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Economics References Committee
Treasury Laws Amendment (2021 Measures No.1) Bill 2021, Provisions

SPENDER, Professor Peta, Private capacity [by audio link]


CHAIR: I now welcome Professor Peta Spender. Are you with us on the line now?

Prof. Spender : Yes, I am. Thank you very much for inviting me to participate today.

CHAIR: With me I have Senator Brockman and Senator Walsh. Our information on procedural rules covering public hearings has been provided to witnesses and is available from the secretariat. Witnesses should speak clearly and into the microphone to assist Hansard to record proceedings. I would like to advise witnesses that answers to any questions on notice should be sent to the secretariat by 5.30 on Wednesday, 16 June 2021. I invite you to make a brief opening statement, should you wish to do so.

Prof. Spender : I make this submission and give evidence in my private capacity. However, I am an emeritus professor at the ANU law school at the Australian National University. Would you like me to proceed with my opening statement?

CHAIR: Yes, please.

Prof. Spender : This is basically a summary of my submission. What I would urge is that the committee recommend that proper process be undertaken to review chapter 6CA. We need to engage the relevant expertise, the stakeholders, and deal with the fundamental issues that that chapter addresses, particularly information asymmetry in the financial markets.

The process so far, with respect, has been a bit of the tail wagging the dog, because it's based upon a number of inquiries that were directed to the questions of class actions and litigation funding in Australia. You don't need me to tell you this, but the ALRC recommended a review of the relevant chapter. This was followed in 2020 by the PJC recommendations that suggested that the relevant determinations be made permanent. But the PJC was always inquiring into class actions and litigation funding and the bill has proceeded on that basis. Previously it has been an analysis of the enforcement side and now it's dealing with the substantive issues under the chapter.

The recommendations of the ALRC have been telescoped into this issue of enforcement. My concern is that we need to deal with the broader range of issues, particularly questions about information asymmetry. We need to think about the stakeholders. I saw that ASIC had put in a submission last night. I haven't had a chance to read that yet. Importantly, ASIC did not address this issue in the report to the PJC. They didn't make a submission to the PJC. They didn't even consider that a review of chapter 6CA was necessary to the ALRC. We also need the expertise of the cognate disciplines. We need the expertise of the economists and our people who work in finance.

I don't need to remind you of the history. With what I would call, for brevity, the CD regime, it has been in place for 30 years, and it's regarded as a world leader. The markets have prospered under this regime. Just to emphasise that point again, ASIC didn't consider it necessary for it to even be reviewed, because it's very highly regarded.

The next issue is the question about whether we should be comparing ourselves to the US and the UK. It's my view that those comparisons are misconceived because of the radical differences in many facets between the different jurisdictions. For example, there are different types of markets. The markets operate differently. The class action regimes are different. The types of disclosure between the different components of disclosure are all different in all of those jurisdictions. You have to consider also that you're not comparing the same types of phenomena.

You also have to consider how the markets work relative to the body of law. What you're doing, particularly with section 674, is superimposing some law upon some market behaviour. The markets themselves operate quite effectively under the listing rules, and that's been in place for many years. To give an example, the AICD recommended that the determinations be passed because of concerns about profit guidance and forward-looking statements in the market; that's completely understandable under COVID-19 because there's a lot of uncertainty. There was an issue about how that should be dealt with in the market. ASX said, 'Withdraw your profit guidance,' and many companies did that; they didn't regard it as being a big issue. So the important thing is that you don't need to change the law in order to change market practices to make them effective.

The next issue is the participation of retail investors in Australia. That makes the Australian market, if not unique, very distinctive. Many of the submissions have talked about this, but my interest is, in fact, in the increasing participation of millennials and women with direct investment in the market. To me, this is a very positive sign. I've been involved in this area for a long time and I saw the swing that occurred in the early 2000s, due to demutualisation, but now I can see a different trend emerging, which I think is very interesting, as millennials shift from residential homeownership into asset-holding through direct ownership, and as women participate increasingly, and perhaps with some renewed confidence, coming from a low bar of financial literacy, particularly for older women.

They are the things that we have to be very interested in and protect, because we know clearly that retail investors don't have the same access to information that the institutional investors have. They've got some hesitancy about information, and that's reflected through the ASX investor survey.

The other thing that's really important is the way that the continuous disclosure provisions act as a mirror to insider trading prohibitions. We're doing very well on insider trading enforcement, in my view, in AustraliaI can talk about that laterbut we've got to be careful about getting as much information in the market as possible, in order to deflect insider trading. I think those retail investors are very sensitive to those types of questions.

I want to say a couple of things about the proposed standard in the bill. The problem is that it substitutes a bright-line legal standard for a very messy standard that makes it very difficult to use. I commend to you Dr Duffy's submission, because he looks at that. I won't go into the technical details, but I'd be very happy to discuss them, if you'd like me to. A consequence of the messiness is that it undermines enforcement action. We know that ASIC can use infringement notices, but we also know that ASIC received a roasting from the royal commission, due to its light-touch enforcement. What happens with this bill is that it creates a bifurcation between very complex enforcement mechanisms and simple but perhaps not as palatable options through enforcement processes, through infringement notices.

We know, from ASIC's information sheet 151, that ASIC needs private enforcement; it has said so on many occasions. If you want another reference point, you can look at the ACCC's submission to the PJC inquiry. The ACCC says, really frankly and openly, that it needs private enforcement, particularly to obtain compensation. There's no doubt about the fact that private enforcement works as a deterrent, but it's very important for compensation, and it's an important and effective use of resources.

The last point that I'll makethere are a couple of other points, of course, that I'm happy to draw out in answer to questionsis that a bright-line legal obligation that's clear creates what I call a triple-up effect in companies. We don't want to reduce the amount of information that's in the market, because it's very important to everybody, including the emerging investors. But, when it creates a bright-line legal obligation, it allows middle management to put more pressure on upper management to comply with bright-line legal standards. In my view, that is an effective way to maintain or to improve corporate culture. That was manifested very clearly in the Hayne royal commission.

I urge there to be a thorough review of the information, particularly about chapter 6CA, because it's fulfilling so many different functions that are not in the least bit related to class actions and litigation funding; and I think we have to look carefully at what's happening with Australia's capital markets and whether the current scheme does, in fact, discourage innovation. In my view, we should pursue that inquiry that was recommended by the ALRC before the proposed amendments to the bill are made. That's my opening statement. Thank you very much for your time.

CHAIR: Thanks, Professor. I will hand over to Senator Walsh.

Senator WALSH: Thank you so much, Professor Spender, for all the work that you have done on this today and over many years. Can I start with your comments on the reviews and consultations? There's been no consultation at all around schedule 2 of the bill. You referred to the PJC report, and you described this process as 'the tail wagging the dog', in terms of starting with concerns around shareholder class action and then working back to the mechanisms that guide corporate behaviour around continuous disclosure. Can you explain why it is a problem to start at the end and work back?

Prof. Spender : There's this perceived problem about enforcement. Enforcement is obviously a critical part of any framework for law and compliance; but, if you don't have in place an effective, substantive legal obligation or, in this case, a legal obligation that's backed up by a very clear set of market practices, dealing with it by way of enforcement is just going about it through the wrong exercise. If you change the enforcement settings, you're potentially changing, of course, the obligations that exist under the relevant chapter. Those obligations are extensive and critical. If we start messing with those obligations, we start undermining the operation of those provisions, so the whole question about putting information into the market is critical for the operation of those markets. If you decide that there might be a question about over-deterrenceI know that this was part of the PJC inquiryyou start thinking about what the substantive obligation is and then you think about the appropriate enforcement mechanism. This one has gone around in the opposite direction. It has looked at what's perceived to be an enforcement problem and then it has decided to change the substantive obligations. The problem with doing that is that you mess with something that's fundamentalI can't emphasise this enoughto how things operate.

I've made submissions to just about all of these inquiries because I have expertise in class actions in corporate law. I could talk about class actions, but I understand that you'll be talking to many others about that issue. I'm happy to talk about it, but I consider that the critical focus should be on what chapter 6CA does.

Senator WALSH: You are in favour of the broader review proposed by the Law Reform Commission; is that right?

Prof. Spender : Absolutely. They've done this in other jurisdictions andthis is what's interesting, of course, and you would have encountered this many timeswhat appears to be a very inconsequential tweak of the Corporations Act has far-reaching effects, so you have to be careful that you're going to draw together some of those issues. For example, an issue raised by ASIC many times is about information leakage in the market. This is so critical to many elements: to the confidence of all investors, including retail investors, and also because of deflecting insider trading. If we're doing a really great job on insider trading, why compromise it, in my view?

Senator WALSH: You refer in your submission and your comments today that your focus is around what these provisions might do for investor information and participation in the market. You've got a particular interest in participation in the market of women and millennials, as you've called them today. How do the existing continuous disclosure obligations support that high level of participation of those groups; and what are your concerns about schedule 2 undermining that participation?

Prof. Spender : It is because retail investors do not have access to the same information as the large investors, particularly the institutionals. The institutionals can do their own research, they can track market trends very easily and they can sniff deals that are coming on. The sniffing of deals is really an element of the close connections of various people within the markets. Often people know what's happening before it happens, so there's a close nexus between various participants in the market.

The retail investors don't have access to that information. They have to rely upon either secondary sources of the information or information that comes directly from the company; so they're more dependent upon official sources of information. In my view, that encourages participation. One of the things about the ASX investor survey is that it said that women, in particular, are a little reticent about their portfolios, understandably, but the more information they have, the more they have the opportunity to genuinely experiment with their investments. The same applies to what I call the millennials. They have an opportunity because of all the official information that's available.

Remember, the other thing of course that occurs with the CD regime is that companies are more inclined to get the information out quickly. It's just human nature for that to occur. It means that there can be this trickling up through the company where there is a sense that the buck stops with them; they've got to disclose that there's no fault and there are no roadblocks to their putting out the information. It means that it gets into the market and the retail investors, even if they're relatively under-resourced compared to the institutionals, have access to it, which means that they have more confidence in the market. To me, this is a really very exciting trend because it means that they're all investing for our collective future. They're not gambling but investing, and they're doing it responsibly, which to me again is something that's very interesting and very important.

Senator WALSH: You talked earlier about the bright-line legal enforcement provisions of the current act and how private enforcement is important to ensuring good corporate behaviour and effective markets. I hope that I'm paraphrasing you correctly. Can you explain, in layperson's terms, how the changes to continuous disclosure and misleading and deceptive conduct, in terms of adding the fault element, might in turn affect corporate behaviour?

Prof. Spender : The Corporations Act has a clear obligation contained with a defence. Often it's a due diligence defence. So when you're dealing with prospectuses or takeovers you have a clear obligation and an opportunity for exculpatory things that are going to be said by the person who is accused of that or is alleged to have breached it. This introduces a series of very complex and multifaceted obligations. I've said in my submission that the problem is associated with proofthere's no doubt about thatbecause you've got a problem with access to information. But putting that to one side, if we just look at the substantive obligation, we've got this new 674A obligation, which has a fault element, which means that it's harder to prove. It also is superimposing this very interesting but complex set of body of law on civil penalties. So you've got a fault based obligation, which is mixing in a bit of civil penalty law; and you've got a little bit of civil penalty law, which is sort of intermingling with a clear, straight bright-line obligation under section 1041H, which is misleading or deceptive conduct. That's only a civil action. There are some contradictions associated with this, and it's messy law.

There are provisions already in chapter 6CA. For example, section 674(2B) has what is a bit similar to a due diligence aspect. What we should be doing is going back to taws, thinking about how the obligations are set up. Are they sufficiently certain? We might want to consider defences. We should consider defences rather than intermingling some of those really sorts of nuanced but complex parts of the law which make it messy. As I've said, Dr Duffy covers this quite well. I think he has demonstrated some of the indeterminacy. The problem with messy, complex and faultbased law, when you've got a fundamental obligation to the market, is that it discourages people from using it, and that means that you undermine the deterrent element of the law.

Senator WALSH: How does that then track back to corporate behaviour? Is this a proposal to weaken private enforcement and will that then potentially sort of expand the scope of poor corporate behaviour?

Prof. Spender : There's no doubt that it will. Whether the relevant corporations still act as good corporate citizens is another question. They may do so. They may consider it important to be good corporate citizensand that's not something that we should ever underestimatebut it will be so much easier not to disclose. These disclosures are quite complex. They have to think carefully about how they disclose a formal market announcement. Clearly they're going to as much as possibleparticularly when it's bad news; I have seen this myself over the period that I've been teaching matters of corporate lawhave a tendency to be slow about bad news. If you're hiding behind a fault or have a fault element you're going to be doing a few things. You're going to be thinking about whether you need to disclose, because it might be that you don't satisfy the fault elements, and it's very likely that you won't, particularly with the way the fault elements are directed at the directing mind of the company. I mention in my submission that this is such a vexed area that the law just has not been able to deal with it since 1972 with Tesco Supermarkets. So there's that part of it. But there's also the question about whether you can shift liability in various ways. Some of the submissions have talked about the shift between companies and auditors and who might be responsible. So there are many opportunities to not do what is a fundamental thing that's important to the market, and it just gives opportunities for people to get out of doing things. Whether it turns out or not, to me, you don't change it until you know exactly what it is that you're changing. In my view, the market has prospered very well, and the Financial Stability Board regards it as a market of very high integrity and it attracts capital for that reason. To me, we shouldn't create opportunities for the integrity of the market to be interfered with.

CHAIR: Senator Brockman, do you have any questions?

Senator BROCKMAN: I admit that the audio line at my end was pretty ordinary for the opening statement; so I might review the Hansard and come back on notice with any questions that I have. It was moderately difficult for me to hear.

CHAIR: I understand.

Prof. Spender : We'll be very happy to take any questions on notice.

CHAIR: Professor Spender, we really appreciate your effort and your time this morning; thank you.

Prof. Spender : Thank you very much, and all the best with your deliberations.

CHAIR: The committee will now have a short break.

Proceedings suspended from 10 : 54 to 11 : 16