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Economics Legislation Committee
Australian Securities and Investments Commission

Australian Securities and Investments Commission


CHAIR: I welcome back the Minister for Finance, representing the Treasurer, Senator the Hon. Mathias Cormann, and officers for the Australian Securities and Investments Commission. Minister and officers, it is good to have you here. Minister, would you or Mr Medcraft like to make an opening statement?

Senator Cormann: I do not, but Chairman Medcraft does.

CHAIR: Just before you get into that, I just would like to thank you, Mr Medcraft, and your many officers that have been involved in quite an extraordinary number of different inquiries that we have had over the past few months. We have had certainly quite a lot with the streaming of financial advice and the future of financial advice, the digital currency inquiry and corporate tax avoidance. And, Mr Kell, you have been very helpful in assisting the committee and I thank you for your work in all of those inquiries. Last night it was brought to my attention that recently, Mr Medcraft—as recently as over the weekend; I note that this has been put on ASIC's website—you made a speech at a forum, all the content of which I found very, very interesting. I hope that somewhere within your opening statement you will be able to refer to those and give the people here some benefit of that address. So, Mr Medcraft, welcome.

Mr Medcraft : Thank you for those comments. We are available for all senators—we think this is a team effort for our country. I would also like to thank Senator Bushby for recently addressing our senior leaders—very helpful. We want to try to engage more, and we are.

Thank you for the opportunity to address the committee. Today, here are all of our commissioners; we have Peter Kell and commissioners Armour, Price and Tanzer. Supporting the commission, we have some of our key executive leaders: Joanna Bird, Greg Kirk, Warren Day, Chris Savundra and Tim Mullaly.

I would like to bring to the committee's attention some work ASIC is doing around the issue of culture—it is very front and centre these days. We are concerned about culture. Clearly, culture is a big driver of conduct in the financial industry. Frankly, it is a very sad fact that bad culture often leads to bad conduct. This inevitably can lead to poor outcomes for consumers. Given that there is a strong connection between poor culture and poor conduct, ASIC thinks culture is a major riskto investor trust and confidence, the cornerstone of our financial system, and to fair, orderly and transparent operation of our markets. Frankly, we know that if markets are to do their jobs to fund the real economy, economic growth and a standard of living then those two things must be cherished and preserved.

ASIC are planning to incorporate culture very strongly into our role as a conduct regulator and enforcement agency. The areas we are planning to target are those where poor practices may increase potential for poor conduct; therefore increase the risk to trust, and investor and consumer trust and confidence. We intend, first, to incorporate culture into our risk based surveillance reviews; second, to use surveillance findings to better understand how culture is driving conduct among those that regulate; and, third, to communicate to industry and firms where we have problems with their culture and conduct. Let me add fourthly, we will intend to enforce where we see the wrong culture that is driving bad outcomes.

Recently, we have announced what we call the three 'Cs' framework on conduct risk for firms to help guide them to think about conduct and culture. The three Cs are, firstly, communication: making sure most importantly that communication comes from the top, that the people at the top know what the expectations are about the right way to do things, and that that communication is consistent and reviewed constantly. Secondly, challenge: to make sure that you are constantly challenging what you are doing to make sure that you are doing the right thing in your business. Thirdly, as we all know, do not ever be complacent—do not ever be complacent; always be making sure that it is dynamic. We can talk more about those if the members are interested.

Where there is a problem with conduct in a particular firm, ASIC at the present time can take administrative enforcement action. For example, we can seek to remove a licence from a company on the basis that it is not providing its services efficiently, honestly and fairly. But there are very limited ways we have to address culture directly in the laws ASIC administers. For instance, it is addressed in some parts of the Corporations Law and particularly in the Commonwealth Criminal Code. Under section 12.2 of the Commonwealth Criminal Code—one that I think many people should be more aware of—is that a company can be held responsible as an accessory for a breach of certain Commonwealth laws by its employees if the company's culture encouraged or tolerated the breach. That is a provision we need to think about more and, frankly, we are. The code defines culture as an attitude, a policy, a course or a code of conduct or practice. We think that when an employee breaches the law ASIC administers and culture is responsible, not just the employee—not just the fruit but also the tree—but also the officers and the company should be responsible.

In particular, we believe that this current penalty should now be not only available under criminal law; more importantly, it should extended to non-criminal sanctions. Therefore, there should be civil penalties and administrative sanctions that can be applied to both companies and officers as accessories. We think the same offence should be able to be actioned by ASIC in the civil courts just like we are able to now do for other misconduct. Just to remind you why this is important, under civil it is a matter of a balance of probabilities as to beyond reasonable doubt. What would a reasonable person think on the balance of probabilities? The standard of proof is very different.

In response to ASIC's calls for the financial system inquiry, they recommended a broad review of penalties. This would be an opportunity to consider these issues. If conduct is front and centre and driving culture, we must go to the heart of what is causing that. If part of that goes to the management and the company itself then it should be addressed by sanctions at the civil level not just criminal. As I said, on criminal, we are examining it more and we may take action. In no way are we turning away from criminal, but we are very focused on making sure we have the right incentive for culture.

Chair, when I talk about poor outcomes for customers, frankly, this is a polite way of saying people are getting fleeced. Sadly, those who are getting fleeced are not necessarily the country's wealthiest; they are everyday Australians who might have no more than their house, their super and perhaps a nest egg. Those affected by poor culture are usually those who can least afford it. Of course, when culture is poor and investors are sold inappropriate investments that become worthless, the situation will often rectify itself in the market. But the key thing I know from my days on Wall Street is that markets recover, people do not. People are often left at a loss and they cannot afford it. That is why cleaning up culture is not about compliance; it is about doing the right thing. That is why restoring trust and confidence where culture and conduct is a problem is crucial.

On this topic of culture, we will have a major campaign in the coming year. I am very pleased to announce that Dr Simon Longstaff, Executive Director of the St James Ethics Centre, has agreed to join the ASIC external advisory panel with the other group of eminent persons on that panel. This is an excellent appointment and does signal to the community, I believe, that we are serious about this area. Dr Longstaff has led to this centre since 1991 and has advised many significant organisations on culture and ethics.

Chair, finally, I want to pick up your earlier point on the committee's attention to the paper I gave at the Davos forum in Queensland last weekend. At this forum, I was asked to discuss two topics—ones that are very dear to my heart. They are both relevant to Australia but also to the global economy. They are the opportunities for capital markets or market based financing to fund the real economy and therefore economic growth; and the challenges for infrastructure and, most importantly, the SME sector—which provides so many jobs in our economy—and their problems in accessing finance today through the banking system and the capital markets. These are very important topics for ASIC, and my paper is available on the ASIC website. I will also refer to my interview with Robert Gottliebsen on Monday, where again I explored the opportunity that I believe markets can play and will play in actually funding the real economy in the coming years. Thank you. Those papers will be made available to the committee, and we are happy to take your questions.

CHAIR: Thank you very much, Mr Medcraft. I think every member of every bank or financial planning board will be reaching for their radio right now to try to get a replay of that. The thing that comes out of this is the pain and suffering that did go on in the last 15 years, really, where we saw what I believe was the fallout of the consolidation of financial planning arms into the banks and the culture that was unable to keep up with that growing need for good advice. Is it fair to say that we already have, by virtue of the Commonwealth Criminal Code in 12.2, the ability to take up these actions in terms of rogue operators?

Mr Medcraft : It is something I am discussing with the Director of Public Prosecutions, and I know he is interested in us perhaps pursuing a case. But the criminal standard is a very high standard, and that is why we believe that we need, in addition to that, a penalty of a similar nature at the civil standard. We think that the time has come for that. We are exploring it, perhaps to test the law with the appropriate case. So it is a warning to everybody. It does exist, so we are examining it.

CHAIR: This is a bombshell, actually.

Mr Price : If I could make one observation, it is that the Criminal Code provision applies to some, but not all, of the legislation that we administer. For example, my understanding is that it does not apply to chapter 7, which deals with financial products and services. So certainly the tool is there, but obviously we will need to choose our case carefully.

Mr Medcraft : It also may be that we suggest to government that it could be extended to financial products and services as well—so both adapting the criminal financial products and services and actually having a new sanction, which would be similar but available at the civil level. It is not a bombshell; I think it is more just a nudge.

CHAIR: I am pretty sure that for all the people that were sitting around in front of us in other forums, if they had known that there was a Criminal Code applying to the boards and the directors on boards of banks and secondary financial planning organisations, and if we are talking about now bringing in some civil remedies as well, you would have their focus. This is a paradigm shift in responsibility for banks and their directors. In actual fact, it may be even somewhat powerful for directors to be able to influence their culture.

Mr Medcraft : I believe that it empowers directors, because directors can then be empowered to question whether they have the right culture. Basically, they are empowered, because they have to make sure that the right system of internal control exists to make sure that people are not systemically breaking the law.

CHAIR: Nothing like a threat of a jail term to break you out of your directorship slumber!

Mr Medcraft : I prefer to refer to it as a right nudge.

CHAIR: Yes, a right nudge. Market based financing is something that we have looked at in this committee as well. Banks are traditionally bricks and mortar and they love to clip the ticket with homeowners and they love the housing market, but the small- and medium-sized enterprises are often second-rate citizens because they are higher risk. Everybody in the banking industry here is making $6 billion to $8 billion or $9 billion to $10 billion every year, and everybody gets a little bit fat and lazy with the SMEs. So I think your comments are well made and I am sure that we will flesh them out.

Mr Medcraft : As I said in my speech, Alibaba, for example, is now funding a million SMEs in China online because they see the flows, and they are funding it through securitisation, not through the banking sector.

CHAIR: It flows very well into the government's agenda of supporting SMEs, or 96 per cent of businesses in this country.

Mr Medcraft : So you have through the opportunity of digital and disintermediation.

CHAIR: We did do an inquiry into bitcoin and digital currency. Hopefully, through the questions this morning, that will come out. Senator Dastyari, you have the call.

Senator DASTYARI: Mr Medcraft, I just want to go through a bit of your opening statement. I think you made some very significant points there. Let's quickly talk about the Criminal Code and the criminal restrictions that currently exist. Mr Savundra or someone might have the figures—do you have any detail here on how many prosecutions under those criminal codes have actually been pursued and been successful?

Mr Medcraft : No. First of all, as was pointed out, at the moment it does not extend to financial products and services. In fact, I will say that this initially came to our attention from Rob Bromwich, the Director of Public Prosecutions. That is why it opened me to looking further into this. We may be able to tell you exactly which provisions it can be, but it is very limited. That is the problem today, so that is why one of our recommendations would be to look to extend those criminal provisions to, probably, all areas of the Corporations Act.

Senator DASTYARI: To summarise, it sounds like what you are effectively saying is you want to be responsible for driving a cultural shift within how corporations view these kinds of issues. Effectively, you would like to see a review or change or re-examination of the civil penalties to nudge them in that direction.

Mr Medcraft : Correct—basically, simply to translate what we have at the criminal standard into a civil standard as well. I want to get people away from having a tick-the-box compliance mentality and creating lots of paper. If you have the right culture, it is not about having lots of paper. You should not need to have that if you have the right culture. This is really trying to create change that is more efficient for boards and for business, frankly.

Senator McALLISTER: Having worked in some other sectors, though not in the finance sector, I know that occupational health and safety, particularly, is an area where most organisations have a lot of experience in trying to shape up culture. There is sometimes a view that culture just happens and cannot be shaped by senior leadership—it is a thing that you can do nothing about. I assume you do not agree with that, and you think that there are concrete steps that boards and executive management can take to shape culture.

Mr Medcraft : I am a big believer in behavioural insights. I believe that you have to regulate for real people, because that is what they are. We know that they are not necessarily rational, but they are real people. I see behaviour as really driven by three things. There are some people who are driven by deterrents. That is to do with the probability of getting caught if you are breaking the law; and then, if you get caught, what is the penalty? Some people go, 'Low probability of getting caught, and if I get caught, not much of a penalty.' We have to deal with that. I think penalties deal with that, and also resources for ASIC—surveillance, making sure we have cops on the beat. For those who are incentivised by that type of thing, we make sure that that deals with that behaviour.

For other people it is a matter of what type of incentive they have. If they have the negative incentives, the wrong incentives, that drives the wrong behaviour. That is an important thing, and a lot has been done, particularly in the financial advice area over the last two years, to deal with some of the wrong incentives to behaviour.

The third one is culture. You can have the right culture, or you can have the wrong culture. If you have the wrong culture, where it is one where the top management ignore problems, then that encourages people. They go, 'They're doing it; they don't really care'. So I think that it is a dynamic thing; it depends on people. Those are all intersecting. So those are certainly my learnings over the years. I tend to agree with you: there is not one single thing that drives behaviour, but what we have to do is get it right.

CHAIR: Can I ask you to table your opening statement?

Mr Medcraft : Absolutely.

CHAIR: We already have it.

Mr Medcraft : There were some things that I added in, but you have the basic core.

Senator BUSHBY: Thank you for assisting us today. You referred to the Criminal Code section that deals with this issue. Have any cases been successfully prosecuted on that section? I am particularly interested in how the courts have dealt with establishing that the undesirable culture exists?

Mr Medcraft : Because it only extends to certain limited parts of the Corporations Act at the moment, and it does not extend to financial services and products, there have never been any successful prosecutions.

Senator BUSHBY: Have there been any prosecutions?

Mr Medcraft : No.

Senator BUSHBY: So no unsuccessful prosecutions either?

Mr Medcraft : No. However, obviously, in other areas under Commonwealth law, there have been. We could provide—

Senator BUSHBY: In respect to culture?

Mr Medcraft : Yes, I believe there may have been in respect to other areas of Commonwealth law. We may come back to you on that.

Mr Price : We will take that on notice. There has been some commentary about it by some judges. However, I seem to remember there was a case where there was some commentary around this particular provision. So it might be best if we take that on notice.

Mr Medcraft : We will take that on notice. As I say, we will give you some examples that are perhaps outside the corporations law, so it might be in the health area or whatever.

CHAIR: That would be useful. I understand and appreciate what you are trying to achieve by making the suggestion, but if the case needs to be made in a court—beyond reasonable doubt or on the balance of probabilities—the concept of culture can be a fairly nebulous one, I would have thought. For a court to accept that the evidence is there that that culture exists to such an extent that a conviction could be—

Mr Medcraft : I think one of the things that we are saying is that it is certainly something—in the new world of, 'We don't want to try and micromanage business'—that we need to explore more.

Mr Tanzer : I gave a speech on this topic also last Wednesday, and part of the point here was to say that this cultural issue, particularly within the financial services industry, should not just be about compliance with the law. We feel that, if it is just about compliance with the law, we are missing the point. Financial services is very much an industry built on trust and confidence of investors—particularly on building long-term trust with investors. As we made the point in the speech, there are some financial services that are much shorter term, but many of the most successful financial services and products, from an investor viewpoint, are those that result in a longer-term relationship. Even for the short-term ones, where you are just after short-term credit, the whole aim is to build a long-term relationship. So, if trust and confidence in the long term is important, preserving that trust and confidence is obviously important for the industry as a whole. From a cultural perspective, you need a culture that supports the long-term best interests of the customer.

So coming back to Senator McAllister's question, part of what we were emphasising here was not just something that said, 'Think about your culture in terms of compliance,' which frequently can become just a box-ticking exercise or something that becomes very process driven. We are emphasising 'Think of it very much in terms of the long-term best interests of the customer,' recognising that sometimes that is quite difficult, particularly if you are in dispute with your customer. The whole point was to say: 'You need a culture that supports good emphasis and focus on the long-term best interests of your customer, and from that you will build good conduct and good compliance arrangements.' If you have a bad culture, it means that when problems arise—as they inevitably will—it will take much longer for them to be uncovered, because internal whistleblowers will not feel able to bring them forward and, when they do, they will be ignored. The problem gets much bigger and it becomes a much bigger problem for trust and confidence.

Senator BUSHBY: That is more the carrot approach in a sense—by educating the businesses that it is actually a good thing for them, as well as the stick. I acknowledge that there is a balance of both that is good.

Mr Tanzer : We pointed out in the speech that there is research that shows that if you have a good culture and good long-term customer relationships then that translates into the bottom line being much better. Conversely, if you have a bad culture, although it might produce some short-term profit for some particular reason, the research suggests that is bad for the business as well. But the key point that we keep coming back to, which the chairman made very strongly before, is that, while markets might recover and while institutions may well recover, the people who are damaged by this type of conduct, particularly where they suffer a very large loss, do not recover.

Mr Medcraft : One thing I will point out as well is that, frankly, we all know that there is the front page test. The front page test is not just about the law. With social media—

Senator BUSHBY: It is the same in politics too.

Mr Medcraft : The front page test is so critical now and we will use the front page test as well. Companies need to be aware of it. We want to be constructive. Since becoming chairman, now, every year at least, we meet with the boards of the six big banks and in addition the three regional banks. We have an annual program of telling them what we see on the front line so there can be no excuse at the top level that they are not informed. We do not want the front page test; we want to work constructively We want the best for our country.

Senator DASTYARI: Mr Tanzer, I do want to say that I did get a chance to follow up on the speech you gave. It was last Thursday?

Mr Tanzer : It was last Wednesday.

Senator DASTYARI: I thought it was fantastic. Mr Medcraft, what you are calling for today is a review of the legal framework in this country to allow what is dealt with under section 12.2 of the Commonwealth Criminal Code about culture to also have a civil penalty attached to it.

Mr Medcraft : Basically, to extend the current criminal penalty to chapter 7 of the Corporations Act 2001, which is about financial products and services, and to have a new sanction under the ASIC Act 2001 that replicates that at the civil standard under the Corporations Act.

Senator DASTYARI: Mr Medcraft, is that something you have relayed to government?

Mr Medcraft : Yes, it is.

Mr Kell : We put forward, in the context of the Financial System Inquiry, that we believed there was a good case to review more generally the penalties of enforcement—the tools that ASIC has—and we have been very pleased that that has been—

Senator DASTYARI: You did specifically cite that? I read your submission to the FSI—I do not know why, but I did—

Mr Medcraft : I hope you enjoyed it!

Senator DASTYARI: It was fantastic! In that, you did not make reference—from my memory, and, again, it was quite a big submission—to this specifically. You made a general point about a review.

Mr Medcraft : In working with Treasury and with the government on the response to it, it is something we are discussing now. Frankly, both here and globally, conduct and culture are becoming front and centre around the world. I think this matches very nicely with the issue of how you deal with conduct and culture.

Senator DASTYARI: As I understand it, the civil penalty exists in the UK—I only know the UK example because I know the UK example—but are there other examples around the world?

Mr Medcraft : As Chairman of the Board of International Organisation of Securities Commissions, I am actually putting a paper to the board of the organisation in London in three weeks, and it will deal with this issue and the issue of setting an international standard. What I am quite happy to do is to share some of that paper—

Senator DASTYARI: But I am worried about that. The UK have this provision.

Mr Medcraft : They do, but that paper will actually look at the issue of how the issue is dealt with around the world, because the Europeans now have a method which starts to move into looking at this area. The UK Fair and Effective Markets Review in the next few weeks will announce the conclusion of that. This is an area that is evolving at the present time. I am very happy to provide you with more detail.

Senator DASTYARI: From what Mr Medcraft said, I am deducing that the process for the government to respond to this specific proposal will be tied in as part of the Murray response?

Senator Cormann: It is a matter of public record that the government is due to respond formally to the findings and recommendations of the financial systems inquiry. The government is currently working through that. Of course, as we do that, we rely on the advice from Treasury and others.

Senator DASTYARI: Sure. I am just working out where this fits into the system.

Senator Cormann: The response will be provided some time over the next few months.

Senator DASTYARI: Mr Medcraft, you said you have put this specific proposal around section 12.2 of the Commonwealth Criminal Code through to Treasury. Is that through their formal consultation process related to the response? Is that through the Council of Financial Regulators?

Mr Medcraft : We are a Treasury agency. We are working as one team. Treasury are working with us and getting our views in terms of how a response should occur. And not only Treasury. We have mentioned it to my minister.

Senator DASTYARI: And your minister is—

Mr Medcraft : The Assistant Treasurer.

Senator DASTYARI: Minister Frydenberg.

Senator Cormann: The relationship between ASIC and Treasury is through the market scope of Treasury, and the minister responsible is the Assistant Treasurer Mr Frydenberg. In terms of the government's response to the financial systems inquiry, that is a very strategic and systemic response. That is going to be very much led by the Treasurer.

Senator DASTYARI: I understand the Assistant Treasurer and the Treasurer and the finance minister work together as a team. Minister, this may already be on the public record, so my apologies for not knowing the answer to this: has the government given an indication of what time frame they expect to be responding to the FSI? Is it this year or next year?

Senator Cormann: It will be sometime this year.

Senator DASTYARI: I am very conscious that my colleague needs to go, so I just want to ask one or two more quick things about this. Mr Medcraft, I will come back to this point about culture a little bit later, because I think there are some things that can be done in terms of transparency from the information that gets provided. If there is an issue of culture, within ASIC's existing powers, wouldn't an additional nudge to culture be a greater level of transparency from ASIC with the information that you already have? I can give you an example if you want: life insurance. ASIC turned around the report that Mr Kell gave, which was a fantastic report—from August last year from memory—in the life insurance area, identifying, I think, the figure of 63 or something per cent or 37 per cent of companies—

Mr Kell : Thirty-seven per cent of the advice we reviewed did not pass—

Senator DASTYARI: But, at the same time, you were not prepared to disclose who had provided that 37 per cent?

Mr Kell : That is correct. Because that was not the nature of the review. We have been very transparent about the fact that all follow-up enforcement actions will be public. We have already commenced some of those, and publicly announced them, such as the action against Guardian in January.

Senator DASTYARI: I am conscious of time. I will come back to that.

Mr Medcraft : If I could just add on that: I am a big fan of being transparent. In the last four years we have increased transparency incredibly beyond what it was when I came into my current position—incredibly. Hopefully you will agree. Every time we do a surveillance now we generally release the aggregated results of it, so it is completely transparent. But at the same time we have to balance that with making sure that, at the end of the day, we have the cooperation of the people who participate, and we want to give them a fair go. But equally we want to make sure that we provide the right nudge where we see poor behaviour and that we communicate that. Getting a balance is always difficult.

Senator DASTYARI: I have a lot of other questions about other matters, but I think that pretty much sums it up in terms of the introduction.

Senator McALLISTER: Mr Medcraft, thanks for your remarks this morning. I wondered if we could speak now specifically around the issue of housing? You recently warned investors that Melbourne and Sydney were already in a housing bubble, and those remarks have been echoed by the Secretary of the Treasury and the Reserve Bank in recent days. Would you care to explain a little more what the long-term implications could be for investors, current homeowners and first homebuyers of this bubble?

Mr Medcraft : Actually, I did not say that there was a housing bubble. What I said is that, in my experience of 30 years in investment banking and with the benefit of having had mortgage businesses around the world and seeing markets go up and down—I have seen many cycles in many different countries including, unfortunately, the US subprime crisis. I think, perhaps, that has been the commentary of many who have been in markets. So that is the first thing. The second thing is that from studying economic history we know that history tells us often people do not know they are in a bubble until after it was over. They go, 'Oh, that was a bubble!' I can tell you, that is exactly what I have seen in my own career, particularly what happened with the US subprime and liquidity. That is the second thing. The third thing is that, when you do the analysis of the average income to average price ratio, it always reverts to around four to one over history. It is just quite extraordinary; and that informed a lot of my thinking and what I said to people.

Then the message is, more simply, to everybody: be careful. When you are taking a mortgage, interest rates will not stay where they are; they will not stay there in the long-term and so do not do your numbers on four per cent, do them on seven per cent, because that is probably a more reasonable interest rate. There is also a message to lenders: you are not being fair. Again, I talked about conduct and culture. You are not being fair to that borrower if you are using a rate that is not realistic in the longer term. That is why it is one area that we are focusing on in looking at our surveillance, and we will release a report on very soon on responsible lending. Also, if you are an owner-occupier you should consider the interest rate but also your cost of living. You should not be thinking that it may not be appropriate for you to be using the Henderson Poverty Index if you are living not consistent with the Henderson Poverty Index.

Again, another message to lenders: think about what you are doing. If you are running your business properly, the last thing any bank institution wants is defaults. I also remind people that to always think about talking to your bank to get hardship relief if you are having trouble. If you are an investor in a loan and you are relying on the rent to service it, again remember housing can be vacant and you can have no income; and make sure that, if you are relying on the rent, then you need to top it up. Make sure you are realistic—that you have the coverage.

Really, what I am saying is, make sure that you do your numbers and make sure that you can afford it. That is really all I was saying. Think about those facts I have mentioned in terms of history. Markets do go up and down and, frankly, when you buy—if you buy long-term, you hold. Mine was just a warning for investors and owner-occupiers to be considered and to be careful.

Senator McALLISTER: Thank you. You mentioned your program of enhanced scrutiny of lending practices in this sector. I am aware that you were initially targeting interest-only loans. Can you talk a little bit about the scope of this particular program of work? I am aware that you are yet to report so you may be limited in what you can tell me. I assume that leans heavily on the credit licensing guidances that you have provided about responsible lending. Can you just talk us through that and if there are any particular segments of that code that you are particularly focused on.

Mr Medcraft : I will pass over to Peter Kell. From what Peter has told me, there are some troubling things emerging on both the interest rate and the cost of living rates that are used.

Mr Kell : This is a project that we are doing in very close consultation with the other regulators in this sector, APRA, the RBA and Treasury. I wanted to emphasise that it is a collective effort on behalf of the regulators. ASIC's review is focusing on the interest-only loans in part because that has been an area of very strong growth, reaching a new high of more than 40 per cent in the September quarter last year.

Senator McALLISTER: For all mortgages?

Mr Kell : That is right. The RBA has noted that there is very strong growth in this area. We are focusing on the application of the laws we administer, from the responsible lending laws to the provision of interest-only loans. We are looking at 11 lenders—nine bank lenders including the majors and two non-bank lenders. We are conducting both reviews of files as well as on-site reviews and will be looking to report within the next few months.

We are focusing on issues such as the way in which lenders are assessing income and expenditure and the ways in which they are complying with those responsible lending requirements to only provide credit in a way that is affordable for the consumer. That is a brief snapshot of why we are looking at this particular area. We think it is a good test, in effect, of what are still relatively new laws, the responsible lending laws, and it is an area of potential risk. We do not have a preformed judgement about exactly how this will play out but it is a very thorough assessment of this area.

Senator McALLISTER: Can I ask a little more about how a lender might calculate the living expenses of a potential borrower? I know that you have been concerned about the use of the Henderson poverty line. You were concerned in particular about that with the Bank of Queensland. You issued a release recently saying you were pleased to see that they had resolved those problems. Is this a widespread practice in lending institutions, to use the Henderson poverty line or other indexes as a proxy for finding out actual cost of living expenses?

Mr Kell : It is not at all uncommon to use some sort of benchmark to help assess the expenditure of the borrower. But we have had concerns about the use of benchmarks that may not be appropriate such as the Henderson poverty index. We think industry has been moving away from that but practices vary across lenders. We were pleased to see the change with the Bank of Queensland in recent times. That is an area now where lenders have to make more thorough inquiries rather than just assuming that people will stick to a particular benchmark. They have to obtain information from the borrower. They have to look at, for example, bank statements and those sorts of things as to their outgoings. So simply making assumptions about expenditure based on a benchmark is not in itself going to be sufficient in most cases under the responsible lending laws.

Mr Medcraft : History does not repeat itself—to quote my colleague on my left—it often rhymes. Having been through the US sub-prime crisis, people need to look at the lessons of history on the underwriting of mortgages. In the US, one of the big issues was actually a proper assessment of the capability of the borrower to service the debt. That is where there was a significant amount of mischief that resulted in massive issues. This is a very important area and I am very concerned to make sure that we do not get into the same sort of problem. We are trying to provide the right nudge.

The other comment I did not make earlier was we know that people are basically optimistic. They often make the view that interest rates stay low for long. They are optimistic and you just have to manage that as well.

Senator McALLISTER: Mr Medcraft, you mentioned in passing that there are some troubling early indicators in this review process around interest rates and also in serviceability assessments. Is that exclusively around this question of making reasonable inquiries or are there other issues that you or Mr Kell can inform the committee about?

Mr Medcraft : I would defer to Mr Kell.

Mr Kell : I would prefer to wait until we have properly analysed all the results. It is a fair enough question but I would prefer to wait so that we have got a full picture to paint for the committee and, indeed, for the wider industry.

Mr Medcraft : And we will be feeding back to those that we see already. As soon as we start to see issues, we do immediately feed back to them. So you will probably see changes already.

Senator McALLISTER: There has been some discussion through the financial systems inquiry around the opportunities for borrowing by self-managed superannuation funds to buy investment properties. I am just wondering if you are seeing risks in that sector in lending practices to self-managed super funds?

Mr Tanzer : We published that we see the self-managed super fund sector as one of the areas that needs particular attention, particularly because investors obviously take responsibility for their own investment decisions. With respect to borrowing, we do not get direct data about that. It is the tax office that gets the data directly from the self-managed super funds. We did note with interest the finding in the financial system inquiry that while this was coming off a very low base, there was a significant increase in the number of entities that were engaging in leveraged activity.

We have certainly taken a couple of enforcement actions with respect to operators around one-stop shop type operations targeting the self-managed super fund investors where there may be an accounting service, a property developer and perhaps a mortgage broker also associated. There is also a current action, which is targeting the issue of whether a promoter is entitled to seek to promote the sale of real estate specifically for SMSFs—that is the Park Trent matter, which is starting in the Federal Court next week.

The active super matter, which was finalised last week, involving banning a range of people including Craig Gore was a matter where self-managed super fund investors had been targeted to make investments in property. Although in that case, it was really an investment scam involving allegedly the purchase of an investment property in distressed US property, which never took place.

The area of SMSF investing is certainly one of our areas around property investment. It is a particular focus largely around whether or not people need a licence and have a licence to engage in that activity of promoting the use of SMSFs to that particular purpose. But in terms of the leverage aspect, we are not really the best agency because our evidence tends to be a little bit more anecdotal and after the event.

Mr Medcraft : There are two further things to add. One is that I have actually said publicly that investing in real estate in an SMSF is not a problem per se. But people need to think about diversification. If basically it is the only asset you have got in your SMSF and it is empty then you do not have an income nor can you pay the debt. What I have said though is if you have got a very large super fund and it is diversified with a bunch of properties then that is something perhaps to think about. But, basically, if you have only got half a million dollars and that is your retirement income, it is probably not prudent, frankly.

It troubles me that the recently rereleased ANZ financial literacy survey very disturbingly showed that Australians are actually thinking that diversification is less of an issue. In fact, for the first time, it has fallen since 2001, so that really troubles me.

Senator McALLISTER: Particularly when it is accompanied by a significant increase in the number of people choosing to manage their own superannuation.

Mr Medcraft : Exactly. And also since 2011, the other one that had declined was people's appreciation of risk reward, so we have got to redouble our efforts on that. Certainly for any senators that are interested, I refer you to that ANZ financial literacy survey. We really have to double our efforts on those two principles to get that across.

Senator LAMBIE: I have recently launched a policy which calls for the government to introduce a financial transactions tax and levy it against high-frequency traders in Australia. Are you familiar with high-frequency share trading in Australia?

Mr Medcraft : I certainly am. On high-frequency trading, basically the way markets work these days is they use algorithms. Big institutions use algorithms to access markets. Fundamentally, our view is that markets are there to fund the real economy; they are not there for people to gamble. But, at the end of the day, high-frequency trading basically does bring liquidity to the market. But, essentially, high-frequency traders clear their books at the end of each day and they only basically trade in very highly liquid stock so they basically contribute to the liquidity of highly liquid stock. A little of it is okay. If you have too much of it and people who are investing in the market feel that they are being disadvantaged then that goes to the heart of price formation in the market and people do not participate in the market. That is where it is dangerous.

Now for high-frequency traders, we actually require a review of algorithms to make sure they are not breaking the law by fronting the market or being ahead of the market. And also we want to make sure that the algorithms will not blow up the market. We have done that. I announced last Friday that we are actually doing a review. We did a review a number of years ago and we said at that point we are implementing some new measures on high-frequency trading. There is another aspect called dark pools, which are trades that occur outside of the markets.

Senator LAMBIE: That is right. Things have changed because we now have supercomputers.

Mr Medcraft : We are now reviewing this to see that we have not hit some sort of switch-over point. We are going to be releasing the results of that in October. It is an area that we are focused on both here in Australia but we are also focused on a global basis. It is a good thing to raise because it is one we have really got to watch.

Ms Armour : ASIC actually cost recovers its own costs of market supervision and we not only pose a charge on each transaction in the markets but also on each order cancelled or amended. So there is a charge already on numerous orders, which are often associated with high-frequency trading.

Mr Medcraft : That is very important because it creates a price signal that has probably actually resulted in lower levels because basically the cost of actually supervising high-frequency trading is quite high.

Ms Armour : Our current review is going to be looking very hard at what we see now in the futures market, where we see more algorithmic trading there. So we are looking at retesting equities but looking again at futures as well. The more traditional over-the-counter markets are really becoming electronic platform markets as well so we are looking at all of those.

Mr Medcraft : Fundamentally, we have to make sure it does not affect trust and confidence in the market.

Senator LAMBIE: Yes, we are going to get to that.

Mr Price : Just to be clear, the charges that are in place at the moment for order, cancel, amend and messaging—if you have a look at our market structure and the amount of high-frequency trading here, studies tend to indicate that it is less than in overseas markets like the US and the UK.

Senator LAMBIE: I am getting to that, so if you can just answer my questions, that would be great. Some of them will just be yes or no questions. Can you detail how much of the Australian market high-frequency share trading companies account for? I have been told that currently high-frequency share traders account for 30 per cent of Australia's market. Is that correct?

Ms Armour : We are doing a study to check and verify that.

Senator LAMBIE: So you do not know. Is it 30 per cent—give or take? Is it close?

Ms Armour : Our estimate is that it is more like 27 per cent of turnover in the ASX200—the top companies. Less than one per cent of traders—

Senator LAMBIE: You are ASIC but you are not quite sure how much—

Mr Medcraft : It is 27 per cent. In the United States it is 70 per cent.

Senator LAMBIE: Can you describe very simply how high-frequency share trading works? I understand that to do high-frequency share trading you need a supercomputer and sophisticated software and you also need to be located inside the Australian Securities Exchange—and then you have a licence to print money. Is that correct?

Mr Medcraft : There is no requirement that you have to have any of those things. However, those who choose to do it may want to have all that. I will pass on to Cathie.

Ms Armour : Generally, high-frequency trading is associated with using very fast computer ordering systems. That part is a general association. To the extent that high-frequency trading is seen as a bad thing, it is because there are a lot of small orders that are trying to tease out large orders in the market. Often the allegation is that the orders are not genuine and they will be cancelled and changed. The high-frequency traders are accused of not holding positions for the long term and looking to have, effectively, a nil balance at the end of the day. Does that answer your question?

Senator LAMBIE: Do you need to be inside the ASX to obtain the technical advantage? Is it a technical advantage to be inside the ASX?

Ms Armour : The ASX facility allows market participants to be located within it. The ASX facility works very hard to ensure that anyone who is located in that facility has the same access to their server.

Senator LAMBIE: Do you know whether or not it is an advantage to be in the ASX? That is what I want to know. Is it an advantage to be inside the ASX?

Ms Armour : I would not say it is or it is not. It obviously depends on someone's technology capability. The ASX does have rules about who can access their system and the cable length that one can have for access.

Senator LAMBIE: Yes, I am on to that. I have also been informed that the companies which do high-frequency share trading make their money, effectively, by scamming and skimming profits—up to $3 billion a year—from mum-and-dad investors of Australia. Is that accurate and correct?

Ms Armour : That has not been borne out by our studies. We have a report on that which we can make available to you. We are retesting that again and will have another report out in October.

Senator LAMBIE: How many high-frequency share traders are there in Australia?

Ms Armour : I cannot give you precise information on that. We will take it on notice.

Senator LAMBIE: I would also like to know their names, because they seem to be hidden in the darkness. Can I have their names? You cannot find them anywhere.

Ms Armour : I think that is a hard thing to give you an answer to. It is really a question of what one means by 'high-frequency trading'. Do you want the names of everyone who uses a computer system?

Senator LAMBIE: Yes, mum-and-dad investors would love those names. That would be great, thank you.

Mr Medcraft : On that point, the algorithmic technology is very accessible to any mum and dad these days. Significant numbers of people who are not close to the mainframe could be high-frequency traders.

It is just an algorithm. Then how quickly you can execute is a function of how close you are to the market. You could not do that, actually. You could get a list, for example, of companies that—the ASX provides a facility, and that might give you an indication of those that are doing it very fast. We could do that for you, if that would help.

Senator LAMBIE: But I think if you spoke to the ASX they would also give you a view that it is possible that people who are not connected to their facility are seeking an advantage because they can—

CHAIR: What they are doing is not illegal.

Mr Medcraft : What they are doing is not illegal. Also, as I pointed out, most institutions now use algorithms. The reason that institutions use it is that they do not want to be seen in the market. So they will use algorithms to break the trades into small pieces. They use algorithms to execute.

CHAIR: This committee is not into naming people who have done nothing wrong. I counsel everybody to have that understanding.

Senator LAMBIE: With all due respect, Chair, they are the head of the ASIC. This is 30 per cent. These companies are 30 per cent, or one-third, of Australia's financial traders. I think mother and father investors need to know whether their profits are being skimmed.

CHAIR: As you have just learned, Senator Lambie, mum and dad investors are using the same technology.

Senator LAMBIE: No; mum and dad investors are not in the ASX. They are not sitting in a chair in the ASX themselves; they do not have the advantage.

CHAIR: It is not my intention to have any conflict here. I just want to be clear that we are not into besmirching people who are not due to be besmirched.

Senator WHISH-WILSON: Any person is entitled as a client of the ASX to be inside that facility.

Senator LAMBIE: I do not think the mum and dad investor can afford the—

Senator WHISH-WILSON: It depends on whether those mum and dad investors are speculators themselves, because if they are short-term traders they are in the same camp as high-frequency traders but if they are fundamental investors it is a totally different thing. So I think you need to differentiate between whether they are a speculator and whether they are a long-term investor.

CHAIR: Thanks for the clarification.

Senator LAMBIE: Are high-frequency share traders connected to our big banks by any business links—specifically the ANZ Ltd, Commonwealth Bank of Australia, Westpac Banking Corporation and Suncorp?

Ms Armour : Senator, was your question whether high-frequency traders are connected to those particular organisations?

Senator LAMBIE: Banks—yes.

Ms Armour : I do not believe we have information that suggests that at all.

Mr Medcraft : We are very focused on, as I said, high-frequency traders where perhaps they are front-running. In our own systems of monitoring in the market in real time, this is a very high priority for us: to make sure that they are not front-running the market, so that, when investors put their own orders in, the high-frequency traders are not front-running them. To your point, that is really important. It is something we focus on.

Ms Armour : Our market surveillance system was developed using technology that firms that are associated with high-frequency trading use themselves. The idea is that we can keep on top of all the orders and attempts to manipulate—front-run—the market.

Senator LAMBIE: Okay. I just have a couple of bank questions.

Mr Medcraft : We are as concerned as you are, I can assure you.

Senator LAMBIE: I am concerned because there are political donations coming from the ANZ, Commonwealth and Westpac banks. You know where I am going with that. I have a problem with that. We are looking at over $250,000 worth of donations to the Liberal Party here. So, yes, I have a problem with that.

Senator CANAVAN: On that last point—on the front-running—have you identified anyone engaging in those activities or have you suspected anyone of doing front-running on trades?

Ms Armour : Where we have seen poor conduct we have taken action. But we have not identified that that has been a significant problem in our market.

Senator CANAVAN: I was not asking about that. So you have taken action against front-running conduct—

Ms Armour : Yes. We look at, if you like, questionable conduct, often by doing things because we are seeing it in real time—picking up the phone and saying, 'What's happening here?' and giving messages to change behaviour. That is pretty key. We are very keen on—

Mr Medcraft : We will take direct action to reveal an algorithm. We now employ rocket scientists at ASIC. We have to be as good as them in terms of technology.

Senator CANAVAN: Absolutely.

Mr Medcraft : We will review an algorithm as well, although we require constant review of algorithms.

Senator CANAVAN: How many rocket scientists do you employ?

Mr Medcraft : We have one at the moment.

Senator CANAVAN: One!

Mr Medcraft : We only need one to build a rocket—right!

Ms Armour : We do have a team—

Senator CANAVAN: A team of rocket scientists!

Ms Armour : whose job is to be on top of market intelligence and looking at these sorts of issues.

Mr Medcraft : The way of the future is data analytics. Basically, we are constantly strengthening our skills in this area. That is the way of the future.

Senator CANAVAN: Yes. You mentioned that you have breached people for front-running conduct. Can you give us the details of those breaches, given that your investigations have concluded?

Ms Armour : We could obviously have a look at our public outcomes. We will take that on notice. Probably the more important point is that, because we are real-time supervising, we are intervening at the time. We will not really have that detail for you.

Mr Medcraft : No-one will reassure the market and the investors that, frankly, we are focused on this in real-time. Often you do not see things happen, but we react immediately when we see it. People like insider traders do not appreciate that we have systems, we have the powers and we do send people to jail. Often people are undertaking this sort of stuff and we are already watching them. That is a message to all those who may think about doing it: do not think about it.

Senator CANAVAN: This is my final question. What about pinging? Has that been an issue in Australia?

Ms Armour : Yes, we have seen some instances of that and we have dealt with those straightaway. It is not a sustained issue, but there have been instances.

Senator CANAVAN: Could you take the same thing on notice—if there are any breaches that could be publicly revealed to the committee?

Ms Armour : Yes.

Senator CANAVAN: Thank you.

Senator BULLOCK: There are some very bright people who are developing algorithms directed to intended consequences: to make a quid. To screen those processes for unintended consequences, like crashing the market, takes the rocket scientist to a new level. You did say earlier that you were monitoring these things to ensure they could not crash the market. How confident are you?

Mr Medcraft : There are two things. We do issue guidelines in relation to algorithms. For example, we require them to have a kill switch where they are resulting in inaccuracies in the market. We also have filters that we require in the algorithms. There are, if you want, the preventative things that we have in algorithms. We are very happy to provide you and the members with the guides that we give on algorithms. They are quite interesting in terms of the things we consider. We are always reviewing them. Most importantly, we are working with our global regulators because, clearly, it is a global issue and through IOSCO, which I also chair, we are constantly exchanging information about what we are seeing in other major markets and fine-tuning that guidance. The second thing is our own surveillance. We also require them to constantly review the algorithm.

Ms Armour : I just want to add to your point about working with our international peers. We also have staff exchanges going on, so that we pick up intelligence over the same period of time to build our capabilities.

Senator BULLOCK: You are not chasing; you are not coming from behind? Do you think you are staying in front?

Ms Armour : We are hopeful that we are. It is a dynamic area.

Mr Medcraft : My focus as a regulator is to be as resilient as possible. You will never avoid risk. All you can do is be as resilient as you can with the resources that you have. There is no guarantee. It is a matter about resilience. I want Australians and international investors to be absolutely confident in our market—absolutely confident.

Senator LAMBIE: I want to know whether ASIC has received any complaints about the rates banks charge on credit cards, at 17 per cent, given that base interest rates are at historic lows of two per cent—which, as a 700 per cent mark-up, makes payday lenders look like charities—and whether it has also received complaints that, when you withdraw $20 from an ATM, you are charged $2.80. I find that disgusting. Is it legal to charge this sort of money, really?

Mr Medcraft : I will pass to Peter Kell, who oversees the credit area.

Mr Kell : On your first question—have we received complaints about the actual interest rate?—we can check whether we have had any particular complaints. But generally, as our jurisdiction does not extend to the level of interest but more to things like whether people have been misled about the terms and conditions, whether the credit has been provided irresponsibly—

Senator LAMBIE: Is it legal?

Mr Kell : Are they allowed to charge interest rates at that level? Yes, that is legal. I know it has been discussed in the last few days. Is it something that we think is worth looking at? Certainly.

Senator LAMBIE: It is certainly not morally right, is it?

Mr Kell : We have seen what Treasury and others have said, and we would be very much prepared to work with Treasury to look at this issue, because it is obviously something of community concern. I can understand exactly where your question is coming from, but they remain very sticky, despite interest rates coming down in other sectors. So, as to the reasons why that is occurring, I think that would be worth a close examination.

Mr Medcraft : Senator, you mentioned payday lending. First of all, from our point of view, we are being proactive with consumers, actually advising them on alternatives to payday lending. Also, the message to people is: if you are having trouble paying your electricity bill or your mortgage, basically approach the utility or the bank, who generally have programs where they can assist you, rather than going through payday lending. I see ads from payday lenders about getting assistance to pay your electricity. You can actually go to your utility and they will generally give you time. So really the message to everybody is: if that is where your problem is, you do not necessarily need to go to a payday lender.

The other issue is that, as I said, we are looking also at surveillance, enforcement and significant action against payday lenders, both in their advertising and in their conduct. My point at the start of this meeting was about conduct and culture, and it is a very significant message to that industry about conduct and culture.

Senator LAMBIE: And what is morally right.

Mr Medcraft : Well, having the right culture to make sure that you are not breaking the law. Can I just say it is a hint or a nudge.

Mr Day : Senator, on your second question, about the fees charged for withdrawing money from ATMs, we will take it on notice as to whether or not we have received any complaints about that, but obviously those things are a commercial matter for the banks about what they may charge for people to make withdrawals. I guess you are referring to taking it out of ATMs from other banks rather than their own.

Senator WHISH-WILSON: Could I just pick up on the payday lending. Mr Medcraft, can you provide an update on your recent report and where you are at with payday lending practices.

Mr Kell : As the chairman has outlined, we have a significant focus on the payday lending sector. The new laws that regulate the provision of those small-amount loans are less than two years old, and we have focused on ensuring that they are contributing to improving standards in that sector. That is why we undertook our report: to test how the industry was performing against those new requirements. We found a pretty mixed response, but in some areas there was quite a disappointing level of compliance with some of the key provisions, including the suitability test. So we are following up with industry on that.

We also have a range of follow-up investigations underway in this area. If you would allow me, I would like to just briefly touch on a few. ASIC's enforcement action has resulted in around $2 million in refunds in the payday sector to more than 10,000 consumers who have been overcharged since taking out a payday loan. We have also taken action to remove licences and to obtain civil penalties. We have done that generally in three areas. One is responsible lending, where we had the recent Cash Store decision, and a penalty of almost $19 million around irresponsible lending in the payday sector, which was a very significant ground-breaking penalty—

Mr Medcraft : It was the largest penalty ever awarded.

Senator WHISH-WILSON: The largest penalty ever awarded?

Mr Kell : It is the largest civil penalty ASIC has ever obtained. The secondary focus for us is on so-called avoidance models. This industry, unfortunately, has a history of setting up business models that seek to get around the law, to get around the interest rate caps, and to get around the other protections that are there. We have a range of matters in court that are targeting so-called avoidance models. We have also had other enforceable undertakings in relation to companies that are seeking to structure their businesses to get around those protections so that they can effectively charge higher amounts. That was something that came out in our review. We are happy to provide a list of those.

The third area we are focusing on in the payday sector is around misleading advertising and misleading fees. We have taken a series of actions there against companies, including PAID International, Nimble, Fair Finance, Fair Loans, and so on. So those are the three areas: responsible lending; avoidance models, where people are attempting to get around the law; and misleading advertising and fees. We are talking to Treasury and government about the upcoming review of how the new payday laws are working, and to test whether they are doing the job we expect them to do. For us it is a major focus area, because, as you all understand, this is an area that involves some of the most vulnerable and low-income consumers in the country. So it is a priority area for us.

Senator WHISH-WILSON: I have to say that it is almost like someone gave you my list of questions. I think you have ticked just about every box there! In relation to the act, you have had discussions with government about whether the act provides adequate levels of protection. Do you believe that the act provides ASIC with adequate measures to take action? Is it the act itself that needs to be changed, or can you fortify this area with the kinds of changes you have just outlined?

Mr Kell : We think the new laws do make a significant difference to our ability to act. They have provided for the first time a national regime, a licensing regime, that helps us to ensure that we can remove from the industry players who are not behaving properly. So we think those new laws have made a major impact on the industry. That will continue to play out as time goes on. But I suppose our recent report, the one we released in March, does highlight some areas where compliance levels are lower, such as around the suitability test. No doubt that will be the sort of area that is looked at in the review and we would hope that the material we have gathered and the evidence we have produced will inform that review as to how those laws are working.

Mr Medcraft : One thing that I think would help for the industry, and the industry would probably support, because often with payday lenders there is the issue of people getting multiple loans from different lenders, is having a national database where you can check if you have a loan from another party.

Senator WHISH-WILSON: One of the big issues is leverage to pay off leverage.

Mr Medcraft : Yes, and then there is no excuse for a lender to say, 'We had no idea they had 10 other loans.' That could be an industry solution, frankly.

Senator LAMBIE: Can that be done—

Mr Medcraft : It is done in the United States—

Senator LAMBIE: Why can't we do it here?

Mr Medcraft : It is something that the industry certainly should think about, if they want to be responsible lenders. At the end of the day, you want to get your money back, right? So it is something that I know they have been looking at. It is certainly something I think would be good for everybody, frankly.

Senator WHISH-WILSON: You have come in here today, Mr Medcraft, and it is good to see you swinging on culture. Would this be a case study for you in terms of a culture you are targeting?

Mr Medcraft : This will be a major campaign across surveillance, enforcement, education and, hopefully, law reform.

Senator WHISH-WILSON: In terms of the online presence of some of these payday lenders, what can you do about the fact that they are producing mobile app services, and can you track how much is actually being provided online or through mobile services?

Mr Kell : It is a good question, and an important question in terms of how this sector is developing. Obviously there is nothing illegal about going online or using apps, and in some ways it might provide greater convenience for consumers. But we do have some concerns about some of the online models. In particular, we have taken action against some online providers around some of the claims they have made about finance being instantly accessible or instantly available, or other claims that imply that there are no tests whatsoever around whether the consumer can afford the loan or their ability to pay back the credit before they take it out. We also want to ensure that having an online model does not stop the provider from carrying out the necessary responsible-lending tests they have to under the law. There is a particular onus on those who are operating online models to make sure that they still very much comply with the requirements under the law that go to responsible lending, protecting Centrelink payments, making added inquiries about income and so on.

Mr Medcraft : Let me add a comment to that which I think is relevant to what you are saying. I want to warn the payday lenders: we are now about to start using Google data analytics to monitor the internet for this type of activity. Basically, we are going to start using data analytics to add to our surveillance activities. It is a very important message for everybody.

Senator WHISH-WILSON: Watch out!

Mr Medcraft : We are working with Google, and we have Google on the advisory board of ASIC. They have offered to work with our staff to help them be more proficient in using Google analytics. Secondly, we are about to invest in Microsoft social media analytics to monitor social media in terms of our surveillance activities. Whether you do it physically or you do it online, we will watch and we will take action.

Senator WHISH-WILSON: Great.

Senator CANAVAN: You can be my friend on Facebook!

Mr Medcraft : No, I will not be your friend on Facebook, because I am not on Facebook. But I am your friend—I will actually meet you in person, Senator.

Senator WHISH-WILSON: You mentioned Centrelink, Mr Kell. Is it true that 80 per cent of users of these payday services are on Centrelink benefits? Are you working with Centrelink at all?

Mr Kell : I am not sure of the exact figure off the top of my head. I can take that on notice. The provision in the new payday lending requirements, which is designed to protect consumers who receive 50 per cent or more of their income through Centrelink, is a provision where there is a higher level of compliance. It is interesting that that particular provision seems to be working well.

Do we engage with Centrelink and the department on issues impacting low-income consumers? Yes, we do, very closely. We have recently been working with them on the whole issue around consumer leases because we want to make sure that if there are firms we take action against, because they have been lending inappropriately or engaging in misconduct, they can be taken off the Centrepay system. Those sorts of issues are part of our dialogue with that agency.

Senator WHISH-WILSON: While we are talking about culture—and we have all been down the FOFA road the last couple of years—I am interested in some media reports that we have had. AFR Weekend ran one recently around property advisers being offered hefty commissions for, essentially, package products. It said:

Big commissions, volume linked bonuses, cash incentives and other lucrative perks are being offered by developers to financial advisers and unauthorised spruikers for recommending property developments, according to advisers and brokers.

Some commissions are being quoted as high as 15 per cent. Mr Medcraft, you have been outspoken about the bubble and the boom in markets we have heard this week.

Mr Medcraft : I did not say the word 'bubble'.

Senator WHISH-WILSON: Okay, we will not define what a bubble is. But we have heard similar evidence this week. Is this an issue that you are cracking down on?

Mr Medcraft : I will defer to Mr Tanzer.

Mr Tanzer : We have been very consistent with our messaging around real estate—investment in real estate. Firstly, it is pretty clear that real estate, per se, is not a financial product as defined in the Corporations Act. So a person does not need a licence to advise on real estate. What we have been doing, though, is, if that real estate is offered as part of a managed investment scheme, whether registered or not, we make it very clear that the scheme needs to be registered and run by a responsible entity. Or, if it is part of a marketing campaign that is really targeting the use of superannuation to purchase real estate, we have also been very clear and on the record as saying ASIC regards that as an activity that may well require a licence. Indeed, we have written to the real estate institutes and commenced quite a broad campaign with the real estate agents themselves with respect to that.

With respect to investment in property per se, the main issues that ASIC has around that activity really are the same as with any other investment. It is leverage, it is about whether or not you are buying a property for the right sorts of reasons—that is, that you have made an assessment of the income producing capacity and the capital raising capacity of that, rather than perhaps being induced to invest in that primarily for the tax advantage, for example. So there is a range of warning activities, and the more direct activities that we undertake are largely around this area of whether people need a licence.

Senator WHISH-WILSON: The Property Investment Professionals of Australia were quoted in the same article saying they are fed up with the lack of regulation. If they are raising the alarm about conflicts of interest, which is essentially what we have looked at with FOFA where we might find advisers are selling these kinds of off-plan developments, for example, because they are being offered massive commissions and other incentives, this is an asset class, it is an investment, we have dealt with it in other areas in FOFA, so how do we go about making it easier for you to police or to apply FOFA-style rules to real estate?

Mr Tanzer : We have definitely been very clear that we see conflicted remuneration as a major risk area and a red flag. A lot of that conflicted remuneration is banned by FOFA, with respect to financial products, obviously. But even where it is still permitted, we have said that we regard that as a key risk area. We are not the regulatory agency—

Senator WHISH-WILSON: Is this conflicted remuneration?

Mr Tanzer : Anything where you are getting high value commissions, it is of the nature where there is a conflict between your interest in selling the property and a perceived duty that you might owe to someone that you are advising. The issue in this area of real estate has always been quite murky about whether or not there is any duty that is being owed by an agent to somebody who might be a purchaser or to somebody who might be selling through them. The fundamental issue is that real estate is not an investment product per se, as defined in the Corporations Act. It is largely a matter for state regulation. But where we see this intruding in the investment space and in the regulatory permit or purview of ASIC, we certainly see it is a risk area and take action.

Senator WHISH-WILSON: If I went to a financial planner, or a financial adviser, and they recommended that I invested in an off-plan development because they were being offered a 15 per cent commission, that would not be covered under conflicted remuneration FOFA laws—or would it? Is the asset class itself the issue or is it the issue that, as you said, real estate is not included as an investment under the Corporations Act?

Ms Bird : Legally, it could possibly be. It has to influence a financial product advice given, so it would depend on the circumstances. It would be a real stretch as it is not a financial product, but maybe we could say that because you are recommending real estate and you were not recommending some other financial product then it would not be an easy matter for us to pursue. In relation to the paying of commissions to financial advisers—people who are actually a financial adviser because they give advice about products other than real estate—there was a whole spate of allegations in the newspaper about one or two years ago. We followed them all up and there was nothing happening. In fact, it was one of those circumstances where the outcome was quite pleasing—commissions were being offered to financial advisers and when we approached the people who were offering them they did not actually manage to find anyone who would take them. We can follow up further media reports, but it is something that we did as a campaign for a while and found nothing. Then we have the added background of the legal complications as to whether—

Senator WHISH-WILSON: Would that have included what the article classifies as spruikers, who describe themselves as brokers for finance and real estate professionals but are not actually registered it in any way?

Ms Bird : Yes.

Mr Kell : Not so much spruikers. The challenge in this area is that some of it might be in relation to the intermediaries such as financial advisers who we regulate, and others might be areas where it is purely direct property investment where we do not have the regulatory hook—and that is a more challenging area for us to regulate. However, we are looking at some of the spruiker models at present. Mr Tanzer mentioned earlier those that have been targeting SMSFs in particular and those where we think there is a clearer crossover into our regulatory sphere. There are no two ways about it; this is not an area where the jurisdiction extends neatly into the full range of activities that you are talking about.

Senator WHISH-WILSON: Is there any legal requirement for them to disclose fees on these kinds of things? My understanding is that there is not.

Mr Kell : If it is simply a real estate agent in effect selling an off-the-plan property, that is not something that ASIC regulates in terms of disclosure requirements.

Senator XENOPHON: I would like to traverse three distinct areas as expeditiously as possible. Firstly, I would like to go to the issue of land-banking scams involving the notorious Henry Kaye, who I understand was struck off as a director. From the nod, I take it you are familiar with Mr Kaye. I think anyone who has an interest in these sorts of matters—

Mr Medcraft : He is famous for questionable financial engineering.

Senator XENOPHON: That is right. Has ASIC opened a probe into the land-banking scams in several states that are run out of Melbourne by companies linked to the notorious Henry Kaye? I know that Royce Millar and other investigative journalists at Fairfax have been running a whole series of stories on this. Can you advise whether a probe has been opened into these allegations involving $100 million amongst hundreds of investors?

Mr Mullaly : Yes, we are making inquiries in relation to those issues.

Senator XENOPHON: Is the nature of the scam quite ephemeral from a regulatory point of view, in the sense that you are being promised an option on a potential development? There are obviously a number of misrepresentations made. Is it something that the current regulatory framework may have difficulty in dealing with because of the vagueness of the promises made?

Mr Mullaly : As I think Mr Kell indicated, it does not fit neatly within ASIC's jurisdiction. However, there are a number of aspects of the conduct that we are considering.

Mr Kell : Given that we are in the middle of active inquiries into this issue, it is probably not sensible for us to continue.

Senator XENOPHON: I understand that. Can you advise me—and I will not traverse it much further—when the investigation began, a rough time frame.

Mr Mullaly : Sometime late last year—I have not got the exact date—

Mr Kell : We can come back to you.

Senator XENOPHON: That is right. Can you give an idea of what resources are involved in this, because they are very complex transactions. I have spoken to people who have been involved in this, and they describe in some detail the elaborate nature of the schemes and the extent to which information is hidden from people and the ruses involved.

Mr Mullaly : I would have to come back with the exact details of the resources but I think it is adequately resourced. There are senior and experienced people involved.

Mr Kell : We fully agree with you: it is complex and large scale.

Mr Tanzer : It would be very interesting to talk to the person that you mentioned.

Senator XENOPHON: I think that the person who I spoke to—how can I put it diplomatically? My understanding is that he did approach ASIC, but not much interest was shown initially. I will follow that up. Time frame expected to make an assessment of any potential action and whether you will proceed or not?

Mr Mullaly : I think there is still quite a bit of investigation to be undertaken. I would not want to be putting a time frame on it.

Senator XENOPHON: By the end of this year?

Mr Mullaly : Certainly by the end of this year.

Senator XENOPHON: I guess what concerns me is that there are still people being duped by this notorious crook Henry Kaye and others, and his family members are involved in this. How can we warn consumers to keep well away from these scams?

Mr Mullaly : I think there have been some warnings put out in relation to it, and we are looking at updating our MoneySmart website in relation to loan banking issue. We will get that public message out, but I understand—and we know—that getting this matter concluded quickly is important and we are putting the resources that we can onto it to ensure that we get into court, if that is where it is going to go, as soon as we can.

Senator XENOPHON: I just need to move on, because of time constraints, to two other areas. There has been some recent media coverage in relation to boiler room scams operating out of Queensland, in particular. What role does ASIC have in monitoring this kind of activity? Has there been an increase in this kind of activity? The sorts of products they have been selling—my understanding is in terms of complaints that they mention gambling software. Would that be covered under the Interactive Gambling Act? Does that give you an opportunity to be involved?

Mr Tanzer : We are aware of the reports that you have mentioned. We do undertake periodic activity with respect to this type of boiler room activity. Largely, the sort of activity we are normally able to take, again, goes to unlicensed activity. Often the type of investment that is offered does fall within our jurisdiction. It might be direct investment in some shares. The software ones are more difficult—

Senator XENOPHON: Hopefully, you are going to win on every horse race.

Mr Tanzer : The software is more difficult because, again, we need to find a hook back to a financial product. But our strategy with this is to work closely with whatever the relevant state police force is, and we have had quite some success in the past with coordinated action with the police forces.

Senator XENOPHON: Further to that: is there a need for a collaborative approach across a number of agencies and jurisdictions in terms of addressing these issues, for instance? What role could ASIC play in respect of that? I have had victims in my office who have been reduced to tears where they have lost a lot of money on these scams. They thought they were doing the right thing. It was a very slick package—this software or other forms of software was mainly gambling, horse racing. What role does ASIC have in some national leadership in respect of this? Is there a national strategy or plan in place; or, if not, will there be? How do you raise public awareness so we do not see more victims turning up?

Mr Day : It is a very good question. I am at pains to stress that when we are talking about potential betting scams, betting syndicates, betting software, those are not federal matters; they are state matters. Across states, we do work with relevant state police forces about those matters. There has been a lot of coordination—

Senator XENOPHON: They offer it from one state to another.

Mr Day : I understand that, but the Australian Federal Police would become involved as well. There is very good liaison across all of these types of matters as needs be. When we are required to, we assist Queensland police with matters that have been reported recently.

There was a headline piece of work done in relation to international boiler room scams a couple of years ago, led by the Australian Crime Commission and supported by ourselves, the Australian Federal Police, the tax office, the state police forces and the ACCC. The Australian Crime Commission put out a very good report that indicated the nature of boiler room scams.

Senator XENOPHON: The paradox seems to be these crooks seem to be doing very well operating internally. So we have done some good work in terms of international boiler room scams, but there are still people getting hurt within Australia.

Mr Day : Absolutely. But, as I say, in terms of those types of scams, we are talking about pure fraud. In those circumstances, those are matters really for the police forces—the Australian Federal Police and the relevant state police—and they do very good coordination there. Where we are needed to assist, where there may be potential corporate offences—corporations offences and financial services offences, as Mr Tanzer pointed out—we have been involved and we will assist.

Mr Medcraft : I was just discussing with the minister that one of the big issues with this area is that often a lot of it happens from offshore—things boiler room falling in from offshore—and enforcement often is quite problematic in terms of going across jurisdictions. We have some ideas that we are exploring with the government that are likely to make that even more effective.

Senator XENOPHON: If you are able to give more information, you can take it on notice, but if it is still in a policy coordination stage—

Mr Medcraft : Just to mention that we are thinking about how we can possibly be smarter.

Senator XENOPHON: Could you also take on notice how you are going to publicise this to warn people about these sorts of scams.

Mr Medcraft : Yes.

Senator XENOPHON: My final question relates to my good friends at Qantas. I will put some questions on notice and forward this to you. It relates to correspondence I have had with the chairman, Mr Clifford, in relation to the information that I raised at the AGM—since I am a shareholder of Qantas. I think I bought $500 worth of shares. Embarrassingly, the share price has gone up since I bought the shares.

CHAIR: Where did you get your information from?

Senator XENOPHON: There is a serious issue here.

CHAIR: Do you want to be investigated?

Senator XENOPHON: Any profits once the shares are sold will go to charity, Chair.

Senator DASTYARI: How many shares did you buy?

Senator XENOPHON: The minimum number to go to the AGM. Mr Medcraft, this goes to issues I have raised with you—

Mr Medcraft : I know; we have had a number of discussions.

Senator XENOPHON: This goes to the issue of private investor briefings and the fundamental issue of why mum and dad investors should be denied the same sorts of information that are given to private investor briefings. Should there be equal access to information? When I asked Mr Clifford about the details of the private investor briefings, he said that the contents of discussions with investors and potential investors are commercial in confidence on the basis that the information imparted by the investors to Qantas is done in strict confidence. I will send this to you. You may want a more considered response. I find that a rather cute response from Mr Clifford. He went on to say, I think quite smugly, 'I agree that it is the role of ASIC to review and investigate such matters. I presume that if ASIC had considered that any of the matters that you had raised had any merit, ASIC would have taken action and it has not.' My broader question is: in terms of continuous disclosure and equal access of information to investors, what work has ASIC done? We do not have to talk about Qantas, but I will use that as a point. What do you say about the general principle if Qantas put their hands up and say, 'We're not going to tell you what was discussed here because they gave us confidential information, so we can't tell you'?

Mr Medcraft : I will allow my colleagues to comment, but I will say that I said at the start of this that, if people are to have confidence in markets, one principle is golden—fair, orderly and transparent. That is the principle. To that end, we are actually very focused currently, as you know, on this issue of proper disclosure and treatment of confidential market price sensitive information. As you know, we did successfully get a civil penalty against Newcrest last year. It is a priority for us in our surveillance and enforcement.

Senator XENOPHON: Before I put it to Ms Amour and Mr Price; Qantas' argument was: 'in other words, it is the protection of information imparted by others'—this is Mr Clifford—'to Qantas that dictates the confidentiality obligations applying to those meetings, rather than any information imparted by Qantas.' Does that give them protection?

Mr Medcraft : It has got to be a level playing field.

Ms Armour : It is not necessarily, a protection. If there was any price sensitive information imparted to Qantas, we would expect that information to be disclosed, broadly.

Mr Medcraft : By the investor.

Senator XENOPHON: But Qantas says, 'We're not going to tell you what happened, because we were given sensitive commercial information by the investor'; does that give them protection?

Ms Armour : If it was price sensitive, there is no protection on that. If it is information that anyone investing in the market would expect to know, Qantas should, once they have received it, have an obligation to announce that, unless they absolutely can show that there are some exceptions under the listing rules, which are around confidentiality, that might apply.

Senator XENOPHON: It does not wash though, does it? You cannot use it as an excuse: 'I've been given confidential information and therefore we won't tell you what was imparted by us.'

Ms Armour : Exactly; the principle is: all investors are entitled to receive material information at the same time, so there is not really a legal reason for companies not to disclose the content of their briefings to institutional investors or researchers.

Senator XENOPHON: I will put these further questions on notice. Thank you, because I will use your wise words back to Mr Clifford when I go to the next AGM.

Mr Medcraft : Companies need to be aware: we are focused very heavily on this. A key part of our surveillance in the next 12 months is going to be on this and making sure that there is actually no naughtiness going on.

Senator XENOPHON: So the reason given by Qantas that I have read out to you—'if we are given information by an investor therefore we can't tell you what we imparted to them'—does not necessarily wash.

Ms Armour : If it is a confidential conversation and there is no breach of that, then that may be acceptable. It really does depend on the circumstances.

CHAIR: With that, we are going to go to a break.

Proceedings suspended from 10 : 52 to 11 : 05

CHAIR: We will now reconvene and welcome back the officers from the Australian Securities and Investment Commission.

Senator RHIANNON: Mr Medcraft, in your opening statement you spoke very extensively and strongly about the need to change the culture. In this context, can you update the committee on ASIC's work to strengthen whistleblower protection in the private sector?

Mr Medcraft : We can certainly do that.

Mr Day : You are asking about what are we doing to strengthen it in the private sector. These are things that flow on from the Senate inquiry into ASIC's performance, where there was an intensive focus in relation to our own handling about whistleblowers, but I think what was also a focus of that consideration was the handling by financial institutions of whistleblowers within their own organisations. In respect of that, what we are doing—and have done previously—is provide a number of information sheets and other guidance for businesses as to what they should think about for their own frameworks and own approaches for dealing with information from whistleblowers. We have also given them guidance. We reissued our own information sheet 52 last year, and we intend to probably update that again shortly in relation to the requirements in the Corporations Act that deal with handling whistleblower information.

We are also contributing to some work being done between a number of universities lead by Professor AJ Brown at Griffith University, who is seeking to do another larger research project into whistleblowing in private enterprise. That follows on from the work that Professor Brown and others did that was under the title of Whistling while they work. We are looking at a research based approach. We are looking at our own guides in that respect and then guidance as to the features of our legislation that relates to whistleblowers.

Mr Tanzer : From a surveillance perspective, I mentioned in the speech that I gave last Wednesday when I was expanding on what ASIC would do in this area of culture that we intend to focus on a couple of areas. The first was to incorporate culture into our risk based surveillance reviews, the second was then to go on and to use those findings to better understand how cultures drive conduct and the third was to communicate to industry and the firms where we have a problem with their culture and conduct—as the Chairman mentioned.

The particular areas that we are planning to target in surveillance are those where poor practices may increase the potential for poor conduct and therefore increase the risk to trust and confidence. One of the six areas that I specifically mentioned there was the approach of the entities with respect to whistleblowing because we see that the response of an entity to whistleblowing, internal or external, its approach to dealing with complaints, is a good indicator of whether the culture of the organisation is such that it uncovers and deals with problems or tends to hide them.

Senator RHIANNON: You spoke about risk based surveillance. Could you describe what that is.

Mr Tanzer : We undertake risk based surveillance across the whole of our regulated population and that ranges from auditors—

Senator RHIANNON: I meant, sorry, with regard to whistleblowers. I was not sure what you meant in that context.

Mr Tanzer : What I mean is that we have a program of risk based surveillance of entities. When we go to see entities we will be incorporating into that surveillance an examination of how they deal with whistleblowers, because we see that as an indicator of a potential issue from a cultural perspective.

Senator RHIANNON: What Mr Day set out was about the information sheets you are updating, and you have expanded on that. I was interested in how you are encouraging businesses to adopt whistleblower protection strategies At the moment how it is working sounds quite passive. Considering it has been identified at international levels how serious this is I thought it might have been more proactive.

Mr Tanzer : Senator, that was precisely why I made such a point in the speech. I made a point that not only are we seeing culture as central to this, because it bears on conduct, but whistleblowing or the way in which entities deal with whistleblowing is one of the six areas that we are identifying. The other ones are things like your reward and incentives policy, with respect to your employees; your recruitment and training policy; and how you deal with conflicts of interest. But out of the six areas whistleblowing was front and centre within that.

Mr Medcraft : It is basically that program I outlined earlier about dealing with culture and conduct. I have publicly said what Greg said, which is that we are going to be encouraging companies to reward people who come forward and whistleblow—and not just say it but actually reward them. Also, we want companies to have a culture that encourages whistleblowers to come forward. As I say, that culture could even incorporate rewarding them for coming forward. In terms of how we enforce the law, our approach is: detect, understand and respond. In part of detection, we consider whistleblowing as a very key source of intelligence gathering for us, and it should be for companies. If companies have got the right culture then they want to encourage whistleblowers to come forward and they want to protect and value them, frankly.

Senator RHIANNON: Have you determined what form that reward would take?

Mr Medcraft : They may offer them a bonus for offering up. It is also what I have said. I made a speech to the stock brokers last week, which I am very happy to give you a copy of. I was very strong on this issue. I said: 'Look, if the person next to you is not doing the right thing, you take responsibility to elevate it to management, because, at the end of the day, if things go wrong, that affects the reputation of your firm and you should be concerned about it. It is actually for all of you. Just being passive is, frankly, not the right culture. It is everyone's business.' I have been very passionate about this particular issue. It is part of this broader push. I am happy to provide you a copy of that speech.

Senator RHIANNON: If you could do so, that would be good. Is ASIC involved in the government responding to the OECD report, where they have identified the need to have better protection for private sector whistleblowers?

Mr Tanzer : I think it is being coordinated through the Attorney-General's Department, but I am not aware of whether we have been specifically approached.

Senator RHIANNON: You are not aware.

Mr Medcraft : We made some comments to the Financial System Inquiry, and I think we did suggest perhaps stronger protections for former employee whistleblowers. Is that correct?

Mr Day : It was a Senate inquiry.

Mr Medcraft : We did make recommendations that protections for former employees acting as whistleblowers should be strengthened, because one of the issues, as you know, Senator, is that often a person who has been an employee, who has blown on somebody, may never be able to get a job again.

Senator RHIANNON: Yes. It is enormous.

Mr Medcraft : It is obviously a very, very important issue. They should not be penalised for the rest of their life for having stepped forward to do the right thing.

Senator RHIANNON: Just to clarify: there is no formal involvement of ASIC with what the A-G is doing in responding to that report?

Mr Medcraft : No.

Senator RHIANNON: Just staying with the OECD anticorruption work: they detailed 16 allegations of Australians bribing foreign officials, and the AFP are investigating. There is speculation that some of these companies may be involved in illegal activities in Australia. Do you have a memorandum of understanding or some working arrangement with the AFP to share information on Australians or Australian companies involved in bribery activities overseas and/or in Australia?

Mr Medcraft : We have a memorandum of understanding with the AFP. We also have staff seconded into the fraud and anticorruption unit within the AFP, with other federal agencies. I will highlight on this issue for companies in Australia—and, again, I would be happy to distribute a copy of it—that the AFP, and with our name on it as well, has recently released an online tool kit for companies dealing with fraud and corruption. I really recommend it. It is an excellent document.

Senator RHIANNON: Thank you. Can you confirm that some of the 16 allegations of Australians bribing foreign officials are also being investigated for illegal activities within Australia?

Mr Medcraft : I cannot comment on investigations; but, certainly, as I said, we are part of the fraud and anticorruption unit that is sponsored by the AFP. Clearly, that unit is probably pretty busy.

Senator RHIANNON: Okay. It says a lot.

Mr Medcraft : Can I highlight again that it would be really well worth you looking at that recently launched online tool kit. We can provide you a link to it. I highly recommended it. It is really excellent. I also highlight it for boards in Australia. They should be aware of it, because it is a great tool kit for companies in knowing how to respond, prepare and question management on their making sure that they have adequate practices to deal with bribery and corruption, whether it be domestic or foreign. I just highlight that. It is a really good initiative, and we are very proud to be part of it.

Senator KETTER: Mr Medcraft, I very much welcome the focus on culture which you have talked about. I think that is very commendable. I want to take you to a specific example of a very poor culture, where some might argue the actions of ASIC have been somewhat perplexing under the circumstances. I am referring particularly to ASIC's action against the Bank of Queensland, particularly in relation to its North Ward Branch. As you would be aware, it had an association with the Storm Financial group, which was a terrible sorry saga. I understand that ASIC has reached a settlement on behalf of the victims of the Bank of Queensland, and that is a commendable outcome. But all other actions in relation to the matter were apparently dropped. ASIC has indicated that its priority was to recover compensation. The question I have is in respect of this broader role in protecting the public and ensuring that there is no repeat of this type of behaviour. What other action is available to ASIC in this specific case?

Mr Medcraft : Storm has been going for many years, but we have recovered hundreds of millions of dollars, as you said, for investors.

Senator KETTER: I am specifically talking about the Bank of Queensland and your involvement in this.

Mr Medcraft : Peter, do you want to comment on the Bank of Queensland—or Tim?

Mr Mullaly : Senator, as you indicated, ASIC settled the Storm matter with the Bank of Queensland, and that resolved issues broadly with the Bank of Queensland and the North Ward Branch relating to Storm. There are no further inquiries currently underway in relation to that particular branch. However, there has been some recent information provided to ASIC by the Bank of Queensland that we are considering.

Senator KETTER: I understand that particular branch of the Bank of Queensland signed 260 of the 300 loans issued to Storm clients. So, when we talk about culture, there seems to have been a culture that was very much to the detriment of Bank of Queensland clients. How can this issue be further pursued?

Mr Mullaly : As I indicated, we have been provided with some information in relation to the North Ward Branch. ASIC is considering the issues that have been provided to us, and we will make a decision on whether we need to take further action in due course.

Senator KETTER: In terms of the original action that was taken, you appear to have dropped any other parts of that action, other than seeking settlement for the victims.

Mr Tanzer : The commission's intention, which it announced very clearly at the time, was that it wanted to take action to seek compensation on behalf of the investors, and that was its top priority—that is right—at the time.

Mr Mullaly : I would also add that we did take action and still have action on foot in relation to the Cassimatises, the directors and owners of that business, as well as taking action against a number of financial advisers in respect of advice given to those clients.

Mr Tanzer : I should also say that the action in terms of compensation was no small action. This recovered over $100 million in compensation from a range of entities involved, including the Bank of Queensland. The recovery, with respect to investors, was really quite substantial. They did not necessarily get all of the money they lost, but it was a very substantial recovery.

Senator KETTER: For the $20 million settlement, as I understand, there were other actions that were taken. What other parts of the original claim were not pursued as a result of this out-of-court settlement with the Bank of Queensland?

Mr Tanzer : We undertook a very broad range of inquiries into the Storm matter as a whole; the Bank of Queensland aspect of this was part of the Storm investigation. As I say, our key focus was on looking at obtaining compensation for investors. That was based on our best assessment of the evidence at the time and the public interest in being able to take that type of action. I will take on notice and I will check whether there were any particular aspects of the claim that were dropped as part of the settlement of the action, but I do recall that at the time we made that settlement, we considered that the settlement that was achieved appropriately dealt with the concerns we had raised at the time.

Mr Medcraft : I will say as someone who was pretty heavily involved with negotiating all those settlements, what we sought to achieve was to ensure that the settlement reflected, in the case of CBA, that the investors recovered the majority of their losses and the same principle applied to the Bank of Queensland settlement. The objective was to have the investors recover a significant percentage of their losses, consistent with the other settlements. My objective was to make sure they were consistent.

Senator KETTER: This branch of the Bank of Queensland, North Ward, continues to operate and, as I understand their media reports, it is due to close on 30 June, but the co-owners of that branch or franchise of the Bank of Queensland have continued to operate, seemingly unaffected by the issues and the victims. What is your reaction to that? There is a perception there that ASIC has not addressed that fundamental issue. One of the co-owners a federal court judge described as 'a cowboy'.

Senator WILLIAMS: What was his name?

Senator KETTER: There were two owners. I do not want to go down that track unless I am sure but—

Senator WILLIAMS: I would.

Mr Tanzer : I think he has missed an early indicator. There is some information that has come to us a bit more recently and we are looking at it at the moment. We will see if there is more that we can tell you about—

Senator KETTER: But this is not an event that has happened overnight, it is an issue that is ongoing for—

Mr Medcraft : I think that what we are saying is that we are aware of it and we are actually dealing with it at the moment. We are saying that we are aware. When people do not see us there, it does not mean to say that we are not there.

Senator KETTER: Yes, but nothing has happened—

Mr Tanzer : To take this example, a lot has happened. There has been a lot of compensation paid to investors; there is a very significant civil penalty action against the key promoters of this scheme, the Cassimatis. We do need to make judgements about how much resource we can devote to each particular matter. So I do contest your point about nothing has happened. I will check whether your point is true that nothing has happened in respect to anybody at the North Ward branch. That might be the speculation in the newspaper but I am not sure that is true.

Senator KETTER: I want to clarify my remark. I was referring to the North Ward project. I think it is commendable what OECD has done.

Mr Medcraft : On Commissioner Tanzer's point, I think Mr Mullaly confirmed that we have got inquiries being undertaken at the present in relation to the North Ward branch. There is a very strong message in what I have just said. I think the hint is enough, yes.

Senator KETTER: Thank you for that.

Senator WILLIAMS: Mr Tanzer, as I have said in this place before, I will go to my grave saying that ASIC should have pursued whether Storm was an unregistered managed investment scheme and to enforce the corporate law, not to seek compensation. We have been there for a long time, and we might go there again.

Mr Medcraft, it is almost 12 months since the Senate report into ASIC was handed down. No doubt you have done a lot of soul-searching since then. What have you done or what are you doing about connecting the dots to ensure all processes are falling into place to make ASIC a better regulator?

Mr Medcraft : I really welcome the question. We have launched a campaign called Connecting the Dots within ASIC. It covers many of the aspects, because we are a learning organisation, and that is important. I will allow others to comment in more detail. But, in relation to our complaints handling, one of the issues that came out of that inquiry was that we needed to better connect the dots in terms of when complaints come in and then track through the organisation. I will ask Mr Day to comment on that a bit more in a moment.

Senator WILLIAMS: Be aware that I only have 20 minutes.

Mr Medcraft : I will be very quick, but I think this is important because it goes to the heart of how we deal with information. The other aspect of what we are doing is that at the moment we have 200 Lotus Notes databases for sharing information, and they are fragmented. My view is that we have to have one ASIC, and it is not just about IT systems; it is about having one single platform for information to make sure we are also connecting the dots when people come to us so that we have online portals and information is in one database and it is shared. We are looking to have one single database to facilitate information flowing through the information. I will perhaps ask Mr Day to comment more about that as well.

Also, it is the reason we are going to be looking at activity based offices. I want to encourage people to really work more closely as teams and have more interchange. We will also allow more interchange between people. I want people to work more as one team. We have some very significant things that we are looking at to make us better connect the dots. It will make us far better in terms of intelligence and making sure information passes quickly. Also, just because you do not think this is of interest to somebody else, you will not have to presume that, because somebody else will be able to connect the dots. That is a bit of a prelude. John, did you want to say something?

Mr Price : I was going to add that we have undertaken a range of work in this area. One of the more important things we have done is undertake an internal audit report in terms of how ASIC manages and shares information within the organisation. That identified that there are some areas for improvement that we can look at. Those areas of improvement are relevant on both a short-term basis and a long-term basis. In the short term I think there is an important issue around training of staff, around changing behaviours of staff to make sure that information is shared more broadly, around thinking about things like standardised reporting templates and activity based working to facilitate the sharing of information. Longer term there is also this issue around ASIC systems. We are already taking some steps around our business processes and our systems to make sure the information is shared in a more coherent and cohesive way. There is a project within ASIC called the business operating model project. It is looking at all the various workflows of ASIC; it wants to collapse those into a single system so that information is recorded in the one space and it is much more easily accessible, rather than having fragmented databases across the organisation. Fundamentally, it also wants to look at the way that we use our systems and good tools that are in the marketplace now, like Microsoft SharePoint, which basically allow—

Senator WILLIAMS: Mr Price, I have asked one question and nearly five minutes has gone by.

Mr Price : I will stop there.

Mr Medcraft : It is a very good question, Senator.

Senator WILLIAMS: I know it is a very good question. You have 30 seconds, Mr Day.

Mr Day : In August, following one of the major submissions to the Senate inquiry was that of the Commonwealth Ombudsman, which was seeking a large improvement in the way we handle complaints to ASIC about ASIC. In August we will launch effectively a more centralised, singular approach for people to make complaints to ASIC about their dealings with ASIC. We have done a lot of work on that. The components will provide better monitoring, better support for staff in dealing with those complaints, better internal transparency and better external transparency. We will start, after that date, reporting publicly about what complaints about our organisation we get and what we are doing about them.

Senator WILLIAMS: Clearly some good has come out of that Senate inquiry, which is pleasing to hear.

CHAIR: Were you on that?

Senator WILLIAMS: Yes, I was. Does a one-legged duck swim in circles? Several of the FIFA officials who have been arrested, Mr Medcraft, have been charged with wire fraud. Can you explain what wire fraud is? Is there a similar charge in Australia and should we be looking at this issue in this high-tech world we have today? Explain wire fraud and how it might relate to Australia.

Mr Medcraft : Wire fraud is something I have certainly raised with the government. I was discussing it earlier with the minister. It is used by the US, particularly by the US Attorney, to establish a connection where crimes have occurred in foreign jurisdictions. It goes back to the days of the telegraph—wire fraud.

Senator Cormann: It goes back to 1872.

Mr Medcraft : Our minister of course knows all about it already. Would you like to respond on that, Minister?

Senator WILLIAMS: You look younger than that, Minister.

Mr Medcraft : What is interesting about wire fraud—and it is very exciting as a tool—is that as long as money has flowed through the jurisdiction or a telephone call has been made into the jurisdiction, a connection with that jurisdiction is established. Even if it was not a crime in the jurisdiction in which it occurred, the establishment of that connection in the jurisdiction where it would be a crime allows you to enforce a crime across borders. Think about that—it is very exciting in the context of a digital environment. If, say, there is a bitcoin transaction that occurs out of Australia or there is a telephone call into Australia—

Senator WILLIAMS: Then you can take action.

Mr Medcraft : Correct. It facilitates law enforcement. If you have followed the FIFA scandal, you would know that it is how the US Attorney was able to take action against the officials in Switzerland. He was able to prosecute them under US law for what they had done in a foreign jurisdiction. Equally, it is how the US Attorney has very successfully prosecuted gangsters et cetera in the United States, using the wire fraud laws to—

Senator WILLIAMS: Mr Medcraft, we are going to have to wind this up.

Mr Medcraft : I believe that, in a digital age, this is the sort of thing that will become essential.

Senator WILLIAMS: It will be a good way to throw the net over people doing the wrong thing. Mr Medcraft, congratulations on your work with David St Pierre. I saw your media release. Thank you for that, Mr Kell, you did well. When we had the inquiry, I asked that bank, 'Why did your bank manager give a 30-year loan to a 97-year-old lady who was in an aged-care facility?' Senator Cameron asked, 'How old was she, Senator Williams?' I said, 'She was 97, Senator Cameron.' He said, 'It must be a bloody good aged-care facility.' I believe compensation has been paid and we will leave the rest for the courtroom.

In the case of John Viscariello v Peter Macks, Mr Price, he did contact you on 24 August 2005—several times. You did not take action. I am disappointed that you did not take action. It was left to him to run the case. It cost him a couple of million dollars. Now of course you are involved with that case, with that liquidator Peter Macks in Adelaide. Do you have an update?

Mr Price : I note that there are various appeals going through the courts at the moment, so we need to be very circumspect.

Senator WILLIAMS: Okay, I will leave it to the appeal courts. I want to go to insider trading and front-running. If a financial services company suspects a manager of conducting improper share trading—that could be insider trading or front-running—should ASIC be notified?

Ms Armour : Yes, I believe it should.

Senator WILLIAMS: If the financial body believes there is wrongdoing ASIC should be notified?

Ms Armour : Yes.

Senator WILLIAMS: Should a breach report be followed?

Mr Medcraft : Often we can find out as well.

Senator WILLIAMS: Should a breach report be filed from that institution?

Ms Armour : Yes, if it meets the situation for a significant breach.

Senator WILLIAMS: Is it enough to give a manager a first and final warning in that situation, do you think? Perhaps that is asking for an opinion, but what action should you or the financial institution take? Should there be a first and final warning?

Ms Armour : If the financial institution has a concern about the law being breached, the first thing they should do is refer the matter to the regulators. One would expect that if there is a serious concern about the law being breached the financial institution would no longer be interested in employing that person.

Mr Medcraft : If they break the law, they have got to report it. There is no first warning.

Ms Armour : There is a difference, obviously, between a suspicion of something happening and actually determining if it did. There may well be a perfectly good explanation.

Mr Medcraft : The point is that if they break the law, it is not a warning. If they break the law, you have got to go to the law enforcement agency.

Senator WILLIAMS: Exactly. You were talking about culture, Mr Medcraft, in your opening statement. We want to move on to financial planning et cetera. The way planners are paid, their remuneration balance scoreboard—are we seeing an improvement there?

Mr Medcraft : I will pass over to Mr Kell.

Mr Kell : Obviously, the FOFA reforms are having an impact in terms of remuneration structures. I do not think I could give you a comprehensive picture of the entire industry at this point in time. But it is also helping to bring to light some problematic past practices such as the charging of fees for advice that was not actually provided. Those sorts of things are now changing as a result of the reforms. We will keep looking at it. We have got a lot of work underway in this area, but I think we are seeing things on the up.

Senator WILLIAMS: Where is ASIC up to with the investigation of the NAB financial planning debacle?

Mr Kell : We have a very significant piece of work underway there, a very significant investigation underway there. We have served quite a lot of significant information requests under our compulsory information gathering powers to NAB in relation to advisers and their systems. We are looking, broadly speaking, at three types of issues—their actual systems, including their breach reporting standards, the behaviour of individual advisers and whether that needs to be reviewed, and also the remediation that they are offering. So NAB systems as a whole, the conduct of advisers and what are they doing to compensate consumers, and is that compensation adequate? So it is a big piece of work.

Senator WILLIAMS: On that issue, how much compensation has been paid and to how many clients?

Mr Kell : For NAB it is still very early days. I cannot give you an answer right now on that, but it is still very early days on compensation with NAB.

Ms Bird : NAB itself, as we know, have paid out compensation in the past other than an ASIC remediation program, totalling about $6 million over a six-year period.

Mr Kell : But there is more, obviously, to be looked at in the context of this review.

Senator WILLIAMS: Will you be giving the NAB scheme greater diligence, bearing in mind the KordaMentha report described CBA's compensation scheme as flawed, high questionable and massively unfair?

Mr Kell : Their past compensation efforts? Yes, and in fact you may be aware that we have recently announced that we will be issuing guidelines for the entire financial planning industry about how to properly structure and run remediation and compensation processes, because we have seen too many inconstancies and too many areas in the past where those schemes have fallen down. So we are going to be issuing guidelines and consulting on them—you may even want to put in your views when we do that—so that there is a more robust set of standards right across the sector if remediation is in question and we can have stronger systems in place.

Senator WILLIAMS: How many people have lost their jobs over this at NAB?

Mr Kell : I could not give you an exact figure on that at the moment. I am happy to take that on notice. Again that is all part of the current investigation.

Senator WILLIAMS: I think there were 37 planners moved on, or was it 41?

Mr Kell : That was the initial figure. We are obviously undertaking inquiries as to whether there were additional planners as part of that.

Senator WILLIAMS: Tom Dawe is one of the planners to be looked at I would imagine.

Mr Kell : I have not got that name—

Ms Bird : We have served notices on NAB to get the names of all of the advisers that they have dismissed.

Senator WILLIAMS: Good. How many planners have now been banned in the fallout of the CBA scandal?

Ms Bird : With the CBA we have banned five advisers, had three EUs—

Mr Kell : So three removed themselves from the industry.

Ms Bird : We have subsequently banned another adviser in relation to his conduct at a subsequent licensee. In fact, he came to our attention because of his work in the CBA group so that comes out of that. We are still looking at about four CBA advisers. We have one brief with the Commonwealth Director of Public Prosecutions in relation to somebody who had previously been permanently banned.

Mr Kell : So nine with more to come.

Senator WILLIAMS: The 16 advisers referred to in point 5 of the KordaMentha forensic report dated 22 April were subject to significant breach reports. Are you looking at those 16 as well or are they part of the group?

Ms Bird : We have looked at all of those people who are mentioned.

Senator WILLIAMS: Good. Mr Medcraft, this is a disappointing judgement as far as ASIC goes. On 26 May 2015 the headline was 'Judge criticises ASIC for taking six years to bring Prime Trust case'.

Mr Tanzer : That is not a judgement.

Senator WILLIAMS: Sorry. It states:

A Federal Court judge says it's a "big shame" the Australian Securities and Investments Commission waited six years before bringing action against five former directors of Prime Trust.

Mr Tanzer : There was a very significant action that we took against the directors of Prime Trust—

Senator WILLIAMS: But he would be right in that he expressed his disappointment that it took you six years to act?

Mr Tanzer : It was in the context of an argument about whether the action should have related to a decision about July 2006 or a decision about August 2006. We took our action based on the decision that the directors made in August 2006 to pay a $33 million success fee to the benefit of one of their number. So the argument was about the technical point of whether the matter that should have been pleaded was the matter in July, when the company took some other steps to start to facilitate that payment as opposed to making the actual payment. So the context of the discussion was that specifically but in fact ASIC became aware of that matter in about 2010 and commenced action in 2012.

Senator WILLIAMS: Right and that is the reason why.

Mr Medcraft : Senator Williams, you do raise an interesting issue, which is speed.

Senator WILLIAMS: That has been my biggest complaint for many years, whether it has been Stuart Ariff, liquidators, financial planners or whistleblowers. This has been my big gripe with you for a long time and now the judge is saying it.

Mr Medcraft : And I do listen to you, Senator.

Senator WILLIAMS: I appreciate that. Not many people do.

Mr Medcraft : No, you know I listen to you and I meet with you. Greg, would you mind commenting on some recent actions we are taking in the enforcement committee to really look at speeding up and being more disciplined? I think it would be quite interesting for the committee.

Mr Tanzer : It goes partly to my response to Senator Ketter earlier and partly to just trying to clarify with respect to that particular matter. We commenced our investigation in 2010 and took our action in 2012. The company actually collapsed closer to 2010 so it was not ever going to be easy for us to uncover the conduct that took place in 2006 until we started investigating.

Taking your point precisely, we conduct at any one time about 180 to 200 investigations. Our median time for conducting those sorts of investigations has ranged at different times. Obviously the outliers go for some years but the median time runs at about eight months. Through better focusing those investigations and, frankly, better targeting upfront we are trying to reduce that time to get ourselves in a position where—

Senator WILLIAMS: When your new system is in place and your dots are in place, lined up with your new computer systems, instead of having 200 silos, that will hopefully make—

Mr Medcraft : And also—

Senator WILLIAMS: We have to move on.

Mr Medcraft : Also, Senator, it means that we have to be willing to just walk away from an investigation if we feel that the outcome is not going to be timely, because being timely is very effective in deterrence. That will mean discipline. So it is something the commission is very committed to—basically, deciding and getting things sorted out earlier. I do not know whether you—

Senator WILLIAMS: I have to move on, sorry.

Mr Medcraft : Yes, okay.

Senator WILLIAMS: Is anyone familiar with this Mark Bryers, a bloke from New Zealand? This article says:

Bankrupt Mark Bryers is using the name Mark Ryan to run a business in Australia with many hallmarks of his failed Blue Chip property investment group which left more than 2000 investors with losses of more than $80 million.

That was in New Zealand. He came out here bankrupt. I think he is running accounting companies and now financial planning businesses.

Mr Day : Yes, I am aware of him, Senator.

Senator WILLIAMS: Mr Day, is he still practising?

Mr Day : We understand that a person by the name of Mark Bryers had been declared bankrupt in New Zealand recently in relation—

Senator WILLIAMS: Yes. Was he also suspended from being the director of a company?

Mr Day : I will get to that.

Senator WILLIAMS: Yes, go for it.

Mr Day : By virtue of the fact that he is a bankrupt in New Zealand, the Corporations Act also recognises that and disqualifies him from managing corporations, under section 206B of the Corporations Act. We understand, though, that in New Zealand he actually had his bankruptcy lifted. However, what the judge did in that case was continue his disqualification from managing corporations for a further seven years. So, that order by that judge in the jurisdiction—

Senator WILLIAMS: Does that carry into Australia?

Mr Day : It carries into Australia automatically. It does not automatically carry through from any other jurisdiction except New Zealand. New Zealand has a unique benefit in that respect. So we are aware of it. We are aware that there are companies that Mr Bryers has connections to but he is not a director of, as far as our registers show. But there are companies that Mr Bryers is alleged to be related to, and we are considering that further—whether or not he may be managing companies while disqualified.

Senator WILLIAMS: Hopefully. If he did the wrong thing over there, well, good luck with preventing him from practising his bad habits here. Thanks, Chair.

CHAIR: Mr Mullaly?

Mr Mullaly : Chair, just on the Prime Trust matter, I think it is also important to note that the comments that were made were made in an appeal—that is, an appeal by the defendant. ASIC won in the first instance, so ASIC was vindicated in the case that it brought in the first instance. And it was a tremendous effort by the team to do that.

Mr Medcraft : Yes, I agree.

Senator WILLIAMS: Good on you.

Mr Medcraft : And we will pursue all ends to make sure we get those penalties.

Senator WILLIAMS: And you will pursue Mr Bryers, or Mr Ryan or whatever his name is?

Mr Day : As I said, Senator, we are looking at that.

Senator WILLIAMS: It is always suspicious when people change their names.


Senator WILLIAMS: I have remained 'Wacka' for a long time!

CHAIR: Yes, Senator John Williams. Senator Dastyari.

Senator DASTYARI: Thank you. Mr Medcraft, I have a whole series of issues to get through. I am going to try and get through them as quickly as possible because I am very conscious of time and there are always a lot of senators who want to ask you questions because you are at the forefront of consumer issues and I think a lot of MPs get contacted about those issues. Mr Kell made a few preliminary remarks in answer to a question from Senator Lambie regarding the stickiness of credit card rates, and the gap between the rate people pay on credit cards—it is outrageous—and the cash rate, and how sticky that has been. If you could make a few comments on that and then we can move on from that topic, because I know it is not directly in your area. I note that the Treasury secretary said two days ago that he thought it was worthy of, I think, a deep and thorough probe. The Reserve Bank of Australia has said that it is certainly worth looking at. It is one of those funny areas that, firstly, is a market issue for competition but, secondly, kind of falls within the purview of a lot of different regulatory agencies. I just want to get your comments on that, Mr Medcraft.

Mr Medcraft : We welcome it, but I will pass over to Peter Kell.

Mr Kell : We would agree, but I think ASIC's view is that we would be very happy to assist Treasury and the RBA to look at the issue. ASIC do have a role in the regulation of credit cards in relation to responsible lending and disclosure. Hopefully those regulatory tools do help consumers in the way that they use credit cards, but obviously there are some limitations and there continue to be problems for some consumers who still seem to be paying a lot. So we would certainly be very willing to be part of that deeper dive.

Mr Medcraft : And I think it should include surcharges.

Senator DASTYARI: Thank you. I have one other quick question on that, and then we will move on from that topic: officials from Treasury yesterday said that they produced a report which they handed to government on 25 March in consultation with other agencies—I am sorry, Minister; you were not here. There was a different minister at the table. Minister Ryan was at the table.

Senator Cormann: Which report are you talking about?

Senator DASTYARI: No; there was a paper produced for government by Treasury on 25 March this year by the Markets Group of Treasury and given to government—

Senator Cormann: What was it about?

Senator DASTYARI: About credit cards, and about the challenging space for credit cards. I should have asked the Market Groups this, but I will ask you, so from the other end: Markets Group said that in developing that document they had consulted with APRA and other relevant agencies in the preparation of the document. I imagine, if they were contacting you, it would probably have been at a level below the commissioner level, understandably. So are you able to take on notice whether or not the preparation of that document also included input—or do you know the answer to that, Mr Kirk?

Mr Kell : We have had discussions with Treasury—ASIC has—about issues around credit cards, but in relation to that particular report: yes, I would have to take it on notice.

Senator DASTYARI: Okay, so the answer is—I just want to be clear—that you have had discussions with Treasury around issues relating to credit cards. Is that both in relation to the challenges facing interest and also in relation to payments? Or is that going to more detail than Mr Kirk has with him at the moment?

Mr Kell : For example, we obviously regulate the responsible lending laws which apply to all credit products including credit cards, so Treasury are interested as to how we are seeing that operating in the credit card space. We have taken some court actions in relation to unsolicited credit card limit offers, notably against GE where we got a $1.5 million penalty so we have—

Senator DASTYARI: Who was that?

Mr Kell : GE Capital.

Senator DASTYARI: And how many of those have you pursued? You just using one example. Do you have a figure with you?

Mr Kell : In relation to that issue?

Senator DASTYARI: Yes.

Mr Kell : We will have to get back to you on that one.

Senator DASTYARI: Yes, sure. I will move on from that. I know it is something that I am keen for us to continue to look at but it is good to see that you have welcomed a probe into it. Again, I do not want to place you in a circumstance where there are things that are part of an ongoing investigation that you cannot talk too much about, but there has been commentary about this in the public domain, and by ASIC in the public domain—that is, about the bank bill swap rate. Who would be the relevant person to ask about the bank bill swap rate?

Ms Armour : I can help.

Senator DASTYARI: Thanks, Ms Armour. Let us go through this quickly because I am conscious of time: what is the bank bill swap rate?

Ms Armour : The bank bill swap rate is a financial benchmark that is used generally to set pricing for interest-rate products, so whether it is interest-rate swaps, whether it is some financial futures over interest rates, or whether it is used, as it is often used, as a proxy for pricing of commercial end loans.

Senator DASTYARI: So it is used as another measure aside from the cash rate.

Ms Armour : That is right.

Senator DASTYARI: How is it calculated?

Ms Armour : At the moment it is calculated by a benchmark administrator, which is the Australian Financial Markets Association. They use a methodology that has been published—but it is by reference to trading in bank bills in the market.

Senator DASTYARI: And that methodology was changed in 2013, is that correct?

Ms Armour : In 2012, yes.

Senator DASTYARI: Why was it changed?

Ms Armour : The methodology was changed in 2013 to move away from what was a submissions methodology, where a number of reference banks made submissions, to a live traded methodology. The live traded methodology something that is more clearly verifiable because you are looking at live market data.

Senator DASTYARI: We have had evidence from the CEOs of several different big banks, and from the ANZ quite publicly, that there is an ongoing investigation into allegations of manipulation of the bank bill swap rate. What is the status of the investigation?

Ms Armour : Our inquiries are continuing. We are still looking at that. We are looking at conduct before the change in the methodology, but those inquiries are still under way.

Senator DASTYARI: I know this is a 'how long is a piece of string' question: explain to me how your investigations work. What is the process? When does it come to an end? Explain to me what you can, more broadly, about how these investigations work—without explaining, necessarily, this one specifically. Then I can ask you about this one specifically.

Mr Medcraft : That is an interesting one. One comment to make is that, if you are interested, you might look at the way it happened, which is now fairly public—what happened in the United States and the UK, how they did it.


Mr Medcraft : Yes. That is actually quite public. That is just one example.

Ms Armour : We have over a number of years—this commenced in 2012—been asking a number of financial institutions about their practices in connection with submissions to the bank bill swap rate. We have followed up with more specific inquiries over the course of a number of years. We are examining information from a number of financial institutions about how those institutions traded in bank bills and how they went about the process of making submissions to the bank bill swap rate. We are looking at conduct over quite a number of years. The process will involve sifting through information, interviews and an assessment of whether or not we see any particularly poor conduct. It is an extensive investigation.

Mr Medcraft : Could I make two comments. I have warned banks—and I have discussed it with a number of bank chairmen—that they need to appreciate that, in looking for BBSW manipulation or FX manipulation, they are doing their own investigations. We talk about connecting the dots. We know how regulators around the world do this, and we are looking across banks. Sometimes they feel they have it under control but, in fact, we are just far more experienced than probably any single one of their staff because we look at it across the world and across Australia.

I have been saying to them, 'Look, let's be cooperative.' Some of them, we are finding, have a very defensive approach to giving us information and contesting us. We encourage them to be very open and cooperative, because we are actually trying to help them. Again, it is back to a front-page test. All I do is encourage them to try to cooperate with us. We want what they want: to have people having confidence. Is that a fair comment, Cathie? There are some issues there, Senator, and being too legalistic and contesting every point is, frankly, just delaying it.

Senator DASTYARI: Effectively, Mr Medcraft, have you made a warning to bank chiefs?

Mr Medcraft : I am just appealing for their cooperation to allow a timely and expansive investigation to make sure that we can deal with this as a problem. As I say, we can always do this the easy way or we can do it the hard way. We would like to do it the easy way, for all of us. That is the message I am really giving. Is that a fair comment, Cathie?

Ms Armour : Yes.

Mr Medcraft : There are a number of people—they know who they are—whose full cooperation we would like. We would like the boards to be aware that we are using techniques that are world standard. At their own level, they cannot have the intelligence that we have about connecting the dots. These are very complex investigations.

Senator DASTYARI: You said that the boards know. Do you contact the boards directly, or do you go through the—

Mr Medcraft : We talk at all levels. Most importantly—and I think it has been a hallmark of my chairmanship—we now meet now annually with the boards, all the boards, of all the banks. We are very frank. If you talk to any of them they can tell you that I am frank and we are frank, and we want to be constructive. So, yes, we go from the top—but, at all levels, we engage. We want to make sure the feedback loop is complete. We are actually meeting with the NAB board this week, for example.

Senator DASTYARI: You said 'a number'. There is question I have that I have not been able to find an answer to in the literature anywhere. You may need to take this on notice. There were 14 institutions that were involved in the setting of the bank bill swap rate prior to the change in 2013. But was the decision weighted to the size of the transactions or was it an average of all 14? I am not sure about this. Does the size matter? I cannot find this anywhere in the literature.

Ms Armour : No.

Mr Savundra : The size of the trades does not matter. There is a topping and tailing process where the 10 banks that are in the middle—

Senator DASTYARI: Is it 10 or 14?

Ms Armour : There are 14 submitters.

Mr Savundra : Yes, but it is whittled down to 10 to eliminate the extremities. It means those outside the centre 10 will be knocked out and then it is a median point of those 10. It is not weighted based on trading. It is their view of the rate at a particular point in time on that day.

Senator DASTYARI: The difference between the changes at a very simplistic level post 2013 is that previously it was based on their view. I assume we made those changes because of LIBOR; is that correct?

Ms Armour : Changes were made by the administrator of BBSW, which was AFMA post—

Mr Savundra : I think it is worthwhile noting the enforcement outcomes that ASIC achieved, too, between 2013 and the middle of last year. Three investment banks—

Senator DASTYARI: That was UBS and two others, right?

Mr Savundra : BNP and RBS. That was in relation to what we call submitter influence conduct.

Senator DASTYARI: But that was for their international operations; it was not—

Ms Armour : No.

Mr Savundra : It was in relation to BBSW.

Senator DASTYARI: So that was in relation to the manipulation of the BBSW?

Mr Savundra : Yes.

Senator DASTYARI: I understand LIBOR is the London interbank offered rate.

Ms Armour : Yes.

Senator DASTYARI: In terms of the international ramifications, LIBOR operated similarly to how BBSW did prior to the 2013 changes.

Mr Medcraft : No, they are very different. BBSW is an offered rate in the market, whereas LIBOR is simply what banks say it will be to provide an interbank deposit. That is why, frankly, BBSW was already a far more robust rate than LIBOR. As you know, IOSCO—

Senator DASTYARI: Which you chair.

Mr Medcraft : Which I chair. I am very proud of what we have done because we have now established international standards for setting market benchmarks which have now been supported by the Financial Stability Board. They are now being rolled out around the world. That is what you want for the future. But there are continuing investigations, and I will be making some announcements about that in London next month.

Senator DASTYARI: On that, the international fines have been staggeringly big.

Mr Medcraft : They are big, but the problem is they are only for corporations. We have to deal with individuals. That is why I said earlier that when you deal with conduct it has to be not just about the corporation; it has to be about the officers as well. Frankly, if you fine the companies it is the shareholders who pay. It has to be the management who are fined. That is an issue in the UK now. They are making sure that management actually feel the sanctions. You can sanction a company; that is fine. But, at the end of the day, companies are people and you have to deal with the behaviour of people. If the chief executives are essentially passing the fine back on to the shareholders, that is not dealing with the behaviour. I think this is a really important point. The good thing about our legal system in Australia is that it focuses on the individual as well as the company.

Senator DASTYARI: On that, the fines for Deutsche Bank, I think, were 2.5 billion. The figures are very, very—

Mr Medcraft : It is an issue for the Financial Stability Board, and it is why the Financial Stability Board—and I have a call tonight with the chairman, Mark Carney—is focusing now on this issue of market conduct and sanctions.

Senator DASTYARI: Looking at sanctions, has the Financial Stability Board—sorry; is this the Council of Financial Regulators?

Mr Medcraft : No. This is the Financial Stability Board of the G20, the world.

Senator DASTYARI: Wow. I understand that ASIC, should it choose to pursue matters—not just in this; generally—has two powers. One is that you can do an enforceable undertaking and the other is that you can place licence conditions. Is that correct?

Ms Armour : No.

Mr Medcraft : No. We can do a lot more than that. Do you want to comment?

Ms Armour : We do have a range of powers. There is a market manipulation offence and a civil liability regime that goes with that. There are a number of other market misconduct provisions that could be relevant. There are some provisions under the ASIC Act.

Senator DASTYARI: Where could I find what could be relevant if I was going to go and do my own research on this?

Ms Armour : We would be happy to talk to you some more about that.

Senator DASTYARI: I am interested to learn about interbank operating rates.

Ms Armour : I think it is useful to be aware, though, that internationally there have been some changes to the legal regime around important financial benchmarks. For example, many jurisdictions have introduced very specific penalties and a specific regime for benchmark. For example, benchmarks administrators are required to be licensed in a number of jurisdictions now, and there is a specific penalty in a number of jurisdictions of benchmark manipulation.

Senator DASTYARI: I have got a lot of technical questions on this. I will place them all on notice, because I do want to cover a couple of other matters fairly quickly. It sounds like what you are saying is that there is an ongoing investigation. It has been reported in the media that something in the vicinity of 20 per cent of your investigative resources have been placed in it. I know that is a difficult—

Mr Medcraft : Of our markets area.

Senator DASTYARI: I am not going to ask for an exact figure, because you probably would not know and that probably changes day to day, depending on what else. Is that a reasonably accurate—

Mr Medcraft : Yes, it is. And, you know, it is very important.

Senator DASTYARI: That is a lot. This is a big deal.

Mr Medcraft : It is a big deal, because the essential functioning of our markets are benchmarks, whether they be foreign exchange benchmarks or, in particular, interest benchmarks. That is why this is an enormous global issue, because this is what actually powers economies—the setting of interest rates or the setting of foreign exchanges. If we talk about what is fundamental to markets, these are markets and we want to make sure that investors and consumers can have trust and confidence in those markets. This is like the wiring of the financial system. That is why we put enormous emphasis on this. That is why we have got to make sure that, if people have broken the law, they feel the full force of the law, frankly. That is the past. Also, for the future, we have got to make sure that we have robust mechanisms for making sure that benchmarks have proper governance. That is why the IOSCO standards on benchmarks are really important. So it is going back but it is also about going forward. I think this is a really important area, because we want people to have confidence in the system.

Senator DASTYARI: On that, I have been trying to follow the LIBOR stuff—and, again, I am not going to pretend to be an expert on this, because it actually does get quite complicated—

Mr Medcraft : It is not just LIBOR. It is also commodity benchmarks.

Senator DASTYARI: But LIBOR is the one that the most has been written about, which makes it—

Mr Medcraft : But it is broader than just financial benchmarks.

Senator DASTYARI: What I want to understand with the BBSW is the impact that this rate can have on things like bank mortgage rates and other consumer lending costs.

Mr Medcraft : As I said, it is integral. It is a bit like the wiring of a house. Interest rates are part of the essential wiring of the financial system.

Senator DASTYARI: So potential manipulation—and, again, this is all being investigated at the moment—could have had systemic industry, financial-system-wide, impact, and that is why you are doing such a deep investigation?

Mr Medcraft : When you use the word 'systemic', I would not say that we should say it is a systemic risk. It is an issue of just trust and confidence in the market and making sure that those, whether they are small businesses or consumers, can trust in the benchmark they are relying on for the pricing of their loan. That is fundamentally what I said at the start. What is fundamental is that they can have trust and confidence in what they are getting. It certainly does not bring confidence when they see what is happening overseas. It is back to where we started today: it is about banks and others and financial services firms, frankly, having he right culture and conduct to make sure that they do not threaten trust and confidence. It really comes back to the same thing again. This whole thing is basically the behaviour in many institutions in this has, frankly, been absolutely appalling.

Senator DASTYARI: I have two quick questions before we move on. Commissioner Armour, the information I have been able to obtain on the public record is that you are going back seven years in this investigation. Is that correct or not right? Is that just speculation in the media?

Ms Armour : We are investigating a number of years before 2013. I cannot recall the exact number.

Senator DASTYARI: Okay. As part of that, are the private or public communications of employees who are potentially involved in this being investigated as part of that investigation?

Ms Armour : What do you mean by private—

Senator DASTYARI: I mean chat room transcripts.

Ms Armour : We have a call for records of chat room transcripts, yes.

Mr Medcraft : If you look at what is out of the US and the UK, you can see it is all in the chat rooms.

Senator DASTYARI: And the chat room transcripts are kept?

Ms Armour : Yes they are. In any mechanisms where an institution is conducting its business, a record of its business needs to be retained.

Mr Medcraft : This is the area where we have had reluctance from some of the banks to provide us—

Senator DASTYARI: Mr Medcraft, what you are saying quite candidly is that there are two reasons this investigation has gone on for so long. One, this is a very complex matter. This is not a simple matter of somebody stealing money from the safe; who are the three people who could get to the safe? Who is the criminal. It is a very complicated matter. Two, that complexity is perhaps at times exacerbated by a cultural desire by some people to put up the wall and not participate in these inquiries.

Mr Medcraft : That is correct. There have been significant delays caused by a legalistic approach to our request for information. I will place that on the public record. It is delaying our investigations. I encourage banks to be more cooperative. They know who they are.

Senator DASTYARI: You are more than welcome to tell us who they are as well!

Mr Medcraft : I know who they are.

Senator DASTYARI: I would like to know who they are as well.

Mr Medcraft : All I can say is we want an outcome and they should want an outcome sooner rather than later. We can do this the easy way or we can do it the hard way. We will get to the outcome at the end of the day.

Senator DASTYARI: I have quite a few questions on a couple different issues. I will try to put a few things on notice. Do you want to go to Senator Ketter or Canavan?

CHAIR: Okay. If you could leave that till the end of the program. We have a hard marker at quarter to one. Senator Ketter.

Senator KETTER: Thank you very much. Mr Medcraft, I want to confirm you have agreed to take on notice the question I asked about the North Ward matter.

Mr Medcraft : Yes.

Senator KETTER: Thank you. Now I want to turn to the Commonwealth Bank's Open Advice Review Program. I wanted to ask what involvement or oversight ASIC has in that program.

Mr Kell : The licence conditions, which I am sure you are aware of—the work that ASIC is doing with Commonwealth Financial Planning and Financial Wisdom imposed a separate to CBA's expansion of its remediation under the open advice review. The open advice review is not subject to direct ASIC oversight. However, the smaller subset of clients that is captured under the actions involving our licence conditions may if they wish also have their case assessed under the open advice review in addition to the remediation review that is going on as part of those licence conditions. It applies to a much broader group of clients and is running under a different process with different oversight; it is not under ASIC's oversight.

Senator KETTER: Are you familiar with the Promontory report that has just come out in the last few days?

Mr Kell : Yes.

Senator KETTER: Do you have any concerns about the fact that, of 22,000 people who have registered so far, five have accepted an offer?

Ms Bird : As the Promontory report makes clear, it is a very big program. CBA have obviously put a lot of resources into it, but it is moving slowly. But it is not a program that we are particularly overseeing. We are overseeing another remediation process through the licence conditions.

Mr Kell : I think we do have concerns more generally about these remediation programs in terms of their timeliness. We think that is a key objective. It is really important that the resources are there to work through these issues as speedily as possible. But, as we have seen in this very case, it is also vitally important to get it right—to get the assessments of the remediation right, to make sure that the right offers are made to the clients. It is balancing those two issues. The timeliness is a key factor, and we will certainly be looking at that with anything we are overseeing.

Senator KETTER: Thank you for that, but is there a point where ASIC would intervene in the process?

Mr Kell : It is a bit hard to comment on that in a hypothetical sense. If that review throws up additional concerns about particular advisers or particular failures in terms of the compliance that was there within the licensees then that is obviously something that we would want to understand and look at. We understand that that is part of what the program will be considering. So we would expect that anything like that that comes up would be the subject of a timely breach report to ASIC.

Senator KETTER: Do you have a view as to whether this particular program should be viewed as a model for others to follow?

Mr Kell : As I have said, we have recently announced that we want to set out some more general guidance for remediation programs in the financial planning sector. We think there are lessons both good and bad to be learned from some of the remediation programs that have operated over the past five to 10 years and that a greater degree of consistency across those programs, whether it is CBA or any other entity, would be a good thing. Is it a model? We will, obviously, look to set out some broader principles that ought to be picked up by any firm undertaking remediation as part of those guidelines. We will be consulting on that. I expect that this committee is one that will be very interested in where we land on those principles.

Senator KETTER: Are there any specific improvements to the CBA program that you would be able to tell us about at the moment?

Mr Kell : I am not sure that we would have something to comment on right now. We will be looking at interest like, for example, how they interact with the Financial Ombudsman Service—I think that is going to be a key part of any program—and also the nature of third-party involvement. Ability to get an independent check is going to be important as well.

Senator KETTER: Thank you. I would like to turn next to another topic: what I understand is a joint investigation being conducted by ASIC and APRA in respect of reports that major banks are offering inducements to employers to swap their employees over to that bank's superannuation fund. I am looking for an update in respect of that investigation.

Mr Tanzer : Earlier this year in March, there was publication of some research done by a group called UMR, which was commissioned by the industry super association in this area about inducements offered to employers to switch default funds. We met with the industry superannuation association and we have obtained a copy of the survey results. The survey itself was not actually designed to try to elicit evidence of potential breaches in the sense that the questions that the survey asked were broader than what the legislation would necessarily prohibit in terms of inducements.

The relevant legislation is section 68A of the Superannuation Industry (Supervision) Act and it prohibits certain types of inducements being offered to employers in order to swap default fund. For example, to give you the potted version, obviously if the inducement that is offered is an inducement that is then passed on to the members of the fund, that is not an inducement is prohibited. It is really intended to catch an inducement, or a payment, that might be made to the employer to induce them to swap the default fund arrangements over.

The survey itself did not identify any particular breaches of section 68A. Some of the reported inducements within the way the survey was conditioned may well be actually permitted inducements. That said, after considering those results, we commenced a surveillance project on a number of superannuation entities, including superannuation funds connected with the four major banks referred to in the survey. We have issued notices to all those entities to gather information to better understand their processes for engaging with employers and to gather data that may assist us in identifying possible breaches of section 68A. I should say actually a number of banks were also proactive in bringing forward information to us.

Gathering evidence in terms of breach of section 68A is not a very easy exercise. We have also asked industry super but we have also made a general invitation for anybody, given the interest and was engendered by this survey, to come forward with any more specific information about an employer, a particular bank or branch manager or representative of a super fund who is making inducements, because we do see this as a risk area. At this stage, we are still working through that information.

As you mentioned, we have had discussions with APRA. APRA has confirmed for us that the information that they gather on superannuation fund activity is not granular enough to suggest any particular red flags in this type of area, but they have also engaged in some discussions with entities around the sorts of control processes that we had. We expect to complete that work over the next couple of months and then to publicly announce the outcome of it.

Senator KETTER: So you have issued notices to the banks and they are now—

Mr Tanzer : We have issued notices to six superannuation entities. We did not restrict it to the banks but we did include the banks.

Senator KETTER: Is there a time frame by which those entities are expected—

Mr Tanzer : It is coming in now, more or less.

Senator KETTER: And you have indicated in the next couple of months that you expect them to—

Mr Tanzer : We expect that we will have completed—subject to what we find through that obviously—our inquiries within the next couple of months.

Senator KETTER: One of the inducements that was reported as being offered—and we have discussed this previously, Mr Tanzer—was offers of tickets to sporting events. Would that be a clear breach of section 68A?

Mr Tanzer : Reasonably clear, depending on the circumstances in which it is offered. Section 68A would still require that we are able to establish that it was for that reason that the employer shifted the default fund. But, yes, that is an example of the type of inducement that would be offered directly to an employer, which is hard to see how that would otherwise fit within a permitted inducement.

Senator KETTER: Is this practice confined to the major banks or other financial institutions?

Mr Tanzer : We have not confined our inquiry to the major banks, because we think that the interest of somebody to move their default fund would be the same for other superannuation entities, but the survey itself was directed to the four major banks.

Senator KETTER: What would you say the penalties for employers who engage in this process are?

Mr Tanzer : The penalty for employers is an interesting issue. Depending on the particular case, there may be some more of the general Criminal Code implications for employers. Section 68A refers to the possibility of civil action being taken by a victim to recover damages as a result of any loss caused by the decision of the employer to move the fund. It is not a criminal provision of itself.

Senator KETTER: I know this might be a bit difficult for you to answer at this stage, but are you expecting any court proceedings as result of your investigations?

Mr Tanzer : It is a little too early to tell.

Senator KETTER: What other repercussions could banks face as a result of this conduct if it was proven to have taken place?

Mr Tanzer : If this type of conduct was taking place, we would also want to look at not just the bank, but whatever the superannuation entity was, what control mechanisms they had in place. If they hold a financial services licence, they bear responsibilities to conduct their businesses efficiently, honestly and fairly. They also bear obligations to have in place appropriate control procedures; not specifically for this purpose but to ensure compliance more generally. We would want to look whether those sorts of procedures were in place or adequately in place if it was established that this type of activity was taking place.

Senator KETTER: I welcome the fact that you are working with APRA on this issue notwithstanding the limitations that they have expressed in respect of the data that they have available. Are there are any lessons in terms of the working relationship with APRA on this particular issue?

Mr Tanzer : This has been quite useful. Periodically, when issues arise with relationships between ASIC and APRA, it may relate to a very serious type of systemic issue affecting a major financial institution. We understand that and we have arrangements for dealing with that. But in this particular area the arrangement has been really very cooperative and very helpful.

Senator KETTER: Could you outline the detriment consumers or, in this case, probably the employees would suffer as result of this type of conduct.

Mr Tanzer : The potential detriment that could be caused is where the default fund arrangements that they are switched into are substantially worse than the default fund arrangements that they are currently in—for example, if the fees were substantially more in the new default fund than the old default fund, obviously over time the high level of fees may impact on the overall outcome for the fund. That also depends critically on the performance of the fund. That might also have an impact. It is also important to note that in this area we recognise that we are talking about default super arrangements. Since the introduction of the MySuper arrangements, the degree of difference between the way the funds perform and the level of fees that are charged is narrowing. Therefore, the significant detriment that might be caused in a pre-MySuper world is not nearly as significant in a post-MySuper world, because MySuper is effectively setting a more homogenised style of product for those default funds. But there is still some potential for variation in, for example, the fees that are charged.

Senator KETTER: Is there a potential for a conflict of interest in a bank-owned superannuation fund providing these default superannuation services where it is also the provider of business services to an employer?

Mr Tanzer : There is always a potential for conflict of interest in a whole range of areas in vertically-integrated institutions. The direct answer is yes. The core issue here is how those conflicts are managed. Firstly how they are identified, and how they are managed, and, if they cannot be appropriately managed, whether they should be completely avoided.

Senator KETTER: I look forward to hearing more about that.

Mr Medcraft : I wanted to mention one thing in relation to Senator Dastyari's questions. This is important, in relation to BBSW and FX manipulation. Basically we have a war chest and we will use it. We have $50 million sitting in the enforcement special account, and the government has supported us for the financial advice theme review and with FX. We have a war chest and I am not reluctant to use it. I built it up during my chairmanship so I just want to send a message that we have a war chest—

CHAIR: The message is: you are not going to bring a knife to a gunfight.

Mr Medcraft : That is right. It is a carrot and stick but I think it is very important to say: we can do this the easy way or the hard way, and we have a war chest and we are willing to use it. I want to send that message to everybody that we will use it, and that is why I have accumulated it. I just pass that message—

CHAIR: I think it is coming up on right now.

Mr Medcraft : I have a war chest and we have built it up, and we have had very strong support from the government to use it, and we are using it. I will send that message.

CHAIR: Thank you very much. Senator Canavan.

Senator CANAVAN: I wanted to ask some questions about Craig Gore. At the outset I would like to congratulate ASIC for progressing this matter and bringing it to a head in the Federal Court in the last couple of months. There have been some fairly hefty sanctions established for Craig Gore and his colleagues. At the start, I want to get to the bottom of when this all started. There was an article—I think after that court case—in The Sydney Morning Herald on 4 May 2015 which stated:

… despite property investments and scams like the Gore's being a chief concern for the regulator, it was not cash-strapped ASIC's surveillance activities that uncovered the scam, Mr Tanzer revealed.

It goes on, quoting Mr Tanzer:

"With respect to ActiveSuper itself, ASIC's initial intelligence came from a cold call that came to an ASIC staff member who thought it sounded it suspicious and got some more information from the call and we were able to act after that."

Can I get you to step through how that happened and whether those quotes are correct.

Mr Tanzer : The quotes are correct in the sense that I did say that, and they are also correct in the sense that that is what happened. With respect to ActiveSuper and our initial inquiry, we had indicated publicly to the market, as I mentioned earlier, that one of the issues that we saw as a particular risk was in relation to SMSF's investing. We had also indicated particularly a concern with offshore scams and with property. The ActiveSuper matter ticked all of those boxes. In fact, the initial information that came to us came through a cold call that was received by one of our investigators. He was smart enough and interested enough to work through the matter and keep the person on the line rather than just hanging up. He sought further information as he went and got enough information that we were able to start making some inquiries behind the scenes to work out that this was, firstly, seeking to target SMSF investors. Some of the immediate promoters were behind that but we then started trying to make inquiries to make connections to who the ultimate beneficiaries of that were. So we commenced investigation in late 2011 and we commenced action in mid-2012 with restraint orders—restraints on assets and restraints on travel. Our action proceeded to court and the hearing of the matter was completed later in 2013. The judgement was delivered, as you mentioned, in April this year.

Senator CANAVAN: Just to get this clear: when was the cold call received?

Mr Tanzer : It was in late 2011, as I recall.

Senator CANAVAN: And when did you first learn that Craig Gore was involved in ActiveSuper?

Mr Tanzer : I would have to get something a bit more precise about that, but my recollection is that it was sometime after that. Mr Gore's involvement, as we pleaded in the case, was as a shadow director of a company called MOGS Pty Ltd. It was not front-line attracting the money itself; it was a developer and intermediary. It was, in particular, a concern that Mr Gore ended up being a beneficiary of an amount of the funds. That was a particular concern directed to him.

Senator CANAVAN: What company was he shadow director of?

Mr Tanzer : A company called MOGS.

Senator CANAVAN: Before you found out about ActiveSuper, per se, was Craig Gore a person of interest, so to speak, for ASIC?

Mr Tanzer : Mr Gore had come up in the course of various inquiries over previous years.

Senator CANAVAN: Before you received the cold call, or before you established that Mr Gore was involved, what were you doing to maintain an observance of his activities?

Mr Tanzer : I will not go into all of the details of this, but within our systems we create persons of interest which have a flag, so that if we receive any information about that particular person then that flag will kick up, and we can, as the chairman says, connect the dots.

Senator CANAVAN: But those dots were not connected until you received the cold call in this case?

Mr Tanzer : Not at that stage. As I said, in this case Mr Gore was a shadow director of MOGS. He was not on the database as a director of MOGS, as I recall.

Senator CANAVAN: You said earlier that he was involved in previous activities. There was a liquidator's report that was completed in 2010, and it related to activities that Mr Gore conducted from—

Mr Tanzer : Yes, I am aware of that. I have not had an opportunity to go through all of that, but yes.

Senator CANAVAN: That related to a company called Secured Capital & Finance. The liquidator's report at the time said: 'ASIC has provided me with funds to conduct an analysis into possible breaches of the Corporations Act by the directors. That report has been prepared and lodged with ASIC. It is noted that the report lodged with ASIC may result in civil and/or criminal sanctions against the directors. It is highly unlikely that this will result in a return to creditors.' What steps did you take after receiving that liquidator's report?

Mr Tanzer : I cannot talk about the specifics about it, because I have to check, but the normal process that we follow with that is we assess the report, we read through the report, we do the searches to see what else is in behind it, and we assess what evidence the liquidator may have within the report—or what he is suggesting he may have within the report—as well as the age of the conduct and the nature of the conduct, before deciding whether or not it should be referred to a team for further work. We receive a large number of these reports, and it is certainly not the case that we put an investigation team on to every one, because sometimes the evidence does not suggest that that is possible, or there might be other reasons for it. I am not aware of the particular circumstances of that report; I do need to check that.

Senator CANAVAN: I am not sure if it was the same report, but it was at least a liquidator's report as well—I believe it is the same report that I have just quoted from—it also said:

I can only conclude that the operation of SC&F—

Secured Capital & Finance, which Mr Gore was involved with—

was something akin to a Ponzi scheme.

So I am still trying to establish what you did, after receiving that report, to stop Mr Gore from being involved in further activities to defraud—

Mr Tanzer : I am trying to establish that myself. I will take it on notice. I am quite happy to come back to you with some information about that.

Senator CANAVAN: Okay, if you could. There seems to be a gap here. You got that report in May 2010 but it does not seem like any action had been taken against Mr Gore, and then you received a cold call in late 2011?

Mr Tanzer : The action in respect of Mr Gore was with respect to ActiveSuper, which related to an SMSF related matter.

Senator CANAVAN: I understand that.

Mr Tanzer : There may be a range of reasons associated with—

Mr Medcraft : We will come back to you on that.

Senator CANAVAN: I would obviously be concerned if people can just change the names of the companies that they should be operating in—

Mr Medcraft : No. I would be interested to hear the response.

Senator CANAVAN: The court found that he was a shadow director of this particular company, MOGS Pty Ltd. Were you aware that he was a shadow director of that entity before the court found that?

Mr Tanzer : I do not think so.

Senator CANAVAN: My understanding is that last year you did actually look into a complaint that Mr Gore had been acting as a director while an undischarged bankrupt. Are you aware of that?

Mr Tanzer : I will go back and check. I will take it on notice.

Senator CANAVAN: I have a letter that ASIC sent on 25 February 2015, signed by Giles Emery. Is Mr Emery here?

Mr Tanzer : Not here, no.

Senator CANAVAN: Giles Emery from the misconduct and breach reporting assessment and intelligence branch.

Mr Tanzer : And the letter says?

Senator CANAVAN: I was just establishing whether we have somebody of that name.

Mr Day : That is a staff member in my group.

Senator CANAVAN: He received a complaint on 15 September 2014. The letter says:

We have completed our assessment of your report of misconduct which raises concerns about a bankrupt individual managing a corporation while disqualified. ASIC has looked at the alleged misconduct and information you provided—

You conduct your inquiries; I will not quote that in full. It goes on to say:

and have determined that we will not take action in this instance.

You said that you were not aware that he was a shadow director, but it seems to me that, at least in this instance, you had received—

Mr Tanzer : That was 2014, I think you said.

Senator CANAVAN: The letter is dated 25 February this year, before the court case was handed down.

Mr Tanzer : The court case was all about—we alleged that he was a shadow director.

Senator CANAVAN: I thought you just said you did not know that he was a shadow director.

Mr Tanzer : We did not know that he was a shadow director before 2011, when we started the action.

Senator CANAVAN: I am sorry, I did not take that as clear. I thought I asked, 'Did you know he was a shadow director before the court case was handed down?'

Mr Tanzer : I am sorry, I missed that.

Senator CANAVAN: You might have misheard me.

Mr Day : It is likely that that letter was in the context of everything else that is going on. Now it may be that it does not indicate that, and if that is the case I think that may be a shortcoming. But clearly, in the context of everything else, in relation to that information at that time, matters were in hand.

Senator CANAVAN: This particular company was 1835 Development Company Pty Ltd. You received a complaint that he was clearly a person of interest, who was allegedly acting as a director or managing a corporation, and you did not seem to take any action on it. I just want to know why.

Mr Tanzer : I will go back and check, but obviously the court case was complete. We were awaiting judgement in respect of some very serious allegations with respect to Mr Gore. So I imagine that part of our thinking, I assume, was that we were going to wait to see what happened in the judgement before we thought about pursuing something else. But I am happy to check that.

Senator CANAVAN: Could you look at that? I understand what you are saying—you had an action already in train. I do not know what 1835 Development Company Pty Ltd was getting up to. But I would like to know what inquiries you made to ensure that his operations in that company were not also defrauding customers or investors, and whether people who did not know about Mr Gore or were not aware that there was a Federal Court case pending could potentially continue to be at risk of being defrauded.

Mr Tanzer : We will look into that.

Mr Medcraft : We will take that on notice.

Senator CANAVAN: Just going to the court case: I believe that Mr Gore was permanently banned from involvement in financial services?

Mr Tanzer : Yes, in financial services.

Senator CANAVAN: Some of his colleagues have been banned from directorships. How does it work? Is Mr Gore banned from directorships as well?

Mr Tanzer : No, he is not. The orders that we sought in the court proceedings were all bans from financial services. A few of those directors consented to orders being made against them and also consented to being banned as a director.

Senator CANAVAN: Why isn't Mr Gore banned from being a director? It seems like he has been involved in Ponzi schemes, he has now been found in breach of an obligation to the Federal Court, with allegations of acting as a director while disqualified. Why didn't you seek an order to have him banned from being a director of a company?

Mr Tanzer : My understanding is that at the moment he is an undischarged bankrupt, and therefore he is disqualified as a matter of course under the Corporations Act.

Senator CANAVAN: How much longer will he be an undischarged bankrupt?

Mr Tanzer : I do not know. I can get you that information.

Senator CANAVAN: Some of these other individuals have been banned from directorships for up to 10 years, I believe.

Mr Tanzer : Yes.

Senator CANAVAN: And you are not sure if Craig Gore has a 10-year period of not being able to operate?

Mr Tanzer : It depends on his period of bankruptcy.

Senator CANAVAN: Could you take that on notice as well? It seems a little strange that some people who are more ancillary to what is going on than Mr Gore have a—

Mr Tanzer : As I explained—

Senator CANAVAN: You are saying they agreed to them, but—

Mr Tanzer : The orders that we sought were bans from financial services, because the action that we were bringing was about involvement in financial services, not just general company directorship.

CHAIR: Senator Canavan, this is a very important issue, and I know that you have not finished.

Senator CANAVAN: I will leave it there. I may come back after lunch.

Proceedings suspended from 12:45 to13:45

CHAIR: I welcome back officers of the Australian Securities and Investments Commission and Minister Ronaldson.

Senator DASTYARI: I am very conscious that we are now running late and we have been running late for the past three days, so I am going to try to get us back on track very quickly. Mr Medcraft, I had a lot of questions about a host of issues, some of which have actually been touched on by other senators, so I am going to put them all on notice. I did want to specifically come to a few issues regarding the NAB. Again, some of these I will put on notice and some of these you did touch on a bit earlier with questions from Senator Williams, so I will leave those ones out. Mr Kell, you said that there were effectively three parts to your investigation. Do you want to just quickly run through those three with me again.

Mr Kell : Well, broadly speaking, we are looking at how NAB Wealth's conduct and systems work, as a major financial planning firm, across their licences—so, their compliance systems, their breach reporting systems and so forth. We are also looking at particular advisers and the remediation aspects of the whole picture. There is a lot more to it than that, but that is a quite simple—

Senator DASTYARI: At this point in time, they do not have an enforceable undertaking, do they?

Mr Kell : No, and I would not want to prejudge what the outcome might be in terms of the regulatory structure that we might require to ensure that certain things are fixed up. All options are on the table. We have said that from day one. There are options in relation to NAB, but also options in relation to individual advisers.

Senator DASTYARI: On that, Mr Medcraft mentioned that you regularly meet with the boards of these institutions, say, the boards of Westpac and NAB. Is that something that you do annually?

Mr Medcraft : It is annual.

Senator DASTYARI: You mentioned that you were meeting with the board of NAB this week, which obviously does not mean today so that is obviously tomorrow or the next day.

Mr Medcraft : It is tomorrow.

Senator DASTYARI: Will these issues regarding the 37 planners be raised directly with the board?

Mr Kell : Generally, we do not go into the level of detail about current investigations with the board, but certainly we do in terms of broader conduct issues.

Mr Medcraft : What we tend to do with these board meetings is that we provide them feedback—what we are seeing on the frontline across the whole of ASIC, whether it is credit, funds management or investment banking—so that we connect the dots here. We make sure that they are aware of the concerns we have, and generally they very much appreciate it, actually.

Senator DASTYARI: Sure, but if there is a specific issue—and, let's be honest, it has been played out in the media as well—and it is a NAB issue that you are dealing with, it would be kind of surprising if you met with the board of NAB and not discuss the—

Mr Medcraft : I did not rule it out. We said we cover all the areas that we cover, but if there are matters that are subject to investigation then we have to be very careful obviously what we can tell them. We try as much as we can to share with them our concerns and that is the key thing.

Senator DASTYARI: Has NAB been subject to any additional scrutiny since the revelations broke in February? The answer is obviously yes, you are conducting an ongoing investigation. Mr Kell, if I could ask you some specifics on the ongoing investigation. Do you have a distinctive team working on this one issue?

Mr Kell : We have a wealth management team that is working on a set of issues and a specific part of that team is dealing with the NAB case.

Senator DASTYARI: There is a specific team working solely on the NAB issue?

Ms Bird : They are also looking at the other major institutions, but up until this point they have been concentrating on the NAB work. There is a specific team.

Mr Kell : It is a priority issue for us.

Senator DASTYARI: How many people are we talking about? How big a team is this?

Ms Bird : Six. That is in the operational areas. There are also a number of people in the enforcement area involved in similar sorts of projects.

Senator DASTYARI: So you are saying that it is not limited to this but there are at least six people working at this point in time as a priority on the NAB issue, but they will obviously go to the enforcement and other people as needed as they address issues?

Mr Kell : It is more than six. With the financial advice team and our enforcement team we are talking around 20 people.

Senator DASTYARI: A 20-person team that has as a priority this NAB issue?

Mr Kell : Yes.

Senator DASTYARI: Last time we spoke you had requested a whole lot of information from NAB. Was the way you requested it enforceable? Was it an enforceable request?

Mr Kell : Yes, we have served 10 notices.

Senator DASTYARI: And has all the information requested in the 10 notices been provided now?

Ms Bird : Yes, and we are likely to serve further notices.

Mr Kell : And there is still a lot of analysis of that information taking place. In some ways, what we are describing here is a fairly typical investigation of this scope: serving a range of notices that leads you to identify further information you might need, a lot of analysis—

Senator DASTYARI: Is it too early to have an idea of how long you expect an investigation like this to go for?

Mr Kell : Yes, broadly speaking.

Senator DASTYARI: It started in February—and these things take a while; I do not want to be unreasonable—and it is obviously June now. You are in the midst of it. You have a 20-person team working on it, which I think is commendable—that is quite a sizeable—

Mr Kell : Working on this and a few other matters, yes.

Senator DASTYARI: Is the team specifically just working on this issue or is there an investigation of any other systemic risk problems or cultural problems within the NAB? Are they just focusing on this breach issue at the moment?

Mr Kell : This is a pretty broad issue. This is an examination of—

Senator DASTYARI: I was going to put my fishing rod out.

Mr Medcraft : I was just wondering if you are allowed to be fishing here.

Mr Kell : It is a review of NAB's financial planning activities.

Senator DASTYARI: Some documents are going to come before us shortly through our inquiry from the British parliamentary committee now that they are back in session. There have been a lot of questions about the behaviour of the UK subsidiary of the NAB. I know it is something that the British authorities have looked at. I have no understanding of how the powers work, but do your powers extend to the behaviour of NAB within the UK or is that a different licence?

Mr Price : It will depend on the exact circumstances of what is occurring, but more likely than not I would think it will relate to UK regulatory requirements rather than Australian regulatory requirements.

Mr Medcraft : We obviously have very close engagement with the Financial Conduct Authority, and I talk regularly to Martin Wheatley, the chair of that. I will be seeing Martin in the next few weeks.

Mr Kell : But you would understand, senator, I am sure, that our powers obviously do not extend to the treatment of retail customers in the UK—that is not ASIC's role.

Mr Medcraft : What is good is that often I will get a call from Martin when there is an issue like this.

Senator DASTYARI: Yes. As you know there was quite—I will use the word, and you can interpret it how you want—a 'scathing' report done by the house finance committee. They call it the 'banking committee'—that is not its official name—

Mr Medcraft : Yes I think that is right.

Senator DASTYARI: in the UK House of Commons. They were quite scathing of the behaviour of Clydesdale and—

Mr Kell : A range of other institutions.

Senator DASTYARI: Yes—and a range of others. But they are the ones that relate to us. There is some information from that and I will put it on the public record. I believe it will be shared with us, but they needed their parliament to return before they were able to move a motion in their committee to do that.

As a result of these revelations that have come out regarding the NAB and the 37 planners who have been let go: has ASIC questioned other institutions? Other banks, AMP and others which are not banks but which effectively operate as banks? These are a few of their six big players, really. There are the four big banks, there is AMP and there is Macquarie. Have the other institutions been asked to disclose how many planners have been let go in the past few years?

Mr Kell : I think we have mentioned this previously. We have a broader wealth management project underway, looking at six of Australia's largest financial advice licensees—the four big banks, AMP and Macquarie. We look at aspects of their activities, including some work around how they have dealt with planners who may have engaged in misconduct and how they have dealt with certain aspects of the provision of their products. So we have that project. We have been on the record, saying that it is one of our key areas of focus and it extends across a range of their activities.

Senator DASTYARI: What I am asking for is within that remit. Again, on the 37 planners who were let go: last time we spoke you did not know who the 37 were. You had made a request for the names and list to be provided to you. That is correct, isn't it?

Mr Kell : That is right. I think that last time we spoke it was three or four days after the story had broken. Obviously, we have sought information since then about the names of the planners.

Senator DASTYARI: So you know who the 37 are?

Mr Kell : That is right.

Senator DASTYARI: Can I ask if Tom Dawe is on that list of 37?

Mr Kell : A lot of this has been gathered under notice. The investigation is still underway—

Senator DASTYARI: It is still underway—

Mr Kell : Yes.

Ms Bird : We have the list of names.

Senator DASTYARI: Okay. Can you confirm any of the names that are on it?

Ms Bird : I do not think so. We got the names under notice, so—

Senator DASTYARI: Okay. I have had some people come to me about some of the activities and actions of Mr Tom Dawe. These are whistleblowers. I think I will suggest that they also come to you.

Mr Kell : Please, I would encourage them to do so.

Senator DASTYARI: But I will urge that you have a look at him as part of this investigation. I know that Graeme Cowper and others have been out there in the public domain. I would urge that Mr Dawes' activities and behaviour be looked at while you are going through this list, because of the anecdotal evidence I have been given. Frankly, I am not going to lie: I know he is on the list.

Mr Kell : We would be very happy to speak to the people who have spoken to you.

Senator DASTYARI: Okay.

Mr Kell : And we will take your suggestions on board around this. We can assure you that we are looking very thoroughly at all advisers who potentially may have been engaged in misconduct.

Mr Medcraft : Chair—I can see the time and I note that Senator Canavan did discuss an item with me that he wanted to raise as a question. Can I just mention it quickly? It is of interest to you as well, actually.

CHAIR: Yes, okay.

Mr Medcraft : He asked me about the issue of digital disruption in the economy. I just want to mention that the forum on last weekend that I mentioned—the think tank; in fact, the topic was 'Thinking the unthinkable'—was about the future and what could be. I thought it was very interesting because, frankly, if you want to be a proactive and forward-looking regulator you actually have to think about the future! We welcome digital disruption because it can bring more efficiency and better competition in the economy for consumers and everyone else.

We embrace change and we embrace digital disruption. We believe that we should harvest the opportunity and mitigate the risk for the outcomes we want. I want to just mention quickly that we have launched an innovation hub. I want to ask if we could quickly talk about that, because I think it will interest all of you.

CHAIR: All right. We will just get this on the record.

Mr Price : Two of ASIC's fundamental roles are around enforcing the law but also facilitating business. We have had quite a strong focus on cutting unnecessary red tape. Since late 2013, we estimate we have saved business compliance costs in the vicinity of $100 million. By the end of this calendar year, I expect that amount to increase substantially. An important part of our more recent work is around cutting unnecessary compliance costs and facilitating innovative business, particularly in the financial services area. So there is a real opportunity, I think, for Australia to show some leadership in the Asia-Pacific region and establish some new and innovative businesses that will be of benefit to our economy and consumers more generally.

Practically what are we seeking to do? Probably three things I will mention. We are looking to have regular engagement with these innovative businesses, financial technology businesses, on a regular basis. We are providing senior-level ASIC representation to help do that. We are also working with other agencies, other governments, such as the New South Wales state government, in their Stone and Chalk initiative that is looking at this. We are providing informal technical guidance to innovative businesses, as I mentioned, and that is at a senior level. And we are looking at better ways of communicating so that innovative business knows how to negotiate the various rules and regulations around financial services and products. Recently we have established a dedicated web page and email contact that people can contact us on, but I do think there is real potential benefit, both for the Australian economy and for these businesses in particular, through the work that the chairman announced not so long ago.

Mr Medcraft : And we are establishing a Digital Finance Advisory Committee with industry to make sure that we get feedback where people are having issues. I just thought I would mention it. I am very excited by the initiative. We want to try and do what we can do, where we think it is a good outcome for consumers, to actually try and facilitate that, including if we need to somehow modify the law sometimes, where it is too clunky. Where we can, we will try and do that. It is about saying: 'We're open for business. Come and talk to us. We want to talk about it.'

CHAIR: Thank you. We will be wrapping up shortly, but it is very good that we have been able to get that out. Yesterday we had the Commissioner of Taxation, Chris Jordan, here, and he was equally upbeat about what is going on in this space. It gives this committee a great deal of confidence with what is going on in this regulatory and compliance space, in this whole universe of government, and how everybody is interacting. It just seems to be that everybody is on warp speed at the moment with getting some innovation and keeping ahead of the game, keeping ahead of the curve.

Mr Medcraft : Absolutely. It is a global competition. We have got to be at the front.

CHAIR: I wish you well. We are just going to finish up with a couple of things from Senator McAllister. Did you have anything more, Senator Dastyari?

Senator DASTYARI: I have got a whole bunch of stuff I am putting on notice. I want to thank Mr Medcraft. There is just one thing, and you can take this on notice—or could you just say yes or no. The investigation into possible insider trading to do with the Reserve Bank currency transactions—interest rate—that has been—

CHAIR: Widely publicised.

Senator DASTYARI: Is that investigation still underway?

Mr Medcraft : Cathie?

Ms Armour : The investigation has not been finally completed. We are still obtaining information about people who did trade in foreign exchange in the relevant windows. It is still underway.

Senator DASTYARI: Can I deduce from what you just said that it is close to being completed, or is that a statement you are not prepared to—

Ms Armour : Well—

Senator DASTYARI: And can you name them!

Ms Armour : We have done a substantial part of the work.

CHAIR: Thank you, and, very quickly as we finish up with ASIC, Senator McAllister.

Senator McALLISTER: I will keep it brief. I am just hoping, Mr Medcraft—and it may be you or one of your colleagues who answers—that you can update me on progress in the reforms to the retail life insurance sector. I am conscious that you issued a report in October. I am a little unclear about the follow-up steps. I am aware of the Trowbridge report. Could you just give me some indication of progress here and the timetable?

Mr Medcraft : I will say it is one where culture and conduct are important as well. Mr Kell.

Mr Kell : As you may be aware, ASIC itself is not ultimately the sole decision maker in this area. The industry has been looking at coming up with a potential reform package off the back of the Trowbridge review. My understanding is that they are getting quite close to a landing as to the elements of that reform. Obviously, they will be considering the Trowbridge review and we will be talking to them about that. From ASIC's perspective, we will be wanting to assess anything that comes forward in terms of whether it addresses the problems, the risks and the issues that we raised in our report late last year. That is going to be our assessment.

The other issue here, of course, that is in play is that the financial system inquiry, the Murray inquiry, made a recommendation in relation to life insurance remuneration; basically a recommendation around a level-commission model. So I would expect that that would be one of the financial system inquiry recommendations that the government will respond to, as Senator Cormann outlined this morning. They obviously have an interest here as well. There are a couple of different moving parts. I am sorry I cannot give you complete clarity around where things are up to, but there has certainly been a lot of attention paid to it within the industry. We have sent a very clear message that we expect the reform package to be a serious and substantial one.

CHAIR: I think the government has delivered a nudge to the industry on this.

Senator McALLISTER: I do feel that there is a sense of urgency about this. These are products that are largely bought by individuals, by mums and dads. I am conscious that back in April the Assistant Treasurer was reported as having given a deadline to the sector of weeks not months. There has been some speculation in the media that that deadline should be interpreted as being the end of May. Are you aware as to whether the AFA or the FSC have actually provided a response to the Trowbridge report?

Mr Kell : I am not aware of that, but I think everyone is keen for there to be an outcome on this as soon as possible. Your point about wanting to move on this, certainly from ASIC's perspective that is important. I would emphasise that, as we said in that report, we are continuing to follow-up with enforcement and regulatory actions in this area. We had a major outcome earlier this year in relation to Guardian, who are primarily in the space of providing life insurance advice, and imposed licence conditions. We have other enforcement and investigative work underway. I want to assure you that we are not waiting for the outcomes of this process in terms of addressing misconduct in the industry. It is a priority area for us.

Senator McALLISTER: We are hearing some anecdotal evidence, and I stress that it is anecdotal, that, in consultation financial advisers, people are being pushed heavily in odd ways towards life insurance. One is left with the impression that it might be a last bastion of commission sales. I wonder if we ought to be concerned about this?

Mr Kell : That was one of the reasons why ASIC undertook its review in this area. We did have some concerns that some advisers under the FoFA reforms might move into the life insurance area, where commission based remuneration is exempt from the conflicted remuneration provisions. That, again, is why it is a priority area for us. Commissions of course are allowed in this space, but, as our study demonstrated, the high up-front commission model is positively correlated with lower quality advice, and that is in some ways the challenge we have put out there that needs to be addressed.

Mr Medcraft : It is a very high priority for us. We are very focused on it and we have cops on the beat on this issue.

Senator McALLISTER: I am sorry not to know this but it would help me to understand what existing enforcement provisions you are able to rely on in pursuing this—noting that there are other reforms that you have recommended for this area.

Mr Kell : I will just mention one but I am happy to provide follow-up information. A key provision is the new best interests duty that came in through FoFA, requiring the adviser to act in the best interests of the client. That is particularly important, for example, when you are switching products. When you are advising someone to switch from one life insurance policy to another, it needs to be in the best interests of the client, and there is a series of tests under that. That is one of the measures in our life insurance remit.

Senator McALLISTER: Thank you, Mr Kell and Mr Medcraft. That is all I have but I am sure we will discuss this again.

CHAIR: With that, I bid you all good day. Thank you for attending today. It seems like we have a lot to look forward to compliance with all these people along the way. Good stories all round. Keep up the good work, and we look forward to seeing you in October.

Mr Medcraft : Thank you, Chair, and thank you for being so accommodating. Hopefully, we can get that culture right.

CHAIR: Yes, culture, culture, culture—and we are not talking about yoghurt.