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

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

CONCISOM, Ms Sharon, Senior Executive Leader, Market Enforcement, Australian Securities and Investment Commission

DAY, Mr Warren, Senior Executive Leader, Assessment and Intelligence; Regional Commissioner, Victoria, Australian Securities and Investments Commission

ECCLESTON, Ms Jane, Senior Executive Leader, Investment Managers and Superannuation, Australian Securities and Investments Commission

HIGGINS, Ms Laura, Senior Executive Leader, Financial Capability, Australian Securities and Investments Commission

KELL, Mr Peter, Deputy Chairman, Australian Securities and Investment Commission

KIRK, Mr Greg, Senior Executive Leader, Strategy, ARMOUR, Ms Cathie, Commissioner, Australian Securities and Investments Commission

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

McGUINNESS, Mr David, Senior Executive Leader, Financial Services Enforcement, Australian Securities and Investments Commission

NIVEN, Mr Doug, Senior Executive Leader, Financial Reporting and Audit, Australian Securities and Investments Commission

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

SAADAT, Mr Michael, Senior Executive Leader, Deposit Takers, Credit and Insurers; Regional Commissioner, New South Wales, Australian Securities and Investments Commission

SHIPTON, Mr James, Chair, Australian Securities and Investments Commission

CHAIR: Good morning everyone. I reopen the public hearing for the Parliamentary Joint Committee on Corporations and Financial Services. In particular I welcome the new chair of ASIC, James Shipton, to his first hearing. This is also the first oversight hearing for ASIC this year.

I made an opening statement this morning which sets out the details of the hearing. If you'd like me to repeat that I'm happy to do that, but if you're already aware of it I won't repeat it.

Mr Shipton : We're aware of it, thank you very much.

CHAIR: Okay. We do welcome you along. We will go to opening statements and then to questions.

Mr Shipton : Good morning to you and to members of the committee. I'm very pleased to be here today for the first time as ASIC's chair. With your permission, Chair, I'd like to make some brief opening remarks.

CHAIR: Go ahead.

Mr Shipton : Thank you. Firstly, it is a wonderful honour to lead ASIC and to serve alongside the impressive men and women of ASIC—to serve the Australian community in this very important role. ASIC is an organisation that plays a crucial role in the Australian financial system, in the economy and, importantly, for the Australian people. At the end of the day, every cent in the financial system is other people's money—not institutions' or companies' money. These entities are merely veils for the real people who stand behind them: individual shareholders, investors, consumers and depositors. And because we are dealing with other people's money we must never forget that financial risks can, and often are, catastrophic to real people, and can, at an extreme, cause human suffering. After all, it's real money to real people.

Before I go on, I would like to acknowledge the previous ASIC chair, Mr Greg Medcraft. I know Mr Medcraft from my work at IOSCO and I want to thank him for his leadership of ASIC until late last year. I also want to thank the deputy chair, Peter Kell, who has done an outstanding job as ASIC's acting chair between Mr Medcraft's departure and my commencement. I also want to thank commissioners Cathie Armour and John Price for their leadership during this transitional period.

I want to recognise the important role of members of the Australian parliament, especially via important committees such as this, in highlighting issues, developing policy and promoting reform. In our democracy, parliament is crucial in shaping the regulatory framework to align with community expectations. With this in mind, I want to highlight a few of the important reforms and proposals relevant to ASIC's work that have started or been refined by parliamentary committees like this one. First, there are reforms to lift the professional, ethical and competency standards of financial planners. These improvements should help build trust in the financial advice industry. Second, there is the review of ASIC's enforcement regime, including expanded penalties for misconduct, because for there to be appropriate accountability penalties must be calibrated and ASIC's enforcement toolkit should be as complete as possible. I also want to mention this committee's current enquiry into the life insurance industry. I know ASIC has been involved in this important work and I look forward to the release of your conclusions and recommendations. Finally, I look forward to appearing before this committee going forward and having a productive dialogue with you and all its members. We look forward to the committee's questions.

CHAIR: Thank you, Mr Shipton. As chairman of ASIC, we welcome you, along with your entourage. We have acknowledged in the past the previous chairman, Mr Greg Medcraft, and the valuable work he's done not only with ASIC but also with his relationship with the committee. Now we will go to questions, and I'll pass over to Ms Butler.

Ms BUTLER: Welcome to our new chair. Thank you, again, to our outgoing chair and to all of the deputy commissioners, including the deputy chairman, Mr Kell, who held down the fort while we were awaiting your arrival, Mr Shipton. I have some high-level questions about how ASIC will operate under your leadership. The first one is: how do you intend ASIC to balance the arguably competing aspects of your statutory mandate under your leadership? Obviously promoting good business practices and your role in relation to corporations don't completely overlap with promoting consumer interests. How do you expect those things to be balanced?

Mr Shipton : Regulatory agencies across the globe have always had to undertake very different mandates, and it's no different here at ASIC. I've experienced this before at the regulatory agency in Hong Kong, where I worked for three years as an executive director. The philosophy that I've always applied is that we need to exercise the very best judgement—balance the various different interests and balance not just the various different aspects of our mandate but also the various different aspects of the industries that we regulate and oversee. I've always thought that it's a job of synthesising these different aspects and exercising the very best professional judgement that we can bring to bear.

I also think that maximising consultation with different stakeholders, maximising our data-driven understanding of the issues involved and maximising our understanding of the industry and sector landscape will help us deliver that balanced exercise of judgement. That's my philosophy when it comes to not just balancing the various different aspects of our mandate but also balancing the various different aspects of the different constituencies that underline and have input into a regulatory decision. I will close on the point that, at the end of the day, I'm here to serve the public. At the end of the day, I've developed my own perspective—as I've said in my opening remarks—that the financial system exists to serve the public, the community and the broader economy. In the long run, that is good for individuals, good for the population and good for the economy and financial sector.

Ms BUTLER: On that point, one of the criticisms that has been made of the financial sector in Australia before—including by your predecessor—in this committee is that there's insufficient competition in financial services in Australia. The Murray inquiry recommended that ASIC be given an explicit statutory mandate in respect of competition. The recent interim Productivity Commission report made reference to that recommendation and made some recommendations about pursuing a greater statutory mandate for competition in our regulators. Do you have a view about whether or not there should be explicit recognition of the importance of competition in your statutory mandate, particularly as the interests of consumers are so important to you, given your values?

Mr Shipton : Absolutely. I support ASIC's submissions on this to date. I think the submissions and the proposal that ASIC has put forward are very balanced. It is very important to consider in our regulatory decisions and in the exercise of judgement, which I just spoke about, the competitive dynamics. That is very important. The Productivity Commission has proposed something slightly different, which we are reviewing and which we will consider. But, for the time being, we and I stand by the suggestion that we be given a mandate to look into the competitive aspects.

I will also emphasise one thing that has become very apparent to me in my now 10-day review of the task ahead, and that is that the team have been considering the competitive dynamic in the respect that we look at the landscape and the environment of the sector in the industry. When we look at the landscape and the environment of the industry or a sector of the industry, obviously the competitive dynamic is an important part of that consideration. So I want to emphasise that, in the very diligent, data-driven analysis that the men and women at ASIC undertake, this is a core part of their work product. But it would be beneficial to go that extra step to allow for, formally in the exercise of that judgement, that professional regulatory judgement to have due consideration to competition aspects.

Ms BUTLER: Both of those questions are related, as is this one. The last time a statement of expectations was issued by the minister was, I think, in 2014, and ASIC responded with a statement of intent. If I were going to make a criticism of the minister's statement of expectations, it would be that it is fairly light on in terms of consumer interest and reference to the importance of protecting consumers. Are you expecting that there will be any discussions about a new statement of expectations, given the leadership at ASIC, and, if so, when would it likely to be?

Mr Shipton : I can't comment on the timing of a statement from the government, but I am looking forward to a statement from the government. The statement of expectations will, I think, be an important document for us and me to have regard to. As I said in my opening statement, I feel very strongly about the role of ASIC listening and being attentive to the expectations of government and the work and commentary and inquiries of committees like this one. So I am looking forward to the statement of expectations, as I am looking forward to, in due course, then working with my colleagues about responding to that with a statement of intent.

Senator WHISH-WILSON: Welcome, Mr Shipton. Your answer to my first question to you is going to have quite a big bearing on your credibility, certainly in my eyes. Is it true that you are related to David Lee Roth?

Mr Shipton : How much time have we got, Senator? Is there such a thing as a 'godbrother'? My late-father knew the Roths and became an official godfather to David. That is the connection. I unfortunately have never met David, nor, unlike my father, attended, believe it or not, Van Halen concerts—but maybe that is something that I will be able to progress.

Senator WHISH-WILSON: That's good enough. You know that there is a banks royal commission on at the moment. I was on the economics committee inquiry into ASIC in 2014, when the economics committee made an unprecedented recommendation for a royal commission into CommBank. Now that that's happened, perhaps I could ask what contact ASIC have had with the commission and the commissioner and what kind of work you've been asked to prepare for the commission.

Mr Shipton : Firstly let me say that I think the work of the royal commission is very important, and I welcome the work they're undertaking. We are prepared and looking forward to providing information to the royal commission. We have been asked to provide information and we are in the process of providing information. We have provided information. And that's probably where, with due respect, I'd better leave it, except to reinforce the fact that we stand prepared to assist the royal commission in every possible way in its very important work.

Senator WHISH-WILSON: Is there any concern that the commission may itself look at ASIC and ASIC's performance in relation to various investigations and scandals?

Mr Shipton : We will let the royal commission determine what they look at. And, as I said, I think the royal commission has very important work, which we support, and I'll leave the determination of areas of focus to the royal commission.

Senator WHISH-WILSON: Fair enough. I noticed recently—in fact, it might have been in the media yesterday—that ASIC have just released a report, which I haven't had a chance to read yet, on ratings agencies. Was this your influence, given the role they played in the GFC? Or is this a report that's been underway for some time?

Mr Shipton : I wish it was under my influence but, as impressed as I am with the men and women at ASIC, the report was not prepared in the last 10 days.

Senator WHISH-WILSON: You've been in train for a few months now, so I was just interested in whether—

Mr Shipton : But it is an important area of focus. And, as you said, referencing back to the global financial crisis, the role and position of rating agencies is an important focus area in the financial system, because they do provide and perform an important function.

Senator WHISH-WILSON: Ms Armour, do you want to comment on that?

Ms Armour : I was just going to say that if you had any specific questions about that report I'd be happy to address them.

Senator WHISH-WILSON: I was just interested in whether it's been looked at overseas. What motivated it at this stage for you to look at ratings agencies?

Ms Armour : Ratings agencies have been required in Australia to have a licence for five or six years, and we thought that we needed to do a comprehensive review. The agencies have had the opportunity in Australia to obtain their licences, to buckle down and work within our regime, and we thought it was timely for us to actually check in and see how effectively they were doing their job under our regime.

Senator WHISH-WILSON: So, it's like a standard—

Ms Armour : It's a standard surveillance—

Senator WHISH-WILSON: It's like a standard five-year review?

Ms Armour : Yes, a standard surveillance. We do, by the way, work very closely with our global regulatory counterparts in relation to credit ratings agencies. We are involved in an international working group that looks at the regulation of credit ratings agencies.

Senator WHISH-WILSON: Could you just very briefly tell the committee what the key recommendations or key findings from your report were?

Ms Armour : There were six key recommendations. The first went to governance. And bear in mind that there are six credit ratings agencies, I think, in Australia. The three most significant are internationally headquartered and part of an international operation. Some of the recommendations were about ensuring that the compliance methodology, the governance arrangements, had adequate reporting back on Australian activities or adequate reporting to the Australian subsidiaries on information. We're also concerned to ensure that actually there were adequate training requirements for the Australian-specific issues being conducted, because frequently people looking at Australian issuers or Australian ratings are staff of these international firms located outside of Australia. So, we're very concerned to make sure that there is adequate training, and we've made recommendations about that. We've also made recommendations on the composition, if you like, of ratings committees to deal with potential conflicts of interest. And regarding the nature, each rating agency is required under the Australian licence to provide ASIC with an annual compliance report, and we had recommendations about the content and verification of that report.

Senator WHISH-WILSON: Mr Shipton, your predecessor had some strong ideas on different things he wanted to pursue. One of them was the idea of exams for financial planners. An education standard has now been put in place. You would have done your series 7 and 63 when you were over in the US. Do you have any views on whether we should have compulsory examinations in this country for financial planners?

Mr Shipton : You are absolutely right. There are examples in the United States. The jurisdictions I have worked in, the United States, Hong Kong and the United Kingdom, have broad-brush exams and competency requirements across the financial sector. I am very much a supporter of the initiatives in financial planning. It is something that I think we will continue to have a look at. There is a number of ongoing projects in relation to various different sectors and segments of the financial sector, which I don't want to pre-empt. But when we consider responses to any issues in the financial sector we look at the appropriate regulatory tools to apply and if we conclude in that sector or in that arena that a regulatory tool is not apparent then I know that ASIC and I certainly will support this. We will be very keen and willing to recommend the application of the regulatory tool.

To reinforce the premise of your question, I see competency requirements and ongoing entry as an important potential regulatory tool to apply in a number of different sectors. We will continue to be open and nimble and responsive to where we believe there is an appropriate need for the application of regulatory tools.

Mr FALINSKI: Why do you think that ongoing education and competency—

Mr Shipton : Because I feel very strongly that when you are a participant in the financial sector you are a financial professional. Professionalism is one of my favourite words, because professionalism has two connotations in its definition. Firstly, there is skill—in other words competency—which I believe is what the senator was getting at. And conscientiousness, which is a regard to the human element. As the person who wanted and prided himself on wanting to be a professional, I took the skill and competency aspects very seriously, as I took the human aspects as well—the conscientiousness aspects. That is why I think a regulatory tool is important. And that's why I think professionalism is an important underlying standard for everybody in financial services.

Mr FALINSKI: Did you do this because a regulator told you you should do it.

Mr Shipton : Yes. I was licensed personally in a number of different jurisdictions. I sat exams and studied for exams and did ongoing—

Mr FALINSKI: How did you go in those exams?

Mr Shipton : Fortunately, I did well!

Mr FALINSKI: So well you became ASIC chairman!

Mr Shipton : I remember sweating on a number of those exams over the years. Fortunately, I passed them. They were rigorous and good. I remember studying for them and I remember going through them and I remember being personally pleased that I did them.

Mr FALINSKI: In the US they have a CFA, which is not part of the formal government regulatory authority. Is that right?

Mr Shipton : Correct. The Chartered Financial Analyst Institute is an industry body that prides itself on its professionalism. I am not a CFA charter holder, but I am led to believe that the CFA charter, which is a series of three exams over three years—very intensive—in which approximately 70 per cent is on the analytical side, let's call it, of the charter, of the profession, which is investment management and research, and then 30 per cent is around ethics and professional standards. That is an interesting role model when I talk about professionalism. I actually have industry bodies like that, professional bodies like that, in mind when I think about professionalism and professional standards inside financial services.

Mr VAN MANEN: One of the contentions that is now being raised with the professional standards body is as to long-time advisers in the industry, particularly those who have gone through the FPA and got CFP designation. My understanding, from discussions I've had with people, is that that CFP designation will not be recognised by the new standards body, even though some of these people have been in the industry for 30 or 40 years. That in itself is creating a lot of consternation. These people, the majority of them, are saying: 'We've never had any complaints or issues or compliance problems, yet we're being treated like somebody who's been in the industry for 12 months or whatever. Why are we not getting any recognition for that experience?' One of my other concerns is: it's all well and good to have all of these 'qualifications', but, to me, experience is still extremely important. You need to know how to apply those qualifications practically, on a day-to-day basis, to assist clients.

Mr Kell : The issues around exactly how that period might work, in recognition of past qualifications, I think is still up for consultation through the new professionalism body, the Financial Adviser Standards and Ethics Authority. I think the issues you've pointed to are genuine issues that they're grappling with and consulting on at the moment. I agree with you on the experience requirement. I think one of the beneficial features of the new requirements is supervision for new advisers; a professional year—in other words, a recognition that experience needs to also be built into the overall set of qualifications that are required. So we'll be participating in that consultation, but we're not the ones who, ultimately, will set those standards; that's FASEA. But I think that the issue you've pointed to is a real one.

Senator WHISH-WILSON: Certainly my experience from doing series 7 was that it was a really, really tough exam and I never want to do it again! My last question, Mr Shipton, is in relation to your predecessor as well. Greg always had strong views on things like tracker mortgages and sale of derivatives to retail investors; there were things that he was pursuing. Is there anything in particular that you have identified already that you would like to share with the committee that you think stand out? I think Mr Kell is smiling at that question. Is there anything you might be pursuing—something that you might bring to the table?

Mr Shipton : One point on which I think Mr Medcraft provided not just domestic but global leadership was highlighting the importance of culture inside financial institutions, and it goes back to the earlier conversation. Mr Medcraft rightly has a very strong reputation amongst regulatory agencies for highlighting the importance of this important topic. At the same time, when I was a regulator in Asia I was saying similar things, so there was an alignment of thinking in that regard. One of the important points that I hope to continue is that focus on the culture inside financial institutions. It ties back to the earlier conversation about professionalism, because, in part, a key indicator of culture is good professionalism and a professional culture.

Senator WHISH-WILSON: A key piece of legislation that will come into parliament soon will be around whistleblower protections, and I know there are many people on this committee who have been involved in the inquiry into that. Do you have a view on whether whistleblowers within corporations specifically should be remunerated for bringing forward information to regulators? Have you seen anything around the world—

Mr Shipton : It's too early for me personally to comment on that, so I'm going to defer to my colleagues on our considered thinking on this to date.

Mr Day : As you would know, Senator, we made a submission to the parliamentary joint committee review of whistleblowing laws and practices some time ago. The government has introduced a bill that seeks to amend the Corporations Act, amongst other acts, seeking alignment for whistleblower protections and provisions across the Income Tax Assessment Act and a number of other acts apart from the Corporations Act. In our submission we said that we see the experience of a reward based compensation as something that does need to be considered. However, at this time, certainly given the paucity of fines and the level of fines and other penalties in Australia, we think that's difficult to do in a similar way as, say, the experience in the US. I think we pointed out at the time obviously there's been a task force review into ASIC penalties. One of the things the previous chairman but also the commission has been unanimous about has been seeking higher penalties—

Senator WHISH-WILSON: Including jail time?

Mr Day : Yes, absolutely, across all types of penalties, but certainly in terms of the monetary penalties. Until those things are addressed, our submission was that we don't see at this time that the rewards based type compensation is something that we think should be addressed. However, we did say that general compensation for loss of earnings is something that does need to be addressed, and we see that that is something the government is trying to address in the current bill.

CHAIR: Thank you for your submission and that report. The committee carefully considered and made recommendations. If the senator wishes to refer to our report, he is more than welcome to do that.

Ms BUTLER: Following on from the questions on enforcement—obviously I have read your enforcement policy—can you give us a view about how you expect to approach the issues of enforcement, whether there will be any change in policy? I also see that there has been a really successful enforcement in respect of best interest obligations and consumer protection laws recently—Joshua Fuoco. What sorts of signals do you think that will send to industry? Do you think that will assist ASIC in having the appearance of being a very strong regulator prepared to enforce our consumer protection and best interest laws?

Mr Shipton : Of course, we feel very strongly that we are an agency that is prepared to use enforcement outcomes and we're very pleased with some of the enforcement outcomes to date, and that will continue. There is no proposal for changes of policy. What I will say though, which is very important, is that the approach that I want to apply—and I know this is an approach that is already embedded into the culture of the organisation—is using enforcement tools when it's appropriate to do so. There are a range of different reasons why enforcement tools are used. But, equally, there are a range of other tools that we want to apply, and I mentioned earlier that competency requirements could be an enforcement tool, as well as ongoing surveillance. These are all different aspects of supervisory tools that we can apply. So my approach is that, yes, we are an enforcement agency, but equally we are also a supervisory agency, equally we are a gatekeeping agency and we will apply different regulatory tools in different circumstances when it is warranted. So a strategic approach is something that we very much have in mind, because we need to be nimble. What the issue is today may not necessarily be the issue tomorrow and therefore we need to apply different tools in different circumstances. I'll finish my remarks by saying that that is why some of the policy work that has been undertaken by your committee and by the government is very important—to make sure that we have all the regulatory tools available to us to allow us to exercise them or utilise them as and when circumstances warrant.

Ms BUTLER: On that specific point, obviously submissions in relation to the exposure draft for the product intervention powers bill closed on 9 February. Do you have any sense of when we might expect to be able to see that bill in the parliament or when we might actually get moving on this issue?

Mr Shipton : I personally don't.

Mr Kell : It's a matter for the government. I'm not sure of the timing, but obviously it's a priority, so we are very supportive of moving on.

CHAIR: In regard to the enforcement sector, I know Mr Medcraft always described ASIC as a law enforcement agency in the financial services sector, but, speaking with the corporate world and speaking with stakeholders who have invested in public companies and have lost money, the perception is—and I'm not saying it's true—that they don't fear ASIC. They fear the ATO, but they don't fear ASIC as a law enforcement body. I'm loath to mention a particular issue but at the same time, if you're aware of it, with your new oversight are you looking at trying to sharpen up and hit some of the targets which might have seemed too hard to target and make the ASIC a feared body for the corporate sector?

Mr Shipton : I want ASIC to be taken very seriously by the sectors that we regulate, and I also want ASIC to continue to be highly regarded by the community and the public and by policymakers and representatives of the public like your good selves. The way I think I can best respond to that question is by saying that we will be utilising enforcement tools when the circumstances warrant it. We want to apply, and we will be applying or continuing to apply, a very strategic approach to issues as they come up. Issues are constantly coming up. We need to apply different responses in different circumstances, but my message to the industry and to the community is that we should be taken very seriously and that we will have serious responses when serious responses are warranted.

Ms BUTLER: But that's difficult, isn't it? If you have too many unsuccessful enforcement cases, then committees like ours will be likely to be critical of that, and that's happened before. But, equally, if you have exclusively successful ones, that can indicate that you're only taking the easy soft targets and not pursuing the harder cases. I think the point everyone's making is, if you want to instil both fear and love in the hearts of those that you regulate, you need to win enough that your litigation is taken seriously but not so many that you're seen as being weak.

Mr Shipton : That's the perennial challenge of a regulatory agency. I will highlight that, in the last five or six years, we've had over 150 criminal actions. We've had 80 people jailed. I think those statistics really should demonstrate the seriousness that ASIC has in these situations. But you're absolutely right; it's a perennial challenge. It goes back to one of your earlier questions about the ongoing need to exercise good judgement in different circumstances. We will be serious and we will be stern when necessary; that's the message that I send to the regulated population.

CHAIR: Following on from this, another area of concern I get repeated calls about is directors who disappear all the time and then pop up again. One of the things that the ASX mentioned last week was the registration of directors, and ASIC, I know, have also supported that idea. That is particular to one guy I'm not going to mention. He has repeatedly appeared and not appeared. Do you think nailing those particular directors will be a focus of ASIC in the future?

Mr Shipton : Phoenixing activity is a real focus, and I will ask colleagues to supplement. There is ongoing work in this area, and I imagine that that ongoing work will continue for quite some time, because clearly it is an issue that is of concern.

Mr Price : To expand on the chair's comments about using a range of regulatory tools, phoenix activity is certainly an area where we are trying to use a range of tools. While we recognise that enforcement is very important, and I'll return to enforcement and give you some statistics in a minute, I do want to highlight for the committee some of the things that we've done in relation to the phoenixing area. For example, we focus on stakeholder engagement, and we communicate through media releases, journal articles and regular newsletters to reinforce and articulate the standards and expectations that are expected of not only directors but also professional advisers who might be involved in facilitating phoenix activity. We have public guidance. We have an information sheet that, again, publicly articulates the standards we expect. We have very focused surveillance activities and, to your point, Chair, we target directors of entities with a history of involvement of failed companies where allegations have been made about illegal phoenix activity, to make sure they know we're watching what they do. We also undertake surveillance activities aimed at disrupting people who might facilitate phoenix activity.

For example, there are some advisers who will regularly monitor publicly available sources of information, and when they find out that a company is in trouble they will write to the directors and say, 'We understand your company might be in trouble; we've got a great way to solve all your problems, and you needn't worry about it anymore.' We have started sending letters to those directors, saying, 'If you receive a letter out of the blue telling you that someone can solve all your problems, you'd better make sure you're not actually breaching any of your legal obligations.' That has proved to be a very important and effective disruption strategy. It doesn't involve enforcement but it's a very important disruption strategy.

Enforcement is very important. In thinking about enforcement, we do need to work closely with insolvency practitioners. Insolvency practitioners tend to be at the frontline when they're investigating the reasons for failed companies. We often provide the funding for them to do that, through something called the Assetless Administration Fund. We also help them prosecute directors when the insolvency practitioner is appointed to a company, gets in and says, 'Where are your books and records?' and the director says, 'Sorry, there are none.' That can be a very significant impediment in establishing phoenix activity.

Senator WHISH-WILSON: Do you ever audit the insolvency practitioners, in that regard?

Mr Price : Yes, we do.

Senator WHISH-WILSON: What has that shown?

Mr Price : When we do our surveillance of insolvency practitioners, we're really focusing on three areas: competence, independence and issues around remuneration or improper gain. The main area that's relevant to phoenix activity as far as insolvency practitioners go is independence. If there's a longstanding partnership between the parties and the insolvency practitioner is appointed to a particular firm, there is a risk that some unscrupulous people may not act in the interests of all creditors but rather for the interests of the directors. That has been a particular focus of a number of our enforcement actions over recent years.

In relation to our enforcement actions, if I think about—

Ms BUTLER: Sorry to interrupt, but could I ask you something relating to the question of insolvent trading?

Mr Price : Yes.

Ms BUTLER: I think we've spoken about it in this committee. You would be aware that the Productivity Commission recommended the creation of a safe harbour defence. The government went much further and created a safe harbour exclusion. My view is that it really significantly weakens—I supported the defence proposal but what the government did by creating an exclusion significantly weakened the civil remedies, in respect of insolvent trading. In your disruption of potential phoenixing activity are you also seeking to disrupt insolvent trading, through drawing directors' attentions to the possibilities of criminal ramifications, if they do trade while insolvent?

Mr Price : Absolutely. Indeed, within the last couple of years there was a director in Queensland of a company called Kleenmaid that received a very significant custodial term, in relation to insolvent trading.

Ms BUTLER: We've spoken about Kleenmaid before. Is it an ongoing feature of your work to have a greater emphasis on insolvent trading rules, in respect of directors?

Mr Price : Certainly, with insolvent trading where we are talking about court action we do tend to focus on matters that might involve criminal conduct. The reason for that is quite simple. In many instances, insolvency practitioners actually have the ability themselves to take civil action where there has been—

Ms BUTLER: My point is, the civil provisions have been substantially weakened by the provision.

Mr Price : I understand that. The reforms have been recently introduced. Whether or not there is an issue there is something that needs to be assessed over time. But from ASIC's perspective, we have a strong focus on where there may be criminal conduct involved in insolvent trading.

Mr FALINSKI: Will you be using the provisions?

Mr Price : I think it's a bit too early to say at this stage. The provisions, from memory, came in mid last year or late last year.

Mr FALINSKI: On 1 July, wasn't it, Terri?

Ms BUTLER: It was around then. But, in asking whether people are using them, the whole point of them is that no-one was ever really using the civil provisions other than very rarely, and this will make it even less likely that they'll be used.

Mr Price : It's important to remember that insolvency practitioners actually do seek civil remedies in relation to directors of failed companies quite regularly.

Ms BUTLER: I'm sorry. That was a gross generalisation by me, but my point was that the Productivity Commission's inquiry in relation to business creation and exits indicated that they were fairly rarely used.

Mr Price : Yes.

Ms BUTLER: This, in my view, will lead them to be even more rarely used.

CHAIR: Mr Price, just going back to the question about unusual activity, part of your answer was that, where you believe that people are actively engaging in phoenix activity, you're watching them. I think the stakeholders who have probably lost their life savings to the same director a few times over would prefer to hear about you suing them rather than watching them.

Mr Price : Yes. That segues neatly back to some points I wanted to make about enforcement statistics. Over the last five years, if I think about court proceedings that ASIC have commenced, we've sought court reviews in relation to the actions of two registered liquidators. To give you a sample of some outcomes against directors, we've taken eight actions against directors for failure to keep books and records and nondisclosure. There have been prosecutions, including jail terms. There's a fellow called Mr Matthews in South Australia. There have been six other prosecutions for director duty offences. There have been five court decisions against registered liquidators, with sanctions including prohibition, removal and suspension. We've had an additional five registered liquidators either being suspended, having their registration cancelled or being admonished by an administrative body that looks at their conduct. We've entered into enforceable undertakings with a number of people. We've banned 32 directors just in the last year.

CHAIR: What's a ban?

Mr Price : A ban is effectively a period during which that person can no longer act as a company director.

CHAIR: Forever?

Mr Price : The time frame will depend on the particular circumstances, and it typically goes through an administrative process where we will brief an ASIC delegate about the alleged misconduct involved. There'll be a hearing right that that person has.

CHAIR: Can they appeal that decision?

Mr Price : They can appeal that decision.

Mr Day : It needs to be emphasised that, through that process that we can do administratively, we have a cap of five years. That's in stark contrast to financial services. So we can administratively disqualify someone from being involved in financial services for up to life, but, in relation to company directorships in the similar circumstances that Mr Price has outlined, at the moment the limit is five years. It was one of the things that we have raised with the government; we said that that is something that needs to be considered.

Mr Price : Importantly, and in addition to everything I've mentioned, just in the 2016-17 year we prosecuted 419 individuals for failure to keep appropriate books and records, which, as I indicated, can be a key indicator in relation to things.

Mr VAN MANEN: In relation to the issues of directors and phoenixing, one of the problems with directorships for companies is that anybody can open a company and become a director with no identification—nothing. If you go to a bank and open a bank account, you've got to produce 100 points of identification. I have no doubt that there is a risk in the system: you ban a director, but they could use a slightly different name or a variation of the name. You've got no way of checking whether that person is banned, because you've got no framework within which to track that person.

Mr Price : There have been some very important initiatives recently that have been released. One was a proposed package of law reforms looking to address phoenix activity. That was released by the minister towards the end of last year. It looked at a range of possible measures, including specific offences being set up for phoenixing. It also raised—and we fully support this—the idea of a director identification number.

In terms of a director identification number, there is a very important question about how practically you might achieve that. For example, if ASIC or another government agency needed to do a 100-point check for the more than two million directors in Australia, that might prove to be impracticable. Alternatively, if there is an existing identifier that people in the community have—a tax file number, a Medicare number—that you could leverage off, the administrative burden and the ease with which that transition could be made to the new laws might be easier. Of course those are all matters for government.

Mr VAN MANEN: But going back to Mr Day's earlier point, that you can ban financial advisers for life, I'm pretty sure now that financial advisers have an identifying number, don't they?

Mr Day : They do.

Mr VAN MANEN: Are they also required to produce 100 points of ID as part of that system?

Mr Price : Not that I'm aware of. As part of—

Mr VAN MANEN: As part of getting their license.

Mr Price : Yes, exactly.

Mr VAN MANEN: Okay, but they—

Mr Day : Sorry, a check on that, Mr van Manen. Just to clarify: my understanding is for you to be entered into the financial advisers' register, that is effectively done by the licensee. So the licensee would know a lot about you, and the licensee takes responsibility. As you indicated, when you're a director it's not the case at all; you can basically fill in a piece of paper, it's signed and it's lodged, and we take that at face value.

Mr VAN MANEN: But once you go into the register, you get a number, don't you?

Mr Day : That's right.

Mr VAN MANEN: That is then your number.

Mr Day : That's right.

Mr VAN MANEN: Now I would suggest that most licensees probably do the 100-point ID check, so it's done at that level.

Unidentified speaker: Yes.

Mr VAN MANEN: Is it not feasible then to take that model of that registry that you've got and use the same model potentially for directors?

Mr Price : It's not simply a case of ASIC making changes. These particular reforms would require changes to the law. It would require parliament to consider. As I said, there was a paper that was issued late last year, and it was asking these very questions around the possibility of a director identification number.

Mr FALINSKI: Is this the ATO process?

Mr Price : No, this was the phoenixing reforms. ASIC, in relation to phoenixing, worked closely with a range of other agencies. That included the Fair Work Ombudsman and also the Australian Taxation Office. There is actually a task force of government agencies that seek to work together to deter phoenixing more broadly.

Mr FALINSKI: So when you look for insider trading—

Mr Price : Insolvent trading?

Mr FALINSKI: no, insider trading—you guys run a very sophisticated algorithm and analytics trying to match relationships between different entities and people. It would seem to me that phoenixing activity is more a dagger to the heart than insider trading is. Why have we allowed—

Mr Day : I'm sorry; can you define what you mean by that, Mr Falinski?

Mr FALINSKI: What I mean by that is that insider trading can be discovered in all sorts of different ways, whereas phoenixing activity goes to the very core of trust in a marketplace where people operate on extending credit to different suppliers in order to enable an economy to work. That's what I mean by that.

Mr Day : [Inaudible], but I understand what you're saying.

Mr FALINSKI: Okay, fine; we can agree to disagree. But I am firmly of the view that while insider trading is a thorn to the side, phoenixing activity, if allowed to go on unchecked and unchallenged, is a dagger to the heart of the very commercial system we have in Australia. So we're running a very sophisticated analytics around insider trading, and I congratulate you for that. It seemed that none of us on this panel actually understood it, but it looked very good. Indeed, Terri wanted to apply it to the factional system in the Labor Party. She thought there was use for it there.

Ms Butler interjecting

Mr FALINSKI: I know, Terri; you'll get me back later. The question I have for you is: why have we allowed, year after year after year, the directors' register to go on without undertaking these identifications so that you can identify people, and those people and those entities associated with them, who constantly seem to be a part of it? My understanding from previous evidence given to this committee is that 80 per cent of phoenixing activity is actually undertaken by the same groups of people.

Mr Price : I just want to reiterate an earlier point: this is not an area, in terms of administration of the law, where ASIC have discretion. We can't unilaterally require identification of people at the moment under the current legislation. If a director identification number is introduced it will require a change to the law. While it is a matter for government, we fully support such a change.

Mr FALINSKI: Just on that—

Ms BUTLER: You guys need to do it. We announced a policy some time ago of mandating these director identification numbers.

Mr Falinski interjecting

Ms BUTLER: No; the government needs to legislate for this.

Mr FALINSKI: My question to Mr Price is: can you point to the report where that recommendation was made, so that we can pick it up and actually run with this?

Mr Price : The government is actually consulting on doing it now. I will check whether or not it was a public submission, but I'm pretty sure that we responded to the government's proposals—

Mr FALINSKI: The chairperson, Mr Irons, referred to a briefing that we had at ASX where they told us that the ATO is managing an RFI for government registers starting with ASIC registers.

Mr Day : That's a broad project.

Mr Price : There is a government proposal at the moment about modernisation of government registries more broadly, and there is a question, I suppose, as to whether ASIC's registry is best left within ASIC to run or whether there would be economies of scale and efficiencies from merging a range of registries to not only reduce the costs of doing business but also to better consolidate and cross-refer to information.

Mr FALINSKI: So that's something slightly different.

Mr Price : That's different, yes.

Mr FALINSKI: But that process could be used, for example, to create—

Mr Price : There is still the need to have legislative support to identify the directors. But, if you were able to do that and consolidate it with other information that the tax office has and a range of other things, that could be very powerful.

Mr Day : And part of the current cross-agency considerations of the broader nature have this vision of a director identification number as part of it—so that it is not done in isolation, say, by ASIC, but its done in a way that works across all agencies for the benefit of all agencies.

Mr FALINSKI: I don't want to get too far away from the original question, but one of the things that was put very firmly to us was that blockchain technology should be used in the development of any new registry capability.

Mr Price : As I said, for the commission, we are carefully considering whether or not we would be best placed to operate various registries in the future or third parties. There are certainly economies of scale in terms of amalgamating registries. I think for us we have an open mind about technology and what technologies might be used. The very important thing for us is that some of the platforms that ASIC uses at the moment for its registries while very stable are quite old. Some of them go back to 1991. So we have a long history knowing that they don't suddenly fall over. But using those things to do data analytics or being able to get the programmers to make significant changes to those registries are real challenges.

Ms Armour : Just on the blockchain in the context of the ASX discussions, you are aware that the ASX is looking at choosing blockchain for its CHESS replacement. To the extent that is relevant for director identification numbers, it needs to be remembered that the ASX is dealing with listed companies—2,000-odd listed companies.

Mr FALINSKI: So there's a scalability issue.

Ms Armour : On the phoenixing issue, it is really director identification numbers that pick up those other companies.

Mr FALINSKI: Before I dive deeper into this, I want to go back to the question before it is forgotten. You were about to say that there have been recommendations made to government to include changes to the legislation to allow personal identification numbers for directors.

Mr Price : There was a paper to do with combatting illegal phoenixing that was issued in September 2017.

Mr FALINSKI: Is it possible for us to get a copy of that?

Mr Price : Yes; it's a public document.

CHAIR: I'm going to appoint Mr van Manen as chair because I have to leave that room for a short time.

Senator KETTER: I have a number of specific areas which are moving away from the topic. But, firstly, I want to congratulate you again, Mr Shipton, on your appointment. I look forward to seeing you in a week's time at Senate estimates, and to seeing you on a regular basis. I want to touch on small amount credit contracts, and ASIC's report 447 in 2015 went to this issue. You found some pretty egregious behaviour by lessors and payday lenders. I am interested in the activity in the last 12 months or so in relation to this area. Do you still have concerns about the standard of conduct engaged in here?

Mr Shipton : Thank you for the welcome. I am going to hand this matter to Mr Kell, who is going to brief you on the ongoing work in this area.

Mr Kell : Yes. It does remain an area of focus, so-called payday loans but also the consumer lease space. We retain that focus on responsible lending in this area, around marketing, advertising and avoidance models. We've had a range of outcomes over the last 12 or so months, including in relation to Thorn. You may have seen that outcome—

Senator KETTER: Radio Rentals—

Mr Kell : Radio Rentals, yes—a major outcome there. We've had outcomes in relation to Cash Converters and Nimble. It remains for us partly because of the nature of the consumers in this area. They are typically more vulnerable, typically lower income, and typically, in many cases, with lower levels of financial literacy. We're talking to Treasury and others about the progression of the reforms that are intended in this area. We're still very supportive of those reforms advancing. Otherwise I'd say it's going to be a perennial, just by the nature of the sector. We want to make sure that people aren't ripped off—

Senator KETTER: I am going to put a couple of questions on notice in terms of the number of complaints that you received, and the nature of those complaints, since, say, November 2016. But I'll come back to you with some of that. And the number of complaints you've received in respect of consumer leases. You provided advice to the SACC review, didn't you?

Mr Kell : Yes, we did. We put in a submission in part based on a public report we conducted that was looking at compliance in the sector—compliance with requirements such as the rebuttable presumption about multiple loans and so on. We found that there were some areas where compliance wasn't working particularly well. On the back of that we provided, if you like, data for that inquiry.

Senator KETTER: Did you provide advice or information to government as it considered the recommendations of the SACC review?

Mr Kell : We spoke to Treasury at the time, yes. Obviously the review itself provided a major vehicle for us to put forward our views.

Senator KETTER: What was the nature of that advice or information you provided to the government?

Mr Kell : I can't recall the exact information around that. But some of that would've been policy advice around how we had found the administration of the regime and the matters that we'd taken on. One area that we have highlighted, and that did come up in the review, was our view that some stronger anti-avoidance provisions would be useful. This is an area, to be frank, where, I think, a few too many of the players don't have a lot of reputational capital and seek to avoid the requirements. One of the areas that we have highlighted from ASICs particular role here is having some stronger anti-avoidance tools.

Mr VAN MANEN: What do you currently have in that regard?

Mr Kell : Current capacities are such that we too often end up having to take individual cases to court on a regular basis. I think we might have described, for example, the diamond trading scheme, so called, that we took to court that purported to be not a small amount lending business but rather a venue through which people could trade diamonds. No-one ever sighted the diamonds; instead, they ended up with a small amount of cash at a very high price. Now, we're prepared to do that. We're prepared to take on those matters. But having a broader mechanism to be able to address that would be far more efficient than having to go to the Federal Court.

Mr Saadat : And I think it's fair to say we've had mixed results in court when we've tried to tackle avoidance by firms that we think should be subject to the legal framework that applies to these loans, which is why we've supported the government's proposal to broaden the anti-avoidance provisions—so that it's easier for ASIC to address avoidance when it occurs. There are existing protections for consumers in the law that are being strengthened, and it's important for there to be a level playing field when it comes to firms that operate in this sector. So we think tackling avoidance is an important thing for us to do.

Senator KETTER: In terms of the tax avoidance bill, there was an exposure draft. Have you provided advice to the government on that exposure draft?

Mr Saadat : We have. I would have to go back and check exactly what that was. But I would just reiterate what the deputy chair said: we have put in submissions to that SACC review that are public, and when the SACC review put out its draft report, which contained some recommendations, ASIC publicly supported those recommendations. So we do support the measures that are being put forward. We think they will strengthen the framework and promote financial inclusion, which is something that we support. We stand ready to assist Treasury and the government with the reforms.

Senator KETTER: And is this issue of avoidance adequately picked up in the bill?

Mr Saadat : It is one of the things that have been picked up in the bill which we're pleased about.

Senator KETTER: In the National Consumer Credit Protection Act, there's a threshold for the definition of a small amount credit contract of $2,000 or less. Have you made any assessments as to whether that figure should be increased?

Mr Saadat : That's not something that has come up through complaints or stakeholder discussions. There is a $2,000 limit for small amount credit contracts and then there is a separate framework for medium amount credit contracts. The independent review that was done did not identify that that threshold was set at the wrong level or that there were problems with that level.

Senator KETTER: We're now nine years down the track since that threshold was originally set.

Mr Saadat : Yes—and what we find through our work is that many loans provided are well below that amount. Consumers continue to borrow amounts in the hundreds of dollars that fall within the definition of these loans.

Senator KETTER: Specifically, one of the recommendations of the SACC review was the four per cent cap on costs. Do you think that will help reduce consumer lease costs, particularly for vulnerable consumers?

Mr Saadat : Yes, we do. We certainly do support the proposed cap on consumer leases. We think there is inconsistent treatment at the moment between consumer leases and small amount credit contracts, or payday loans. The work we did that helped to inform the review that occurred identified that there were some very expensive consumer leases that were being provided to consumers where, if you calculate the effective rate of interest, it is several hundred per cent. We think that is a concern and we support the proposal to restrict what can be charged. We think that the proposal, the four per cent per month, still means that the potential costs of a consumer lease will be quite high. So we think it does strike the right balance between viability of the industry and consumer interests.

Senator KETTER: I turn to the issue of add-on insurance, and you've got a couple of initiatives there that you've announced. I'm talking particularly about the car yard add-on insurance—you're going to impose a delayed sales model there—and also remediation schemes for customers who are mis-sold add-on insurance. Can you just give us an update on the status of those?

Mr Kell : We had several additional outcomes in relation to remediation for customers for mis-selling of add-on insurance through car dealers just over the last few weeks. That means we are up to—across, I think, four or five insurers—$120 million in refunds for 210,000 customers, which I think is illustrative of the fact that this was an industry-wide problem. It has been ultimately a constructive engagement with the key players in this industry. We are really now looking at, having remediated the consumers and stopped the immediate misconduct, how we can put in place some arrangements around the sale of these products that ensure that they are better designed and they are not sold in such a way that they end up in the wrong hands. One of those measures is potentially a deferred sales model, so that you're not being pressured into buying a car, and the credit and the insurance and whatnot, all in an environment which makes it difficult to understand what you're getting and to make good decisions. It's something that has now been applied in the UK. It was interesting to see that it was actually one of the recommendations in the recent Productivity Commission competition review—they recommended that this would be one of the ways of addressing a competition failure in this industry. We are about to commence the next round of consultations.

Senator KETTER: Do you agree that that approach is necessary?

Mr Kell : Yes. It then comes around how that might best be designed. We're very open and consulting with the industry around how that might work, how the deferral would work, how the communication with the consumer might best work. It's the sort of area where you do need some structural changes to the sales model to address some fundamental problems with just the nature of how add-on insurance is sold in this context.

Mr VAN MANEN: Cooling-off periods and things of that nature to address an issue are not an uncommon practice in other areas.

Mr Kell : That's right. That's a good point. Some ability for the consumer, who in this instance is buying a car, which is a big decision, taking out credit, which is a big decision, and looking at a range of other insurances—they are all complex decisions—to just build, if you like, some breathing space into the sales process, we think, is desirable. We're consulting not so much about whether it should happen but, in our view, the design.

Mr Saadat : The other thing I would add is that we've had a lot of success through social media in promoting the work that we've been doing on add-on insurance. The engagement we're getting from consumers, I think, is very promising, because we are taking a multipronged approach to addressing the harms that we see in this market. We think empowering consumers and informing consumers about some of the pitfalls and risks with these products is also very important and part of the strategy that we are taking here.

Senator KETTER: I want to move to debt management firms. You handed down a report a couple of years ago, No. 465. There were some concerns about high-cost, low-value services to people in financial difficulty. Do you continue to hold concerns about the regulation and conduct of debt management firms?

Mr Kell : We do, yes. We have some work underway in this sector, some serious investigations underway. There may well be some outcomes in the near future in this area. I'd prefer not to go into details right at this point in time because we are still part-way through our actions. It is an area where the regulatory coverage isn't straightforward. So, for example, the question mark has come up as to whether these firms should be captured by coverage of the ombudsman scheme, or something like that. They are, after all, dealing many times with consumers in vulnerable positions who are negotiating with creditors, and so on and so forth. One of the recommendations that came out of Ian Ramsay's review of the dispute resolution framework was that consideration should be given to how to capture these firms within that dispute scheme framework.

Senator WHISH-WILSON: Mr Price, in relation to discussions about identification numbers for company directors, I am interested in whether you've had anything come across your desk from agencies or the minister's office around a beneficial ownership register?

Mr Price : There were some proposals that were, I think, put out from a tax point of view in relation to whether or not there should be better transparency around beneficial ownership.

Senator WHISH-WILSON: Yes.

Mr Price : That was a public document, and it would have been out maybe last year. I would need to take on notice where that's up to.

Senator WHISH-WILSON: I would be interested—obviously we're working on that with the ATO and other departments. Could I ask you about your report 562, Financial advice: vertically integrated institutions and conflicts of interest. It was released last week or the week before. It showed some fairly strong and troubling results. We've had this debate about vertical integration now for quite some time. Were you surprised by those results, and where do you think the remedies or solutions lie on this issue? And, just quickly, could you also comment about whether conflicted remuneration should be applied to the mortgage broking market.

Mr Kell : On the report into vertically integrated institutions and conflicts of interest—that was a report we had been working on for a while as part of the broader set of actions we had been undertaking to look at how financial advice is provided through the major institutions. That included our work on the fees for no service issue; it included our work on whether poor advisers were being appropriately dealt with, including the consumers who had received poor advice; and then it looked at how conflicts of interest were being managed in the large vertically integrated firms. I think it probably wouldn't have come as a surprise to anyone to see that there would be some sort of bias towards internal or in-house products, but the question was to what extent and whether that was associated, in some cases, with poor quality advice. We now have a better picture of how that bias works across different product types and across different entities. One of the responses that we think will help in this area—to ensure there is, if you like, focus and accountability in the way that the impacts of vertical integration play out in practice—is having some transparency around approved product lists. That's one of the recommendations we've made. We'll be consulting with the industry about what the balance is between in-house products and external products on the approved product listed and what the actual balance is between what's recommended or sold by the firm and the advisers working for it.

Mr VAN MANEN: I want to revisit this because the important thing is not the platform; it's where the money's invested underneath. You have a single line in your report which says that the money invested in platforms was roughly split 50-50—I think it was 53-47—between in-house products and external. So, if you take the platform out of your report and put those figures across the other three platforms, it completely changes the nature of the report.

Senator WHISH-WILSON: I think we'll come back to this. It is really important. I suppose what concerned me, Mr Kell, was that the report found that in 75 per cent of cases there was noncompliance with the best interest requirements. I remember the banks lobbied really hard to prevent these best interest requirements in the FOFA legislation. But then you went on to find that in addition—

Mr FALINSKI: To be fair, that was because they felt it conflicted with their fiduciary duties.

Senator WHISH-WILSON: Whatever.

CHAIR: Can we let Senator Whish-Wilson ask his question, please.

Senator WHISH-WILSON: In addition, '10 per cent of the advice reviewed was likely to leave the customer in a significantly worse financial position'. Maybe you could let us know on notice what 'significantly' really refers to. Were there other grades of findings? When you look at it on face value, it looks like there was 75 per cent noncompliance but only 10 per cent of people were worse off. Can that be turned on its head by the banks to say, 'The best interest requirements aren't really that important'?

Mr Kell : Very quickly on that, it's important to remember that some of the elements of the financial advice regime that we now have, partly as a result of FOFA but also other reforms, are intended to ensure that there's a process in place that, if you like, helps to prevent people ending up in situations where they've lost money or received fundamentally inappropriate advice. So, yes, there was a smaller percentage of advice where it was, if you like, immediately apparent that there were losses or significant financial detriment. There was a larger percentage where that wasn't necessarily the case but where there was no demonstration that the best interests of the client had been taken into account. Maybe in some of those circumstances the client will be okay, but part of the design of the new regime has been to try and introduce some practices, procedures and professional standards that help prevent people losing money in the first place.

Senator WHISH-WILSON: Should mortgage brokers come under conflicted remuneration laws—yes or no?

Mr Kell : There's been a lot of work done on this, so it's difficult to get a yes or no answer, but we've obviously highlighted in our report that we think there are some aspects of the way that remuneration works in the mortgage-broking sector that would be better to take out of the sector because they raise unreasonable conflicts.

Proceedings suspended from 12:53 to 13:51

Mr FALINSKI: Mr Shipton, welcome back to Australia. How are you enjoying it?

Mr Shipton : It's great to be back.

Mr FALINSKI: I'm glad to hear that. Referring to some of your earlier answers, when you look at the United States and you see the CFA, which is a signal of both professionalism and integrity for people seeking advice, do you think that has had some advantages over a more regulatory government response that we have here in Australia?

Mr Shipton : I think the CFA Institute is an outstanding example of the industry itself taking a leadership role in increasing professional standards within its sector, within itself. And I believe that it's a model that should be replicated in other areas. The CFA Institute is particularly strong in the United States, but not only in the United States. It's strong here in Australia, it's strong in the Asia-Pacific and it's strong in Europe and elsewhere. It has a global brand recognition. I think it's a very good example of the industry taking leadership in relation to heightening standards in a competency sense, a professional sense and a conscientiousness sense.

Mr FALINSKI: Do you think there are lessons that we can use here in Australia rather than always pulling on the lever of regulation and government intervention?

Mr Shipton : I would go back to my earlier remarks about the fact that we need to apply all the spectrum of regulatory tools, which includes self-regulation. The CFA is a very good example, again, of self-regulation. They will discipline and regulate members who do not live up to their standards. That is a self-regulatory tool which should be coupled with policy and more public-oriented regulatory tools. So, I'm a big believer in utilising all of the regulatory tools, in balance and in coordination. It's difficult and I think impossible to say that one is better than the other. We should be applying all of them in the appropriate circumstances.

Mr FALINSKI: So, why do you think that in Australia we constantly lose faith in self-regulatory models?

Mr Shipton : Well, I don't think it's just Australia. The CFA is a great working example, and I think it's a role model that should be applied or should be looked to in other sectors. And I would encourage self-regulatory bodies—and industry bodies, for that matter—to try to look at case studies like the CFA Institute and others as a good example of how it can work effectively. I think the CFA Institute is a really good example because they do discipline members, they do expel members, they do take away the CFA designation. It's really interesting, because the CFA designation is highly prized and highly sought after by members of the financial analyst community, and if it's taken away it's meaningful.

Mr FALINSKI: I take it from your comments that you are indicating that Australian self-regulatory models haven't worked, because people aren't willing to discipline the members.

Mr Shipton : No, I wouldn't draw that conclusion. Instead, the conclusion that I would draw is that it's a good case study to look at. I would also draw the conclusion that I would actively encourage industry organisations and professional bodies to improve, enhance and evolve their role in ensuring that the entire ecosystem is living up to community expectations and, importantly, also living up to the expectations of policymakers, regulators and society.

Mr FALINSKI: It sounds like it's a lever that we should be pulling on more often.

Mr Shipton : Yes. You will hear me talk a lot about the broader ecosystem. We all need to be acting in coordination and concert, aiming in the same direction. No one entity or regulatory agency can solve all of the problems all of the time. We can do, and we will do, our level best, and I know that ASIC and the men and women in ASIC are firmly committed to doing their very best for our mandate and our roles, but there is a responsibility for every single participant, both corporate and individual, in financial services to do their part.

Mr FALINSKI: I'm conscious of the limited time that we have. On employee share ownership schemes, there seems to be a massive blockage under Australian law. Because the Corporations Act doesn't agree with the Australian taxation act, all sorts of problems are created. Is that something that ASIC could look at to make sure that we have harmonisation and that those roadblocks are removed?

Mr Shipton : I will have to defer to colleagues to see if we've covered that.

Mr Price : We can take that on board, Mr Falinski. We already try to facilitate employee ownership schemes as far as we can, but if we could get some further detail, in particular about that blockage or the inconsistency between the ATO and ourselves, that would be very helpful.

Ms Armour : We do have a standing class order which provides exemptions to facilitate employee share ownership. We have made modifications to our regulatory regime to facilitate that.

Mr FALINSKI: I will swap you the details I have if you could swap me those details.

Mr Price : Yes, absolutely.

Mr FALINSKI: That'd be good.

Mr VAN MANEN: Is that an exemption based on the number of shareholders?

Mr Price : No. I think private companies is an area where there are often some difficulties. Exemption mainly focuses on larger entities, particularly listed entities.

Mr FALINSKI: So this is really about start-ups. I'll undertake to get some more information.

Mr Price : Yes, please.

Mr FALINSKI: I would like now to turn to Report 562:financial advice: vertically integrated institutions and conflicts of interest. Firstly, I congratulate you on the report. I think it's a very important report. Is it fair to say that its conclusion is really that there are inherent bias and incentives for people providing financial products to direct customers towards products that they themselves produce?

Mr Kell : There are a couple of points. Firstly—and I want to put this on the record because the tone of the commentary on this sometimes goes straight to the negatives—we make it very clear in the report that vertically integrated business models are perfectly okay in our regulatory regime within our market and that there may in fact be—

Mr FALINSKI: That steals the next five questions.

Mr Kell : advantages for some customers at some times to look to deal with those large institutions. They might want all their financial dealings through that one institution. They might anticipate that that might provide them with greater access and greater convenience. ASIC's starting point is looking at this in terms of how it works rather than making a judgement.

The second point, and we're clear on this, is that there is an inherent conflict of interest—it's not prohibited, but it's a conflict of interest—when you have an entity which is a product manufacturer and a product distributor and when, at the end of the day, there is an obligation to act in the client's best interest. The question is: how is that playing out in practice and how are those conflicts of interest being managed? That's clearly one of the key aims of this report, to get a better picture around that. Obviously, it's been something of considerable interest to this committee, as well as to many others. Part of that was looking at what the distribution was of in-house products versus external products and what is recommended, typically, by the advisers, both at an aggregate level but also in how that plays out across different product types and across different institutions so that we have a sense, potentially, of how that conflict is being managed.

Again, we make it very clear. If, for example, you had a third of the products on your list that were internal and two-thirds that were external, we wouldn't necessarily expect to see that the recommendations would be one-third and two-thirds in exactly the same way. For the reasons I've just outlined, you'd expect to see some sort of bias, if you like, towards the in-house products because some customers at least want those. But in some instances it is also the case that people will have perfectly good products at the moment and are just encouraged to switch for no good reason. Indeed, there are situations where that may not be to their benefit at all, it may actually be detrimental. So those are some of the issues we've explored in this report.

To your question: in our view, yes, there is an inherent conflict there, but there are benefits on either side. The question is: how is this inherent conflict being managed? Are the institutions making sure that nonetheless they are still providing quality advice? We found that there were areas where, certainly, improvement was required and that there were also areas where, frankly, we need to get a better grasp of the details and the data. There would probably be a benefit from transparency overall in this area, which is why one of our outcomes was better reporting around approved products.

Mr FALINSKI: Despite the fact that the character of this particular model, being vertical integration, is inherent biases, it's not your recommendation that we ban that model from the financial sector?

Mr Kell : That wouldn't really be our call. An interesting question might be whether the Productivity Commission will look at that issue. I think they've made a recommendation about ensuring greater transparency around ownership and ownership links—not just in this area but also in the mortgage-broking area. I didn't see that they had a recommendation to actually ban in this area. We've made the point to this committee before that while there are potential conflicts and there are some potential problems that you get through vertical integration, there are also some potential benefits. For example, if you look at unpaid decisions under the Financial Ombudsman's scheme, none of those relate to big financial institutions. If something goes wrong, they will generally be there to pay at the end of the day. So there are pros and cons in both directions.

Mr VAN MANEN: But, with respect, isn't part of the problem that the commentary that generally comes out of ASIC—and I raised this with you before—focuses on the negative aspects? I very rarely hear from ASIC about the good stuff that the majority of advisers do.

Now, the advisers have a responsibility to sell their own services. However, the way ASIC portrays the industry as a whole—and this report is an example. This is focused on superannuation and it's not a commentary on the whole breadth of services that these vertically integrated businesses provide. It's focused on the superannuation—

Mr Kell : I'll pick up on that in a moment, but, yes.

Mr VAN MANEN: There's a question in there about doesn't a non-compliant file result in non-compliant advice? I take your point that documentation in some files was not up to scratch.

Mr FALINSKI: Before we go there, if I walked into parliament and the whips allowed me to say, 'I have just come from the corporations committee. ASIC's report No. 562 makes it clear that this parliament needs to ban vertically integrated financial service companies,' your testimony is that I'd be misrepresenting ASIC's view.

Mr Kell : I would say, 'Please go back and re-read our report.'

Mr FALINSKI: So I am misrepresenting your view. Can I reverse that and say that your view is that there is a place for vertically integrated financial services companies in the financial service market.

Mr Kell : There is a place for large firms and for small firms. This is an issue that has come before this committee before. Certainly most of the areas we regulate—I'm not going to make a blanket statement, because I might be corrected on one or two areas—but in most of the areas we regulate we are not regulating for a particular business model. We are regulating for appropriate consumer outcomes and appropriate advice being provided or appropriate products getting into the right hands. We're not saying it has to be this business model or that business model that has to deliver it at the end of the day.

Mr FALINSKI: That's where I get confused, because reading your report and listening to what you just said, it is an inherent characteristic of this business model that there are biases that will impact the level of service and advice that consumer is getting. Am I misunderstanding that? That's my question.

Mr Kell : No, you're not misunderstanding that. All of us in one way or another have conflicts of interest in different parts of our professional lives. There are conflicts of interest that are there in the vertically integrated model just like there are conflicts of interest, for example, that are there in the way that home loans are sold through mortgage brokers were some of those mortgage broking firms may be owned as well. Some conflicts in remuneration have now been prohibited—that's not what this is looking at. There are other conflicts in terms of the structure of businesses that are allowed. The key question is: are they being managed appropriately? Some of those conflicts might be associated with other sorts of benefits, which means you would say it's better to manage them than to try and rule them out altogether.

Mr Shipton : The same thing can actually said with horizontal business loans. There are conflicts that need to be managed both horizontally and vertically.

Mr FALINSKI: You have tiptoed on to Mr Keogh and my favourite topic of horizontally integrated financial service firms, but those land mines will have to wait for another day. Going to that report, yes, there are conflicts. Everyone's got conflicts, whether it's vertically integrated, horizontally or an independent standalone, but it's how you manage those systems to ensure those conflicts are not adverse to the consumers outcomes. But your report also says, I think, 78 percent of cases looked at by ASIC were a breach of the law. Is that right?

Mr Kell : 75 per cent now. Remember, we're looking at particularities of assessing a range of advice files.

Mr FALINSKI: This was a sample of files, wasn't it?

Mr Kell : Yes.

Mr FALINSKI: How many files were sampled?

Ms Macauley : It was a sample of 200 files. They were taken from across a number of licensees—two each of the licensees from the large institutions, so eight licensees. They focused on superannuation products.

Mr FALINSKI: Would 200 files represent a statistical sample?

Ms Macauley : I don't think it would. I think there would be many more files.

Mr Kell : It would, but with a margin for error.

Mr FALINSKI: Which would be very large. You were saying these breaches might represent—what were you going to say?

Mr Kell : There's a larger number where the best interests requirement was not properly demonstrated and then a much smaller number where there was more obvious immediate and significant detriment. Both of those issues—

Mr FALINSKI: So you know what my next question is going to be.

Mr Kell : More broadly, and not just in this report but in a couple of our recent reports, we've highlighted that adherence to the relatively new best interests duty is still an area where the industry as a whole—big firms and small firms—have some work to do. It is a relatively new law and there's a journey here to go through. We're sending a very clear message, because we keep finding it, that this is an area where we need to see better standards.

Senator KETTER: This was a fairly significant change to the regulatory landscape, and Mr Kell, with due respect, you seem to be excusing—and I know that you are involved in some fairly significant litigation at the moment which you won't want to talk about in detail, but the Westpac-BT matter at the moment is pretty egregious.

Mr Kell : That's a good point, and I don't want to suggest for a moment that we regard breaches of the best interests duty lightly. Where we see more systemic and serious cases we will take them on. We had a $7.8 million fine in the Federal Court last week for a serious breach of the best interests duty. That was $7 million for the financial services firms and about $650,000 for the individual. It was pretty egregious conduct. So we will take that on. We're pretty pleased with that. That is still a relatively early case, but that sends a pretty good message that this needs to be taken seriously.

Mr VAN MANEN: None of us here has any issue with that.

Mr FALINSKI: These are the big eight—is that right?

Mr Kell : The big five and then—

Ms Macauley : It's the largest firms within each of those institutions by number of adviser.

Mr FALINSKI: So the big eight, if I could call them that?

Ms Macauley : Yes.

CHAIR: So about 30 per cent or—

Ms Macauley : The five largest institutions now have about 32 per cent of advisers who are currently authorised. But, as amongst these eight licensees, I don't have the figures to hand.

Mr FALINSKI: How does their performance compare to the other licensees outside that big eight?

Mr Kell : Although, again, it doesn't necessarily get a lot of media, one of the things that we sought to highlight is that the lessons from this report—

Mr FALINSKI: You would be amazed about what hasn't got media attention!

Mr Kell : No, I wouldn't. The lessons from this report apply very directly to other large vertically integrated firms. We made that very clear; in fact, I think we may have even put that in our report. That's why when we are looking at having some greater transparency around the reporting of APLs and in-house versus external products, our proposal is not to limit that just to the top five; we would want to consult on whether we should make it the top 20 largest vertically integrated firms. There are others in this space. There are others that are growing. The fact is that we've seen similar sorts of issues in other areas.

Mr FALINSKI: I completely understand. But, as a benchmarking exercise, are the big eight creating more breaches as a percentage compared to the rest of the market, or is the rest of the market the other way? Or haven't you had a change to benchmark the two pools?

Mr Kell : I don’t think we could give you a statistically rigorous benchmark. I think our view would be that there are certainly some similar issues in other parts of the sector. The key in this matter is that obviously not all pats of the sector are vertically integrated. So that issue doesn't necessarily always come up. But in terms of the problems around best interest, yes.

Mr FALINSKI: But your hypothesis—and I'm testing it, and I think you're testing it too; I'm not suggesting otherwise—is that the large vertically integrated firms perform more poorly on this issue because—and fill in whatever reason there might be or what the underlying cause might be. But the problem for this committee and in relation to Senator Ketter's point is we don't know what the rest of the market looks like.

Ms Macauley : In relation to other vertically integrated firms that are in other parts of the market, we have seen similar issues around the quality of advice.

Mr FALINSKI: Yes, but you don't have the number.

Mr Kell : Can we come back to you with—

Ms Macauley : We have examples of situations where we've take an action, but we don't have statistical examples.

Mr FALINSKI: That's okay. All I need to know is: do you have a number or not? And that's fine. I understand that.

Mr Kell : And we have some examples. Just to be clear, though, in this whole area, the promise that the regulatory regime now holds out to consumers is that you will get good-quality professional advice in your interests, irrespective of the ownership structure—irrespective of the business model, if you like. So, if there are some areas where the business model might raise concerns around that, we want to make sure that that promise in effect can be delivered on in the regulatory regime.

Mr FALINSKI: This is the last thing I'm going to say because I do have to go. You know—and I know you guys promote this as well—that that is a dangerous falsity, because ultimately consumers need to rely on themselves as well. I would hate for us to be in a position to be holding out as a government or as a regulator, 'We are going to make sure that you get the best product, and you don't have to do any work to understand that you're getting the best advice possible.'

Mr Kell : I understand exactly what you're saying. I hope the way I just articulated that—'You're going to get good advice, professional advice, irrespective of the ownership structure'—doesn't reflect at all on the fact that as a consumer you also need to do some work. Mr van Manen and I have had this discussion before. We do actually have quite a lot of material on our website, and it's quite popular: 'Here's what you should do before you go and see an adviser. Here's how you should think about going about the process of getting advice.'

Mr FALINSKI: And, frankly, not just seeing an adviser. Your information videos that you have are very good on a whole range of things. I have to go.

Mr VAN MANEN: This is always an interesting discussion, but, before I get to a series of questions, I'd like to have a discussion about a slightly different topic, and that is the difference between strategic advice that people receive and products. I think, in part, this goes to some of the commentary around the report. I said to you when we had a discussion recently that my view is that the most important thing for clients is actually the strategic advice they receive—

Mr Kell : Agreed.

Mr VAN MANEN: and the product becomes secondary. When you do these types of reports or the other work you're doing, how are you looking at the strategic advice that's being provided and how that's being documented, firstly, to ensure that there's a correlation between what's in the fact find, the file notes and that base information that an adviser should collect, and ultimately the strategic recommendations in the statement of advice to ensure that they reflect that base information—because, if there's a mismatch there, the rest is not going to work—

Mr Kell : I think that's spot on.

Mr VAN MANEN: and then, secondly, to ensure that that is implemented with whatever the product suite is?

Ms Macauley : I agree with what you say about the importance of strategic advice, and we have seen, since the implementation of FOFA, an improvement in that and an improvement in the way that advisers document the fact find and how they consider the client's circumstances. In many cases, the strategic advice in these files is not bad, particularly in the files that we looked at for this report. Where they fell down was that they then recommended that the client switch to another product, and it wasn't clear why it was to the client's advantage to switch to another product. So, it wasn't a problem with the strategy, it was a problem at the product sales end.

Mr Kell : In other words, the product recommendation actually didn't support the strategy in too many cases.

Ms Macauley : It did to the extent that superannuation and insurance—

Mr VAN MANEN: It was implementing the strategy with a new set of products. That is effectively what you are saying?

Ms Macauley : Yes, that is right.

Mr VAN MANEN: But there wasn't adequate justification as to why those products were required in place of the original products?

Ms Macauley : Yes, and often not proper consideration of the client's current products, and whether or not they met the client's needs.

Mr VAN MANEN: Did you identify any circumstances in those files where the client's existing products were not on the approved products list of the licensee that would potentially then as a consequence result in the adviser needing to remove the product? If that was the case, was that documented in the file as part of the rationale for moving them?

Ms Macauley : There are two ways in which I want to answer that question. I don't have the stats with me today about that. I am not sure if we looked at that. I would have to go away and ask the question. The other thing is that we say that a good APL should also include an ability for an adviser to advise on products that are not on that APL, particularly in instances where our client comes in with products—the adviser shouldn't be forced to advise only on products that are on the APL and therefore not on those clients' current products if they are not on the APL.

Mr VAN MANEN: The purpose of the approved products list is as a risk management tool for the licensees. Most reputable licensees should have a process in place for managing products that are not on the approved products list. If that were the case, did you ask the question of these licensees as to whether they have a process for their advisors to manage products that somebody might come in with that are not on the APL?

Ms Macauley : When we looked at the institutions' APL I am pretty sure we asked the question: do you have a process for advising on products off the APL in suitable circumstances? I think it is in the report. I think the answer was yes in all instances.

Mr VAN MANEN: Is there any evidence of that being used in the circumstances?

Ms Macauley : I am sorry but I do not have that information to hand.

Mr Kell : Certainly not a lot.

Mr VAN MANEN: I know you have done this particular piece of work with these five large institutions and it would focus purely on super. We have some other very large players in the superannuation sphere. Have you had a look at those players, in particular the industry super funds, to see what level of vertical integration there is in those models? And what advice if any is being provided in that system, either unintentionally or properly documented advice, to ensure that they are complying with the law with equal responsibility to what we are seeing you do in this particular work with these five big licensees?

Mr Kell : We haven't done the equivalent of the sort of work with other entities, other industry funds or other large vertically integrated entities. As I said, this was in the first instance part of our project looking at advice in wealth management in the big five. But, as I indicated, we think there are lessons here for other large firms. We will be looking at how, for example, the approved products list transparency issue can be rolled out to some of those larger firms and how they are working. And we are looking at other aspects of advice and performance in some of those other large firms. But have we done exactly this sort of work in relation to other firms? Not at this point in time. It is an interesting bit of work in that it does suggest that there are some other parts of the industry that we may also want to have a look at, but I haven't got the project in mind just yet.

Mr VAN MANEN: I think a third of the industry, roughly, is made up of industry super funds. Super's roughly split, I think: a third, a third and a third. There are probably far more members in industry funds than in retail funds, by virtue of their small balances, and a whole range of issues. But there's a lot of interaction between those members and the super funds, potentially. Where do you draw the line on advice in that space to ensure that if the line for advice is being crossed then that's being properly documented and provided to the member?

Mr Kell : To go back a step, as you know, the distribution model, for want of a better term, is different. It's predominantly a workplace based way—

Mr VAN MANEN: But if a member rings up, and they—

Mr Kell : Sure, then within those funds, yes. How is advice provided? Is it general advice or personal advice, and what sort of models are those funds using in relation to advice? That's something of strong interest to us. We continue to have discussions with those funds and others about, for example, how scaled advice might best be delivered. But your question about exactly where you draw the line is a live one that we're talking to the whole industry about, because people are constantly interested in looking at how they can provide advice and when they're going to fall within a general advice or a personal advice model.

Senator KETTER: Have you had consumer complaints in this area with industry superfunds?

Mr Kell : Not of the same sort that we've had in the other area to the same degree, no.

CHAIR: But you have had them?

Mr Kell : We're going to get some complaints about any large fund or firm from time to time, so that's not a surprise.

CHAIR: Are they more to do with claims or are they to do with advice?

Mr Kell : Claims, particularly relating to insurance, go right across the board. They are complaints about insurance claims, yes. You'd be familiar with some of those at the moment from your other inquiry, I'd suspect.

Senator KETTER: Coming back to report 562, very briefly: what are you planning to do about the findings? I note that your report does talk about a remediation program. Where's that up to and what other activities will you be doing to ensure this doesn't happen?

Ms Macauley : We're obviously engaging with each of these licensees in relation to their remediation. Peter has foreshadowed that we'll be looking at approved product lists and transparency around that. That will be a bigger project, which will involve consultation with industry. We are also looking at this in the context of steps we're taking coming out of other work we've done. That's report 515. It's work where we're engaging with these same licensees. Work coming out of that project involves improving processes around monitoring and supervision of advisers, looking at the quality of the advice that the advisers are providing and looking at things like reference checking. There's a broad program of work. We've also got our project around banning the advisers who've been reported to us by those licensees as having serious compliance concerns. There's a whole program of work, not just—

Senator KETTER: Remediation?

Ms Macauley : And remediation as well, yes.

Senator KETTER: Can you tell me where that's up to?

Ms Macauley : The remediation coming out of report 562 is at a preliminary stage. We're just starting to engage with the licensees on that. The remediation in relation to our advice compliance project—

Mr Kell : More broadly in remediation, if I'm right, on fees for no service and advice compliance over the last two or three years it is up to about $300 million. The bulk of that is fees for no service.

Ms Macauley : Yes, which is over $200 million.

Mr Kell : But there's also been remediation for other problematic advice. It's a big ongoing bit of work that Louise is doing.

Senator KETTER: Are you concerned that this conduct has occurred after the best interest duty that has come in under FOFA? Are concerned that this has continued?

Ms Macauley : In this broad project, we are looking at conduct that occurred pre FOFA as well as post FOFA, not specifically in relation to report 562. We say in report 562 that we have seen improvements in the advice files that we are looking at, particularly around understanding the client's situations and their needs and objectives—the strategic advice that Mr van Manen was speaking about.

Mr Kell : Our aim here—and I think everyone shares this aim—is to lift the standards in the sector. There are the FOFA reforms on conflicted remuneration and best interest duty. There is also the financial advice register. There are the new life insurance reforms. There is the professional standards piece, which is yet to be actually implemented but is now being discussed. Our view is that you have to look at the package. There is not one element in all of that that is somehow going to magically solve all of the issues. But if you look at that package of reforms that have been introduced—and we are very pleased to see these reforms introduced—you can see that it is lifting standards across the board. But there is an element of a journey here.

Senator KETTER: I don't want you to comment specifically on the Westpac BT case I mentioned earlier. But, given that the argument there is that what was being given was general advice, are you concerned that elsewhere in the industry, under personal advice, we could see even worse, that this points to a blurring of the distinction between general advice and personal advice?

Mr Kell : I certainly don't want to comment on the Westpac BT matter at the moment. More broadly—

Mr VAN MANEN: If I can assist Senator Ketter in that: you have just had an issue with Clearview—and a settlement, I believe—on their direct insurance sales processes. I would say that that is a similar argument, so maybe you could comment on the Clearview case without running foul of the Westpac one.

Mr Kell : One of our concerns is that, in some areas, we have seen pretty aggressive sales models occurring under general advice models. Under personal advice, you get a range of additional protections. There are a range of additional obligations on the adviser that are not necessarily there under the general advice models.

Senator KETTER: My point is that this is happening under what you would argue is personal advice, but what's going on under the general advice space?

Mr Kell : We have seen some pretty poor practices under general advice models. We are, of course, as I think the committee may be aware, undertaking a review at the moment of the direct insurance channel, which includes some general advice models. So in the second half of the year we will be in a position to report on what we find there around some of the issues that arise in relation to general advice, not just personal advice.

Senator KETTER: I want to talk about what I have called the bank bundling issue. I know that Mr Day has been involved—and Mr Tanzer is somebody I used to ask about this particular issue. This is where we have the activity of banks going out and engaging with small businesses and providing what I would describe as incentives to go into the default superannuation fund space. I am interested in whether you are aware of the Rice Warner report commissioned by Industry Super Australia. It found that, where people were provided with choice of superannuation funds, in most cases they were basically switching from high-return, low-fee products to suboptimal situations. So they were acting against their own interests in that space. Are you familiar with that report? Are you doing anything about this problem?

Mr Kell : I will might make a couple of quick comments and then hand across to Jane Eccleston, who is heading up our superannuation and managed investments team. Yes, we are aware of the Rice Warner report. I wouldn't say that we have had an opportunity to fully follow through on all the issues that are raised there as yet. But, more generally, we are part way through a project on employers and superannuation and the sorts of incentives that are offered there. So I might hand over to Ms Eccleston to tell you where that is up to and the sort of time frame.

Ms Eccleston : We have been doing a project which has been looking at the way in which employers are influenced in making decisions about default funds. So we are primarily looking at two areas. One is the sort of advice that they receive in this context, and the other area is whether they are receiving benefits in connection with making that decision. Obviously, both of those areas have an ability to really influence potentially poor decisions in that context. We started the project in 2017 and we did serve some notices at the end of 2017 and then another round close to Christmas. At the moment, we are going through those notices. We went out to a larger group of about 47 trustees and then we narrowed it down to about 18 trustees. We are running this project in conjunction with another project, but we're analysing that information at the moment.

The sorts of issues that we are trying to drill down into are things like the quantum of the benefit. We have seen a range of different benefits provided. And the other issue—

Senator KETTER: Would you categorise them as inducements?

Ms Eccleston : We are trying to explore what they are. Some of the benefits that are provided seem fairly benign in the sense that they have some benefits for the employees—free information seminars and things like that—whereas other benefits are more in the nature of corporate hospitality, for instance. One of the things that we found was that, in the majority of cases, there was disclosure in addition to the product disclosure statement, which is the regulated document which outlines the features of the product. We are trying to go through and see what the quality of that additional disclosure was. Our concern is whether that disclosure matches the regulated disclosure and accurately reflects the product's features, benefits and risks, or whether there are some gaps or misleading statements in the additional information provided.

Senator KETTER: I have run very short of time so I will go to BMW Finance. Where is that case up to? And can you confirm that there is an independent consultant who is overseeing the remediation there?

Mr Kell : I might hand over to Mr Saadat.

Mr Saadat : There is an independent consultant still working on that matter. There is some work we are doing with BMW that we are yet to announce. That will be the subject of an announcement in the next little while. This is the matter where BMW agreed to an outcome of about $75 million, which was made up of a significant amount of remediation for consumers as well as the $5 million community benefit payment. They have now made significant changes to their processes to make sure that they do comply with the responsible lending obligation. What we are also conscious of is making sure that the broader car finance industry is meeting its obligations, and we have also got a project underway to look at levels of compliance with responsible lending, more broadly. So this is a focus area for us. And, as I said, we are expecting to make a further announcement in relation to BMW Finance, with a little bit more work that we are doing there.

Senator KETTER: Is their remediation on track?

Mr Saadat : Yes, it is. It has been a significant piece of work and we're comfortable with how it is proceeding.

Mr Kell : Are you asking about how much out of the $70 million or so has been paid back so far?

Senator KETTER: Yes.

Mr Kell : We're happy to take that on notice.

Senator KETTER: I do have a specific case that I would like to raise, but if I can I'll do that offline with you, on notice, and we can raise that specific matter with you.

Mr VAN MANEN: Have you got any other areas where you are seeing issues of failing to meet responsible lending criteria?

Mr Saadat : In relation to car finance or more broadly than that?

Mr VAN MANEN: More broadly.

Mr Kell : We had the Federal Court decide on a $5 million penalty against ANZ for their Esanda car finance business, two days ago or yesterday. So that was a significant case for a pecuniary penalty of $5 million for responsible lending failures. That's a significant matter. We haven't yet seen the full reasons from the court, but responsible lending, both in the home lending area—we have a matter before the courts at the moment involving Westpac—and in the car finance area is a big focus for us.

Senator KETTER: I have a couple of quick areas to cover. The next is—on a completely different note—Clive Palmer. We have followed up in estimates previously on this matter, I think. Can you just give us an update on the investigation into Queensland Nickel? Are there any other entities in relation to this matter that you are looking into? And are there any roadblocks to the investigation at this point in time?

Mr Price : Our investigation concerns suspected breaches of directors' duties provisions and also various provisions of the Corporations Act to do with false documents, and it's looking at the directors and officers of the group of companies beneficially owned by Mr Palmer, including Mineralogy Pty Ltd and Queensland Nickel. Broadly speaking, the investigation is looking at issues such as the use of companies' funds to fund the Palmer United Party, the transfer of assets without payment of due consideration and how those transactions were accounted for, and the disclosure of information to auditors and to ASIC. In terms of the investigation, it is progressing. We've issued a total of over 120 notices, for example, for the compulsory production of documents. We've compulsorily examined more than 30 witnesses, some on several occasions. We've received and processed almost eight terabytes of data, and we're doing a detailed analysis of over 37,000 documents. So the investigation is proceeding; it's a large investigation that is looking at a large number of documents—and that's probably as far as I'm comfortable commenting on it.

Senator KETTER: In terms of roadblocks, or anything getting in the way of the investigation, are you able to tell us?

Mr Price : Obviously, there are some people who are out of their jurisdiction at the moment. In an ideal world, we'd like to speak to those people. But, as I say, we have a large number of documents upon which we can make our decisions, and that's what we are doing.

Senator KETTER: When can we expect an outcome from the investigation?

Mr Price : It's very difficult in these sorts of matters to make a prediction. I think, as I've indicated to you, our investigation is well progressed. It's looking at a wide range of potential actions—administrative; civil; possibly criminal. Really, the timeframe will depend on exactly what is the best path—

Senator KETTER: Finally, on the privacy breach issue in relation to the search engine problem: you were expecting a report back from AGS by the end of last year?

Mr Price : Yes.

Senator KETTER: Have you received that report yet? Will the document be made public?

Mr Price : Yes, we have received a report back from AGS. We are intending to make a summary of that document—an extensive summary; it is 30 pages long—public. It should go up on our website shortly. In short, it indicates that the main cause of the privacy breach was inadequate consideration of privacy issues during the design phase. It also indicated there was a period after the breach was reported where ASIC staff didn't adequately progress the issue as a privacy issue. However, on a more positive note, once the incident was recognised as a privacy breach, AGS noted that ASIC responded proactively and effectively. AGS also notes that it does not appear that any individuals have suffered harm as a result of the breach. That summary document will be put on our website; if it is not up there today, it will be there next week.

CHAIR: I thank you all for appearing before the committee today. We appreciate your time. I thank the other witnesses who have given evidence today. I thank Hansard, Broadcasting, the committee secretariat and my fellow parliamentary colleagues here today. We appreciate your time. Any questions on notice will need to be responded to by 9 March. We did have further questions, so we will put those in writing to you from the secretariat.

Committee adjourned at 14:46