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

PHI, Mr Ben, Managing Director, Phi Finney McDonald [by video link]


ACTING CHAIR: I now welcome the representative of Phi Finney McDonald. Thank you for appearing before the committee today. We have Senator Brockman on the line as well. Information on procedural rules governing public hearings has been provided to witnesses and is available from the secretariat. Answers to any questions taken on notice should be sent to the secretariat by 5.30 pm on Wednesday, 16 June 2021. I invite you to make a brief opening statement, should you wish to do so.

Mr Phi : On behalf of Phi Finney McDonald I'd like to thank the committee for the opportunity to make submissions to this inquiry. We strongly oppose schedule 2 of the bill, which will permanently weaken Australia's world-class continuous disclosure laws. In our view, the proposal will leave millions of Australians worse off. This includes just about every Australian in paid employment. Each month Australians put a percentage of our income aside for our retirement, with a significant proportion invested in Australian shares.

These proposed amendments are intended to make it easier to bring shareholder class actions but who actually thinks that's a good thing? Not class action group members, with empirical reports showing that most people who opt out of class actions do so mistakenly; not the regulator.

ASIC has supported shareholder class actions for a long time. Private litigation recovers compensation for victims and allows public resources to be devoted to other priority areas. Class actions have raised directors' awareness around their disclosure obligations. They've improved compliance and promoted market cleanliness.

Even the Certified Practising Accountants Association filed submissions warning the government that the amendments are dangerous. CPAs are hardly activists; they're accountants who look after the finances of self-funded retirees.

We are all aware that the AICD supports these changes. But last year King & Wood Mallesons conducted a survey of company directors about the continuous disclosure obligation changes when they were in their temporary form, and 90 per cent of those surveyed said that they hadn't relied on the temporary provisions and 80 per cent said they should not be made permanent.

The people who really want these changes are the insurance companies who lobbied for them. Stepping it out, insurers charge exorbitant directors and officers insurance premiums. Without any evidence they assert that the high cost of insurance is deterring talented would-be directors accepting prestigious roles on company boards. They blame shareholder class actions for the rising cost of these premiums and they then say that premiums will come down if the government makes it harder to bring shareholder class actions through reforms such as these.

On that basis, the government's own explanatory memorandum to the amending legislation estimates that the changes would generate a $900 million saving to the industry. It was only once everybody thought that these amendments were going to be passed through that the Insurance Council of Australia filed submissions stating that the government's estimate might just be overstating things and, guess what, the D&O premiums won't be coming down after all.

This is a sham. It's highway robbery. These reforms are a device that will allow the insurance industry to boost their profits at the expense of ordinary Australians.

The losses that we're talking about will still be sustained. However, they will stay with the Australian shareholders while the insurers, as they always do, keep hold of the premiums while avoiding paying out on claims.

The government seems to be operating under the assumption that this is just an attack on plaintiff lawyers when it's not. Continuous disclosure is bigger than class actions. It's foundational to our financial system and this is an attack that will hurt all of us.

These changes send the wrong message to corporate Australia. We're only two years out from the financial services royal commission which uncovered egregious misconduct by companies such as AMP which, let's not forget, admitted to charging fees to dead people.

Here the government is expressly attempting to make it more difficult for such companies to be sued. The government has not established that shareholder class actions that have been brought are without merit. The government has not parroted the AIDC's ridiculous fantasy, which is the largest companies in Australia are avoiding trials for $100 million settlements when really, truly, they haven't done anything wrong. It's actually the opposite. The government is instead moving the goalposts.

Corporate misconduct that would have resulted in compensation yesterday will no longer be regarded as misconduct tomorrow. None of this will improve corporate behaviour. Instead directors have been given a free pass at the expense of those who own companies that employ them.

It's retail investors who will be most exposed. Retail investors rely heavily on corporate disclosures when deciding where to invest and any reduction in the quality of that disclosure will jeopardise their savings. We all know retail investors who have suffered substantial losses on the share market and we all know how reluctant they are to invest again.

Retired Australians are particularly exposed to this. At the end of their working lives they've got a fixed pool of assets and, interestingly, in a zero interest rate world they increasingly demand dividends to maintain their standard of living. They have an extremely low tolerance to losing their capital, and this is what the government's placing at risk through these reforms. These are actually the quiet Australians the Prime Minister and the Treasurer went in so hard for when promising in the last election that they were campaigning against franking credits.

The only winners in all of this will be the large insurers, the big companies and the well-paid company directors who have most to fear from breaking what is currently the law. In our view, these changes are unwarranted. The government's going to war for corporate Australia in an apparent belief that the only casualties will be litigation funders and plaintiff lawyers. The government's wrong and Australian shareholders will bear the collateral damage.

In advice released under freedom of information ASIC warned the Treasurer against any weakening of good disclosure laws. It described continuous disclosure as a bedrock of market integrity and a fundamental tenant of fair and efficient capital markets in Australia. This issue goes well beyond class actions.

We encourage the Senate to oppose schedule 2 of the bill and we ask senators to protect Australia's world-class continuous disclosure laws and to defend the rights of retail investors.

Thank you for allowing me the time to make these submissions, and I am happy to answer any questions.

ACTING CHAIR: Thank you very much, Mr Phi, for your submission and for your opening statement today. I'll just kick off with a few questions, working through what you've told us this afternoon and then move to Senator Brockman.

You've spoken a lot today about the impact on retail investors of these proposed changes. Can you just give us a broad overview of your understanding of how the changes will impact the ability of retail shareholders to bring actions for losses that they suffer if companies do fail to disclose price-sensitive information and then also what the implications of that impact may be for corporate behaviour in general?

Mr Phi : Absolutely. The amendments that are proposed are intended to introduce a false standard, a mental element into these

ACTING CHAIR: Sorry to interrupt you there, we heard you very clearly in your opening statement but I did just lose you there. I am not sure what happened. Maybe just start again with that answer.

Mr Phi : Of course. No problems at all. I was saying that the amendments are expressly intended to introduce a false standard, a mental element, into these claims of recklessness, fraud or negligence. That creates a barrier in particular to the pleading of these cases. There's obviously information that companies and company directors know that they don't divulge to the market. When a company comes out and says that actually it's misstated its accounts it typically doesn't go through and explain exactly who knew what and when. So the major impediment that will be created by these amendments is really to impose that front-end barrier to making these allegations.

Quite often in these cases by the time we get to the end, by the time we get to the point of trial, we absolutely have enough information at that point that if we wanted to we could amend the claim to plead high mental elements but simply we don't have access to that information at the outset. This is deliberate.

Raising that threshold at the beginning is expressly intended to reduce the number of claims. That's why the insurance industry, company directors and key members of the big business lobby have fought so hard for these changes for so many years.

In terms of the impact on retail investors, it's particularly profound. In one of the first shareholder class actions that I was involved in, my firm at the time represented 4,000 retail investors who'd invested in a listed property company called Centro. The majority of our clients were retirees, people who had invested in listed property trust because they understood or they thought they understood property as an asset. You can imagine how they reacted when overnight the company said that it had misstated its debt and the share price fell by 95 per cent. These people were heavily invested and their savings were wiped out overnight.

ASIC does not pursue compensation for investors. That's not their role. That's where we come in. I guess that the role shareholder class actions can play, and they're doing so increasingly effectively, is to step in and try and recover some of those losses for people who need it.

ACTING CHAIR: You just gave us an example there that goes to your point about how shareholder class actions that are brought under the current laws are of benefit to retail investors in circumstances where they've suffered massive losses of the kind that you just described. It's been suggested that the government's move to weaken continuous disclosure laws will hit self-funded retirees particularly hard. Is that something that you can talk to us about, the potential impact on self-funded retirees?

Mr Phi : Absolutely. Speaking from my own experience, when my parents retired they were both extremely risk averse and they did what many at that stage did, which was to take their entire retirement income and put it into a term deposit. Their aim was to basically place their nest egg into a term deposit where it was safe. They could earn five to seven per cent interest at that time. Their aim was to live within their means and live off that. That was their hope and their aim.

Retirees can't do that any longer. It's just simply not available to them. You go into the bank and ask for a term deposit now and you're going to get less than one per cent back. So what people have been forced to do is put their money into different assets.

Typically most of us will invest through superannuation, and it doesn't matter whether it's an industry fund, a retail fund or a self-managed superannuation fund. Typically what people are advised to do is have a balanced portfolio which comprises Australian equities, international equities, fixed interest and property in various, different combinations. But every single person who's got superannuation in Australia is exposed to Australian shares. These continuous disclosure principles don't exist to provide these rights of remedy and relief. Class actions get involved when things go wrong.

By and large, Australia does have a very healthy share market. By and large, the overwhelming number of Australian companies and company directors do the right thing 90 per cent of the time. These class actions only get involved when some companies do the wrong thing, where the law is breached. It's a very rare occurrence but it's extremely important that in those circumstances people have the right to be able to go off and take action against companies and recover what they've lost.

ACTING CHAIR: As you've said, in those rare examples when people have suffered damage it's important that they have a pathway for remedy. When you look to the broader impact of these sorts of changes on the market in general, would you agree with the ASIC advice that you cited earlier that the government's plans may make the Australian sharemarket a less attractive place for people to invest in generally and can you explain why that would be the case?

Mr Phi : Absolutely. Continuous disclosure is such a foundational concept. When you ascribe labels to things you risk overcomplicating it. But really what we're talking about here is the obligation that every listed company has to release price-sensitive information to the market as soon as it becomes aware of it. How else are people supposed to invest with any sort of confidence in shares in a market if they don't have confidence that the company is telling them all that they need to know that's relevant to what that company's share price would be, what its financial prospects are, what its current performance is and what its future prospects are.

That information flow is critical and it's that principle that not only founds continuous disclosure but it's also the basis why we prohibit insider trading. The idea is that you should not have people who are inside the company and who are blessed with price-sensitive information that other people don't have, who are able to therefore profit off that information imbalance either by avoiding losses or by making gains. It's that transparent and equitable access to information that is at the very core.

On shareholder class actions, goodness me, I think the evidence that was before the joint parliamentary committee was 0.68 per cent of Federal Court filings were shareholder class actions.

There is recent empirical evidence to suggest that in the last 29 years only 71 companies have been sued in a shareholder class action. In the overall corpus of Australian litigation this is an insignificant issue. The reason why it has drawn the sort of prominence that it has is simply because of the individual people who feel personally aggrieved when they are on the receiving end of litigation. We are talking about the boards of directors of the most powerful companies in the country. Of course they don't like it. When the company receives a shareholder class action, its board members feel their reputations have been slighted. But this is not about hurt feelings; the cases in themselves are not intended to make anybody feel a particular way. Whether they do or not, if there has been wrongdoing, if people have suffered losses, then that is what the law should step in to remedy.

ACTING CHAIR: You mentioned concerns about insider trading earlier in our hearing today. Are you suggesting that these changes to continuous disclosure would in some way provide a shield for insider trading? Can you elaborate on the links there and your concerns?

Mr Phi : I would not necessarily go that far. It is more the foundational concept that information about a company that is relevant to its financial performance needs to be made available to everybody immediately. That is how people invest confidently; it is one of the cornerstones to people. Australia has done so well in this regard because there are so few occurrences of companies coming out and surprising the market with the sorts of announcements that lead to shareholder class actions. That is one of the reasons why Australia is so highly regarded as a financial centre. It is one of the reasons why we can have 9½ per cent of our total pay going in part into superannuation every month and for that to be a good investment, something that everybody should feel comfortable with. It is critical to the nation's prosperity. It is not to say that this will necessarily give rise to more insider trading; that is rare. The free flow of information is fundamental to both.

ACTING CHAIR: You made some statements in your opening statement about what you think is driving these reforms. Today we have heard from you and other witnesses that there does not seem to be any evidence about a rise in shareholder class actions, let alone opportunistic shareholder class actions. We have seen that there is probably no relationship between these sorts of measures and insurance premiums for directors and officers. You have cited the King & Wood Mallesons survey that said that 80 per cent of company executives didn't think the temporary changes should continue. It also seems unclear that this is something that CEOs and executives want. That led you to make some statements about the insurance companies seeking these measures. How did you arrive at that?

Mr Phi : In terms of arriving at it, there are two ways. You can follow the submissions that have been made to this inquiry and to the joint parliamentary inquiry that was conducted last year. You can look at the submissions that were made to the Australian Law Reform Commission, the Victorian Law Reform Commission, and the Productivity Commission before it. A consistent theme has been running through the reform agenda in relation to shareholder class actions, and it has been consistent for the last six or seven years.

There is nothing in any of this that is surprising. Everybody involved in the industry understands that there is a shopping list of key asks that the big business lobby and the insurance lobby have been pushing for, for some time. That list included: the regulation of licensing of litigation funders, winding back continuous disclosure reforms and making changes to misleading conduct. This has been a wish list of those entities for many years now. When this came up in the joint parliamentary inquiry, it all sounded a bit conspiracy-theory-esque et cetera. The evidence is there; it is plain to see. Ultimately when you are involved in this area you tend to look for money as being the motive. You see reputationally and financially who has the most to gain.

The thing that sets this apart is that this in no way can be suggested to be a measure intended to increase consumer protections. This cannot be suggested to be anything other than a lifting of the bar to make it harder to pursue the powerful. The only people who benefit from that are those who feel aggrieved by it and the insurance companies, who now admit that they are going to maintain their premiums, continue charging what they have always been charging, but are not going to be exposed to as many claims as they otherwise thought they would be. It is too convenient. None of this is coincidence.

ACTING CHAIR: Thank you.

Senator BROCKMAN: Mr Phi, continuous disclosure is also supported in our system by statutory penalties, which remain unchanged under this legislation, and criminal prosecution, which remains unchanged under this legislation. So this deals with a band of civil litigation. We have heard from class action funders and lawyers that the number of class actions is very small. Do you risk overstating the impact of these changes on continuous disclosure?

Mr Phi : There are two points to make. First, if you don't want to take my word for it, don'tlisten to ASIC. The regulator in this space doesn't think these changes should be made. The regulator was warning in advice released under FOI that continuous disclosure is the bedrock of our capital markets, and that we should not be making these changes to it. If the regulator who is involved in this area thinks it is a bad idea, then that is what the government should be listening to.

Secondly, you suggest that this fits within a broader regulatory frameworkabsolutely it does. With the greatest respect, it is not correct to say that these changes do not impact upon the regime that applies to ASIC and the civil penalty proceedings or the criminal charges that it can bring. The amendments themselves leave in place the lower standard, no-fault mental element when ASIC wants to bring a criminal claim, which is obviously subject to a high evidentiary burdenbeyond reasonable doubt. But they then impose the higher standard, the strict liability standard, when ASIC wants to bring a civil penalty claim. So the lower standard of proof applies to the more difficult evidentiary burden and vice versa. That in itself is expressly intended to make life more difficult for the regulator. ASIC complains about that in the submissions that it filed today.

ASIC went further. An ASIC deputy commissioner was quoted in the Australian Financial Review a few weeks ago pointing out that this might make it less likely for ASIC to issue infringement notices. Their fear was that companies might be less likely to pay an infringement notice in circumstances where ASIC would then be subjected to this higher threshold in order to bring a civil penalty proceeding which is necessary to enforce it. It was reported in the press about the additional difficulties that will be created for it. Tellingly, in response to that, the AICD was quoted in the Financial Review as disagreeing with ASIC and saying that perhaps ASIC was overstating how difficult it would find things in this brave new world. So this case not only affects class actions and civil litigation; it also affects the regulator.

The final pointsorry to labour itis that this is an area where you have a regulator who is dealing with a vast amount of responsibility and a limited amount of funds. For many years ASIC has been able to look at private shareholder class actions and law firms such as my own and the scrutiny that we apply to continuous disclosure, basically knowing that that level of enforcement is going to be picked up by the private sector. It seems like we are living in a topsy-turvy world where it is the coalition government that says that kind of private activity needs to be stepped down and this type of action needs to be reserved for government. It is unusual. I am not aware of any other circumstance in which that same argument is being made.

Senator BROCKMAN: One other thing has come to mind. There was a bit of an uptick, I understand, in shareholder class actions filed when the period of temporary relief was in place. Is that correct from your perspective?

Mr Phi : No. I don't think there has been any kind of significant shift in the volume of class actions that have been filed. If it were established that the temporary restrictions that were in place were suppressing shareholder class actions and keeping the numbers down, again my question is: why does anybody think that is a good thing?

Senator BROCKMAN: That seems to be particularly fair. But that wasn't really my question. My question was more: can you point to any cases that you think would not be able to be run because of the temporary relief?

Mr Phi : A lot of that remains to be seen. You have seen submissions that have been filed from both plaintiff law firms or litigation firms but also from defendant law firms pointing to the additional uncertainty that gets created as a result of changing the law in this area. People have spoken about the introduction of the negligence standard, for example, and said, 'With the negligence standard it may not be as bad, it may not actually make any difference; fundamentally these cases won't be able to continue; but will continue in any event.' But if that is the case, then what is the point of the change? What is the point of introducing this level of complexity and introducing this standard, if it is not going to make any difference to the number of cases that are filed? The entire premise of this amendment is that it will reduce the numbers. For that reason I say that is the wrong way of proceeding. If the intention is not to suppress it, then don't change it. If the intention is to suppress it, then I think you should reconsider.

ACTING CHAIR: Thank you, Mr Phi. We really appreciate your evidence today. The committee will have a short break.

Proceedings suspended from 14 : 14 to 14 : 33