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Parliamentary Joint Committee on Corporations and Financial Services
Oversight of the Australian Securities and Investments Commission, the Takeovers Panel and the Corporations Legislation No. 1 of the 46th Parliament

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

CHESTER, Ms Karen, Deputy Chair, Australian Securities and Investments Commission

COURT, Ms Sarah, Deputy Chair, Australian Securities and Investments Commission

DAY, Mr Warren, Chief Operating Officer, Australian Securities and Investments Commission

HUGHES, Mr Sean, Commissioner, Australian Securities and Investments Commission [by video link]

KIRK, Mr Greg, Executive Director, Strategy, Australian Securities and Investments Commission

LONGO, Mr Joe, Chair, Australian Securities and Investments Commission

PRESS, Ms Danielle, Commissioner, Australian Securities and Investments Commission [by video link]

SAVUNDRA, Mr Chris, General Counsel, Australian Securities and Investments Commission

CHAIR: I welcome representatives from the Australian Securities and Investments Commission. Thank you for appearing before the committee today. Information on procedural rules governing public hearings and claims of public interest immunity have been provided to witnesses and are available from the secretariat. I would remind members of the media who may be either present or watching or listening of the need to report fairly and accurately the proceedings this afternoon. Do you have an opening statement, Mr Longo?

Mr Longo : Yes, I do.

CHAIR: Feel free to go ahead.

Mr Longo : Thank you. Good afternoon, Chair and committee members. I'm pleased to appear for the first time before this committee today as ASIC's chair, although I did appear before predecessor committees many years ago. I'll start by acknowledging, as I did recently at the Senate Economics Legislation Committee, that ASIC takes its accountability to the parliament and the Australian people very seriously. We recognise the important role that this committee has in overseeing our activities and responsibilities and the legislation relevant to our work.

This is a very challenging time for ASIC as it emerges from the legacy of the financial services royal commission, the COVID-19 pandemic and recent commission-level changes. ASIC is also entering a new phase of its enforcement and regulatory work. We are finalising enforcement actions arising from the financial services royal commission and are working towards implementing the last of the law reforms emerging from the royal commission's recommendations. I believe that ASIC's strength and effectiveness as an institution can and will be enhanced. This includes further improving our governance structure to support the commission and our senior executives to be more effective decision-makers.

I've begun engaging widely with ASIC staff and stakeholders to further understand ASIC's current strategy and approach to regulation and enforcement. This engagement and collaboration will assist me and the commission to shape and develop ASIC's new strategic priorities and longer term strategy. From an internal perspective, I've commenced some work to look at ASIC's infrastructure. I want to consider ASIC's operating model and organisational structure and our key internal operations and processes, including corporate services, information technology, finance, people and development and also compliance. There's a lot of work ahead for ASIC, but I'm confident about its future.

I want to briefly address comments made in parliament yesterday regarding the Nuix IPO. The Nuix prospectus was reviewed by a specialist team at ASIC. We take all complaints and intelligence we receive very seriously; this was no exception. We considered the complaint and requested further information from the company—that is, the issuer, Nuix—in accordance with our usual procedures.

ASIC's role and approach to the review of prospectuses has been in effect since 1999. ASIC does not consider the merits of an offer when reviewing a prospectus. The market needs to assess the merits of the offer. ASIC's reviews are limited to disclosure. We may intervene if we believe a document makes material misleading statements or omits information that is required for an investor to make an informed investment decision. We are very aware of the current market concerns and are conducting a review of the Nuix IPO.

I take the committee to what happened last November. Nuix lodged a prospectus with ASIC on 18 November. Between 23 and 26 November, ASIC received three complaint letters from a law firm on behalf of an anonymous client. Based on the complaint, the specialist team questioned the company on historical accounting statements in relation to a number of areas of revenue recognition. Based on the response ASIC received, it did not appear that the prospectus was misleading or deceptive or contained any material omissions. I have spoken to the relevant senior executives, and they have confirmed to me that Commissioner Armour has not been involved in or otherwise sought to influence ASIC's approach to the review of the Nuix prospectus. One of the complaint letters were sent to ASIC's commission members, and this was referred to the team in accordance with our usual processes. The relevant ASIC teams have reported to the commission on their approach and progress to date. The commission has not made any decisions in relation to this IPO. Our current review is being processed by the responsible executives involved.

Before concluding my opening remarks, I turn to the concern raised about Commissioner Armour. ASIC has clear procedures in place for the disclosure and management of conflicts of interest by ASIC commissioners. These are based on disclosure of material personal interests to the chair and to fellow commissioners. Prior to and at the commencement of each commission meeting or commission committee meeting, commissioners are asked to disclose material personal interests or any other interest that's related to the matters to be discussed at the meeting. Commissioner Armour does not hold any Macquarie shares or otherwise have any financial connection with Macquarie other than a bank account. It is more than eight years since Commissioner Armour was employed by Macquarie. At this point in time I don't believe Commissioner Armour has a conflict of interest. As this matter progresses, the commission will follow its usual processes to assess and determine whether there are any conflicts of interest that might emerge in the future.

In concluding my remarks and comments on this matter, let me say clearly that I believe ASIC's processes and procedures were properly followed by staff, commissioners and Acting Chair Chester. I look forward to working with this committee, and to taking your questions with the help of my fellow commissioners and other colleagues this afternoon.

CHAIR: Thanks very much, Mr Longo.

Senator O'NEILL: Thank you for being here today, and thank you for your opening statement and your response to some comments that I put on the record last night in the adjournment debate in the Senate. I'm sure that this will move to some general consideration about IPOs and the confidence that Australians can have in what they see go through ASIC and come out at the other end, but can I go to Nuix in particular. It's clear that Nuix has now cost shareholders billions of dollars in value since it was listed six months ago. Given the material that is available for us to have a look at, this appears largely due to missed forecasts and to allegations that its prospectus was misleading. Mr Longo, you've defended the process of ASIC. But did ASIC regret not doing more when it received a serious tip-off from a law firm, acting on behalf of a client, a week ahead of the IPO?

Mr Longo : Based on the information received from that law firm and other work we would normally do in the course of reviewing a prospectus, and the time frame we have for doing so, I don't believe anything more could have been done at the time.

Senator O'NEILL: The process that you described in your opening remarks, and despite the historical reveal of what's happened with Nuix—does that cause you any concern?

Mr Longo : I don't have any concern about the process we followed at the time the prospectus was lodged or the work that was done by the specialist team at that time.

Senator O'NEILL: You're defending your team, but there has been a significant impact on investors in quite a significant way.

Mr Longo : I'm focusing on the work that was done in November.

Senator O'NEILL: Chair, can I refer to some documents that I want to table? It is correspondence between Aperion Law and ASIC in the period between 23 November and 26 November 2020.

CHAIR: Do you want to table those documents now?

Senator O'NEILL: I do, thank you. ASIC has in fact released those documents under FOI. However, the documents can only be accessed by contacting ASIC by email.

CHAIR: I'll just make sure the witnesses have a copy of those documents.

Senator O'NEILL: Thank you. To assist those participating in and watching this hearing, I have provided copies of the correspondence to the secretariat—they will be publishing them on the committee's website—and hard copies are currently being provided to witnesses in the room. I note that related material is available in FOI requests 011-2021, 039-2021, 038-2021 and 271-2020; they are on ASIC's FOI disclosure log on its website. I just remind people that the logs actually run to about 530 pages; that won't all be tabled here. If you, as a citizen or an investor, whether you're investing yourself or you're advising others, have any interest you will have to contact ASIC by email to access those other documents.

Mr Longo, this may be for you. On 18 May 2021 Nuix's chair, Jeff Bleich, openly admitted Nuix was not IPO ready. Does ASIC feel it failed shareholders, given it didn't do more to protect shareholders from an undercooked IPO?

Mr Longo : No.

Senator O'NEILL: Nuix was the biggest float of 2020. According to FOI documents the Nuix IPO complaint was in fact assigned to a graduate to do most of the work. Is it common practice to assign such important matters to a graduate?

Mr Longo : I think that's a mistake in premise. The important matters are not assigned to graduates. The work was done by a team which included senior managers and a senior executive leader—it did include some assistance from a graduate, but the team did the relevant work—and judgements about the prospectus and what steps should be taken and not taken were taken at the appropriate level within that team.

Senator O'NEILL: Can we go through what happened, in the emails that are provided—

CHAIR: Just before you do that, Senator O'Neill: we might just formally table those documents. Senator O'Neill is moving these documents be tabled. Those in favour? Against? Carried. Thank you.

Senator O'NEILL: On Monday 23 November, according to this email chain, at 2.10 an Aperion letter arrived at ASIC. At three o'clock it was sent by an admin law team chief legal officer to a Mr Cootes, who then flicked it on to a graduate. In that email chain, which we'll have a little bit of a closer look at later, the substantive work appears to have been done by the graduate. Is that appropriate?

Mr Longo : Some work was done by the graduate, but the suggestion that the entire process was driven by a graduate is, I think, mistaken.

Senator O'NEILL: I accept that the process involved other people. But, based on this email chain, as I read it, the substantive thinking and the careful reading of the document that you would have hoped had occurred—

Mr Longo : An initial review was done by this graduate, but the other work was being conducted at a senior management level with the assistance of the graduate. It's a team effort. Last year I think ASIC received some several hundred prospectuses; I'd have to take on notice how many. We don't have a system of pre-vetting in Australia; it's risk targeted. Normally we get about a week. So a lot of the issues that were raised by these complaint letters were already work that we were doing with the issuer. So I think, yes, a graduate was involved, but you would be quite mistaken to think that the graduate was the key player in this process or was the only one doing substantive work that required judgement and analysis.

Senator O'NEILL: We have the emails that have been released on FOI request, and they give us a clear time-and-date sequence of communications. It's pretty clear to me that the one who did most of the work and recorded that, and prepared documents, was actually a graduate. That's not to say anything bad about graduates; they do important work. But, given the number of IPOs you said you get, is part of the problem that you're too thin on the ground and you haven't got people with years of experience to draw on to respond to some of the concerns that are raised?

Mr Longo : Let's just focus on this particular one. The work wasn't just done by the graduate; it was done by the team. I accept there's an email, but that paints an incomplete picture of the work that was actually done by the team. If the email is being relied on to draw the inference that the graduate was the only person who did any substantive work in connection with this prospectus, then I think that's an inference that shouldn't be drawn from this email.

Senator O'NEILL: We will go to that a little further in some detail, but my question is: is it common process to assign a graduate to do this sort of an assessment and provide sample letters in response?

Mr Longo : As I've tried to explain to the committee, this is a team. This graduate's on this team, and the allocation of work from prospectus to prospectus is driven by the management of that team. And, as I've tried to explain, I don't accept the premise that this prospectus was just handed over to a graduate and then reliance was placed on all the work the graduate did and then we moved on. That's not the process. The process is: it's a combination of efforts that reflect the skills and experience of that team in connection with the issues raised by the particular prospectus that the process leads us to. I'm not sure I can take that much further.

Senator O'NEILL: Mr Longo, as to the Aperion Law series of correspondence, how frequently do you get such detailed and very concerning communications about an IPO?

Mr Longo : I'd have to take on notice how often we get communications, but these ones definitely got attention—

Senator O'NEILL: Yes, they did, actually—

Mr Longo : and we followed through on the issues raised, and we were satisfied by the responses of the issuer.

Senator O'NEILL: Perhaps that's the most important thing that you said so far—that you were satisfied, as ASIC—

Mr Longo : Yes, the ASIC team was satisfied. It was already doing its own analysis. This material came through, and that triggered—which is quite a common process—communication with the issuer and its advisers as to any concerns we had with the prospectus, but those issues were resolved or addressed to the satisfaction of the team, and the prospectus was allowed to go through and the company listed.

Senator O'NEILL: As much as I think you are trying to indicate that there's nothing to see here, I do believe that there is, so my question to you is: does ASIC have sufficient resources to take on board signals such as were given very clearly by Aperion Law, to a degree, that an IPO that is made available, having gone through ASIC, with, when it comes out the end of that process, its status in the community of investors and advisers to Australian investors—do you have enough resources at your disposal to do the analysis of an IPO, and to carefully and with sufficient time take up intelligence and insights from companies such as Aperion, to prevent another IPO disaster like we've seen from Nuix? What has happened with Nuix was foreshadowed in those documents.

Mr Longo : ASIC does not pre-vet prospectuses. I can take it on notice, but I think we are sufficiently resourced to administer the regime for filing prospectuses as it currently exists under the Corporations Act. We're not a merits based regulator in this area; we're a disclosure based regulator. So, when a prospectus comes in, we review it on its face. If any issues arise or come to our attention, either through our own analysis or through a third party bringing an issue to our attention, then we will raise that issue with the issuer. If we're satisfied by that exchange of communication, then the prospectus goes ahead.

Now, I think it's important for the committee to appreciate that the way the system is intended to operate is that ASIC isn't there to warrant the truth of what's in the prospectus. That is the responsibility of the directors. It's their responsibility to ensure that the prospectus is full and complete, and it's the company, its directors and underwriters that are liable for loss or damage caused by a defective prospectus. The system doesn't operate on the basis that ASIC does a lot of checking. We don't pre-vet. So, normally, about a week goes by where we will look at a prospectus. We actually don't look at a lot of prospectuses, depending on our risk-targeting methodology. We did look at this prospectus—

Senator O'NEILL: But, Mr Longo, you said you get a lot of prospectuses.

Mr Longo : We do.

Senator O'NEILL: They all have to come to you, don't they?

Mr Longo : They're filed, actually, with us and the Australian stock exchange.

Senator O'NEILL: That's right.

Mr Longo : So we—

Senator O'NEILL: There's a reason for that, Mr Longo.

Mr Longo : Sorry, Senator, I'll just complete—

CHAIR: Senator O'Neill, could you just let the witness answer the questions.

Senator O'NEILL: Yes.

Mr Longo : I think it's around 300 or 400 a year. They don't all get the same attention. Under the system that operates under the Corporations Act, the prospectuses above a certain value that are risk targeted—if we have particular information that would warrant us putting particular resources into a prospectus review within the short period we have, then that's what we do. I think the committee would understand that not every prospectus is the same; not every prospectus raises the same issues or risks. This prospectus, I believe, got the attention it could have gotten in the circumstances in which it was received and in the time we had to look at it. But I think it is important for the committee to appreciate the ground rules for how prospectuses are filed and what ASIC's role is in connection with them.

Senator O'NEILL: And I'm happy for you to clarify on notice for the committee what that is, but I question, given that Nuix has cost shareholders billions of dollars, that saying the system is the system is a sufficient response to those investors who've lost money. There is the imprimatur of it having been through ASIC. I'm sure you'd want to believe that that would give some assurance to people that this is a decent document. While I accept that you indicate very clearly that ASIC doesn't actually vet prospectuses, you actually received, in this instance of Nuix, a letter that not only should have, in my view, rung significant alarm bells; it actually contained serious potential allegations about fraud, tax evasion and money laundering. So, if that didn't set off bells, Mr Longo, I don't know what would.

Mr Longo : The issues relating to disclosure in that prospectus that were raised with us, we raised with the company, and they were addressed and met our internal criteria for allowing a prospectus to go forward. There's one thing I would like to highlight here. With respect, Senator, you used the word 'imprimatur'. I don't think the investor community sees ASIC's role as giving its imprimatur to a prospectus. I think the market does appreciate that it is the responsibility of the directors and their advisers as to what goes into a prospectus. I think that's really at the heart of it. The corporations team that dealt with this matter did question the company on historical accounting re statements in relation to a number of areas of revenue recognition. We got responses that were rational and reasonable on the face of it and that enabled, in accordance with our usual approach, this prospectus to go forward. I do accept that it traded very well in the short term—in fact, extraordinarily well. Then, in the medium term, it didn't. So that has raised issues that we are looking at. At the moment we have a couple of inquiries ongoing, so it's difficult for me to take the matter much further today as to where this might be end up. But, as to the prospectus being lodged and then forming the basis of the IPO, I think that part of the process is, to my mind, at this stage of our knowledge, regular and appropriate.

Senator O'NEILL: Is it fair to say it's essentially a tick-and-flick exercise? If everything that's supposed to be in there is there, you tick it and let it go.

Mr Longo : I think 'tick and flick' would be understating the work that gets done. It's a very experienced—

Senator O'NEILL: Mr Longo, you're not taking any responsibility.

CHAIR: Hang on, Senator O'Neill. Could you just let Mr Longo finish his answer.

Senator O'NEILL: Chair, I know that we're time limited for this and I have a number of other questions.

CHAIR: You've asked him a question about whether it's tick and flick, and he's trying to answer you.

Mr Longo : I wouldn't characterise it as tick and flick. I think that's going to the other extreme. It's a review exercise that looks at the face of the prospectus, and we try to satisfy ourselves of accounting principles. If the approach taken seems appropriate, reasonable and regular and is based on the information we have, including, in this case, information that was brought to our attention by a third party, that's the system we have. It's not a complete vetting, where we will test and prod what's in their prospectus and test the business model and all that. We don't do that in Australia, nor do we just tick and flick. We're—I hesitate to put it this way—somewhere in the middle. I'm happy to take it on notice. We do have a lot of regulatory guidance on this. There's a lot of information and knowledge in the market about how we deal with prospectuses, so I don't think investors would be surprised by the approach we took here.

Senator O'NEILL: I think the letter from the law firm indicates a pretty deep knowledge of exactly what the practices are. And, knowing the practices, the law firm wrote to you and said, 'We've got some pretty serious concerns here.' They actually raised concerns about fraud, tax evasion and money laundering. If I look at this process, it was very hasty—very speedy. You talked about the seven days; that's all there is. It's a 320-page document. The consequence of billions of dollars of shareholders' money being lost in the very short period afterwards that goes to matters that were raised in this, for me, signals great concern about what's happening in terms of the prospectus—not tick and flick but not deep dive, in terms of what ASIC is doing. My view is that this letter from Aperion Law was not taken seriously. You do not agree with that. Then I ask: did ASIC assign this concern from Aperion to the same staff that reviewed the prospectus?

Mr Longo : Yes.

Senator O'NEILL: So there was no alternative—

Mr Longo : I'm sorry if I haven't been clear. All the issues raised by Aperion Law were taken into account by a senior corporations team that deals with prospectuses all the time. They are a very experienced group of people. They have my full confidence. They addressed and considered the matters raised by Aperion Law. In fact, some of those matters were issues they were already working on. They engaged with the company—the issuer—in the way we would normally do in the circumstances of the filing of a prospectus, and we landed on accepting that we were satisfied that this prospectus could go ahead and in particular—to be quite clear—that there was no basis at that point in time to use any powers to stop the prospectus going any further. Under the statutory regime, there's a limited period of time for us to review the prospectus. And, if you want to stop it—

Senator O'NEILL: Which is roughly how long?

Mr Longo : Seven days. That can be extended, but I think it's seven days. It's a very limited period of time, and, if, within that limited period, ASIC forms a view that there are deficiencies that are—my word—'actionable', then we have a stop order power, but we did not have a basis for using that power with this prospectus.

CHAIR: Senator O'Neill, I want to pick you up on something. I want to ensure that there is appropriate procedural fairness provided to the witnesses. You've said that the letter involves allegations of tax avoidance or fraud. That's not how I read the letter, and I'll just take you to the third last paragraph on page 2—

Senator O'NEILL: I do intend to come to that, Chair.

CHAIR: If you're going to put something to the witness, I suggest that you actually take the witness to the document, particularly when it's involving very serious allegations. The letter says 'conceivably these could extend to matters involving allegations of material misstatement, improper R&D claims, tax avoidance or fraud'. That's not an allegation of tax avoidance or fraud. It's highly qualified. So I just don't want there to be any suggestion that this letter actually makes those allegations of tax avoidance or fraud.

Senator O'NEILL: Actually, in context, if you read what follows on, there are some significant warnings there about what was revealed at 5.1.21, and I think the detail of that needs to be explored, Chair.

CHAIR: From a procedural perspective, if you want to put that to the witness, can you take the witness to the document and—

Senator O'NEILL: I promise I will, Chair.

CHAIR: Thank you.

Senator O'NEILL: I asked you whether it was the same staff wo reviewed the prospectus who received this correspondence, and your answer, to be clear, was yes—

Mr Longo : Yes, they considered—

Senator O'NEILL: so there is no-one outside the team that's giving it consideration?

Mr Longo : Yes, the team that did the work on the prospectus had the benefit of these letters.

Senator O'NEILL: There is no-one outside of that, observing? Is that process contained within one group?

Mr Longo : Yes, I think that's right.

Senator O'NEILL: How many people are in that group?

Mr Longo : I'll have to take that on notice. Are there three or four in that particular team, Cathie?

Ms Armour : In corporations team there are about 50.

Mr Longo : There are about 50 people in the corporations team, but not all 50 would have worked on this prospectus.

Senator O'NEILL: So a particular group would be assigned to each IPO? Is that how it works?

Mr Longo : That would be a matter for the team leaders—exactly how they allocate the work among the different prospectuses.

Senator O'NEILL: How many team leaders are there?

Mr Longo : There are approximately 50 people in the team and, I think, one or two senior managers in that team. I can give you more detail on that on notice.

Senator O'NEILL: Thank you very much. According to emails released under FOI, when speaking with a junior colleague, the senior manager stated:

As predicted, a complaint in relation to NUIX.

CHAIR: Senator, do you mind taking us to the document?

Senator O'NEILL: I'll go through the email chain. Just for clarity: at 2.10 on Monday 23 November, Aperion sends a letter to ASIC. At three o'clock, it's sent by the senior manager of the admin law team's chief legal office to Mr Kouts, who then flicks it to the graduate at 3:03. The graduate replies at 3.35. At 9.06 that evening there's a response from Mr Kouts, who I'm assuming is the team leader responsible in this instance. Is that correct?

Mr Longo : I'll have to take that on notice.

CHAIR: Senator O'Neill, for my benefit, which document are we looking at?

Senator O'NEILL: We're looking at the email chain. If you go to page 4 of 5 you will see the first communication from Aperion Law. Above that is the response, which was sent from the admin law team's chief legal office. It then goes, back on page 3, to Mr Kouts. Is Mr Kouts the person who was responsible for this particular matter?

Mr Longo : I'd have to take that on notice, but he would have been a member of the team that was looking at this.

Senator O'NEILL: I'm trying to find out who's responsible for the decision-making, Mr Longo. You're more familiar with the processes.

Mr Longo : It's clear that Ms LaBouchardiere leads that team and would have made that decision. She's copied on this email.

Senator O'NEILL: Okay. She was sent this from Mr Kouts. She's the lead person. It's addressed, however, to the graduate, not to Ms LaBouchardiere.

Mr Longo : She's copied on it, though.

Senator O'NEILL: Mr Kouts says here:

As predicted, a complaint in relation to NUIX.

Why would Mr Kouts say 'as predicted'?

Mr Longo : I'd have to take that on notice.

Senator O'NEILL: What did that mean? Was there already some concern that there would be advice that was negative about Nuix?

Mr Longo : I'm taking that question on notice.

Senator O'NEILL: The next thing the senior manager says is:

Let's digest quickly …

Given that this has cost shareholders billions of dollars, why would ASIC, who are responsible for giving this the good once-over, digest it quickly to see if there was any substance? Was it because of the time constraint?

Mr Longo : My expectation is that work of this nature would be done quickly and efficiently. The reason for that is—

Senator O'NEILL: There's a difference between those two things, Mr Longo.

Mr Longo : It is my expectation that work of this nature would be done quickly and efficiently. That's because of the way the regime works under the Corporations Act. We have a limited time frame to work through any issues that are brought to our attention. I should also add, if it's helpful to the committee, that the regime we presently have is intended to encourage capital raising and to be a system that encourages companies to go to market quickly. The trade-off is that the issuers, as I mentioned earlier, take primary responsibility for the contents of the prospectus and their business model, and investors understand that that's the regime we operate under. So it is my expectation of staff that, in order to give effect to the system that we have in Australia to encourage investment, issues are dealt with quickly and efficiently. I don't take from that any intention not to give proper attention; I do take from it an intention to do it efficiently. That's how I would look at it.

Senator O'NEILL: Thank you for your view of that. I'm sure that the shareholders who've lost money would have a slightly different view. Is there anything else that's not available in documents at the moment that would indicate that there was a phone call, a serious consideration, a conversation, a file note or anything to do with contact at that point with Aperion Law?

Mr Longo : I understand you're quite concerned about the level of work that was done on this prospectus by ASIC. I'll answer what I can today. On the detailed analysis that we did, who did that work, the inquiries we made and the judgements we made—that kind of assistance with your question—I would rather take that on notice.

Senator O'NEILL: If you need to take it on notice because there is additional material, I'm happy to receive additional material. But can you tell me if it's standard operating procedure that there's a whole other realm of communications that happen outside this official email chain? Do you know if that's the case or not?

Mr Longo : There's other communication going on among team members. I don't know what other inquiries they made to satisfy themselves about the issues that were presented by this particular prospectus. I'm only offering to take this topic on notice in order to be helpful to the committee and to ensure that an accurate picture of what we actually did is presented. I think the danger, if I may say so, with great respect, of focusing on one email and two or three letters and drawing inferences from that as to what we actually did and didn't do is an incomplete way of looking at things. So I would prefer to take it on notice and give you a complete picture as best we can. Of course, we're here to be open with the committee and, of course, you as well.

Senator O'NEILL: I know that you have taken time overnight to prepare a response to my contribution in the Senate last night, and you are continuing to say you believe ASIC's processes and procedures were properly followed by staff.

Mr Longo : That's right.

Senator O'NEILL: But I'm asking you detail about what happened in addition to this email chain, if there was anything in addition to this email chain. You're unable to answer my questions. Can you understand why that would be of concern to me?

Mr Longo : Your remarks in the parliament were brought to my attention overnight. In the time I've had with my colleagues to consider the issues raised in the parliament, I think we've made a reasonable effort here today to come to the committee and to give you and the committee a reasonable outline of what happened to the best of our knowledge in that limited time frame. But I really want to reassure the committee, through the chair, that I'm happy to come back at a subsequent hearing, and certainly on notice through a letter, to elaborate and amplify what work this team did. So I'm—

Mr Savundra : I think it is appropriate that we take it on notice, given the short period we've had. It shouldn't be assumed that the freedom-of-information request resulted in the production of all documents concerning this matter, so you would need to look at the terms of the freedom-of-information request, and also it's possible certain documents were exempted. We received the complaint on three occasions, between 23 November and 26 November. On 24 November, based on the complaint, the relevant team questioned the company on historical accounting restatements in relation to a number of areas of revenue recognition. On 25 November, a response was received by the company, and, based on that response, it didn't appear that the prospectus was misleading or deceptive or contained any material omissions. That was the assessment of the team. It was 25 November that the relevant exposure period expired. So we really had two days upon receipt of the first complaint and the exposure period expiring. This is based on the briefing I've received. I would appreciate the opportunity to take it on notice and provide you with the full picture.

Senator O'NEILL: Thank you. I appreciate that. What I do note is one of the things that seems to be an important factor here is the shortness of the time in the receipt of the document. If there is additional documentation, file notes et cetera that were not released under freedom of information, I would be absolutely interested in seeing them. If this is all there is, I have grave concerns about the level of response to the seriousness of the complaints, as you've described them, and concerns that were raised in the three Aperion letters that arrived at ASIC in the window of time that they had to respond. They responded quite carefully with some considerable insight, which has been proven quite accurate in retrospect.

Mr Savundra : Certainly. I understand that and am happy to take that on notice.

Senator O'NEILL: Thank you. Could anybody advise me if Mr Oliver Harvey was involved in this matter?

Mr Savundra : To my knowledge, he was not involved in this matter.

CHAIR: Senator O'Neill, can I get some indication of where you're at with your number of questions?

Senator O'NEILL: I have two more quick questions regarding that, and then I'll come back another set of questions. I still have plenty to go.

CHAIR: After colleagues have had an opportunity?

Senator O'NEILL: Yes, happy to share it around. To be clear, you're taking on notice that he was or was not part of the team that made the assessment of this IPO?

Mr Savundra : If you'd like me to take it on notice, I said, to my knowledge, I wasn't aware that he was involved.

Senator O'NEILL: But it's possible he could have been?

Ms Chester : I can confirm that he was not involved. We had processes in place regarding Mr Harvey given his intention to leave ASIC's employ. We've worked through all of that. I can confirm that for you. So we don't need to take that question on notice.

Senator O'NEILL: So Mr Oliver Harvey was leaving your employ to go to which company?

Mr Savundra : If I could clarify, I think the timing is important. I'm assuming your question is on whether Mr Harvey was involved in November—

CHAIR: Mr Savundra, don't assume anything.

Senator O'NEILL: He thinks I'm going to ask him a good question, Chair!

Ms Chester : Mr Savundra is correct; the time lines are important.

Senator O'NEILL: They are.

Ms Chester : The reason I can confirm that for you is that, when we became aware after that period of time at that Mr Harvey was leaving our employ to go to Nuix, we had put in place arrangements. As part of doing that, we made very clear that Mr Harvey had not been involved in any of the Nuix matters to date. I can confirm for you that in my responsibility as the acting accountable authority at the time, he was not.

Senator O'NEILL: That was something that you assured yourself of retrospectively—is that correct?

Ms Chester : Yes.

Senator O'NEILL: So, in terms of Mr Harvey's intention to move to Nuix, what precautions were in place to make sure that Mr Harvey, who was intending to move to Nuix, didn't accidentally become part of the assessment team?

Mr Savundra : Again, I'd like to get the chronology accurate, because, based off my recollection, Mr Harvey advised ASIC of his intention to leave ASIC at some stage this year. When you refer to the assessment team, the assessment team's work was conducted during November of 2020.

Senator O'NEILL: To be clear, given the time line—and I'm happy to take further information on notice—it is a happy accident, it might appear, that Mr Oliver Harvey was not involved in the assessment of the Nuix IPO.

Mr Savundra : Mr Harvey's role was as a chief supervisory officer. It wasn't within the scope of his role to be involved in this assessment.

Senator O'NEILL: I'd like to get some more information about that on notice, as you've indicated. You were assured retrospectively that there was no conflict with Mr Harvey moving into Nuix. Is it possible for you to confirm that Mr Oliver Harvey is or is not be related to Macquarie's chief financial officer, Alex Harvey? Are you aware of that?

Mr Savundra : I'm not aware, Senator. I'd have to take that on notice.

Senator O'NEILL: Thank you very much. That will be it for the moment, thank you, Chair.

CHAIR: Mr Longo, do you have a copy of the corps act there?

Mr Longo : It's assumed proportions make travelling with the Corporations Act rather unattractive! So I have to concede that I don't have a copy with me, but perhaps someone in the room does.

CHAIR: I'm cognisant of the fact that you're relatively new in the role but I don't want to downplay your knowledge of the legislation. Can I refer you to section 711?

Mr Longo : While we're waiting for someone to—ah.

CHAIR: I'll just get you to have a look at section 711, subsection (7). Can you identify that it's the relevant provision which refers to the contents of prospectuses? You'll see that I've highlighted subsection (7).

Mr Longo : That's right.

CHAIR: Is that the relevant provision in the Corporations Act which deals with what should and shouldn't be contained in a prospectus? I don't just mean subsection (7), I mean more broadly—section 711.

Mr Longo : Subsection (7) deals with—

CHAIR: No, just generally about section 711 to start with.

Mr Longo : It deals in general terms with what should be in a prospectus.

CHAIR: And what does subsection (7) say? You might want to read it out.

Mr Longo : It says:

(7) The prospectus must state that:

(a) a copy of the prospectus has been lodged with ASIC; and

(b) ASIC takes no responsibility for the content of the prospectus.

I'm quite happy to read that sections of the Corporations Act!

CHAIR: Okay, thank you. Mr Van Manen do you have any questions?

Mr VAN MANEN: Thank you, Chair. These are more about process generally, given that at a previous hearing I raised my concerns in relation to an issue that arose with an equity raising for the Bank of Queensland—the time frame in that and the concerns that a very significant number of small shareholders missed out on the opportunity, given the turnaround times for responding to the offer. Equally, it appears so in this case, with a seven-day turnaround in the context of a deterioration in the level of culture in corporate Australia—as we discussed recently, Mr Longo and Ms Court.

With the issue of prospectuses and timing, would it be fair to say that in the context of what is in my view a decline of corporate culture in certain parts that longer time frames, notwithstanding the requirements of the Corporations Act, would at least give ASIC the opportunity to better review the information being provided to satisfy itself more fully that the information is accurate?

Mr Longo : Thank you for that question, and I'll ask Commissioner Armour to follow me on that. But, from speaking earlier, I think that would raise some significant policy questions about what sort of regime we want to have for fundraising, and for IPOs in particular. As I said earlier, historically the regulatory role was more intense and broader and then the law changed and it's been like this for a while now. The way the legislation is intended to operate is that obviously ASIC has a role, but it's more on the enforcement side, I think. It clearly has a role in setting standards and reviewing prospectuses in the way that we've been discussing so far. I think it would be quite a significant change to the law and to our current approach if we were given that role. But Commissioner Armour, I know, is long experienced in this area.

Ms Armour : Mr Van Manen, the structure of offerings of securities is embedded in the law. The change to the law that occurred changed our regime. As Chair Longo says, it's a long time ago that this law changed but it changed our regime where we did pre-vet the prospectus, which is, for example, what happens in the United States. But there was a deliberate policy decision taken in Australia to change the law so we don't. Our powers, when there is a question about a prospectus that is effectively going to go live, are covered by the stop-order powers. But otherwise we don't have that vetting power. We have a regulatory guide, 254, which does talk about how we go about reviewing disclosure documents where there's an offering of securities. We tell people what we do, what we can do and what our powers are. Then there's a separate regulatory guide that sets out what our expectations are on the content of the prospectus. But the timing issues you mention are embedded in the law.

Mr VAN MANEN: As a comparison, you say in the United States they have a requirement for prospectuses to be pre-vetted. The US market, to me, is equally liquid and flexible as the Australian market, although, obviously, it's a lot deeper with a much broader capital base. But what is the time impact between what happens here in Australia and what happens in the US, where there's a pre-vetting model?

Ms Armour : I can't give you the answer with any perfection as there are different rules.

Mr VAN MANEN: No, but as a guide.

Ms Armour : But generally IPOs happen in a much shorter time period in Australia, when you're talking about large companies, compared with large companies in the United States, from the time of having a disclosure document almost ready to go, if you like, and the offer occurring.

Mr VAN MANEN: If we look at the Nuix example, a number of the allegations are around financial disclosures and the quality thereof. Is there a requirement in Australia, under the Corporations Act, for a prospectus to have a clean audit report as part of the financial information disclosed in that prospectus, or is that not the case?

Ms Armour : Yes, there are requirements to have financial information available and for that to meet certain standards.

Mr VAN MANEN: Is there are a requirement for them to be audited financials, as would be required in the annual financial reports?

Ms Armour : I'm happy to give you a dot point, if you like, of what the requirements are on notice. But there are requirements.

Mr VAN MANEN: Okay, thank you.

Mr GEORGANAS: Thank you for appearing before us today. Would ASIC be able to update this committee on its policies in relation to policing conflicts of interest and research quality in relation to investment research under the AFSL regime? Please give us a very quick overview.

CHAIR: Sorry, can I butt in there for a moment? Are we totally changing tack, or is that to do with—

Mr GEORGANAS: This is a separate issue.

CHAIR: That's fine. I was just trying to—

Senator O'NEILL: Get your head there?

CHAIR: No, I was trying to work out what this has got to do with what went before. Thank you, I appreciate that. Could I get you to ask the question again?

Mr Longo : I'm glad you asked that question, because Commissioner Armour is happy to take—

Mr GEORGANAS: Yes, I just want to see what regimes you have in place for policing conflicts of interest and research quality in relation to investment research under the AFSL regime.

Ms Armour : So this is when research has been written about a listed company—is that what you're asking about?

Mr GEORGANAS: Basically when there's a conflict in relation to policing conflicts of interest in research quality in relation to investment research under the AFSL. It's actually to do with Regulatory Guide 79.

Ms Armour : Okay. I can't recall exactly what RG79 says, but we generally do have a policy. When research has been written by an AFSL holder, there is obviously a requirement of the AFSL holder to act efficiently, honestly and fairly, and have a process to manage conflicts of interest. And in relation to research, we have conducted a number of research of equities markets. We have conducted a number of surveillances and developed better practices on the sorts of disclosures that are appropriate to be made by the licence holder, and also the particular individual who is writing the research.

Mr GEORGANAS: In relation to the provision of research reports that are given to companies, what's ASIC's policy on that, for those companies, before they're actually published to clients?

Ms Armour : If the question is what is the policy in relation to conflicts—

Mr GEORGANAS: And who are they released to first, basically. Can they be released?

Ms Armour : Generally, the important thing with research is if it is presented as research in a professional sense, so it is independent as distinct from a sales document or a marketing document, then we take actual care to ensure that independence is maintained and it's not subject to being overly influenced, if you like, by a company. Generally, we'll encourage fact checking of matters with the companies where there's something new there. There isn't an obligation—and this has been an issue of interest globally to securities regulators for at least the last 20 years, maybe longer—to ensure that research that's written about a company is the research house's opinion, and is the research analyst's opinion; that it is not coloured by any other commercial relationships with the company who it has been written about.

Mr GEORGANAS: I suppose ASIC's position would be that final copies of research shouldn't be provided ahead of clients?

Ms Armour : No, not necessarily. When there's a need for fact checking, we encourage that to be done. But we don't, no.

Mr GEORGANAS: So how would you safeguard the independence of the research? Presumably, you'd want to safeguard the independence of the researcher?

Ms Armour : And that's partly how you do that. It is a research house's opinion. Their research is their research. They've drawn their own conclusions. If they were negotiating their research with the company they're writing about, that would be a problem from our perspective, so we try to ensure that isn't the case.

Mr GEORGANAS: I'm sure you'd be aware of proposals for the regulation of proxy advisors that would require pre-release of an entire proxy report five days before it can be sent to clients. Can you explain how this proposal would be consistent with ASIC's policy?

Ms Armour : That proposal, or discussion paper, is something that the Treasury are developing. I think those questions are really better directed to the Treasury. It's their proposal.

Mr GEORGANAS: So that was advice from Treasury?

Ms Armour : Yes.

Mr GEORGANAS: ASIC has investigated proxy advisors twice, I think, and you've only found—from the report you did, you recommended to the government there was no case for regulatory change because you only had two cases. It was two or three from what I read.

Ms Armour : We did some work in 2017 and put out a public report on the results of that work. We haven't done any detailed work like that since that period of time. But, yes, we put out a public report in 2018.

Mr GEORGANAS: And when was ASIC first consulted by Treasury about the consultation paper? There's an FOI which shows that Treasury first consulted ASIC by email on Friday the 30th, just as the Treasurer's press release went out.

Ms Armour : I'm sorry, Mr Georganas, I will have to take it—

CHAIR: Mr Georganas, if you want to take the witness to a document that you've FOIed, can you actually show the witness the document?

Mr GEORGANAS: It's an FOI thing. I don't currently have it with me, but we know that Treasury first consulted ASIC about the consultation paper. I want to know when it happened. In the FOI document, it shows that you were first consulted at 3.41 pm on Friday the 30th, at the same point in time that the press release was going out. What I'm trying to get at is: were you surprised that there was no consultation on this issue?

Ms Armour : Mr Georganas, I apologise; I had to take the same question on notice at Senate estimates a week or so ago. I don't have the details yet. There could have been discussions between us and Treasury at various times. I apologise, but I need to take that on notice again.

Mr GEORGANAS: So, did you advise Treasury or the government that the proposals contradict the longstanding ASIC policy in relation to investment research and releasing that information before it goes to a particular client?

Ms Armour : I'm not aware of the discussions that occurred. We'd have to look at what exchanges there were. I will have to come back to you on notice. I'm not sure—I think our work that you refer to is very public.

Mr GEORGANAS: In terms of public, there's a press release that's put out by the Treasurer that contradicts ASIC's position on this issue. What I'm trying to get at is this: did you advise Treasury of your long-held view in this area?

Ms Armour : I'd have to take it on notice and check to see what the discussions were. But, as I mentioned earlier, we did our work in 2017; we put out our report then. We haven't done any work like that again.

CHAIR: From a procedural fairness perspective, if witnesses are going to be asked to remark upon a difference between a document that they may have published through a press release and/or a government policy, members of the committee should take the witnesses to the document, just so that the witnesses are afforded procedural fairness. Otherwise, we're asking questions of witnesses where they just can't lay their hands on documents. Just for future reference, if committee members want to ask questions about documents, they really should bring them with them.

Mr GEORGANAS: Could the existing AFSL regime, which is under Regulatory Guide 79, be applied to proxy advisors to give everyone certainty of operation?

Ms Armour : At the moment, the existing AFSL regime applies to the provision of advice about security, so that is research advice, as we've been discussing. But there is an exemption from the application of the existing AFSL regime for advice about particular voting intentions. That is an exemption by regulation—that's what my understanding is—and so that prevents the existing regime being applied.

Mr GEORGANAS: What I'd really like you to get back to me on is when you, or ASIC, actually became aware of the consultation paper.

Ms Armour : Yes, I will come back to you on notice about that.

Mr GEORGANAS: Thank you.

Senator SCARR: Mr Longo, I want to return to some of the questions raised by Senator O'Neill. In relation to this concept of material personal interest and people's previous employment, my understanding is that in most cases where these issues are considered, under the vast majority of policies that I'm aware of—including the ASX corporate governance best practices and principles—previous employment beyond, say, a three-year period is not considered to be relevant in terms of independence. Is that a fair assessment?

Mr Longo : As a general principle, the greater the gap between the cessation of one employment relationship and the creation of another one—and there's an interaction—I think three years sounds like quite a long time. The way to think about this is that sometimes conflicts can creep up on you. I think you're right, as a general principle, but that doesn't mean that a previous entity you've been employed by or associated with might not create a conflict in connection with the discharge of your duties at ASIC in ways that you didn't expect. I think you're right, as a general principle, but that doesn't mean we're not always conscious of the possibility that a conflict might arise in the future. We have a strong expectation that we are alive to that all the time.

Senator SCARR: Excellent. When a prospectus is lodged for the exposure period, is one of the things ASIC looks at whether or not the prospectus is clear, concise and effective?

Mr Longo : Yes.

Senator SCARR: What are ASIC's views with respect to the appropriate length of a prospectus? I note here that the prospectus referred to earlier was 330 pages long. The prospectus is really intended to be a key disclosure document for retail investors. Mr Longo, with your background and coming to this new position, do you have any particular views as to what the phrase 'clear, concise and effective' should mean in practice?

Mr Longo : I will defer to Commissioner Armour in a moment because she has a lot more recent experience in this area than I have. As a general matter, it has been a challenge for many years for issuers to come up with disclosure documents that investors are prepared to read. The expectation of disclosure of risks and the full explanation of the issuer's business model all takes time to explain. The financials also take up a lot of attention in the prospectus. The key issue that we've had for many years, both in this country and in others, is of getting investors—particularly unsophisticated investors—to read the prospectus. It's something that has been a challenge for a long time.

Ms Armour : My views are much as has been said. I know that at various times at ASIC we've had really concerted efforts to try to adjust some of the practices regarding length of prospectuses. I think it's the right issue to raise. Now in particular, people who are making investment decisions are reading material on their phones. It is an area in which there could be some really concerted work in the future, whether by this committee or more broadly from a policy perspective, on how to provide this information to reach our investors. Some of it is, effectively, mandated, which makes it harder to cut out.

We did a report in 2019 that talked in a slightly different context about whether or not a lot of disclosure is actually effective in helping people make investment decisions. The result of a lot of that work, which drew on some behavioural economics work that has been done more broadly by academics and other regulators, was that we found it wasn't achieving what was originally hoped for.

Ms Chester : Can I supplement there: indeed, my first meeting with this committee, albeit under a previous chair, was to present, prior to the PJC gathering, a presentation on that post-disclosure report. We are now in a world that is post disclosure. We're past a world where everything goes as long as you disclose. You raise a very fundamental policy issue, and that report showed that disclosure is failing. The other policy issue is the distinction between retail and wholesale investors, which has never been indexed. It beggars belief that that has not been indexed. So we have a very unfit-for-purpose disclosure regime that is very outdated, and ASIC is very much on the record as saying that these are fundamental policy issues that need to be addressed by the government and this parliament.

Senator SCARR: Just taking that point further, my friend and colleague from Queensland Mr Van Manen referred to the Bank of Queensland's recent offering. That's an enhanced-disclosure security, so it's already listed on the ASX, and there were many retail shareholders who missed out because they had to get the disclosure document—the brick of disclosure if I can call it that—through that efficient service organisation known as Australia Post, and as a consequence many of them missed out. So is that something else which should be taken into account in terms of this issue as well?

Ms Armour : Yes, you're absolutely right. The exemptions for documentation for institutional investors are contained in the Corporations Act. Those difficult questions about whether electronics should be a default for retail are also in the legislation. So I think it is something that's really worthy of a conversation.

Senator SCARR: For my last question on this point, I want to return to this prospectus. The letter from Aperion Law dated 23 November 2020, which was tabled by Senator O'Neill, refers on page 2 to a section of the key risk statement in the prospectus. I have taken the liberty of going to the source document and checking that I was—

CHAIR: I'm impressed, Senator Scarr.

Senator SCARR: Are you? Well, you should be impressed, Chair, because actually this key risk is on page 199 of our clear, concise prospectus document. I must say it is accurately transcribed in the letter, although the letter does, usefully, have dot points, which the prospectus doesn't. Mr Longo, you've got the perfect background for the position you're in. There's a compliment for you.

CHAIR: Flattery will get you nowhere, Senator Scarr.

Senator SCARR: You've held very senior positions in relation to these matters. I'm going to put a rising intonation on the end of this, so it's a question. The document says:

There is also a risk that financial errors or mismanagement by Nuix, including but not limited to:

errors in financial reporting practices or the accounting treatment of certain transactions,

the incorrect interpretation of accounting standards or incorrect tax calculations,

the under or over-statement of key financial metrics, or an inability to implement appropriately third party checks to identify such errors,

may result in contraventions of applicable laws or standards, financial loss or allow fraudulent activity to go unnoticed.

I must say that when I read this risk, having been involved in the preparation of prospectuses and in the drafting of key risks—bear in mind that it's key risks—that seemed to me to be a very unusual articulation of a key risk in a prospectus. Is that a fair comment, based on your experience?

Mr Longo : The risks one sees in these documents exercise the imagination. I do take your point that this particular risk raises the possibility of accounting errors. But I think the risk they're trying to identify is a risk: that the accounting treatment might be mistaken.

Senator SCARR: I'm interested. Ms Armour, do you have a view based on your experience? Is that the sort of risk that you would typically see in a modern-day prospectus?

Ms Armour : As a result of what's been said in parliament, I have no intention of commenting on----

Senator SCARR: Sorry, it was unfair of me to ask you that. Perhaps Ms Chester?

Ms Chester : Given what was in parliament, I have nothing further to add.

Senator SCARR: Okay.

Mr Longo : We do want to be helpful, though. All I would say about risk disclosure in prospectuses is that I was involved in a number of listing committee issues in another jurisdiction, and, you're right, the breadth and width of risk disclosure is often driven by legal or policy considerations that wouldn't readily occur to you. On this particular one I'd prefer to take it on notice and get the benefit of the team's view on this in context.

Senator SCARR: In one of the emails that Senator O'Neill tabled, one of the team members actually referred to it as 'slightly unusual' and then referred to the re-stated accounts, so maybe that explains it. But I would appreciate your views on that matter.

Mr Longo : I'm not suggesting it's a bad question. I think it's a very interesting question.

Senator SCARR: I come back to this concept of 'clear, concise and effective'. The key risks, I would have thought, should be risks that are not necessarily unique but particular to the investment.

Mr Longo : You touch on a very important problem. It goes back to what Commissioner Armour and I were talking about earlier with your earlier question: we've got ourselves into a situation with documents of this nature that are very long and not always as helpful to an investor as they could be. On your particular question, with this particular risk disclosure, what I'd prefer to do is take it on notice, so I have the benefit of the expertise of the corporations team, and put this particular disclosure in a better context; otherwise I'd be misleading you.

Senator SCARR: That's fine. Thank you very much.

Mr VAN MANEN: Would it be fair to say that the key risks in the prospectus should relate to the risks to the business and the operation of the business that are potentially going to affect the long-term value or otherwise of that business, which is what investors are ultimately interested in? Is that a fair observation?

Mr Longo : On principle, that must be right, yes. These documents, particularly in places like the US, are almost drafted as defence documents. We're approaching this from an investor consumer perspective. Obviously, we want investors to understand the security they might buy and to be well informed and, as Senator Scarr said, alerted to risks that are actually relevant to the business. I think they're all appropriate observations to make. On this particular risk we'll come back to you on notice. The way the system works, though, is that, if something goes wrong and the issuer is sued for misleading and deceptive conduct or for issuing a prospectus that has material omissions, the prospectus assumes quite a profound legal significance because it becomes the centre of whatever the allegations are. Well-advised issuers, sophisticated issuers, obviously will take into account all those considerations in what they actually draft. I think I might leave it at that, because I know we've taken a couple of questions on notice and we'll do our best to be more expansive in writing. You've obviously touched on a very significant topic for the Australian economy and for how we raise money, raise funds.

Mr HILL: I want to turn to timeshare schemes and then to the context of an enforcement discussion. Timeshare schemes are complex financial products that trap people into contracts, in effect, that can exceed 60 years and cost over $450,000. They're often sold in very high pressure sales environments where salespeople can coerce people into purchasing timeshare memberships. Timeshare salespeople, I understand, are regulated as financial advisers and they have an obligation under the Corporations Act to act in the best interests of their customers. What were the findings of ASIC's review of the quality of financial advice in time share?

CHAIR: Mr Hill, could you ask that question again?

Mr HILL: What were the findings of ASIC's review of the quality of financial advice in time share? I understand there was a review recently completed.

Ms Chester : Mr Hill, could you just cite the document that you're referring to, because then we might be able to help you as to whether this is something that Commissioner Press would love to answer or that I might love to answer. No, Commissioner Press is shaking her head. So can you please take me—

Mr HILL: I hope it's not the hospital pass.

Ms Chester : Oh, I've had some of those this week; don't worry. Perhaps—going back to the chair's point about procedural fairness—if you could cite the report and the document I might be able to help you.

Mr HILL: Sure. My advice is that in December 2020 ASIC reported that they'd undertaken a review of the quality of financial advice in the timeshare industry and 'found high levels of noncompliance with the best interests duty and related obligations in part 7.7A of the Corporations Act'. That quote was taken from a media release published by ASIC, on your website, on 11 December 2020.

Ms Press : I am aware of that.

Ms Chester : I think Commissioner Press is correct. We'll take that question on notice, but my understanding is that that work was not completed, because we had to defer some work related to time share when COVID interrupted our world last year. The reason I'm a little confused is that we did do a substantial piece of work. We published our updated regulatory guide on time-sharing schemes in December 2020, and that followed a substantial review that we did and that we published. We incorporated those results into the guide, where we had reviewed. I think it did go to the quality of financial advice, but it was not a document that we released in 2020. I'll have to take the question on notice so I don't mislead the committee with my response.

Mr HILL: Sure. The extract that I've got here—and I think this is from your release—says:

Specifically, we found inadequate inquiries into:

(a) whether the consumer could afford the financial commitments, at the time the advice was given and for the period of membership;

(b) the consumer's objectives, particularly their interest in saving money on their holiday accommodation costs; and

(c) reasonably foreseeable changes to the consumer's circumstances and the ongoing appropriateness of the membership.

It then refers to your targeted review, which does seem to imply you've actually done a piece of work.

Ms Chester : We have, but what we haven't done is update the guidance any further. We did do a substantial paper, and I thought it was towards the end of 2019. It was published, and we had findings of significant consumer detriment and harm and the issues that you're pointing to, Mr Hill. We then were planning on—

Mr VAN MANEN: It is report 642, for your assistance.

Ms Chester : What date was that?

Mr VAN MANEN: That was in December 2019.

Ms Chester : There we go. My memory serves me right. It was December 2019, my very first year at ASIC. So that's where I got a bit confused about the dates. Sorry, Mr Hill. That then informed work that we were planning to do to consult further on reg guidance and what regulatory policy changes might be required. We put out a draft on that, and then we had to hit the pause button with COVID. So we stand by those previous findings. The issue we now have, though—and I think I answered this fully at a Senate estimates hearing two weeks ago, so there will be transcript of this, Mr Hill, which would be very helpful, and we're happy to provide a copy of that to you—is that we then had to hit the pause button on what we were planning to do with respect to time share, because we could not find similar evidence, and there had been a delay because of what had happened with COVID and the suppression of the local tourism industry. So we've put the industry on notice. We have issued some changes to the guidance recently. We haven't gone further with respect to the cooling-off period, but we're monitoring that now and we'll make a determination, probably in September, as to whether or not industry's behaving and whether anything further is required.

Mr HILL: Is that, in effect, the answer to my next question, which is about what you are actually doing to address 'high levels of noncompliance' with financial advice laws in the timeshare industry? Is there anything else you'd add to that?

Ms Chester : I think Commissioner Press is now interested in saying something here, which excites me extraordinarily. So, Commissioner Press, over to you in sunny Melbourne.

Ms Press : I am aware of the report that you're referring to now. We are doing investigations into some of that noncompliance, but, given the active investigations, it would be inappropriate to talk to you about what we're doing in that space.

Mr HILL: Okay. That's good to hear. Has ASIC ever taken legal action against a timeshare provider for breach of financial advice laws—ever? My understanding is no, but I'm happy to be corrected.

Mr Longo : I'll take that on notice.

Ms Press : My understanding is no, but I would need to take that on notice to be absolutely sure.

Mr HILL: No-one's aware of any, but we'll just run a line under it. Is there any reason it appears that ASIC's never taken any legal action against a timeshare provider for breaches of financial advice laws?

Ms Chester : We'll take that question on notice.

Mr HILL: It's not meant to be a trick question. I'm just curious. I don't understand your enforcement model.

Ms Chester : Time share has been around for a very long period of time, as you know, because we've got the major legacy problem of people who have been in these—

Mr HILL: So has ASIC.

Ms Chester : I'm aware of that—so we would need to go back and trawl through many documents and talk to the relevant staff to be able to fully answer that question. But we do have an enforcement action in train now, so there we go: history's changed.

Mr HILL: Maybe more than one. I heard a plural, but is it a plural or a singular, Ms Press?

Ms Press : I think it's a singular. I could be incorrect.

Mr HILL: If you could advise whether it's one or more, or how many, that would be helpful.

Ms Chester : It is in the public domain, though. We've made that public before: that there is an investigation underway. And—I just got a message from staff—it's 'investigation', without a final 's'.

Mr HILL: Sure. In May this year—so only a month ago—the consumer group Choice wrote a 'super complaint' to ASIC, alleging at least eight industry-wide breaches of the law and alleging that the industry regularly breaches financial advice laws. The particular scenario I've had put to me is whether a timeshare salesperson can be acting in the best interests of customers if they sell people into a timeshare product that can last over 60 years and cost $450,000.

Ms Chester : You're right that we received from Choice their 'super complaint' on time share, and we did welcome that. A lot of the evidence that they pointed to was informed by the document that Mr van Manen helpfully reminded me of; it was released in December 2019. We did have an issue with some of the dated information that they had—that is, a lot of it was still pre COVID—but, as industry now knows from REP 642, Timeshare: consumer's experiences, we are currently investigating one major timeshare operator in relation to its advice and sales practices, and we expect to be file proceedings in the court in the next few months. Stakeholders are aware, so the deterrence effect is already alive and well. They are aware of the investigation but not of the identity of the firm involved.

Mr HILL: Is it fair for Australian consumers—and, no doubt, the legions of people listening at home to this hearing—to be concerned about the behaviour of some timeshare sales operators? Is that a reasonable conclusion for consumers to draw at this point, given the work you've done today?

Ms Chester : I think that's the only reasonable conclusion that can be drawn. With the guidance we put out a couple of months ago, we have heightened the limbo bar this year already for timeshare operators. We have a Damocles sword above the industry now. We have an investigation underway, and we've made it very clear to them that, if they don't clean up their act, we will go back and look at the reg policy settings and decide whether or not we go to a deferred sales model with a cooling-off period.

Mr HILL: Thank you. If you can provide any additional information, given the general interest in the topic—I say that in a genuine spirit—that would be helpful.

Ms Chester : We'd be happy to organise a briefing for you, as well, Mr Hill.

Mr HILL: The pointy end of the questions I'm asking is about the points based schemes that are being sold to consumers today. I understand that the issues about regulating legacy schemes are a little more complex, given the state-Commonwealth issues.

Ms Chester : That's right. You can't undo that noodle bowl and make those people whole. It's become a very illiquid market for these people to try to exit. All we can do is really try to address it in a forward-looking way.

Mr HILL: Mr Longo, in your opening statement, you included this sentence: 'ASIC is also entering a new phase of its enforcement and regulatory work.' You mentioned a few things which you're clearing out. Given this is your first date with this committee, can I ask you some more general questions about ASIC's intended approach to enforcement? In the final report of the royal commission, Commissioner Hayne outlined the nature of the response he expected of ASIC as a regulator. I'll put the two quotes on the record, to frame the discussion. He said:

… the critical question whenever ASIC is considering any contravention of the law must be the question ASIC now accepts must be asked: 'Why not litigate?'.

He went on to say:

… the solution lies in more precise case formulation and preparation. It does not provide any reason for responding to misconduct by asking 'How can this be resolved by agreement?'.

How would you describe ASIC's approach to enforcement now, under your leadership, and does 'why not litigate?' still continue to be the frame?

Mr Longo : The financial services royal commission, now several years ago, was a very significant contribution to the way we think about law enforcement and regulation in Australia. I think my starting point on this question is that ASIC will always be an active, credible law enforcement agency. Now, the why-not-litigate mantra that came out of the royal commission was a very useful approach to that topic, the question of enforcement. But, to my mind, no particular mantra is ever going to really capture the subtlety or the complexity of what we're talking about. ASIC legislation, as we all know, is very complex; it's very wideranging. We're never going to be able to investigate everything that's brought to our attention. We have to make choices, so our case-selection criteria—what we resource, what we don't resource, where investigations end up and what actions we take—all require judgement, and I think the concept that Commissioner Hayne came up with was a useful concept. But I think we all need to be reminded that what we're really talking about is active, credible, targeted law enforcement, and to my mind that's what we're about, and that's not going to change. As I mentioned in my opening remarks, we have a tail of royal commission matters that we are completing and, for my part, as incoming chair, one of the things I'm working on, with the other commissioners, and with Deputy Chair Court in particular, is what our enforcement settings should be in the next couple of years, because priorities change. But what I want to reassure the committee about is that our commitment to enforcement isn't going to change. The critical question is: what enforcement? What cases do you run? What investigations do you launch? They're the critical questions. I can reassure the committee, then, that we intend to continue to be an active litigant in furtherance of those objectives.

Mr HILL: In essence, Commissioner Hayne was criticising the then regulatory approach as being more focused on agreement than on litigating. I couldn't disagree with what you've said. As a regulator, of course you have finite resources and you're going to prioritise them and use risk based tools—all of that—and you have a toolkit. That is my paraphrasing, but I think the issue that has been gone to is about the culture of reaching for agreements and other things in the toolkit, without studying—

Mr Longo : I can understand your question. Again, I think the answer to that is clear: not every matter is going to end up in court. There will be times when we will not take any action because the matter doesn't require or warrant action being taken. But, for those of us who have been around a while, we know that launching court proceedings brings with it litigation risk and cost. Part of the judgement that goes into launching proceedings and continuing them is whether that's justified in all the circumstances. So occasionally we will settle matters, and very often those settlements will be court based outcomes, and we may very well go back to enforcement undertakings occasionally, if it's in the public interest to do them. We have a wide toolkit. But the point Commissioner Hayne was making—that we look for agreement as our first option and a soft result—I don't think is an accurate view of how we approach enforcement.

Mr HILL: Now.

Mr Longo : I can only speak for this commission in the future.

Mr HILL: Sure, but that's what I'm inviting you to do.

CHAIR: Can I just interrupt for one moment?

Mr HILL: Sure. I do have a couple of questions though.

CHAIR: That's okay; it's germane to this issue. I just want to disclose to my colleagues and to the general public, as per part 9 of my register of interests, that I own time share, and if any issue arises in these discussions which might require a ruling on procedure or anything, I might hand over to you, Deputy Chair.

Mr HILL: I think this line of questioning has moved beyond time share, but it's good to have that on the record.

Ms BELL: I'd like to go back to it though.

CHAIR: I'm just putting it out there; that's all.

Mr HILL: This is a more general invitation to you as the new head of the regulator. Should people listening and companies interested in this discussion now expect more of the same? Sorry, I should be clear. There were significant changes, I understand, post the royal commission's work, some of them as a result of, I think, the work that Kelly O'Dwyer initiated. There was a Treasury-led task force. So there have been changes. But, with you coming into this role in the last few weeks, should people now expect more of the same, in terms of approach, or are you planning a change in approach to enforcement?

Mr Longo : I think they should continue to expect an active approach to enforcement. I'll ask Deputy Chair Court to speak to this, because she's leading this area within the commission. But our commitment to dealing with serious misconduct, egregious misconduct that causes harm, is clearly going to continue.

Mr HILL: Perhaps in the interests of time, unless there's anything in particular you want to add, Ms Court, this is an opportunity to signal any change in approach or any review activity going to your approach. If it's simply a restatement of what's currently in your enforcement guide, I've got that. I'm just mindful of the time share—

Ms Court : I might just elaborate very briefly, because when you say 'a continuation of the approach', there are two time frames that you could be referring to. We've got the pre-royal-commission approach, which, as you say, Commissioner Hayne took issue with in relation to ASIC's use of enforceable undertakings in particular. Then we've got the 'Why not litigate?' regime that has been in place over the last couple of years.

I'm very new to ASIC. I come from the ACCC. I'm very much feeling my way, but my approach to litigation is that litigation is an important enforcement tool. It will remain so at ASIC going forward. There's no doubt in my mind about that. But litigation is one of a number of tools that you can use in a broader enforcement spread, if you like. We might use infringement notices. We might use undertakings. We might use some of the other new powers ASIC has recently been given. We may go criminal and refer to the DPP. We may take civil litigation. Every matter is one for the commissioners to look at, have a think about, assess, look at the potential conduct and how egregious the harm is, and make a choice within that range. It needs to be proportionate, and it needs to be an efficient and a timely use of our resources.

Yes, we're going to continue to be in the courts, if that's what's at the heart of your message, but I would also hope we can look flexibly at our full enforcement toolbox to achieve outcomes for the public.

Mr HILL: I notice you publish a six-monthly regulatory and enforcement report. Is that data available in a longitudinal format for, say, the last four years?

Ms Court : I will have to take it on notice.

Mr HILL: If you could prepare and provide that, that would be helpful.

Ms Armour : We have data that goes to criminal, civil, administrative infringement notices and enforceable undertakings for a period from July 2011—

Mr HILL: That would be terrific. It might be of interest to people to have a bit of a look. My final topic, Chair—

Senator O'NEILL: Before we move onto that, a particular piece of evidence that we received from former commissioner Medcraft that sticks in my memory was: 'We have been perceived as a regulator. We are moving to becoming an enforcement agency.' That was before the royal commission, and there were some changes underway, as I recall that sequence. I think that Mr Hill's question is really important, because it's been popular to move to enforcement rather than enforceable undertakings. But as soon as I hear, 'We need to be efficient in the way we spend money,' I'm reminded of court cases that did not go ahead because the cost was a prohibitive factor in terms of thing advancing. It just didn't meet the community expectations. My concern is to get the fullness of the picture. Is it one, the other or somewhere in-between, or is it, indeed, as Mr Hill asked—

Ms Chester : In doing it, we might also want to share some up-to-date data that we've got, where we've been doing express investigations. Indeed, we went into this at length at the previous estimates hearing. I'm happy to share the transcript with you, because I don't think you were there—

Senator O'NEILL: That would be great. I was at another inquiry—education and employment.

Ms Chester : I know you were away for family reasons. I'm happy to share that with you. 'Effective regulator' means using the whole toolkit, but, when we do, we use it in the least-costly way. Express investigations have resulted in a reduction in costs for the entities involved of up to 70 per cent of legal fees.

Senator O'NEILL: That seems to me to be very helpful. Thanks.

Ms Chester : Chair, I didn't want to mislead the committee on two matters. When I said before to Mr Hill that we can't do anything about the noodle bowl going back, I meant that ASIC can't do anything about that. Legislative reform will always fix up a legacy issue.

Mr HILL: There are potential constitutional issues in that particular issue, though, but, to the limits of our power, theoretically, sure.

Ms Chester : Yes, that's right. I can also now confirm, thanks to colleagues who are enjoying watching this from home, that we do have two historical matters where we have taken enforcement action against timeshare operators. There was one against ULTIQA for responsible lending in 2018. These all predate my time at ASIC, which is why I couldn't recall anything. The other one was Trendwood, which is now known as Wyndham, in 2000.

Mr HILL: Thank you. This is my final topic. ASIC has conducted two reviews of buy-now pay-later—in effect, unregulated credit—in 2018 and 2020, which is rather close together. In your 2020 report you state:

While most buy now pay later arrangements are marketed as a budgeting tool or a way to make purchases more affordable, some consumers are missing payments and incurring fees as a result. Our consumer research indicated that 21% of buy now pay later users who were surveyed missed a payment in the last 12 months. In the 2018-19 financial year, missed payment fee revenue … totalled over $43 million, a growth of 38% compared to the previous financial year.

Could you summarise your concerns regarding BNPL and any ongoing activity you are undertaking in terms of monitoring, given the concerns you raised in two quite significant reports?

Mr Longo : I'm going to ask Commissioner Hughes to take that question. He has done a lot of work in this sector.

Mr HILL: Maybe in the interests of time I'll put some initial questions. It might enable quicker responses. What are the concerns in summary? What's the ongoing monitoring activity that you're undertaking? What would be the indicators of concern of a growing problem? Do you think the problems you identified are getting better or worse or are stable? What are the indicators that you or we should be looking at?

Mr Hughes : Good afternoon, committee. The reports that we undertook were intended to provide a factual basis, data analysis, of the market and the consumer experience to support good policy considerations. As you noted, Mr Hill, we don't make any law reform recommendations in relation to those reports. Those are matters for government. The concerns we had and that were expressed in the report were that, over the period of the two reports and, indeed, some further data collection that we did in the first six calendar months of 2020, the number of users of buy-now pay-later operators across the sample set we looked at remained stubbornly the same in terms of those who had cut back or gone without essentials to make their buy-now pay-later repayments on time and the number became worse for users of buy-now pay-later operators who used their credit cards to meet their obligations and it became worse for those who had multiple buy-now pay-later accounts.

The indicators, to answer your question, Mr Hill, are those who are going without essentials, those who have used other credit facilities to repay their buy-now pay-later obligations and those who have multiple arrangements of buy-now pay-later operators. The initiatives that we are encouraging to address this are twofold. Firstly, there is some law reform, which comes into effect on 5 October this year, which is the design and distribution obligations. That will require buy-now pay-later operators to design their products in a way that suits their target market. I can give one example of that. If a buy-now pay-later product is being marketed as low cost but it incurs significant fees for late payments then that would not meet the target market determination.

Secondly, we are encouraging a self-regulating industry code, which AFIA has established. We see that as one way in which buy-now pay-later operators could start to share some data so that they can identify where it is that users are taking out multiple accounts. As you would also know, Mr Hill, the RBA is consulting in relation to the payments system, which includes some consideration of surcharging.

Mr HILL: Thank you. That's incredibly helpful. You've jumped through a couple of my next questions. So you can confirm that both the product info disclosure and the DDO regimes will apply to BNPL? Yes, there's a bit of nodding. I note the nodding in Hansard. Thank you, Ms Chester.

Ms Chester : That was a yes.

Mr Hughes : Product intervention already applies to buy-now pay-later operators and DDO will apply from 5 October.

Mr HILL: You've indicated one of the potential impacts or a scenario of a product that's marketed as low cost but actually has significant fees, so that's an example. I'll just throw another couple of questions in there to make it efficient. Are there any other expected impacts on BNPL when the DDO legislation comes into place; have you had discussions with the sector around this; and are there particular sectors of concern which you might point us to? You talk about one of the indicators being people going without essentials. There's been significant media commentary, and I've heard growing concern from the financial counsellors in the disadvantaged parts of my electorate, that people are now effectively buying essentials on BNPL. So I put that scenario to you as well; is that a concern? I've just googled Youfoodz, and their website says:

Afterpay is here, and it means you can eat your food now and pay later!

That seems to be moving a little bit beyond an innovation of layby, when people are actually now buying their food on buy-now pay-later. Would you anticipate any particular sectoral impact of concern?

Mr Hughes : Mr Hill, the market, as our two reports show, is fast moving and innovating, and it would be fair to say that there is some degree of specialisation or targeting of different products or services by buy-now pay-later operators. If we take one end of the market, Afterpay tends to target very low-cost type areas of expenditure, but, at the other end of the market, others include amounts up to $30,000 for things such as solar panels. It's not ASIC's role to exercise some sort of moral judgement as to what items of expenditure people should use their buy-now pay-later accounts to acquire. However, as we did do in the report, we would express concerns if we felt that people were going without the essentials of life, such as food or meeting utilities bills, in order to make those repayments.

Going to your earlier question regarding the application of DDO, yes, Deputy Chair Chester and I have had a series of meetings with some of the larger buy-now pay-later operators, including with chairs and CEOs and board members. We've also met with the code-monitoring committee for the AFIA buy-now pay-later code to express our expectations regarding the application of DDO, but we will have to wait to see after 5 October how they meet those obligations. We can't predetermine that.

Mr HILL: I take your point about a moral judgement; that's not what I'm getting at. Zip's recent report said 'between July 19 and July 20, cosmetic procedures have gone up by 106 per cent, tattoos by 59 per cent'—I have a tattoo; I don't judge that. It's a secret. I won't tell you where it is!

Senator Scarr interjecting

Senator O'NEILL: Don't give him any incentive, Senator Scarr!

Mr HILL: Mental health and counselling was up by 47 per cent. I'm not exercising a moral judgement in pointing out the incredible growth in discretionary consumer spending and the reports from the financial counsellors are that it is these kinds of things—I'll resist reading into the Hansard what you can find on the Re. Plastic Surgery website, but there are a range of images that could probably test the standing orders if we tried to table them, but you can buy them on BNPL. Consumer harm is the question that I'm raising here—not a moral judgement.

Ms Chester : Mr Hill, perhaps if I could supplement here—

Mr Longo : Chair, I notice we're close to a break. I was wondering whether we could—

CHAIR: I'm hoping that that's Mr Hill's last question.

Mr HILL: I have one final question and then I'll have no more.

CHAIR: I would rather, if we can, deal with Mr Hill's matter and then we'll break.

Mr Longo : Okay.

CHAIR: If that's okay—if the body allows!

Mr Longo : Okay.

Mr HILL: Is there any further response to that before I put the last question?

Ms Chester : I didn't want to cut off my commissioner colleague Mr Hughes. I'll let him go first.

Mr Hughes : Thank you, Deputy Chair. What I wanted to say, Mr Hill, was that, whether the credit is regulated or unregulated under the National Consumer Credit Protection Act does not make a difference in terms of what the credit can be used to acquire. For instance, if somebody wanted to use a regulated product such as a credit card to acquire the sorts of services or products you're discussing, the fact that that is subject to a credit licence is not going to change the behaviour of the consumer in their decision to acquire the product. It may in fact change the cost of the product for them to acquire it, but, in terms of their choice, that is not something that I think is going to be captured or not captured by regulation of this particular service.

Mr HILL: Given the time, maybe you could just take on notice whether you think there would be any impact, potentially, from the DDO legislation on these areas of expenditure that the financial counsellors are telling us are of the greatest concern in the way that these products are marketed? They are cosmetic surgery, young women's fashion and food—and the actual essentials of life.

Ms Chester : I think it was fairly clear in the discussions that we've had with the buy-now-pay later operators, and indeed in the final reg guidance that we've put out on DDO, that going through the process of doing a target market determination and, in doing so, setting out how this is something that the consumer gets benefit from, will get to the heart of the issues you're raising. Without any moral judgement—

Mr HILL: Sure.

Ms Chester : it's whether or not the product or the service gets to the right target market without causing detriment. Once you're in the world of detriment, you're out of the boundaries of DDO. Don't forget that we have the bookends here. We have DDO from 5 October this year. We've put them on notice and we're in the door from day one to see what they're doing on it. It will go to the very heart of the issues that you're talking about. And if we feel that there's significant consumer detriment and we can't get them with DDO, don't forget that we have the PIO—we have the bookends.

We've put this industry on notice; we made it very clear in the report that Mr Hughes referred to that DDO was a game changer for us in the regulatory sense of what we need to do with buy-now pay-later. We went on at length about this at the recent AFR business summit, that we were putting the industry on notice. We are a unicorn, globally. DDO does not apply to buy-now pay-later anywhere else in the world, including the UK. Indeed, the new chair of the FCA is in envy of Australia—that this parliament was smart enough to extend DDO to buy-now pay-later.

CHAIR: Alright. Thanks very much.

Proceedings suspended from 14 : 41 to 14 : 52

CHAIR: I declare these proceedings resumed.

Ms BELL: It's probably no surprise to ASIC that I'm be happy to talk about time share because it's something I've been working on in this place since I set foot in it two years ago. Time share has 180,000 owners across our country and is responsible for 4,300 jobs, 2,000 of which are in my electorate on the Gold Coast. I have a vested interest when it comes to jobs and the unemployment rate on the Gold Coast so I'll start with that. I'd like to make a few assertions around time share and address some of the things that have been said today. Firstly, I don't believe, and neither does the timeshare sector, that the regulatory framework for financial services should be applied to time share to start with. This has created a lot of problems for a lot of years. I believe that they should possibly be in the real estate realm of the regulatory area because, basically, every time there is a new impost placed upon time share, which I don't believe should be under financial services anyway, and every time there's a change, they have an impost to apply for carve-outs because their business model is simply not made up of a number of financial products that they're selling. They're selling a lifestyle product, one product. So there are very many imposts that are unfairly placed on time share that have been costing the industry and costing jobs. Already, in fact, these imposts have cost hundreds of jobs. I'd just like to put that out there to start with.

I would just like to say, with regard to Ms Chester's reference to time share as having 'a major legacy problem', that I don't see 180,000 owners and 4,500 jobs as a legacy problem. I see them as employment opportunities and opportunities for growth for the timeshare industry.

Ms Chester : Chair, would it be possible for me to respond to these one by one, as opposed to a big full monty at the end?

CHAIR: I'm hoping that we'll get to a question very shortly.

Ms Chester : I thought I had to respond to assertions.

Ms BELL: I just wanted to make a couple of assertions from ATHOC's point of view. I would like to outline a couple of points, Chair, if I may. The ASIC investigation into time share and consumer harm was based on a couple of very small samples. So the first thing I would say is that it was based on a minuscule number of complaints; in fact, the complaints were fewer than those made about financial advisers. I think ASIC said a few hours ago that they were less than two per cent, and time share was even less than that. The surveys that were sent out to consumers were sent to approximately 50 people, many of whom had left their timeshare arrangements. That could possibly have shown skewed outcomes for the timeshare industry, in terms of consumer harm. And I would put to ASIC that any arrangement for opt-in for the timeshare industry, or a deferred sales model, would ruin the industry in terms of sales moving forward. I know, from ATHOC's point of view: 'ASIC has advised that it continues to consider whether it will proceed with further public consultation and reconsider implementing an opt-in regime in place of the current cooling-off regime. This ongoing threat by ASIC leaves many members wondering whether the effort and fight to recover and save jobs now is worthwhile, as the implementation of opt-in will result in certain cessation of new timeshare sales, job losses and all associated economic benefits, if implemented.' So I would just say to the committee and to ASIC that these regulations which have unfairly been placed upon the timeshare industry are putting the entire industry at risk: 4,300 jobs across the country and 180,000 timeshare owners. I would like that on record, Chair.

CHAIR: Alright. Just before you respond, Commissioner Chester, I'm going to ask the deputy chair to jump into the fray and temporarily chair these discussions, because I'm growing uneasy about where we're going from here. Mr Georganas, I hand the chair over to you temporarily.

Mr GEORGANAS: Thank you. Back to Ms Bell. Have you completed your questions?

Ms BELL: I have. They are the assertions that I would like to put on the record, thank you.

CHAIR: I think that Commissioner Chester, Acting Chair, wants to respond to those.

Ms Chester : Thank you, Chair, thank you, Deputy Chair, and thank you, Ms Bell. And thank you for sharing with me before what musical instrument you play, which has piqued my curiosity. What may be helpful, Ms Bell, would be for us to make available to you extensive Hansard answers to questions that Senator Stoker put to me, basically repeating what you've just said, which I addressed factually and fulsomely at the time. But let me just supplement a little bit. For the purposes of efficiency, I'll just take that as already in the Hansard, Chair—Deputy Chair, sorry.

Ms BELL: Many of those questions were taken on notice.

Ms Chester : I got about 82 questions from Senator Stoker, and I think I took 31 on notice, so I had a pretty good batting average that day. Thank you. Timesharing schemes are deemed to be managed investment schemes under section 9 of the act. That's a policy issue. Due to the unique nature of timesharing schemes, operators would be unable to comply with the raw, unmodified act. As a result, since as early as 1993 ASIC has modified the act to enable the industry to operate in compliance with the act. So we are actually modifying things and providing forbearance to the industry to allow them to exist. I think that's an important factual point, given your remarks about us looking to have a deleterious impact on the industry. If we were to withdraw our forbearance to the industry, you would have to go to the government of the day to get legislative change for the industry to continue. That's a policy issue, and it's probably one, Ms Bell, that you should take up with Treasury.

With respect to the issue about the jobs, we fully understand that this is an industry that employs, this is an industry of small business people that work hard, and there are financial advisers. When we view these issues, though, as a regulator we need to take a bit of a cost-benefit lens to the matter. We also have to look at the consumer side of the equation, and that's where the world becomes a little out of kilter. I would even suggest to you that we've shown greater forbearance to the timeshare industry than perhaps we ought to, but we decided to do so, in the spirit of wanting to make sure the industry lifted its game such that it had a chance of survival. It is up to the industry to change their business model to stop the egregious conduct that we have articulated in our work.

On the issue of sample sizes: that was already addressed completely. The metrics that you referred to that ATHOC cited are incorrect. And that's on the Hansard.

We have established an evidence base which shows that there is significant consumer detriment, significant consumer harm, here, and an illiquid secondary market. So, following extensive consultation with industry, consumer groups and Treasury, we updated RG 160 to introduce new requirements, including—and these are just basic must-haves, not nice-to-haves—formal hardship arrangements, and subject to finance rights. We also bolstered disclosure requirements about key information, a tailored fees-and-costs disclosure regime and retained cooling-off rights. These settings are all designed to directly improve consumer outcomes in relation to a high-cost, long-term, illiquid product sold using high-pressure sales tactics. There are around 30 legacy timesharing schemes, [inaudible] that predates RG 160. These schemes have stopped issuing interest, and it is difficult, if not near impossible, for consumers to exit, because there is no secondary market.

Choice has voiced disappointment that we have not gone far enough, Ms Bell—disappointment that ASIC has not introduced a deferred sales model with its timeshare settings. And I would note, for the committee, that a deferred sales model is now required very extensively by other parts of the financial system, as recommended by Commissioner Hayne. Commissioner Hayne decided not to go and look at time share, because he had confidence that we would deal with it with our regulatory guidance, which is what we are doing. Choice has voiced disappointment. They believed that the cooling-off regime was inadequate and that we should have gone further, to the opt-out model, immediately. We were very mindful that moving now to that model would be very problematic for the industry, and, given what happened in COVID last year, there had been a falling away of—going forward, consumer detriment, as opposed to the legacy consumer detriment, which abounds, fundamentally, and we've articulated that with an evidence-based review that is on the public record from December 2019.

So I have to say: your assertions, Ms Bell, we do not accept. We think that, if anything, we have erred on the side of generosity to this industry for way too long. They are on notice. We will go and surveil what they're doing—probably, in September-October this year—and we will then make a decision on whether or not we listen to the voice of Choice and to the voices of the many consumers who have suffered significant consumer detriment. That is not to say that we discount the jobs and employment that you talk about. We always look at those things as well. But we, as a regulator, have to weigh up the net benefits of the conduct and the business models.

On the other issue, about whether or not time share can operate: that's a matter for government; that's a matter for policy. We've put the industry on notice. We've given them warnings, over a three-year period. We'll work out what we're doing later this year, and we will consult, as we always do.

Mr GEORGANAS: Any further questions?

Ms BELL: I'd like to know, if possible: Ms Chester has just outlined the period of consultation that will take place—from September?

Ms Chester : Well, we've already had about 4½ years of consultation with this industry. I think we'll probably go for another couple of months. Typically, we would put out a draft guidance position, and then we would consult for three or four months. So we'll probably look at doing the same again, but I can take that question on notice and see if the team have an update on the time frames. It will be a narrow consultation. We've done about 80 per cent of the heavy lifting in RG 160. It would just be whether or not the final opt-out issue comes back on the table. That is really in the hands of industry. So I would really encourage you, Ms Bell, to talk to your timeshare providers at ATHOC and tell them: this is in their hands.

Ms BELL: I'll continue to consult with ATHOC and timeshare providers on the Gold Coast—

Ms Chester : And we will, Ms Bell.

Ms BELL: and we'll continue to keep talking to ASIC.

Mr GEORGANAS: Before I hand over to the chair, are there any further questions on time share? There being no further questions on time share, I'll hand back to the chair.

CHAIR: Thanks, Deputy Chair. Senator Pratt, did you have any questions?

Senator PRATT: In relation to Sterling Group, there was some money given to KPMG, some $440,000, to examine the cases of a couple of— I'm just going to find the correct piece of paper; sorry, I've just put it aside. It was covered in an earlier question I asked on notice, but I want to find out if you've had anything reported back to you on that.

Ms Armour : Yes, there was money made available to the liquidators of the Theta companies. They have provided a report back to us on matters that are relevant to our investigation. It has assisted our investigation, and we are building that into the work we're doing on that matter.

Senator PRATT: What does that report say?

Ms Armour : Firstly, I don't know what that report says; the team that is managing the investigation is looking at it. Secondly, it is relevant to an investigation and I would prefer it if we could complete our investigation, because it may become relevant to decisions about legal proceedings. I think it would be preferable if we could get to the stage of making our decisions there before we go into the detail.

Senator PRATT: Is there anything in that report from a regulatory point of view that you're able to make us aware of?

Ms Armour : I don't have the detail of what's in that report, other than it is helpful and relevant for our investigation. So, in general terms, I would expect there is material that is relevant from a regulatory perspective.

Senator PRATT: Can you take on notice what you are able to tell us about that report? I understand that it may be relevant to legal proceedings. So you've got good value for money from that report?

Ms Armour : Yes. My briefing is that it has been helpful for our investigation.

Senator PRATT: It was some $440,000-odd, so it would have to be a fairly in-depth report looking at the structure of the entities and where the money went—and why, I would hope.

Ms Armour : I really don't have any additional information that I can helpfully provide at this stage, I'm sorry.

Senator PRATT: I asked ASIC some time ago, in March this year, about the business model for Sterling Group. It was found to be 'a business model focussed on property investment involving the aggregation of rent rolls' et cetera. They had said that they'd created 'an innovative, genuine alternative', incubating these new products, and that they had 'over 3,600 properties under management with operations in WA, Victoria and Queensland'. The scheme was found to be particularly complex, but when I asked why it had failed there wasn't a particularly clear answer to that. Is there any further advice as yet about that?

Ms Armour : I don't have any further advice on that at this stage. I'm happy, though, to take that on notice and see whether there's any additional information that we can provide to you.

Senator PRATT: Okay. Are you aware, in relation to coming to these hearings, that Sterling's come up any number of times—

Ms Armour : Absolutely.

Senator PRATT: and that it's a good thing to be prepared for?

Ms Armour : Absolutely. We are aware, and we are very aware of the difficult position for particularly the elderly investors in the schemes and in the Silverlink proposal.

Senator PRATT: Have you had discussions with the government about the Compensation Scheme of Last Resort?

Ms Armour : I believe ASIC has had conversations with government on that. I might defer to some of my colleagues, who might be closer to that.

Ms Chester : I'm happy to do so, and I think we are on the Hansard as having said this. ASIC of course is a huge supporter of CSLR. It's the final realisation of the vision of the Ramsay report, and it is relevant to your concerns around Sterling. As part of the government's response to the Hayne review, CSLR was considered by a group, with Treasury as the chair, called the Financial Services Royal Commission Implementation Steering Committee, of which I was a member representing ASIC. Also on that committee is Treasury and APRA. We have discussed CSLR in that context and, as you'd know, there's been a deferral by the government to deal with CSLR. We understand that it's still on the radar and that it is to be happening, but it's been pushed out for budgetary reasons. I'd suggest that the status of CSLR is a question that is probably better put to Treasury, but I understand that they are getting close to doing some consultation.

Senator PRATT: My understanding, based on my last discussion with ASIC and others, was that a scheme was to be announced in the middle of this year. But now we hear that it's for consultation. I will follow that up with Treasury.

Ms Chester : I think that would be the best thing to do.

Senator PRATT: And you say that's for budgetary reasons.

Ms Chester : I think it would be better if you put those questions to Treasury, given that they chair that steering committee, and they will be better placed to fully articulate the issues at hand, particularly given that they're in constant dialogue with the Treasurer's office about it, not us.

Senator PRATT: We had some discussion in earlier questions today about disclosure and prospectus. What are you able to tell us in relation to disclosure and prospectus when it comes to the Sterling Group?

Ms Armour : We've probably covered this before, but I'm very happy to repeat what we've covered. We began looking into the activities of the Sterling Group in March 2017 and we prohibited the offer of units in the Sterling Income Trust in August 2017 by issuing some stop orders. The trust was closed by its then responsible entity, Theta, in April 2018, and the responsible entity decided to wind it up in August 2018. There was a second vehicle for fundraising, which we became aware of I believe in December 2018. That vehicle was issuing redeemable preference shares through two subsidiary companies in this group referred to as Silverlink. No fundraising documentation had been lodged with us, which we say was necessary for that fundraising to occur, so we convened meetings with the directors. When we discovered it in December 2018 we took immediate steps to stop further fundraising and subsequently met with the directors of the Sterling Group. In May 2019 they appointed voluntary administrators to the group.

Senator PRATT: So in the context of what ASIC was talking about in needing more powers in disclosure to prevent vulnerable consumers from falling prey to complex trust arrangements and investment arrangements, particularly as in this case, where particular consumers were targeted—they were not institutional investors that were targeted—is this relevant to the discussion that you were having before about that?

Ms Armour : It's slightly different, because this was a managed investment scheme, where at least the fundraising in the Sterling Income Trust was a managed investment scheme and that is done under a different procedure. There is a product disclosure statement, a PDS, and it's a different document, but some aspects of the same issues apply. We are not a merits based regulator in relation to that; it's, again, about disclosure and whether or not there is any misrepresentation in the material that's provided. But we are—

Senator PRATT: And was there misrepresentation in the material that was provided?

Ms Armour : There was, but we did have concerns about the product disclosure statement. I understand that the initial concerns were addressed but then there became further subsequent concerns, which led to us actually prohibiting the offer of units. So we have slightly different powers.

Senator PRATT: Okay, so I don't quite understand how they would have been addressed in the first instance and then end up going into liquidation, because it would show that the fundamentals weren't there, particularly in such a short period of time, for the investment base actually to be there for what they were arguing they were investing in.

Ms Armour : I'm very happy to come back to you with details of the initial issues that we looked at. But I must say, the job that parliament has set for us in relation to these things is not to give any accreditation or approval or validation to a business model; that is not the job. But I'm very happy to come back to you with the details of what we initially looked at and then what were the matters that formed the basis for us to prohibit the offer of the units.

Senator PRATT: Okay, but misleading or deceptive conduct—

Ms Armour : It is just statements, not conduct, so it's looking at what the document itself says.

Senator PRATT: I'm thinking of other parts of the Corporations Act.

Ms Armour : Oh, okay, yes.

Senator PRATT: I think this was part of the discussion I had with ASIC many years ago. The problem with Sterling was the extent to which you tick the boxes to make sure all the right information is disclosed but there is nothing, in effect, given the statements that you've made and that have been made before by ASIC, that says whether there is something innately wrong with the product that means it shouldn't be marketed at all, which would make it not fair value for what someone has paid.

Ms Armour : So, interestingly, and I don't want to suggest—

CHAIR: We need to wind this up, Senator Pratt, too.

Ms Armour : Okay, I will just be very quick. There is now a different law which gives ASIC the product intervention powers. If there is a product that is effectively a legal financial product that has been made available to retail investors and we form the view that it will or is likely to result in consumer detriment, we can actually prohibit that product. We have made orders using that power in relation to things like binary options being made available to retail investors. That—

Senator PRATT: When did you get that power?

Ms Armour : The first time we used it was towards the end of 2019, so it is later than the Sterling situation. I don't know whether that situation would have been ideal. I'm not suggesting that it is or isn't but I just wanted to flag there is now this power that does give us the flexibility to take some steps that are a bit more looking at what are the outcomes for the consumers from this particular offering and product, and are they causing detriment? It was May 2019, I'm informed, the power became effective.

Senator PRATT: It was robustly advocated that investors in Sterling should approach AFCA in relation to their complaints, but AFCA has been found in some cases to not have jurisdiction. What do you say about that?

Ms Armour : My understanding is not necessarily that AFCA doesn't have jurisdiction. But there is a question arising from a case on another matter—that is, the DH Flinders case—about whether that limits jurisdiction for complaints. I think they were people who made a complaint to AFCA before—I want to say 13 January—a particular date in January, when the AFCA rules were able to be changed—

Senator PRATT: Yes, that's what I'm talking about. It was before that time that, back in 2019, 2020—I think probably '20—when ASIC said very firmly to me and to Sterling investors, 'You must take these issues to AFCA; don't complain to us.'

Ms Armour : Yes, because we don't have an available compensation angle for investors. AFCA is the external dispute body that does have that compensation power. The DH Flinders decision, I understand, came in at the very end of 2019, so that created a technical issue.

Senator PRATT: Would you have referred those people to AFCA? Some of them waited for years to get attention from AFCA in relation to these complaints. AFCA looked at them in good faith, but they actually found out in hindsight that they didn't have jurisdiction. People are very concerned that they are being passed around the bureaucracy.

Ms Chester : I can totally understand why some of the vulnerable consumers involved in Sterling would feel that way. I think this is a question from you that I answered not so long ago. ASIC, in good faith, advised you, advised folk in Perth, consumer groups and legal counsel helping the victims of Sterling that they should go to AFCA and that was absolutely the right thing to do—absolutely the right thing to do. AFCA accepted those complaints and was going to action them. But then, when the government deferred the CSLR, AFCA didn't know whether they were going to be kept whole in a budgetary sense and had to push the pause button on complaints like Sterling if they did not have the funding. I'm not sure if you managed to cover this this morning in PJC with Mr Locke, but you've already asked and we've already answered this question. ASIC was on the money doing that. We acted in good faith. We did not know CSLR was going to be deferred. It has been deferred, largely because of COVID also because of budgetary reasons. These are policy matters for the government, not for ASIC and not for AFCA.

CHAIR: I know that Senator O'Neill is chomping at the bit to continue her questions, but I have a couple of questions I would like to put to you myself. The first one, Mr Longo, is in relation to the compensation scheme of last resort. My understanding about the compensation scheme of last resort is that it is designed as a means of providing a mechanism of compensation where the financial adviser is incapable of meeting a determination made by the old financial ombudsman service, which is now AFCA. Apparently between 1 January 2010 and 30 June 2018 there were a total of unpaid determinations of a little over $16 million. My concern is that, whilst this has been identified as an issue to be examined by the royal commission, is the bar set too low for financial advisers as far as their own financial capabilities to meet these determinations go? Obviously professional indemnity insurance enters into here, but, as we all know—my dad always told me, 'Never trust insurance companies.' I think I said that in my first speech to the House! Where you have a professional indemnity insurance policy that may not cover the field of any particular issues that may arise, we see this discrepancy between the ability for an affected consumer to be able to recover. Do ASIC have a view on whether we need to lift the bar about the financial wherewithal for financial advisers?

Ms Chester : I might have an initial go at this and then I'll ask Commissioner Press to supplement. I just want to give a bit more context, though, before we go into the financial advisers piece. I'll just remind the committee that, while the government did accept the recommendation to do a CSLR post the Hayne royal commission, it does go back to the Ramsay review, which was done in two stages by a panel, and there was extensive consultation. It was like a full monty Productivity Commission inquiry. Professor Ian Ramsay chaired it. Julie Abramson was on it and one other expert. They drew the line in the sand and set up the scheme in terms of how it was meant to be implemented. The government then did exhaustive and extensive consultation. Treasury did this. And then the government wanted to wait and see what came out of the Hayne royal commission to see if they needed to change the limbo bars for anything in terms of nuancing what the Ramsay report found. So I think the question that you are asking is really a policy one for Treasury, but I will give Commissioner Press a chance to say anything she wants to add, given this is her area of expertise when it comes to financial advisers, as Mr van Manen well knows.

Ms Press : The only thing I can say really is that it's a discussion that we need to have with Treasury around whether there's a policy issue here or not. I can understand the view that might suggest it is required, but it's certainly not our position as stated at the moment.

CHAIR: Mr van Manen, did you want to add to that?

Mr VAN MANEN: AFCA shared with us this morning that there are a range of people they've found against who are to deliver compensation to affected consumers. How's that information provided back to you, and how does it impact on the ability of the advisers or other organisations who fail to pay that restitution to do business? How is that managed by ASIC?

Ms Chester : That's a really good question, Mr van Manen, and, indeed, it's a live one that we're dealing with at the moment. Under the current arrangement, one of the roles that we have with respect to AFCA is where they've made a determination and there needs to be remediation and compensation paid. If a party does not do that—provided they're not bankrupt and there are no other proceedings against them, which would then push them into the CSLR—AFCA report that to us. Indeed, we have teams, our behavioural unit and also our enforcement team in South Australia, that monitor that. We're there to play a deterrence role. If we think that there's one case that's egregious—where we know that they've got the wherewithal to pay and they're just obstinately not—we can then enforce the law. We actually have one investigation and one active case underway. Does that help answer your question?

Mr VAN MANEN: What are the tools that are available to—

Ms Chester : Enforce? That's the only tool that we have, and I'm telling you—

Mr VAN MANEN: Can you cancel or suspend their licence?

Ms Chester : We could do that as well. Poor AFCA have a long limbo line of people at the moment who are not paying because of COVID. We're working with AFCA to distinguish whether COVID has put those people in a position where they cannot do it or they are using COVID as an excuse simply not to pay. We've worked with AFCA through those cases, and we've identified several cases that AFCA believe are egregious and obstinate refusals to pay. Our enforcement team has identified the best cases for a public interest deterrence effect, and they are going hell for leather now to secure that outcome. That is what AFCA have asked of us, and that's what we'll deliver.

CHAIR: Before I go to Senator O'Neill, my next issue is in relation to the safe harbour provisions, which are required under section 961B(2)(a) to (g). I listened with great interest to Commissioner Chester's earlier evidence about disclosure. It really troubles me that we have set up an environment where we have so much emphasis on disclosure. I've spoken to Mr Longo and Deputy Chair Court about the fact that we require these financial advisers to go through so much disclosure. In fact, for a new client, I'm told that the necessary paperwork can be in excess of 1,000 pages. The more we complicate these things, the fewer people read them. I understand that many of these so-called requirements aren't, in fact, prescriptive requirements under the Corporations Act; they are the firm's interpretation of what they have to do to comply with their disclosure requirements. We have established this beast with all the best intentions. We want clients and consumers to be appropriately informed, but we've made it so difficult. The disclosure requirements have basically meant that no-one reads them, and, therefore, no-one is informed. How do we fix it?

Ms Press : Thank you for the question. It's a really important one. It's one that is unfortunately very difficult for us, as a regulator, to solve, because a lot of the issues come down to legislative issues, as opposed to regulatory issues. Some of it is in interpretation. So, two things are happening here. Firstly, part 77(a) of the corps act, which contains a lot of these requirements, is actually something that ASIC has no modification power in. So, they are the requirements as they are currently set out by the law. Where I think ASIC can do more—and we are trying to do more—is around how we get better guidance to the industry. We've talked about this for a little while in these committees, around us reframing and recasting some of the guidance that we're putting to industry so that we can get rid of potentially some of this overlap or misinterpretation around what is required to comply with the law. Having said that, I'm not sure that it's a regulatory burden that we are putting on. I think it's a legislative issue.

Ms Chester : Perhaps I could just briefly supplement on that, beyond the issue of financial advisers. This is something that we have raised with Treasury, and it followed the post-disclosure report that we did. This is for us an area of unfinished business of policy reform. We're very mindful, though—and this parliament and this committee would know this—that we have an exhaustive legislative program underway at the moment—from Hayne, from PC inquiries, from Ramsay and from Murray. To fix this in a way that would fundamentally reform the corps act and get disclosure right is a huge initiative for a government to take on at the moment. So, we respectfully accept that there's just not the bandwidth to do it at the moment. But we do take some comfort from knowing that the other new powers where we have design and distribution obligations, with the product intervention order and with choice architecture—and indeed the reforms that this parliament has made to superannuation—will go some way not towards fixing and answering your question around the impost on financial advisers but towards helping consumers who are not reading PDSs to not be harmed and to have the right product that is of some value to them getting to them.

So, you can see a world where yes, we've still got this reg burden hanging over us, and to prune that away is a momentous task for Treasury, the Treasurer, this government and this parliament. But in the interim these new powers allow ASIC to make sure that if they don't read a PDS they're less likely to get in harm's way. So we're now beyond a world of, 'Everything goes if you just disclose.' With these new powers—

CHAIR: Yes, a post-disclosure world, I think you referred to earlier.

Ms Chester : Yes, a post-disclosure world. You're talking about a legacy clean-up to get rid of reg burden. We support that completely. We do not want reg burden, because it just involves more costs for consumers, it impacts small business and it impacts time share. We totally get that. But, rest assured, with what the parliament has given us now, we can at least prevent consumers from suffering and falling foul of the royal commission and poor products through using these new measures. Sorry, that was a bit of a—

CHAIR: A lot of financial planners or advisers are telling me that they are having to excise smaller customers, smaller clients, from their businesses because they simply can't afford to have them any longer. So, the people who most need financial advice are the ones who are being drifted aside.

Mr Longo : It's a big issue. I can see Danielle Press nodding. We've had this discussion several times already with Commissioner Press. The regulatory burden that we're talking about arises out of very complex legislation that was put in place, very well intended. For example, the government has asked the Australian Law Reform Commission to do a review of chapter 7, which is what we're talking about, to try to simplify the legislation. But, as Deputy Chair Chester has said, it's actually a very big drop to take what's complex and to simplify it. In the meantime—and I'll ask Commissioner Press to comment again—we're doing a lot more industry engagement and trying to look for ways of making what we have at the moment more digestible while we're—

CHAIR: I'm going to jump in there, because we are running short on time. Mr van Manen, is there something burning that you want to—

Mr VAN MANEN: It will be very short. Off the back of the chair's comments, I want to say to Commissioner Press, thank you for the work we did back in April. It was a very constructive meeting on this very subject. Importantly, on the issue of clarity and simplification, what work are you doing around the fee disclosure statements and the issues and concerns that have been raised in the industry about how that whole system is going to work post 1 July? The more I look at it, and the more work I do on it, the more problems I see coming down the track, rather than solutions.

Ms Press : It's a good question, and that's a concern that we have. The legislation is [inaudible] and we understand that. We are working with and discussing with industry groups and Treasury at the moment what a potential solution might be. Unfortunately, I can't say much more than that, but we are aware of the issue and we are looking at it very closely.

CHAIR: Alright. Thank you.

Senator O'NEILL: Given the constraints we have on time, I would appreciate short and helpful answers, if possible, to the series of questions that I have. With regard to matters that I commenced asking questions about this morning—Nuix and the cost of billions of dollars to shareholders in value since that's gone badly— Aperion Law sent ASIC a number of letters. Is that correct?

Mr Longo : Yes.

Senator O'NEILL: How many letters did they send?

Mr Longo : I think it was three.

Senator O'NEILL: That's correct—well, to the best of my knowledge; I hope that's correct. The third letter was highlighting their client's concerns after the first two letters appeared to be ignored. Is that correct?

Mr Longo : I don't think that any of the letters were ignored.

Senator O'NEILL: Did they receive a response?

Mr Longo : Well, they weren't ignored. They were taken into account in connection with dealing with the review of the prospectus, as we discussed earlier today.

Senator O'NEILL: But in the documents that we have tabled here, I note that the third letter was sent to Acting Chair Karen Chester, Deputy Commissioner Cathie Armour and a long list of others.

Mr Longo : It wouldn't surprise the committee to know that commissioners get correspondence from a wide variety of people. What we normally do is immediately bring relevant correspondence to the relevant part of ASIC, which is what happened here. I can be corrected—I don't know whether this firm got an acknowledgement of its correspondence. I'd have to take that point on notice, but I can certainly reassure the committee that the commissioners, on receipt of correspondence of this nature, draw it to the attention of the relevant officers immediately.

Senator O'NEILL: I note, Deputy Chair Chester, that you simply asked for a short dot point summary in emails. Why did you only want a short dot point summary, given the seriousness of the allegation that's alleged?

Mr Longo : I think in view of the way this issue has been ventilated in the parliament and before this committee, I'm happy to take on notice a question like that.

Senator O'NEILL: Chair, on a point of order.

Mr Longo : It's a matter for the chair as to how he wants that issue dealt with.

CHAIR: Mr Longo, could you pause for a moment. Senator O'Neill?

Senator O'NEILL: I think that these are important matters. I'm just going to matters of fact. I think that Deputy Chair Chester is actually able to answer these questions, because it was her determination to ask for a short dot point summary. I don't think there is anything extraordinary about getting an explanation from the deputy chair.

CHAIR: I think that's reasonable. Deputy Chair Chester?

Ms Chester : I'm happy to answer, but I appreciate that we might need to expand on my response with a question on notice, given you've got some documents here but not all documents and not all discussions. Just by way of background and context, this was an incredibly busy time at ASIC. Indeed, just to help this committee know how busy it was, I do recall this day very well. It's the day after my husband's birthday. I'd been up since 4.00 am working. When this came into my inbox and I saw what it regarded, I immediately got in contact with Mr Day to make sure that it was all underway and acknowledgement would be happening through CCU, and that I needed to know whether this was a live one or not, given it was a large IPO during a very difficult period of market time.

Senator O'NEILL: Could you just explain CCU for the record, please?

Ms Chester : That's our correspondence unit. We get CCU to acknowledge all important correspondence that comes to commissioners, deputy chairs and chairs.

Senator O'NEILL: Mr Savundra indicated that it was lodged as a complaint. What does that mean?

Ms Chester : We'll take the detail of the question on notice, thanks.

Senator O'NEILL: Why was it lodged as a complaint?

Ms Chester : At that stage, I wasn't aware whether or not it was a complaint. It came in as a series of letters. We get CCU to acknowledge it and it then goes to the relevant team to make an assessment as to what ought be done. So my reference to, 'Short dot point email fine,' was saying to the team, 'Get cracking, but let me know where this is going and what are the issues.' Now, this is a narrow piece of correspondence here. There were further meetings and discussions that are not covered by this FOI. I think that the chair has already made clear that we're going to provide you with more fulsome information. So you can't make mistakes about references to emails which are a very partial story.

But I would say, Senator, I responded to this on the day I received it after having started work at 4 am. I remember it very clearly because it was the day after my husband's birthday and I didn't finish until about 11 pm that night. So I hope that that helps put a little bit of context around your questions and your comments, but I'll leave it there and follow Chair Longo's counsel that we will take the rest of that on notice to see if there's anything further that we need to add.

Senator O'NEILL: I've just got a couple of questions in response to that. Firstly, you might want to take this on notice: do you actually have enough resources within ASIC for this short-term response to IPOs, given what you've just put on the record there? Could you provide me with some understanding—and I think the intent of the FOIs was pretty clear—of why all of the documents weren't released in a way that would allow public scrutiny of them?

CHAIR: Senator O'Neill, so you have a copy of your actual application?

Senator O'NEILL: No, it wasn't me who put in the FOI. I have acquired the FOI because they have become public documents.

CHAIR: My only concern is that, from my perspective, I don't know what the request for information says. Did the request for information say, for example, 'Please provide us with correspondence, emails—everything that you possibly have?' I don't know. I don't know. I have no idea what it says.

Senator O'NEILL: One thing is clear: there's a lot of information that's missing. But there's enough here for us to have some concern about and also to have a sense that this matter didn't actually get to the attention of the deputy chair until just two days before the matter was about to close. That much we do know.

In the email chain that we do have, a staff member responded to your request, noting that after speaking to Nuix, they—'they' referring to Nuix—didn't consider that there was anything of substance such that the exposure period needed to be extended or further disclosure provided. Was this the end of the matter in respect of your involvement with it, Deputy Chair Chester?

Ms Chester : Chair, I'd like to take that question on notice. I'm conscious of time and we need to work through this internally.

Senator O'NEILL: So will you be able to provide a time line with the full exposure of correspondence, conversations, file notes, et cetera?

Mr Longo : Chair, can I answer that question?

CHAIR: Sure.

Mr Longo : Earlier today, I undertook to the committee that we would take on notice and amplify the actual circumstances around the process and work that was undertaken during the period that this prospectus was being examined by this team. Just to be clear for the committee, we will take reasonable steps to include in that response what, if any, direct involvement in that decision-making process involved the commission. We've taken all of that on notice. I've already reassured the committee that the team and the commission followed its normal procedures and processes in dealing with the prospectus of this nature in those circumstances. I do accept and understand that your question would like as much detail as possible. I ask the chair to let us write to the committee, and we will amplify what happened during that process. If there are additional questions that arise from that letter then we can do what we can to address them.

I ask Chris Savundra, our General Counsel, to address one question you asked, and that is our approach to dealing with FOI requests. We have a specialised team that deals with FOI. There is a specialised and nuanced legal regime around the administration of that legislation. I will ask Chris Savundra to quickly respond to that question. Is that alright?

Senator O'NEILL: Chair, if there's an opportunity to extend the time till 4.30, I'm happy to take that sort of evidence.

CHAIR: There's not.

Senator O'NEILL: Perhaps we need to receive that on notice because I have 10 minutes and I'm up to question 13 of 30 or 40 questions.

Mr Longo : I'm in the hands of the chair. We can take it on notice or I can ask Mr Savundra to answer it now.

Senator O'NEILL: It's not a lack of interest, Mr Longo. There is a lack of time.

Mr Longo : I'm in the hands of the chair.

CHAIR: We've also got another question from Mr Hill and a question from Senator Scarr. I think Mr Longo has been very clear with the committee that he's prepared to provide the information that you're after.

Senator O'NEILL: I know, but there's so much time getting caught up in commentary and repeating what was said this morning. I have many questions that I would like to ask.

CHAIR: Alright. Do you want to move to your next subject?

Senator O'NEILL: Commissioner Armour, can you give me an idea of what actions you took upon receiving the Aperion Law letter dated 23 November?

Ms Armour : The letter was referred to the commission's correspondence unit in accordance with our normal practice and a team was assigned to address it. My actions were the same as the other ASIC commissioners.

Senator O'NEILL: So you didn't have any action or activity involved with this?

Ms Armour : No, I did not.

Senator O'NEILL: So you had no responsibility for the decision-making of ASIC with regard to the IPO other than being informed of a process being underway?

Ms Armour : The review of prospectuses is part of ASIC's normal business operations. We have a specialised team headed by a senior executive who does that work.

Senator O'NEILL: I'll ask a couple more questions on notice in relation to that, but was ASIC contacted by Macquarie or any of its advisers—Morgan Stanley or Clayton Utz—to assist with the Nuix IPO?

Mr Longo : I'm sorry, Senator. You said 'assist'. I think we've indicated that we've taken your questions on notice, but I think we've already noted that members of the team did have communications with the issuer. I don't know whether that included communications with the underwriter or with the issuer's counsel. The letter or communication I have in mind I'm happy to include in answer to that question—

Senator O'NEILL: Thank you.

Mr Longo : I think it would have anyway. Just to be clear with the committee, we will be reasonable and broad in trying to provide the information.

Senator O'NEILL: Thank you. Since listing, Macquarie Bank has made $24 million in underwriting and insurance fees from the IPO and $565 million in proceeds from the sale of Nuix shares, and it still owns 30 per cent of Nuix. Commissioner Armour, your LinkedIn profile states that you were General Counsel for Macquarie Capital from March 2002 to May 2013. I expect that that is correct. At that time were you working on the same floor as Mr Dan Phillips, who sits on the Nuix board as a rep of Macquarie, and Mr David Standen, who recently left the Nuix board? And were you in that role on the same floor with Nuix co-founder Tony Castagna?

Ms Armour : Can I ask what the relevance of these questions is? They relate to things that occurred in 2013.

Senator O'NEILL: Yes, that's correct.

Ms Armour : Can you explain to me why—

Mr Longo : Chair, can I just jump in there?

CHAIR: Just before you do that, it's not the practice for a witness to ask for relevance from a senator, but perhaps, Senator, given the time, it would assist if you could indicate what the relevance of the matter is. I think I know where you're going.

Senator O'NEILL: These are key people who were involved in the Nuix float and I expect that they're known to you in a way that they are not known to me, and I seek to be assured by Mr Longo's comments about conflicts of interest. We have had conversations in this committee over the years about the difficulty of regulatory capture and keeping these things separate and the sensitivities around communications, so my question really is: given—

Ms Armour : Perhaps I can help you, Senator.

Senator O'NEILL: What communications have you had with those three Macquarie staff since you joined ASIC?

Ms Armour : I was general counsel to Macquarie Capital. I know those three individuals that you mentioned. I don't have regular communications with them. I'm not sure if I've had any communications with them. If there have been, it may have been if I've run into them in the street, but I can't recall that I have.

Senator O'NEILL: So 'no connection' is your evidence?

CHAIR: Senator O'Neill, given the time frame, would it be convenient for you to provide your questions to the secretariat and we could ask ASIC to provide those questions on notice?

Senator O'NEILL: It would be much more helpful if there were sufficient time for me to ask them today.

CHAIR: The reality is that we don't have time. You have had a long time; you've had a good shake.

Senator O'NEILL: We've had some pretty long answers.

CHAIR: Are you willing to do that; are you willing to put your questions on notice?

Senator O'NEILL: I will have to put questions on notice because, frankly, I think that this matter is of considerable national importance. We had a defence provided at the beginning of the day of Mr Longo claiming that he believes ASIC's processes and procedures were properly followed by staff, and we've had another admission from him post that statement that there is actually a review into the IPO. We've also had revelations today that not all of the information has been—

CHAIR: Senator O'Neill, this is not an opportunity to relitigate your case.

Senator O'NEILL: I think it's important, given I'm not going to be asking questions. It is important.

CHAIR: You will be asking questions. You'll be able to do that of ASIC in writing. ASIC will respond. I'll give them a time frame in which they have to respond to the committee, so you will get your answers. We will move on, because we are short on time.

Mr HILL: I have a procedural question. As a committee, we can always decide to have another discussion when we do get those answers; can't we?

CHAIR: Absolutely. This is not your last chance to question ASIC.

Mr HILL: I'd just make that point.

Senator O'NEILL: I have some questions that would not be appropriate on notice. We will have to recall to have the interrogation of that. Perhaps with further information we might be able to do that more efficiently.


Mr HILL: I'm interested in the substance of the issue. I'm not in any way making personal accusations against ASIC staff members; I'm genuinely interested in the substance of the issue.

Senator O'NEILL: We just need to know what actually went on.

Mr HILL: I have just one thing, if you could respond to it. There was a Fin Review report, which referred to an unpublished communication seen by the Fin Review, which said:

Social influencers and social trading are contributing to herd momentum in speculative stocks … There are a lot of scams and misinformation about products and trading strategies.

That was in relation to social media influencers giving financial advice. The minister made a speech—I think yesterday—where she said, to paraphrase, that a boom in social media financial advisers is mostly a good thing, but she rebuffed calls for tighter restrictions, saying:

The TikTok influencer spruiking Nokia is not that different to the bloke down at the pub who wants to tell you all about the really great company he just invested in—but with a much louder voice.

This isn't financial advice …

I get that point in the generic sense. Could you just outline any concerns, though, that ASIC has in relation to social media influencers and financial advice? The specific thing I'm concerned about is reports in the media and anecdotally that some of these influencers are actually taking fees and kickbacks, which does seem to raise regulatory questions.

Mr Longo : This is a big subject. I don't know whether Danielle wants to have a crack at it. Clearly, an area of great concern is the interaction of social media and where people get their advice from and the basis upon which they make their decisions. But I'll ask Danielle, who has given this a lot more thought than I have.

Ms Press : It really comes down a question of whether or not it is financial advice. If it is, it's probably unlicensed. That is illegal activity, and we would be very interested in that illegal activity. We are looking at unlicensed advice as one of the topics that we think very closely about and are considering. What we would suggest is that, if there is evidence of unlicensed advice being given, we would very much appreciate it being referred to us so that we can look at it appropriately, because it is illegal activity.

Mr HILL: Would that issue of kickbacks or commissions be one of indicators of concern?

Ms Press : If it's an ongoing business in advice where you are actually earning money from that advice, then, yes, that is one of the key issues that creates it as a business.

Mr HILL: Chair, just to close that earlier comment, I think they're legitimate lines of inquiry. There's nothing I've heard today that raises concerns about the people appearing before us and their conduct, but I do think the issues that Senator O'Neill is raising, in substance, are important to pursue, and there's a lot of stuff on notice, no doubt, about further detail down the chain that we'll all be interested in.

Senator O'NEILL: Also, Chair, I think, given the concerns about ASIC and the departure of the recent chair and the tumult around that, it would be important, given the public role that you do play, Mr Longo, to perhaps reflect on the Reserve Bank governor, Philip Lowe, making public his interests in a declaration of material personal interest when he detailed personal shareholdings. Have you given any consideration to that level of transparency, because these are issues around integrity?

CHAIR: That is a very good and valiant effort, but can you put that in your written questions?

Mr HILL: Yes, that's 10 out of 10!

Senator O'NEILL: Well, it's important.

CHAIR: The last question goes to Senator Scarr.

Senator SCARR: I'm going to make a very, very quick and valiant effort. On the issue of superannuation reforms, there was legislation passed yesterday. I appreciate and understand that it's a hotly contested area, and there are colleagues sitting around this committee table who have a very different view from mine. In conclusion, Ms Chester, given your previous history with the Productivity Commission and now with ASIC, do you have any reflections you'd like to share with us?

Ms Chester : I would love to, and thank you for that lovely question. Yesterday was a great day for many Australians. I did a big Toyota jump in Sydney when I got a text from one of my colleagues that this great parliament had passed legislation that will effectively transform the lives of so many Australians. They'll have greater balances when they retire. That was the culmination of five years of work when I was at the Productivity Commission. There were three inquiries that we had the good fortune to get, thanks to the Murray report and the government of the day, who gave us the three inquiries so we could do the work well, such that this parliament and this Senate could consider the wonderful legislation and the work that had been done by Treasury. But I would like to just take this opportunity, with the forbearance of the committee, to call out two colleagues at the Productivity Commission who were the warriors who worked throughout—

CHAIR: You'll need to do it quickly.

Ms Chester : They worked through the triathlon of the three inquiries. Joseph—or Joey—Moloney and Peter Garrick worked with me on the inquiries. Peter Garrick passed away two weeks ago. He was an extraordinary young man. He was a Melbourne Demons fan. He had three passions in life: public policy, the Demons and pub food. I want to have this recorded in the Hansard for Peter's family and for my colleagues at the Productivity Commission: he was an absolute warrior; we admired him and we miss him. So thank you, Senator Scarr, for your question. Thank you, Deputy Chair.

CHAIR: Thank you Deputy Chair Chester. Thank you for your appearance as witnesses today. Answers to questions taken on notice should be provided by 9 July 2021. That concludes this hearing. I thank all witnesses who have given evidence to the committee today. I thank all witnesses who have given evidence to the committee today. Thank you to my colleagues. Thank you, Hansard and broadcasting. The committee is now adjourned.

Committee adjourned at 16:03