again, it might prompt you to think about a few things which, as you move forward, you look at. Do union owned industry superannuation funds currently have to report to ASIC on their status in industrial awards? For example, do they need to report if they are named in an enterprise agreement as a default fund?

Mr Fitzpatrick : I will have to take that on notice. I would think that that information is actually available publically.

Senator BUSHBY: I think it is publically available. Does it need to be notified to you?

Mr Fitzpatrick : That would be my understanding, but I would like to take that on notice.

Senator BUSHBY: Would ASIC become aware whether or not trade unions receive any money from industry superannuation funds, including where they have an ownership interest in that fund?

Mr Fitzpatrick : ASIC would not necessarily become aware were we to ask a particular question, but we can ask a broad range of questions in the notice of the fund. As to whether that is a particular area that would be reported to us, that would not be something that would be part of the public disclosure as part of the product disclosure statements, for example. That would not necessarily be part of the overall disclosure. There are certain requirements that sit in the SI(S) Act about the governing documentation that is expected to be on the website, and certain elements of that may be able to describe what the arrangements are in terms of relationships with other parties. However, in the governance and general operations of the entity itself, that is largely a matter for APRA. As has been mentioned before, we are focused on the consumer side and questions around the consumer information and disclosures that are made.

Senator BUSHBY: My questions will get to that, maybe not directly and maybe not in an obvious fashion, which is one of the reasons why I am asking now—to get these issues up and in your awareness and in the circle of what you might be looking at. The reason why I am asking about whether ASIC is aware of that is, particularly, that there are potential questions, if funds are being handed over, about whether that is happening at around the time that superannuation funds find themselves named in enterprise agreements for the union that is actually part of this. There is potential there for conflict which I think there would be value in looking at. Are trade unions currently required to be licensed in order to advise an employer about the selection of a default superannuation fund?

Mr Fitzpatrick : Trade unions per se?

Senator BUSHBY: Yes.

Mr Fitzpatrick : I would not think so. I would assume that, if there is a provision of financial advice, there would be an expectation for anyone who is providing financial product advice to advise us.

Senator BUSHBY: That is really what I am getting at. If a trade union is providing advice to an employer about what might be appropriate default superannuation funds, I would have thought it might fall foul of that requirement. That may be something to think about. And, if not, which depends I guess on what they are doing—I will phrase this question slightly differently. I would have thought, and so I would encourage you to look at this and put it in the framework of a question and ask you whether you will look at this or whether you will consider it. The advice of that nature, which is provided by a trade union, does not seem to me to differ too much from financial advice that is given by a financial advisor about the same decision. I ask whether you will acknowledge that that is a potential question that you could look at.

Mr Fitzpatrick : Sure. I acknowledge your comment and understand what you are seeking to look at.

Senator BUSHBY: I might leave that line of questions there. But still related to superannuation: you will be aware that a question was asked by Senator Bernardi of a regulatory guide of a number that I think was probably not one that had been in front of you for some time—maybe this one is different: Regulatory Guide 97.

Mr Fitzpatrick : Yes.

Senator BUSHBY: Can you explain the benefits to consumers that RG97 is intended to deliver.

Mr Medcraft : Yes: transparency.

Mr Fitzpatrick : First of all, we have undertaken quite a long and very consultative piece of work in looking at the fees and cost disclosure in the area of superannuation and managed funds. We issued a report in 2014 that identified a number of areas of concern in terms some underdisclosure through various mechanisms, particularly fees and costs disclosure of superannuation funds and managed funds. Some of these areas we thought would require clarification in terms of our regulatory guidance and, in quite significant consultation with industry, we released Regulatory Guide 97 in November 2015. This guide covers a range of different areas related to fees and costs, including how they are disclosed and the types of structures that need to be included within that cost disclosure.

In terms of the benefits for consumers, clearly, it is very, very important that consumers must have confidence in the disclosures that are made to them, that they can look at those disclosures and understand that the figures that are being reported are accurate and comparable. I think this is an important aspect of this new clarification that we have provided in terms of the regulatory guidance. It is effectively in place now. There is some relief that is available until the end of September for those who have applied under certain specific conditions. However, what will happen is there will be very likely an increase in reported costs, but we have to be very clear that these are an increase in the reported costs and not necessarily an increase in the actual costs and that clarification will enable consumers to have a better picture of what they are actually paying.

Senator BUSHBY: I think that is very important. There is a lot said about the costs of administering various superannuation funds, and I believe there is a bit of contention about the ability to compare, so what you are saying is that this is important because it improves the ability for consumers to understand in a consistent manner what fees are actually being paid across various different superannuations.

Mr Fitzpatrick : May I also add that we are very cognisant that there has been a lot of focus on fees and costs. We certainly do not think that fees and costs are the only aspects that consumers need to bear in mind when they are making investment decision, whether in managed funds or superannuation. They also need to bear in mind: what is the investment strategy and their own needs in terms of the product that they are looking at. The performance of the funds is an important aspect as well. We are looking at that area, because what we would like to get to is a point where the focus is actually on net returns and not solely a focus on what is actually being paid. It is important that there is an overall benefit that accrues to the consumer.

Senator BUSHBY: And, once again, transparency, understanding and consistency of that so you are making sure you are comparing apples with apples, not apples and oranges.

Mr Medcraft : It is all about transparency.

Senator BUSHBY: My understanding is that some participants are opposed to the changes—is that a correct understanding?

Mr Fitzpatrick : I think there has been a discussion in industry from a range of sources that have identified areas where they would like to see amendments, greater detail or further guidance. We have worked very closely with industry and we have encouraged the development of industry standards. There is an industry working group that is working through developments in terms of specific, more detailed and granular information that will be available to funds. So, whereas there are differences of views as to how this might apply, a lot of these areas have been addressed as a result of our consultation and not just the guidance that has been provided by ASIC but also the guidance that has been provided by the industry working group.

Senator BUSHBY: Given that you have worked through that, does opposition remain?

Mr Fitzpatrick : I think the discussion is still ongoing. We are steadily working our way through the issues, and I am pretty confident that the engagement that we have had has been very productive, and I have welcomed the discussions that we have had with industry.

Mr Medcraft : I think we try to be as facilitative as possible but, at the same time, it is about improving transparency.

Senator BUSHBY: Absolutely, and the ability of consumers to make an informed decision.

Mr Price : In studies or consistency, sometimes there will be winners and losers, so that is something that we have very much kept in mind. We need to be fair across the entire sector.

Senator BUSHBY: Absolutely, but with the end objective of transparency—

Mr Price : Absolutely.

Senator BUSHBY: and an ability to consistently understand what fees are being taken out and so forth.

Mr Medcraft : Correct. The ultimate skin in the game is those investors.

Senator BUSHBY: That is right. Super funds, from time to time, use related parties for their investments. Would the RG 97 requirements force disclosure of the associated fees and transaction costs for related parties?

Mr Fitzpatrick : We have, within the guidance, a concept called 'interposed vehicles' where it is specific to describe what are the transactions that have been undertaken through interposed vehicles. This may be related or unrelated parties, but it will ensure that the transactions that are run through those entities are transparent.

Senator BUSHBY: So whether they are related parties or otherwise, if there are other parties that interposed, they have to disclose the fees associated with those?

Mr Fitzpatrick : Yes.

Senator BUSHBY: Is this type of disclosure requirement unique to Australia?

Mr Medcraft : No.

Senator BUSHBY: Where did the policy requiring super funds to disclose these arrangements come from? What was the genesis for moving down this path for RG 97?

Mr Fitzpatrick : These requirements have existed in the law for managed investment schemes since about 2005, and for super funds from 2013 with the introduction of the Stronger Super changes. I think the significant difference was an understanding and clarification about how those requirements would apply. Again, this went through quite a significance consultative phase with industry. We have provided quite clear guidance on how the law would apply in those contexts.

Senator BUSHBY: For clarity, they would have to comply with RG 97?

Mr Fitzpatrick : That is correct. We have extended the transition period, but the transition period was completed on 1 February this year, except for those entities that had applied for conditional relief, and that will run until the end of September.

Senator BUSHBY: Thank you. Just changing the subject, you mentioned some of your enforcement activities in your opening statement, Mr Medcraft. Could you provide a bit more specificity and an update to the committee on the current enforcement action. In doing so, can you also provide some information on how ASIC is using the government's $121 million funding package, which was announced a bit over 12 months ago, to take proactive action in regulating the financial sector.

Mr Medcraft : Sure. Half of the $120 million funding package, as you know, is going to rolling out our data analytics capability. I will perhaps ask John Price to comment on that. And the other roughly $60 million was really to deal with responsible lending, financial advisers, misconduct and breach reporting and what we are doing in the insurance sector. I will perhaps ask Peter Kell to deal with comments on that, or maybe Greg Kirk. Maybe we can start off, because we are doing some really exciting stuff in the data analytics area. I pass over to John.

Mr Price : A key part of our work in the data analytics area is occurring through a project we refer to as regulatory transformation. That is really looking at the existing ASIC-business processes and IT systems and striving to get a much more simplified, harmonised and off-the-shelf product that will enable better searching and more consistent terminology throughout the organisation and simpler and fewer business processes which will assist us in analysing data that comes into our organisation. We are also quite keen to use both internal and external data, so we are seeking to revise our systems in such a way that we can get external data feeds, combine them with internal data and then make regulatory decisions on that basis. I think a lot has been said in the business community more broadly about the use of data and digital disruption. It is very important for this committee to understand that those trends apply to regulators well as. Better use of data and thinking about clever use of automated searching processes can help any business that is really interested in targeting and understanding risk, and we are certainly in that category. I just wonder whether Commissioner Cathie Armour or someone else might like to say something on that.

Mr Medcraft : Just to add to that: already, as you know, some courts now accept e-discovery—basically, using machine learning to scan documents rather than using paralegals to look for documents. We are now doing that. We are using pattern recognition software in our surveillance of documents, which is quite interesting. And then also we are piloting, at the moment, with Red Marker, a program to scan the web to identify illegal activity. Again, that is machine learning.

Globally, I am very happy to mention that, last week, at the IOSCO board meeting, we initiated a new global forum for looking at data analytics across the world with regulators who look to exchange information and how we develop. As you know, we have created the role of chief data officer at ASIC now, so it is not just at a local level but also at a global level. We do think that the ability to detect, understand and respond is going to be revolutionised with new data analytics.

Senator BUSHBY: Big data is the future of so many commercial and government initiatives.

Mr Medcraft : I think that initiative will put us at the forefront of new technology, so it is really important. Peter, did you want to comment about the other things?

Mr Kell : Just quickly, the funding is allowing us to undertake some new projects that we would not have otherwise been able to undertake in areas around financial advice, credit, insurance and super. It is also allowing us to expand the scope and the reach of some existing projects. It is allowing us to undertake additional coverage through both of those ways. Without wanting to go to everything but to give you a couple of examples, we have undertaken a project looking at the breach reporting practices within large banks and how that has operated over time. In the financial advice space, we are looking at a project assessing how accountants are providing advice, especially those who have recently entered the financial advice industry. We are looking at inappropriate insurance switching by advisers, and, in effect, it has allowed us to undertake a more substantial surveillance of the SMSF-advice sector as well. In the credit sector, it includes some of the ongoing work we are doing on mortgage broking. We are undertaking a significant project around loan fraud, particularly in the home-loan market, looking at requiring lenders to improve their procedures for detecting applications that may involve fraud. In the insurance area, we have embarked upon a review of the direct sale of life insurance. I do not know whether you recall, but, when we did our review of insurance claims handling last year, we found the direct channel had, on average, the highest denial rates for claims, so we want to look at how that channel is working in terms of the products that are sold, the information provided to customers and the outcomes. We are continuing follow-up work that is allowing us to do more work on life insurance claims handling, including joint work with APRA on the publication of data on claims outcomes. It is part of the reason why we are unable to undertake a more substantial project around employers in super. We are also looking at exchange traded funds from the SMSF and retail-investor perspectives. That is a snapshot of some of those projects. We are happy to provide a quick written summary for the committee to give you a sense of—

Senator BUSHBY: Maybe on notice. I am way over time. My question was within the minute that I had left, but your answer is taking longer—which is fine.

Mr Medcraft : The other thing that I will mention on data is that we are actually creating data labs for regtech start-ups to actually use anonymised data to test their ideas. That is a pretty interesting development as well.

Senator BUSHBY: It sounds like you are making good use of the money that has been provided. If you could take that on notice in a bit more detail, that would be fantastic.

Senator WHISH-WILSON: I was actually going to ask about one aspect of your response to Senator Bushby around loan fraud. I put some questions on notice after the last estimates. You said a loan fraud project. Could I ask you to elaborate on that? In your response to me, ASIC said that you basically have a number of matters involving false documents or false information supporting loan applications more generally being investigated. You said you obviously do work to detect, understand and respond to loan fraud in the credit industry on a broader basis. Is that different to a specific project that you have instigated, or are you referring to—

Mr Kell : It has been a focus for a while, but I suppose, in some ways, some of the patterns that we have been seeing indicate to us that we need a more systemic look at how we can reduce the incidence of loan fraud and how we can work with lenders to improve their procedures for detecting fraud. It tends to fall into two categories, and I think that we have had this discussion: individuals sometimes might have a gambling problem or something like that and engage in loan fraud as a mortgage broker; and then we have also had some cases of far more systemic organised examples of loan fraud, with amounts well over $100 million. In both of those, it is one of those things where you will always need to be alert and keeping an eye on it. We are seeing different approaches by lenders as to how they detect it. We think if there is an ability to share some of those learnings and to look at how that can be undertaken, that will help minimise—

Senator WHISH-WILSON: Before you do, I would like you to respond. Last time, I think I asked you about some media reporting around some self-reporting from Westpac and ANZ—that they detected some loan fraud within their own organisations and they came to you about that.

Mr Kell : We are getting quite a few reports from the lenders themselves when they see loan fraud. That is positive, obviously. That is what we like to happen. We have taken quite a lot of actions to ban brokers from the industry and in some cases undertake criminal prosecutions in relation to loan fraud. What we also want to do is sheet back some of that responsibility to the lenders as well. That is quite critical here.

Mr Saadat : To answer your question about whether there is a separate piece of work—

Senator WHISH-WILSON: A separate project.

Mr Saadat : There is. We are in the process of scoping that project at the moment to work out what it will cover and what it will look at. The intent, as Mr Kell said, is to look more broadly than isolated or individual instances of loan fraud to come with a strategy that can deal with it more comprehensively. ASIC has limited resources. We cannot take action for every single allegation that is made about loan fraud. We prioritise the higher-risk ones. Part of this is understanding how we might approach that in a way that does not require us to—

Senator WHISH-WILSON: On that point, in terms of detection, the case I mentioned at last estimates was self-reporting. Clearly, the pressure that you are bringing to bear is, let's say, not coercing the banks but incentivising them to self-report. Is your ability to actually detect these things unless they are brought to your attention by whistleblowers very limited?

Mr Saadat : We get intelligence about loan fraud from a number of different channels. One of them is through lenders. One of them is also through the aggregators that are responsible for having brokers operate under their networks. The other way we also get alerted to these issues is through AUSTRAC and the suspicious matter reports that are lodged with AUSTRAC. Where those reports relate to instances of loan fraud, AUSTRAC will alert us to those issues to enable us to consider whether action is required.

Senator WHISH-WILSON: In relation to another question on notice—also going back to a question I asked in the last estimates—around the civil proceeding that you initiated against Westpac, in your response to me you said you could not give details because it was before the courts. Is it still before the courts?

Mr Kell : Yes.

Mr Saadat : Yes, it is.

Senator WHISH-WILSON: Just to be clear, that is more on predatory lending than it is on loan fraud. That is not on loan fraud or credit, it is on—

Mr Kell : That is not on loan fraud.

Mr Saadat : It is on responsible lending.

Senator WHISH-WILSON: responsible lending.

Mr Kell : Responsible lending, particularly in relation to interest-only loans.

Senator WHISH-WILSON: Is there a technical definition of 'predatory lending'? Or is that just a term that is used?

Mr Kell : It is not a legal term.

Senator WHISH-WILSON: It is not a legal term, so we should use 'responsible lending'.

Mr Kell : Responsible lending—

Mr Saadat : is the obligation in the law.

Mr Kell : Yes.

Senator WHISH-WILSON: Are you able to comment on that case. Is it still before the courts?

Mr Saadat : It is, yes.

Mr Kell : It is.

Senator WHISH-WILSON: I have a case study that I want to give to you in confidence after you leave today. I raised it with APRA last night. You are aware of the details. It is before the courts.

Mr Medcraft : We will coordinate on that.

Mr Kell : It does not look good.

Mr Medcraft : No.

Senator WHISH-WILSON: No, it does not. But I want to specifically ask: if this case were before the Ombudsman—and they are looking at it at the moment—would the Ombudsman come to you for advice on these consumer issues. I know APRA was different; that was prudential.

Mr Kell : Not necessarily for advice around individual matters, but, as a condition of their approval, the Ombudsman has to report serious or systemic misconduct to us. So, if they think either the matter represents a systemic pattern of behaviour by a financial services licensee—a lender—or it is an individual matter that is so serious that it raises broader issues, then they are required to report that to us. It will depend on how it is seen in that process. So, yes, regarding advice on individual matters, we do not seek to get involved as such, but there is a reporting requirement there back to ASIC.

Senator WHISH-WILSON: In terms of whether that case study, for example, had breached the requirements for responsible lending under the legislation, they would make their own determination.

Mr Kell : They would make their own determination. But, clearly, one of the things that they will take into account is ASIC's guidance and statements on responsible lending and how we see it applying in practice. That will often be one of the benchmarks they refer to when making a decision.

Senator WHISH-WILSON: That makes sense. I was not aware of that.

Mr Medcraft : Most importantly, as I have responded, we will coordinate.

Senator WHISH-WILSON: In terms of the intelligence that you mentioned earlier that you would get from different sources, does the Ombudsman give you cases where these things come before them as indications. I think this loan was granted in 2013, so it is a few years old. Do you also monitor their caseload for these kinds of examples to determine whether they are systemic or potentially systemic. I liked your bad apples versus bad tree analogy today, by the way. That goes to the heart of the problem.

Mr Kell : There is quite a structured communication process with the Ombudsman. Depending on the case, if we feel that the Ombudsman might have material that would help us to assess or investigate the matter, we will serve notices or require that information be handed over.

Senator WHISH-WILSON: This is my last question because I have to go to another committee. Were you consulted on the construction of the new one-stop shop legislation that was put up in the budget and how the kinds of issues that I have raised with you would fit into this in terms of advice on consumer disputes?

Mr Kell : The new dispute resolution framework?

Senator WHISH-WILSON: Yes.

Mr Kell : We were active participants in the Ramsay inquiry. We, obviously, have to talk to Treasury about the future of that sector. We have a particular role because we have, for quite a while, had the role of approving Ombudsman schemes against standards that we set out in a regulatory guide. It is a condition of participating in the financial services sector that you belong to an ASIC-approved scheme. Obviously, ASIC is very interested to ensure that the whole arrangement works well and we have been supportive of having higher limits, allowing a wider range of matters to be heard, better publication of dispute resolution data and those sorts of things that are part of our act.

Senator WHISH-WILSON: Did you want to say something, Mr Kirk?

Mr Kirk : I was generally nodding in agreement. One of the other things that we have sought, and which was recommended and accepted by the government, was that we would have more direct and nuanced powers where there are problems with schemes. Historically, if a dispute scheme—and luckily, it has not been the case—was failing to deal with disputes appropriately, all we could really do was to take away their approval, which then would have meant consumers had nowhere to go. There would not be a dispute scheme for them. The proposal now, which we think is very useful, is where they have problems with particular things, for example, perhaps they are getting a backlog and they do not have the resources to deal with the number of disputes that they are now getting, we can give explicit direction, 'You need to address this issue,' and requirements that that be done. We think that that is a good step forward.

Senator WHISH-WILSON: Just picking up on something that you said in my last set of questions, Mr Kell—and you were also responding to Senator Gallagher—around the new product intervention laws that we were talking about. You mentioned the need to include remuneration in those laws. Could you expand a little bit more on that?

Mr Kell : It really goes go—when we are talking about a product intervention power, what do we mean by intervention? That is one of the issues that has been consulted on. It might be looking, ultimately, as I said, perhaps in extreme cases, at banning a product outright, but it is more likely to be looking at some aspects of its design, even elements around how it is described, whether the risks are appropriately characterised and so on. You saw some of those issues come up just a few minutes ago when we were talking about funeral insurance. Another type of intervention that was not in the model that is being consulted on, but we think is very important, is how the product is sold, if you like. What are the remuneration arrangements that go to the way the product is sold, advised upon or promoted? These arrangements, in many cases, are inextricably linked to the design and the way that the product gets into the hands of consumers. As we have seen too many times, the wrong sort of remuneration arrangements have generated very poor outcomes. So we think that aspect should also be one of the interventions that is allowed.

Senator WHISH-WILSON: So the remuneration it sets is kind of like a siren call for highlighting potential issues—

Mr Kell : That is right; it might even be that—

Senator WHISH-WILSON: It could be real estate brokers; you mentioned cars a little bit earlier; I know we have asked questions about real estate before, particularly off-plan sales; insurances and the whole range of things where commissions are a big part of that.

Mr Kell : It might even be the case that the product itself is a reasonable product, but because of the way that the remuneration is structured, it is being provided to people for whom it is inappropriate. A loan of some sort is a perfectly reasonable product to many people, but if it is being dealt with in such a way that people are getting it in the wrong circumstances. That is partly covered by responsible lending, but that is—

Senator WHISH-WILSON: And by FOFA—is it a conflict, in a sense, with the FOFA laws that we passed, or is it complementary?

Mr Kell : I think it would be complementary. If there are existing laws then they will do their job, you would hope. But we know—this is the issue as to why we have argued for remuneration to be one of the interventions that would be allowed—history tells us that the financial services sector over time will develop new and innovative, and at times undesirable, ways to remunerate people to push product. We cannot anticipate every single one of those today, but we know—history tells us—that that has often been the cause of problems in the past. If we had a power that would allow us to act on some of those things sooner rather than later when we see them emerging, wherever they do emerge, that would be very useful. I cannot tell you today what that might be in five years time, but if we have that sort of power it allows us potentially to stop some of these problems becoming major catastrophes for the consumers involved.

Senator WHISH-WILSON: We will wait with interest on the submissions and feedback process on that.

Senator GALLAGHER: I do not want to delay you unnecessarily. I have two areas I would like to touch on. One is the time it takes for reports to be made to ASIC from—

Mr Kell : Breach reports?

Senator GALLAGHER: Yes. I notice, if I look at NAB, there seems to be a bit of an issue. On 27 May there was a report in Fairfax saying, 'NAB notified ASIC on May 18—six months after the bank first became aware of the issue.' There was also a report on 18 March, in Fairfax as well, mentioning that it was taking banks 'up to six months to notify the corporate watchdog when they find misbehaving advisers,' and also that they frequently fail to reference-check properly. You are quoted in that story, I think, Mr Kell.

In front of a House Standing Committee on Economics hearing, the CEO of NAB told the committee:

… we have continued to implement our wealth initiatives, including reporting planners who breach our code of conduct immediately to ASIC …

In light of those stories I have mentioned, how do you think the CEO's reference around 'immediately reporting breaches to ASIC' aligns with what is happening in practice? Could you comment.

Mr Kell : We have been calling out for some time—

Mr Medcraft : Quite a long time.

Mr Kell : that we think breach reporting standards are inadequate across the financial services sector. At times we will get breach reports that come in right when you want them, but too often there are very significant delays between an institution's first becoming aware of the misconduct and their reporting it to ASIC, which makes it more difficult then to take action.

Senator GALLAGHER: What can you do about it? If it has been a problem for some time—

Mr Kell : It is one of the key elements—it is up for consultation, the reform to the breach reporting requirements, because the bottom line is that as they currently stand they are grossly inadequate, in several ways. It is as simple as that. The threshold for what is a significant breach is too high and unclear—

Mr Kirk : Very subjective.

Mr Kell : and, in fact, it might even work in the way that a significant breach for a very large entity may be a different threshold to a significant breach for a smaller entity, despite the fact that it will have the same impact on the consumer. The question as to when you have to notify or when you have to report is also unclear and at times can almost be deliberately manipulated so that the decision maker does not find out about the matter until well into the issue becoming first identified. The penalty for failing to report is at the criminal threshold and the actual monetary amount is trivial, so we are seeking improvements there, as well. We think infringement notices would be useful.

Senator GALLAGHER: How long will this take?

Mr Kell : It is something where I think there has been general agreement that this does clearly need to be fixed. It is not ultimately in ASIC's hands, but it is being consulted on as we speak.

Senator GALLAGHER: Do Treasury do that?

Mr Kirk : It is one of the components of the enforcement review.

Mr Medcraft : This is a major problem—both the timing and also what is significant.

Senator GALLAGHER: The threshold, yes.

Mr Medcraft : It is a major problem, and it has to be dealt with.

Senator GALLAGHER: There was another article relating to NAB in late April in The Australian, and in this it reports that ASIC was informed through APRA of another breach relating to $1.9 million—customers were basically robbed of that money when it should have been credited to their superannuation accounts. I do not know whether that is true or not or what the status of that investigation is, but it seems to me there are repeated references to failure here. Are you telling me that you do not have anything available to you in your suite of tools to deal with this now—that could tighten things up now?

Mr Kell : We have looked at certain cases—I will not go into the details of individual cases—where we were of the view that this would by any measure fail the intent of the breach reporting requirements, and we have received advice that it would not be a good case to run. We certainly have looked at this. I think at the moment our major way of putting pressure on this is to highlight some of the poor performance and have a dialogue especially with the larger firms about how to improve it. It has improved in some areas but obviously there is still a way to go.

Mr Kirk : The enforcement review, which is very important to us in terms of getting better outcomes—

Senator GALLAGHER: Do we know when that will be finished? I should have asked Treasury yesterday, but is there any end of that in sight?

Mr Kirk : I think the original intent was that a panel has been set up by Treasury to look at all these things, and there are a number of elements to it, and that they would go back to government before the end of the year.

Senator GALLAGHER: Before the end of this year?

Mr Medcraft : That is my understanding.

Senator GALLAGHER: It did start out of last year's budget? I am sure we discussed it at the last estimates.

Mr Kell : It commenced in the latter part of last year.

Mr Kirk : The other thing worth mentioning is that, again with the new money coming out of the improving outcomes in financial services NPP, we have a specific project where we are looking at the practices of institutions around breach reporting. I guess this goes beyond the legal to more of the cultural elements that are at play here, trying to understand them better and get changes in that way. That work is started, but that is a relatively long-term piece of work as well.

Mr Medcraft : It is an area that we have to have fixed up.

Senator GALLAGHER: Do you think the banks themselves in this instance are doing enough to get their systems in place? Again it comes down to systems—there always seems to be a reason why they failed to report, and it is usually a systems error or a record error or something like that; the usual response. At the same time as this enforcement work is going on are you pushing them to get their house in order and to take it seriously?

Mr Kell : We certainly are pushing very hard on this. They are clearly aware of our views. We highlighted in our recent advice compliance report that of the advisers that had serious compliance concerns that were identified as part of that review, only half had been breach reported to us. That in itself tells a pretty damning story. It is something that we are engaging with banks on at the most senior levels, from the boards down. They are very well aware that this is impacting on their reputation and also their engagement with the regulator, and they are clearly seeing that reform is going to be introduced. So we are seeing improvements but it is not always consistent across the banks and other large entities.

Senator GALLAGHER: I guess when a CEO fronts up to a House committee and says, 'We are continuing to implement our initiatives, including reporting clients in breach of our code of conduct immediately to ASIC.' That is the information that has been provided by the bank. It does not align then with articles that come subsequently from that. They tell a different story.

Mr Medcraft : I guess the issue always is what 'immediately' means.

Senator GALLAGHER: I would not say that six months is immediate. Would you?

Mr Medcraft : A good point.

Senator GALLAGHER: There is a bit of leeway, surely.

Mr Kirk : To go into some of the legal issues that need to be addressed, at the moment they have to report breaches. Their argument: we have to determine that it is a breach; we may need to get legal advice; we may need to get in-house legal advice and external legal advice. So it disappears into the never-never very quickly.

Mr Medcraft : Immediately they determine it is a significant breach—

Senator GALLAGHER: Then, that is the report.

Mr Kirk : The new test that is proposed is that they have to report breaches and possible breaches.

Mr Medcraft : It is an area that has been subject to very interesting interpretation.

Mr Kell : The proposed reforms are very important.

Senator GALLAGHER: Regarding responsible lending, I think ASIC has some work underway in relation to a case against Westpac, looking back over a period of time—three and a bit years, from December 2011 to March 2015. Are you able to give me any information about that?

Mr Saadat : I cannot really say much about any new developments on that matter. It is before the court and there is another directions hearing, I think within a few weeks' time.

Senator GALLAGHER: How many loans does it involve?

Mr Saadat : The case has two elements. One element is around their overall process for approving loans. That would affect quite a few loans—I do not have the exact number in front of me.

Senator GALLAGHER: Could you take that on notice?

Mr Saadat : We can take that on notice.

Senator GALLAGHER: Are we talking hundreds or thousands?

Mr Saadat : It would probably be in the thousands, I imagine. The other part of the case is that we identify six individual borrowers where we say that Westpac failed to meet its responsible lending obligations, based on the specific factors that relate to those borrowers. But it was about the process Westpac used to have in place. It is not a process they have in place any more. It was identified through the work we did in 2015, when we reviewed interest-only loans across the industry.

Senator GALLAGHER: We might get further updates from that as required. You said that the matter is before court. Have you imposed any other penalties in relation to this?

Mr Saadat : On Westpac?

Senator GALLAGHER: Yes.

Mr Saadat : No, the matter is before the court, so we have not announced any other regulatory outcomes.

Mr Kell : We can certainly provide you with an update on the matters we have taken around responsible lending breaches, if that is what you are asking for generally.

Senator GALLAGHER: Yes.

Mr Kell : There have been quite a few cases we have taken on there. I will not run through all of them, but to give you one example: BMW Finance last year paying $77 million following their failure to comply with their responsible lending obligations. We are happy to provide you with an update of our responsible lending actions.

The second issue is that under the responsible lending regime we did get a series of cross-industry changes to the way that interest-only loans were assessed, coming out of our review, where we found more general areas of concern around the use of benchmarks and inadequacies around the way that income and expenditures were assessed, and so on. So there have been some quite significant movements.

Senator GALLAGHER: With the responsible lending regime in place now for six years or so, I know you have the case against Westpac and that other banks have agreed that they are going to improve their procedures from now on. We are six years on into the regime. Why has it taken this long to get to this point?

Mr Saadat : Is there a particular aspect that you are concerned about?

Senator GALLAGHER: You put out a media release on 3 April 2017.

Mr Saadat : Yes.

Senator GALLAGHER: It seems to me that it is a long time after a law passes to be still getting things wrong.

Mr Saadat : The responsible-lending laws are principles based. The obligation is to make sure that a person can afford the loan without substantial hardship, and also to make sure that the loan meets the requirements and objectives of the borrower. They are the principles that are outlined in the law. We have provided guidance in Regulatory Guide 209 about how we see those obligations operating. The more recent work we have done has really been as a result of an emerging risk that was identified through the Council of Financial Regulators, as it relates to interests-only loans in particular. That was why we did that review in 2015. We did a follow-up review in 2016. So that more recent work has really been prompted by significant growth in the number of interests-only loans that are being provided to consumers, including approximately a doubling of interests-only loans to owner-occupiers, from 2012 to 2015. We were concerned about that and we wanted to make sure that the processes and procedures that were in place with the lenders were adequate, so we did a cross-industry review. So, although the responsible lending laws have been in place for six years or so, some of our more recent work has really focused on some of the emerging risks that have come about.

Senator GALLAGHER: Sure. I understand that you are responding to emerging risks—that the laws have been in place. Even with the fact that they are selling a lot more interests-only mortgages should not change the processes that they use to ascertain whether or not it is the right product for a particular customer.

Mr Saadat : Correct.

Senator GALLAGHER: I agree that you have had to respond. What I am saying is that you should not have had to respond, necessarily, if they—

Mr Saadat : We have provided more guidance to industry through that process—more detailed guidance—so, industry understands what our more specific expectations are. But, yes, you are right to say that the obligations have not changed in that period.

Senator GALLAGHER: More-detailed guidance is very nice language! I will look for that in future releases. Whenever I see ASIC using 'more-detailed guidance' we will be alert to a problem somewhere!

Mr Medcraft : Sometimes it is a bit like cat and mouse.

Senator GALLAGHER: Yes.

Senator KETTER: In regard to the Wealth Management Project, I understand that Macquarie was excluded from that project because of an enforceable undertaking that you had with them, whereas the Commonwealth Bank was included, despite the fact that they also had an enforceable undertaking. Can you tell us why the CBA was included but Macquarie was excluded.

Mr Kell : I should emphasise that Macquarie is included, but there are a couple of particular projects under our overall wealth management work, where other work we have done meant that it was not so relevant.

Ms Bird : They were excluded from some specific projects we have done—for example, the Advice Compliance Project, which has been referred to—it is in report 515. It is not just actually on the basis of the enforceable undertaking. The main reason for excluding them is that they operate quite a different business model from the other ones, so they have not really fitted in the scope. But, also, we have looked at them quite thoroughly very recently.

Senator KETTER: Did Macquarie threaten any legal or other action if it was included in the report?

Ms Bird : No. With things like the Fees for No Service Report we have included them in the scope but we actually have not yet found any breaches by them, because they in fact run a different business model.

Senator KETTER: Returning to the BBSW, I note that there is a report that you have appointed law firm Johnson Winter & Slattery to help you on that case.

Mr Medcraft : That is correct.

Senator KETTER: What is their mandate and does it include entering into settlement negotiations?

Ms Armour : They are assisting us with the matter. As we have mentioned before, we are running significant litigation that involves important issues. They will assist us with that, and we have mentioned that we are open to having discussions about solutions with the parties we are running the litigation against. That is probably all we need to say.

Mr Medcraft : So they will run in parallel with our other team.

Senator KETTER: So the potential is there for them to enter into settlement negotiations?

Ms Armour : We have always said we were open to having discussions for that matter, like most matters.

Mr Medcraft : We have always said we could do this the easy way or the hard way. So there is a team looking at the hard way and a team looking at the easy way.

Senator KETTER: Finally, Mr Medcraft, in the last few minutes, I always used to raise this matter with Mr Tanzer, and I hope he is enjoying his retirement—

Mr Medcraft : He is probably watching!

Senator KETTER: I am sure he is! I want to ask you about what we refer to as the bank bundling exercise, and I know you are looking at the quality of advice and information provided by superannuation trustees to employers, and you were looking at reviewing up to 50 super fund trustees and you have identified what potentially could be aggressive marketing tactics and inducements to win employer default fund business. We have also seen reports that AMP have advised that 80 per cent of their new customers come through employer superannuation agreements. I know you are writing out to superannuation trustees. How is that going? I understand there is also going to be a further round of meetings following that, so could you give us an update?

Mr Fitzpatrick : As part of that work that we had undertaken on employers and super, that is a component. It is looking at what the relationships between super fund and the employer are. This is not a new issue, and when this has come up in the past we have reviewed it, and we have reviewed it across all sectors of the superannuation industry. In a similar way, we will be looking, through the employers in the super project, across all sectors of the superannuation industry to see whether this is a factor in terms of decision-making by employers when choosing a superannuation fund.

Senator KETTER: So you have written to the trustees, and where is your actual investigation up to?

Mr Fitzpatrick : We are undertaking a review at the moment, and that is at an early stage. We have written to approximately 50 trustees and superannuation funds following an assessment of the information provided, which is a fairly broad notice. We will choose a selection of those entities to look at a bit more closely.

Senator KETTER: When are they supposed to respond to your correspondence?

Mr Fitzpatrick : The notices went out I think about two weeks ago, so I think it will be within the next few weeks. We were giving them somewhere in the region of four weeks.

Mr Price : Response are due in June.

Senator KETTER: Would it be reasonable to assume that after that you will assess those responses, and depending on them you would undertake some further meetings as required?

Mr Fitzpatrick : That is correct. Just as I was mentioning earlier, this is part of this broader employers in super project, so it is going to take us through to the end of this year, and possibly early next year, before we get to any form of final report. But the timing of that will be determined by what we find from the initial notice and what we need to follow up with the relevant entities.

CHAIR: We are finishing just on time. Thank you very much. If there be no more questions for ASIC, they are free to go. Run like the wind!

Proceedings suspended from 12 : 44 to 13 : 45