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JOINT COMMITTEE ON CORPORATIONS AND FINANCIAL SERVICES
24/11/2010
Oversight of the Australian Securities and Investments Commission

CHAIRMAN (Mr Ripoll) —I declare open this public hearing of the Parliamentary Joint Committee on Corporations and Financial Services. I welcome the committee members: Senator Sue Boyce, who is the deputy chair; Mr Paul Fletcher MP; Mr Tony Smith MP; and Ms Laura Smyth MP. I also acknowledge that we have Senator Williams here, who is a former member of the committee and will be in the public gallery.

This evening the committee is conducting a hearing into oversight of the Australian Securities and Investments Commission under section 243 of the Australian Securities and Investments Commission Act 2001. The corporations and financial services committee is required to oversee the functioning of ASIC and this hearing is part of that oversight. I welcome to the table the Chairman, Deputy Chairman and Commissioner of ASIC and I also welcome other ASIC observers.

I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. This gives special rights and immunities to people who appear before committees. People must be able to give evidence without prejudice to themselves. Any act that disadvantages a witness as a result of evidence given to a committee may be treated by the parliament as a contempt. It is also a contempt to give false and misleading evidence to the committee.

Parliament has resolved that an officer of the Commonwealth shall not be asked to give opinions on matters of policy and shall be given a reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution prohibits only questions asking for opinions on matters of policy. It does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted.

If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer, having regard to the ground claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. A request to give a particular answer in camera may also be made at any other time.

I invite ASIC to make some opening remarks.

Mr D’Aloisio —I, probably uncharacteristically, do not have an opening statement this time.

CHAIRMAN —That is very uncharacteristic! But I do understand you have had a very lengthy board meeting today, and we will certainly be asking you a range of questions in that specific area. There are some key areas of work that the committee, I know, will want to ask questions on tonight, in particular the ASIC annual report. Perhaps you could open by making some comments about the annual report—how you believe the year has gone for ASIC and whether it has met its objectives during the year.

Mr D’Aloisio —To put the annual report into context, as you know we went through the global financial crisis, and during that period, clearly, workloads increased and there were a lot of issues. As we say in the annual report, I think the staff of the organisation responded well to that. Certainly, there has been a lot of work and a lot of positive attitude. We have called the report A year of achievement. I recognise that that is a tall statement, but when you look at ASIC’s achievements—notwithstanding some of the setbacks in some of the major litigation—it has discharged its responsibilities well. I think it responded well in terms of judgment on the specific issues around the financial crisis, particularly around short selling and market disclosure. It discharged its function in relation to dealing with, investigating and seeking to punish wrongdoing. Indeed, ASIC has a number of cases now before the courts which are cases that have arisen out of GFC related events.

So, whether you look at us from the point of view of our compliance, our surveillance and our enforcement work, or in terms of our day-to-day business operations, I think ASIC have performed well. We set all that out in the annual report, which provides a lot of the specific details and statistics to back that up. With that introduction, I am happy to go into specific areas and answer specific questions in relation to the annual report.

CHAIRMAN —Sure. We will get into a whole range of different themes in terms of the annual report, but I might just start with Storm Financial because I understand you had your board meeting today and it was also expected that you would make an announcement today about the potential for an outcome of the discussions and commercial negotiations you have had. Could you give the committee an update as to what is happening with Storm Financial.

Mr D’Aloisio —As I said, the commission met today and we made a number of decisions concerning Storm. We need to complete that process tomorrow, and that includes the need to notify relevant parties. What we have decided is that we will make a full announcement to the market on Friday morning following that. That is where we are. We did spend time on it, but I think that in the process what we need to do is to complete our processes tomorrow, talk to the parties and then announce where we have reached. We will do that through the Storm website, which is a public website that is available to all Storm investors, and also, where we need to, through the individual page on the website for each of the investors who have registered. That is where we are with Storm. I am not in a position to go into those decisions at this point. We need to follow our process through tomorrow, and we will make, as I said, a full announcement on Friday morning.

Senator BOYCE —Mr D’Aloisio, you mentioned completing the process tomorrow and talking to other stakeholders. Is that all that is involved in completing the process? What is it that you are going to be seeking from them—agreement or advice?

Mr D’Aloisio —There are agreements and things that are in place in the way that we conducted certain discussions. Now that the commission has made some decisions, we need to complete those processes, but they will not involve reopening of issues or further discussion; it is simply a process of advising where we have got to and then telling the Storm investors and then the market.

Senator BOYCE —So the Storm investors are among the stakeholders you will be telling tomorrow?

Mr D’Aloisio —Friday morning will be the Storm investors.

Senator BOYCE —Who are the stakeholders that you will be talking to tomorrow?

Mr D’Aloisio —They will be the parties we have been talking to in the commercial negotiations.

Senator BOYCE —So the banks and financial institutions.

Mr D’Aloisio —They will be the parties we have been talking to, yes.

CHAIRMAN —Can we expect that, in the announcement that you make on Friday, you will give a definitive position on whether a commercial resolution has been achieved or whether there will be further investigation, litigation or any further action?

Mr D’Aloisio —Yes, I can say that. It will be a definitive statement.

Senator BOYCE —Could I just get this clear: will the statement be telling investors what they will get or will it simply be telling investors what you are going to do next?

Mr D’Aloisio —It will be telling investors of the decisions we reach today. I think that, at this point, to go further we really have to go through this process, and we will. I am sorry that this meeting is happening tonight straight after the meeting; it is just happening that way. We have reached a point where the next stage in the process and in the arrangements we have in place is that we need to have some discussions, and then we will make our announcement on Friday morning. I think that, as I have said, it will be decisions that we have made in relation to commercial discussions and in relation to litigation.

Senator BOYCE —In regard to litigation and compensation?

Mr D’Aloisio —Both those issues, yes.

Senator BOYCE —What I am seeking here is something that might give some comfort to investors that they will see an outcome on Friday morning—what they would perceive as a genuine outcome.

Mr D’Aloisio —I think the comfort for the investors will be that we are really doing everything we possibly can to assist them. I think they will see that in the announcements we make.

Senator BOYCE —I have some questions that relate to a report in the Age.

CHAIRMAN —Do they relate to Storm?

Senator BOYCE —Yes, Storm and Macquarie. There is a suggestion that there was a secret alliance between Macquarie and Storm Financial. You would have seen the report, I imagine.

Mr D’Aloisio —Yes.

Senator BOYCE —Could you comment on that report, please.

Mr D’Aloisio —With the investigations ASIC is carrying on, I think ASIC is well across the work that it has done and the discussions that have occurred between various lenders and others involved in the so-called Storm scheme. We are aware of some of the email traffic and so on that is referred to in that article, and we can say that our people—our investigation team—would have looked at that material. What inferences they drew from it and what action we may take as a result are an operational matter for ASIC.

Senator BOYCE —It would also be something that you would speak on if you were pursuing it, isn’t it? You would say, ‘We are investigating Macquarie further in this area,’ or, ‘We are intending to prosecute someone in this area.’

Mr D’Aloisio —Can we get the announcement out on Friday and see if that answers your question.

Senator BOYCE —This is very frustrating.

Mr D’Aloisio —I am sorry. I truly am, but there is a process. In terms of who we are and the way we act, we need to follow that process. I would have liked to have been able to talk to you further because it is a parliamentary joint committee, but we have made decisions, we have a process to go through tomorrow and we will announce on Friday morning.

Mr ANTHONY SMITH —What you are really saying is that you are midway through a process, so you are quite restricted in what you can say. With respect to the article that the deputy chair refers to, essentially it is not new news.

Mr D’Aloisio —No. I can check more specifically with the team, but my recollection from reading it and from the initial discussion I had at the time was that there were no new facts or material in that that we were not aware of.

Senator BOYCE —That was one of my questions. I was going to ask you when you became aware of these allegations about a secret alliance.

Mr D’Aloisio —We do not use the term ‘secret alliance’. The material that is referred to, we are aware of.

Senator BOYCE —When did you become aware of that material?

Mr D’Aloisio —I would have to take that on notice and give you an answer, but I think it would have been during the pretty thorough investigation that our team has been engaged in.

Senator BOYCE —That leads me to the point that during a parliamentary inquiry into Storm Financial there were no suggestions raised in regard to Macquarie that were untoward.

Mr D’Aloisio —I think there were no suggestions. I do not know what you mean by ‘untoward’—

Senator BOYCE —Well, something that you characterise as a secret alliance is pretty untoward.

Mr D’Aloisio —But there have been a lot of suggestions, allegations and issues. This matter has been going on for a period and there have been a lot of suggestions, allegations and issues, but at the end of the day ASIC has to move through a thorough process of reviewing material and drawing inferences. If ASIC formed a view that a proceeding was open to ASIC, ASIC would take that proceeding. In other words, if there is a regulatory breach of some sort then ASIC would take action.

Senator BOYCE —Would you be covering your likelihood of doing that, your views, the decisions you have taken, the report you—

Mr D’Aloisio —The decisions we have taken will address regulatory issues and compensation issues, and beyond that I am trying to—

Senator BOYCE —Will it also cover a statement of what ASIC believes to have been the occurrences of Storm Financial? There has been a lot of evidence on one side, and on the other side, as you have said, some people have called this a secret alliance. Will you be setting out your views on the truth, for want of a better word, of the matter?

Mr D’Aloisio —We will set out our decisions and the actions we propose to take or proceed with, but at the end of the day, if this matter is not resolved commercially, these will be matters for the courts, if we take action.

Senator BOYCE —I think that is the end of the story.

Mr D’Aloisio —Chairman, if you want to reconvene the meeting later, we are in your hands.

Mr ANTHONY SMITH —What you are really saying is that you have said as much as you can say and we will know the rest in 36 hours?

Mr D’Aloisio —Yes.

CHAIRMAN —It is frustrating for all of us.

Mr D’Aloisio —We have been on this path for two years.

CHAIRMAN —We have. We are all very close. We are all anxious. Mr D’Aloisio, can I get a commitment from you that you will write to the committee once you have made the decision, Friday morning, with full details of the decision?

Mr D’Aloisio —There is no issue at all with that. We are in contact—indeed, I am in contact—with the committee on a regular basis. They will be one of our first ports of call.

CHAIRMAN —That would be great.

Mr D’Aloisio —As I said, in terms of timing, the Storm investors through the Storm website will be part of that process and then there will be the broader media release.

CHAIRMAN —I take you to page 16 of your annual report, ‘Deterrence: summary and major actions’, and ask you some questions about civil and criminal prosecutions. You detail in the report that you have completed 30 civil proceedings, amongst a range of other things, and that ASIC was successful in 94 per cent of civil litigation and 80 per cent of criminal matters and that you have concluded 156 matters during the year. My question relates to how you determine what actions you take, which ones you pick and how you go through that process. It is a very good outcome. Anyone would say that 91 per cent average overall is fantastic, but what I am interested in is how you get to the place where you decide who it is that you take further in terms of litigation or other criminal or civil proceedings.

Mr D’Aloisio —In the ordinary course an analogy I have used in the past is that ASIC is a bit like when you turn up at the scene of a car accident. You see what has happened—a collapse—and an initial investigation is made as to whether the accident was an accident or whether there was wrongdoing and the nature of the wrongdoing. Typically that could lead to an investigation where the information is analysed. An investigation is carried out to assess, if there has been wrongdoing, what the nature of the wrongdoing was and the likelihood of success if we were to take action. As part of that, the legal team would be involved with the deterrence teams to assess the strength of the case and the nature of the wrongdoing. The decision making process would go to a senior leader who would assess the strength of the case and whether, from a public interest point of view in sending a message to the market, that is a case that should be taken on. The senior leader would involve a commissioner. In a lot of cases the decisions are made at that level to take the proceedings. In more serious situation they will come to the full commission. The commission will assess the strength of the case, the public interest considerations. Some of the public interest considerations could be whether it is important to test an area of law that has not been tested before, whether it is important to send a general deterrence message to the market that this is the sort of behaviour that is not going to be tolerated and, in doing that, the other side of it is that it actually lifts corporate behaviour.

So we follow those processes and, through those processes, we will make decisions, both to take major cases and a lot of the other cases that we take. We do not try to set very strict parameters around that, because you need a degree of flexibility because you do not know what the issues are likely to be. So to constrain people and say, ‘You’ll investigate these sorts of cases and not these ones,’ et cetera gets difficult so we do tend to rely very heavily on our senior leaders and the staff of ASIC that, as they came through the accident, if you like, that I talked about, they really try to pick up everything that might involve wrongdoing, then sift that through with the team and with the leaders and, through that process, we end up making decisions on major, middle and small cases. It is interesting that sometimes we are criticised for not taking enough big cases, sometimes for taking too many, sometimes for taking too small cases and sometimes for not enough. That usually indicates to me that we are probably okay in the sense that we are covering the spectrum.

CHAIRMAN —On the specific point of the size of the cases, obviously there are some very large cases. For example, the One.Tel and JD Rich case was a massive case. Obviously it takes a lot of resources, time, energy and money. How do you make those determinations between the large resource-intensive cases to the very small cases?

Mr D’Aloisio —As all agencies do, you need to operate within your resource levels. Certainly the major cases can consume significant resources. But it is a factor we need to weigh up. At the end of the day, we are not going to not take a major matter on because we think it is going to be too expensive. If we need to take the case on because of public interest considerations then, as an agency, we have to rebalance our budget and other priorities to be able to fund that matter either through our general funds or through what we call the enforcement special account, which is $30 million that we have to draw on for major litigation on an ongoing basis. And, as you would have seen from other discussions we have had, our enforcement special account is pretty much fully drawn and has been in the last couple of years because of the increase in investigations and actions, probably more indirectly the GFC related issues.

CHAIRMAN —What do you think we as a committee should interpret from the numbers you have provided? You have 23 criminal proceedings, 22 criminal convictions and 12 jailings. Do we interpret from those numbers that this is the upper limit of ASIC? Is this where your resources finish—your capacity either in people terms or in funding terms or otherwise? Can this number be doubled? Where is the limit? Where is the point at which ASIC makes a determination that it cannot take on another case in any particular year?

Mr D’Aloisio —That is a very good question. Clearly, in balancing our resources, we look at that. We do get concerned, particularly if we lose litigation, because we do not have carry-forward profit or carry-forward accounts that we can debit against; the loss has to be worn in the year, as happened with One.Tel. In One.Tel we had something in the order of $13 million of costs awarded against us, and that came out of the ESA. So, to the extent that the ESA, the enforcement special account, was used up for that, it could not have been used up for other actions.

CHAIRMAN —You do have the opportunity though to seek further funding on specific cases—

Mr D’Aloisio —You can seek further funding for specific cases and you can ask the government to review the ESA, but we do not work on that basis. We really try and work within the limits. You are asking the question: do we turn cases away because we do not have sufficient resources? In my experience as chairman that has not been the case. We are running a very tight ship and we are really pushing as hard as we can, but that is not our approach, and from a public policy point of view we do not think that is a desirable signal that the market should get.

CHAIRMAN —The reason I ask the question is that I am not sure of the picture in terms of the quantum, but obviously there are many cases and, as you have said, you do pick and choose, as you would be expected to.

Mr D’Aloisio —Yes, I think at the moment we have something in the order of—I will get the exact number, but I think it is about—300 investigations on foot, and we have something in the order of 120 before the courts.

CHAIRMAN —I think the point I am trying to drive at—

Senator BOYCE —Sorry, what was that last figure?

Mr D’Aloisio —I think it is about 120.

Ms Gibson —It is about a hundred, yes.

Senator BOYCE —Before the courts?

Ms Gibson —One way or the other.

CHAIRMAN —I suppose the answer I am seeking is to this question: is it the case that ASIC looks at everything that is brought to it in its regulatory role, makes a judgment on each one on its merits and then goes through a process of selection based on the merit of each individual case, regardless of size or potential cost and how that is measured throughout the year, rather than just, ‘How successful can we be and end up with a 90 per cent strike rate?’

Mr D’Aloisio —No, that is certainly not a consideration that we take into account. Indeed, as you can see from some of the cases and the difficulty of the cases we have before the courts, certainly there are cases where we are testing the boundaries of the law. In any litigation, in that sense, you have a fifty-fifty chance of success, and we do not factor that in. Let me be clear: we do have to comply with the model litigant rules. We have to have reasonable prospects in taking a case, and clearly we do that. But, beyond that, these are public interest issues, and public interest issues that have to weigh up the individuals involved, what is there, plus the public’s interest in that particular issue. Essentially, a lot of these cases around insider training, market manipulation and breach of directors duties are really cases that go to maintaining confidence in the integrity of Australia’s capital markets, so it is important that as the regulator we take those actions even though they are difficult. Easy actions that could increase the statistics, to use your analogy, are not taken if they are not going to be in the public interest. If they are not issues—

CHAIRMAN —You would not be offended, for example, if your hit rate was actually 50 per cent rather than 90 per cent, as long as you are meeting—

Mr D’Aloisio —I think the media makes more of that than we do and it gets used in different ways. The 90 per cent figure can be used as an example of being too successful. It is something that the market wants, and we provide those statistics but beyond that we do not use them. They are not used for internal training purposes. They are not used in internal review systems. The commission does not sit down and review that and say, ‘How do we get this percentage up or down?’ it is just a percentage. It is there. The market likes to see it.

Senator BOYCE —I have some questions in this area. Just to go back to the investigations and the cases before the courts, what would be the conversion rate, for want of a better word? How many investigations end up before a civil or criminal court?

Mr D’Aloisio —I do not have that figure. We could have a look at it.

Ms Gibson —It would be a lot less than half.

Mr D’Aloisio —Let us give that as an indicator.

Senator BOYCE —I have another question you might have to take on notice. What is the average success rate of 91 per cent if we put it into dollar terms? What percentage of the legal budget was spent on civil cases you won or civil cases you lost and ditto for criminal cases?

Mr D’Aloisio —Again, I would have to take that on notice.

Senator BOYCE —Have you got a ballpark figure?

Mr D’Aloisio —No. I look at the overall budget and what we spend. We do not segment and say, ‘We spent this much on cases lost and this much on cases won.’ I think, again, it goes to the issue that you cannot get preoccupied with losing and winning; you really have to focus on the public interest issues. Money is not irrelevant; we have to work within our budget. But the real thing that matters is the public interest.

Senator BOYCE —So how are you measuring success in this area?

Mr D’Aloisio —For a regulator, if we take by way of example insider trading market manipulation, success is really around how our actions deter that behaviour. In deterring bad behaviour, we are contributing to the confidence and integrity of our markets. How do you measure that? You measure it by the level of investment in that market and the international investors that come in and invest in our markets and regard our markets as clean. So a lot of factors will go into those clean markets but essentially the success of the deterrence impact of successful actions and even just taking actions on insider trading market manipulation is really the confidence that that translates into in the integrity of those markets. So people who might be thinking of engaging in insider trading would think twice but, importantly, those who trade on the market will think, ‘Actually Australia is a good market. It does police insider trading. It has good insider trading laws. It has a regulator that is active. It gets convictions. Therefore, it is probably a clean market.’ That is the real test that matters in that area.

In areas going down into perhaps unregistered and managed investment schemes and the smaller amounts of $10 million or $20 million that might be being raised from the public, again coming in and looking at those and either getting money back or putting people in jail who engage in an illegal activity sends a very clear message that those who want to raise money from the public have to go through these processes, because ASIC will take action. Again, you are promoting confidence for investors that if they deal with a managed investment scheme it is probably registered and has proper disclosure and ASIC will take action if there is illegal activity. So you will find that you generally have to have measures that go back into the positive impact they are having in the market in terms of confidence and lifting standards of behaviour. Why do you take action against directors and officers of companies? It is so you are sending a clear message that breach of directors’ duties and failure to follow the law will be enforced. That is not to suggest that we do not have a good corporate culture. We do. But ASIC’s presence and policing of those matters pushes and lifts standards of behaviour. They are the measures that are important to us in these actions.

Mr FLETCHER —When you take legal action against individuals or companies, do you ever get a costs award? If you do, how often are you able to collect the cash and then what do you do with it? Can you use it to fund further action?

Mr D’Aloisio —We do get cost orders and we do enforce them. The money goes back into, I think, the enforcement special account. It comes back into ASIC and then it is used. As you would know—and this happens with all litigants, not just ASIC—you do not always get back what you spend on a case. We do get cost orders in the civil matters and we do collect.

Mr FLETCHER —Presumably the companies you are dealing with are not always good for the money.

Mr D’Aloisio —In some of the actions, yes, that would be so. Again, we can have a look at that and give you some more detailed stats. But certainly, yes, that is a good point.

Mr FLETCHER —You spoke about the importance of maintaining confidence in the integrity of the markets. When you are taking enforcement action or investigative action, what weighting do you put on that factor and what waiting, if any, do you put on the importance of securing some form of compensation for those who have been defrauded?

Mr D’Aloisio —Again, it is a very important point. Our ability to get compensation for investors can arise under different provisions of the Corporations Act. They can be under what are known as ‘section 50 actions’ and they can be compensation orders that are consequential on civil penalty proceedings that may have occurred or declaration—the two key ones. What we have to weigh up when it comes to taking compensation action is a public interest test under section 50. In effect it says to you, ‘Should you spend public money to recover private losses?’ We have to look at the public interest considerations. You look at the investors, whether they are likely to be able to take action themselves, what sort of class of investors they are and so on.

A good example is Westpoint. In the Westpoint case we looked at that and we took regulatory action by banning advisers and so on. We took the view that there were actions that the investors in the mezzanine companies should pursue against the auditors, financial advisers and directors. In that case, from the point of view of public policy and public interest, we decided to take the actions on their behalf under section 50. We have been, so far, reasonably successful in those.

It would follow from that that we do not and are not expected to take compensation actions in every case where investors have lost. Certainly if as a consequence of taking civil penalty actions we can put in a compensation claim for the investors on that we will generally try to do so. It is case by case. But our role in civil litigation for compensation and damages is quite limited. It is limited by law in the sense that I have outlined. So we are not involved in as many civil cases. We are not in competition with the class action firms. They have their role to play; we have a much more limited role which generally tends to be around cases where we would feel the group of investors need the ASIC protection in order to assert their rights. As I said, the best example is Westpoint. We have made statements in relation to Storm in a similar vein.

When it comes to unregistered and managed investment schemes, if we think there is an illegal scheme, if we can put our foot on a lump of money that might be in an account, we would clearly freeze that. We would take that. If that belonged to the investors we would then get court orders to pay that back out to investors. That is not compensation as such; that is protecting investor money. I hope that answers you.

Mr FLETCHER —As you think about the range of risks or problems facing investors or people coming into the market, how large a proportion of the problems comes from financial advisers who are either fraudulent or negligent?

Mr D’Aloisio —I think in recent times the actions we have taken—certainly in the Westpoint action we took action against a number financial advisers. I cannot extrapolate from the point of view of the market, but I think that financial advisers by and large have gone through quite a difficult period over the last couple of years. Indeed, this committee has looked very extensively at the financial advice industry and a series of recommendations have been made. ASIC has made a number of the suggestions that have been taken up in those recommendations, because we feel it is an area that needs to improve, essentially in the quality of advice and so on. The government and this committee are pursuing that, but I cannot extrapolate across the board. I think the question you are asking is: ‘How many crooks are there?’ I really cannot answer that.

Mr FLETCHER —It is a slightly different question: as you look at the various sources of risk that need to be managed or contained, how important is the problem of fraudulent or negligent advisers as compared to, for example, people peddling dodgy investment schemes or any of the several other categories of risk that face the innocent Australian venturing into the financial markets?

Mr D’Aloisio —We do not actually prioritise it in that way. Our focus through a number of Greg’s teams in the financial advice area, for example, when we look at how the market operates is to look at the principals and then we look at the intermediaries and the gatekeepers—auditors, financial advisers and investment banks. There are a number of players and we have an oversight role in relation to them. We put extensive resources into the oversight of investment banks, of auditors and of financial advisers. A series of surveillances will go in these different industries. We do not try to categorise which are more risky than the others. We take the view that we really have to oversight all those in that sector.

Mr FLETCHER —There is a company called Trio Capital Ltd, which I think is well known to ASIC. Could you describe in general terms the basis on which you have been looking into their activities?

Mr Medcraft —We are still undertaking an investigation into Trio, so I cannot really comment on what is going on in our investigation. I can tell you what is public knowledge about Trio, which is that the RE, Trio Capital, was established back in 2004. They had a licence to be an RE and also to be a responsible entity for super funds. On the super fund side, they operated five super funds with funds of $300 million and which had 10,000 investors. Those funds invested themselves in a series of 17 active managed investment schemes.

Mr FLETCHER —Was one of those funds the ARP Growth Fund?

Mr Medcraft —One of those was in fact the ARP Growth Fund; that is correct.

Mr FLETCHER —My understanding is that that was a relatively small fund compared to some of the other funds that they managed. Is that correct?

Mr Medcraft —I will confirm that, but my understanding is that ARP Growth Fund actually had funds around $50 million in it. Obviously the problem fund was the Astarra Strategic Fund, which had approximately $120 million in it.

Mr FLETCHER —It has been put to me that the ARP Growth Fund is also a problem fund in the sense that all the money in it has disappeared. Is that consistent with complaints that have been made to you?

Mr Medcraft —The ARP Growth Fund forms part of the Trio investigation. There has been correspondence to us that investors are concerned. As you know, the fund is now in the hands of administrators and the administrators are still investigating as to the value and the existence of those funds. So you have got two lines at the moment. You have got the administrators trying to see whether there is any value, if assets do exist, and on our side we are still investigating the broader Trio area. There will be actions announced in the near future.

Mr FLETCHER —The focus of your action is the conduct of Trio and its directors?

Mr Medcraft —Correct.

Mr FLETCHER —Do you separately turn your mind to the question of compensation?

Mr Medcraft —In relation to compensation, for those investors that are invested in regulated super funds, as you may know if they can demonstrate under the SIS Act that there has been basically fraud they are entitled to compensation.

Mr FLETCHER —My understanding is that this fund was not invested in by people in that position. I am not certain of that.

Mr D’Aloisio —Sorry, were or weren’t?

Mr FLETCHER —They were not in that position; in other words, they did not have the benefit—

Mr D’Aloisio —It was their own money.

Mr FLETCHER —It is self-managed superannuation funds.

Mr Medcraft —That is correct. Self-managed super funds are not entitled to compensation under the SIS Act.

Mr D’Aloisio —But on your question about whether that is the sort of case we would take recovery for the investors, we would look at it but it is not one that would readily come in from a public interest point of view that ASIC would take that action. The commission could consider it but it is unlikely that it would meet a public interest test, unless it was part of some other action that we may take where you could bolt on a potential compensation claim.

Mr FLETCHER —I am told that information has been provided to ASIC by investors and that they understand there is some investigation going on but they do not know much more. When might they expect an update?

Mr Medcraft —At the present time, as I said a few minutes ago, the investigation is ongoing. I expect that we will make an announcement in relation to a part of the investigation probably within the next few weeks.

Mr FLETCHER —Does that part of the investigation include the ARP Growth Fund?

Mr Medcraft —I cannot really comment other than to say that it will be in relation to the overall Trio matter, which obviously all the investors will have an interest in. But it is very hard because it is an investigation and we do not want to prejudice either the beneficiaries or the parties we are investigating.

Mr D’Aloisio —If there is additional information in what you are receiving that we should have, Mr Fletcher, please encourage them to let us have it.

Ms SMYTH —Mr D’Aloisio, a general question: at what we hope is the end of the GFC, is there anything that ASIC perceives as a continuing and significant regulatory reform that may need to be attended to from the perspective of both its own arrangements and any relationship with other regulatory authorities?

Mr D’Aloisio —During the process over the last year or two we have seen two lots of policy developments, one emanating internationally and one domestically. The domestic agenda has been to reform and the government has reformed the margin lending provision, brought in a national credit regime and, through this committee and government’s response to the now so-called FOFA, the financial advice area, it is proposing to introduce additional reforms. So I think you have seen reforms emanate and, as I said, in that process we have provided advice either to Treasury or to this committee on those areas for reform.

The other set of reforms which have emanated more internationally have had less of an impact on Australia because it is generally perceived that our systems are probably more robust. The reforms that have come out of the international regime are the changes to short selling and improved disclosure, the changes to the credit rating agencies and greater oversight from ASIC and licensing. These are two examples of the sorts of reforms that have had more of an international flavour and that have come into our system. There are currently proposals around improved disclosure, hedge funds and improving the regulatory regime around securitisation. These are issues that are being driven internationally and they are coming back onto the agenda for Treasury and the government to pursue.

From an ASIC perspective, I think those two streams are addressing the sorts of issues that we have seen emerge. From our point of view, we have not at this stage made other suggestions to government outside those two streams on what is needed or what additional reform is needed. As you would expect, our job as the oversight body is very much to try and push the existing regulatory regime to the limit and only seek additional powers where we feel there is a clear case.

Mr ANTHONY SMITH —My colleague asked a question flowing from the GFC. In 2008, many investors’ funds were frozen. Please give us a broad update on where things are at there.

Mr D’Aloisio —We had significant freezing of funds which, as you know, was caused by the fact that, in a sense, insufficient new money was coming in and the funds did not have the liquidity to enable people to take funds out because insufficient new money was coming in. As a consequence, under the Corporations Act, the trustees of those funds could freeze and a significant number did so. In order to ease the burden on the unit holders, we allowed what we called hardship relief—that is, in certain circumstances, unit holders could withdraw their money ahead of other unit holders, otherwise, under an illiquid scheme you can only take it out in equal amounts. We can indicate what sort of hardship relief has been paid out by these funds. This is in Greg’s area and he might be able to give more specifics. The funds themselves are trying to work through a way of, over time, rolling out these investments so that the unit holders get their money back dollar for dollar, but we think that is going to take two to five years to work its way through. I thought I had the statistics that you are after.

Mr Medcraft —We have; we have them there. Basically, in terms of hardship relief, we have had 5,387 applications, which represent $183 million in hardship relief. Of those, 4,328 applications, representing $93.3 million in hardship relief, have been paid. So that is the hardship relief. Then, as the chairman was saying, there are the funds. Basically, the dynamic, if you want it in the mortgage fund space—which represents the bulk of the moneys that are frozen, $16.8 billion in 63 schemes—is that you can divide them between aggressive and, if you like, prime mortgage funds. With prime mortgage funds, basically the issue is that they generally have five-year commercial mortgage loans, so the loans are not necessarily being renewed but the money is flowing back. Then what is happening is that the schemes have come up with various mechanisms to release the cash back to investors. Some of them are doing it at five per cent a quarter—that is five years. Five per cent a quarter is 20 per cent per annum. Others are accumulating it and then offering it back to them every six months, saying, ‘To whoever wants their money back, whatever we get we’ll distribute pro rata.’

Mr ANTHONY SMITH —Rationed, basically.

Mr Medcraft —Yes. So it is not sitting there. Then we have something called rolling withdrawals, where they say, ‘Do you want to enter into a program where in the next 12 months, if we get the money in, whatever we’ve got we’ll just distribute to you automatically?’ It just facilitates it and makes it easier to get the money back.

Mr ANTHONY SMITH —So it is not as simple as how many are frozen and how many are unfrozen; it is—

Mr Medcraft —You basically had a mismatched risk, in that basically you had assets that were for a five-year term, and that money was simply released from those assets even if no new loans were made in mortgages. Commercially, I think, it is in the industry’s best interests to try to get money back to those people who want their money as soon as possible, because otherwise investors basically are not investing in those mortgage funds. So there is quite a commercial driver there as well to try to win back confidence from investors.

Mr ANTHONY SMITH —Thanks for that. That answers, I think, most of the questions I had. If people have not got others, perhaps if there is any information you would like to provide on notice—

Mr Medcraft —One thing I will mention is that on our website we have an information sheet that is available for investors. It actually provides information on frozen funds, what the various available schemes are and what there is in hardship relief. I would recommend that to investors.

Mr ANTHONY SMITH —Without taking up the time of the committee, if you would be able in the coming weeks—it is not urgent—to provide any further information on notice about percentages or with respect to how those processes are working, that would be useful if there is any more, just to give us a bit of an update.

Mr D’Aloisio —We can give you a table that sets out what was frozen and what has been subject to hardship relief.

Mr ANTHONY SMITH —That would be great.

Mr Medcraft —No problem. We can do that.

Mr ANTHONY SMITH —That would be good.

Senator BOYCE —Following up on that, Mr Medcraft, you mentioned roughly 5,400 hardship applications and 4,200, I think, that had been approved. That is since the funds were frozen. What can you tell us about the rate of those applications? Are they slowing or increasing?

Mr Medcraft —I do not have that available. I will take it on notice and we can come back to you with that information.

Senator BOYCE —And you do not have a sense of whether people are now applying more or less?

Mr Medcraft —No, I do not have the information. But one anecdotal thing is that, because more funds are coming up with mechanisms to naturally release cash—

Senator BOYCE —You would expect that if you were—

Mr Medcraft —you may expect that you would be getting less hardship because the funds are releasing cash. One of the other dynamics is that, as the economy is recovering, some of the mortgage loans can actually be refinanced and are then releasing cash. So there could be that factor at play. But, again, we will take it on notice and come back to you.

Senator BOYCE —I know you said that it was the open-ended mortgage schemes that are the majority of the frozen funds—is that right?

Mr Medcraft —Yes, the actual, straight prime mortgage funds. Then you have the other section, which is the aggressive mortgage funds, which were the ones that were investing in speculative property developments et cetera. It is a smaller sector. There are around 13 of those, with about $3 billion under management, and they are a little bit more problematic because, if they are in speculative development, they are not necessarily generating cash flow. We have been looking at those to examine and engage with the REs to determine what their strategies are—whether they should be looking to wind them up, whether they have a strategy for when, ultimately, they are going to start repaying funds. So we are still engaging with that sector to try and encourage them. One of them basically could not justify continuing the scheme in the best interests of the members and is looking at winding up the scheme. There are another three who have decided to undertake restructuring and have adopted a new structure in the scheme. There is another one that has been replaced by an RE. So, again, those aggressive ones are essentially working their way out, trying to resolve the situation in terms of the way forward.

Senator BOYCE —With the ones that are being wound up, are investors getting their investment back, dollar for dollar?

Mr Medcraft —I cannot tell you whether they are—

Mr ANTHONY SMITH —You could do that in the material you are going to provide.

Senator BOYCE —If you could let us know that, that would be good too.

Mr Medcraft —Yes.

Senator BOYCE —Thank you.

Mr Medcraft —But we are focused on both sectors. That is the key point.

CHAIRMAN —Do you want to finish off, Mr Smith?

Mr ANTHONY SMITH —Yes, thank you.

Senator BOYCE —Sorry, I did not realise you had not finished.

Mr ANTHONY SMITH —Just while we are talking hardship provisions in that respect, can I take you to another area you administer, which is early access to superannuation funds in hardship cases. I know there is a limit to what you can provide and you get lots of requests, but I was hoping you could give us an update on that.

Mr D’Aloisio —Mr Smith, do you mean illegal early-access schemes?

Mr ANTHONY SMITH —No, I mean where people seek early access and apply—

CHAIRMAN —Where people apply for early access to their superannuation under the hardship provisions.

Mr ANTHONY SMITH —Yes.

Mr D’Aloisio —You would like statistics on what sort of—

CHAIRMAN —If you could just give us an update.

Mr D’Aloisio —Okay. Can I take that on notice as well? We cannot do that this evening.

Mr ANTHONY SMITH —Sure.

Mr Medcraft —Just on that, as you know, when members’ funds are illiquid, they often also have to deal with APRA.

Mr ANTHONY SMITH —Yes, I understand. The other issue I thought you could give us a bit of an update on is mortgage termination fees. You recently issued some guidance on mortgage termination fees.

Mr D’Aloisio —Exit fees?

Mr ANTHONY SMITH —Exit fees, yes.

Mr D’Aloisio —As you know, the government changed the law in relation to unfair contracts and unfair terms which came in on 1 July. Pursuant to that, we issued a regulatory guide in relation to how we felt institutions should calculate an exit fee that recoups their costs. That was released a couple of weeks ago, and we think it has been very well received by the market in terms of providing greater explanation and guidance around exit fees. Two banks, NAB and ANZ, at about the same time—coincidentally, in any event—abolished exit fees for certain residential mortgages, so we welcome that. That is what ASIC’s role is in relation to these fees. Our regulatory guide does give examples and goes into quite a lot of detail to provide consumers with guidance.

Our FIDO website also provides information to consumers who wish to calculate whether an exit fee, in conjunction with interest rates and so on, in relation to a change in mortgage would be of benefit and when they pass the break-even point and are in front. We are working on a calculator to put on the FIDO website which will enable consumers, borrowers, to type into the various fields the exit fee, interest rate, term of mortgage et cetera so they can work out where the crossover point is—

Mr ANTHONY SMITH —The true cost.

Mr D’Aloisio —for a benefit in exercising their right to exit. So I think in that area we have probably taken our regulatory role as far as we can in terms of both education and guidance. It will now be for the market and borrowers to exercise their rights.

Mr ANTHONY SMITH —Sure.

Mr FLETCHER —On the question of frozen redemptions again, Mr Medcraft, did I hear you say that none of the 63 schemes that you have mentioned have yet resumed paying redemptions in the normal way?

Mr Medcraft —I did not actually—

Mr FLETCHER —Let me put the question another way. Have any of them—

Mr Medcraft —I can check that. I do not believe that any of them have, but we will check that and come back to you and confirm it. Those that are going to stay around are all making efforts to get to that point.

Mr FLETCHER —Was the legal basis upon which they froze redemptions the terms of the prospectus or the trust deed, or is there a statutory division?

Mr Medcraft —It was. In fact legally, when they are unable to realise 80 per cent of their assets within the period specified in the constitution to satisfy withdrawals, they basically can declare themselves frozen, which is what happened.

Mr D’Aloisio —It has got legislative backing. The Corporations Act has provisions for illiquid schemes. Just to contrast that, in some jurisdictions where these provisions were not in place, from our work with IOSCO and so on, in most cases, in effect, they put some of their mutual funds into winding up and broke the dollar return, if you like, and paid out net assets. The Australian corporate system that we operate under has illiquid asset provisions which, as Greg says, get reflected in the constitutions.

Mr Medcraft —A lot of them have a one-year ability to convert into cash and, basically, they decided that they were frozen when the crisis hit.

Mr D’Aloisio —The definitions of ‘liquid’ and ‘illiquid’ are clear. We are looking at that to see whether the definition of ‘liquid assets’ can be improved and we will give advice to Treasury as to what liquid assets you need to maintain in these funds so that, if you get a run, you can actually pay out the redemptions. Unless your assets are liquid your redemptions are—

Senator BOYCE —Sorry, I missed that.

Mr D’Aloisio —I am sorry; I was not clear.

Mr FLETCHER —How high would you say the awareness is amongst unit holders in these funds that the capacity existed to freeze redemptions and, further, that there was an underlying economic reason why the capacity needed to be there—in other words, that the term of the assets of the fund was a lengthy one?

Mr D’Aloisio —I cannot comment on the policy reasons. The law has been in place for some time, I think.

Mr Medcraft —I can perhaps add something to that. In fairness, in the global financial crisis none of us really appreciated the extent to which asset illiquidity could occur. So I think in fairness to the operators of those mortgage funds the illiquidity that occurred was probably unanticipated. Secondly, going to what the chairman said earlier, the other aspect of those funds is that they often relied on inflows of funds to pay out funds. That was another aspect that perhaps was not appreciated by investors. There is probably a third aspect. It is quite interesting when you talk to the operators of these funds. The investors in the older funds were people who invested for income and not for liquidity, whereas in the later years of those funds they found that perhaps the fund’s liquidity was being mis-sold and the investors who bought them were those who were putting in the funds as an alternative to bank deposits and the funds were seen as liquidity.

What you had in those funds was probably a mixture of old and new investors and perhaps an element of the newer investors were probably in there for the wrong reason in thinking there was an alternative to cash. In respect of that one of the things we have done with the new regulatory guide is to seek to bring out the risks of mortgage trust in terms of the business model and the mismanaged liquidity. We have a consultation paper out at the moment for a new reg guide to flesh-out some of the risks a bit more in the mortgage trust sector.

Mr ANTHONY SMITH —Just to finalise that area and follow up on Mr Fletcher’s question—and you will provide the information in the material that you will send us in the coming days or weeks—I do not want to put words into your mouth, but, essentially, what you are really saying is that whilst they were suddenly switched off, to the best of your knowledge, none of them have been suddenly switched on.

Mr Medcraft —No.

Mr ANTHONY SMITH —It is a slow switch on again.

Mr Medcraft —It is very simple for the assets that they have invested. As the chairman was saying, we are fortunate in the way we have the system because just simply liquidating the assets in the market that there was would not have been a very good outcome for a lot of investors because you would have trashed value. You have to be equitable to all investors. Particularly what I said before about having a lot of old investors who were actually in there for income; they were not there for liquidity. That is what I think you found with the people who managed them. They were trying to balance between both types of investors and that is why they released some liquidity and tried to preserve value.

Mr ANTHONY SMITH —On the superannuation scheme, I do not want to send you off on a ‘make work’ scheme but I am interested in the material you collect and your role and responsibility vis a vis APRA’s. Obviously under financial hardship provisions people tried access super. The point you were making, Mr Chairman, is that you have responsibility in different areas and whether the information you get from that is useful.

Mr Medcraft —As you know any member can request their money with 30-days notice other than if they have consented to invest in a length of investment. Once a member has done that a fund can apply to APRA to give portability relief, which is basically that the funds are not given back to the investor. As at 1 July 2010 there are 18 trustees that applied for portability relief from APRA.

Mr ANTHONY SMITH —You get that information as a matter of course, do you?

Mr Medcraft —It is information that I think we must have got from APRA but I am not sure.

Mr D’Aloisio —There are two issues—there is the issue of transfer out and the issue of transfer to another fund. You are going to the issue of saying: wherever it is, can I get it out under hardship grounds. That is the bit on which we will give you more information.

CHAIRMAN —Before we move off the topic of deterrents and some of the major actions I have a couple of quick questions. One is in terms of Opes Prime. You have in your annual report that you have recovered $253 million in compensation for Opes Prime creditors and you have also brought criminal charges against directors. I am looking for an answer in terms of outcome. On page 22 it says that earlier this year ASIC also brought criminal charges against the directors of Opes Prime Stockbroking Ltd for breaching their duties as directors. Can you give me a very brief update on where that is at?

Mr D’Aloisio —In relation to the civil part of that we work with the liquidators for the mediation of the recovery of the $253 million, as we said there. Charges have been laid against three of the Opes Prime directors, Laurie Emini, Julian Smith and Anthony Blumberg, and a committal hearing has now been scheduled for February 2011.

CHAIRMAN —And I have the same question on Westpoint in terms of prosecution.

Mr D’Aloisio —With Westpoint we have taken banning actions in relation to a number of advisors and in relation to proceedings. You will have to bear with me; I am not sure what is public and what is not at the moment. Can I take that on notice?

CHAIRMAN —Yes, that is fine.

Mr D’Aloisio —I just have to be careful.

CHAIRMAN —That leads me to something that has been a major point of contention for this committee for some time, particularly in relation to Storm more broadly. We eagerly await of course Friday. I want to give you an opportunity to put on the record a full explanation of where ASIC stands in terms of commercial resolutions versus protracted litigation and how ASIC determines a position on which course of action to take.

Mr D’Aloisio —Can I speak generally?

CHAIRMAN —You certainly may.

Mr D’Aloisio —You need to balance the interests and so on when you are involved in major litigation. In fact, I talk about Westpoint and indeed Opes Prime because we have demonstrated that through mediation and settlement discussions you can actually get good results, which from the point of view of investors are quicker and have fewer costs involved. Clearly if you can settle matters ahead of protracted court discussions where we are talking about compensation—and we talking about civil litigation here, not criminal litigation because the DPP runs the criminal—the commission feel we have a responsibility to explore those avenues. At the end of the day whether you accept mediation or not depends on the result. Clearly it is by agreement so, if nothing is offered, it is not likely to get anywhere and you will continue with the litigation. If something is offered and negotiated, clearly you will assess it and make a balanced judgment about whether in all the circumstances you are going to recover more by continuing the protracted court process. It is a judgment you make.

Where we do proceed with mediation or proceed with those judgments, generally we adopt the practice of ensuring that we have a facilitator and counsel appointed to ensure we are looking after the interests of all of the investors. Indeed, when we do reach settlements they are approved by the courts, so that is an extra safeguard for the investors. There is no hard and fast rule. In some instances the court may well direct mediation. So again it is part of the process. The court may say: ‘Parties, I want you to go off and mediate this. It looks like you should be able to reach agreement,’ so we would participate in that in addition to initiating them ourselves and in addition to responding to those that are initiated by parties on the other side. There are no hard and fast rules.

CHAIRMAN —I accept that. I think you understand the public pressure and the public interest in terms of Storm Financial in particular and other cases as well where a judgment needs to be made by ASIC as to which course of action to take. Certainly the community, the public, sees that case as having been protracted already and having taken quite some time. I know we are now literally very close to an answer, which is great, but it does raise questions. Knowing that that is the case and knowing some of the time sensitivities—and I note you have used the time issue in statements on a number of occasions—and knowing that there are aged clients, do you set time limits? Do you seek to set a boundary in terms of what will be a reasonable point at which you say to the stakeholders, ‘We will move on from here and go down a different path’?

Mr D’Aloisio —You are constantly reviewing the strength of your tactics and what they are delivering or not delivering. When you are doing an investigation there will be periodic review as to how we are progressing, similarly in mediation settlement discussions. As I said, if we are using experienced external facilitators to assist ASIC we rely on their judgment. There is a risk that you use up the time and it does not produce a result. That is part of the process. There is no hard and fast rule. They are not the sorts of issues where you could say to someone: ‘Unless you agree with me within three weeks, I am going to commence legal proceedings.’ You could do it, but whether that gets you into any sort of bona fide discussion or result—

CHAIRMAN —I was not imagining three weeks, but you understand what I mean. Unfortunately, two hours is a very short period of time for all the matters that we have to raise so, if it is okay with the committee, I will move on from deterrence to market supervision.

Mr FLETCHER —Could I just ask a final question about frozen funds?

CHAIRMAN —Sure.

Mr FLETCHER —Just on frozen funds, how can investors know when they can expect a return to normality?

Mr Medcraft —I think it is really a matter of engaging with the fund that they are with to discuss with them what their actual asset maturities are and the type of loans that they have got. That will give them some idea of the rate at which cash should be released to the underlying fund. That is basically how they should be able to—

Mr FLETCHER —I am just looking at a letter that a constituent of mine received from Colonial First State in relation to their mortgage fund which essentially explains that the fund is frozen but says ‘while markets have improved, the fundamental issues that led to suspension of these funds remain’. In other words, there is nothing in this communication that gives any sense that the position is expected to improve at some point. Is it ASIC’s view that the position will improve at some point?

Mr Medcraft —I think the Colonial First State fund has actually announced that the fund is going to be wound up over a period of time, if that is the one you are referring to. In fact, what they are going to do is they do not intend to get it to the point of starting new money; they are essentially going to wind it down over a number of years and return the money back to the investors.

Mr FLETCHER —Has that been communicated to investors, do you know?

Mr Medcraft —I believe it has, but I can take that on notice and check. It was publicly announced to the market and I believe it was communicated to investors exactly what the strategy was in relation to it. We could take that on notice and come back to you.

Mr FLETCHER —I would appreciate that.

Mr Medcraft —If we can get that it is the same fund we are talking about.

Mr FLETCHER —Sure. Is it part of ASIC’s role to effectively keep the pressure on funds to be communicating with unit holders and keeping them fully informed?

Mr Medcraft —We do encourage REs to communicate with investors in relation to what is happening with funds. We do it particularly through industry groups like the Financial Services Council, who in fact have been doing a lot in this sector. So yes is the answer. During the crisis we spent a lot of time with individual funds, particularly the large ones, intensively going through with them what the options were to release the funds, looking at how we could facilitate it from a regulatory perspective, and also looking at things like the hardship relief, for example. We have engaged with a lot of them. As I said before, first of all, at the end of the day, the ones that want to continue in business actually want to get money back to those who want to be out as soon as possible so that they can go back to being unfrozen. In fact, one of those funds that this should occur to is the Challenger Howard fund. With their recent restructure, which is currently in progress, their objective for that fund is to return to accepting new money. They are in process as we speak—it has just been approved—and that is a very large one. So there is an example of one that should be a success story in getting started again.

CHAIRMAN —Can I take you to market supervision? In particular, now that you have oversight of the ASX since 1 August, could you give us an update on how that is progressing and any issues that may have arisen since that time?

Ms Gibson —The transition went through on 1 August as we had planned. All the people were able to come from ASX on the Friday evening, log on and they were monitoring the market by the time it opened on the Monday which was something we were keen to have happen. The integration process has gone well over the last four months and we are now at the position where we are monitoring the market real-time. We are assessing an average of about 300 alerts a day where there is some questionable activity or questionable conduct that requires greater analysis. Of those some of them are going through in a progression of detail.

We also have the teams that are monitoring brokers and their conduct actively engaged. I have some stats here. We have commenced inquiries into 62 trading matters and nine of those have gone through to formal investigation. One of those was a pre-transition matter that had come to us from ASX. Three matters of participant misconduct have been referred to deterrence for investigation and litigation if that is warranted. That is averaging about four referrals a month which is, from memory, slightly more than in the previous structure. The time from identification of a problem through to formal investigation has decreased. In these cases a number of them have been less than 30 days. That is a benefit of the change in supervision program. It is telescoping the analysis ASX did and the analysis we did into the one exercise.

We are actively raising unusual trading with market participants directly particularly the question of rogue algorithms. I gather we have had some 10 of those discussions with participants about what their programs—

CHAIRMAN —Are these brokers?

Ms Gibson —These would be the brokers, yes, about what their programs might be doing in the market and the effect on the market. We are also, as a side-effect of seeing more real-time supervision, more actively dealing with issuers and talking to the ASX about issuers conduct in the continuous disclosure space. There might be transactions that we know are in the process of going through because people have come to us for relief for a takeover or a scheme and we are monitoring the trading that is happening before that is public and calling companies in circumstances where one might think there has been a leak.

Our people have been in touch I think with most brokers. We have done risk based assessments in complaints with some 10 different participants and we are doing thematic reviews. We have decided that there are certain areas that we particularly should look at. One of them is the question of algorithmic trading and monitoring of algorithms before they are allowed on the market. Another one is control of unauthorised trading. We set ourselves the objective of taking things from the ASX and providing them to the same standard. We certainly think we are achieving that and we are achieving some efficiencies.

CHAIRMAN —Is it still the case that the two supervisory bodies are operating in parallel? It is still the case that the ASX is running its own parallel supervision as well as the supervision that is being done by ASIC?

Ms Gibson —Both of us are running real-time supervision because the ASX has primary responsibility for continuous disclosure issues and listed entity trading. Whether they are still monitoring the market for broker conduct or misconduct and insider trading and market manipulation I do not know, but I would expect that a lot of it is a similar alert.

CHAIRMAN —Isn’t there a liaison team that exists between the two bodies for the exchange of information and supervisory matters?

Ms Gibson —There are informal liaison meetings on a regular basis. There are operational meetings each month and people are talking to the ASX team almost daily about particular conduct and asking, ‘Does that look odd?’ or whatever. I think there is very good dialogue and rapport, which comes from the exchange of people and also, at the more senior levels, a desire to work together.

CHAIRMAN —Would you characterise the new arrangements and the responsibilities of ASIC as having improved the supervision? Is that the experience to date, that it has improved supervision? I am expecting a yes but I am asking the question to give you an opportunity.

Ms Gibson —And you will then ask how I measure it!

Mr D’Aloisio —An unconditional yes.

CHAIRMAN —I am hoping it is, but I would like some sort of response about what your experience is.

Mr D’Aloisio —I think what we are seeing is we have taken it over and, as Belinda said, it went through seamlessly. We think it is going very well. We are achieving some efficiencies, but with all things there is change and we would think we probably need another six to 12 months and then we can do a fuller assessment of just what benefits have come through. But certainly in terms of where we started and where we are, we are very pleased with the results.

Mr FLETCHER —How many people have come across from the ASX?

Ms Gibson —From memory, 23 or about that number came from the ASX. We already had a number at ASIC who had been at ASX in the past and we have others with market experience.

Mr FLETCHER —It sounds like it is not the case that every regulatory function of ASX has now moved across. They retained some of their own regulatory responsibilities?

Ms Gibson —Correct. They have the issuers function, the listings function and the continuous disclosure function. We are also keeping our eye on that, as we always did, but now we are closer to the market and closer to seeing some of that activity. They also have responsibility for their operating rule compliance. We have the integrity rules and they have the operating rules.

Mr FLETCHER —If the ASX were a subsidiary of the Singaporean exchange, what impact would that have on the regulatory function, in your view?

Mr D’Aloisio —I think at this stage the issue of the ASX-SGX is really a government policy matter. While ASIC will have input into government on issues, at this stage we are not really in a position to provide commentary in relation to that proposed merger.

Ms Gibson —They would of course still have their licence obligations. That would not change, I would not expect, so they would still have their supervision roles from their licence obligations.

CHAIRMAN —One of ASIC’s new roles—and you have a number—is consumer credit. It would be good if you could give us a brief update on this particular area. It is one of ASIC’s new and wide-ranging responsibilities.

Mr D’Aloisio —As you will recall, in the first stage people registered up to December and then had to convert to licences. As of 18 November, we had received 2,933 licence applications. Of those, 1,299 have been approved with licences issued, 1,198 are in progress, and 436 have been either withdrawn or rejected due to incompleteness or other defect. At this stage we have not received any appeals against decisions that we may have made to reject an application. What does all that mean? When you relate that back to the fact that we had something in the order of 14,758 registrants as of 1 July, you can see that a significant number of those are converting into licences. Our online registration and licensing process is working extremely well and we are getting through the applications. Clearly, after the licences are issued in the next 12 to 18 months we will do follow-up work to review how licensees are performing in the market.

A number of guides have been issued, as I think I may have reported before, on responsible lending and so on, and more recently the exit fees guide. So I think from our perspective it is another very good success story of being able to take over national consumer credit, deal with registration to get people going in dealing with licensing, and moving into surveillance and other issues.

We are starting to receive individual complaints in relation to lending and so on, and our complaints group is handling those. We will monitor those closely to see if any areas emerge where we need to put additional resources. We have got a credit website that has got links and background information on the regulatory regime, the regulatory guides, the information sheets and so on. Again, there is a lot of information available through our website for borrowers that we are continually building.

I just remind the committee that, leading up to the regime, we conducted Australia-wide roadshows in both capital and regional cities and through webcasts to get across to potential licence holders, consumer groups and others, what the change was and what it means.

CHAIRMAN —Thank you, Mr D’Aloisio. In terms of the registration, there wasn’t 100 per cent registration expected of the ones who did not register. Is there any particular explanation for that?

Mr D’Aloisio —There were 14,758, so there were a lot—

CHAIRMAN ——It is a lot.

Mr D’Aloisio —and, as part 1 of the exercise, the team in the next 12 months will be looking at the margins to see if there are areas where people should have applied that did not and whether they need to take any action. We can get a fuller answer on this, but I tend to think it is very much at the margins, by and large, when you look at the number of registrations, we are not expecting that all those registrations are going to convert to licences. The take-up rate of the licences is probably going to be much less, which will give us a clearer picture of the number of real providers in the market going forward.

Senator BOYCE —How many complaints have you had to date, Mr D’Aloisio?

Mr D’Aloisio —I do not think I have got the statistics.

Senator BOYCE —If you could just give us that on notice—

Mr D’Aloisio —Between 1 July and 31 October, we received 747 credit—

Senator BOYCE —Is there any way we can quantify those; what characterised them?

Mr D’Aloisio —Not in the material I have, but we could see if we can break it up.

Senator BOYCE —Thank you. One other question: have you seen any trends yet emerging of people trying to work out how to get round providing credit but not registering or—

Mr D’Aloisio —No, I have not got any examples but, as I said, part of the work that the team has identified in the next 12 months is to focus on the areas at the margins to make sure that, where they should be licensed, they are licensed or registered. Again, I can ask the question of the team and give you further information.

CHAIRMAN —Just following up on the matter of complaints, I note the excellent visit the committee made to your complaints handling centre in Traralgon on page 71 of your annual report.

CHAIRMAN —Drawing your attention to the public complaints trends on page 39, there has been an increasing trend of more and more complaints each year. Could you give us some idea for the rationale behind the increasing number of complaints?

Mr D’Aloisio —I think, as we have discussed on other occasions, this is an area which the committee has clearly drawn to our attention, and also its concern. We are looking at what we can do to improve complaints handling. It is very difficult at the moment because of the GFC related issues—and we are working our way through those with regard to what is a normal level of complaint and what is an excessive level of complaint—but it is an exercise that we have got and we will update the committee as the work is done as to whether the increases are due to any particular factors and, indeed, what else we can be doing to probably reduce the number of complaints. As the committee has noted, over time you would like to see fewer complaints rather than more complaints. But it is very difficult because when you have got additional responsibilities and changes in the law and you have had the GFC you are probably not looking at a normal period. But I think it is an exercise, the point is valid, we have got it on the work program and we will do and are doing more analysis.

CHAIRMAN —So if you could provide us with a rationale at some point, and I am not going to set a time frame, as to an explanation of those things and include that actually in your annual report I think that would be helpful in terms of giving us a better understanding of why those trends might be shifting and if it is simply just a case that there is more of the market, hence more complaints.

Mr D’Aloisio —Okay.

Senator BOYCE —One hopes there are more informed consumers who know how to go about complaining.

Mr D’Aloisio —This is an issue.

Mr Medcraft —I was actually going to say it might not be a bad thing because people are more engaged and more aware of their rights and are complaining.

Mr D’Aloisio —We do encourage it. We always use our complaints number or hotline and draw to people’s attention: if you have got an issue call the number.

Mr Medcraft —It is a very good source of intelligence.

Mr D’Aloisio —But the point you make is valid, Senator, because over time there will be normal times, abnormal times and categories and what is going on is that they are telling you there is something else going on which you should be looking at. We will update you on that.

Mr FLETCHER —I want to ask about the way that financial advisers are regulated. I understand there are some changes coming in and that there will now be a requirement for advisers to effectively get a renewed authority from their client every year. How do you see that working in practical terms?

Mr D’Aloisio —It is probably difficult in a sense that the issues of refresh and opt in each year are issues that I think the government has announced as part of the possible package of reforms and my understanding is that the minister is still consulting on these issues with the market. So it is essentially a policy matter for government and we are going to be guided by government if it introduces that. The rationale behind it, as you would know, is that one way of managing fees and ensuring that people pay a fair price for the advice they get is that you require the provider to refresh the retainer each year. On the other side of that is the practicality of being able to do that, given the nature of some of the investments. So they are the two issues. It is really a matter for government, and the government is consulting on it at this point.

Mr FLETCHER —Thank you.

CHAIRMAN —An issue this committee raised some time ago through our inquiry is the possibility of a national business names register, and it is now coming into place in April next year. I think we would all be interested in your perspective in terms of the enormity of the task, what that might entail, the sorts of resources and the additional workload that ASIC receives by having to deal with this issue as well.

Mr D’Aloisio —As you say, the national business names register is from April 2011. The services are going to include a joint registration service for an ABN and business name and it will be hosted by the ABR. The new service is going to be available online. There is something in the order of 1.8 million business names, and certainly this is going to increase ASIC’s registered and related transactions.

The advice I have is that we are on track for implementation. The design of the customer service experience, including the look and feel of the user interface for a business name, transactions and the channel strategy, is being worked on and it is going to integrate the approach for so-called ASIC-Connect with our wider online registry system. We are working on a workforce plan to identify the resource requirements that are going to be needed for the delivery of the business name service in the first three years post commencement with ASIC.

In short, we are working towards that date and that changeover. It is a significant project. We have the experience to do it; indeed that is why government has asked us to take it on. Indeed, a lot of the know-how and experience that the team has had in the work they have been doing on licensing and online registration and so on will be transferred into this project and will be extremely useful in delivering business name registration. At this stage, the advice I have is that we are on track.

CHAIRMAN —I am trying to gain a picture of what the service might look like. Is it a self-regulated type of approach to business name registration in that it does not carry within itself any particular responsibilities? How does it work in terms of people registering names?

Mr D’Aloisio —Do you mean: can we not register a name?

CHAIRMAN —No, I mean in the sense of the self-regulatory component where people are given scope to register a name and go through a process. Is that where it ends, or does ASIC take a further role in ascertaining the credentials of name registration and so forth every single registration?

Ms Gibson —I believe it is the former. I believe it is a straight registration proposition to reserve names and numbers. There is an element of screening, which would be computerised, to make sure that it is not already registered as that name or in that zone.

CHAIRMAN —So it is a software based, program based type arrangement.

Ms Gibson —It is very much a software based program and I think there is very limited discretion in the grant of the name.

CHAIRMAN —Okay.

Mr D’Aloisio —It is intended to be computer based.

Mr FLETCHER —Is there any risk that people will get confused and think that, because they are now registering a business name with ASIC, it has legal status?

Mr D’Aloisio —It should not be any more than currently, because at the moment you go through state registration systems, so you are really replacing a state based system with a more efficient single system. So it should not of itself give any greater imprimatur of that business name than you would have with any company name that is registered. So I do not think so, Mr Fletcher.

CHAIRMAN —Mr D’Aloisio, one of your key responsibilities is obviously to protect retail investors, and the use of risk-based surveillance has been a key component of that and a successful one. In your annual report you spent a little bit of time talking about that. Can you just update us on the rigour with which you approach risk-based surveillance? Or Mr Medcraft?

Mr Medcraft —Basically we adopt ISO 31000, which is the international risk management standard. That is the basis of the methodology which we use for risk-based surveillance. In applying that that standard, we look at the regulated population we have got. We take a sector and look at it and then we identify the risks that exist to ASIC in that regulated population. Then we look at those risks and work out the likelihood of occurrence of those risks or the probability of the occurrence of those risks and also what the severity of those risks would be. Then we have a matrix of likelihood and severity. If you are talking about a matrix, those that are up at the top corner are of a high likelihood and a very high severity in terms of their impact on investors. They are the ones we use to prioritise in terms of our surveillance. Basically, we look at the resources we have for a particular stakeholder team and that determines the intensity of our surveillance on an area.

We take a consistent approach. There is a constant need to look at the risks in the regulated population, because they are not static. It is a dynamic process and it is incumbent on the SELs and the commissioners constantly to be looking for emerging risks and then looking at the priority. Basically, what comes out of that is a risk surveillance plan. The plan anticipates what outcomes there will be from the surveillance. That is basically the process that we have been applying for the last 18 months. So it has a rational basis and it is internationally accepted.

CHAIRMAN —ASIC on a number of occasions have asked for further and increased powers in a range of areas, which I think everyone agrees with. Those powers have been granted—in particular coercive powers. Could you give us a report on the use of coercive powers. I am not too sure, because I have not got the full report in front of me, but I believe that you are to report, or you did report, on the use of coercive powers. Could you give the committee a brief—

Mr D’Aloisio —The issue of coercive powers and how ASIC uses them came up at Senate estimates. In that forum we have provided answers about what our powers are, when we have used it and the number of times. I am happy to share that with the committee.

CHAIRMAN —You could just do it that way.

Mr D’Aloisio —That could give you an oversight in relation to the use of those powers, which essentially fall into two categories: the ability to examine people and the ability to require the production of documents in the two broad categories. We have outlined how we use it, when we use it and the numbers and so on. We have also said that we clearly regard the use of coercive powers as a very important and responsible thing. As a commission we want to make sure we have the processes and procedures in place for the proper use of those powers in the organisation, with the proper delegations. Again, we can give you more detail on that.

As a result of a recent discussion on this issue the commission has said that two commissioners are working with a team looking at coercive powers to see that we have the right checks and balances in place in terms of the way that they are exercised and the way that we review the exercise of those powers. We would be more than happy to answer more specific questions from you or, alternatively and additionally, to share what we have provided to the other committee. We will keep you informed on our review of those powers. We do assure you that we regard it as a very significant issue. We believe that we exercise our powers properly. There has been no instance of abuse of our powers and clearly we want to keep it that way.

Senator BOYCE —I have two questions. One is in relation to the work you are currently doing on contracts for difference. You have put a new page up on the web site and you have a positions paper out there. I am quite happy to be told that it is too early to tell me how it is all going. Mr Medcraft, we know there is a page up there on the web site that has only been there a week or so, and a discussion paper—

21:54:26 —We have issued a consultation paper for regulatory guide that focuses on the risks. In the last few days we released an investor guide that explains the risks. That went out in the last two days. It goes back to what we said back in July when we had a health report. We said, ‘We’re not saying that these are the products that people should invest in; what we are actually saying is that you have got to have adequate knowledge, resources and the time to invest in these products.’

Senator BOYCE —So perhaps the next hearing is the time to ask you what responses you have got and where you have got to? The consultation is to be finished on 21 December. What do you expect the next step will be?

Mr Medcraft —We will assess what has come back. This is a consultation paper for a reg guide to guide the market in CFDs. As with any of these consultation papers, we will take into account what comes back from the market.

Senator BOYCE —Will you publish that in any form?

Mr Medcraft —Normally when we have had a consultation we do publish a summary of the responses we have had. What we are saying to the industry is: ‘These are the issues that we have identified. They are things that you have to address. If you want to run a good business, you do not want people to be uninformed and losing money with your product, because they are probably not going to come back again.’ I expect good principles to apply—you want the right investors to be buying your product and you want to have a sustainable—

Senator BOYCE —Do you mean that they all really did believe it was just going to keep going up and up?

Mr Medcraft —I think you would agree, Senator, that a good business principle to follow is to want the right people buying your product.

Senator BOYCE —Mr D’Aloisio, I notice from the report that your current term as chair expires in May next year. When do the negotiations start?

Mr D’Aloisio —I think that is a question that you have got to direct to the Treasurer.

Senator BOYCE —I would have thought that they would need at least six months to replace the chairman if that were to be the case. So I thought we would have had a date for when this would get discussed.

Mr D’Aloisio —It is a matter for the government, so it is not for me to comment on.

CHAIRMAN —If there are no further questions on the matters before us, I would raise with you Mr D’Aloisio that I have written to you in the past about a specific constituent in my electorate—Mr Mitch Dodrell. I ask again if you could review his case on the grounds of new information and court cases and a range of complex issues which he is still dealing with. As he is my constituent, I think it is in the public interest—as I sure other members would agree. We thank you very much for your participation, as always.

Committee adjourned at 9.57 pm