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Economics References Committee
Performance of the Australian Securities and Investments Commission

GRATION, Mr Douglas, Director, Governance Institute of Australia

SHEEHY, Mr Tim, Chief Executive, Governance Institute of Australia

WOLFE, Mr Simon, Head of Research/Legal, Blueprint for Free Speech


Evidence from Mr Wolfe was taken via teleconference—

CHAIR: I welcome Mr Sheehy and Mr Gration from the Governance Institute of Australia and Mr Simon Wolfe from the Blueprint for Free Speech, via teleconference. We will start out with questions to the Governance Institute and then go over to you, Mr Wolfe. Welcome, gentlemen. Do you have an opening statement to make?

Mr Sheehy : We do. Looking at a brief summary of our paper, first of all we would like to say that we are strong supporters of the role and responsibilities of the Australian Securities and Investments Commission, and we do not believe that the review being undertaken today should contemplate a significant change to the powers of the regulator. We believe the regulator has significant powers at its disposal that it can utilise but in some instances does not necessarily apply those powers most effectively.

I would like to make some specific comments on areas where we would like to commend ASIC on what it is doing and then also some areas where we think there is room for improvement. For example, in terms of information systems, we think ASIC has undertaken significant work in improving its administrative and information management systems. Our members work very closely with ASIC in this area, particularly in the Business Advisory Committee, and we commend it on the work it is doing, the way that it has kept industry informed, the rollout of the technology improvements and so forth. We, for example, give ASIC a big tick in that area.

But there are some areas where we think there is room for improvement. We think ASIC should undertake a marketing and education program. We know that ASIC has a great deal of information on its website and its MoneySmart website, yet we do not think those messages are getting out to the general public much beyond the corporate arena, where we operate. There are a great deal of retail investors and consumers that would probably be very familiar with the work that the ATO does and would go to the ATO's website regularly but would have absolutely no idea of the extent of information which is available on ASIC's website. So we think it has significant work to do there in educating the public, really, about its existence and what it does and then following that up.

A second area where we think there is room for improvement is how ASIC could engage more with industry and with industry associations like ours, and I will give you some examples. Our organisation's mission is to improve engagement and practices. We do that, and we do not do it for profit. We often develop best-practice guidelines, typically on highly technical areas, and we have done so sometimes with the support of ASIC and sometimes without. I am now holding up a document, 'Guidelines on managing voting exclusions on remuneration-related resolutions'. It is highly technical. It is something that we did at the encouragement of ASIC, and we were pleased that the then deputy chair of ASIC, Belinda Gibson, chose to write a foreword to it. It is these sorts of things which add weight to industry-led best-practice guidelines and avoid the need for further regulation.

But on the flip side there is another document I am holding up, 'Handling confidential, market-sensitive information: principles of good practice'. We did this at the urging of ASIC and in conjunction with another association, the Australasian Investor Relations Association, but in this particular instance ASIC chose not to—you could use whatever you want—write a foreword, endorse or whatever, and that was disappointing. We have spoken with ASIC on this and we encourage them to work more closely with industry on highly technical issues like this. We think it would be a more effective marketplace if that were the case.

Another area where there is room for improvement is for ASIC to be more accountable in the disclosure of public actions taken. With this, I mostly turn to infringement notices around breaches of continuous disclosure. There were a couple of instances a couple of years ago where infringement notices were issued around a lack of disclosure and a company's obligations with listing rule 3.1. In this case, they revolved around the immediacy or lack of immediacy of the release of the information. In these cases, we are talking about periods of 60 and 90 minutes. The industry then operated with only the barest of information released as a result of these infringement notices and, for some period of time, could only interpret 'immediate' as being 60 or 90 minutes, a very short period. It was not until another year or so that guidance note 8 was released by the ASX, which gave a more fulsome description of what 'immediate' meant so that industry was brought much more into the picture on what it meant. We do not think that is healthy. We think ASIC should be more fulsome in its disclosures. We understand the infringement regime; it is not an admission of guilt by the company but it leaves an area of uncertainty.

To sum up: you get what you pay for. We have listed in our submission the increase in the responsibilities that ASIC has. In recent years there has been new credit registration and licensing scheme, 26,000; a new margin lending licensing scheme; a new national business name service; a new financial product authorisation service et cetera; and self-managed superannuation funds—and we know what has been happening with those. But this has not been matched with an increase in funding. We have seen annual expenses rise by 50 per cent but government funding rise by only 24 per cent, much of that tied to specific projects. So we are clear that the constant accrual of functions and services by ASIC has played some part in reducing the ability of ASIC to devote resources to legislative, surveillance and investigative responsibilities. It is an inescapable fact of life that you get what you pay for.

CHAIR: Thank you, Mr Sheehy. Mr Gration, do you have anything to add?

Mr Gration : I would like to touch on two areas that our members, who are often company secretaries, are often responsible for and have some concerns they would like to raise. The first, as Mr Sheehy mentioned, is infringement notices. These were originally introduced with the analogy of a speeding fine: they were for relatively minor offences where it was relatively clear-cut that the offence had been committed and relatively clear-cut that if the fine was not paid the offender would be convicted. But they have in fact been used in quite different circumstances to that. In particular, continuous disclosure breaches can be quite serious; they can involve large sums of money and certainly large reputational damage for the company concerned. For example, where 60 or 90 minutes is considered 'immediate', or where other companies have paid the penalty in an infringement notice, it means the rest of the market is not sure what has happened, what conduct is complained of, whether it in fact occurred and whether it was a breach of the law. So the rest of the market is left uninformed.

This may be a peculiarly Victorian analogy—I am from Melbourne—but it is a bit like the situation in which the AFL now finds itself with drugs in sport: all sides are claiming victory; the people who are accused say, 'We paid a penalty but we never admitted liability'; the regulator, the AFL, says, 'We have secured an outcome'; and nobody is left in a satisfactory position. So the infringement notice regime is completely appropriate for minor breaches—breaches of AFSL licences, failure to file things on time and so on—but it is not an appropriate mechanism to enforce and develop the law, particularly in relation to continuous disclosure. If ASIC has a valid complaint, it should bring it and have the company concerned admit liability or it should prosecute that in the courts to say, 'We will get a clear public statement that this conduct is not acceptable.' The infringement notice regime is very appropriate in the right place. It is not an appropriate mechanism in relation to many of the continuous disclosure breaches that it has been used in.

The other area I wanted to touch on was whistleblowing—and I am sorry that I arrived late and did not hear most of the presentation of the previous witnesses, because I expect they covered it in much more detail and with much greater expertise than I can. ASIC's written submission to this committee outlines a number of steps it is taking to improve the way in which it handles whistleblowers, but ASIC has also highlighted in its submission, correctly, that the current whistleblower regime in the Corporations Act is much less extensive than much of the public might think it is and has a quite technical and narrow operation. It only applies to directors, officers and contractors of the specific company concerned. It does not cover subsidiaries. It does not cover an unsuccessful contractor complaining that misconduct—or cartels, bribes or whatever it might be—has led to their being the unsuccessful contractor.

ASIC also correctly points out that the whistleblowing regime only deals with breaches of the Corporations Act. You need to be a particularly well advised and prescient whistleblower to understand exactly which act what you see as misconduct might fall under—whether it is a breach of the Corporations Act, whether it is a breach of state-based criminal legislation, whether it is a breach of competition and consumer law or whether it is a breach of the Taxation Office. So the whistleblowing protection only applies in particular, narrow circumstances.

We as an institute think ASIC is doing its best and is trying to do better within the constraints of its legislation, but what is really required is a much broader whistleblowing protection that applies to all people who bring complaints in good faith to the attention of all regulators, whether they are the ACCC, ASIC, the ATO, the Federal Police or state based authorities. There are recent examples of allegations of bribery and corruption overseas; it is not at all clear that ASIC has jurisdiction over those and it is not at all clear, if you were an employee or officer in a company and suspected such conduct was going on, which regulator you would approach and whether as a whistleblower you would receive any protection at all in those circumstances when you did so.

We welcome the steps that ASIC is taking to improve its handling of whistleblowers, but ASIC can only do so much in the narrow legislative regime that it has at the moment. There really needs to be a more extensive regime giving much, much better protection not only to the regulator, which I think is what ASIC is focused on, but also to the whistleblower concerned. Thank you.

Senator FAWCETT: You mentioned the ATO a couple of times. We have had a few witnesses tell us about the different approaches regulators take. In one sector of the industry, in financial services, superannuation and self-managed funds come under the ATO, as opposed to the others, who come under ASIC. There have been some comparisons saying that the approach that the ATO takes is actually far more effective than that taken by ASIC. Do you have any comments in that regard, on whether there should be an alignment of the regulators? I know the Productivity Commission, for example, has just put out a document on best-practice auditing of regulators. Is there a template that we should be seeking to bring regulators towards?

Mr Gration : I think it is very undesirable that there is a sort of regulatory arbitrage and a perception that people will get better or worse treatment depending on which regulator they approach. I think there are quite clear differences between a large public-offer or employer or industry sponsored super fund and a self-managed super fund which might, essentially, only affect the individual or the individual and their family who are the beneficiaries of it. So there are reasons why you might have a different regulatory template there. The Governance Institute, in fact, made a submission recently to, I think, a Treasury inquiry into the governance of superannuation funds and made various recommendations there as to how the governance of super funds could be improved, but that submission recognised again that there was a distinction between the public offer or industry-sponsored super fund and the small, self-managed super fund. I do not have a lot of direct experience of the ATO's approach, but certainly I have heard anecdotally—as you have said, Senator—that they have a more constructive approach in some ways in their regulation.

Senator FAWCETT: Sure. Before I go on with questions, I am just conscious that we have Mr Wolfe on the line. You are not sitting here in front of us, Mr Wolfe, so I am sorry if I have overlooked your opening statement. Would you like to make that now? Then we will continue with questioning.

Mr Wolfe : Sure, but I will make my statement very brief, as we focus solely on the issue of improving whistleblower protections. It dovetails into what Mr Gration said about the need for systemic change rather than simply blaming ASIC for underperformance as a regulator. So we focus on paragraph (e) of the terms of reference. We would just repeat what we said in our submission: whistleblowing is such an important anticorruption mechanism which has been picked up in the public sector in this last year with the passage of the Public Interest Disclosure Act. The essence of our submission is that the private sector can pick up on the lessons learnt in the public sector and replicate many of those protections such that it takes the regime out of the very restrictive part 9.4AAA of the Corporations Act. Those protections include better access to compensation, better protection for external disclosure, increased cost protections and anonymity, which is just not in the Corporations Act. Then we need to think about the regulatory burden on the regulator itself—that is, how much it costs to police all of this and what role ASIC or an ombudsman-like creation might have in that. So our recommendation is essentially that the private sector adopt in one way or another—either by incorporation into the Public Interest Disclosure Act or by amendments to part 9.4AAA of the Corporations Act—the same protections afforded to those who work in the public sector. That is the essence of it.

CHAIR: Thank you. I have a question on corporate governance, for both organisations. A number of submitters have referred to ASIC having a full-time commission type structure that both oversees and does the regulatory work. So, when we started to ask questions last time of Mr Medcraft and he had all the commissioners there, they were also, for want of a better description, senior executives responsible for implementation of decisions made. It was explained to us that it is not like a company, where you have a board of directors and then you have your executives, your management and the rest of your team. Similarly, we have had suggestions that ASIC needs to be better able to tap into the knowledge, know-how and understanding of experienced businesspeople and to benefit from outside, independent and objective sources. They have suggested, in principle, that ASIC have the equivalent of an executive and non-executive board to have recourse on a regular basis to outside experience and talent, particularly in a case where there are emerging issues that have not properly filtered up, along the lines of the various financial scandals that went on to the nth degree before there was resolution. Do your organisations—we will start with Mr Sheehy first—have a view on that proposition, or are you satisfied with the current structure of the governance board of ASIC?

Mr Sheehy : We are certainly of the view that ASIC can benefit more from closer ties with the market and with industry. I would have to think about whether or not that is the solution, but in our submission we have suggested that ASIC get involved in senior-level secondments, and we think that is a way that they can get closer to industry both in having individuals within ASIC spend some time within industry and vice versa. We also have said, as I said in my opening statement, that we recommend that they work more closely with industry associations—

CHAIR: No, that is not my question. I was quite intrigued last time that the full board of ASIC, for want of a better description—all the commissioners—were here but they are similarly charged with day-to-day responsibilities in their area of work. They are the linemen as well as being in charge. It is almost like Caesar appealing to Caesar about the work of Caesar. Is that a satisfactory regime? That is my question.

Mr Gration : If I could perhaps answer your question, Senator. I think there are two elements to it. There is the drawing on industry experience. I am not familiar with all the ASIC commissioners but I know many of them both past and present have been senior private sector figures—so the previous chair, Mr D'Aloisio, and also Mr Cooper et cetera. In that sense, there is quite an availability to tap private sector expertise. I think the more important issue that you are raising, the issue that is not addressed in the current structure, is this independence. It is like a company that is composed entirely of executive directors. The ASX corporate governance principles that we have been heavily involved with others in developing very much value the presence of independent directors on a corporate board. It is not obvious why ASIC would not benefit similarly from the expertise of having commissioners who were not, in effect, full-time executives and employees of ASIC as well. Again, this is slightly out of my area of expertise. But you look at an organisation like the Reserve Bank, its board is comprised of eminent individuals who bring expertise from outside the organisation to assist in the deliberations. ASIC does not have the benefit of that. So it can wind up very much living in its own world and in its own cocoon without that benefit of outside expertise.

CHAIR: Are you suggesting to the committee that there is value in having both executive and non-executive boards?

Mr Gration : Undoubtedly, the private sector recognises that there is value in having independent directors, independent non-executive directors, on the board of a company who are not employees. It is an odd arrangement that you have the chair of the commission, and in one sense all the other commissioners are beholden to the chair. It makes it quite difficult to have an independent line of thinking there. If you have got a terrific chair, that is okay; but even a terrific chair can benefit from that sort of independent thinking.

CHAIR: A bit of contestability of ideas.

Mr Gration : Yes. That comes from someone who is not an employee and who can bring in that sort of separate viewpoint.

CHAIR: Mr Sheehy, do you have a similar view?

Mr Sheehy : Yes. Even the previous commissioner, Mr D'Aloisio, stepped away probably more than his predecessor in the way that he operated and gave more independence to the individual commissioners. He took on probably an informal chair-type perspective. We saw that as being beneficial.

CHAIR: Mr Wolfe, do you have a view on that?

Mr Wolfe : I am wholly in support of Mr Gration's submission. I could not add anything meaningful to that.

CHAIR: Thank you. Wholly supportive?

Mr Wolfe : Yes.

CHAIR: The Governance Institute has suggested that the creation of separate prosecutorial body for prosecuting white-collar crime could be considered. What are our views on that, gentlemen?

Mr Sheehy : ASIC is constrained in that it does not have the ability to prosecute in its own right.

CHAIR: That is the question.

Mr Sheehy : Yes, we think it is worth looking at. We see what happens overseas with the Securities and Exchange Commission, and it is able to do that; ASIC is not. We are of the view that that is worth considering. It is often—

CHAIR: How would you consider that? Should the government commission a white paper or something to that effect?

Mr Sheehy : Yes, in a form like that.

CHAIR: Mr Wolfe, do you have a view?

Mr Wolfe : I apologise. The second half of the question was cut off during the call so I was struggling to pick up the exact thing being asked.

CHAIR: The Governance Institute submission suggested that the creation of a separate prosecutorial body for prosecuting white-collar crime could be considered. The question is: do you support such a proposal, or do you think it should be retained within the Director of Public Prosecutions?

Mr Wolfe : I think it is a proposal that is worth being considered, but of course it should be considered in tandem with the financial support required of such office.

CHAIR: So a recommendation by this committee to government for some sort of green paper or white paper or review of the utility of such an idea would be a good idea?

Mr Wolfe : I think so.

CHAIR: Gentlemen, thank you for your attendance.

Proceedings suspended from 15:10 to 15:28