Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Economics Legislation Committee
04/06/2014
Estimates
TREASURY PORTFOLIO
Australian Securities and Investments Commission

Australian Securities and Investments Commission

[09:01]

CHAIR: The committee will continue consideration of the Treasury portfolio with questions for the Australian Securities and Investment Commission. I welcome the Minister for Finance, Senator the Hon. Mathias Cormann, representing the Treasurer. Minister, would you like to make an opening statement?

Senator Cormann: I do not, but I think Mr Medcraft will make one.

Mr Medcraft : Thank you for the opportunity to address the committee. Representing ASIC today are all of our commissioners: deputy chairman Peter Kell and commissioners Greg Tanzer, John Price and Cathy Armour. Supporting the commission are senior executive leaders Greg Kirk, Warren Day, Chris Savundra and Tim Mullaly. In my brief opening statement, I want to cover the budget position of ASIC and the latest developments in Commonwealth financial planning. As has been reported and as in the budget papers, ASIC's budget will be cut by around $120 million over four years. This is in addition to the increased efficiency dividend of $47 million over four years—totalling $167 million.

In the 2014-15 financial year, $44 million, or around 12 per cent, has been cut from our operating budget. Average staffing levels will reduce by 209. Again, this is a reduction from 1,782 to 1,573, or a reduction of 12 per cent. In anticipation of this cut, we have been proactive in conducting a voluntary redundancy campaign. Over the coming weeks we will be working with our business units to meet the remaining budget reductions.

What does this mean for ASIC's operations? With reduced funding ASIC can still perform its statutory functions. We will adjust our resource allocation to reflect the available funding but will continue to aim to achieve our strategic priorities of (1) confident and informed investors and financial consumers, (2) fair and efficient markets and (3) efficient registration and licensing.

We will also look to mitigate risks arising from the lower levels of activity, but some changes are inevitable. In particular, our proactive surveillance will substantially reduce across the sectors we regulate and, in some cases, it will stop. For obvious reasons we do not want to identify to the market the areas where we will not be conducting proactive surveillance. However, with the lower level of resources, we have had to adjust our risk appetite from focusing on those areas that we have assessed as medium risk and higher to those better than medium-high risk. We will rely more on intelligence we get from misconduct reports and complaints we receive. We will limit our risk-based approach to focus on those entities or activities which actually have the greatest market impact, but where we do find someone has intentionally broken the law we will continue to do our best to basically enforce the law and make sure that the consequences are severe.

Some examples of the changes in our consumer cluster are the deposit takers, credit and insurance team. There will be reduced proactive surveillance. As a result, they will focus on activity by entities that have the greatest market impact at the expense of smaller entities that have a smaller customer basis. In our markets cluster we will be doing less proactive surveillance of debenture issuers and fewer document reviews, for example prospectuses. In our registry businesses there will be reduced levels of service to our registry customers and fewer process improvements such as online services.

On Commonwealth financial planning, I would like to correct some media misreporting that has occurred recently. On 16 May ASIC lodged a correcting statement with the current Senate inquiry into the performance of ASIC. We did so because some of our evidence to the inquiry on Commonwealth Financial Planning, or CFPL, both in our submissions and our answers to questions was incorrect. We advised the inquiry that $52 million in compensation was paid to CFPL clients. In fact, that $52 million was made up of $41.5 million paid to CFPL clients but another $10.5 million were to clients of the Commonwealth Bank owned financial planning firm Financial Wisdom Limited. We have advised the inquiry that ASIC had negotiated a robust process for compensating CFPL clients; however, and contrary to our earlier evidence, two important measures from the original compensation process were not applied to all affected customers of CFPL or Financial Wisdom. The two measures that were not consistently applied were (1) upfront communication with all clients whose files would be subject to review and (2) the offer of up to $5,000 to those clients to get independent advice on any compensation offered.

To address the inconsistent treatment of those customers we imposed, by agreement with the bank, license conditions on the AFSLs of Commonwealth Financial Planning and Financial Wisdom. These conditions, which are being finalised, will require both businesses to provide those two measures to customers who did not receive them and they will be overseen by an independent party who ASIC this time appoints, not the Commonwealth Bank. This will provide over 4,000 customers with the opportunity to reopen the question of compensation and, in doing so, have the benefit of $5,000 to obtain independent advice. I emphasise the inconsistency in methodology does not go to the quality of the file reviews or the adequacy of that compensation offered.

ASIC regrets that we gave incorrect evidence to the Senate inquiry and that the customers involved were potentially disadvantaged by the inconsistent treatment. We have sought to remedy the situation for the customers involved to the fullest extent through license conditions and not an EU. Clearly there were problems with the mediation process and confusion about what steps had to be taken with different groups of clients. ASIC was keen that the methodology originally agreed upon with the bank for compensating customers was applied consistently. The bank was aware of that. Despite the methodology, what has changed is the two ways I noted above and that the bank was not sufficiently upfront with ASIC in advising of its decision to change the methodology and this is clearly very disappointing. Despite this, it was ASIC's job to ensure the compensation process, both in methodology and implementation, worked effectively. In practice there was ambiguity in communications between ASIC, the bank and the independent monitor. As a result there were different interpretations of what was expected. We should have controlled the process more tightly so that the departure from the original methodology could not have happened.

So in conclusion, Mr Chairman, I reiterate ASIC's regret that we allowed the failings of the Commonwealth Bank's compensation process to occur and that our evidence to the committee was inaccurate. We are using our best endeavours, and we did so very promptly upon recognising the issue, to address the situation for the many customers of the bank and also the long-term improvements to achieve good outcomes for financial consumers in the future. We are now happy to take your questions.

Senator MARK BISHOP: Welcome, Mr Medcraft and officers of ASIC, to the session this morning. Mr Medcraft, I want to talk about Commonwealth Financial Planning. What is an enforceable undertaking—just for the record so that people who are listening understand?

Mr Kirk : An enforceable undertaking is an undertaking given by one of the entities we regulate to ASIC. There is provision for the giving of those undertakings in our legislation, so it is something set up by legislation, as a way of addressing problems in an entity. The terms of the undertaken will vary according to the circumstances. Often it will provide both for redress for past problems and also for changes into the future. Because it is set up under the legislation it forms a statutory contract. That contract, if breached, is potentially enforceable through the court.

Senator MARK BISHOP: Correct me if I am wrong: enforceable undertakings can be imposed unilaterally by ASIC or they can be imposed by ASIC after a process of negotiation with the relevant entity.

Mr Kirk : No, essentially they can only be imposed where an entity proffers the undertaking to ASIC. So it is not something that we can impose unilaterally. If they are not willing to offer an undertaking, then ASIC would have to adopt other measures, possibly taking the matter to court.

Mr Kell : On that point, it is a fairly standard policy for us in the enforcement space that we will only enter into an enforceable undertaking where we would otherwise go to court if it were not offered.

Senator MARK BISHOP: I understand, thank you for that. In the chairman's introductory remarks, he said, on page 6: 'We have sought to remedy this for the customers involved to the fullest extent possible through the licence conditions.' 'Through the licence conditions' is the operative phrase. What does that mean?

Mr Kirk : That means that the licence conditions, and they are currently being drafted, will require the bank to go back in relation to these two licensees—the conditions will be on the individual planning licences of the two licensees, Financial Wisdom and Commonwealth Financial Planning. Those conditions will require them to go back and take the steps that have not been taken to date, the two that the chairman mentioned: the up-front communication with anyone who did not get it and the offer of the $5,000 to whoever did not get it. Within that, all those people affected will be entitled to reopen the question of compensation, have their file re-reviewed and, if the review is not satisfactory from their point of view, take the matter on to the Financial Ombudsman Service. All of that will be provided for in the details of the licence conditions—that that has to be done.

Senator MARK BISHOP: Would you provide on notice to the committee a copy of that licence agreement or arrangement you enter into with Commonwealth Bank, in due course when it is concluded?

Mr Kirk : Yes, and I would note that that will be a public document in any event.

Senator MARK BISHOP: If you could make it available to the committee, that would be appreciated. Regarding the imposition of these particular conditions via the method of licence conditions on the arms of the Commonwealth Bank, is that a stronger way of achieving the purpose than via the route of negotiated and consent based enforceable undertakings?

Mr Kirk : Yes, from our point of view that is an escalation of the seriousness of our treatment of the matter. Licence conditions are something that we can impose unilaterally, although in this case the bank is consenting to them.

Mr Medcraft : And, if licence conditions are breached, it is a basis for removal of licence.

Senator MARK BISHOP: Of the parent organisation or of the arms?

Mr Medcraft : Of the arms.

Senator MARK BISHOP: Of the arms?

Mr Medcraft : As I understand it, yes.

Mr Price : Just one point quickly: while we can impose license conditions unilaterally, there are certain hearing and other natural justice rights that you need to go through.

Senator MARK BISHOP: Got that.

Mr Medcraft : But once they are imposed and agreed to, if they are breached then it is a basis for removal.

Senator MARK BISHOP: Understood. Understanding the process you are going through, can I now turn to the letter from ASIC on 29 February 2008—signed by a Mr Darren Williams, Director, Compliance, Financial Services—addressed to Mr Tim Gunning, General Manager, Wealth Management, Commonwealth Financial Planning Limited and Financial Wisdom Limited, and Mr Sean Graham, Head of Professional Standards, Commonwealth Financial Planning Limited and Financial Wisdom Limited. That letter was made available to the committee as I understand it sometime on or after 14 April, and I was made aware of its detail last evening.

Now the letter is some five pages plus a set of attachments under headings of annexure. I want to go through, firstly, the issue of the compliance framework because the letter from ASIC back in 2008 addresses the compliance framework of the Commonwealth Bank and you say:

the use of the risk matrix does not address whether representative's advice is compliant with all of your legislative obligations;

the number of representatives CBA has rated as Negligible or Low and subsequently revoked or cancelled the representative's authorisation is significant; and

representatives who have been rated Critical as a result of serious misconduct are not effectively addressed within the current framework.

So the compliance framework not adhered to; the number of representatives affected is significant; more importantly, representatives who have been rated critical—and for those who are listening, right at the top of the seriousness scale—are not effectively addressed within the current framework. Do you have any comment to make on why you wrote that letter and subsequent follow-up action to ensure the issues you identified have been remedied?

Mr Kirk : The origins of the work that led to that letter were very broad concerns about the quality of advice being provided across the board in the financial planning industry. We had done a number of shadow shopping exercises that identified that, generally speaking, and it was repeated from one exercise to another, about 20 per cent of the advice was of very poor quality or legally inappropriate.

Senator GALLACHER: What is shadow shopping?

Mr Kirk : That is where we engage real potential clients of financial planners and they would go to financial planners of their own choice, generally speaking, to get a financial plan. Then we had a panel, which was really made up of industry experts, that would look at the plans and do an assessment of the quality of them. Each time we did that we produced a public report setting out the results, and the results, to be frank, were very concerning because of the scale of the problem across the industry. It was not that we had isolated pockets of poor behaviour or anything; it was that there was an industry-wide problem of very poor quality advice. A lot of it associated—and this was again in the reports from those shadow shoppings—with problems of conflicts of interest.

Senator MARK BISHOP: Can you come back to my question, Mr Kirk?

Mr Kirk : So starting with that, I think the most recent report before that was in 2006. We had done an exercise; again discovered poor quality advice. ASIC was trying to work out how to address such a large scale problem and thought one way to make a big change quickly was to focus on some of the biggest entities in the marketplace. We ended up focusing on AMP, CFPL and PIS—three of the biggest licensees in terms of the number of representatives they had out there giving advice. All of those exercises found problems, all led to EUs and all led to significant changes. The ramifications of a lot of that are still going on.

As part of the Commonwealth Bank planning process, we did a more significant surveillance through a lot of 2007 in relation to advice they were providing—and that is what is reported on in this letter. Consistent with the general problems in the industry, there were problems with the quality of advice and also with some of the systems behind that. So in February 2008 we wrote that letter to them raising these concerns and demanding a response from them about what they were going to do correct this.

That is what led to the continuous improvement compliance program—which I think we have referred to in reasonable detail in our earlier submissions. It was a documented and independently reviewed program—not under an EU but agreed between us and them—that was going to address these concerns. That started in April 2008 and it was in that context that we got the whistle-blower's material in, I think, October 2008 and then made the subsequent decision, based on our experience with the CICP, that the existing program was not working adequately to address the scale of problems they had and we needed to put it onto a more formal enforcement style footing. That is when it became an investigation of Commonwealth financial planning and then let to the EU.

Mr Kell : For context, we set out in some detail in our first submission to the Senate inquiry—

Senator MARK BISHOP: We are much time limited here, Mr Kell. It is on the record. We understand that. I asked a specific question about the letter, the three issues, your discussions and the imposition of the CIC program. My question really was: up until a month ago, were you satisfied that the conditions that you extracted via this letter had been complied with?

Mr Kirk : No. The process we extracted by this letter was the initial continuous improvement compliance program. We eventually were not satisfied with that, and I think we said in our submission that we took too long to reach that realisation.

Senator MARK BISHOP: Hence you went to—

Mr Kirk : We were too slow to reach that level. We gave them too long with that process. But that then moved into the investigation and the enforceable undertaking. As we have been putting in our submissions, until the last month we were satisfied that the conditions of the enforceable undertaking had been met—both with respect to compensation but also the broader conditions around future change and changes to the business. But it has not changed in relation to that broader suite of things about changing the business going forward, but there are the two issues around the compensation.

Senator MARK BISHOP: As the chair referred to in his opening comments, there are two issues of such significance that licensed conditions are in the process of being redrafted and reimposed. So it is clear that the process from at least 2008 until early 2014 in terms of outcomes has been demonstrably inadequate; otherwise, you would not be imposing such stringent conditions.

Mr Medcraft : I think it is fair to say that the level of trust and confidence was misplaced by us.

Senator MARK BISHOP: I understand that. Can I go back to the letter. Paragraph (a) on page 2, says:

In their monitoring procedure, the compliance staff use a risk matrix, which compares representative's activity levels with their risk rating (which range from Negligible, Low, Moderate, High to Critical).

So 'critical' is the worst risk rating that can be applied to an adviser. The correspondence makes two points:

The CBA risk matrix categorises representatives with Negligible risk to CBA and its licence, as exhibiting the lowest level examples of misconduct, using benchmark examples—

And they are itemised there. You go on to say:

Notwithstanding the above definition, our review of advice given by representatives that were rated as Negligible identified significant issues that we would not consider negligible.

So, firstly, you challenge the identification of the risk level by the bank and say it is not sufficient, and then you go on to say:

As we have stated, we reviewed 496 examples of randomly selected advice during this Surveillance from 51 representatives.

You go on to conclude:

Given the above findings, we are concerned that the use of the risk matrix does not lead the CBA compliance team to consider whether the representative's advice is compliant with their legislative obligations under the Act.

Do you have any comment on that set of findings, firstly, back around 2008 and in the classification process and the misapplication of 'low' or 'negligible' in the current context?

Mr Kirk : In 2008, I think our conclusion was that their approach to monitoring the quality of the advice and their risk rating of it was inadequate and needed to change.

Senator MARK BISHOP: Fast forward.

Mr Kirk : We think, as a result of the work done under the enforceable undertaking, those processes have dramatically changed and dramatically improved. The independent monitor that looked at that, PricewaterhouseCoopers, has reported very significant change and much improvement in those processes.

Senator MARK BISHOP: Can you say to the committee now on public record that, with current employees, current practices and current sale of products by advisers within the relevant arms of the Commonwealth Bank, the classification of risk currently practised by the bank is 100 per cent correct and you have no fear that there are misapplications or failures or shortcomings? Can you give us that undertaking?

Mr Kirk : I cannot say that every licensee out there or any licensee out there is doing things 100 per cent correctly all of the time. There is no licensee about whom we do not have concerns and fears that maybe they are going to be doing the wrong thing, and that is why we do surveillance and monitoring to try and discover those issues. I can say that we consider, based on the material that we have looked at, particularly the reviews we have had by the independent monitor, that the situation has greatly improved and that, as a general matter, their approach is appropriate.

Senator MARK BISHOP: Let me ask the question in a slightly different way. If you go from 40 per cent compliance, for example, to 70 per cent compliance, that is a significant improvement. Whether it is an acceptable final result is a different matter. I accept that there has been improvement, I accept that the independent monitoring advice you are relying upon shows that to you and I understand what you have just said. However, my question is: in the context of compliance with the law and compliance with acceptable practices, is supervision adequate so that, if Mr and Mrs Jones walk in off the street with half a million dollars in their kick wanting advice on how it might be placed, are they getting, 97 times out of 100, correct, proper and appropriate advice these days?

Mr Kirk : It is very hard to put a percentage on it, but, again, based on the material we have had access to and the monitoring we have had done, they have appropriate and adequate procedures for monitoring the quality of the advice that their staff give. They have changed the remuneration so that the incentives push staff in the right direction in terms of quality of advice rather than in the wrong direction in terms of just increasing sales. We can go back and look for you, but certainly I am not aware that there is any indication from our more recent complaints history that there are significant problems there.

Senator MARK BISHOP: Your commentary, Mr Kirk, is not as reassuring as I would have hoped. If I place my car with the mechanic, I expect the job to be done properly not 97 per cent of the time but 100 per cent of the time. If I go to Myers, DJ's or a tailor to buy a suit, I expect the advice that is offered by the salesman, and the quality of the cloth and the quality of the cut, to be right 100 per cent of the time. No-one writes letters to me about cars or suits from Myers and David Jones. They do write letters to me and my colleagues about the quality of advice they still receive from the Commonwealth Bank. What I am hearing you say is that you think systems are correct, you think processes are proper, you think supervision is adequate. But you are not going to tell me everything is 100 per cent.

Mr Kirk : Those processes and systems have been looked at and independently tested probably more than those of any other licensee in the industry and they have come through that testing process. They have been independently found to be adequate and appropriate. That does not mean there are going to be people who get poor advice from time to time. That is why people can come and complain to ASIC and ASIC would investigate. That is why ASIC does surveillance and that is why the Financial Ombudsman Service is there so that people can get redress.

Senator MARK BISHOP: Maybe I will give you another reason. Maybe if they had paid $250 million in compensation and not $41 million or $52 million, then you might be able to sit there and tell me everything is 100 per cent kosher. Then you would be able to say it. Now you think so; under those circumstances you would know, because I can tell you now, from the CEO down to the most junior clerk, they would have fixed it if the penalty was $250 million and not $41 million.

Let us go on to paragraph (c) 'Addressing Serious Misconduct'.

CBA's policies denote Critical risk as the highest rating in the risk matrix and is intended to encompass serious representative misconduct which may include the following:

fraud and dishonest conduct;

clear mismatch of risk profile;

inappropriate product selection;

deliberate or reckless failure to address known needs and objectives;

consistent and deliberate or reckless failure to disclose fees, costs, charges, relationship and warnings;

no evidence of appropriate advice; and

remediation of more than $10,000.

You then go on to say:

We observed that of the 38 representatives who were rated Critical—

that is, guilty of some or all of those sins in the advice they gave to clients—

CBA revoked the authorisation of only 12 representatives.

So 38 were rated 'Critical' for those gross and scandalous behaviours and the CBA revoked the authorisation of only 12. Why did CBA not revoke the authorisations of the other 26?

Mr Kirk : I cannot tell you what their thinking was but from the outside their processes for reviewing things were inadequate and finding these things in the first place and their culture was wrong in terms of the behaviour they were seeking to encourage was overly focused on sales and volume and not on the quality of advice. That cultural issue, probably the biggest one of all, was another thing that needed to be addressed and was addressed through the enforceable undertaking.

Senator MARK BISHOP: I understand that, but my question wasn't, 'What were the problems and what was the cultural focus of the bank?' My problem is that, when all of the sins have been disclosed, identified, reviewed and assessed by ASIC and correspondence sent to them identifying these 38 miscreants, they only revoke the authorisation of 12. My question is: why were the other 26 still flogging financial products? What is the answer?

Mr Kirk : The bank had not revoked their authorisations.

Senator MARK BISHOP: Thank you, I understand that.

Mr Medcraft : I might take that on notice, because on that one I would like for us to come back you.

Senator MARK BISHOP: Make it pretty quick, if you don't mind—I do not mean that rudely.

Mr Medcraft : I personally would like to get a clear answer.

Senator MARK BISHOP: The next question then, is: you said to a three interesting things this morning, Mr Kirk. You said that the Commonwealth Bank's processes prior to 2006-07 were pretty bad, you did your surveillance, you did your investigation, you had negotiations, you imposed conditions, they accepted them and then it got to the stage that, notwithstanding their undertakings and the trust that ASIC had given to them, new licence conditions had to be imposed. You now tell me that 26 did not have their authorisations revoked because the Commonwealth Bank chose not to. Why did not ASIC sometime in 2010, 2011 or 2012 just go in there, kick the doors down, and tell them at a minimum that those 26 you forgot to revoke, we are now telling you to revoke them? Why didn't you do that?

Mr Kirk : Again, without going back and looking at each of the individual advisers, it may well be that, whilst they were rated as critical, that within the bank system that did not justify revocation; it was something that could be managed by means other than revocation, like very close management or taking the more front-line advice and putting them in another role. We would have to go back and look at each individual one. Similarly, in terms of anything that ASIC could do, in terms of banning individuals, whether for any of them there was enough evidence of wrongdoing to ban them, I cannot tell you.

Mr Medcraft : Again, Senator, we will come back with a fuller response.

CHAIR: I will allow a couple of minutes just to wrap up. We will move to some other senators. If we have got time, will come back.

Mr Medcraft : Will take that on notice.

Senator MARK BISHOP: I want to go now to one issue that has been troubling me for some time, Mr Medcraft, and it is this. We know Commonwealth Financial Planning has something in the order of 300,000 clients, give or take. We know that some of them have received really bad quality advice. We don't know exactly how many—it is somewhere above 1,100, perhaps 4,000, maybe 7,000. We can speculate that it is more than 7,000, but the figures I have seen in correspondence, the critical figures are the 1,100 that have received compo; the 4,000 that you have told them to review the files, as of a fortnight ago; and the 7,000 they have identified in their correspondence. There is maybe more, maybe less. What I want to know is this: in terms of the two impositions of a licence conditions, the original enforceable undertaking applied to clients of Mr Nguyen and clients of the other fellow—

Senator WILLIAMS: Mr Awkar

Mr Medcraft : Yes.

Senator MARK BISHOP: Mr Nguyen and Mr Awkar, clients of those, and when you go through the correspondence we have received, it is a section of those 1,100 who have gone through the process of compensation and received compensation. I want to know, in terms of the original enforceable undertaking and now the amended licence conditions that you are in the process of drafting and imposing, why the entire remediation process has not been and is not being applied to all clients of financial advisers identified as having been at least in the 'Critical' category—that is, the 50-odd? Secondly, why weren't the new licence conditions extended to apply to all clients of people who worked in the two sections with Mr Nguyen and Mr Awkar, their subordinates and their seniors who responded up the line? Why was not that remediation process in the last new licence condition extended to those two sets of clients?

Mr Kirk : Can I just clarify? The enforceable undertaking applied to the whole of the business of Commonwealth Financial Planning Limited. In terms of the process for working out the clients of which advisers were within the scope and needed to have final reviews, that was based on conduct identified by us, conduct identified by the bank and referred to us through brief reports and any other advisers they had about whom there had been client complaints.

Senator MARK BISHOP: Mr Kirk, that is not quite correct.

Mr Kirk : There was a broader range of advisers.

Senator MARK BISHOP: Mr Kirk, we have now received detailed correspondence from Commonwealth Bank—27 pages. I read it through on Monday or Tuesday, and that identifies the entire process of remediation and compensation, and it says who got what. It is clear, unless I have misunderstood that material, that it applied only to clients of Mr Nguyen and to the other fellow. My question still is: why then did it not at least extend to all the clients of those 50 advisers who had been classified as 'critical', and secondly, when the new licence conditions are being issued, why is it not applied to a much broader class of persons?

Mr Medcraft : Just to give fair response to your question, I think we should take it on notice.

Mr Kirk : It is the case. There may be some confusion—there was an initial compensation process called Project Harnett, which occurred before the enforceable undertaking. So it occurred through 2010 and into 2011, and the enforceable undertaking was entered into in November 2011. The Harnett process applied to clients of Mr Nguyen and Mr Orca. Then there was further remediation under the enforceable undertaking that was extended to a wider range of advisers within CFPL under the enforceable undertaking. In addition to that an undertaking was provided by the bank that was separate from the enforceable undertaking that was provided in October 2011. They undertook by letter that they would roll out the learnings and approaches from the enforceable undertaking within their business, as appropriate. One of the things they did roll out was that broader remediation policy, albeit reduced by the removal of the two items we have already talked about.

Senator MARK BISHOP: We will examine your response, Mr Kirk. All I can say to you—and I have no reason at all to suggest that it is not 100 per cent correct—is that the correspondence we received in response to questions we put to both the Commonwealth Bank and to ASIC arising out of Mr Medcraft's decision two Fridays ago, does not seem to me to be anywhere near as wide as you now suggest. It seems to be limited to the project Harnett and the identified people. So we will check that.

Mr Medcraft : I think what we should do is see that correspondence.

Mr Kirk : We certainly have not seen anything that the Commonwealth Bank has provided to you.

Mr Medcraft : Can we get a copy of that correspondence, and let's reconcile the two?

Senator MARK BISHOP: It is currently under the classification of 'confidential', and the committee is going to have a discussion about that in due course.

Mr Medcraft : I think it would be easier if we can see it.

Senator MARK BISHOP: But Mr Medcraft—this is really a question for the boss—why in the new licence conditions has it not been extended either to all of those 50 people and their clients, or to all clients as I identified related to the sections run by Mr Nguyen and the other fellow?

Mr Medcraft : Again, I think what we should do is come back to you. What we sought to do was, within the EU, where we identified there had not been consistent treatment, we sought to rectify what we had identified. But I will come back to you separately on that issue.

Senator WILLIAMS: Mr Kirk, this is a frustration. On 29 February 2008—and you do not have many 29 February, only one every four years—you are well aware of wrongdoings with Commonwealth Financial Planning. Well aware. You have gone through 51 files, and 38 are classified as 'critical'. Then in October 2008, you get the four-page fax from the ferrets, the whistleblowers. Then it is 16 months later that you act. This has been the whole frustration of this whole inquiry. What can you do in the future to see that you act faster? That is my major question in this whole inquiry and what I put to Mr Kell last year. If you had acted faster, the Commonwealth Bank would have cleaned their job up sooner, they would not be paying so much compensation, they would have their act in place and a lift of their game. You should have acted quicker when of those 496 files, those 51 planners you went through, 38 are classified as critical. They might have had 500 planners at the time, and on a ratio like that they would have been right across the board with the 38 out of 51, which is probably 70 per cent. That is really scary and this is my whole argument. Why didn't you act quicker?

Mr Kirk : Can I make two points? One is that, given the submissions we put to the inquiry and the questions we have answered, both on notice and in the hearings, I would have thought that it would have been clear by now that we did act in relation to it earlier. We put to you all along, through our submissions, that long before the whistleblowers came in, we had identified there were serious problems and we had put into place a process with the Commonwealth Bank. It was not that we sat there doing nothing. There was a large-scale process with independent monitoring put in place. Eventually we considered that that had not worked effectively.

Senator WILLIAMS: It was not good enough because Mr Morris, after sending you the fax—and I think you said that you had never read the fax—which said, 'Please act quickly,' or words to that effect. Sixteen months later he banged on your door and said, 'What are you doing?' He was working in the institution. This is clearly too slow to react on a very, very serious matter.

Mr Kell : We have acknowledged there were three broad learnings out of this in our submissions. The first is that we relied for too long on CFP's ability to fix its own problems, and that is the timing issue. We agree with that. It should have been faster, it should have been quicker, and we have put in a whole range of measures to ensure that we identify risks earlier so that we are in a position to be more proactive in terms of entering into enforceable undertakings or other matters. That is the first learning. The second is that we should have communicated more effectively with the whistleblower. The third issue is that we have taken a policy now of being more transparent in public about our actions when we take them, and that was one of the issues that, at the time, ASIC was not public enough. So those are the three broad learnings we are taking out of this. I can assure you that in all of those areas we are doing a lot of work and we have already put in place a lot of measures to make sure that going forward they will help ensure that we get those issues addressed much faster when we come across misconduct in the market, as we do.

Mr Medcraft : As I said before, unfortunately, our trust and confidence was misplaced.

Senator WILLIAMS: Speaking about trust, I am going to take you to one financial planner, Rollo Sheriff. I am just going to run you through his timeline. Please bear with me for a minute. In October 2004 the Financial Planning Association suspends Rollo Sheriff's accreditation for five months after it was found he gave inappropriate advice. In March 2005 Sheriff's suspension was over after it goes to arbitration. The CBA pays legal fees believed to be $380,000. In June 2007 Meridien Wealth becomes aware Sheriff is promoting the shares of an obscure mining company, Metals Australia, based in Western Australia, with operations in Namibia. Sheriff is told that it is in contravention of his responsibility as a financial planner. On 31 July 2007 Biodiesel is registered as a company and Sheriff buys a stake. In February 2008 Sheriff convinces clients of his at Meridien Wealth to invest in Biodiesel. In 2009 Financial Wisdom formally asks Meridien Wealth for financial data on Sheriff. Information indicated that Sheriff was near or close to bankruptcy. Financial Wisdom failed to take any action. In 2010 Sheriff stops working for Meridien Wealth. In February 2010 investigation into Sheriff's Meridien Wealth clients reveal that 18 were given advice in breach of the Financial Wisdom license standards. This is reported to Financial Wisdom. In March 2010 Sheriff formally steps down as the director of Meridien Wealth. On 18 March 2010, CBA files have a breached report and a letter to clients to Julie Fewster, Senior Manager of the Financial Adviser team at ASIC.

On 30 March 2010 Sheriff files for bankruptcy and is automatically banned as a planner by FPA, not ASIC. On 20 April 2011 Biodiesel holds a meeting where shareholders are told that Sheriff did not pay for 65,000 of his shares. It goes on. In May 2010 CBA conducts a total review of Sheriff. On 21 May 2010 Meridien Wealth write to clients informing them that Sheriff and David Walters have left and that Nick Dangerfield and Angelo Caltabiano have replaced them. In September 2011 an application to write-up Biodiesel is lodged. It goes on and on. On 24 November 2013 Joanna Burg, Senior Executive Leader of Financial Adviser Team emails Peter Kell with a summary of the reasons to withdraw from action and relation to Rollo Sheriff.

He has a history of wrong doing, of bad financial advice, and the only thing he gets when he is bankrupt is that the Financial Planning Association ban him. Why can someone do so much wrong over such a long period and then just walk away? What are you going to do to see that he never gets back into the financial planning industry? That is my question.

Mr Kell : Well, we did devote significant resources to investigate Mr Sheriff's conduct, including reviewing samples of advice, and that led to CBA reviewing all advice given by Mr Sheriff, then ultimately paying compensation, totalling more than $7 million, to 98 of his clients. Because our investigation did not ultimately lead to formal enforcement action, there is a limit to the specific details. One of the issues that we have to take into account is that Mr Sheriff left the industry at the beginning of 2010. Our banning power is primarily geared towards protecting the public. So absence from the industry is a relevant matter when considering banning action. We are monitoring as to whether Mr Sheriff re-enters, although as we have spoken before, we do have one limitation there and that is we do not have a complete register of advisors because we do not have a track on employee advisors.

Senator WILLIAMS: Hopefully that will be coming, Mr Kell.

Mr Kell : If that were changed, that would help us to ensure that we could monitor re-entry into the industry.

Senator WILLIAMS: What you are saying to me is: 'I've robbed a bank but because it is some time back, as long as I don’t keep robbing banks, I'm right.' To me that is not a good analogy.

Mr Medcraft : If he robs a bank, he has a criminal record, and at least we can keep a track of him. It is a big difference. With a criminal record, I can check it and see whether you have robbed a bank before. At the moment we cannot check whether you have robbed a bank or not.

Mr Kell : The other issue here, if I could just quickly comment, is that we do not have the luxury of looking at these issues in isolation. There will be 20, 30, or 40 matters in front of us that we are looking at, at any particular point in time. It is a target-rich environment, Senator. We do not have unlimited resources, and no regulator ever will be in that position. So, the relevant question is really: which other matter would you drop if you are going to take on this?

Senator WILLIAMS: Okay, if we can hold there as we are limited for time. I want to rush through some quick questions, quick answers. Clearly we need to set up a register of all financial planners. Clearly they need to be licensed, so that you have powers to act quickly. Mr Medcraft, how much does ASIC spend a year policing, if I can use that word, the financial planning industry? Roughly.

Mr Medcraft : Roughly it is about $33 million.

Senator WILLIAMS: How much do you collect from licence fees from financial planners a year? Roughly.

Mr Medcraft : It is around $3.3 million. Sorry $2.8 million.

Senator WILLIAMS: You spend in excess of $30 million policing the industry and you collect less than $3 million off the industry?

Mr Medcraft : Correct.

Senator WILLIAMS: I am sure Senator Cormann would be very interested in this. It should be a case of user pays, and we should have everyone licensed and they pay a fee each year. If their industry is not doing the right thing and you have to police them, that industry should be paying exactly for it.

Mr Medcraft : I think the user-pays funding model would actually provide economic incentives or a proper market price signal to drive regulatory outcomes that should be set by government—

Senator WILLIAMS: and resource your organisation.

Mr Medcraft : I think it is clear that our functions have grown over time. The revenue collected has become increasingly misaligned with the cost of regulating different sectors, and recovering it through a user-pays funding model through an outcome focused user-pays model can drive economic efficiencies and strengthen resilience.

Senator WILLIAMS: Does that happen in other countries around the world?

Mr Medcraft : Yes. Basically, a user-pays funding model is used in the United States, United Kingdom, Hong Kong, throughout Europe, Brazil—mostly throughout the world—because 1) it encourages good self-regulation, 2) it limits the overuse of resources of the regulator, 3) it creates greater visibility and cost accountability for the regulator, 4) it fosters opportunities to better target regulatory outcomes, 5) it has greater equity in who pays for regulatory activity where those who generate the need pay for it and 6) clearly it strengthens operational independence. We have done some work on that, and I am happy to outline that.

Senator WILLIAMS: Good. We are short of time, but I appreciate that. With the insolvency practitioners industry, likewise: how much does it cost you to oversee the liquidators and administrators in the year, roughly?

Mr Medcraft : At the moment, it costs us around $10 million.

Senator WILLIAMS: Okay. How much do you collect from registration fees from liquidators?

Mr Medcraft : About $40,000.

Senator WILLIAMS: It costs you $10 million to police the industry, and you collect $40,000?

Mr Medcraft : That is correct.

Senator WILLIAMS: Another call for licences there on an annual rate so they can pay their way. If they clean their industry up, obviously you can charge them less because you don't have to spend so many resources, so much time and so much money policing their industry.

Mr Medcraft : Basically, the outcomes the government wants from the sector are being achieved. There is no reason why a sector should have to pay more than it needs to for the cost of its regulation.

Senator WILLIAMS: Mr Kell, I commend you on your speech in relation to the 10-point plan put forward by the Financial Planning Association. I think it is outrageous that I could walk out of a shearing shed at 50 years old, worn out, do an eight-day crash course and become a financial planner advising someone where to invest their $2 million inheritance, life savings, proceeds of sale of asset or whatever. Surely the standards must be lifted. To become a financial planner, you must have education—surely a tertiary degree—and raising the bar surely will raise the quality of this industry.

Mr Kell : I do not want to comment on your personal circumstances! More generally, yes, ASIC is strongly supporting the improvement in the professionalism of the financial planning sector. We see a move to tertiary-level requirements as desirable down the track.

Senator WILLIAMS: Superannuation is such a huge industry. We are talking $1.8 trillion, and I think it is going to go to something like $3 trillion by 2030. It is a hell of a bucket of money, an unthinkable amount. You cannot fathom how much money.

I want to bring you to another issue: Justice Steven Rares's introductory remarks for the 2012 competition law conference. He says:

1. I suppose the Federal Court is really at the cutting edge of what this session’s topic foreshadows. I wanted to draw attention to one aspect of the enforcement of competition law from the perspective of the courts. … That concept has been ignored by the Treasury drafters of some of the nation’s most significant legislation. This includes the byzantine Taxation laws, the ever growing less and less intelligible Corporations Act and ASIC Act and, of course, the Competition and Consumer Act 2010.

…   …   …

2. We now find other bits of s 52 bizarrely cut up and strewn into the Corporations Act, the ASIC Act and the Australian Consumer Law with enormous definitions and provisions specifying each portion’s discrete roles in the various regulators’ arsenals. But this senseless waste of paper costs the community and the courts time and money. Why does it matter whether you are misleading or deceptive about a financial product or service, or a consumer transaction or a market dealing? Surely, if the standard to be obeyed is that persons in trade or commerce are not to engage in conduct that is misleading or deceptive, that is all that needs to be said in the legislation.

We now have judges saying the legislation is so complicated across all sorts of things like the ASIC Act and the Corporations Act that they do not know how to make a judgement. To work their way through the minefield is so costly and complicated. Is there a strong case here for simplifying these corporate laws?

Mr Medcraft : I think there is and I think that, frankly, it is an area where there are a lot of areas within the corporations law that are superfluous. It is something that we have highlighted. We think of it as a deregulatory initiative. There is opportunity. If you think about the theme of being smarter, I think there are opportunities to get better outcomes with essentially a rewrite of the law because a lot of it is very outdated. That includes penalties. Some of the penalties, frankly, are ridiculous and out of date. They are not even indexed to inflation; so, if the law has been around for 20 years, they are 20 years out of date. I think we need to have a fresh look in particular at penalties, because what we want is a system where those who intentionally break the law suffer severe consequences so they do not cross that line. That is really important. So I think it is a very good point. As you know, we have been focusing on deregulatory initiatives and have achieved our target for this year by June, so we are very focused on deregulation. Mr Price?

Mr Price : The only thing I would add is that there is a process underway within government at the moment to review what are called legislative instruments over a rolling period. There are already opportunities to revisit some of those older provisions or provisions that might not be needed and either redraft them if they do not meet current needs or, indeed, take some rules off the books.

Senator WILLIAMS: I think we are all for simplifying and removing red tape and costs. Mr Medcraft, I want to take you back to those fines, penalties et cetera. If a financial planner does the wrong thing and it leads to huge losses for someone in their superannuation, self-managed funds or whatever, how can those severe penalties be put in place? Is it up to the parliament to legislate them, or can they give ASIC as a corporate watchdog the power to impose your own penalties and set the severity of them? How does it work?

Mr Medcraft : I think the first thing is that, at the moment, our law does not really provide for compensation equivalent to the loss, and that is something most jurisdictions do provide. In fact, often they provide that there is compensation for the loss and then there is a penalty.

Senator WILLIAMS: So it is restitution plus a penalty.

Mr Medcraft : Correct. And most jurisdictions, interestingly, have a concept you have probably heard of: triple damages. Basically, if you do something bad and you gain $1 million, if I find you guilty then the actual penalty is three times the gain, or $3 million. That is what exists in most parts of the world. What is says is to think about whether to break the law and, if it is a million-dollar gain but the penalty is half a million dollars then many people will try to do the trade. Even if you lose, you are still making money. You have to think about human behaviour and have a system that deals with greed versus fear so it is not losing $1 million; it is losing $3 million.

Senator WILLIAMS: Greed versus fear is a very good analogy.

Mr Medcraft : You have to lift the fear to smother the greed. It is human nature. And remember: we are in finance. This is about money. It is important. It is also important to those who do the right thing to make sure that those who intentionally do the wrong thing suffer and are treated severely when they cross that line.

Senator WILLIAMS: Thanks.

Senator WHISH-WILSON: I will take up that point of penalty since we are discussing it. I understand from your response at last estimates that you were very disappointed with a $50,000 fine to John Gay, the ex-CEO of Gunns.

Mr Medcraft : I think the whole country was.

Senator WHISH-WILSON: I certainly know many people in my state of Tasmania were. You mentioned that you had referred this to the DPP. Can you give us an update on the status of that and what options there are in relation to what we have just been discussing with higher penalties? Clearly you are still seeking that or some sort of redress. Can you give us an idea of what they would theoretically be able to do?

Mr Medcraft : In relation to Mr Gay the DPP are pursuing a proceeds of crime action, and it is in front of the court on 12 June. So that is there. In relation to penalties we undertook a white paper, and what we found comparing penalties of other agencies in Australia and agencies like us around the world was that in criminal penalties we were reasonably consistent except for the United States, where basically you can go to jail for 20 years, but in civil penalties we were woefully inadequate compared to both our fellow regulators in Australia and regulators around the world. That is something that we have highlighted in our submission to the financial systems inquiry. As I said on the issue of penalties, triple damages should be something very important.

Senator WHISH-WILSON: In the case of Mr Gay, then, if he had made a profit on his share trade of half a million dollars—I think it was $800,000, but I stand to be clarified—then under the triple penalties he would be facing about $2.4 million.

Mr Medcraft : Correct.

Mr Price : One point I perhaps should note—and Ms Armour may want to comment further—is that I believe the provisions that Mr Gay faced when we took regulatory action have been amended since that time, and some of the penalties have been increased.

Senator WHISH-WILSON: If the court case were now, what would be the minimum fine?

Ms Armour : It is the greater of $750,000 or three times.

Mr Medcraft : Criminal.

Ms Armour : Criminal is 10 years, and the civil penalty is the greater of $750,000 or three times the benefit.

CHAIR: If the court case were held now or if the incident had occurred now?

Ms Armour : Action.

Mr Medcraft : Under the new law it would be triple damage. The new law really reflects where standards are, which is triple damages.

Senator WHISH-WILSON: Would that be the case even if the defendant pleaded guilty as in this case?

Ms Armour : If the action occurred under the new provisions, that would be the range of penalties.

Mr Price : We think these changes to the penalties are welcome from our point of view. It is perhaps a question of whether they might be looked at in a broader suite of areas beyond insider trading.

Mr Medcraft : Yes. The same concept really should apply across all the civil penalties where they break the law. It is pretty well consistent around the world.

Senator WHISH-WILSON: Thank you. In relation to the earlier questions from Senator Bishop and Senator Williams, I focus on what we have been looking at with Commonwealth Bank. Can you give us a rough estimate of what sort of resources and staff you have had to throw at this issue since it has come to public and community attention?

Mr Medcraft : I think we estimated that we have spent about $1 million in resources. We will take it on notice, but I think last time we discussed it it was roughly $1 million in resource cost. We will come back on it, but it has been substantial.

Senator WHISH-WILSON: What I am hearing today is that lessons have been learnt and you are changing the way you approach these problems, but at the same time—

Mr Medcraft : I think that, more importantly, the level of trust and confidence is an issue.

Senator WHISH-WILSON: With Commonwealth Bank specifically?

Mr Medcraft : Clearly. I think that when we deal with others we probably are going to be a hell of a lot more sceptical going forward. For example, accepting that somebody selects their own independent expert to check things—I think I am going to be much more reluctant if it is not us selecting our own independent expert. The level of trust and confidence, frankly, was misplaced.

Senator WHISH-WILSON: In terms of being proactive and the role you play with surveillance, it has occurred to me listening to all this this morning that you have funding cuts coming through that are going to make it more difficult for you to prosecute these types of cases, take preventive action and follow up with your resources. Where are the staffing cuts? Have you been able to work through where you are going to have to cut staff at ASIC?

Mr Medcraft : Yes. We have and we have done it on a risk based approach. As I said, we have had to adjust our risk appetite. In those areas in the financial system that we regulate, we basically go high, medium-high, medium and low risk. Previously, we were able to focus on those that were identified as medium risk or higher, with the focus of our business plans in terms of where we allocate resources. Now we have had to adjust our risk appetite to only those areas which are judged to be medium-high risk and higher. We are happy to share with the committee those areas that we regard as medium high and higher.

Senator WHISH-WILSON: I would certainly be very keen to look at that. I looked at your media release around the staffing cuts and you seem to be saying to the government, 'You'll get what you pay for.'

Mr Medcraft : And I have always said that. It depends on the level of resilience and that level of resilience translates into the level of risk that you are willing to accept—the risk appetite. Frankly, no system can completely eliminate risk. No matter how much you throw at it, there is always risk. So it is a matter of being able to calibrate that risk and then say, 'Right, we have an ASIC at 350 or 450 or 200.' At some point, the less money you have, the higher risk you have to accept. We have been very transparent about that.

Senator WHISH-WILSON: Certainly, if it is a target rich environment—and I think we have all learnt that—I hope that we can look at a funding model for you that will get you adequate resourcing.

Mr Medcraft : I think a user-pays funding model then provides a real incentive to those sectors. Frankly, with a positive incentive, those that self-regulate or co-regulate in good fashion and do not need our attention should not be paying for it. For those that we regard as high risk and are not achieving the outcome the government wants, either they do a better job and pay for that job or, basically, the resources have to come from the regulator. I think it provides a better market price signal.

Senator WHISH-WILSON: I like the word 'resilience' in dealing with risk. I have also heard you make comments publicly around the amendments for the FoFA reforms about changing culture in the financial services industry. Do you have concerns around the amendments that the government is considering and have you been involved in consultations on those amendments?

Mr Medcraft : I guess my overall comment, as it has been for several years, is that in the financial advice area—and it is actually one of the areas we regard as high risk—frankly, I think you cannot regulate a change in culture. My message to the advisers, and I have been very public about it, is that they need to focus on winning the confidence of Australians. I think a lot of that comes down to culture. The fact that only one in five Australians goes to see an adviser is, I think, very sad. If we think about superannuation, basically there is no guaranteed outcome in defined contribution superannuation, and most people actually need advice. I think there is a fabulous commercial opportunity there to say, 'One out of two Australians should be going to see a financial adviser because it's really important.' But that has to come about from a change in culture. I am sure that many advisers would agree with me that, as in any industry, you have elements that are creating a bad reputation for many others. I think that change in culture is so important. That is an overall comment. If we think about culture, it goes to corporate governance; it goes to everything in our system. If culture is not right, you have outcomes that are not appropriate.

Senator MARK BISHOP: Mr Medcraft, I want you to take this question on notice and give me a considered response. I know you appreciate the time. I have done hundreds of inquiries in my almost 20 years in this place. I did numerous inquiries for outside organisations before coming here on issues for which they wanted independent review and advice. I have never been in an inquiry, at the end, where I did not have the most clear view of the outcome. This is the only time it has ever happened in my time in public life.

I continue to be much troubled by this inquiry, because I am unclear as to what has occurred. I have noted Mr Kirk's comments today, going back to 2007 through to 2009 and 2010, where you had to constantly readdress the same issues. I have noted your comments about the lack of trust and how the lesson you have learnt is that you need to be much tougher and more proactive, for the benefit of clients in this industry. I continue to be troubled by the responses we have received from the Commonwealth Bank and others.

I would ask you to give me a considered, thoughtful response on why the new licence conditions you are about to impose cannot impose the following conditions: firstly, why the entire file history on all the clients of advisers who worked with, under or above those two characters—Mr Nguyen and the other man—cannot be reviewed and recommendations made by an independent expert, appointed by yourself; secondly, why all clients of advisers at any time classified as high risk or critical risk, by the Commonwealth Bank or other organisations, cannot have their entire file system similarly reviewed so that at least the people who have lobbied to have this inquiry can see that public justice has been delivered.

Mr Medcraft : I will come back to you.

Senator MARK BISHOP: Thank you, Mr Medcraft. Thank you, Chair, for that indulgence.

CHAIR: A three-minute question on notice! Thank you.

Senator WHISH-WILSON: I understand you cannot regulate a change in culture, but you can certainly help. One of the things we have seen in the FoFA inquiry so far is the impact of commissions and general advice. I will perhaps ask Mr Price around MIS schemes and all the problems we have seen with MIS schemes. Do you believe that if we are still able to, under our law, provide commissions for general advice we will see a resurgence in those types of financial-engineering products?

Mr Price : Without wanting to handball the issue, this might be one for Mr Kell or Mr Tanzer.

Mr Medcraft : One thing I will say is that financial advisers are a high-risk area. MIS are the equal high-risk area for ASIC.

Mr Tanzer : I have responsibility for investment management and superannuation within ASIC. The area of managed investment schemes has proven to be another area, as the chairman said, that we classify as one of our high-risk areas. That is for a number of reasons. There are problems with commission based selling of managed investment schemes, and at different times that has reared its head in much more substantial ways. It particularly has proven to be a problem with agriculture based managed-investment schemes, which may or may not have as much merit or as much financial viability as some other financial schemes. This is largely because the business of engaging in agricultural enterprises often involves much longer time frames and a series of uncertainties about whether or not the particular agricultural venture will produce either the crop or the price that one wants at the end.

Those sorts of things build in a degree of inherent uncertainty, but when it is exacerbated by high commissions paid to sales people and by people—the investors, in some cases—being attracted much more by the tax concession than necessarily a sober assessment of the investment, you find a combination of problems. That is really a significant part of the reason this has been an ongoing issue.

Senator WHISH-WILSON: I just thought I might use that as one example of the types of products that have come up in our discussions. Could you also give the committee a quick update? In the ASIC senate inquiry, I think you said you intended to respond in detail to the claims made by former employee James Wheeldon.

Mr Tanzer : Yes.

Senator WHISH-WILSON: Have you supplied to the—

Mr Tanzer : Yes, we have done that.

Mr Kell : Both as an individual submission and as a set of responses to questions on notice.

Senator WHISH-WILSON: I just wanted to get an update on whether you had provided that response; thank you.

CHAIR: Chairman, I notice you distributed a document. Is that the document you would like tabled?

Mr Medcraft : Yes, certainly. I thought that given the question on the user-pays funding model this outlines what we have been saying. Over time, we have really quite a—back when they formed ASIC, in '91 or '92, the corporation's revenue was pretty aligned with costs; therefore it was probably reasonable not to have the user-pays funding model. But what we have seen in the period since is that the expansion of activities of ASIC, frankly, has meant that there is a complete misalignment between its revenue and its cost. That is why I thought it was relevant to the question of Senator Williams.

CHAIR: I have a couple of questions about insider-trading laws, and I think that some of this has been traversed before. In late 2013 or early 2014 there was significant media attention given to the allegations of insider trading by two David Jones directors. It was alleged that the directors were aware of certain sales data and the highly conditional Myer proposal prior to the broader market, which once released had a very positive impact on the David Jones share price. My understanding is that ASIC investigated the two David Jones directors as well as the chairman, but ended up issuing a 'no further action' letter. Why did you do that and what does a no-further-action letter mean?

Mr Price : I am happy to answer that. Speaking simplistically, there are four things you need to establish the offence of insider trading. First, that the trader was in possession of the relevant information; secondly, that the information in question was not generally available, so it is tightly held or inside information; thirdly, that the information is material, and by that I mean that that piece of information, and that piece of information alone, would have an impact on the share price of the company; and finally, that the trader knew or ought to have known that the information was not generally available and was material.

In the case of the David Jones matter, we did conduct an investigation into that. We served compulsory notices and we gathered much material. As a result of our inquiries, it became apparent to us that we had difficulties in establishing two of the elements that I have just mentioned. The first element we felt we had real difficulties in establishing was around whether the information in question was material. When these questions of materiality arise—and they do commonly arise in insider-trading matters—typically, we will brief an external-market expert for their view on whether the relevant piece of information and that information alone would have an impact on the share price.

That is what we did in the David Jones matter. We briefed expert Mr Shapiro. Mr Shapiro has many decades of experience in the financial markets and has received several awards for his contribution to that industry. Mr Shapiro's view was that the information, on both counts that you mentioned, was not material.

CHAIR: So that it is why you decided to proceed with the no-further-action course.

Mr Price : Yes. And just for completeness, the other element of the offence we had concerns in establishing was whether the traders knew, or ought to have known that the information was not material. Indeed, some of the material that we obtained suggested to us that not only would we have difficulty in establishing that offence but also that some of the evidence suggested was very contrary to our case.

CHAIR: It was not the case. So what does a 'no further action' letter actually mean then?

Mr Price : A 'no further action' letter is not an exoneration and it is not a tick of approval. It is simply a letter that says that at a particular point in time we are not intending to pursue our inquiries any further. We always have the opportunity to reopen a matter if further evidence comes to light. Mr Kell makes a good point and that is that a 'no further action' letter does not bind third parties.

CHAIR: In response to concerns about the regulatory framework, the then Assistant Treasurer, Senator Sinodinos, announced that ASIC would convene a roundtable to explore how to more effectively implement the existing framework related to corporate governance. Can you give us an update on where that roundtable is at?

Mr Price : The roundtable has actually occurred. That roundtable focused on two key matters. One is areas around director share trading, as became an issue through the David Jones circumstances, and the other was around the handling of confidential company information. The basic themes or issues that were explored through that roundtable were: are the existing laws around director share trading and the guidance around director share trading sufficient? That is particularly of interest because, even if there is director share trading that is not illegal in the sense that it is not insider trading, it can still create a real perception of unfairness for other investors because they might feel directors have access to information, even if you cannot prove that that information is material, and there might be a concern that someone has more information than someone else. The conclusion of the people at that roundtable was that existing laws and guidance around director share trading were sufficient. There is quite a regulatory framework around director share trading. Director share trading that is insider trading or that somehow breaches continuous disclosure provisions is already a breach of the law. There is guidance on director share trading from the Australian Institute of Company Directors and from the Governance Institute of Australia. So there is quite a good framework there. Of course, there are the listing rules of the Australian Securities Exchange and the guidance they provide about director share trading as well.

There are a range of protections there, and I think it was a unanimous view of the people who attended that corporate governance roundtable—which included stock brokers, investor representatives and director representatives—that the existing regulatory framework was okay, but that probably there is a higher need to be aware of the issues around director share trading. What I would say to directors—and I know that they appreciate this already—is that directors do need to be very diligent in making decisions around when they should engage in share trading, thinking not only about what the legal rules are but also what the perceptions of the broader shareholder base might be.

CHAIR: So the roundtable process is finished?

Mr Price : The roundtable process is finished.

CHAIR: Have they reported?

Mr Price : They have reported and a report has been provided to the government.

Senator Cormann: It arrived on my desk yesterday.

CHAIR: Have you read it yet, Minister?

Senator Cormann: I had a read of it yesterday in the break.

CHAIR: Presumably, that largely reflects—without asking you to disclose what is in the report at this point—the view that was expressed at the roundtable?

Mr Price : Correct, it does.

Senator Cormann: I am very relaxed about that being discussed.

Mr Medcraft : I think it picks up some lessons, perhaps, on how we might strengthen the system.

Senator Cormann: Yes, the key is that obviously we want to make sure that the regulatory arrangements for preventing and prosecuting insider trading where it occurs need to be strong, to the extent that, when there are unintended consequences that inappropriately weaken the system as a whole, then they ought to be addressed. ASIC has formed some considered views in relation to this. They have just arrived with government now. I am looking forward to having some further discussions with ASIC to make sure that we have the best way forward.

CHAIR: I look forward to the government's response in due course and hearing more about it in this forum and others.

Mr Medcraft : I think what it is important is that we want great company directors. We have great company directors and we want to maintain that. We want to make sure that they do not feel inhibited. I think them owning shares in the company is a good thing. We want to make sure that if they do want to own shares, which is 'skin in the game' it is a good thing, and that there are no unintended consequences.

CHAIR: On a broadly similar matter, I asked some questions of the ABS last night about an insider trading matter. Can ASIC briefly set out the time line regarding this matter, how it became aware of it and the actions that were taken?

Mr Medcraft : We will ask Mr Savundra to answer, as he was very close to the case.

Mr Savundra : ASIC first became aware of this matter through a tip-off from a market participant late on 18 February.

CHAIR: Is it true that the market participant became aware through social media?

Mr Savundra : That is unclear, Senator. There has been a lot of misreporting in the media around who discovered it and the timing of the report to ASIC. I think there was a suggestion in the media that we were advised as early as September. I can confirm that the first we were advised of it was late on Tuesday, 18 February by a market participant. They were not the only market participant who provided us with a tip-off. There was more than one. We issued notices on that market participant on the 19th, and then on the morning of 20 February we involved the AFP. Again, the media seems to report that we referred the participant to the AFP. It was us who engaged the AFP, given it involved a Commonwealth officer. It was a slightly over 24 hours from when we received the report of misconduct, issued notices and involved the AFP.

CHAIR: The media reports suggested that, when the stockbroker who wished to report the suspect trades contacted ASIC, they were told by an ASIC official that he would need to ring another agency. That is incorrect?

Mr Savundra : That is incorrect. I have also spoken to that individual, the market participant, and he says that his view aligns with what I have just outlined to you, and also reports that he has been misreported.

CHAIR: It is important to correct the record on that.

Mr Medcraft : It is extremely important, actually.

CHAIR: Yes. Prior to this incident, has ASIC ever engaged with ABS to discuss the possibility of such an incident occurring?

Mr Savundra : Not that I am aware. I will take that on notice and just confirm that.

Mr Medcraft : I expect it sent a signal to many agencies.

CHAIR: I suspect it has. The ABS had a proud history of 100 years of operation, with nothing like this ever occurring, despite the clearly sensitive market information that it deals with. I think they were pretty upset that it had occurred.

Mr Medcraft : It means any agency that deals with sensitive economic information needs to be careful.

CHAIR: A final question on that. Have there been any ASIC discussions with the ABS as to how procedures might be improved or what lessons could be learnt from this in terms of minimising the risk of it happening again?

Mr Savundra : There has been. We have spoken with the head of the ABS in relation to the review that they are undertaking, and we have offered to provide any assistance or advice that they may wish to take up. We understand that they are undertaking an independent review themselves, but we remain available and have offered to assist in relation to the review.

CHAIR: A final set of questions is in relation to the scoping study on the potential sale of the business register—the registry function. As you are aware, the government has announced a scoping study into its future. Mr Medcraft, in February, you described the ASIC business registry as a 'technology business' and indicated that it was not a core business of a regulator. Is that still a fair characterisation of your position?

Mr Medcraft : It is a technology business, as I said earlier. It has great opportunity to be scaled up to create potentially a one-stop shop for business. I think you can extract efficiencies from it. There is great opportunities to extract and sell metadata from it. But, as I said, we have got roughly five million entries on it. That system is capable of handling 80 million to 90 million entries. Certainly, there are other agencies which have business registries both in the states and federally. I think there is great opportunity there in achieving those economies of scale with that technology and to make access to business simpler and more cost effective.

Mr Tanzer : When the business register was originally established, it was a very important part of the establishment of the national scheme to establish a national companies register, and over 20 years that has been developed and it is now a very fine functioning register. In fact, we still get complaints about aspects of the register; it is a very high-volume business. We have over two million companies. Only two years ago, we took on the registration of business names from the states and territories. Again, that has been done very successfully by ASIC. But it a very specialised business. It is technology driven and it is process driven. It needs its own type of attention and strategic view, frankly.

CHAIR: Presumably, it also needs its own skill set. I would imagine that there is a different in the skills that are needed to run a registry like that, as compared with the skills that are required for the core business of ASIC. Is that a fair characterisation?

Mr Tanzer : It is. The registry business is very customer focused. Much of ASIC's regulatory business—indeed, the structural change that we undertook over the last four to five years—has been to provide a much greater focus of our regulatory business on the regulated population. What are the emerging issues in that regulated population? Whereas in the registry business, which is fundamentally running a public register and extracting and processing information from ordinary Australians, that is very much a customer-focused business. That is why we run it.

CHAIR: I think Mr Medcraft might have previously told us that a sizable investment will be required to realise the full potential of the registry business and the data on that registry.

Mr Medcraft : Yes.

CHAIR: Is there a growing gap between the state of the technology that you currently have and the investment that is needed?

Mr Medcraft : Yes, I think it could be self funding. At the moment, the company register is not on the Siebel system. Currently, it sits on a system that is 25 years old. Moving it onto the Siebel system would actually allow us to be able to, for example, offer companies to be incorporated completely online. You could just go online on night and actually set up a company.

CHAIR: There would be a lot of productivity benefits for companies.

Mr Medcraft : Yes, can you imagine? If you want to set up a company tonight, you just go home and set it up online. It basically allows everything to be executed online. It also then has the metadata extracting becoming even more efficient in single registry. Basically, to actually upgrade the system to put the corporate register on, it would cost around $65 million over about three years. Essentially, we have demonstrated that actually the cash-flow that could actually be generated from that is well in excess of $65 million.

CHAIR: Why would it then be advantageous to put it into a separate ownership structure? Is it because other registry companies already have the Siebel systems and do not need to make that investment? What is the advantage of putting it outside of ASIC?

Mr Medcraft : Putting it into a separate entity makes it a focused company, which really just focuses on providing registry services. Frankly, that makes sense to me, because it is focused on that activity.

CHAIR: So regardless of the outcome of the scoping, you are saying that that should happen? There should be change to the registration structure?

Mr Medcraft : Exactly. It means that you have got this federal entity that is really focused on business and providing registry services and is basically a par excellence. Essentially, other agencies do not feel that it is an ASIC controlled thing. It is seen as being very efficient and scalable. That is the attraction. The more you put into it, the more metadata scope there is. There is more value added by making it bigger both in economies of scale and in the extraction of metadata from it. It has got a lot of economic benefits. I think having a focus on really providing registry services makes sense, frankly.

CHAIR: Are there comparable registers in the private sector in Australia? For example, would the share registry be like it?

Mr Medcraft : You have got a company sharer, which operates share registries, for example. Yes.

CHAIR: This is probably an opinion, but are you aware of any evidence that suggests that there would be investor interest in running such a registry?

Mr Medcraft : I think it is a bit early. At the moment, it costs $70 million per annum to run the registry. I guess it is a matter of just seeing what the market says. If you think about it, there are two elements of where there is value to be created. One is whether undertaking the service could be done for less than $70 million through the same system and, secondly, the real value there is the value of the metadata and what a private enterprise puts on the value of that metadata. Clearly, the metadata could be substantial.

CHAIR: Thank you for that.

Senator XENOPHON: Mr Medcraft, can I go to ASIC's media release of last week, 27 May, which included the release of Report 393 'Handling of confidential information: Briefings and unannounced corporate transactions'. In relation to the continuous disclosure applications, in your release on behalf of ASIC Mr Price said:

Australia's rigorous continuous disclosure regime, … ensures retail investors can be confident in the integrity of the market …

It goes on to say:

However, it's important for companies not to become complacent. They should address any perception—real or otherwise—about unfairness in access to market-sensitive information.

As a general principle in terms of an efficient market hypothesis, everyone should get the same information at the same time?

Mr Medcraft : Absolutely.

Mr Price : Material information, yes.

Senator XENOPHON: Explain this to me. You hear how a number of investor houses and analysts say: 'Come to us. Invest your money via us, because we get confidential briefings with companies.' That is their marketing ploy. You are nodding your head, Mr Price, and I hope I am not verballing you. You are aware that there are a number of people in the marketplace who say: 'Come to us, because we can give you better information and better analysis than others, and it includes briefings with corporations.'

Mr Price : Yes. The real question with these issues—and I alluded to it a little earlier—is whether or not the existing regulatory framework appears adequate to deal with these sorts of issues. When you are talking about confidential information, the two critical bits of the regulatory framework that govern that are, firstly, the rules around continuous disclosure and, secondly, the rules around insider trading. But, again, as I said before, there is a question that, even if certain information is not material,—that is, that that information would not have an impact on the share price of a company—there will always be people who have access to that non-material information, and they will use that.

Senator XENOPHON: Mr Price, can you help me out with this? In terms of the materiality aspect of it, is it material at the time that the information is provided, but it could also be information that could become material down the track, could it not? In other words, at what point of time does something become material? Some information may be provided on date A, but two weeks later another piece of information is provided which makes information provided on the earlier date material for the purpose of the market.

Mr Price : I would argue that the materiality should be judged at day A, and, if it becomes material on day B, then the company has an existing legal obligation to disclose that to the market immediately, when it becomes aware that that information is material.

Senator XENOPHON: This is what I do not understand in terms of some of the information provided to me. Would a company's claim of commercial-in-confidence briefings of investors override their statutory obligation of continuous disclosure?

Mr Price : No.

Senator XENOPHON: When a company says, 'We have commercial-in-confidence discussions with investors', should that information, whatever information is provided, be automatically provided to the market, whether it is material nor not? The fact that it is tagged as commercial-in-confidence—

Mr Price : No. You only need to disclose information to the market if that information is material because, if companies were disclosing every bit of information they had to the market, the whole system would grind to a halt.

Senator XENOPHON: I am not suggesting that. What I am saying is that companies say that they hold commercial-in-confidence briefings selectively with certain investors and certain investment houses. Should the fact that they do that of itself raise a red flag, and that information, whatever is discussed, should be made available to the public? By virtue of the fact that it is characterised as commercial-in-confidence, doesn't that in itself clash with the continuous disclosure obligations in the Corporations Act?

Mr Price : I am not sure it does. And on the broader issue of briefings—

Senator XENOPHON: Why not?

Mr Price : CAMAC, the government's law reform advisory body, did look at this issue in June 2009, and their point around selective briefings was that they were an important, and probably a necessary, part of the system in which we operate. Their feeling was that the existing regulatory framework around continuous disclosure and insider trading was sufficient, and in the Australian environment to make sure that there was not abuse.

Senator XENOPHON: If I am a mum and dad investor and I have my life savings put in certain stock, but I do not have access to those commercial-in-confidence briefings that others have, why shouldn't I know what a public company is telling an elite few?

Senator WHISH-WILSON: Can I give you an example, Senator Xenophon? Could I perhaps add to that?

Senator XENOPHON: I am happy for you to.

Senator WHISH-WILSON: I have travelled with CEOs before who have been to see their biggest clients, their biggest pension funds, and they want to use them as a sounding board for a change in strategy, because they are potentially looking at equity, capital-raising issues etc. They are not taken behind Chinese walls at that stage, but it is very clear that they are providing sensitive information to certain investors that mum and dad investors and others do not get access to. There is an example, perhaps, that you could answer.

Ms Armour : That is not sufficiently definite to be something that needs to be disclosed to the market. The fact is that the company is considering a range of options and is just testing waters on those sorts of things. There is a fine line. The company has to make a judgment. I do not think it actually helps market integrity for every potential thought bubble that someone has. There does have to be a balance in this.

Mr Price : Going back to the basic principle, the key question is: is the information material? The more indefinite the information is the less likely it is to be material, because it might happen or it might not happen.

Ms Armour : What we have said in our report is that these sorts of briefings are an area of risk for companies.

Mr Price : They certainly are.

Ms Armour : They really do need to be managed very carefully. Often the briefings are going into quite technical details that maybe many investors are not particularly interested in. They do not change the fundamental economics of the information that the companies put to the market.

Senator XENOPHON: But if it is commercial-in-confidence, how do you know what is been discussed? There does seem to be a two-tier level of information. It appears to go against the grain of the efficient market hypothesis that some investors get more information than other investors.

Mr Price : Yes.

Senator XENOPHON: You agree with that proposition, especially if it is commercial-in-confidence.

Mr Price : The fact that there is a two-tier level of information or availability of information can lead to a perception of unfairness.

Senator XENOPHON: Are you saying you will not do anything about that? A perception is not enough.

Mr Price : Legal issues aside, I think that is a very important thing for companies to consider. But, as I said, when you think about the overall regulatory framework and whether that is sufficient, the government's law reform advisory came back in June 2009 and their report Aspects of market integrity specifically looked at this issue and came to the conclusion that the existing regulatory framework was okay.

Senator XENOPHON: Maybe I should direct this to Mr Medcraft. There is a perception of unfairness, that there are commercial-in-confidence briefings of investors which other investors do not have access to. Why shouldn't that information be given generally to the market so there is not the perception of unfairness that Mr Price has referred to—when a public company says, 'We gave a particular investor a commercial-in-confidence briefing and we are not going to tell you what was contained in that.' Doesn’t that contain a perception that some materially sensitive information was provided that others in the marketplace do not have?

Mr Medcraft : There is a fine line here, isn’t there? The law says, basically, that if it materially price-sensitive information, it needs to be disclosed to everybody. If it is not material, then it is fine. If you are doing analyst briefings and sharing commercial-in-confidence information that you regard as non-material, then what we have said is that we are going to watch very carefully in relation to that information that you are providing. In a way, what we have said is that, if you are going to err, in terms of where you have crossed that line, you probably want to err in favour of actually sharing it with the whole public, not the other way around. If you think about the law being materially price-sensitive, that is the benchmark. We are saying, 'Don’t stray too close to that benchmark. If you go over it, then we will take action in respect of it.'

Senator XENOPHON: How do you determine materiality? My stumbling block is this: why should anyone have a commercial-in-confidence briefing that mum and dad investors do not get, and how do you determine materiality?

Mr Medcraft : I am sympathetic to what you are saying—

Senator XENOPHON: But how do you determine materiality?

Ms Armour : It is in the insider trading laws. In those briefings, if the research analysts obtain material information there is a legal test for that which we went through in answer to Senator Bushby's question about David Jones. The analysts are not entitled to disseminate any of that information. Investors are not entitled to trade once they receive that information. One of the actions that we are going to follow up on from our report—

Senator XENOPHON: Sorry, but why would they receive that information if they cannot deal with it? Why should they receive it?

Ms Armour : The assumption I think people are making is that if there is a one-on-one briefing necessarily material information must be being passed on.. What we found in our report and which I think some of the CAMAC material is saying is that that can happen and it is a danger area but actually they are set up so there can be a conversation between companies and their shareholders on an individual basis about the company's affairs where material information is not passed on.

Senator XENOPHON: Then why would there be a problem in issuing a memo saying, 'This is what we discussed,' so that there is no question—

Mr Price : As a matter of best practice I think that is something that companies should consider.

Senator XENOPHON: Is that something that ASIC is looking at?

Mr Price : There are various industry guidelines that promote that.

Senator XENOPHON: But it is not mandatory, though, is it?

Mr Price : No, it is not mandatory, but I think the sharp policy question is: what sort of regulation do you think is necessary to deal with the perception of a problem, and what cost would that put on business and communities?

Mr Medcraft : Senator, in response to your question, we support best practice. There is the issue of what is best practice and what is the law.

Ms Armour : We are having a follow-on surveillance program from the report on analyst briefings—

Senator XENOPHON: So would you agree, to quote Donald Rumsfeld, that right now, as you are not in those investor briefings, it is an unknown known?

Mr Medcraft : We are undertaking surveillance. We are going to maintain our proactiveness in this area. We are going to be out there participating in selected—

Ms Armour : We surveil the markets all the time. We do it every day in real time. We are looking at this all the time. But we have announced that we are having a very targeted focus on research analysts and why recommendations have changed.

Senator XENOPHON: I cannot wait until the next estimates in November, then.

Mr Medcraft : We have sent a message that this is an area we are going to be focused on. So we have sent a message and we have taken action. There will be some action coming out of—

Senator XENOPHON: I think your paper was terrific.

Mr Medcraft : Thank you. So we have recognised that is an issue and we agree with your point that it should be best practice. Let's face it, we saw with David Jones that it is not about necessarily just complying with the law; it is about—

Senator XENOPHON: It is perception.

Mr Medcraft : You are spot on. It is perception that counts, frankly. If you are a company, you want all your investors to trust that you are being fair to them. So I think perception goes above the law and is probably something any company would have to deal with.

Senator GALLACHER: I have listened with great interest to your evidence here this morning. One area that I want to touch on is self-managed superannuation. There are now over one million accounts with a $500 billion—and rising—level of investment. How many self-managed super fund auditors are there?

Mr Tanzer : ASIC became responsible for registering self-managed super fund auditors through the middle of last year. There are now just over 7,300 registered SMSF auditors.

Senator GALLACHER: Will you proactively scrutinise these auditors?

Mr Tanzer : The whole purpose of instituting the registration system was to raise competency in this area, so there were a number of measures that were put in place. Firstly, the registration system itself was not a requirement previously. In order to register, a person had to establish that they met particular qualifications and a certain number of audits of self-managed super funds. If they did not have that level of audit proficiency in terms of the number of audits they had done, they had to sit an exam. Those exams are rolling out as we speak. Through the process, the tax office estimated that there were 11,500 people who used to do SMSF audits and there are 7,300 now registered to do them. The failure rate of the exam process is about 20 per cent. You are allowed to sit it twice. The second time around, again, there is a failure rate of about 20 per cent. So we would say that both the drop in the number of registered auditors based on the number of audits that they are actually doing together with the exam results suggests that standards of competency are improving.

Senator GALLACHER: Are you proactively scrutinising this process, though?

Mr Tanzer : The whole registration process since it started has been a proactive approach of dealing with whether or not an auditor meets the high standard. In addition to that, we have regular engagement with the tax office over any compliance issues that might be raised in the audit reports that are filed with the tax office by self-managed super fund auditors. The tax office, under the arrangements as they currently exist, is responsible for investigating any such matters but then refers them to ASIC if disciplinary action needs to take place. There are some of those matters active at the moment.

Senator GALLACHER: What other activities does ASIC undertake in relation to self-managed super funds, given their exponential growth?

Mr Tanzer : There are a range of activities. I will touch on a couple. Perhaps the commissioner—

Senator GALLACHER: You could take that on notice. Send me the complete list but touch on a few of the important ones now.

Mr Tanzer : One of the key things we have been focused on is advertising, particularly advertising of the benefits or otherwise of SMSFs. Anything that exaggerates the benefits or understates the benefits of an SMSF, in particular the cost, we have been very active around. Together with the very serious compliance obligations that someone takes on when deciding to manage their own superannuation, we have been active in ensuring, to the extent that we can, that advisers who are advising that a person move from the regulated super fund sector into an SMSF give a very explicit warning that in doing so a person may lose the benefit of a backstop compensation scheme in the event of fraud or theft by the trustee. That is something we have been active about. The third area that we are particularly focusing on is property investment and potential one-stop shops where you may have an adviser or an accountant together with a link to perhaps a property developer providing advice for a person to set up a self-managed super fund and then invest those funds in the property.

Senator GALLACHER: Given that retail funds account for approximately 26 per cent of the $1.8 trillion, industry funds have 20 per cent and public sector funds have 16 per cent, can ASIC effectively carry out its functions in the self-managed super fund area in light of its budget cuts?

Mr Tanzer : Our responsibility with respect to the self-managed super funds, apart from the auditor registration that I just mentioned, is largely around the types of products that self-managed super funds invest in. That is a very important focus for us. We have identified superannuation and self-managed super as one of our high-risk areas. It is something that we are giving a lot of attention to. Certainly we can give you more information about the specifics of where—

Senator GALLACHER: But do the budget cuts that have been imposed upon you curtail your ability to look at this growth area—and it is an exponential growth area?

Mr Tanzer : Going back to the Chair's point a little bit earlier about the user pays model, one of the issues we have seen in the superannuation area is a little bit similar to some of the examples that were given earlier. The growth of the sector is not necessarily met by growth in ASIC's resources—that is certainly true. But we apply the same risk based approach to understanding where the risk areas are in this sector, particularly for self-managed super funds, because it is a growing desire of people to manage their own superannuation and because then they are responsible for making decisions about what investments they make, it is a high-risk area.

Senator GALLACHER: Just finally, the other sectors—retail, industry and public—are all governed by RSE licence holders?

Mr Tanzer : That is right. In that sector there is a dual regulatory arrangement. APRA is responsible for prudential regulation of those funds because they are public offer funds. There is no prudential regulation of self-managed super funds. There is only regulation at the tax office level on whether or not they are complying with things such as the sole purpose test. On the other side, at the ASIC end, is regulation of general financial sector financial products and services.

CHAIR: Thank you very much.

Proceedings suspended from 11:00 to 11:15

Senator RUSTON: I would like to ask some questions on behalf of Senator Eggleston, who is not able to be here because he is chairing another committee. Senator Eggleston asked me to ask these questions, so forgive me if I do not understand all of the detail. He wanted to raise a question in relation to questions at the estimates in February—in particular, question No. 29 in relation to the Commonwealth Bank takeover of BankWest. Apparently, the response to his question took six weeks longer than the deadline by which answers to questions on notice were due. He asked a question about whether there had been an ASIC review of the Commonwealth Bank takeover, and the written answer he got was basically no. He is wondering why it took so long to say no.

Mr Day : I can take that on notice. In terms of the answer no, if you want me to revisit the substantive question I am happy to do that.

Senator RUSTON: Thank you. I have got an article from The Australian on 6 August 2013. Senator Eggleston noted that this article, 'ASIC review CBA resort dispute', states that 'the corporate watchdog is making inquiries into property developer Rory O'Brien's $512 million unconscionable conduct claim against the Commonwealth Bank'. It goes on to quote Mr O'Brien as saying, 'I was contacted by an ASIC officer who said he wanted to review my evidence and the spokesperson confirmed that ASIC had obtained the affidavit but said at this stage there was no formal investigation because the commission was only reviewing the case'. Senator Eggleston drew the parallel between that and his question on notice—if there was no review, why are you referring to a review in a newspaper article?

Mr Day : We are happy to revisit the question and consider that article and whether there are any inconsistencies there and, if so, explain those. Can I just give you an overview of ASIC's considerations of BankWest?

Senator RUSTON: Sure.

Mr Day : We have received a certain number of issues and concerns that have been raised by various members of the public regarding the operation of BankWest and certain commercial loans. Some of those include Mr O'Brien. ASIC considers and gives a full assessment of every one that is brought to its attention. Some of that might require that we request certain further materials—in this case, affidavits that may have been lodged in commercial court cases and those sorts of things. We will consider those and see what issues there are for ASIC. The principal issue raised is that, potentially, small businesses were not in default of their payment obligations but that 'BankWest requested new asset valuations, resulting in businesses being in default and subsequent enforcement action effectively being threatened or taken'. There were also issues around the appointment of receivers and managers and some of their conduct. As far as we see it, there is insufficient evidence of a breach of the law there. In relation to these loans, our purview is limited to enforcing broad standards of conduct—certainly relating to misleading, deceptive or unconscionable conduct. I understand that there has been a further article in The Australian Financial Review in the last two weeks relating to Mr O'Brien's commercial dispute, which I understand has been resolved without final judgement in that matter. We understand the matter is in confidence between the parties—and we are not sure what happened about that. If other information is provided to us about BankWest, we are happy to consider that. All of those matters were given initial full consideration. We have no investigation on foot and we have not had an investigation on foot.

Senator RUSTON: You have just said there was insufficient basis to warrant an ASIC regulatory investigation. In reaching that conclusion did you seek any evidence or request anything from BankWest or the Commonwealth Bank?

Mr Day : I would have to take that on notice.

Senator RUSTON: Did ASIC seek evidence relating to the relevant basal ratios and provisions for the Commonwealth Bank and BankWest during the takeover?

Mr Day : My understanding is no; we did not see that as necessary.

Senator RUSTON: I will put the rest of Senator Eggleston's questions on notice.

Senator DASTYARI: Mr Medcraft, I want to be clear about what you have said earlier today. We referred to the cuts to ASIC in addition to the across-the-board efficiency dividend. The point you have made today—and I want you to explain and clarify this—is that, to make the savings that the budget demands of you, you are not talking about back-end operations; you are saying that you are reprioritising mainly in the surveillance area and this is now fundamentally affecting the delivery of services by ASIC. Is that correct?

Mr Medcraft : We are basically adjusting our discretionary activities, and proactive surveillance is a discretionary activity. We are doing it on a risk based approach; we have had to adjust our risk appetite. So those areas we regard as medium risk we will no longer pursue, and those that are medium-high and high are the ones we are focused on.

Senator DASTYARI: So, if these savings are implemented, you cannot guarantee that you will be conducting the same level of surveillance and investigation?

Mr Medcraft : No, not the same level. Basically, as I have said before, you have to choose the level of resilience that you want, and the amount of funding that you provide determines the level of resilience you get. So, within that, you calibrate the risk accordingly. So yes, the answer is that we will not undertake the same level of proactive surveillance that we did previously, and we will have to be more careful in selecting those matters which we do pursue.

Senator DASTYARI: Senator Whish-Wilson said earlier that this is a rich environment, that there are obviously lots of people out there. You do surveillance for a reason. With these cuts, don't you we the risk that more people will be able to get away with what we commonly call white-collar crime?

Mr Medcraft : At the end of the day, what it means is that, where people see white-collar crime occurring, it becomes more important than ever that they report it to us. If people are intentionally committing crime, and we regard it to be of an appropriate level of seriousness, we will pursue it. So, rather than us going out and finding the committing of white-collar crime, we have to rely more on Australians letting us know where they see it. The system relies on those who are gatekeepers reporting where they see misconduct. That is a requirement of the law, anyway. Outside of that, we rely on individuals who see poor behaviour letting us know about it.

Senator DASTYARI: You do surveillance for a reason; and, obviously, it is fruitful. This is a function you do for a reason. As a result of these cuts, we are going to be catching fewer people.

Mr Medcraft : As I said, it means the level of resilience that we have is lower, because the appetite for risk is higher because of the level of resources that we have. If you look at our Charter of Proactive Surveillance which, under my chairmanship, we now make public—

Senator DASTYARI: Someone said earlier they were going to make this public today. Could you table that?

Mr Medcraft : It is in our annual report, but I am happy to table it. I think it does make for interesting reading.

Senator DASTYARI: And part of that will be cut?

Mr Medcraft : Yes. What you will see in that report next year in terms of proactive surveillance is that some of the numbers will move out. Let's take funds managers, for example. At the moment, we get around to the top 25 every two years; but that might change and push out to every three years. We get around to be the top 20 financial advisers on average every year, but we never get around to the remaining 3½ thousand—it is basically reactive; so, again, that number will push out. It basically means the frequency will decline in terms of proactive surveillance because the resources are less. That is in the annual report that I have just circulated.

Senator DASTYARI: How do you reconcile that? I am sure you spend more time with the Economics Committee than most people in this room spend with their partners.

Mr Medcraft : I spend more time in Canberra!

Senator DASTYARI: You come here and you get media report after media report. Understandably, everybody's grievance is the biggest issue; for the people who are affected, it is the most significant thing in their lives. We are talking about individual cases—

Mr Medcraft : We touch most Australians with what we do.

Senator DASTYARI: How do you reconcile that, and the pressures that are on you, with a funding cut?

Mr Medcraft : At the end of the day, our mandate remains the same: we want investors to be confident and informed when they participate in the system.

Senator DASTYARI: That does not help confidence though.

Mr Medcraft : The first thing is that we need to make sure individuals take responsibility for themselves; we are not going to be on every corner. It is really important that Australians do take responsibility for themselves in terms of accessing financial education. What we do in education becomes even more important. Millions of people access MoneySmart, so that becomes important. Looking to hold gatekeepers to account continues to be important. Most importantly, as I said, at the end of the day, I will say to people: be careful; we are not on every corner; we try to offer a level of protection, or resilience, and that is the choice you have with the level of resources that we offer. So my warning is that people need to be careful and take responsibility for themselves. Personal responsibility becomes very important.

Senator DASTYARI: The case you have put to this committee in the past—and you did it earlier today—is that, with the cuts you are facing, there is a model of cost-recovery which would involve a user-pay systems. You have spoken to us about that. I take it you have presented that to government.

Mr Medcraft : We submitted it to the Commission of Audit and to the financial system inquiry, and it is actually what was recommended for ASIC by the Wallis inquiry 20 years ago. The corporations fees 20 years ago basically did a line to the cost of ASIC, but that is now not the case. We are not sending the right price signals to industry. So I think there is a very good case, consistent with every major jurisdiction in the world, to think about a user-pays model.

Senator DASTYARI: And a user-pays system would allow you to have the resources that you have without placing an extra additional burden on the budget. That is a separate debate we will obviously have.

Mr Medcraft : Most importantly, it puts pressure on those sectors that do not do a good job to actually lift their game. I think we will get a better outcome without spending more money because the pressure is back on those who generate the need for the use of ASIC's resources. It is changing the dynamic and it allows government to determine the outcome in the sectors that they want. Rather than saying to ASIC, 'Here's a lump of money, do your best, 'this actually turns the equation around and government can say, 'This is the outcome we want in this sector, and either industry achieves that outcome or ASIC will pursue the sector to achieve that outcome.' So I think it is outcome focused, where government can determine the level of resilience it wants in the sector.

Senator DASTYARI: That makes such sense. I do not understand why the government would not embrace that model rather than cut your funding. Are you going to tell me that is a matter for government?

Senator WHISH-WILSON: I would like to get a clarification. Did the Commission of Audit recommend the levy as well?

Mr Medcraft : We did put it to them.

Senator WHISH-WILSON: So the Commission of Audit did not recommend it?

Mr Medcraft : It did not recommend it.

Senator DASTYARI: No taxes on business!

Senator WHISH-WILSON: Did you get feedback on why not?

Mr Tanzer : Not specifically with respect to ASIC, but it made comments about broadening that type of funding approach for government services.

Mr Medcraft : But it is really important that, if the system of user-pays funding that we are suggesting is introduced, it is granular enough that, if the sector involved does a good job, they can see the benefit of that investment in good compliance. So it is really important that it is sufficiently granular that they can see the benefit. It has got to allow a market price signal to come into play. That is really important.

Senator WILLIAMS: During the break, I spoke to a friend of mine who is a financial planner. He said he has no problem with the licence fee. But his problem is that it is costing him $26,000 a year in compliance costs. He said that, if that goes up more, they are going to price themselves out of the market. If they are going to be changed, with licence fees et cetera, surely we must look at the compliance cost. One in five Australians is getting financial advice; if they price themselves out of the market, that is going to drop even more. So surely it must be looked at as a compliance cost of running the financial planner's business.

Mr Medcraft : One of the things we have been looking at is deregulatory undertakings to try and lift the load on business of the cost of regulation.

Senator WILLIAMS: That would be good.

Mr Medcraft : We have a target set for this year and basically we have achieved that already. We are making some other recommendations—for example, in reviewing disclosure. We think that, frankly, if nobody reads it, then we have got to rethink how we approach disclosure. So I think there are significant opportunities to get better outcomes and reduce the cost of compliance.

Senator WILLIAMS: He just had a bloke who invested $20,000, and he had to charge him a fee of $1,000 because of the $600 compliance cost to put it together. So perhaps that is something to look at.

Mr Medcraft : I think we have got to look at how we can be smarter at achieving outcomes.

Senator WILLIAMS: Exactly—and put the licence in place.

Mr Medcraft : Particularly with things like online, I think there are great opportunities.

Senator WILLIAMS: We have got to do it cautiously and carefully and get it right.

Mr Medcraft : Agreed.

CHAIR: I thank you for assisting us today.