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Economics Legislation Committee
Australian Securities and Investments Commission

Australian Securities and Investments Commission

CHAIR: I welcome officers from ASIC.

Senator SHERRY: Good to see you again—a different perspective—

Senator Arbib: More relaxed.

Senator SHERRY: I am sure you are aware that there is a raft of reforms that are under consideration by the—

Senator Arbib: Sorry, Senator, I think Mr Medcraft would like to give a statement before we start.

CHAIR: Sorry, Mr Medcraft.

Mr Medcraft : Thank you Mr Chairman. I would like to make a short statement to update the committee on our work at ASIC.

CHAIR: Make it short Mr Medcraft. We are very pushed for time.

Mr Medcraft : I will. With me today is Deputy Chairman Belinda Gibson, Commissioner Peter Kell and other leaders. First of all, I really just want to outline how we are delivering against our strategic framework—

CHAIR: Mr Medcraft, I am pressed for time for questions, so I would appreciate it if you paid attention to that.

Mr Medcraft : I think the opening statement—

Senator SHERRY: Can I suggest, if you have a written statement—which I suspect you do—is it in table form?

Mr Medcraft : Yes, we can table it.

Senator SHERRY: Give it to the secretary. No disrespect, but—

Mr Medcraft : No, that is fine. It was really just addressing some of the things that I thought might come up as questions.

Senator SHERRY: If we have it in front of us—they will copy it and we will get it in five minutes—we can adjust our questions.

Mr Medcraft : Let's do that. That is fine.

Senator SHERRY: I just have questions in two areas. I am sure you are aware that there is a raft of reforms that are under consideration by parliamentary committees due to go through the parliament, whatever the final form—FOFA, better super et cetera; there is a whole raft of reforms. Has ASIC considered what the implications are for it, as an organisation, in oversighting some of those reforms? Some of them are in the APRA remit. Has ASIC considered—as the supervisor in part of the financial services space—how to apply the proposed new law and regulation? I do not want lot lots of detail, but where are you up to in considering how to apply the new law and regulations?

Mr Medcraft : Specifically in relation to things like FOFA—

Senator SHERRY: Yes, let's deal with FOFA specifically, which is clearly predominantly in your remit.

Mr Medcraft : I will actually ask Peter Kell who looks over that area to comment on that.

Mr Kell : I will kick off and then hand to my colleague, John Price. ASIC has flagged that we will be issuing guidance on how we administer the law following the FOFA changes, in four areas to begin with: scaled advice, the best interest duty, conflicted remuneration and ASIC's modified licensing and banning powers. We are already undertaking extensive consultation with the industry about the sorts of issues that are going to play out when we administer the new laws and the sorts of things we need to give them guidance on. We see that the reforms will give us the ability to more effectively take on some of the problems in the financial advisory sector and thereby raise confidence and improve the quality of advice. Our new powers in particular give us the ability to more easily prevent potentially problematic advisers from entering the industry and enable us to more effectively remove those advisers. We think that is going to improve our ability to raise standards. Those are already some of the issues we are approaching. I am not sure whether that addresses the sorts of issues you mentioned.

Senator SHERRY: I know it is hard to be firm on time frames, but approximately how long would it take from the passage of the legislation before you issue guidance notes? Obviously, industry will be looking for some further detail about how you oversight.

Mr Kell : That will depend in some part on the ultimate timing of the passage of the legislation, which we do not control.

Senator SHERRY: Yes, I understand.

Mr Kell : We have commenced on consultation with a wide range of participants in the industry, both individual firms and industry associations. We would like to get draft guidance out, give industry an opportunity to respond to that draft guidance and give us feedback on how we are proposing to approach the administration of the law. That is obviously something we want to be able to spend some time on, And then we will issue final guidance after that. I do not think we have a firm time frame in mind.

Senator SHERRY: It would be within some months?

Mr Kell : That is exactly it: some months.

Senator SHERRY: Do you have any information on the number of financial planners that are actually practising at the present time, who are licensed directly or indirectly? Are we seeing a significant contraction in financial planner numbers? Is it roughly stable? What is the current factual position?

Mr Kell : If you are talking licensees—in particular licensees with personal financial product advice authorisation—the numbers have been fairly steady. We have seen a very modest increase over time in the last few years. That trend seems to be continuing. There were around 3,200 in 2007 and up to about 3,330 in 2011. That is the trend we are seeing. We are not anticipating any great change.

Senator SHERRY: Despite the GFC and arguably greater pressure on planners, and despite technology changes in delivery of advice—and there are new technologies that presumably make it easier—we are not seeing any decline in financial planner numbers as yet.

Mr Kell : I should emphasise that ASIC does not ultimately regulate employment numbers.

Senator SHERRY: I do not suggest that you would; I am just interested in your licensing perspective.

Mr Kell : You are right, that period that I have mentioned does cover the GFC, which was obviously a difficult time for the industry. But we are seeing that trend still either steady or rising slightly over time.

Senator SHERRY: Perhaps you could take this on notice, because I have run out of time. You have completed a shadow-shopping exercise. I saw a reference in the media to at least some of the outcome. What is the time frame for the public release of that?

Secondly, could I submit—and I have done this on a number of other occasions—there is a lot of focus on financial planners, and I understand why. However, there is one group—namely, accountants—who are the gatekeepers to self-managed super funds who effectively give 'tax' advice on which I understand there has been no shadow shopping exercise ever carried out. So we focus on planners, but we have a segment of advice—albeit claimed to be tax advice—on entry to a self-managed super fund, which is a very large sector, for which I understand there has been no comprehensive shadow shopping exercise ever done.

Mr Kell : That is correct in terms of the accountants' role as advisers. Obviously we do a lot of work with accountants in respect of some of their other roles, but that is not what you are focusing on here. We do not have any plans for a specific shadow shop focusing on accountants right now, but we certainly are aware of the sort of issue that you are raising. Accountants do get picked up, if you like, in our other surveillance in shadow shops, and the sector is part of our advice surveillance programs. But, in terms of more significant shadow shop, that is something that I do think we will need to think about.

CHAIR: Thank you, Mr Kell. Senator Cormann.

Mr Kell : I am sorry, just to very briefly address the first question about timing—

CHAIR: No, we have passed on.

Senator CORMANN: ASIC released a report in September 2011 called the Review of financial adviceindustry practice. In that, you reviewed the top 20 licensees in 2010 based on practices in 2008 and 2009. Is this correct?

Mr Kell : Yes, the top 20. We have now commenced a survey of the next 30 largest.

Senator CORMANN: But the report, which I have here, has the top 20 in 2010 based on practices in 2008 and 2009. Is that right?

Mr Kell : Yes.

Senator CORMANN: In that report ASIC made a number of observations and recommendations, but did not actually identify any issues with the quality of advice plans made. Is that right?

Mr Kell : That report did highlight some issues that we wanted licensees to address and issues that needed to be improved in the industry, including more effectively managing conflicts of interest, the need for more robust compliance systems, the improvement of complaints handling and compensation arrangements. So there were a range of issues that we identified in that report that we have been speaking to some individual firms about and we will continue to do so.

Senator CORMANN: Sure. In any audit there are always issues, but I have to say I have read this report and, if anything, that is actually a very positive assessment of the state of those top 20 financial advice licensees. I have looked at many audits in my previous life and that is not a bad audit.

Mr Kell : I am not sure that ASIC would say that we are satisfied with the quality of advice that came through in that audit, but we want to work positively with the industry to identify the sorts of issues that come through.

Senator CORMANN: Let us just look at the figures. What percentage of remuneration received by licensees in 2008 or 2009 related to shelf space fees, referral fees, marketing fees or soft dollar payments?

Mr Kell : I do not have that figure. I do not have the report in front of me.

Senator CORMANN: If I said to you it is less than one per cent each, would that sound right?

Mr Kell : I think taking that on notice would be more appropriate.

Senator CORMANN: So, prior to the late 2011 shadow shop of financial advice, is it true to say that the last time ASIC conducted a shadow shopper review of financial advice was six years ago?

Mr Kell : That is correct. It was some time ago. The main reason there was a gap was because we thought it would not be particularly productive to carry out a shadow shop in the middle of the GFC.

Senator CORMANN: You recently revealed some highly preliminary shadow shopper results at a parliamentary inquiry. Did the industry have an opportunity to comment on the preliminary results of that review?

Mr Kell : No. We do not provide industry with an opportunity to comment on those headline results prior to releasing them. What we have found, however, is that industry participants are very keen to engage with ASIC to find out the nature of the results—which we will again be releasing soon, next month—and to learn where the opportunities are to improve or address some of the issues that we have raised.

Senator CORMANN: Would you have released these headline results six years ago without having first gone through a process with the industry?

Mr Kell : We certainly released the full results without—

Senator CORMANN: Were they released after consultation?

Mr Kell : We do not undertake extensive consultation with the industry about the results prior to releasing the results. We have conversations with industry participants who, for example, are members of our expert panel that we incorporate into our shadow-shopping projects, but the release of the results is something that ASIC does as a matter of course through its own timetable.

Senator CORMANN: If I can summarise what you are saying: in the past you have released the full results after they were properly scrutinised by your expert panel, which included relevant industry representation, but at this time you chose to release headline data which had not been scrutinised by the expert panel, which includes—

Mr Kell : I should clarify the role of the expert panel. It is not to scrutinise the overall data. The role of the expert panel—and it is a role that we value highly—is to help assess particular plans or pieces of advice, especially where there is some concern within ASIC as to whether it might fall into one category or another. So the role of the expert panel is not to check the data but to provide input into the value of the plan that is being offered to the consumer.

Senator CORMANN: Does ASIC see its role as administering regulations, or does it see its role as being an active participant in policy debates?

Mr Medcraft : Perhaps I should answer that Senator. Shadow shop was something we undertook—

Senator CORMANN: I did not ask a question about shadow shop. I just asked a question about whether you see your role as administering the regulatory framework—at being the regulator—or whether you see your role as being an active participant in policy debates.

Senator Arbib: Mr Medcraft was just starting to answer—

Senator CORMANN: No, he was talking about shadow shop. I did not ask a single question—

Senator Arbib: I was attempting to answer, Senator. Can you please give me—

Senator CORMANN: I was not asking a question about shadow shop.

Senator Arbib: Give him the time to answer the question.

Senator CORMANN: I have 10 minutes. As long as we are clear I am not asking about the shadow shop. I asked a question about policy debates versus administering regulations.

Mr Medcraft : Our focus at ASIC is on our framework, which is making sure that investors are confident and informed, that markets are fair and efficient, and that registering and licensing is efficient and fair. We use the tools at our disposal. Our role, and it is one of those tools, is to provide policy advice to government in the areas of our expertise. That is often what we do; that is our role. Policy is a matter for government and our role is to advise government in relation to policy.

Senator CORMANN: Advice to government is something I understand quite well. Just a couple of quick questions. ASIC is now rolling out the cost recovery in relation to market supervision. That will cost $22 million over the 18 months to 30 June 2013. Is that right?

Ms Gibson : Correct.

Senator CORMANN: What are your plans for cost recovery in terms of market supervision in the period post 1 July 2013?

Ms Gibson : I believe those would be in the papers that are in the forward budget estimates. I believe that that would roll out over a period of recovery for us purchasing and installing smart technology and for providing services. That is incorporated in the budget papers going forward. I cannot tell you the exact numbers year after year, but next year it is up slightly and then it would—

Senator CORMANN: It is $22 million over the next 18 months. What will it be per year after that?

Ms Gibson : I cannot tell you offhand. I will have to take that on notice.

Senator CORMANN: With the 90 or so market participants, how are you actually determining who pays how much? What is the basis for it?

Ms Gibson : The regulations set out the percentage. The two operating markets bear a proportion—about 14 per cent of the total—and the market participants bear the balance and that is calculated, in some respects, by reference to the number of trades and, in some respects, by the number of orders.

Senator CORMANN: The number of formal market participants is reducing, partly due to market conditions and partly due to higher costs, including market supervision costs. That is the advice I am getting from key stakeholder groups. How is it going to work? If there is a reducing number of market participants, is the share for everyone going to go up or is it going to be a matter of going beyond the current net of market participants, looking at others whose clients deal in listed equities?

Ms Gibson : The regulations impose the payment obligation on the two licensed operators, as I said, and on those who are market participants. Those market participants can choose to pass on those fees if they wish. The amount that is to be charged is divided up pro rata to those parties in accordance with the number of either the trades or the orders they have, depending on the cost components.

Senator CORMANN: Can you explain to me the best execution rule and how that will impact, in the context of Chi-X now operating, on the requirements of stockbrokers? How will that play out? As I understand it, the best execution rule will mean that stock brokers will have to be able to offer either ASX or Chi-X listed securities, even though there is immediate arbitrage, which means that there is not going to be any sort of circumstance in practice where they would be able to offer better conditions.

Ms Gibson : The theory is that that should happen—the arbitrage—but part of the trading is to bring that arbitrage about. For retail investors, the best execution is taken as the best price available on the market, and people providing retail brokers have at least another six or perhaps 12 months to comply with best execution in that instance—that is, they have to get a connection to Chi-X. At the moment, the retail brokers do not need a connection to Chi-X, but they will need to get one with the laws introduced. For those who are not providing retail or for those whose clients are not retail, they will tell their clients and have an arrangement with their clients as to what best execution may mean in their context, and that can be a function of price, time of sale and so on. That will be negotiated. They will need to provide best execution on both markets also.

Senator CORMANN: The best execution for retail clients is on price. It is a very theoretical concept, isn't it? You get the big companies that have got very involved software to make sure they can capture this miniscule price differential in order to get an additional bit of benefit and because of big volumes. Aren't the additional costs that are enforced on people effectively forced to be able to offer both Chi-X and ASX? Aren't they going to far outweigh the benefits of being able to chase that last little bit of price differential?

Ms Gibson : At the present time that should follow and we need to track and make sure that, in fact, the arbitrage we postulate would happen on both markets in fact happens. But it does not necessarily follow that it is only a moment of time apart in the bigger stocks. I am aware of that concern about connectivity. We expect that the cost of connectivity will come down very significantly as things emerge, particularly through the smart order routers. So we will need to look at that cost of connectivity.

Senator CORMANN: Even stockbrokers who are servicing retail clients will not be able to compete with the price benefit that can be taken by high-frequency or algorithmic traders. What is the benefit for clients of your average stockbroker servicing retail clients that is going to incur additional costs by being connected to both ASX and Chi-X without actually being able to deliver a better benefit, just in order to satisfy a theoretical best execution rule, which in practice will not deliver a better outcome?

Ms Gibson : I do not think there are any brokers that just have retail clients executing small orders. There are a number of retail clients who are placing very large orders. But we will, and we have said this to the stockbrokers association, look at how the market evolves in this transitional period to see how the cost outcome works with the need to provide best execution. But our view would be that the world over there is best execution particularly for retail and particularly in these markets so that it is going to be difficult to say, 'Well, actually it isn't necessary.' If trade-ex gets no traction perhaps that will be so, but that seems unlikely at the present time.

Senator CORMANN: I am running out of time and so this is my final question. It is unrelated to that. Is there a formal type of relationship between ASIC and Choice? Is there any contractual arrangement? Are there any service contracts between ASIC and Choice?

Mr Medcraft : Not that I am aware of. I am not aware of any as such.

Senator CORMANN: I will put the questions on the ASIC deterrence team staff cutbacks on notice.

CHAIR: Thank you, Senator Cormann. We will go to Senator Bushby.

Senator BUSHBY: I thank ASIC for assisting us this evening. It is always fun to come out at this time of night!

Mr Medcraft : It is always a pleasure. That is why I bought us stress balls!

Senator BUSHBY: I will start with a few brief questions regarding some recent changes to Australia Post transaction fees. Is ASIC aware that for business credit accounts Australia Post, as of 1 August 2011, charges a $100 annual processing fee for payments made by cheque? Is that an issue that has been raised for ASIC to consider?

Mr Day : Not to my knowledge, but if you like we could take that on notice.

Senator BUSHBY: If you are a business and you seek to pay your Australia Post bill by cheque, even if you just do it once, you will get charged a $100 fee. It is a one-off fee per year. It is an annual fee. You can continuing paying for the rest of the year.

Mr Medcraft : So you pay a flat fee—

Senator BUSHBY: Yes, it is a flat fee of $100.

Mr Day : I am not aware, but we will take it on notice and see if it has been raised with ASIC.

Mr Medcraft : We will take it on notice and come back on it.

Senator BUSHBY: Yes, if you would take it on notice because I would be interested in knowing—if you do have a look at it—whether you consider that $100 fee—even if you just did one cheque—is excessive and whether it meets ASIC regulations and guidelines as to Australia Post costings et cetera.

Mr Medcraft : We will have a look at it.

Senator BUSHBY: I note, Mr Medcraft, that you were reported in the Australian Financial Review on 9 December as making some comments regarding the impact of cuts to ASIC's budget. Are you aware of that reporting?

Mr Medcraft : Yes.

Senator BUSHBY: Are the comments attributed to you accurate?

Mr Medcraft : I would expect so, yes.

Senator BUSHBY: This is without going through them all.

Senator Arbib: Which article is it?

Senator BUSHBY: It is in the Australian Financial Review of 9 December 2011, on page 5. It is headed 'ASIC fearful of budget cuts'. It says, for example:

The ASIC chairman warned that the decision—

to cut up to $8 million from the corporate regulator's budget this year—

would carry real risks at a time when the workload was increasing and the prospect of white-collar crime was on the rise.

There are other similar comments.

Mr Medcraft : Yes, we have the article here.

Senator BUSHBY: And the comments attributed to you are accurate?

Mr Medcraft : Yes.

Senator BUSHBY: I am aware that your budget has already been cut to $348 million from $381 million the previous year. I am also aware that the amount of money that you have raised—and I think I have raised this at estimates before—far exceeds the cost of running ASIC. Looking at it now, I think you raised $622 million. Given that you are now down to $348 million or less, are you getting close to raising double what it costs you to run it?

How is this most recent increase in the efficiency dividend, from 1.5 to 4 per cent, going to impact on ASIC's operations? Will you be able to guarantee, not only to the government, but to the Australian people, that you will be able to deliver the level of service that you are charged with delivering—that you should be delivering?

Mr Medcraft : I think I have said before that the matter of how much funding is provided to ASIC is a matter for government. Our objective is to look at the outcomes which we have set for the Australian people and to take the resources we have to try and make sure that we, if you like, leverage those resources to achieve the outcomes we are looking to achieve. In relation to that article, it is important for the community to understand—we have been very transparent, much more transparent than in the past, in showing in our annual report what staff are allocated to particular areas, so that the mandate we have in specific sectors and the leverage in those sectors are clearly understood.

You can have an ASIC at $250 million, $350 million, $450 million—

Senator BUSHBY: But you get what you pay for.

Mr Medcraft : and that is a matter for government. It does come back to: what level of resilience do you want in the financial system. Our job is to focus on those outcomes and, basically, to leverage the resources we have to achieve those outcomes as well as we can with the resources we have, including the powers we have as well as the financial resources.

Senator BUSHBY: Have the outcomes that ASIC is being charged with delivering increased or reduced in recent years?

Mr Medcraft : The outcomes we have are consistent. As you well know, the perimeter we have to regulate has grown over the last few years, with the taking over of market supervision and credit, and we are about to take over business names. So our perimeter has risen. At the same time, within our existing perimeter, there are probably three things that are very important looking forward to the next decade. There is the growth in superannuation, which is expected to grow at seven or eight per cent per annum over the next decade or so—it will outstrip the growth of the economy—and now superannuation invests in equity and invest in debt, so it really affects all of the things we regulate. Another very important factor is that the GFC has really changed the equation in that regulators can no long afford to be reactive. We have learnt that we have to be proactive. One important thing that means is that we need to have cops on the street rather than having them back in the police station.

Senator BUSHBY: Presumably, it means that it is easier to do that if you are better resourced than if you are less well resourced.

Mr Medcraft : Being proactive is something—I think you are well aware, that I have been very focused on surveillance and getting cops on the beat a lot more. The third and continuing aspect is complexity. Complexity is growing: financial product complexity, what we see with things like contracts for difference, synthetics et cetera, is growing and market complexity, with high-frequency trading and all-go trading. They are the issues that in the next decade will test resilience.

Senator BUSHBY: The challenges are not getting any smaller.

Mr Medcraft : No, but I like a challenge.

Senator Arbib: I would just note, Senator Bushby: I understand the point you are making, but I want to make sure it is on the record that Mr Abbott has in place efficiency dividend cuts as well—

Senator BUSHBY: I understand that.

Senator Arbib: planned for the public sector, including a two per cent cut into the future. It is important to note that efficiency dividends need to be made to ensure that budgets get into the black.

Senator BUSHBY: But not all areas of government raise almost twice as much as it gets to run.

Senator Arbib: So you are saying that under your efficiency dividend ASIC will not be part of that. Is that the policy of the Liberal Party?

Senator BUSHBY: I am not saying anything. I am trying to explore the level of—Mr Medcraft used the word resilience. I was going to put to him a question about the degree of balancing of risk in managing these areas. Presumably, Mr Medcraft, there is a point, when managing a portfolio like yours, at which the resources get so small that the risk increases that you are not going to be able to catch all the mischief or deal with all things you are supposed to be dealing with. I am just asking whether at some point that risk would increase if the resources became too small.

Mr Medcraft : As you said, you pay for what you get. If you know our strategic framework, our approach is very risk based. We look at systemic risk and thematic risk—so we are very risk based. A big driver in the way we allocate resources is risk based. At the moment the very important thing in regulation, if you are proactive, is the frequency and the intensity of surveillance. For example, at the moment we visit each RE on average once every seven years, and that is with our resources what we currently allocate. Another example is advisers. I think at the moment we get around them once every 31 years.

Senator BUSHBY: You have to balance and manage that risk.

Mr Medcraft : Exactly. You can dial it up or dial it down. You have to live within your resources.

Senator Arbib: I hope you pass that back to Mr Abbott. There are 12,000 jobs, a two-year freeze and $3.8 billion being taken out.

Senator BUSHBY: The other point that I have raised here with Mr Medcraft, and possibly his predecessor, is the desirability of having the corporate regulator independent of the annual budgetary processes, for quite different fiscal reasons but for the value that that actually delivers. That is something that is hard to deliver, given that it is an arm of Taxation at the moment. The next subject is super fund adverts. I asked some questions which I think in the end you took on notice at the last estimates. These are in relation to the super industry fund adverts like those where they run figures on poker machine reels which manage to produce fantastic results for those in some funds but not in others, and which predict to the dollar an outcome 30 to 40 years in the future. They are running on Sky TV. There is even a huge billboard that faces people coming to and from Canberra at the airport. If Holden were to advertise that its vehicle range was able to produce an economy of, say, six litres per hundred kilometres and that this was superior to Ford's economy, using figures of 12.8 litres for a V8 Ford Bronco, that would not be a fair comparison; that would be misleading. Would that be a fair comment?

Mr Medcraft : I will ask Mr Kell if he would like to answer your question.

Senator Arbib: If he can—it is a hypothetical question.

Mr Kell : I am not sure I can give you a clear answer on that.

Senator BUSHBY: Let me give you some examples that I think you have actually dealt with.

Mr Medcraft : He can comment on the ISN. He has been dealing with this issue.

Senator BUSHBY: RG156.11 notes that an advertisement for a debenture should not state that the product is, or compares favourably to, a bank deposit because they are different products. That was a finding by ASIC. This seems to me to be a similar situation. From what you have just said, Mr Kell is in a position to comment further on this to that which was in the questions on notice.

Mr Kell : That is essentially correct about the particular matter. We do not provide comment on specific operational matters. But, as to your wider comment on the issue of comparisons, that is something we are focusing on at present more generally in our examination of financial services ads. You may have seen that earlier this week we released our guide on financial services and financial advisory advertising. That issue of appropriate comparisons is front and centre. We are monitoring the market. If we see ads that we think need attention, we will be engaging with the organisations—we are engaging with the organisations—behind them, but our policy is not to comment on particular matters.

Senator BUSHBY: You say you are engaging with the organisations behind the ads. Does that suggest that you have seen ads that you think warrant further investigation?

Mr Kell : We have regularly seen ads since July 2010 that we have taken action over. We have seen almost 120 advertisements across the financial services sector being withdrawn or remedied in response to ASIC's concerns. So it is part and parcel of our regular activities.

Senator BUSHBY: On another subject matter—I might have asked questions on this in the past; I just want to explore the issue again—does ASIC maintain a conflict-of-interest register for its commissioners and staff.

Ms Gibson : I do not know if we have commenced a register, as such. Commissioners are obliged, under the ASIC Act to make declarations of interest to the minister, and we do so each six months. There is another provision of that act that says that if there is a conflict on a matter, we will declare that. There is a proposition that we declare interests at commission meetings. ASIC staff are obliged, by the APS code of conduct to make disclosures. I am not sure whether there is a formal register as such, but the executives maintain the records for their staff.

Senator WATERS: Is ASIC aware of media reports alleging that customers of Bankwest are being treated unfairly by its new owner, the Commonwealth Bank?

Mr Medcraft : Not right now, Senator. I can take that on notice.

Senator WATERS: It has been claimed that the Commonwealth has unfairly done all sorts of things, including revalued assets, changed loan-to-valuation ratios and pushed customers into receivership with more than necessary haste. The claimed motive is that under an agreement at the time of the takeover the Commonwealth Bank would be compensated for customers that go into receivership by a certain date. Those are the claims. Is this a matter that ASIC would investigate?

Mr Medcraft : I will take that on notice and I will come back.

Senator WATERS: You are not able to tell me if that would fit your—

Mr Medcraft : I would like to find out about whether it is something that has come to our attention.

Senator WATERS: The question is: is this something that you would investigate? Are you already? Are you planning to?

Ms Gibson : We would investigate unconscionable conduct. That is within our remit. We certainly do that sort of thing.

Senator WATERS: You would determine whether it fits within that—

Mr Day : May I ask, Senator: are you referring to a loan arrangement between individuals and the bank or small business and the bank? That was not quite clear.

Senator WATERS: All customers.

Senator WILLIAMS: Hoteliers, developers, small businesspeople; I have a list of about 50.

Mr Medcraft : We will have a look at it and respond, on notice.

Senator WATERS: Those are all the questions I have. I told you I would be quick!

CHAIR: You were indeed.

Senator CAMERON: Mr Medcraft, I know that you are fairly new to the job but I am just wondering if ASIC has had a look at these private equity takeovers that have been around in the past. Are there any lessons to be learned from it? For instance, the Qantas private equity takeover that was mooted some time ago would, I think, in hindsight, have been an absolute disaster for the airline. Given that we had a board prepared to recommend that this take place and leverage the company up into huge debt—and though the chief executive walks away with riches beyond most people's belief—what are the lessons for corporate behaviour in that type of situation?

Mr Price : Specifically in relation to the proposed bid by Allco to take over Qantas, I would note that ASIC did have a role in that. We were asked to provide various facilitations to allow that takeover to occur. As I recall, the bid closed and ASIC was asked to re-place the bid on foot. It refused to do so and in the end the particular transaction did not proceed. It is important to remember that with these transactions ASIC often has a role and will be asked to facilitate a particular approach. Whenever we are asked to perform that facilitation role, we basically adopt a cost-benefit analysis, which is: what is the commercial benefit that would flow from facilitating the transaction compared to the regulatory detriment if we were to facilitate that transaction? That is well-established ASIC policy; it is stated publicly; it is available on our website.

Apart from the important lesson of very carefully weighing up that commercial benefit against regulatory detriment, the comment that I would make is to be very clear around the disclosure that is provided to people about these transactions. I appreciate that while disclosure is important it may not cure all ills, but certainly for shareholders and other interested parties it is very important that people fully understand what the implications of a particular transaction proceeding are.

Ms Gibson : In a private equity scenario as you project, we have a role in the takeover itself. We are very interested in the market disclosure concerning the takeover and, with private equity now the notion of a bear hug, we want to make sure that the market becomes informed about proposed bids in a timely manner. Where private equity is raising funds, we are very concerned about the disclosure about the raising of funds, particularly where that is by public funds. At that point the question of leverage of the purchasing vehicle and that disclosure is of great interest to us.

Senator CAMERON: What particular lessons are there? Are there any warning flags going up about, say, the role of the executives who stand to make huge amounts of windfall profit from recommending and participating in the private equity bid? How do you avoid conflict of interest?

Ms Gibson : The takeovers panel has a great deal of guidance about that very question. Where management are involved in buyouts of that nature, disclosure is critical. To understand the quantum and the conflict it is very important to make sure that other bidders get the same information that management might have when management is hooked up with one. The general proposition to payment out is set by the act and set by the listing rules. As you would know, there have been some recent amendments to the act as to determination payments and as to approval of remuneration. ASIC is monitoring those.

Senator CAMERON: What about a situation like TPG Newbridge Myer, where TPG Newbridge buy Myer for $300 million, sell it for $1.8 billion then use some offshore tax havens, including the Cayman Islands, Luxembourg, the Netherlands and the US? What lessons have you learned from that?

Ms Gibson : Where the payments are sourced and where they are routed through is a matter more for the Taxation Office than ASIC in that instance. As long as we are satisfied that the corporate entities are making appropriate disclosures—

Senator CAMERON: Is that good enough? Here we have a company, TPG, taking over a well-established Australian company, clearing out the bank balance and then sending it offshore.

Ms Gibson : I cannot talk about the specifics of any particular entity in this instance. As we touched on earlier, we have to regulate using the laws we have. We do not have a wider remit.

Senator CAMERON: Do you need any more changes to deal with either the private equity issue that arose at Qantas or TPG? Do you need any more legislative tools?

Ms Gibson : That is a very overarching question. Without looking at either of those two I could not say. There are a number of other agencies—

Senator CAMERON: Would you like to have a look at them and take it on notice?

Ms Gibson : which have remits that I really do not want to encroach on.

Senator Arbib: The question has been answered. We are moving into policy issues.

CHAIR: That concludes that session. We now go to Senator Williams.

Senator WILLIAMS: Thanks, Chair. Welcome to the House of Representatives. I first start with the secured notes declaration. I think that it is a very good thing and I commend you for that. We realise that they are secured. I have just one concern, Mr Medcraft, about the advertising. The secured note products are clearly different to the old debenture style unsecured products, but they still have to advertise, saying, 'You may lose some or all of your money.' If you invest in a private company that has secured notes, they have real assets for security, such as farms and commercial buildings. Surely those properties that they take security on are never going to be worth nothing. You might lose some of your money but you would never lose all of your money unless all of those assets went down to zero.

Mr Medcraft : You are talking to an ex-banker, Senator.

Senator WILLIAMS: But these are secured. Is that an issue that you would look at in the future for advertising?

Mr Medcraft : Perhaps I will ask Commissioner Gibson.

Senator WILLIAMS: Ms Gibson?

Ms Gibson : You were very keen to have us look at that question of secured notes and the issue of advertising. We had quite a considerable amount of discussion with both the debenture issuer industry and with the retail investor. The concern ASIC has is that a number of people do believe that it affects some of these debentures as they are like bank deposits. We found from the collapse of so many in the industries in the past—ACR—

Senator WILLIAMS: The cowboys, yes.

Ms Gibson : A lot of money was lost and a lot of people were surprised. We thought that short summary was there. We can look again perhaps in a few years and see how it is working out. At the moment we are looking pretty closely at that sector.

Senator WILLIAMS: But they were unsecured, of course. Those debentures companies got the money in, had their own commercial developments et cetera—a different kettle of fish to these secured lenders who have real security. I will just ask you to address that, because we are short of time.

Ms Gibson : Sure.

Senator WILLIAMS: Ms Gibson, you put a media release out after the jailing of Stuart Ariff. ASIC Deputy Chairman, Belinda Gibson, said:

ASIC’s decision to pursue criminal charges against Mr Ariff is a clear demonstration of our commitment to deterring misconduct by gatekeepers including insolvency practitioners.

This is all very good and I am glad of the decision, but I want to bring you to the point that the first complaint about Stuart Ariff went to ASIC in 2005. It was reported in August 2008 that ASIC had commenced proceedings against Mr Ariff. I have no doubt that raid did a lot more damage to a lot of other people in those three years. I just hope that in that process you have learned from that and you can act quicker next time if we happen to have a rogue come along. That is the only point I wish to make to you on that issue. The final decision was good, but that did not return any money to those people who lost their life's earnings.

Ms Gibson : Would you like me to respond to that, Senator?

Senator WILLIAMS: No, it was more a comment. Mr Medcraft, I want to take you to section 420A of the Corporations Act, which basically says that, when assets are sold off from companies, they must be sold at or around market value. Are you familiar with that section? Is someone here familiar? Mr Brown?

Mr Brown : Yes.

Senator WILLIAMS: If I had an asset valued at $2 million and it was sold for $500,000, would that be a breach of that section? Who draws the line and where?

Mr Brown : It depends on the other circumstances surrounding the sale. As I understand it, and I am only a bush lawyer, the section requires the receiver to obtain a reasonable price. It is market price. Whether the receiver manages to meet his obligations under that section really depends on the circumstances surrounding what he has sold and the methodology by which he sold it.

Senator WILLIAMS: I will give you a quick example. The property is valued at $4 million. It was sold for $635,000. Two months after it was sold, it was valued at $3.58 million. Do you think the receiver had a breach when he sells for $635,000, when two months after it sold it was revalued again at $3.58 million? That seems a clear breach to me.

Mr Brown : I would suggest that at first blush it might be. In the circumstances, it might be that it was reasonable at the time to obtain that particular price. There might well be circumstances that arise after that that give rise to the $3.5 million. I think they would have to be extraordinary circumstances—I agree.

Senator WILLIAMS: If you looked at one of those situations and you thought it was wrong, what sort of punishment do these people face if they have firesaled an asset to one of their mates or whatever?

Mr A Brown : As I understand it, it can give rise to civil action to those who have an interest.

Mr Day : There would also be duty issues in terms of the duties required of external administrators as well. That would also be another option that ASIC would have to look at.

Senator WILLIAMS: If a receiver or a liquidator sells an asset of a privateer who is not in a company, does he or she still come under section 420A—when they are selling a business owned by, say, a man and his wife and they are not a company, they are a partnership—or does it just cover company assets?

Mr Day : Without the act in front of me I would not be able to answer that. I would need to take that on notice.

Senator WILLIAMS: Perhaps something could be looked at, Senator Cormann. I want to take you to the liquidation of Ansett by KordaMentha. It was reported that there were not account records given to ASIC. Can you actually apply when you are a liquidator for an accounting relief order?

Ms Gibson : If you have had a company that has previously had to prepare audited accounts, we will, on application, give relief to an administrator to relieve them from the obligation to prepare audit accounts; however—

Senator WILLIAMS: Did KordaMentha apply for a relief order with Ansett?

Ms Gibson : If I could just finish, Senator, there was a judgment yesterday, which we are still trying to work through, which seems to say that it is not the obligation of the administrator to prepare those accounts, which rather throws all of this in a little disarray.

Senator WILLIAMS: A grey area again.

Ms Gibson : KordaMentha did originally apply for that relief. We are in dialogue with KordaMentha and, indeed, many other of the insolvency practitioners about some failures to renew relief after the expiry of two years. That is an ongoing discussion we are having with those administrators.

Senator WILLIAMS: So the liquidator applies to you for relief and probably sends an application in and pays a fee and then you may grant that or you may not—is that the situation?

Ms Gibson : It has been in the past.

Senator WILLIAMS: Could you take on notice when KordaMentha sent the applications to you for accounting reliefs and how many they sent in to you? I have been informed that, in the 10-year liquidation of Ansett, there was no summary or accounting given to ASIC at all. Is that correct?

Ms Gibson : I would need to go back and look at—

Mr Medcraft : We will take it on notice, Senator.

Senator WILLIAMS: You are talking hundreds of millions of dollars. We do not know what the fees were that KordaMentha charged, some suggest $60 million fees plus $100 million disbursements, but these should have been given to you. Even when they take over Ansett, it is still a company that has got to be audited and the information goes to you. I cannot understand why this never happened, if that is the case.

Ms Gibson : Perhaps I can outline the regime that applies. If a company previously had required to be audited and lodge accounts in the ordinary course, they would need to continue to provide audited accounts. We have a regulatory guide that says you would get relief, and only where creditors are the only ones with interest, and creditors receive a full account of the information. Since the law was changed in 2007, there is also an obligation to release some data to us that would disclose these fees, but that only relates to insolvencies after 2007.

Senator WILLIAMS: Perhaps that is another area to look at as well. Could I just ask you briefly in relation to Storm Financial: can you give us a one-minute update of where it is at, Mr Medcraft?

Mr Medcraft : Certainly. I will just get my notes on that.

Senator WILLIAMS: Ms Gibson, you will take on notice the application from KordaMentha for those account relief orders?

Ms Gibson : The number of orders that were made.

Senator WILLIAMS: Yes, the number or orders and if they do them over the 10-year period? Could I have them reasonably soon? Many of us got your returns today on questions on notice from last time. Senator Bushby and I only got them today, so can we have these in a shorter period?

Ms Gibson : We can get that information for you promptly.

Mr Medcraft : On Storm, we all know that over 3,000 investors lost up to $900 million. We have three actions underway at the moment. Firstly, we have our civil penalty proceedings, which were actually in court for directions today, against the Casimatis. The Casimatis applied again to strike out our application. That is being heard in the next month. The judge has set a date for the trial to commence. I believe the commencement of those proceedings will be in May. In relation to the Doyle proceedings, which were principally unconscionable conduct by the banks, we are waiting for the judge to establish a timetable for the matter for trial. Again, there was an attempt to challenge and strike out our statement of claim.

Senator WILLIAMS: Was that by Macquarie Bank?

Mr Medcraft : That was by the parties, yes. Effectively, on all three claims, what has been happening is essentially an attempt to strike out our claims. I think we are almost at the end of that process across all three. In relation to the third one—the unregistered managed investment scheme proceedings, which is against Macquarie Bank and CBA—that is definitely the case. That is scheduled to go to a mediation next week and for trial commencing on 10 September 2012.

Senator WILLIAMS: So it will probably go to trial.

Mr Medcraft : Yes.

CHAIR: I thank you and your officers for attending. You have been of assistance. Could the officers from the Australian Prudential Regulation Authority please come forward.