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Australian Securities and Investments Commission

CHAIR —Before I welcome the Australian Securities and Investments Commission, I will just read a motion passed in the break by the committee. It is: ‘That filming and photography of today’s hearings be permitted insofar as it does not hinder or distract from the proceedings of the committee. Media representatives should not harass or distract witnesses, and filming or photography of senators’ or witnesses’ documents is prohibited.’

I welcome here this morning the Australian Securities and Investments Commission. Mr D’Aloisio, do you have an opening statement that you would like to make?

Mr D’Aloisio —Thank you, Chair. I will very briefly mention a couple of things of note for ASIC since we last met in June this year. Firstly, we took over the national credit regime from 1 July. I am pleased to report that the registration and licensing of that and the changeover are going very well.

Secondly, on 1 August we took over the transfer of surveillance from the ASX. Again, I am pleased to report that that changeover has gone very well. In terms of how that activity is going, it is early days for us to give figures about that surveillance and how it is working, but I thought it was useful just to give some initial figures to the committee. ASIC has commenced inquiries into some 57 separate market related matters since the transfer. Of those, nine matters have proceeded to formal investigations as at today. That is a rough average of about three a month, in contrast to comparable periods with ASX of around 1.7 to two a month. It is early days on those numbers, but we are comforted by the fact that the transfer is going over in a seamless way. These matters have, we believe, proceeded to an investigation stage probably in a shorter time than may have been the case, although the two agencies—that is, ASX and us—did work very well together. We have also been very active in that period in raising unusual trading with relevant market participants, very much being mindful that the supervision function is very much about being close to the market and working with the market.

The final matter to mention is that, in terms of our other work, our business-as-usual work, in that period since we last met, in enforcement ASIC in that period has had 41 outcomes: 19 in the civil area, 14 in criminal and eight in administrative. We have also provided extensive guidance to the market on a number of issues including contracts for differences. I think I will close there. I thought it would be useful for the committee just to get a little bit of an update on the key issues that have been occupying our minds since we last met. Thank you, Chair, for letting me make an opening statement.

CHAIR —Thank you for that.

Senator BUSHBY —Thank you to ASIC for coming along today to give us assistance. In the June estimates, you stated that ASIC would discharge its responsibilities within budget for the 2009-10 year. Did you actually do that?

Mr D’Aloisio —In the final numbers that will be in our annual report, we ended up with a deficit of, I think, 4.9. There was a software write-down that accounted for a significant part of that, and we also made provision if we needed to do restructuring in the 2010-11 year, so we ended up, I think, with a 4.9 deficit which we funded from the carry-forward from previous years. This will be all in the annual report shortly.

Senator BUSHBY —So you funded that by carry-forward. Were there any additional matters added to your allocation by the government during that financial year that were not shown originally in the budget?

Mr D’Aloisio —Not in that financial year, but shortly after, in the new financial year, the government approved an additional $10 million of unclaimed moneys funds for ASIC for the 2010-11 year, for the current financial year.

Senator BUSHBY —On what basis was that provided?

Mr D’Aloisio —That was provided on the basis of projects that fell within that form of funding.

Senator BUSHBY —So that was for a specific project?

Mr D’Aloisio —A number of specific projects

Senator BUSHBY —But there was no money provided to cover the shortfall or any perceived shortfall in operations in any of your areas?

Mr D’Aloisio —No, we did not ask to cover the $4.9 million shortfall.

Senator BUSHBY —There were no other shortfalls in any other area?

Mr D’Aloisio —We have budgeted, roughly, on a breakeven basis for the 2010-11 year and at this stage we are obviously involved with Treasury and government in relation to funding beyond the 2010-11 year, which we are progressing. That will take its course through government.

Senator BUSHBY —You have had a lot of new responsibilities allocated to ASIC, most of which have come with increased allocations. In the June estimates, in terms of the actual costs of running those new responsibilities, you indicated that effectively time would tell whether that was sufficient. And you indicated you would approach Treasury if you felt that those allocations were inadequate. You also noted that in three to six months you would have a better feel to assess things and talk to government as to whether you need additional resourcing. We are about four months later—so we are within that three-to-six-month period. Are you in a better position to make the assessment as to whether the additional allocations that have been provided to you are sufficient?

Mr D’Aloisio —We are working on that, as I indicated. And clearly, as I indicated, we are talking to Treasury and I have a task force that is reviewing our funding beyond 2010-11. As part of that the commission is considering those issues. I do not have anything to state publicly at this stage but our intention is to be looking at the ASIC funding well beyond the 2011-12 year and picking up. As I said at the last meeting, and you quite rightly point out, it is one thing to plan in the sense of supervision et cetera; it is quite another when you get into working it through. The commission is comfortable that our funding is right for this financial year and that in relation to going beyond that this is a matter that we are discussing with government and going into detail. Hopefully we will be able to report better on that in the next Senate estimates meeting.

Senator BUSHBY —I will just move onto something different—short selling. I understand that ASIC is now publishing new short selling data on its website. What trends are you establishing?

Ms Gibson —I do not believe we are finding troublesome trends. We get monthly reports with highlight issues and the most recent one I read said nothing out of the ordinary.

Senator BUSHBY —Has short selling returned to its pre-crisis levels?

Mr D’Aloisio —No.

Ms Gibson —Short selling in that period in September 2008 was at extreme levels—

Senator BUSHBY —I am talking more about the longer-term average.

Ms Gibson —until we introduced the ban. No, I do not believe so. I could check the figures but I do not believe so.

Mr D’Aloisio —We can check and do some analysis. One of the difficulties is that we do not have comparative numbers, in the sense that the disclosure requirements were not there. The issue of disclosure really assumed significance from September 2008 on, when we had the Lehman Brothers and the issues around short selling. So we can look at that. Certainly, we are not detecting from the market, as Ms Gibson has said, that there are concerns being raised with us that companies have been heavily short sold, and what is ASIC doing about it?

Senator BUSHBY —Have you performed any analysis of how the impact of the ban on short selling actually impacted on the volume of short selling in Australia. Was the ban effective while it was in place?

Mr D’Aloisio —I think we have reported on this in previous meetings. I need to refresh my mind. You will recall that the ban went in in three tranches. There was the initial complete ban of naked short selling and covered short selling. That went, I think, for about two or three months in the September through to the December-January period of 2008 and early 2009, when the GFC was probably at its height. Then we reopened the market, other than the financials. Then we opened the financials as well. So in that period short-selling did have the impact that was needed, we felt, given the potential systemic issues that could have occurred for the financial sector and for the REIT sector of the Australian market.

These were matters of judgment, and no doubt historians and others with the benefit of hindsight will look at them, but certainly at the time we felt that that was the right call and certainly since then there has not been any material given to us saying that the ban was not effective and did not achieve the sorts of purposes that were needed essentially to restore confidence in the market when buyers had vacated the market.

Senator BUSHBY —Back in June you noted on the day of the estimates that the new short-selling system had just started on that day. You noted that it was open to receive reports but the industry was not fully ready to interact with it at that point and you had provided a period of grace of some weeks. I presume that that period of grace has ceased.

Ms Gibson —Yes—it has, substantially. My understanding is that the main players are now all operating through the system—that the IT people who were developing the interface privately have extended that to other clients. I would need to check whether all short sellers are now on the system.

Senator BUSHBY —Okay. Could you take that on notice, please? At the time you indicated that you were looking at a period of about three weeks to allow people to get up to speed and you were confident that you would be able to make that. But we are four months later now, and if industry is not fully compliant I would be interested in knowing about that.

Mr D’Aloisio —We will take that on notice and confirm it in a written answer.

Senator BUSHBY —I would like to ask some questions about coercive powers. Last estimates I asked you some questions about your use of legislatively granted corrosive powers and the internal policies you have surrounding their use, and I note that answers to how often some of those powers have been exercised have now been provided. But I do not recall seeing anything in those answers about your thoughts in response to the question on whether you need to extend the record keeping and the transparency around the use of those powers. Do you have any thoughts on that now?

Mr D’Aloisio —We take the use of coercive powers seriously, because you are balancing public interest and individual rights, and we need to balance the use of those powers in the range of investigations that we have. In the last three years, I think we have had something like 792 investigations on foot, so we have quite a wide remit. The powers, as you know, fall under two key headings: the power to examine individuals and the power to require production of documents and so on. We are hearing the debate and the issues that are being raised, and, as part of that, quite clearly I would like to talk more fully to the Rule of Law Association and also to the law councils that are raising some issues about seeing where they are, because we do not believe the powers have been abused. We believe the powers are needed.

ASIC has itself asked our staff to prepare papers for review for us to re-examine the processes we follow and to examine whether we need to be more transparent in reporting in the way that the powers are used. So from a public interest point of view we recognise the seriousness of this issue and the need to reassure the community that there is no abuse, that we use the powers properly, that there are checks and balances in place when powers are used and that individuals have the right to claim certain privileges when they answer questions. So we see it initially as an exercise in just redoing a fresh stock take on powers that have been given to ASIC over many years since the Corporations Act has been in its current form.

Senator BUSHBY —I am pleased to hear that you are—

Mr D’Aloisio —So that is what where we are at, and we will be very pleased to report further to you in future meetings about what we have done and what the outcome of those discussions has been. In providing the figures to you that we provide, we are well aware of the fact that when you see those sorts of numbers you say ‘that is a lot of notices’, but when we go into the complexity of the cases, the number of people we need to see, the evidence that is needed in running a case and the actual probity of that evidence that is needed to stand up to cross examination, the use of these powers is very important for ASIC discharge its functions.

Senator BUSHBY —I am pleased to hear that you are looking at the processes around it. I think the last time I asked you sort of a surprise question that did not appear—and I apologise if I am putting words in your mouth—to be something that you had thought of in terms of a process of oversight, and I am pleased to hear that ASIC is looking at that.

CHAIR —Are you still on coercive powers.

Senator BUSHBY —Yes, it will be a while before I finish on this. Currently are there any policies and procedures within ASIC to ensure internal compliance with the law and that coercive powers are only used to further the legitimate objectives of the organisation?

Mr D’Aloisio —Before an officer of ASIC can issue a notice or use a coercive power there are internal processes that have to be followed that are document in our enforcement—

Senator BUSHBY —This is for the use of all coercive powers, even the most—

Mr D’Aloisio —Yes—

Senator BUSHBY —We went through this last time, what you needed to do and I think the most commonly used one was up to the discretion of the investigator to some extent.

Mr D’Aloisio —The investigator has to make a judgement about what they need from an individual or in terms of material that has to be produced. What we say is that you make that judgement and then you have to go through a process of a form of document that is then used and needs to be settled. That becomes the request, if you like—the document of demand. In the processes leading up to that the investigator makes a judgement, a lawyer in the team generally will review that, the document will be settled, it will then be signed by the appropriate delegate and then it will be served. You cannot sort of get a bit of paper and write out, ‘Please give me this’; you have to go through these processes.

Senator BUSHBY —I understand. You have these processes you need to go through.

Mr D’Aloisio —And then what comes in and how it is recorded is there as well. I am more than happy, if you like, to take it on notice and for us to outline to you just what that process is both in respect to calling individuals to come before us and calling for material. The notice needs to be used for proper investigation, but also in a lot of cases does need to be used to override possible confidentiality obligations that may exist between parties that are responding to those. So as a matter of law they are required to provide information they may regard as confidential but we do not think is confidential and it is in the public interest of the investigation that it be given to us. There are a range of reasons. As I say, we can outline those.

Senator BUSHBY —I would appreciate it if you would do that. Thank you.

Mr D’Aloisio —Okay.

Senator BUSHBY —In general, are the coercive powers available to you sufficient and appropriate to ASIC’s role in ensuring compliance with the law?

Mr D’Aloisio —Subject to one comment. We do not have within the commission a view that we need more coercive powers. The one qualification relates to—again, we have discussed it in the past—the issue of access to information from telephone interception that is carried out by the Australian Federal Police. There is a bill currently before the parliament, which I think has been reintroduced following the election and is in committee. We have said to government that we felt that it was important for ASIC to be able to share information through telephone intercept that was carried out by an intercept agency.

Senator BUSHBY —That is the Corporations Amendment (No. 1) Bill 2010?

Mr D’Aloisio —Yes. My team is indicating that it relates to market offences above five years. Where we were particularly interested in it was in relation to insider trading and market manipulation.

Senator BUSHBY —I imagine on 3 November we will have the opportunity to ask you a few more questions about that at the Senate inquiry into the bill.

Mr D’Aloisio —Yes.

Senator BUSHBY —In applying the coercive powers that you have, what regard does ASIC or your investigators have to the potential impact of their use on business efficiency?

Mr D’Aloisio —Business efficiency is a factor. We can do some investigation. When these investigations are on foot, in a lot of cases the investigations are in relation to companies that have got into difficulties and we are looking at wrongdoing.

Senator BUSHBY —But not all of your financial services or surveys that you send out. I suspect there is a lot of paperwork there.

Mr D’Aloisio —I agree. I think we try to use judgment in that way, but there have been instances where we have been criticised for having an impact on business efficiency by issuing notices when business would probably say, ‘They weren’t needed. We would have provided you with the information.’ So there are judgments that are made. We are conscious of the issue and we accept that from time to time there will be criticism that we might have used a power when we could have got the information anyway. But the judgment has to be made, whatever we are doing, whether it is surveillance or an industry review or an investigation. The officers need to make a judgment on what they need and how quickly. So, yes, they will look at business efficiency, but we will not always get that judgment right and business will say, ‘We could have provided that in any event.’

Senator BUSHBY —Are you aware of the Australian Government Investigation Standards?

Mr D’Aloisio —In terms of the model litigant and the way we do things? Yes.

Senator BUSHBY —The Australian Government Investigation Standards are a set of best practice standards for all investigations of offences under Commonwealth legislation.

Mr D’Aloisio —Yes, we are aware of those and they are incorporated into our manuals. I am personally not able to answer questions specifically on those standards, but they are covered in our enforcement manuals.

Senator BUSHBY —So the standards that they contain would be complied with and followed by ASIC?

Mr D’Aloisio —I think they would, but I am happy to take that on notice and check it more specifically for you.

Senator BUSHBY —I do not know that it is necessary a requirement, but it is a set of best practice standards. So could you take on notice the extent to which you enforce the use of and train investigators in the use of the AGIS.

Mr D’Aloisio —I am happy to do that.

Senator BUSHBY —Are you aware that the ANAO recently audited Centrelink and, amongst other things, found the in the context of those standards that evidence re investigations was not collected in an appropriate manner. Ineffective intelligence processes led to the unnecessary collection of information on persons. There was unauthorised or inappropriate use of coercive notices to extract information from persons. There was a finding of a 100 per cent failure rate in a sample of 113 cases for the 2009 financial year and a lack of training to ensure knowledgeable and appropriate conduct by investigations staff. How do you think ASIC would fare in a similar audit by the ANAO into the use of its investigatory and coercive powers?

Mr D’Aloisio —I was not aware of the results of that audit. I am not really in a position to give you a judgment on that, off the cuff.

Senator BUSHBY —But clearly the ANAO is looking at these issues in agencies. It may not yet have brought its focus to bear on ASIC, but it may well do so. Those Centrelink investigations are similar activities to those undertaken by ASIC. I would hope that ASIC’s internal procedures would mean that you would not fail, but I am just highlighting that it is something of interest—rightly—to the ANAO and parliament. That is why I am asking questions about it, for the people of Australia. I have asked you about AGIS, and you have undertaken to take that on notice.

Mr D’Aloisio —And the last issue as well, because I am not in a position to answer. I think we will do very well, but I need to look at the information.

Senator BUSHBY —Are you aware that the US government has regulated intelligence-gathering processes, through the federal codes, to prevent unnecessary intrusion into the affairs of individuals and businesses in its investigatory activities?

Mr D’Aloisio —I am not personally aware of that. What is the extent of the protection there? Is it the sort of protection we have already?

Senator BUSHBY —No. I think it extends further.

Mr D’Aloisio —It has gone beyond what we have?

Senator BUSHBY —It goes beyond what we currently have in Australia. So you might have a look at that—

Mr D’Aloisio —Okay.

Senator BUSHBY —as part of looking at your internal processes. As you do not have an internal policy on the use of your coercive investigative powers as such—other than to the extent which you outlined previously—how do you ensure that unnecessary intrusion into the affairs of individuals and businesses does not occur?

Mr D’Aloisio —This is what I was saying about the strict procedures we have in our enforcement manual. As I said in answer to the previous question, I am prepared to look at that and at whether we need to improve. Probably the next step is for us to discuss those internal enforcement manuals and procedures that we follow with groups out there—lawyers and so on—to try and home in on where the problem areas may be and to review them. But certainly we do have those procedures and policies in our manual. The issue is: are they adequate; should there be some change? As I say, we do not see it, from the way we are working, but we are happy to look at it.

Senator BUSHBY —I understand. My questions are not intended to imply that there are any inappropriate uses of your coercive powers either, for the record.

Mr D’Aloisio —Thank you.

Senator BUSHBY —I think it is important that you have coercive powers, but it is also important that the Australian public has confidence that those powers are used appropriately. My question is more to do with ensuring that there are appropriate transparencies, procedures and rules that are followed in the use of these powers, to ensure that the Australian public can have confidence that they are used appropriately and not in situations where they are not needed, particularly when they cause burdens on those who have to comply with them. In that respect, given that you rely to a significant extent on your investigators to exercise their own judgment and the extremely high level of utilisation of the coercive powers as outlined in answer BET-25, what evidence do you have that investigators are only using those powers in appropriate circumstances?

Mr D’Aloisio —I think because of the process of responsibility in the delegation of the powers, their use and the teams that are put in place, the leaders that are in place, in running investigations and supervision—we work on a pyramid structure—there is accountability. There is review. There are performance assessments. There are a range of things that we would expect our leaders to be examining. Certainly, had they picked up and should they pick up potential abuse of that power, that would be referred to us or to our internal unit that would look at these issues. We have within ASIC a complaints unit that would look at issues where there are complaints from the public about the way we are exercising our powers. That unit would examine that and provide a report to me or to the commission or to a senior leader. If they come from the outside, they would be examined.

Senator BUSHBY —There are checks and balances.

Mr D’Aloisio —There is that check and balance. There is the check and balance that comes through the leadership structure.

Senator BUSHBY —There are varying levels of potential abuses, though. The most glaring one, which would I think get caught out by those checks and balances, is where the coercive powers are used for nefarious purposes. But there are much lower level but still important abuses, where they might be used to pepper particular industries or businesses with requirements to comply with notices or other things which might seem on the face of it reasonable but, standing back objectively, might not be reasonable in all circumstances.

Mr D’Aloisio —As I said at the beginning, I think we need to home in on what those are. Through this round of discussion that I mentioned earlier, I think we can get a better feel on that and then make that assessment. At the moment, with the information from what we have seen and the way we operate, I am not seeing that within ASIC. I am not dismissing it. We are conscious of the need to be perceived by the community to be responsible in this area and not just to be responsible.

Senator BUSHBY —Absolutely. It is important that the community has confidence in ASIC, and the business community in particular. Part of ensuring that confidence is ensuring that your use of your coercive powers is seen to be transparent and appropriate.

Mr D’Aloisio —I think the next step, importantly, in taking on a lot of the comments you have made this morning and brought to the market, is for us now to actually try to home in more specifically on the issues that have concerned business and concerned people and then for us to make a judgment. Clearly if it is an issue of efficiency and the use of a notice that should not be used, if it is a simple ‘disgruntled because we’re getting information you didn’t want to give us’, that is different. We have got to analyse the pressures and then make a judgment as to whether we need to introduce additional protections. We want to be perceived as a responsible regulator that is respected in the way it uses its powers.

Senator BUSHBY —I have one final question on coercive powers. Of the matters in which your powers have been used—and you have outlined those in the answers to questions on notice, particularly those ones in respect of investigations of potential breaches—what percentage have actually resulted in action being taken against those investigated? You might want to take that on notice.

Mr D’Aloisio —I would have to take that on notice.

Senator COONAN —I have a very brief point that I want to raise with you about the corporations law amendment enhancing asset search warrant capacity without first issuing a notice to produce and also enabling an interception agencies such as the AFP to apply for interception warrants in the course of a joint investigation relating to insider trading. The point I am about to make will no doubt come up in the scrutiny of bills examination of the legislation and possibly in debate, but I just wanted to flag it here. It might require some thought in the meantime, unless I have not understood something about the bill.

ASIC’s powers in division 3 to apply for a search warrant provide in effect that it should be exercisable for ‘proper purposes’ in connection with ASIC’s statutory functions. Yet it does not seem that in the current bill that we will shortly be considering that the exercise of the powers will be subject to specified safeguards with reference to the purpose for which the power is being exercised. In other words, there is no reference to particular seriousness. I heard Ms Gibson’s point earlier about indictable offences, which might be the answer, but it certainly is not very clear. Do you have any comment about that?

Ms Gibson —I think the term ‘proper purpose’ appears in many pieces of legislation. It intones in common law motions of the right intent and so on. I cannot comment specifically on the legislation but I think ‘proper purpose’ brings with it a lot of common law as to what that is, which is perhaps the protection that would otherwise be built in.

Senator COONAN —I just wonder about that because, for example, I had a look at the New South Wales Law Enforcement (Powers and Responsibilities) Act where it actually defines ‘searchable offences’ in relation to a warrant to mean an indictable offence and various other things. But there is certainly a definition that it must be serious. This appears to just be at-large. I think there is a real issue as to whether that is potentially an infringement on personal liberties et cetera that will be raised as part of the scrutiny of the legislation. I think it would be certainly worth limiting ASIC’s powers or specifying that the powers be confined to seeking a search warrant for investigations of particular seriousness. Perhaps there should be some collaboration about that, because it is potentially very coercive.

Ms Gibson —I think I will leave that for government.

Senator Sherry —The detail of the legislation is a policy matter. I think I can anticipate a letter—not to me but to my colleague, who I think is Mr Bradbury in this case.

Senator COONAN —This constant changing means there are a lot of people to write to.

Senator Sherry —It is a consequence of being re-elected—which is a nice place to be I might say. I will take it on notice and let—

Senator COONAN —I thought it was worth alerting you to it, particularly given the generic discussion we have just had on coercive powers. This is a particular legislative case in point where I think it does arise.

Senator Sherry —Okay, thanks.

Senator PRATT —The government has given ASIC powers to act on unfair mortgage exit fees. I am interested to know how your custodianship of this is going. I know it has been fairly recent and relates to a range of consumer law changes and consumer credit changes that we have seen come into play, but have any examples of this come before you or are banks simply changing their practices?

Mr D’Aloisio —As you know, as part of taking over the responsibility on 1 July for consumer credit, we have the responsibility for enforcing the unfair contract terms legislation as it applies, including to mortgage exit fees, early termination fees, break fees et cetera. Under that we have been given the power to be able to go to court and look at unconscionability and so on. We have not at this stage commenced any cases. The position we have taken is to put out a consultation paper on how we think these issues should be approached by industry, by the lenders and so on. We are working to finalise that consultation and issue guidelines. We will then typically probably give the market a little bit of time to digest it. That will then be followed by proper surveillance and techniques to look at whether or not it has been complied with. Clearly in the meantime if we get complaints we will act on those as well. So we do see these as important protections, but in the first instance it is really about consulting with industry and to get it clearer when there could be issues and how they should approach it.

Senator PRATT —Is there any clarity then on the extent to which consumers might be just assuming that the mortgage exit fee in their home loan is just part of their contract and they are just continuing to wear it because they will not be aware—

Mr D’Aloisio —That is a very good point. I think our approach on that is very much through our FIDO website and our consumer advice that we put out. As part of that and as part of this consultation we are making people more aware. Interestingly, since we have had the credit legislation we have received some 600 complaints in relation to various aspects of consumer credit. So I think the community is getting to the point of understanding that there is ASIC and there is a new regulator. Our FIDO website provides guidance about what rights are. Once we have completed the consultation I am sure our people will put very clear guidelines on the FIDO website about what to do when you have an exit fee—how can you challenge it; are you comfortable that it is reasonable in the circumstances; what are the sort of questions you should ask your lender to satisfy yourself about that. So those are the sorts of issues we will be promoting. Our FIDO website, which is a very direct means of getting to financial consumers, has had this year over two million hits. So it is a serious form of education to get the messages out on what the right questions are to be asking.

Senator PRATT —I appreciate that you are probably doing as much as you can at this point—although I would suggest that your average consumer out there finds their mortgage paperwork hard enough to understand; let alone the idea that they might be shopping around what are in their view obscure government departments. What would you suggest in terms of a role for parliamentarians in communicating with their constituents and talking to consumer advocates about raising awareness of people’s rights under these new arrangements?

Mr D’Aloisio —As you know, ASIC has a consumer advisory panel that it works with. So we are in that part of our business very close to a number of consumer groups. Again, as with FIDO, we will work through them. The key issue here is that because you are talking about reasonableness and reasonableness in certain circumstances there is not a ‘one answer fits all’ approach or a ‘one or two answers fits all’ approach. It is really about informed choice and asking questions. I think it is about working through these sorts of initiatives, and from time to time ASIC doing a full investigation and taking action where it feels it needs to. So that again becomes another way of getting the message across as to what is the right thing to do. I think the more we encourage people to visit the FIDO website or to consult the sort of material ASIC can provide and to ask the questions we can provide the more it will assist.

Senator PRATT —You mentioned a range of complaints that you are receiving as a result of having these new powers looking at unfair terms in contracts. Are you able to tell us the nature of some of those complaints?

Mr D’Aloisio —No, I would have to take that on notice and give you a bit of a breakdown. They will range from credit cards to mortgages and fees. We could probably look at that and give you a bit of a breakdown of what is coming through.

Senator PRATT —Is telecommunications credit still featuring highly in there?

Mr D’Aloisio —I cannot answer that.

Senator PRATT —I know it has been a significant problem historically.

Mr D’Aloisio —This is phone bills, is it, basically?

Senator PRATT —Usually mobile phone bills which are in effect.

Mr D’Aloisio —I know that people have been looking at that and are involved in the issue. I will have to get some more specifics for you.

Senator PRATT —It is when people have gone over their caps and have got a line of credit for something that they were not really aware of consuming. I know that many companies have changed their practices in response to that, but I would be interested in where ASIC thinks that is up to. Also related to credit is the status of margin lending currently. I know that margin lenders are now being licensed, in line with other credit licensing that is taking place. I want to know where that is up to and the extent to which people consuming these financial products are now less vulnerable to loss.

Mr D’Aloisio —The changes that the government made, I think it was when Senator Sherry was the minister, have been introduced and are working. Of course you have had the situation where the market itself has not been at the sort of market level that encouraged margin lending back in 2007-08, so it is hard to measure. But, certainly, the changes have introduced an element of responsible lending and also the broader education that ASIC has done, again through FIDO, about the questions people should ask and the pitfalls. We have certainly added a lot more information about the pitfalls of margin lending for the retail investor. I think all those factors are indicating to us that it probably is not a problem out there at the moment, but there is going to be a relationship between the market—

Senator PRATT —Moving again—

Mr D’Aloisio —which is related to the degree of risk that people are prepared to take in relation to shares. I think, with the benefit of the problems that occurred, people understand that if you are going to go into margin lending products you have to not borrow to actually have your equity; and, if you do you have the equity, it means you have got to be prepared to lose it because of the volatility of the markets. We are trying to get those messages out. Essentially, what we are saying to retail investors is that the bottom line is: this may not really be a product for you and you have got to be really, really careful and get proper advice.

Senator PRATT —Yes. Indeed, we had some discussion at the last estimates about the fact that it did not appear to be that much of an issue because of the change in market conditions and it may only be once things hot up again. Given what you have said and the new powers in relation to consumer credit, it seems that there are some planks in place to mitigate those kinds of risks for people who should not be taking them.

Mr D’Aloisio —We think, for margin loans for the retail investor-financial consumer, the degree of take-up, the knowledge of those products now and the disclosure that is required when you use it with a retail investor will add quite a good degree of protection for the investors. The consumer finance credit legislation again adds another level of protection in relation to consumer loans and so on. So at the moment we are not seeing it as an area that is going to explode and be a problem. I think there are things that are working their way through, and the indications are that people understand the pitfalls of margin lending more clearly today than they did in the last market movement upwards.

Senator PRATT —So, when the market does next move upwards, the provisions in the new act that require things like advisers providing advice that is appropriate to a client’s circumstances will all be in place; is that correct?

Mr D’Aloisio —In so far as responsible lending and it coming in for financial consumers, we have got that guide; that is Reg. Guide 209. We are in the process of issuing another guide in relation to the disclosure of margin loan products over the next few weeks. Again, that will complement that further disclosure around the margin lending products.

Senator PRATT —And are the dispute resolution services in place now as well?

Mr D’Aloisio —Yes, I believe so. Where you are a financial services licensee, you have to have alternative dispute resolution methods, both internal and external, and those would be in place.

Senator Sherry —I will just mention that, from a policy point of view, the government identified the regulation, supervision and oversight of what is known broadly as consumer credit, which included margin lending. That is—or was—done by state governments, because it was a state supervised area. Some three years ago, we took a policy decision to seek to have the states transfer those responsibilities to the Commonwealth, and I will not go into the detail. Obviously the transfer has only just occurred and there are a range of supervisory guidance notes and consumer protections. Until that time, there was little if any supervision of margin lending in Australia. That is not a criticism of the states. I just think that the sector has grown dramatically, although it has significantly contracted as a consequence of the GFC. But certainly, up until the GFC, margin lending had grown very significantly in terms of the individuals engaging in that activity. It is not a criticism of the states, but I do not think they were particularly well equipped to supervise this area of significantly growing financial activity. So, for a number of reasons, we took a policy decision to transfer regulatory and supervisory responsibility. Mr D’Aloisio and I have indicated this. I will take it on notice. I am sure we can get you some figures on the level of margin lending either through ASIC or through the department.

Mr D’Aloisio —Yes, we can.

Senator Sherry —Suffice it to say in summary that, from a policy perspective, those individuals who are engaging in margin lending, or may move into engaging in margin lending in coming years as the market becomes more active, will have a higher level of protection than that which existed three years ago.

Senator PRATT —Thank you for that exploration, Minister. I appreciate that.

Senator XENOPHON —Mr D’Aloisio, in relation to consumer issues, I wrote to you very recently on the issue of the Bank of Queensland’s ‘Save to Win’ accounts, whereby, if you would forgo interest, you could have a punt on winning a prize in a lottery by virtue of having more than $250 in the bank. What is ASIC’s response to that and what role does ASIC have to regulate that sort of product? Many have expressed concerns about it, including Choice—Christopher Zinn said that it sets a pretty bad example to consumers, and I think it does to young savers as well.

Mr D’Aloisio —Senator, I did receive your letter of 19 October—thank you—and I will respond in more detail. In response to the question that you have asked, our understanding is that the product was announced, I think, last week by the financial institution concerned, the Bank of Queensland, and it has not as yet put out all the detail. As I understand it—

Senator XENOPHON —You know enough of it to—

Mr D’Aloisio —Yes. As I understand it, it is on the basis that you have a deposit and it has low interest—

Senator XENOPHON —Or no interest.

Mr D’Aloisio —or no interest—and you participate in monthly or weekly draws. As you know, the starting point of the Corporations Act is really that it is self-executing; it is for corporations to make their own judgments about complying with the law and putting out new products and innovations. Our role is to look at this from three key perspectives. We need to be satisfied that what is being put out is not misleading or deceptive, that it does not involve issues of unconscionable conduct, and that it does not involve unfair contract terms, as we were discussing a bit earlier, and that there is proper and adequate disclosure if it is a particular form of deposit that is regulated as a financial product. Our position at this stage is that clearly we want to talk to the institutions and work through those issues. We are concerned that it is the sort of product that could mislead, and we want to ensure that, if the institution is going to release it, it will comply with the law. So, at this stage, this is an interim report to you, if you like. Thank you for making us aware of it. We are looking at it and we will look at it closely. We will talk to the institution and then we will report back to you in reply to your letter.

Senator XENOPHON —So at this stage the time frame is within the next month?

Mr D’Aloisio —It is going on right now. It is important because the institution has indicated it wants to release it fairly quickly.

Senator XENOPHON —It is basically asking people to have a gamble on their interest. That is what it is. You can get zero interest or you can get a $20,000 prize or whatever it is. You are having a punt.

Mr D’Aloisio —We are not a gaming authority.

Senator XENOPHON —You are being asked to be, in a sense, aren’t you?

Mr D’Aloisio —No, I think there are a number of aspects to this. There is the deposit aspect, which no doubt APRA is looking at, and there is the gaming aspect.

Senator XENOPHON —APRA told me to talk to you guys.

Mr D’Aloisio —ACCC will no doubt be looking at it and ASIC’s function is around the areas that I have spoken about. I think we are on to it; we are looking at those issues and we will respond to your letter.

Senator XENOPHON —Thank you. I have two or three other issues. Briefly in relation to the Brien Cornwell saga and the investors that are being stung by Brien Cornwell. As I understand it, on 30 August the Supreme Court in New South Wales ordered Cornwell to repay investors within 28 days and, unsurprisingly, he has not done so. What role does ASIC have in relation to this whole issue with Brien Cornwell and the number of people that have been hurt quite badly by his activities?

Mr D’Aloisio —As you know following last Senate estimates, where the issue was raised, we looked at it again. We are satisfied that we had been doing what was required in relation to what the investors were doing in relation to this group over a period of time, but we took the view that the enforceable undertaking should be enforced in court. We took those court proceedings. The orders were made. We are now waiting on the companies to respond. If we do not receive satisfactory answers then we will go back to the court. Our options after that would be winding up and seeing what happened to the money and following it through to those involved or seeking other court orders in relation to where that money may be, and so we are proceeding. The next step, if we do not get a satisfactory response to the demands that have been made, is that we will go back to court.

Senator XENOPHON —But you can understand the distress and the frustration of investors who have lost a lot of money.

Mr D’Aloisio —Yes, we do, but in the way this unfolded, the amount of money involved and how it came together, the orders ASIC got at the time and the EU, we have tried to recover the money.

Senator XENOPHON —Can I move on to a story on the front page of the Financial Review today headed ‘ASIC faces sharemarket query’ by David Crowe and Matthew Drummond.

Senator ABETZ —I have got some questions on this as well.

Senator XENOPHON —I might be a bit truncated then, given that Senator Abetz, I am sure, will ask more perceptive questions than I will.

Senator ABETZ —I will just try and clean them up.

Senator Sherry —It did not name them in the article. I wondered which senator was going to ask the questions and pose the queries.

Senator XENOPHON —Can I tell you, Minister, that it was a happy coincidence. I actually saw this this morning and I am not misleading the committee. The stat dec is on its way!

Senator Sherry —I will accept in relation to the Fin. I am not sure I would if it was the Australian.

Senator XENOPHON —You can accept it in relation to any publication, even the Gawler Bunyip.

Senator Sherry —Of course, in respect to you.

Senator XENOPHON —Mr D’Aloisio, essentially there is a concern that there has been a change of surveillance from the ASX to ASIC as of 1 August—that is correct?

Mr D’Aloisio —That is correct.

Senator XENOPHON —Concerns have been reported in relation to the software that there have been some configuration or other issues. Can you tell the committee where we are at with that? In other words, has the changeover meant that there is in some way any lessening of scrutiny, any transitional blips, that could affect the level of scrutiny of irregular trades, for instance?

Mr D’Aloisio —I will ask Commissioner Tregillis to comment as well, but certainly, as I said in the opening statement, we think that the transfer of surveillance from ASX to ASIC has gone extremely well. It has been quite seamless. From the market related matters that we are referring to formal investigations, which I mentioned earlier, there is nothing to indicate that we are not detecting the issues that we should be detecting. In any settling in of a new system, particularly where you are looking at where you set your warnings and what comes up, there is going to be a settling-in period. We have obviously read that article as well. I was a little bit surprised that it was raised, because I felt at my level that things were and are going very well. I will ask Commissioner Tregillis to talk a little bit more about how we will address that issue to make sure that we assure the market.

Senator XENOPHON —Before you do that, insofar as you have acknowledged that there is a settling-in period, does that mean that the settling-in period could mean a slightly lesser or a lesser level of scrutiny or surveillance?

Mr D’Aloisio —No, not from our point of view. The preparation and the transfer across to us was always on the basis of it continuing and the market not being put in a position where it felt that it could gain or do things because we were getting up to speed. The staff, the systems and everything else we have put in place assure us that it is working well and, indeed, the results themselves are coming through already in that regard.

Senator XENOPHON —Mr Tregillis, one of the sources quoted in the Financial Review article says:

ASIC decided that they would be able to set up their own calibrations. It has not been able to set the calibrations effectively enough to be able to effectively monitor the stockmarket.

That is the assertion.

Mr Tregillis —I would say that that is not correct. As the chairman has indicated, through the surveillance over the last month some 57 matters have been identified for further detailed review. Nine of those matters have been referred off to deterrents. That is the outcome of the surveillance. In terms of the real time market activity, the team does monitor that on a real time basis. The number of alerts that we are generating, as we understand it, are broadly in line with the types of alerts that had been previously generated by the ASX. If I could explain the process a little bit, just to provide a bit of context, we are using the SMARTS system, which the ASX and a number of other jurisdictions use. When we are talking about trading alerts, we are really talking about alerts that are generated in relation to unusual volumes compared with previous patterns. We have alerts that look for market manipulation—for example, there may be some layering of trades to try and give a false sense of supply and demand—or we look for excessive volumes of trades. They are the types of alerts. We have a range of parameters that are designed to pick up those. Typically, in any one day, there would be generated something like 300 alerts. Part of the calibration process is to make sure that when we are getting alerts we are picking up suspicious activities rather than just the types of activities that are the normal volatility in the market.

Senator XENOPHON —In terms of what the ASX was doing and what ASIC is now doing, is there an apples for apples comparison? For instance, how many alerts have you had for irregular trades since August compared with a similar period last year? Can we get a fair comparison between the sorts of alerts that were issued when the ASX was doing it and those now that ASIC is doing it?

Mr Tregillis —I do not have the precise figures. I am told that the numbers are broadly comparable. Again, the use of the system by ASIC is slightly different. We have a newer version of the system than ASX has, so that creates some differences. In terms of the use by ASX of its system, it was monitoring not only for trading but also for continuous disclosuring. So the comparison of apples for apples is not precise, but I think the number of alerts we are generating is around the same.

The numbers is not the only thing. You can set the parameters so wide that you can generate a very large number of alerts. The real aim of this exercise is to generate alerts that enable you to follow up suspicious activity of the type that I have identified, such as unusual volumes, price and volume alerts, suspicious activity that leads you to inquire about whether there is some market manipulation, or excessive volumes that may be the result of algorithms.

Senator XENOPHON —I am conscious that Senator Abetz wants to ask questions on this, but can you, on notice, provide details to the committee of the extent to which the parameters have been changed so that at least an attempt at a comparison can be made with what the ASX was doing, and also, for instance, on the issue of irregular trades. I think it would be useful information on the number of irregular trades that have been reported and there may be factors, if there is a difference, such as that the market is quite different than it was a year ago.

Mr Tregillis —I will take the question on notice in terms of the numbers of trades and the number of alerts. I can give you those figures. Again, I do put a caveat that the parameters are not exactly the same because we are using a slightly different system and we are using it for different purposes. As the chairman has said, for us the key issue is: are these alerts leading us to matters that are subject to further inquiries? The answer is yes, the 57 matters and the nine. That is, in fact, more than comparable to the types of issues being identified previously.

Senator XENOPHON —And you can tell us how the parameters have changed—that will not be a problem, will it?

Mr Tregillis —I would have to take that on notice. I do not have that detail. We have configured the system because it is a new system, and it is slightly different, so I am not sure that I will have exactly the information on how the parameters have changed. In terms of the numbers of trades and the number of alerts being generated as a percentage of trades, I can provide those figures.

Mr D’Aloisio —We will take that on notice, Senator, and be helpful. At the end of the day, we also need to be careful that how we set our parameters and how we vary our algorithms to what we look at and what alerts come up is quite important, sensitive information for the market. So I will just take it on board and we will see how we can help you.

Senator XENOPHON —Yes, sure. I, for one, would not want the release of any information in the public domain which would make your job more difficult. I make that clear.

Mr D’Aloisio —I was not suggesting you would. But, in the background of all this, for people to know a lot more about how ASIC sets its parameters, how it works, how it sets its algorithms and what it looks at and what it does not look at and how it makes those judgments, is quite important investigative information.

Senator XENOPHON —Yes.

Mr Tregillis —Senator, I think the relevant information is, in general, the type of parameters, the things we are looking for, the number of alerts that are being generated, some comparison with the number of trades—that is information that we can provide. The process of alerts is something we continue to refine because what we are trying to do is make sure we do not get too many false positives. A high number is not necessarily a good thing. What you want is a number that allows you to identify those that are most suspicious and able to be followed up for further inquiries. So a high number, by itself, of alerts is not something that we would seek to target; it is actually alerts that lead you to make further inquiries and give you a lead-in to making sure that you can identify suspicious activity.

Senator ABETZ —What do we mean by a settling-in period that this new program? I think you mentioned that.

Mr D’Aloisio —All I was referring to is that in any changeover arrangements you do all the preparation, and I think we are going through seamlessly, but it is going to take a period of time to do all your testing. At the moment we have had roughly two months—August and September and a bit of October. We are continually looking at that information, and we will continue looking at it very closely for probably at least the next six months to make sure that the comment that the changeover has been seamless is substantiated. We feel it is at the moment and we will continue to monitor its closely. That is all I meant.

Senator ABETZ —Right. There was no acknowledgement, if I recall correctly, of that in your opening statement. All we were told, I think, was that the changeover has gone very well or extremely well—words to that effect.

Mr D’Aloisio —That still is my position.

Senator ABETZ —You say that there have been 300 alerts. How does that compare to the ASX alerts?

Mr Tregillis —I do not have those figures. As I said, that is an average figure, just to give you an indication of the type of numbers of alerts that we would get on a daily basis. I would have to take on notice the question of a comparison with ASX alerts.

Senator ABETZ —Can you give us a breakdown for these first few months of the daily number of alerts. Because, if you tell me there is an average of 300, it might be that for the first month you had none and for the second month you had 600 on each day. So, if we can have the exact figures on that—on a daily basis just for the first two months—that would be very helpful. As I understand it, the software that is being used by ASIC is the SMARTS system. That was also used by ASX. Over a number of years, as I understand it, the ASX had invested its own intellectual property into finetuning the SMARTS system to ensure that it was highly attuned to the needs of monitoring the market. Is that a fair assessment?

Mr D’Aloisio —I do not know. You would have to ask ASX, I think. There is an issue of whether it invested or whether SMARTS invested and whether, in us acquiring the SMARTS system, we have the benefit of that.

Senator ABETZ —Thank you very much. You are leading me to exactly where I was going. I have been advised that ASIC deemed it inappropriate or not necessary to purchase the intellectual property from the ASX, is that correct?

Mr D’Aloisio —I am not sure. I will have to take that on notice. As I understand it—and perhaps my colleagues assist here—our contract is with SMARTS in terms of the software and the program it is needing. SMARTS is the industry leader in this area and certainly we have sought to get the full benefit of what is needed for us to be comfortable that we can run a system. That has meant some transfer of know-how through people and otherwise with ASX through the agreement in relation to that transfer.

Senator ABETZ —I would have thought you would be full bottle on this as to whether or not you had fully taken benefit of everything that ASX had been able to add to the SMARTS system over its many years of experience in this area.

Mr D’Aloisio —Let me check that and come back to you. We certainly formed the view that we had what was needed to do what I have outlined. How we acquired that is the issue you are getting to. Let me look at that and come back to you specifically about what we acquired from ASX and what we acquired from the software houses.

Senator ABETZ —Because the information I have been provided with is that ASIC did not purchase the intellectual property from the ASX, which had been built up over a number of years and provided calibrations from the SMARTS system to be able to monitor the market and detect irregular trading activity. I understand that ASIC decided that they would be able to set up their own calibrations and not get the benefit of the learnings and experience of the ASX. So that is the issue and I would have thought—

Mr D’Aloisio —Well that is new to me.

Senator ABETZ —What about Mr Tregillis?

Mr Tregillis —I think we would have to take that question on notice.

Senator ABETZ —So you do not know either?

Mr D’Aloisio —It is not that we do not know. The assertion that we do not have what was needed to calibrate SMARTS proceeds on the assumption that we have not acquired that from ASX and we have not acquired it from SMARTS. What I am saying is that I would like to look at that because I am not sure what the source of your information is.

Senator ABETZ —But surely you must know whether you bought the intellectual property from the ASX. You must know that?

Mr D’Aloisio —We would have acquired from ASX what we needed, our team would have assessed on what was needed to run the surveillance system. We would have acquired from other software houses and SMARTS what was needed. It is the aggregate of that that gives us as the commission the assurance that we have the wherewithal to do the surveillance of the market. How we acquired that, who we paid and how it was put together, I am happy to look at that in more detail and answer that question for you, but the overriding issue for us as a commission is that we are satisfied that we have the wherewithal to conduct surveillance, and we have.

Senator ABETZ —I am sure you are self-satisfied in relation to this, but can I assure you that there are a number of people about who are not satisfied that you are necessarily able to detect the irregular trading activity and monitor the market at this stage as well as the ASX did in the past. In relation to the numbers that we were given, were they started off completely fresh—they are the 57 market matters—were they all as of 1 August or were they hangovers, if I can use that term, inherited from the ASX when matters were handed over to you?

Mr Tregillis —My understanding is that they are matters we have identified, but I would want to check precisely.

Senator ABETZ —In relation to the nine that had moved to a formal investigation, were they matters that had already come to the attention of the ASX before being transferred to you or were they as a result of your investigations as of 1 August?

Mr Tregillis —Again, my understanding is that eight of the nine are matters that we identified and one is a transfer. But let me reconfirm that figure for you.

Senator ABETZ —If that is the case and, sure, it is only one number—it does not make much difference—but why have we been told that the system is working well and you now have nine going to formal investigation, when you cannot really take responsibility for one of them? Sure, it is small, but it potentially creates the impression that all is well. You are painting a picture that may be a little bit better than it actually is, and I accept that this is only one formal investigation that, with respect, you cannot lay claim to, given that it was initiated by the ASX.

CHAIR —The officers have said that they will take it on notice and get back to us. Your colleagues, I would remind you, are waiting to come on.

Senator ABETZ —Senator Xenophon has already asked you about the difference in the calibrations between the ASX system and the system that you are operating under. If you could provide me with the details of the differences there because that is very important. You are saying that, currently, there is no effect on the Australian Stock Exchange with the changeover?

Mr D’Aloisio —We think that the changeover, as I said earlier, has gone seamlessly. We think that in fact the speed at which we are able to look into issues is probably starting to indicate that it will be faster because we do not have to deal with two agencies or the ASX. We have said that it is still early days, as I said a moment ago. Also, one of the other indicators is that the market itself is not saying to us that there has been a big change here or that there is a problem. So, as we see it, it is going well. I take on board the questions you have asked. They are all important questions and we will do our best to answer. As we move further towards probably December and early next year I am hopeful that the evidence will build much more clearly that will support what I said to you this morning.

Senator ABETZ —Concern has been expressed that insider trading and market manipulation may be undetected in the Australian market as a result of this changeover, but it is not as rigorous. The figures will ultimately bear you out or the source that I am relying on. We will undoubtedly revisit this matter at next estimates.

Mr D’Aloisio —If I can say so, one of the other key things in terms of investigation on insider trading market manipulation is that, even well before the transfer of market surveillance from ASX to ASIC, we had increased resources in their area. We are continuing to do that. As these cases come through, we will take action. We have made it clear to the market that one of our key priorities is to stamp out ‘insider trading’. When you look at the results now that are coming through on the work we are doing on insider trading, we think, again, that it is starting to have a general deterrent effect and that that, together with our supervision of the markets, is going to be what is important in maintaining confidence in the integrity of the markets. We do not think you will ever eradicate the perception that markets will have insider trading, but we are certainly working hard at keeping that as the key priority in the confidence in the integrity of Australia’s share markets.

Senator WILLIAMS —Welcome, Mr D’Aloisio and your team. Can I commence by thanking you for meeting last week in relation to the Provic Group. I think it was a very prosperous meeting. Mr D’Aloisio, you would agree that there is a need for change in the regulatory guides as far as the secured investment companies go, would you?

Mr D’Aloisio —The discussion we had, Senator, was that I indicated that we would take on board two issues. One was the issue of whether, in the nomenclature, or naming, of debentures, unsecured notes or secured notes, there needs to be a category of secured notes, which at the moment is missing. We said we would look at that issue further.

On the second issue: you raised and Provic raised with us the potential disadvantage of needing to say in an advertisement for debentures or secured notes or unsecured notes that the lender could lose their principal, could lose their money. We explained to you that those requirements had emerged at a time when we felt that investors had not fully appreciated that with some of these products they could lose the principal, and therefore our changes going back two or three years were designed to get that level of knowledge up. We recognised the thrust of the argument that you and Provic put in relation to whether or not that may now be disadvantaging the market or certain of the players in the market, and I indicated to you that we would take that on board and revisit our regulatory guide on that issue to see how we could deal with the issue that was raised with us. That work is in progress.

Senator WILLIAMS —Good. Just on that issue about the work in progress, I know that some of those companies have to issue prospectuses in the near future. Would you be able to give me any indication of the time when perhaps we may have a result on this very issue?

Mr D’Aloisio —The team, Senator, after the meeting went away to do that work, and they have not as yet indicated to me what the timing would be on that, but I think we indicated at the meeting that we would get back to Provic fairly quickly about at least what the program would be and how long it would take. I did make the point at that meeting that any change of this nature does involve ASIC in a consultation process with the broader industry, and we have Christmas coming up, so there is going to be a little bit of time, I think, in getting the issue resolved.

Senator WILLIAMS —But you are aware of those companies that do have to issue new prospectuses and hence their—I suppose—urgency?

Mr D’Aloisio —Yes.

Senator WILLIAMS —You are aware of that; thank you. Moving on to Storm Financial, can you give me an update on where your inquiry into Storm is, please?

Mr D’Aloisio —Yes. We put out a statement last Friday updating the Storm investors. As you know, we have a website for Storm investors, and we use that website to communicate with them. Also they have a private page on that website, each with their own login arrangements, so that they can keep track of what is occurring. We put on that website that we have continued our commercial confidential discussions with key parties and we have extended that consultation until 24 November. We have indicated that the commission will then consider, if there has not been agreement in principle on those commercial discussions, and the commission will then make its decision about commencing legal proceedings. That is where we are.

Senator WILLIAMS —Legal proceedings against?

Mr D’Aloisio —It will be against a number of parties involved in relation to Storm. We will identify those and indicate who they are at that point in time.

Senator WILLIAMS —So, in short, you have completed your investigation into Storm?

Mr D’Aloisio —Yes is the answer—not in the sense of being able to launch proceedings; that is subject to further consideration by the commission. But, certainly in terms of the material facts and what occurred and so on, yes we have.

Senator WILLIAMS —So are you encouraging financial institutions to perhaps come to settlements with some of their clients?

Mr D’Aloisio —I have said that the approach by institutions on seeking commercial resolutions is desirable. The Commonwealth Bank has done that and ANZ has also announced that. We have said, in relation to those resolution schemes, that there needs to be a carve-out so that, if ASIC is able to then recover money over and above that, the investors get the benefit of that. So we are encouraging commercial resolution. We ourselves believe that confidential commercial resolution of this matter remains in the interests of the investors and those involved, not because we are against taking legal proceedings—clearly we will if the commission so decides—but simply: given the time that is required to do that, given the position of the investors, we do believe that a commercial resolution is the better outcome here.

Senator WILLIAMS —So you agree with me: the more they stay out of court, the better off they are!

Mr D’Aloisio —Well, I think we are bona fide—we have said to the parties: we are bona fide in seeking to pursue commercial resolutions and are not using the legal process in any sort of aggressive way or anything of that nature; we are simply saying, ‘Let’s see if we can get this resolved commercially; if we can’t—that happens—we’ll then look at the legal option.’ We are not suggesting that we will not pursue the legal option if we need to.

Senator WILLIAMS —Do you have grounds to pursue the legal option?

Mr D’Aloisio —We have indicated in one of our earlier releases that we are looking at a range of potential claims. Any litigation, as you know, is fraught with issues. You can never be certain. But certainly ASIC will launch those proceedings if it so decides, with the intention of seeing them through and recovering money for the investors.

Senator WILLIAMS —I understand you have been contacted in writing twice by solicitor Stewart Levitt, who is acting on behalf of a group of investors. Is it true that ASIC representatives have told people to be careful and Stewart Levitt is working on the other side of the Storm Financial issue? Were any words like that issued by ASIC?

Mr D’Aloisio —We have written to Mr Levitt explaining—my recollection of that is that we have not done that, and we have written to him. In terms of his approach in commencing actions and seeking to recover money—and Slater & Gordon and others are involved—we are all on the same side. There are no issues here. ASIC is the regulator. It has to clearly look at it across the whole range. It cannot take sides with Slater & Gordon or with Levitt’s or other class actions. ASIC has to make its own judgments. What we are encouraging people to do is, if they go into resolution arrangements and enter into arrangements that are commercially settled, to have a carve-out so that, in the event that ASIC can recover more, they get the benefit of that.

Subject to that, with the class-action law firms and other law firms we have no issue. I do not see that we are at different ends of the spectrum here. We are all trying to do the right thing by a group of investors. In ASIC’s case, its ability to do that has to be independent; it has to be across the range of interests it is seeking to protect. We are doing that job and, in the approach we are taking to commercial resolution, we are very mindful that, at the end of the day, in any resolution that is achieved, our own actions and how we conducted that will be subject to scrutiny by the investors, so we are very mindful of being careful in the way we are running these proceedings.

Senator WILLIAMS —It is a big mess to clean up. Have you had many negotiations or discussions with Emmanuel Cassimatis from Storm Financial?

Mr D’Aloisio —I have not personally, no.

Senator WILLIAMS —I suppose your representatives have.

Mr D’Aloisio —You can assume that we would have over a range of time been talking to all those involved and, clearly, he was involved.

Senator WILLIAMS —I have spoken to a Sergeant Sean McCardle who is a senior forensic examiner with Queensland Police. Have ASIC had any contact with Sergeant McCardle?

Mr D’Aloisio —I would prefer not to be going into the specifics. Perhaps I could take it on notice, but it is not going to be productive. This thing is difficult and we are trying to balance all interests, and I think going in to what people allege to be evidence and not evidence and responding to that is not going to be helpful. We are aware of issues that have been raised with us. When they are raised we look at them; we look at them carefully. We assess them. But our people, at the end of the day, have got to make judgments about the probity value of evidence that is put before us.

Senator WILLIAMS —Time is very limited so moving on from Storm Financial I have this. In relation to questions relating to Corporations Law, a lady constituent by the name of Christine Bowen contacted me. She has been involved with a company called Allco Finance Group. Are you familiar with the group?

Mr D’Aloisio —We are certainly aware of the Allco group.

Senator WILLIAMS —I know it is at a stalemate at the moment. The liquidators Ferrier Hodgson have taken her to court. I think their claim is that there are 50 employees who were not actually employed by the Allco group and hence they have not received their entitlements and they have not received any GEERS as well. It is concerning that this may be dragged on while these 50 employees do not get their proper entitlements, the long service leave, holiday leave et cetera that they are entitled to. It is in deadlock. I know that on 3 February 2009 Christine Bowen contacted ASIC and she received a formal response on 5 February 2009 but has not heard anything from you since. Mr D’Aloisio, this is one of the common complaints we got during the Senate inquiry into liquidators, administrators and the role of ASIC, where people lodge complaints with ASIC but they do not get any feedback; they might get a generic email. Can you add something as to that? Has ASIC been more responsive to those complaints now?

Mr D’Aloisio —The advice I received when we got your question is that there were a group of these complaints which included Ms Bowen’s and that our people in fact did respond and did respond subsequent to the acknowledgement. But I am advised that in fact in her case she did not get the letter that the others got. Our people have got on to that and are looking at it now as to why that occurred. I am not taking away anything from the point you have made. It does look like it is inadvertent, and we are following it through at the moment.

Senator WILLIAMS —I will take you to another situation which was brought to my attention: a liquidator from Armstrong Wily and Co. which was actually suspended for four months some time back. I have here a letter from ASIC, from the media centre actually, saying that on Thursday, 4 December 2003 Mr Wily was suspended for four months for various activities—without going into too much detail. Are you familiar with the collapse of a company called BACF?

Mr D’Aloisio —I am.

Senator WILLIAMS —Did you appoint Mr Wily as liquidator for that company?

Mr D’Aloisio —I didn’t.

Senator WILLIAMS —ASIC, I should say—not you personally.

Mr D’Aloisio —My understanding of that was that he was appointed because he had already been appointed to three other companies in that group, and it was the feeling at the time that it would probably make sense. He was not suspended, obviously; that was in the past. It made sense, because he had the other companies, to appoint him to this one.

Senator WILLIAMS —You are aware of some controversy with that BACF group and the liquidation of that, of course?

Mr D’Aloisio —Senator, in relation to that, I would prefer to take any further questions you have on this on notice, because this is an operational matter, it is on foot and I think, again, it is one of those situations where as ASIC we do need to let this run its course. You have made clear, and you have given me material that makes clear, the seriousness of this, and I can assure you that it is an operational matter at ASIC that is on foot.

Senator WILLIAMS —Good. Briefly, I will go to the infamous Stuart Ariff. When Mr Ariff initially applied for registration as a liquidator, was he—

Mr D’Aloisio —Senator, sorry to interrupt, but this is an important point. Mr Stuart Ariff has been arrested on ASIC charges. That was on 23 August 2010. He is on 19 criminal charges following investigation by ASIC. The alleged offences relate to his conduct in relation to HR Cook Investments between 9 June 2006 and 29 March 2009. He has been charged with 13 counts under section 176A of the Crimes Act and also six counts under section 1308(2) of the Corporations Act. This is a matter that is before the courts, and the advice that I have received is that I should not answer questions or go into details concerning Mr Ariff. I recognise that there is a balance between that and what you need to know. The best I can do, on the advice I have, Senator, is to take your questions on notice. As and when the court proceedings or information becomes public or gets to a form where we are advised that we can release it to you, we will do that. I recognise that some of the questions you have asked do not specifically relate to the charges, but the advice to me still is that it would not be proper for ASIC to be engaged in a discussion on these issues at this time, balancing up his interests and ASIC’s interests.

Senator WILLIAMS —No, I am comfortable with that, Mr D’Aloisio. That is fine. Chair, I am going to hand over to you.

CHAIR —Excellent. Thank you, Senator Williams. Senator Cameron.

Senator CAMERON —Mr D’Aloisio, can you advise me who represents Australia on IOSCO?

Mr D’Aloisio —Yes. ASIC is the relevant member of the International Organisation of Security Commissions. We are on two committees—the technical committee of IOSCO and the executive committee. As Chairman of ASIC I would generally represent ASIC at those meetings.

Senator CAMERON —I ask because in your answers to my questions on notice you raise IOSCO a couple of times. I do not have a lot of time so I am not going to go to the issues I did want to raise about the answers to my questions; I might put them in writing to you on notice.

Mr D’Aloisio —Sure.

Senator CAMERON —Are you aware of a speech that was given by Jane Diplock, the chair of IOSCO, in Colombo, Sri Lanka, on 28 September?

Mr D’Aloisio —No. I know Ms Diplock; she is the current chairman of the executive committee of IOSCO. I do from time to time read her speeches but I am not aware of that one specifically.

Senator CAMERON —Can I just put some issues to you from the speech. Obviously you will want to consider it more carefully by looking at the speech. In it Ms Diplock raises the issue of the lessons of the global financial crisis. She says there are three lessons: the interconnectedness of global markets, that markets matter and that governance matters. Do you believe that governments also matter, or is this a position for IOSCO? Why wouldn’t they have a role for governments who were absolutely essential in dealing with the financial crisis—not just from a governance point of view, but from a fiscal policy point of view?

Mr D’Aloisio —I have not read the speech but I can talk about ASIC and its approach. It is very clear in the work that we do with IOSCO in representing that we work closely with Treasury. Treasury, as the policy adviser to government, comes with us to those meetings. We take the view that, as the regulator, our function in this forum is to identify the issues. The actual decision about what governments then do are policy decisions for governments, and we worked closely with Treasury on, for example, the implementation of the reforms on credit ratings and the implementation of the reforms on short selling. These were issues that arose out of the financial crisis. These were issues that were discussed widely at IOSCOand that we inputted. These issues were then brought back and the Australian government—and Senator Sherry, who is here—made decisions, as I recall, on short selling with us that were then implemented by government. On the broader issue, the global issue of where IOSCO fits in with the responsibility of governance, the IOSCO agenda, the Financial Stability Board agenda and the Joint Forum agenda are all primarily being driven by the G20 governance. All the work that IOSCO and FSB has done is coming to a head next month in Seoul, with the G20—

Senator CAMERON —I am happy, Mr D’Aloisio, if you want to give me some further information on how you see our organisation working within IOSCO, but I really want to come to some of the detailed issues. The speech goes on to say that the crisis also overcame the traditional belief that, so long as we regulated institutions such as banks and markets, they would look after themselves:

We thought that the self-interest that drove markets meant markets would discipline and take care of themselves—

while continuing to deliver sustained economic growth and welfare—

The crisis demonstrated that this belief was woefully wrong-headed.

Do you agree with that?

Mr D’Aloisio —I have also given speeches on some of these issues, so I might stay with my own views and what we have said. When you are looking at the global context—and this speech is—and you look at the so-called misaligned incentives, particularly in the United States between executive remuneration commissions and so on and what occurred, and conflict of interest, I think that is what we are referring to—that probably some of the assumptions around so-called efficient market hypotheses that markets will regulate themselves with a minimum of interference have been called into question. But how they have been called into question depends on the particular jurisdiction. They have probably been called into question more in the United States and parts of Europe than in Australia. We did not see in Australia that sort of degree of problem around incentives and what the investment banks may have been doing.

Senator CAMERON —But the government had to intervene to keep the economy running, so I do not think you can downplay the effect of the global financial crisis in Australia by saying that everything was okay regulatorily; there are issues. What I want to come to is that in her speech Ms Diplock goes on to talk about reporting on environment, social and governance aspects, and argues that the public is increasingly expecting companies to report on environmental, social and corporate governance. It is called ESG, and we will probably see a bit more on ESG. Ms Diplock then moves on to talk about how you deal with that: you do this in integrated reporting. Are you across what is being proposed in this new approach on integrated reporting? What this does is takes the arguments I have heard from you about how we were well placed, jumps over that and says that there are new ideas and new issues that need to be dealt with. So I am surprised that you are not—

Mr D’Aloisio —I am happy to reflect further on the questions you are putting, but essentially we are not a policy arm. We are there to advise government. These are very significant policy issues that government—

Senator CAMERON —But this is the chair of your international body—

Mr D’Aloisio —Well, no—

Senator CAMERON —who is raising these issues.

Mr D’Aloisio —What I do not know is the capacity in which she is giving the speech. Is she giving the speech as the chair of IOSCO?

Senator CAMERON —Yes, she is.

Mr D’Aloisio —Then those issues are still at an early stage in the working groups of IOSCO, and if they get to such a form within IOSCO that we feel that we should discuss them with the government here and take them up, we will do that. At the moment, they are not on the specific agenda that IOSCO has. This may be something that the president of that committee may want to bring forward and discuss with IOSCO. It is something to look at.

Senator CAMERON —So if I were to ask you in the future about a governance issue, I would have to go and talk to the minister before I could even—

Mr D’Aloisio —No.

Senator CAMERON —What are you telling me?

Mr D’Aloisio —To the extent to which we are regulating governance in Australia, we would obviously talk about the regulatory regime. To the extent that you were asking me questions about whether we think there should be changes to those laws, we would take those up with government. To the extent that you are asking me if I have a view on where we should be on some of these issues, if it is in a policy area then ASIC probably will not have a view because it is a government matter.

Senator CAMERON —Can I get your view—

Mr D’Aloisio —I may be misunderstanding your question. I am trying to help.

Senator CAMERON —No. I am just interested that your international body has raised these issues and you say, ‘I cannot have a view on this.’ On the integrated reporting, in her speech Ms Diplock quotes a key international auditing firm, KPMG, as identifying three features of integrated reporting: one, reporting that covers not just financials but also economic, social, environmental and governance factors; two, performance that follows a company’s strategies and targets; and, three, reporting that serves a wide range of stakeholders. Is there any advice or discussion that you are looking at that could take us to this level, which seems to be the emerging level of corporate governance as distinct from where we are that moment, where it does not have that integrated approach?

Mr D’Aloisio —Not within IOSCO, no.

Senator CAMERON —I am talking about within your organisation.

Mr D’Aloisio —Within our organisation we are clearly trying to keep abreast of changes that go on and discussion that occurs. But we are not at the point of putting a proposal to government or a change to government.

Senator CAMERON —What I am concerned about is that we have this position put continually that, ‘We were great; our governance was good.’ But now we have an international body that you are involved in saying that that old approach was not good enough. I might ask more questions on it in future.

Senator Sherry —Senator, I think you are being a little unfair about what Mr D’Aloisio has been touching on. Perhaps there is a misunderstanding. Neither Mr D’Aloisio nor indeed the government have claimed that the Australian financial system operated perfectly during the financial crisis. There are a range of issues that Mr D’Aloisio, both publicly and privately to government, has discussed. Indeed, we have discussed those very issues or referred to them this morning: short selling; the licensing and supervision of credit rating agencies; the consumer credit area; margin lending, which we saw with Storm Financial; the supervision of the ASX; and a whole range of corporate governance issues such as executive pay. So, whilst Australia did comparatively very well, certainly the government has never claimed—and I certainly do not believe that Mr D’Aloisio has claimed—that the Australian financial system sailed through with perfection.

Senator CAMERON —I may have read it in the Australian!

Senator BUSHBY —I am willing to take those questions further, if the senator wishes. During the North Atlantic financial crisis and driven at least in part by the government’s deposit guarantee, which was put in place suddenly in late 2008, many investors whose savings were not protected by the guarantee were frozen. I understand from ASIC press releases from late May this year and from other sources that many of those funds remain frozen. How many funds are still frozen and what is the total value of those frozen funds?

Mr D’Aloisio —The advice I have is that around 63 schemes representing $16.8 billion of mortgage payments are frozen. There are $3.7 billion in property funds, about half a billion of hedge funds and about $2 billion in cash-enhanced funds that remain frozen. As you will recall, freezing occurs because the liquid asset position of being able to redeem the units is such that the trustee forms the view that they should freeze because they cannot meet—

Senator BUSHBY —There would potentially be a run on the bank.

Mr D’Aloisio —There would be a run, yes. So what they do is then trade out of it. As money comes in, they then pro rata and give distributions back. We have given a range of relief around hardship and around rolling withdrawals and so on to enable people to withdraw funds. Some 81 schemes have sought approval from ASIC for hardship relief, some 5,387 applications have been considered and about 4,228 of those applications have received payment under the hardship provisions of about $93 to $94 million.

CHAIR —Senator Bushby, I am afraid we are past the lunch break time, so we will need to thank ASIC for their appearance here today.

Mr D’Aloisio —Thank you, and I note that there are a number of questions that have been foreshadowed to be given to us on notice. We will answer those as quickly as we can.

Senator BUSHBY —Hopefully quicker than last time.

Mr D’Aloisio —There was an election in that process, Senator.

Senator ABETZ —With the questions that were placed on notice, if any information can be brought back today, or indeed as soon as possible, that would be very much appreciated.

Senator Sherry —That is assuming, of course, it is not at the ministerial level.

Senator ABETZ —Of course.

Senator Sherry —In terms of the later questions, I will get my office to check with the other responsible office or officers to see whether they are at a ministerial point.

Senator BUSHBY —I may have unfairly accused APRA last night, but I am fairly confident that ASIC’s answers were not within the timeline.

CHAIR —Thank you, ASIC, for coming in today and answering questions in person.

Proceedings suspended from 12.32 pm to 1.31 pm