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Parliamentary Joint Committee on Corporations and Financial Services
Oversight of the Australian Securities and Investments Commission and the Takeovers Panel

ARMOUR, Ms Cathie, Commissioner, Australian Securities and Investments Commission

DAY, Mr Warren, Senior Executive Leader Assessment and Intelligence, Australian Securities and Investments Commission

KELL, Mr Peter, Deputy Chairman, Australian Securities and Investments Commission

KIRK, Mr Greg, Senior Executive Leader, Strategy Group, Australian Securities and Investments Commission

MACAULAY, Ms Louise, Senior Executive Leader, Financial Advisers, Australian Securities and Investments Commission

MEDCRAFT, Mr Greg, Chairman, Australian Securities and Investments Commission

PRICE, Mr John, Commissioner, Australian Securities and Investments Commission

TANZER, Mr Greg, Commissioner, Australian Securities and Investments Commission

Committee met at 12:45

CHAIR ( Senator Fawcett ): I declare open this public hearing of the Parliamentary Joint Committee on Corporations and Financial Services. Today the committee is taking evidence as part of the committee's ongoing oversight of ASIC, the Takeovers Panel and corporations legislation. This is a public hearing. The committee prefers to hear evidence in public, though we may agree to take it confidentially if it is relevant. The committee may publish confidential evidence later, but we would consult before doing this. It is important that witnesses giving evidence to the committee know that they need to give notice if they wish to give it in private. In addition, if the committee has reason to believe that certain evidence may reflect badly on a person, the committee may direct that the evidence be heard in private.

I remind witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is against the law for anyone to threaten or disadvantage a witness because of evidence given to a committee. If they did, the action may be treated by the parliament as a contempt. It is also a contempt to give false or misleading evidence to the committee. Witnesses should be aware that, if they make adverse comment about another individual or organisation, that individual or organisation will be made aware of the comment and given reasonable opportunity to respond to the committee. If a witness objects to answering a question, they should state the grounds of the objection, and the committee will determine whether we insist on an answer.

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

Officers of departments are also reminded that any claim that it would be contrary to the public interest to answer a question must be made by a minister and should be accompanied by a statement setting out the basis for that claim.

Finally, on behalf of the committee I would like to thank ASIC for being here today. Mr Medcraft, would you like to make a short opening statement before the committee asks questions?

Mr Medcraft : Thank you for your indulgence. We will look to get this to you at least 24 hours beforehand next time. We have had a few things recently, but we will try to do that next time because we do think it is good that you can read it beforehand.

Thank you for the opportunity to address the committee. In addition to those mentioned we also have other leaders: Louise Macaulay, Chris Savundra and Tim Mullaly. My opening address covers five topics: NAB Wealth, ASIC media releases, payday lending, behavioural economics work we have been doing and cyber-resilience.

Firstly, on NAB Wealth I wanted to briefly update the committee on our investigation into NAB Wealth. We have actually served 10 notices on NAB using our compulsory powers. We have actually gathered substantial information. We are now looking at how NAB identified and then dealt with problem advisers. We have also considered how they conducted remediation and whether they should have reported misconduct breaches to ASIC. It is a significant investigation and an ongoing operational matter; therefore, we are unable to comment any further.

The second item was media releases. The NAB Wealth matter highlighted ASIC's practices around media releases and enforcement matters, and our practice on sending media releases to external entities has been that we only do it with negotiated outcomes. Only with negotiated outcomes such as an enforceable undertaking do we generally provide parties with our media release shortly ahead of publication. I emphasise that this is done separately from the negotiation of the resolution and after negotiations have completely concluded. So we consider that it is an appropriate courtesy in circumstances where, 1), an entity has agreed to resolve the matter; 2), they have chosen to cooperate rather than contest issues; and, 3), they have committed to steps that ASIC considers necessary.

It actually has practical benefits. For example, entities have the opportunity to correct factual errors. It also provides updated figures—for example on compensation paid or customers impacted. It is also important that the ASIC releases are absolutely accurate, particularly when they involve market-sensitive matters. So we are reviewing our policy on reviewing media releases to external parties mainly because there have been inconsistencies around two issues. One is whether all entities have been provided with media releases before we release them in these circumstances. Two is timing—that is, how long before the publication entities are given the release. So our updated policy—because we are a learning organisation—that is currently being documented will be that generally media releases are provided to all entities involved in negotiated outcomes and they will get the release 24 hours before publication.

The third topic was our recent payday lending report. This week ASIC launched a groundbreaking report into the payday lending sector which found that the industry continues to struggle when it comes to meeting the obligations under the consumer protection law. We reviewed 288 files for 13 payday lenders who were responsible for more than 75 per cent of the payday loans in Australia and we found that the actions of some lenders fell short of the law. These included conduct that risks breaching responsible lending obligations. The payday lending sector was actually worth about $400 million in loans written last year and is growing. It is important that this sector operates properly, especially when these loans are aimed at financially vulnerable consumers. That is why ASIC is putting the payday lending sector on notice to improve its practices.

I will highlight that consumers who have financial difficulty should be aware that there are alternatives to taking out a payday loan. For example, most utility companies—electricity, gas et cetera—and most mortgage providers are actually required to have hardship relief programs in place that consumers can access if they are actually facing financial difficulties. If you are having trouble paying your electricity or gas bill, often it is probably a good idea just to talk to your utility rather than necessarily borrowing money on a payday loan. I think that is really important.

Fourth, ASIC released two reports on behavioural economics this week, and these reports explored possible behavioural biases impacting investors' decisions to buy hybrid securities rather than bonds or shares. We continue to focus on this because it is an area that is particularly popular with self-managed investors and we want to make sure they do understand what they are buying. We have also used behavioural economics to look at the right nudges in our communication with directors in firms in liquidation to encourage better compliance.

I think it is really important to undertake evidence based studies about how people think and behave in the real world. I think it is going to be increasingly important if you want to get smarter regulation. I think they do provide valuable insights into how people make decisions and how ASIC and industry can actually use those insights to get better consumer outcomes.

Finally, we released a major report yesterday on cyber-resilience. This is a crucial document because the linkages in the financial system mean that the impact of cyberattacks can spread very quickly. We think that potentially it affects the integrity and efficiency of the market and trust and confidence in the financial system, which obviously goes to the core of what we do. So the report, we hope, helps entities that we oversee improve their cyber-resilience particularly when it comes to identifying, evaluating and then communicating their relative level of cyber-resilience.

The report also highlights how cyber-risks should be addressed when complying with legal and compliance obligations, particularly those around risk management disclosure. Really a lot of this comes down to risk management. You cannot stop being cyberattacked, but what you can do is be resilient. We were trying to provide the right nudge, as they say.

Thank you. We are happy to take your questions.

CHAIR: Thank you. I remind committee members about the caveat around questions on NAB at the moment. I dare say in time you will have plenty. Senator Williams.

Senator WILLIAMS: Thank you for your time today. We had a hearing of the Economics Committee with NAB in Melbourne recently and asked them to name the seven people who had put breach reports to you, but they refused to do that. Would you know of those people who had breach reports on them? Are you prepared to tell us, or would that have to be taken on notice?

Mr Medcraft : I will pass over to Ms Macaulay.

Ms Macaulay : We do have the names. Those people were the subject of reports to ASIC. There were eight of them, as Mr Hagger mentioned. We do have those names and obviously we have copies of those reports. I am not sure whether we are able to name them publicly.

Mr Kell : We will take that on notice.

Senator WILLIAMS: Chair, how do you feel about naming financial planners about breach reports given to ASIC by NAB, which refused to give them to us at the economics committee?

CHAIR: We will take that on notice. I will need to make some inquiries of the clerk to see what we can publish and whether it is appropriate for us to publish it, and then we will receive those from you and publish them accordingly. If not then we will take them in camera.

Senator WILLIAMS: Ms Macaulay, I am going to drop this name to you. Am I allowed to ask questions about a planner, chair?

CHAIR: Is this someone who has been named previously?

Senator WILLIAMS: No. Mr Cowper has been named, but this person has not.

CHAIR: I think we will take advice from the clerk first. We will get some advice on that.

Senator WILLIAMS: From the Clerk of the Senate. So that will forbid me. Okay, we will stay away from that given the direction of the chair. Mr Medcraft, have you looked at NAB's behaviour in the UK? NAB owns Clydesdale Bank and Yorkshire Bank. A damning parliamentary report came out last week about the misselling of business loans to small businesses. It was scathing of NAB's internal compensation scheme. The committee found a lack of public oversight, minimal transparency and limited coverage of the compensation scheme meant that the committee could not have faith in the process. Are you familiar with what has been going on over there in the UK?

Mr Medcraft : Yes we are. Peter, do you want to deal with this one?

Mr Kell : I am not sure we have all the details of that report to hand, but we have been following that because we are obviously concerned to see, in the first instance, what sort of problems have emerged there and whether we have similar problems or similar issues in Australia and, second, whether there are Australian banks involved, to make sure we can assess their conduct in light of it.

Senator WILLIAMS: Because they do have concerns over transparency and compensation as I do of the current financial planning issue.

Mr Medcraft : We have a cooperation agreement with the UK's FCA, so we are looking closely.

Senator WILLIAMS: On financial planners: I have serious concerns about the register being established. It is now clear to everyone that financial planners have been removed—kicked out, forcibly made to resign—from the whistleblowers information from NAB, for example. They have moved on to other institutions and are still in the industry. If people get booted out, sacked, suspended or whatever, surely that would have to go on a register, because the whole idea of the register of financial planners is transparency so people, in seeking financial advice, can check out the history. But if all the good ticks are on the register and none of the black marks are on it, it is a misleading register. This is the problem I have. Would you like to add something, Mr Kell?

Mr Kell : The material that is to be placed on the register is determined in the first instance by the government. The government set out regulations as to what should be included—the name, the adviser number, what they are allowed to advise on. On the issue that you are talking about, there will certainly be information right up in front of people as to whether the adviser has had any enforcement action against them, in terms of whether they have been banned—

Senator WILLIAMS: Even breach reports?

Mr Kell : No.

Senator WILLIAMS: Breach reports will not go up?

Mr Kell : or have been the subject of an enforceable undertaking—and thereby have taken themselves out of the industry for a period of time. The matters that you are talking about will not be captured directly in the register.

Senator WILLIAMS: Do you see that as a problem?

Mr Kell : I suppose it depends on where you see this register going. In the first instance, ASIC thinks this register is a very positive step forward in terms of regulating the industry. For the first time we will be able to get a very clear picture of all the advisers in the industry and where they move. We cannot even get a clear picture of that at the moment. If someone does move from NAB to another firm and we subsequently find out that there were problems there, we will be able to determine instantly where they have moved to and which new firm they have joined. It will certainly help to deal with the sort of problem you are talking about although it will not go as far as you have indicated you would like it to go. There are the rules that we are operating under.

Senator WILLIAMS: Can we change the rules?

Mr Medcraft : It is a matter for the government.

Senator WILLIAMS: What if someone is dismissed—is sacked—even though it might be that they have resigned themselves because the boss has said they will resign or they will be sacked—and they then go on to another institution when they have been forced to resign because of wrongdoing?

Mr Kell : There are natural justice issues here as well.

Mr Medcraft : It is done on the FINRA register in the states. I agree with Peter Kell. The register initiative is a great move. I think it is a great initiative to get this off the ground. What you want to add to it in the future is really a matter for government.

Senator WILLIAMS: How is the register progressing, Ms Macaulay?

Ms Macaulay : It is progressing well. It is on track to be made available to the public on 31 March.

Senator WILLIAMS: That has been a lot of work for you, obviously.

Ms Macaulay : Yes, of course.

Mr Kell : It has been a huge project.

Senator WILLIAMS: How many planners in total?

Mr Kell : That is going to be a very interesting question. We opened it up for lodgement from the industry on Monday of last week.

Senator WILLIAMS: I do not want to know the exact number. Is it 25,000 or 30,000?

Mr Kell : It could be. That is one of the problems at the moment. We do not even have a clear indication of exactly how many planners are out there providing personal advice. This is, for the time, going to give everyone an indication of that. At the moment, as we predicted, they have been a little slow at coming in the door. We expect a last minute rush, which has put a bit of stress on things. But we will then have that picture and we will be able to answer that question hopefully in a few weeks time—down to the nth degree.

Mr Medcraft : The government is taking a reasonably transitioned approach on this. I think penalties are not applicable for nonlodgement until September. There could be some slowness, but eventually we will have a register. It will be a really good initiative.

Senator WILLIAMS: Is it September that penalties will be applicable?

Mr Kell : It launches on 31 March. On 31 May professional qualifications and industry association membership is included, and full operability in September, in terms of the fees and penalties for failure to lodge, coming in further down the track.

Mr Medcraft : One benefit is that at least you see if somebody is moving firms fairly frequently and you might question that, for example. That would be something you could draw from the register. There is significant progress here.

Senator WILLIAMS: It will be good when it is up and running. Does the system work where the planners have to come onto your web site and register their details.

Mr Medcraft : Yes.

Mr Kell : The responsibility rests with the licensee to put up the names of the planners who are working for them. So, ultimately, they are also responsible for ensuring that the information is accurate. I would hope that they have a pretty clear incentive to ensure the information is accurate. But they are the ones who will also ultimately face sanctions if they are providing inadequate information down the track.

Mr Medcraft : Do we have a screen shot of what the register looks like?

Mr Kell : Not here.

Mr Medcraft : We might give the committee a copy of what the screen shot looks like.

CHAIR: Could you take that on notice.

Mr Medcraft : I have seen it and I think it looks quite good. Also, the information will go on, which I think is important, because it does mean that third parties will have the ability to analyse the information. We should not underestimate that.

CHAIR: The register will obviously capture advisers. But clearly from a licence holder's perspective, when you are employing not only advisers but a more senior manager, understanding their background and whether they have a record with breaches or other non-compliance issues is important. APRA have a 'fit and proper' test. Has ASIC ever given consideration to having a similar test so that a company or a licence holder could approach you to ask about the fitness of a person for a role they are considering?

Mr Day : We are asked questions like that from people internationally—from people in other jurisdictions. They ask about the probity of people who might be applying for a licence in those areas. We do communicate with them, if it is another regulator asking us under the relevant memoranda of understanding. We give them the information we are at liberty to.

In terms of, say, domestic private industry asking us those questions, there are restrictions about what we can say. If your question is aimed at whether we expose our own determinations about whether they are fit and proper, the answer is no. In fact, it is rare that we would be asked that question. It may be that we are asked in other meetings we have if we have heard of someone or if we know of someone. But in terms of formal requests, there are few.

Mr Tanzer : Within our licensing regime there is quite a common practice of referring to a responsible officer or a responsible manager where there may be a licence condition that says that that person needs to continue to perform the role of a responsible manager, and that if that person ceases or leaves the firm, that would breach that licence condition. There are licensing checks done around fame and character at the point that those people are appointed. It is not a completely foolproof system. I would not suggest that. But it does provide a degree of surety at the point of licensing that there are appropriate people in that, more from a management perspective rather than the advisers themselves.

CHAIR: Can I ask you to take on notice to come back to the committee with a range of models and options right from: will this tell you if this person has had a compliance issue, through to the APRA style 'fit and proper' person test and right through to, for example, the aviation regulator. When an airline wants to appoint someone as a senior pilot for the organisation they actually approve that person as being fit and proper for it. From your perspective as the regulator, can you come back to the committee with details of what current hurdles there are to each of those. That would be of interest.

Secondly, the other people at the moment who have a check on the behaviour of individuals are the professional associations, where an adviser is currently a member. If they have breached the code of conduct and their membership terminates with a professional association, in practice is there a line of communication between the professional association and you as the regulator? I do not believe there is a legal requirement, but is there an expectation that they would advise the licence holder that someone who works for them has been removed from the association?

Mr Day : In terms of the licence holder, that would be a matter for the professional association to answer the question about whether or not the professional association tells the licence holder. I do not know that we are aware of that.

Mr Kell : But in terms of telling us, yes. If someone is terminated for perhaps not paying their fees, we may not always be told that. But if it is something where the professional association believes there has been some sort of misconduct or poor advice, then generally they will tell us, although I would have to say I could not guarantee that that is 100 per cent consistent across all of the bodies all of the time.

Mr Price : Timing is often an issue. For example, with the two largest representative bodies for accounting professionals we certainly generally do give that information, but it is once a determination has been made by the tribunal that looks at misconduct. That is because natural justice needs to be afforded to these people. So there can be a timing issue in the sense that a professional association may know of possible issues earlier. But until that determination has been made in the normal course of things we would not become aware of it from the professional association.

Mr Medcraft : Chair, regarding your first question, if it interests you we might add to that analysis the UK's proposed responsible manager regime, which you may be aware of. The Financial Conduct Authority, which is our equivalent in the UK, which is now implementing it. It might be useful for you to see that, because it is pretty interesting and it deals with this same issue.

Senator WILLIAMS: Mr Medcraft, in regard to when someone is jailed for wrongdoing, did you see the story 'insider trader hid behind the Block'?

Mr Medcraft : Yes.

Senator WILLIAMS: $7 million in insider trading. They have been put in jail. The judge, Justice Hollingworth, was not one bit happy about the whole situation. When these people go in for criminal activity, do they then get banned in a civil case from being directors of companies or going back into the corporate world when they get out?

Mr Tanzer : There is a five-year ban under section 206.

Mr Day : Yes, there is an automatic disqualification.

Senator WILLIAMS: Is that after they are released?

Mr Tanzer : I am pretty sure it is after their release, but I will check that for you.

Mr Medcraft : I hope so!

Senator WILLIAMS: You would hope so! Seven years jail and you are banned for five years but two years later you can come back into the corporate world!

Mr Tanzer : It is for conviction of a pretty serious offence, which includes insider trading.

Senator WILLIAMS: I want to go now to an issue that is really concerning. Mr Price, you might know something about Interfert Australia Pty Ltd and Megafert Pty Ltd.

Mr Price : Yes.

Senator WILLIAMS: I am really annoyed because Peter Evans and John Simper were directors. NAB has put covenants over them not to draw dividends. In December 2008, they drew two dividends for $3 million. Now we find in evidence in the courts that they drew them in February 2009 and backdated the dates on the dividend drawings prior to the covenants being put on by NAB. Are you investigating this?

Mr Price : We are. The matter to which you refer was referred to our enforcement area at the start of March.

Senator WILLIAMS: Keep us up to date. I am reading reports on this in The Weekly Times where those directors were set free—they were not pursued by the liquidator or NAB, I believe. They have boats and houses and all the bells and whistles.

Mr Price : As I said, generally we are looking at these issues and certain matter that have been alerted to us through reports of the liquidators. Given where things are it is probably not appropriate for me to make further comment at this stage.

Senator WILLIAMS: Okay. And are you also inquiring into Sapphire South Australia, trading as River City Grain?

Mr Price : Yes. There are a couple of issues in relation to Sapphire that I could draw to your attention. The first is that we had asked that the relevant administrator of that group of companies provide us with a further report and some further evidence in with respect to some concerns that they had in relation to Sapphire grains. We have very recently received some further information, and we are looking at that at the moment. The second aspect is that we are in communication with the relevant administrator about the handling of the administration more generally. Some of our questions in that area are ongoing. The third element is that we recently became aware that there had been a dividend date when the administrator was aiming to pay dividends to various creditors. That date was not met. We have made some inquiries in relation to that—

Senator WILLIAMS: On 28 February.

Mr Price : We have made some inquiries in relation to that particular issue. In the circumstances we believe that the administrator has acted appropriately. The issue there is that, before they can pay dividends, administrators should understand who each of the unsecured creditors is and get them to prove their debts. There is a large financial institution that is in the process of proving its debt at the moment, but has not completed that process. In those sorts of facts and circumstances it would be inappropriate, knowing that this information is coming, for the liquidator to start distributing the proceeds of the administration, because they are uncertain about what that financial institution's right to funds might be. Indeed, if the liquidator were to go ahead and provide those funds, I think we would have a real concern that they were not carrying out their duties appropriately.

Senator WILLIAMS: Mr Price, for about six years now I have pursued with you changes to the regulations and management and registrations of the insolvency practitioners industry. Hopefully those changes will come through very soon. I will run you through what I would like to see: registration for each liquidator—they pay a fee to get some money into your coffers to police them, because I believe you spend about $10 million a year on oversight of the insolvency practitioners industry and collect about $40,000 in registrations, which is leaving you far, far short. Say you had the power to, with a phone call, remove liquidators off a job—Mr D'Aloisio told me long ago it is very hard to deregister and remove them—for example, if their public indemnity insurance lapsed you could, with one phone call, suspend their registration and so on. Is there anything in particular that you, being the commissioner in the oversight of this industry, would like to see as far as these changes that are proposed or hopefully coming forward very soon in relation to the insolvency practitioners industry?

Mr Price : I think the exact nature of the changes is a matter for government, obviously.

Senator WILLIAMS: I am asking you because you work in the industry, and you probably know the shortfalls as far as the guidelines you have to work under.

Mr Price : I understand. But I think the aim of the bill, which provides a greater ability of creditors to protect themselves—

Senator WILLIAMS: Yes, for the creditors to remove a liquidator with a majority of the number that vote?

Mr Price : The suggestions around improvements to ASIC powers and the improved registration processes are all positive developments from our point of view.

Senator WILLIAMS: And the examining—the test you sit for to become a liquidator?

Mr Price : Exactly. I think one area that may cause some practical difficulties is that at the moment ASIC has hearings in a body called CALDB, or the Companies and Liquidators Disciplinary Board. Once the bill starts, as I understand it, ASIC will need to start those hearings afresh in another jurisdiction. Obviously, that would cause lost time and potentially wasted resources. If that were something that could be addressed.

Senator WILLIAMS: That very point that you raise, Mr Price, I would be glad to take up with the Assistant Treasurer, Mr Josh Frydenberg, to point out that that would be a stumbling block and cause a restarting again which would probably not be convenient for anyone.

Mr Price : The only other one is a very technical point, but there are some suggestions we have about the creditors' voluntary winding up processes. I would be happy to provide some material for you outside of this hearing. It is quite technical.

Senator KETTER: You would be familiar with the scrutiny of financial advice hearing, which took place on Friday 6 March?

Mr Medcraft : Yes.

Senator KETTER: There were a number of comments made by Mr Morris—and I am mindful of what you have said about your enquiries into NAB wealth, so I am not going to be going anywhere near any specifics. But I thought I would like to give you the opportunity to respond to some of the more general criticisms that were made. I will just quote from the Hansard:

The big, vertically-integrated institutions have long found ASIC to be a pleasure to work with, and this sentiment seems to have been reciprocated by ASIC's appreciation of the fact that the big players seldom bothered ASIC with their problems.

Further, he says:

The big-six players, who between them control 80 per cent of the financial planning industry, have been largely left to their own devices, and these systemic problems are the result.

I would just like to give you the opportunity to respond and to say something about that.

Mr Medcraft : Thank you, Senator. Mr Kell?

Mr Kell : A couple of points on that issue: it is not true to say that the four largest banks have been left alone. In fact, there have been well over 40 enforcement actions against those four, say, over the last five years, including hundreds of millions of dollars in compensation to clients of those banks, license conditions imposed, numerous infringement notices, enforcement actions in relation to misleading advertising and so on. So they are very much a focus of ASIC's work in the financial advice area, and that is not counting some of the work that takes place in relation to the other parts of their businesses.

We have also, obviously, argued quite publically—and ultimately in relation to FOFA, successfully—for major reforms that have reduced some of the conflicts of interest in their remuneration structures, and we are looking for further reforms in that area in our submissions to the financial systems inquiry and so on. We have also set up—as I think we have said to this committee; certainly to some other parliamentary committees—a major wealth management project. In an environment of tight resources we are devoting significant additional resources to looking at the major four banks, AMP and Macquarie, with a range of surveillance and enforcement actions around their wealth management and financial planning activities. These are underway at present.

The other point that I would make here—stepping back for a bit—is that ASIC has been saying for many years now—many years—that there have been consistent systemic problems in the financial advice space. We have released a range of reports and taken a series of actions going back two decades or so. These have been presented to the parliament and to the public at large on numerous occasions, highlighting the problems in this industry. So we have also been calling attention to this for some considerable period of time. My view is that for too long disclosure was seen as the only answer to this issue—I think FOFA indicated why that was a problem. Saying that disclosure would fix conflicts of interest in this area is a bit like saying to someone facing a tsunami that they ought to swim between the flags. We needed tougher rules; we are now getting some of that with FOFA, finally, and we will be looking to implement that and take action there going forward.

Mr Medcraft : I will add that there are also recommendations from EJC on competence, and then there is the financial adviser register, so I think—

Mr Kell : There is a lot underway.

Mr Medcraft : There is a lot underway in this sector.

Senator KETTER: Do you accept Mr Morris' assessment that the big six players control about 80 per cent of the financial planning industry?

Mr Kell : I am not sure what the exact figure is, but they are obviously dominant in the industry, yes.

Senator KETTER: When you mentioned earlier that there were over 40 enforcement actions over the past five years, were those in relation to any of the big six? Were they specifically for the big six?

Mr Kell : Those were the ones I was talking about in relation to the big four.

Mr Medcraft : I think what we could do is table the statistics we have with the committee. If we can, we will extend it to the six.

Mr Kell : I will take that on notice.

Mr Medcraft : That will be a bigger number, clearly, with the big six. We will provide you with the data which will go from admin to civil to criminal.

Senator KETTER: Okay. What do you say to the criticism that it was not ASIC that was involved in uncovering either the CBA or the NAB financial planning scandals—that it was whistleblowers, the media and even the Senate involved in that? What do you say to that?

Mr Kell : Our first submission to the original Senate inquiry into ASIC sets out in some considerable detail the action that we were undertaking in relation to CFP prior to any whistleblower contacting ASIC, and the concerns we had prior to that taking place. What we have said is that, with the benefit of hindsight, it would have been much better for ASIC to have been more public about those concerns—to have acted sooner to move our regulatory action on to an enforcement footing—and that when the whistleblower did come in, to have acted sooner around that. We have certainly said that is something ASIC has picked up about that. But we had strong concerns, and were already taking action prior to any whistleblowers approaching us on CFP.

In relation to NAB: I would prefer not to comment in detail, because there were some elements of what has been publicly reported that ASIC was already working on. There were elements that were not, and they have been highlighted by the whistleblower in that case. As to exactly how that plays out, I think we would prefer to allow our investigations in our work to proceed a little further before we discuss that in more detail.

Senator KETTER: I am interested in if there has been in any internal changes within ASIC to address any of these issues?

Mr Kell : There are a lot of internal changes that we have taken, and quite a few of them in response to the reports and considerations of the Senate inquiry and other parliamentary inquiries. I think it would be useful, rather than trying to run through all of them, to provide you with our response to that inquiry. To give you one example—we have set up far more substantial arrangements about dealing with whistleblowers, including establishing an Office of the Whistleblower, headed by Mr Day, and we are providing training to our different units about how to better deal with whistleblowers and identify those issues earlier. That is just one example of something that we have taken on board as a result of some of these issues. We have certainly said publicly, and to this committee, that we think there is a range of things we could learn out of these experiences to make sure that we regulate more effectively.

Mr Medcraft : There are a number of lessons we have had from it. But I would like to make the comment that even before this, under my chairmanship, we have never expected not to make something public. We always insist that if we have some sort of an undertaking, it must be public—to be clear.

Senator KETTER: I have a matter that has been raised with me, and I have raised it with one of your officers in recent times. I am interested in getting a response on that. I understand that you are going to take that one on notice?

Mr Day : I am aware of that issue. We will take that on notice. We will have a good look at that, and we will respond to you completely about that.

Senator KETTER: Thank you very much.

CHAIR: Before I move on to some other questions, I just want to come back to your opening statement where you talked about cyber resilience. Can you tell the committee if you are working with ASD in your approach to that and your engagement with industry?

Mr Medcraft : We have been liaising with the government—sorry; Cathy, do you want to comment?

Ms Armour : We have been working with ASD generally and with CIRT—I think that is what it is called—the civil section of the signals directorate, which is set up to deal with commercial issues. We have also been working with the Prime Minister and Cabinet exercise with the government review of the whole-of-government cyber resilience perspective.

CHAIR: Is that information flow two ways, as in they are informing you about threats and ways to help industry counter it? Or are you informing them about sectors of industry they need to be working with to help?

Ms Armour : It has generally worked two ways. We have had the opportunity to hear from ASD about the areas that we should be aware of and that we should have particular attention to and, certainly, where we have seen issues or where we have seen industry has had issues, we have encouraged reporting into the CIRT team.

Mr Medcraft : We are also coordinating globally amongst our peers as well on this whole issue. Clearly, it is an extraterritorial issue as well. That is also quite critical.

CHAIR: I will take you to recommendation 10 from the Senate Economics References Committee report into the performance of ASIC. That was one of the recommendations that was supported by government. The recommendation says:

… with a view to making it more effective in detecting deficiencies in internal compliance arrangements.

Can you give us an update on what you are doing in terms of your surveillance activity?

Mr Tanzer : The recommendation went to the effectiveness of the surveillance of financial advice businesses generally. There are a couple of obvious actions that are taking place on that, with respect to particular entities. Obviously, Macquarie CFP are amongst them. I think, more broadly, we have been undertaking, within ASIC, quite a detailed exercise of trying to understand what sort of data sources would help us better target potential problems as they arise. Obviously, we need to interrogate the breach reports, and we have been putting a lot of effort into emphasising to industry that we regard breach reports as very important. We would rather receive many than fewer and not just rely on whether or not they feel a judgement that, under the law, they are required to provide a particular breach because they regard it as significant or not, because we regard that intelligence as really very important. But, on top of that, internally, we have been thinking very hard about what other types of data and what red flags there may be that we might be able to find that rely less on responding to a report of misconduct that might come from an investor, for example, because often that occurs some period down the track, or a breach report from the entity itself, and that data can take a range of forms. In fact, some of this information, particularly in the managed funds area, is available through public reporting of various types: how the fund is growing, where the inflows of funds are coming from, what types of commission arrangements they may have in place and the like.

CHAIR: Mr Tanzer, I am going to cut you off there. My question is more specific about the compliance arrangements with the governance within an organisation and their ability to actually monitor compliance from within. If we look at the failures where there have been two enforceable undertakings come out, in both cases it has been identified and publicly stated that the internal compliance was to that company rather than to a corporate headquarters, and that has subsequently changed and everyone thinks, 'Yes, that's a great thing.' But, sitting back and looking at it from a holistic perspective, it amazes me that someone like the Institute of Company Directors has not been out with a template of what a good governance arrangement looks like. So my question to you is: at that level, what are you doing to engage with industry? Have you considered making it a condition of a licence to have a governance arrangement? You would not be telling them exactly how to do it but saying, 'Here is a model.'—perhaps by the Institute of Company Directors—'This is best practice. Your licence is dependent upon you having something that meets the outcomes of a best practice system.' Because if we have had two failures—and I will be interested to see your report on NAB when that comes out to see why their internal governance and compliance system did not pick up on this problem—it strikes me that we are constantly fixing problems up rather than addressing some of the root causes.

Mr Medcraft : If you do not mind, we will take that on notice and come back to you.

CHAIR: With a more fulsome explanation.

Mr Medcraft : With a fulsome explanation.

Mr Price : I will make a couple of quick comments. The ASX corporate governance principles already set out extensive guidelines for companies in terms of risk management and governance. As you are probably aware, they are on a comply or explain basis most of the time. The second thing is that, for financial services entities that are APRA regulated, obviously there are extensive guidelines that APRA issue in relation to the right structures there. But we will take it on notice and come back to you with some more comprehensive information.

Mr Kirk : I have just one more thing. This is actually covered in one of our answers in response to questions on notice from the last occasion. We have been working in a very focussed way on upskilling our own staff who are going out on surveillances and the like, looking at these entities in compliance systems, looking at how to recognise good and bad compliance cultures and auditing methodology. That has now been incorporated in our broader learning framework for staff in those roles. We have established the framework, we have established a regulatory network of all staff involved in that and we are providing a centre of excellence for them to build on there and to share ideas here from both internal and external speakers on those issues. Also, as part of our broader capability assessments of staff, which we are rolling out across all the teams—that is, again, for the staff in those areas—one of the capabilities that they are going to be assessed against is whether they currently meet it and what needs to be done in order to make sure they do. It does not cover fully your point in terms of a licence condition or anything. But, certainly in terms of our own surveillance activities, we are very much upskilling our ability to rigorously test internal compliance systems of the entities that we are doing surveillance on.

CHAIR: I will let Mr Medcraft in. He has been seeking the call.

Mr Medcraft : I think I understand what the senator is after. As I understand it, you are thinking this is not so much about internally ASIC focused, it is externally focused on what we are doing, if I am correct.

CHAIR: I will let Ms Owens ask her questions and then I will come back.

Ms OWENS: It came from me originally, I think, so I will go through it a little bit. In looking at some of the circumstances of some of the big companies that ASIC is looking at at the moment, it seems that the relationship between ASIC and the communication with the company was at a level within the company but not at the upper level of the company.

Mr Medcraft : Okay.

Ms OWENS: Which allows two things. It allows for a person in an organisation to block the flow up, regardless of their compliance protocols. It also means that people within the company who might actually have a completely different perspective on whatever is seen by ASIC do not get to see the full picture. So it is two things.

Mr Medcraft : Just on that point—and I will come back because it is a good question—one thing I initiated a few years ago is that we have now a regular board lunch with each of the big banks where we sit down with the board and we talk about issues that are of concern. It is something we started a few years ago. We had lunch a few weeks ago with the board of Westpac, for example. The reason that I initiated that was to make sure that, from the very top, they heard our messages. We have been doing that for a couple of years now. We do it with the big six and, in fact, a little bit even lower than that, largely to deal with that issue, which is to make sure the messages are going down, so that we are doing it.

Ms OWENS: Do messages go in two directions?

Mr Medcraft : We meet as a commission and it has been a proactive thing with the banks to catch up with them at the board level. Also I do reach out frequently to chairs of the major banks if I have concerns to make sure that there is nothing missing on the way up. To the senator's question, it is a good question to think about that perhaps there is another aspect to this which is a problem, which is the misconduct reporting where I think there is a lot of mischief at the moment.

It was highlighted in the NAB issue, which is that at the moment under the law they only have to report significant breaches. I think there are two issues with that. One is determining what is significant, and the time it takes to determine what is significant. I think that is an area which perhaps we need to look at more closely.

There was one of the behaviours in a breach report that I looked at today. Somebody said 'We've reported, but we don't think this is a significant breach. But we are reporting.' So maybe there is some guidance to give in which is significant relation to the current law. Basically: report it, even if in doubt. Report it, so that perhaps there are some nudges around that. As I said, I think we might just think a bit more about that in addition to what we have said and come back to you.

Ms OWENS: I will take it a step further, if I can? The new system, the surveillance system that you have where I understand you are in contact with people virtually on a daily basis—'Can you explain this transaction, or that transaction'—is terrific. But is ASIC and the middle level of the company the best place to identify trends from the management perspective on an overview of a company? Again, I am wondering whether there will be flags which might be significant to the upper levels of a company that they will not hear because they are actually being assumed to be fairly—

Mr Medcraft : That is often where meeting with the board is really important. I can tell you, I have met with boards and said 'Look, you've got a cultural problem. There is a cultural problem.' It has been a surprise to them and it has triggered action. That is why it is quite important never to presume anything. I think you have to be proactive at all levels. As I said, it is something that we have actually been doing in the last couple of years. I know from my days as a banker what occurs further down—there can be an issue. So, I do agree.

Senator WILLIAMS: Could I expand on one thing there from Ms Owens, please, Chair? Mr Medcraft I want to take you back to the substantial breach. This seems to be a real concern and I think—

Mr Medcraft : Significant.

Senator WILLIAMS: Significant, yes. Are you saying that the significant breach is in the law?

Mr Medcraft : Yes.

Senator WILLIAMS: Who makes that law, the government obviously?

Mr Medcraft : Yes.

Senator WILLIAMS: You do not have it in regulation yourself?

Mr Medcraft : No.

Senator WILLIAMS: So you are saying that word 'significant' should be removed?

Mr Medcraft : That is a matter for government.

Senator WILLIAMS: No, hang on—the trouble is that we have a piece of string here and we do not know how long that is.

Mr Medcraft : Sorry, it is a matter for government. What I am saying is that I believe that there is, frankly, a lot of mischief that goes on around the word 'significant'. I will be blunt: I think there is abuse by people determining when it is significant and when it is not. Some people are at one end of the scale and other people are at the other end of the scale, so there are issues around when it is significant. There is also another area, which is how long it takes to determine it is significant. Some people may take several years to determine it is significant. Timing is an absolute issue and therefore it is critical. If you think about it, if we have a system which relies on people to report breaches of the law, and they are not significant breaches and they are not getting reported then that is a problem.

Senator WILLIAMS: Chair, could the secretary make a note of this to put on our agenda next time this committee meets so we can have discussion about that issue, please?

CHAIR: In fact, my decision on this is: can you provide the committee with a brief as to the impact—

Senator WILLIAMS: Sounds better.

CHAIR: of that current legislative word 'significant'? What it allows companies to do, the practical impacts you have seen and what you think a more suitable wording in that legislation would be?

Mr Kell : And the second component, which we did put in our submission to the Senate inquiry, was that the only remedy we have for failure to breach report is a criminal remedy. It is a very high standard of proof. We think this would be an ideal provision for a civil penalty provision which would allow us to act faster and more effectively where there has been a failure to breach report. So it is that the issue of significance and the nature of the remedy we have both inhibit our ability to really deal with breach reports in way that would send a stronger message.

Mr Medcraft : I think that is a good suggestion, and it does go to the heart of the system.

Ms OWENS: Can I just follow up on that, too?

I look at the range of work that ASIC is doing, and I think, 'My goodness, if it is spending its time on the big banks, how many staff do we have to give you to look at the whole sector?' It is quite an extraordinary workload. I look at the ins and outs in your annual report; there are some areas that are growing significantly. There is just this incredible volatility coming off the end of the boom. For me, because I am a change maker, I am always looking at making myself redundant. I am going to ask you the same question. You have just given us one, but what are the things that you need to make some of your processes faster, to lift the standards so that some things come off your plate because they are more controlled and you can move into other areas?

Mr Kell : In the financial advice space in particular?

Ms OWENS: The full range?

Mr Medcraft : The thing about it fundamentally is that ASIC is a law enforcement agency. That is what we do; 70 per cent of what we do is surveillance and enforcement. In surveillance and enforcement you can dial it up or you can dial it down. We are in financial services. Frankly, for people breaking the law, often it is an issue of fear versus greed. You have two things that you can dial up or dial down. The reason, often, that people are driven to break the law is deciding between that. So you have to lift the level of fear of getting caught and the fear that if you get caught the punishment will be severe. They are the two key behavioural drivers.

If you think about getting caught, then that is about things that we have just talked about what we do in terms of data gathering; breach reporting; misconduct; and surveillance, be it reactive or proactive. Some of it comes down to the law; some of it comes down to resources. That is a thing that we have raised before. A senate inquiry has recommended on resources, and we have just talked about some of the law. On the enforcement side, it comes down to the penalties. We have highlighted previously the issue of civil penalties that are too low. The Financial System Inquiry has recommended on that as well. If you can adjust those dials, then obviously you lift the level of fear and, therefore, hopefully have a system that is more resilient.

Mr Kell : I wonder whether the committee would find it useful if we provided a summary document of the proposals that we have made to the various inquiries that have taken place—to the Senate inquiry, to this committee in some of its inquiries, and to the Financial System Inquiry—so that you can see some of the key issues that we have been raising or some of the key proposals that we have been putting forward that would help us to do a better job, ranging from higher professional standards, which is something we have addressed; to power to take action against managers and executives; and through to a review of penalties. That might give you a picture of what we have been proposing, which we believe would help make us a more effective regulator.

Ms OWENS: That would be very useful.

Mr Medcraft : The way of the future is, and I have discussed this previously, is getting data in an electronic format, which makes it easier for us to take action. There is a lot more opportunity these days with data analytics to take more focused quicker action. That is another area that we are really focusing on. I think the way of the future is using data analytics a lot more, but getting the data in an electronic form that we can better—

Ms OWENS: Is the new surveillance system that you have a learning system?

Mr Medcraft : The one for markets, MAI, is actually a very good system. It uses algorithms to really target in on outcomes. I must say that there is no reason, in the financial services space, that we should not be thinking in the same area in the future. For example, even with the financial adviser register, perhaps thinking about how we might use the data that is going to be on there to do our job better. With data analytics you can actually be a lot smarter.

CHAIR: On that point you were raising then about data, you obviously have surveillance and enforcement areas. I assume that you have a number of other subdivisions of markets, advice or others. Where you are working with a given organisation who may span a number of sectors, but also you may be interacting with them in both a surveillance and enforcement level, do you essentially have a case manager, somebody who has an overall view of the totality of ASIC's engagement with that company—even if it is from different perspectives in different markets—such that rather than this area asking for a data set and then another area asking for exactly the same data set a few months down the track—

Mr Tanzer : We had a system like what you are talking about, but not exactly the same as that, which is to help coordinate communications between ASIC or those sorts of requests for information from ASIC with at least the major entities. We have previously thought about the idea of structuring ourselves such that you had teams that were based on institutions, which is more of the prudential-style approach that many prudential regulators use around the world. At least so far, we have found it better to try to structure ourselves around stakeholder specialties, because the size of our regulated population is so much bigger than it is for an entity like APRA. That said, the point that you are making about trying to connect the dots around the different things that are happening—we definitely do that. I will not tell you exactly what the period is, but Mr Day's group is responsible for producing, for example, a big banks report which draws together all of the themes not just of his area but also of existing activities around some of the major institutions, so that we can look for those sorts of trends and abilities. Then obviously within the organisation itself there is quite a lot of open sharing of information about what activities are on at the time, and an encouragement for the teams to speak together to try to understand what intelligence they need.

CHAIR: Is that synthesis of information based on interaction of your teams or do you have a software tool that is essentially like a client management tool so a suitably empowered manager can at any given time have a look and see with a particular stakeholder what your interactions are?

Mr Tanzer : We have developed a data warehouse which enables a trawling of many, but not necessarily all, of ASIC's internal systems and it was very much designed with this in mind. It might have been about an entity or it might have been about a particular person—to do a search of those databases to try to draw out what are the key activities that are taking place at the moment. That is the primary software tool that we have got.

The point that I was raising before—but probably not in as direct a way as it should have been—is that we are building off what we have done in the market surveillance system and thinking about how you might apply that to the broader regulatory activities of ASIC, where traditionally we have, honestly, relied very much on breach reports or reports from members of the public. We are looking at ways that we can have a much better system of interrogating or understanding what is happening in the market on a more real-time basis.

That is much easier with a regulated market, because you are dealing with a whole stack of trading that is going on. We need to think pretty hard about how we would construct a similar sort of system or think about what data we would want to request or is already available about, for example, a financial advice firm or an investment manager. We do require various things from both of those types of licensees, but on a much more periodic basis. There are other sources of information out there, like your Morningstars and other types of entities that collect more contemporary information about what is happening in the marketplace.

That is what our vision for the future on the regulatory business would be—to say, 'Let's take what we've done with this market surveillance system and think about how you might be able to apply that to the broader regulated population.' We do not do a bad job in connecting the dots on what we know about the regulated population. But the preponderance of the information about financial advisers, investment managers and investment banks tends to be much more reactive information than up-to-date information that we have on trading in the markets.

Mr Medcraft : I think the simple answer is that we have a matrix view on our database. The databases might be separate, but there is a consolidated view in the data warehouse. So, if you go into Commonwealth Bank, you will see the activity that is sitting on different databases—which I think is what you are asking—but also we have a matrix of a person who has an oversight of the relationship as well.

CHAIR: So do your internal processes—

Mr Medcraft : So this is for the large entities—

CHAIR: So do your internal processes require, then, that before, for example, the enforcement division or surveillance division requests information or takes a particular action they go back and they review what is currently occurring, and the question of what information ASIC already holds?

Mr Medcraft : It should be looking at the database to see what we are actually looking at currently. So there is also a person overall who coordinates the relationship.

CHAIR: The other aspect—I am looking here at the compliance burden on the sector—is that, clearly, every time ASIC changes people in a role, there is a burden on industry to get that person up to speed with how their particular operation works and who their client population is. How frequently do your people change—the people you would send out on audit teams, or people who are, if you like, relationship managers with significant stakeholders or groups of stakeholders?

Mr Tanzer : Our turnover—it varies depending on the stage of the cycle, really—is a little bit higher than the APS average but significantly south of the average of the industry that we work in, so it tends to run at eight per cent to 10 per cent. The public sector average might be a little bit less than that, depending on where you are looking, and the financial sector average—

CHAIR: For a given stakeholder or sector, are you saying that within a year someone would turn over, or would you replace that position every two years or five years?

Mr Tanzer : As to the numbers that we have, it is not susceptible to an average. I would say that it is much more likely that we would lose a lot of people, when you are talking about an up stage of the cycle, where the industry is employing a lot of those sorts of people, rather than that, because the numbers that we are talking about is a relatively low number of people, when you are talking about the response haul coordinating point for those particular entities. More generally, our surveillance teams will be looking at this entity on one particular day, and at another entity—I would not say the next day, but the next week or the week after that. What they tend to be applying is their knowledge of the industry and its structures, less than the knowledge of that particular institution, which is more of the prudential-style approach.

Mr Medcraft : Mr Chairman, what we might do is perhaps get you the turnover statistics on our stakeholder teams. The average across the organisation is about eight to 10, but let us have a look at what it is for the stakeholder teams; that would give you an indication of that issue. Obviously, in the last twelve months, we had to lose a couple of hundred people for retrenchments, so you would have to overlay that. That might help give some guidance on that.

CHAIR: Particularly if you could break that down by the sectors that you—

Mr Medcraft : That is what I was suggesting: we will take it by stakeholder team and give you that, because some of the stakeholder teams are quite small, so we would probably need to give you the numbers as well as the percentage. Cathie, did you have a comment or not?

Ms Armour : Just in the context of the last question: we are moving to a new technology system, which will assist with joining many of the dots. We have got two things happening. In the next three months, we are progressively rolling out to market operators and market participants a portal which will hold all their interactions with ASIC, so that some of those issues about diffusion and communication should disappear. The other thing is that we are, over the next six months, rolling out an analytics program, which again has a much more enhanced capacity than we have at the moment to actually join the dots and see the connections between people that are of interest in our enforcement activities and that sort of thing. So we are getting there.

CHAIR: I will hand back to Ms Owens. I just want to clarify before I do, though, that my question about the compliance systems and your interaction was really looking at the macro scale, in that everything I have heard so far is about people looking at process within the system. What I am talking about is: is the structure of the system itself, at a very macro scale, suitable? Is it best practice? What we have seen in both of these recent EUs is that it clearly was not. It was not reporting to an independent part of the company or an independent body outside, which is really at a macro level.

I am asking: what work are you doing among yourselves, with institute or company directors or with whomever to have a best-practice model and whether or not you will make it part of your licence requirements. If we have got to this century and very large organisations are still having fundamental flaws in the design of their governance models, what is happening at the lower levels in the smaller companies that are working in this space and how are you going to flow those learnings down to try and prevent the same kinds of corporate governance failures in much smaller organisations? That is my question, if you can come back to it.

Ms OWENS: Ms Armour, you might have answered this question already, but is that system visible to the companies?

Ms Armour : Yes, it will be visible to each company, so they will be able to see all of their interactions with us.

Mr Tanzer : This is for market participants who have obligations to report to us and may be receiving notices as well. It provides a much more interactive portal for them to use. We do not have that capacity in other parts of the organisation. A very important point about that is that it is market funded, so the market participants themselves have paid for that, and that is why we have been able to build that system.

Ms OWENS: So that would to some extent have solved the problem that one of the big banks had where they were not aware. That is its point.

Ms Armour : Yes, it could become a platform so that all the activities for all the regulated population could be recorded. I think that would address many of the issues that you have been asking questions about.

Mr Medcraft : We are thinking about whether we could take this as a pilot. I said before that, at the moment, the system we have actually aggregates a lot of different diffused databases and we think we may want to transition to essentially just having one single database, perhaps using a system like this, which is based on Microsoft and Linux Dynamic.

Ms OWENS: Mr Tanzer, when the chair asked about turnover rates, you referred to the industry turnover rate.

Mr Tanzer : Yes.

Ms OWENS: I think the chair's question relates to whether ASIC is providing a consistency of relationship. If they are easy to get, could you also provide the turnover rates just as a little footnote?

Mr Tanzer : I do not know how much of that we have, but we could try.

Ms OWENS: Only if it is available. Do not go out of your way. You could have a staff member for 10 years, but, if they turn over six times, you do not have—

Mr Medcraft : We are turning over less than our counterparts somehow.

Ms OWENS: Exactly. That is my question.

CHAIR: We are going to spend about another 15 minutes on some general issues that have been raised with the committee by people and then we will move to the annual report and dig into that a little bit. Would you give us an update on your regulatory guides around the treatment of time-share products.

Mr Tanzer : There are a couple of issues emerging around time share at the moment and some of this is clearly linked to the broader issues around financial adviser competence. We do not see that there is a particular sense, particularly when we are dealing with an issue of competency of advisers on time-share, of dealing with that in isolation from the broader issues of adviser competence. But there are not proposals on raising the training standards for persons providing advice. We have decided that, while we have been engaging with the time-share industry on that going back a year or two, we decided to put that on hold until the broader issues around adviser competence become clear.

We are considering a current application from the Australian Timeshare and Holiday Ownership Council, an industry body called ATHOC, which is the time-share industry's main industry association. One particular requirement of a time-share scheme we had was that any deposit for the purchase or issue of an interest in a time-sharing scheme should be less than 30 per cent in value of the total purchase or issue price of the interest. That was an obligation that we put in place because we felt that that was a good protection against the risk that many investors were bearing where the time-share operator was actually involved in development of the property itself.

The timeshare industry now has developed a little bit differently. There are not so many timeshare operators in particular; they are involved in developing properties, and a number of them are more involved in managing an existing operation. While that was a protection—and we felt very strongly was an appropriate investor protection in the circumstances in the industry at the time—we are happy to consider an application as to whether or not there should be relief from that in this particular circumstance.

We also have some class orders relating to timesharing schemes more generally, which are due to sunset in 2017. That is another two years away, but we will be consulting more generally with the timeshare industry around this. The timeshare industry itself seeks to make an industry where the investment should not be seen really as an investment; it should be seen as some form of—to use a term that has gained some undue provenance recently—a lifestyle choice or a leisure choice, rather than being seen as a core investment. But I can tell you that at the time many of the problems were emerging with timeshare, the problems were really around high-pressure selling. The pressure selling was really about the investment capability of the particular scheme. While these things continue to evolve, that is something that we are a little bit wary about.

CHAIR: Going to professional indemnity insurance—can you talk to the committee about your view of the efficacy of the current models that are in place for the financial advice industry.

Mr Kell : Professional indemnity insurance has been one of the requirements under the licensing regime for some time now. We have highlighted that, while it is an important part of the regime, it is no magic bullet when it comes to dealing with consumer claims. In particular, if you are looking at some of the potential for problems, they tend to emerge arguably just when those claims become most acute—that is, where you have multiple claims. That is why we have seen a growth of unpaid decisions through the Financial Ombudsman scheme. They typically arise where a firm has collapsed and the PI insurance is unavailable to pay those multiple claims. While we do think it plays an important role to deal with those one-off claims that advisors may have to deal with, we have also suggested in our submissions to various inquiries that we think there is scope for a targeted last resort compensation arrangement to deal with the particular sort of situation where PI is not actually going to work that well.

We are doing a bit of work on the PI insurance sector at the moment to get an idea of levels of availability and cost, and the preliminary results are that the market is fairly stable. There are not a lot of providers, but it can be difficult for some smaller firms to get it at times. There are about five core insurers in the market, and we will be coming out with some results soon that help to provide a bit of a picture as to how that market is operating at present.

CHAIR: One of the recommendations that came out of this committee's work looking at raising the educational ethical standards of financial advisors was that they should be members of professional associations which are approved by the PSC. With other professions that come under the PSC, this whole issue of liability is part of what the PSC look at. In the work that you are doing, is it the view of ASIC that the current arrangements through the five providers who are out there are suitable for this industry moving forward, if we are going to end up with a profession of financial advice such that it would provide an equivalent cover for the consumer that PSC currently does for other professions?

Mr Kell : I am not sure if the answer—

Ms Macaulay : We are not at the stage where we can say that we are comfortable that that would be the case. But it is something that we are looking at very closely.

Mr Kell : It is a very live issue for us at the moment. We have actually been discussing with industry members this past week to try and get a better sense of what would be available under the sort of scheme you are talking about and how that would operate. So we are giving it further consideration. We would be happy to come back to you once we have—

CHAIR: What is your time frame for coming up with even an interim report in that area?

Ms Macaulay : We are doing a separate report on the PI. We were not going to do a report as such in relation to the issue that you just raised about the PSC and changing professional standards. It is certainly something that we are looking at internally and engaging with Treasury on.

Mr Kell : On that, however, I would say that, should the government, as I think the Assistant Treasurer has flagged, consult or do some further work around how that model for lifting professional standards might work, we would obviously be wanting to provide our views on how we see that operating. Within the consultation time frame that might occur on that issue, we would certainly be happy to provide some views.

Mr Medcraft : I think the one issue that has emerged is that the PSC has a limitation of liability.

Mr Kell : I think we need to get a better sense of how that works.

Mr Medcraft : If you are trying to build confidence and trust from consumers for a sector that does not have a lot of trust and confidence, that will be an issue they need to think about. At the end of the day, it is all about trust and confidence.

CHAIR: Indeed. What is your role in relation to foreign exchange brokers, particularly looking at January this year and Swiss currency?

Ms Armour : I am to help talk about that. Yes, we regulate the foreign exchange brokers. When there was the Swiss currency event, we contacted all the relevant providers of retail foreign exchange products to remind them of their obligations on minimum capital et cetera. We did not have a provider that went into difficulty into Australia, unlike in some other jurisdictions, so we were lucky in that sense. Obviously there were some client losses, and there were different approaches taken by various providers on how to deal with those issues. From our perspective, we were quire fortunate because Australia, unlike some of the other regional jurisdictions such as Japan and, I believe, Singapore, allows leverage. So people can really take quite significant risk in the foreign exchange market. I think we were quite lucky that there were not more significant issues.

The other thing is that, in our regime, our client money rules allow a foreign exchange organisation to use the client margin that is lodged with it. It has client money to manage the liabilities of other clients. There is a little mismatch there and it can create a risk. So we were quite fortunate that our providers were able to operate reasonably effectively, not withstanding the significant shock, and did not have those sorts of difficulties. We have had a number of complaints from concerned individuals which we are working through.

CHAIR: It does concern me that you used the words 'lucky' or 'fortunate' in almost every sentence.

Ms Armour : Exactly, absolutely.

CHAIR: That puts the question in my mind: if the environment in which people trade in currencies has a large element of risk and, therefore, luck in outcomes, do we need to do anything else in highlighting their acceptance of that risk and appropriate disclosure?

Are there sectors of the market that we cannot reasonably expect to understand that? Or are you satisfied that those who engage in a substantial way in currency exchange are educated, sophisticated investors, who should understand the risks they are getting into?

Mr Tanzer : I do not think we are at all satisfied of that last statement.

CHAIR: What can we do to make sure that we continue to be—

Ms Armour : I think there is an open issue about whether or not, as a jurisdiction, we simply should take the same approach that other jurisdictions have taken, which is to limit the amount of leverage. We have spoken for some time, and I know Treasury have consulted, about improving the client money arrangements. We think there would be really significant benefits.

Mr Medcraft : When we have discussed this more globally, we are being picked off as a jurisdiction that allows for very high leverage—500 to one. We are doing what we can in terms of vetting those that apply for licences in this area, particularly those that do not actually have a connection with Australia, that are operating outside Australia but are operating under the supposedly Australian licence. We are doing what we can there but, within that, they have the capability to offer 500 times leverage. Again, this is an example where they are global operations. This is an issue, and it is an issue that has been discussed recently at the Council of Financial Regulators.

CHAIR: How does that 500 times compare with, for example, North America, the UK, et cetera?

Ms Armour : I do not know that we have the exact figure, but the USA, Japan and Hong Kong have capped leverage. We can get back to you with the exact figure. We have no limits at all.

CHAIR: So do other people who allow significant leverage also have different disclosure requirements?

Ms Armour : It is interesting. One of our executives is on an IOSCO committee where this issue was discussed. The message that came back was that people in other jurisdictions with a similar lack of limits on leverage are all grappling with how to deal with the issue. I do not think there was any message back that disclosure would solve this issue.

Mr Tanzer : It is very much for that reason that we have given consistent public messages that people dealing in foreign exchange really need to understand the dynamics of the market and also the fact that often the basic economics are not necessarily what drives that market. It is such a huge market that gets moved by so many factors. People need to understand that, notwithstanding what type of broad research they might be able to do at the retail level, they really are dealing with something that is very speculative and can move very quickly, and they need to be especially careful about leverage.

We have also found that in this area we have seen more unscrupulous operators move in and promote it as a retail investment, with big claims about how much might be made or using a testimonial that someone made a certain amount over a certain period of time. We have been very active in closing down a number of those operators. We had a matter involving a group called Voltmarkets just within the last couple of weeks, where we take enforcement action, effectively, to either remove the person from management of that entity or to close down the entity as a whole.

Mr Medcraft : There are really three issues. There are those that are actually doing these businesses that do not really even exist in Australia; there is the issue of leverage; and then there is also the issue of client money. They are the three big issues. The client money issue is something that the Treasury has taken on board, because basically their funds get commingled if something goes wrong.

Ms OWENS: There are a number of number changes in the annual report between last year and this year. I just want to run through about five of them, and I would like feedback on whether they are an aberration or whether they are caused by something that ASIC is doing differently or something that is happening in the field, and whether there is a response by either ASIC or regulators needed.

Mr Medcraft : I am delighted that you have read it!

Ms OWENS: I have! Page 7: a decline in the number of illegal schemes shut down from 39 to zero.

Mr Tanzer : Yes, that was a question that was raised on the last occasion by Senator Fawcett. A number of the illegal schemes that we shut down in the previous financial year were related to illegal boiler room-type operations and Ponzi scheme-type operations. The truth is that we have seen a dramatic drop-off in the number of reports of misconduct that are coming forward about that. It is very tempting, obviously, for us to say that this suggests that we have been very effective in the field, and I think there is something in that. But I think a feature of that is that there is probably not quite so much of that activity occurring at the moment—partly because of the attention that we have given to it, and partly because of the economic cycle. But we are definitely not seeing nearly as many reports of misconduct in that field as we did 12 or 18 months ago.

Ms OWENS: But your likely view is that it is because the market cycle was causing—

Mr Tanzer : I do not think it has been eradicated, but—

Mr Day : We still had some concern, and we watch for this. It is interesting, when we are in a low-interest-rate environment—given current rates of term deposits at two per cent—you would think that fanciful offers of investments for a Ponzi scheme or some other form of illegal investment at even what three years ago would have seemed a not-high rate of five per cent would attract the market at this point. You would think this is an environment where you could have more of these at what might be more a modest rate of return. But we are just not seeing that. Echoing what Commissioner Tanzer has said, we do think that because of the 'clean out' of the market, if you like, the tide going out in recent years and the downward cycle that people are much more cynical in what they will put their money to. They are looking for safe harbour investments and they are not necessarily chasing yield in that respect from something that they are not quite sure about. That is our best guess.

Ms OWENS: Okay.

Mr Tanzer : I think it is also probably right with calling matters—these boiler room-type matters—that they do move to other jurisdictions. There is no reason why they should necessarily target Australian investors if they are getting a better return from South African investors, or Spanish investors or whoever. I do think there is some truth to the fact that we have taken a fairly public stance on boiler room scams, so we are fairly active with them. They will move somewhere else for a while.

Ms OWENS: So they will retreat to places? They nick off to easier places.

Mr Day : But they will be back.

Ms OWENS: They will come back—okay! Page 161 says that the number of authorised financial markets doubled from 2012-13 to 2013-14 and is still going up. What is going on there, then?

Ms Armour : Partially, there are some new market entrants in the established market; the Australian Pacific Exchange, APX, came into the market. But I think the most significant thing is that technological change has meant that there are now more facilities which allow various types of financial products to be exchanged electronically.

Mr Price : The cost to enter the market—

Ms OWENS: Is down. Does that affect the role that ASIC has, or the size of the job?

Ms Armour : Yes, it does.

Ms OWENS: I know everything does; it is a genuine question—I worry about you guys!

Mr Price : Don't worry about us!

Ms Armour : It is an interesting issue, because the market licensing framework is set up to assume an Australian Securities Exchange, an ASX-style entity. In fact the new markets are becoming less formally structured, and so the licensing regime and the requirements that attach to them are really not necessarily ideal for those sorts of markets.

Mr Medcraft : It may be useful to give the committee that diagram we have which actually shows what the markets look like today versus a few years ago. It is quite an interesting single page that breaks up what we may have—

Ms Armour : I think the committee might already have that. We gave it to them back in September.

Ms OWENS: We probably do.

Mr Medcraft : You do. It just shows you there is so much more fragmentation of markets because of technology.

Ms OWENS: If they are essentially technology-based markets, is that another area where your surveillance systems need to come up to speed?

Mr Medcraft : That is why they have had to come up to speed.

Ms OWENS: This one is great, on page 5—this one is fabulous: 685 meetings with industry groups and stakeholders. I figure that is three each work day—up from 281. You had a big year. You looked alarmed, Mr Day!

Mr Day : I am alert, not alarmed.

Mr Tanzer : There are a number of pretty significant policy reforms that have been undertaken over that particular year; 13-14 was very significant year for the implementation of the Stronger Super reforms. And that involved quite a lot of detailed discussion and roundtables with industry over the detail of the implementation of things like the MySuper dashboard and the institution of the executive officer remuneration. We have a website disclosure by super funds and the like. So there was the implementation—

Ms OWENS: It is not a general trend; it was specific?

Mr Day : We have also lifted our engagement with small business over the last two years. And that continues to grow. As a result of that, a lot of that increase would be attributable to that area, as well, with us liaising with industry groups and directly in that area.

Ms OWENS: What has been the benefit or the change as a result of negotiating so much more with the small business?

Mr Tanzer : We get a couple of concerns from small-business people. One is about the ease of lodgement requirements and things to do with the registry itself. Much of that has been streamlined, but we do get periodic concerns about aspects of that. The other one really relates to the problems of phoenix companies. Much of our engagement with small-business entities is to make the point that small businesses tend to be both the victims of and the conductors of phoenix company type activity. So the purpose of it is both educative—to let people know—and to get out a message about avoiding phoenix company activity and the sorts of things you can do to protect yourself against it. But, also, we have some targeted campaigns in that area, particularly in the construction industry. Very much part of the engagement with the construction industry is to say, 'Who's doing it? Give us evidence about it. This is the type of program that we run.'

CHAIR: Before we move on from that one. I am always very wary when I see figures like that. Sometimes activity is equated with productivity. How do you measure the efficacy of your engagement with industry? For example, with the internal processes, how do you structure meetings, how do you plan for them, how do you evaluate them, what feedback do you get from industries on whether they think the engagement process has been productive?

Mr Tanzer : Our main, more systematic, way that we do that is through our stakeholder survey, which we conduct every two years or so. Our last stakeholder survey showed that our engagement with small-business people felt that, firstly, they did not understand what ASIC did or they found it difficult to make contact with the right type of people. So we have followed up directly with that. We played back those concerns to check with the participants we were working with that that sounds valid to them, and we have been seeking to address those. We will do another survey in about another 12-18 months. I think it might have been Senator O'Neill who, on a previous occasion in this committee, raised the issue of the small-business hub that we have set up within the ASIC website. The website was to give people some basic information about what they do need to let ASIC when they change to new directorships.

More generally, also, within this small-business area, one of the interesting things that we have been doing is more of a direct engagement with industry over this phoenix company problem. We have been going to people who we think are more at risk of doing that, frankly, and reminding them of their obligations directly, and then testing that population against the general population to see whether we think that that is actually having an improvement. The numbers are relatively small at the moment, but we had our strategic intelligence area do a proper evidence-based assessment. They said, 'Firstly, you can't draw firm conclusions because your numbers are too small.' But the indications are positive; we are finding a better level of compliance with those that we had visited to remind them of their obligations. We also tried to add some numbers around that about what that might have saved in terms of our activity and the potential damage that we understand from phoenix company activity to the economy as a whole. So that was quite encouraging but small numbers. But it is to give you an example of the assessment that we do of that type of more direct engagement.

CHAIR: My question also went to the efficacy of the meeting format and the target group that you were selecting. Clearly, if as Mr Medcraft says you are a learning organisation, you do not want to keep investing resources in something that is not actually producing. So my question stands. What do you do to understand whether this form of engagement with these kinds of companies is actually achieving the outcome you are looking for so that the next time a round of engagement is planned people have some baseline to learn from and, hopefully, iteratively develop and improve from.

Mr Tanzer : And certainly the stakeholder survey gives us that type of baseline from time to time and helps us identify things.

CHAIR: That is very broad though. Do you come back to the specific stakeholders or engage with these meetings—

Mr Price : The stakeholder survey actually goes to industry sector.

CHAIR: If you invite 10 groups to come to a meeting, do you follow up perhaps six months after the meeting to ask: 'Were you happy with the level of engagement? Were you happy that outcomes have been achieved? Do you feel as though you were listened to?' You do the same thing internally so that you are measuring the effectiveness of where you are spending your resources?

Mr Medcraft : I think it is better we come back on that because there are a number of aspects to that question.

Mr Price : I think that is right. Certainly in relation to more formal public consultations we publish reports later, but it probably is best to get the data and come back to you.

CHAIR: What I am hearing out of that is that, no, you do not specifically do an evaluation of a round of consultations. You have broader processes. Or are you saying you do not know and you are going to come back?

Mr Medcraft : We are going to come back to you on the answer. That is what I am saying.

Ms Armour : I think our interactions are quite different when we are having an interaction with someone about some aspect of poor conduct where we may follow on with some enforcement action.

Mr Price : They may feel that was unproductive.

Ms Armour : Exactly.

CHAIR: There are two different types of meeting. There is that kind of meeting, where it is an enforcement or surveillance type which is giving someone a warning. I guess I am talking more about where you are engaging with industry around essentially a regulatory approach with what needs to happen moving forward. I have heard some very good feedback about, for example, your engagement in the markets area, where you get a range of stakeholders in the same industry sector and you thrash out what you are planning to do and use their perspectives. That, from the feedback I am getting, is very constructive. What I am asking is if you measure that across the range of areas.

Mr Medcraft : I am not saying we do not do it; I just would rather come back with a more informed answer than just something off the bat.

CHAIR: Okay. Senator Ketter.

Senator KETTER: On page 55 of the annual report there was a dramatic drop in the application of SMSF auditor registration. You did put on some extra staff in the lead-up to 30 June 2013, as I understand it, to cope with that new requirement. Since then it has dropped off to about 240.

Mr Tanzer : That is right. We think that is the more likely standard state. The last six months of 2013 were the period when people had to register as an SMSF auditor for the first time, and there were of the order of 7,000 applications that needed to be processed over that time, but we think the steady state year on year is probably more of the nature of 200 to 300.

Senator KETTER: I know you are expecting me to ask a superannuation related question, so I will not disappoint you. I will depart from the annual report for a second and touch on the issue of inducements to business to switch the default super fund of employees. There was a survey conducted on behalf of Industry Super Australia, and that revealed some evidence of inducements out there. As I understand it, you were involved in a joint operation with APRA to investigate that. I am seeking an update on that.

Mr Tanzer : Sure. We are aware of the research that you are referring to. It was conducted by a group called UMR and was commissioned by Industry Super Australia. We met with Industry Super to understand the background to the research and to try to get more detailed information. The research itself asked questions online and of some 550 employers about whether they had had any engagement with the bank that provides their general business services and whether they felt that there had been discussions about changing their default super arrangements and whether any inducements had been offered. The survey did not identify any particular breaches of section 68A. It was not designed—well, whether it was designed to or not, it did not identify any particular breaches and it was not conducted at a level of particularity that allowed it to do that.

In particular, the way the survey was designed, some of the inducements that were mentioned in questions in the survey are not banned by the legislation. For example, if the inducement relates to the provision of a service to the members of the fund itself, that is not a prohibited inducement, because it goes to the members of the fund as opposed to the employer.

Senator KETTER: What about discounted fees, lower insurance premiums, lower interest rates and free tickets to sporting events?

Mr Tanzer : Free tickets to sporting events are the most obvious example of an inducement. That is very clear. But it depends on the circumstances in which that might have been offered. Discounted insurance arrangements, lower fees and so on depend on who it is offered to—whether it is offered to the employer or to the members of the fund. The point I am trying to make is that the inducement might be that the fund itself will offer lower insurance premiums or something, but typically that is to members of the fund. But it may also be that the inducement was offered by way of saying, 'We will offer you a discount on your public liability insurance' or something of that nature. That may well be an inducement.

With regard to the section itself, the fact of something like that occurring needs to be analysed in its particular facts because there is a difference. Cross-selling is not banned by the provision, whereas offering an inducement is banned by the provision. Each allegation needs to be treated on its own facts.

The short answer to your question is yes, we are in discussion with APRA about this. We are expecting through that to do some work jointly with APRA and probably some work directly ourselves on some surveillance directly with some representative entities in the superannuation industry just to understand what type of programs they have going around seeking to attract default funds and what controls they have. We expect out of this that perhaps there might be other information that comes forward from whistleblowers and the like.

Senator KETTER: Are you still in the planning stages or have you commenced your investigation?

Mr Tanzer : We have certainly commenced some discussions with some of the majors. We are also completing the more detailed project plan about what sort of notices we might issue to ask for more specific information.

Senator KETTER: Are you suggesting there might be some need to clarify the definition of what an inducement it?

Mr Tanzer : No. In the legislation itself—section 68A, which was put in the law back in, I think, 2005 and is the provision that governs these inducements—it is not a criminal offence. It provides an ability for a person who suffers loss or damage as a result of one of these inducements to take a civil action to recover that damage against the person who offered the inducement. I think it is offered the inducement rather than accepted, but I will check that. It is not a criminal offence of itself, although the fact that an entity was offering inducements of this type we think would also raise issues around its suitability for holding a licence. So we are not restricting ourselves in our consideration of this to section 68A itself, but 68A by itself certainly is a civil provision, not a criminal provision.

Senator KETTER: We are talking about activity by some of the big banks' retail funds, aren't we?

Mr Tanzer : The research was directed to that. We are not necessarily going to restrict our examination to that, because the competition for default funds I think is reasonably intense, as it should be. We would rather get a broader picture of the industry, not just the banks.

Senator KETTER: Thank you.

CHAIR: I take you to page 37 of your annual report, where it is talking about cross-border compliance for managed funds and also your international cooperation requests. The context of my question, here, is looking at ASIC's current resource and workload with our domestic environment. As the financial markets and product offerings become more global, I am interested to understand your forecasts for increased workload. I notice you have entered into 29 supervisory cooperation arrangements with European Union securities regulators. You have 448 requests from other financial regulators and law-enforcement agencies. That is just Europe. As we look forward to the Asian financial passport, what are the implications for ASIC, in terms of your workload and your resources, and are these on a fee-for-service basis? I am assuming that if it is an agreement we do theirs for free and they do ours for free?

Mr Medcraft : That is correct; there is no fees. You make a good point, if we do move to the Asian funds passport, clearly, there will be a need for more resources to enable this, for us to undertake this activity. Also, with the ones that you have highlighted, a lot of this, the more of these we sign—the reason we often sign them is to allow mutual recognition between jurisdictions. They are quite important, in terms of helping business and cutting red tape for business, but there is a cost to that cooperation.

CHAIR: Could you quantify that cost for us? What are we talking about? An extra three or four FTE? Thirty or 40 FTE?

Mr Tanzer : We can come back to you.

Mr Medcraft : We will come back to you with specific—

Mr Tanzer : We have given some specific estimates around our implementation of the Asia Region Funds Passport, which was based on some projections but also on the building of the database to help manage all of that. We can come back to you with those.

Mr Medcraft : We will come back on both, because as we have more and more global capital markets this is the way to go, but it is not without a cost.

Mr Tanzer : There probably is a user-pays perspective too. I think what the chair mentions is very important. These types of arrangements are entered into because they offer benefits to Australian businesses as well as consumers from the wider range of offerings that are available here but also the ability to compete in other markets. We have a range of options. Were we to pursue a user-pays funding model in recovering some of this from the Australian industry—it does benefit from the existence of the arrangement and being able to go overseas, or from a fee arrangement around the entity that wants to take advantage of it from overseas.

Mr Medcraft : We will come back to you with the costings.

Mr Tanzer : The second depends on what the arrangement is that is entered into with the foreign country.

Mr Medcraft : We will come back on Asian funds passport and on this one as well.

CHAIR: As a broader understanding—

Mr Medcraft : And we will come back with the increase as well.

CHAIR: As a broader understanding of where ASIC fits in the whole agreement or treaty-making process, whenever I sit with the Treaties Committee and we look at treaties, the national-interest summary looks at the cost implication, consequential legislative changes required in Australia. For these kinds of agreements, as the government is engaging with overseas partners, are you leading the financial space in that work and therefore identifying for government what the impact will be from a resource perspective—

Mr Medcraft : Yes.

CHAIR: And can I take any comfort that the national-interest summaries that we see in that committee have reflected your position about the increased resources you may need? This is in terms of appropriations or consequential legislative change that enables you to charge back to industry for this. Or do you feel there is a gap in that system where new agreements are entered into and where, with the requirements you put up, people have just said for you to absorb that out of your current budget?

Mr Medcraft : It is a very good question, Chair. We do not see those national-interest summaries, so the answer is: I do not know. For example, at the moment, on the Chinese free trade agreement, we are working with the Chinese and we have had people up in China but, at the moment, I do not think we see—the only thing really is the Asian funds passport.

Mr Tanzer : It depends on the agreement. Typically, in the negotiation of free trade agreements and, particularly, the financial services chapters, the ones that we have seen in recent years have been at a reasonably high level and have talked about best endeavours, equivalent treatment, no preference and those types of things. Where it becomes more specific, with the Asia Region Funds Passport, in particular, the Treasury is leading that negotiation and the development of that. But we are very actively engaged in that work to provide our estimates, but also to provide our expertise and be part of the negotiating team about what sorts of accommodations and what sort of regulatory system would actually work. So we are much more directly engaged with something which is a specific proposal than is the case with the negotiation, for example, of the Korea free trade agreement or the China free trade agreement.

What has tended to happen is that then the Department of Foreign Affairs and Trade or the Treasury will seek to engage us on specific proposals. We have the advantage that we have got some regulatory settings around recognition of foreign regimes more generally, and that tends to be our starting point with this, which is based on whether or not the foreign regime offers and produces similar regulatory outcomes to what we seek to achieve with our own regime. And there are some benchmarks that are used to try to assess that. The assessment that is currently being undergone with China is of that nature, around how equivalent is their regulatory regime with respect to managed funds, such that we might start to explore whether or not there is any appetite from their side and our side to provide some mutual recognition or whatever.

Mr Medcraft : I think the nub of your question is a good one. Where in fact it is something clearly on financial services, we certainly appreciate that that impact is considered. I was not even aware of the summaries you mentioned, so we certainly welcome the opportunity, where it is something that is proposed and it is just presumed that we will absorb the cost. In this tight environment, it becomes problematic actually.

CHAIR: Obviously a free trade agreement is a very large trade push. With something like the Asian financial passport, is some of your work in that led by industry identifying that there is opportunity and they want you to help clear a regulatory pathway, or is it predominantly led by DFAT and the trade side of government saying, 'This is a strategic relationship we want to establish'?

Mr Medcraft : Yes, with the mutual recognition on markets like the over-the-counter derivatives markets recognition, that has actually been from industry coming to us and going: 'Can you help us? We need mutual recognition.' It is where I have had to pick the phone up to the SEC or the CFTC or the Europeans and go, 'We need to do something here.' So that has generally been industry driven because they do not want to have double regulation. In terms of the Asian funds passport, I think that—

Mr Tanzer : That was also significantly—

Mr Medcraft : It had a lot of interest coming out of the Financial Services Council wanting to do this as the opportunity. As Greg knows, one of the things that I have always been very keen to say, coming from the banking and finance industry, is that you do not want to build it and they do not come, so you want to make sure that you have got some industry champions—where, if we build this, they do come. And I do believe that has been the approach that they have taken on this.

CHAIR: The context of my question here is that this government—probably all governments, but this government particularly—is very much about trying to reduce regulatory burden and the cost of red tape. But, at the same time, this committee's role is to make sure that ASIC is suitably resourced to look after consumers here and to enable and encourage business. So, if it has been business led in some of these areas, have you had the discussion with them about what contribution they think would be appropriate, as they look at their business case, to open up those opportunities for them and for them to contribute?

Mr Medcraft : We have had that discussion with them, and with a couple of them, in particular, we have spoken to them about the products that they would think to offer under the Asian funds passport. In fact, I have met with a number of fund managers that have a real interest in this that are Australian based that even have offshore funds already and actually are keen to try and develop this—and where the issues are. So, yes, we have. But I think where we start on this is that sometimes it is not overlaid with a price signal, which is, 'We can do this but it will cost something; it won't cost nothing.' I do think at times that that price signal is not well enough built into the equation, because sometimes the managers go: 'This is what we would like to do,' and we go, 'That's fine,' but what we do not say is, 'We realise we can do that, but it actually is going to cost money, if, in fact, we have this Asian recognition.' We need to work with a common regulator. Everything is possible as long as you recognise that there is a cost to doing something and you need to factor that into opening up a new market. There is no use building this and then people saying, 'It' going to cost too much.' That equation, frankly, in my view, needs to be built in more.

Mr Tanzer : Not always. The financial advice register, of course, is being funded by the fees that come from the register. With the Asian Region Funds Passport, I am not aware that we have engaged the industry directly on how much we expect—

Mr Medcraft : No, we have not. We engage with them on the need for their passport, not the cost.

Mr Tanzer : That is right, but we have also, obviously, been engaging with industry more generally about the user-pays funding model.

CHAIR: And that is well understood. I guess what I am interested in knowing is where there is a specific program like this that has been identified and that has been flagged as an initiative that everyone welcomes. Have you done the cost-gap analysis to understand what will be the difference between what industry are prepared to pay to get the opportunity and what you might have to take out of absorbed funds or the government might have to produce as addition funds?

Mr Tanzer : Under the current budget rules, there is pretty much an assumption that, if it is going to go ahead, there will be costs that we are costing, and that will be recovered from industry. That was the assumption with the financial advice register also and that is what has been put in place.

Mr Medcraft : Let us hope that it is clear.

Mr Tanzer : Let us hope it happens that way.

Mr Medcraft : I do think that should be the mode going forward, very clearly—that the two come together.

CHAIR: Any final questions?

Ms OWENS: Looking forward to next year's annual report!

Mr Medcraft : You have given me an idea. I think we might put the comparative in that particular page, actually.

CHAIR: I think we had the discussion last hearing, Mr Medcraft, that it would be good to have a longer period so you actually get a bit of history—

Mr Medcraft : Yes. We will take that on board.

CHAIR: a longitudinal view, of a lot of those figures, because two years in isolation does not actually tell us much.

Mr Medcraft : I think I agreed with you on this.

Mr Tanzer : I think we have provided that data back to you, but for the annual report—

CHAIR: You have; but what I am saying is that that should be an ongoing part of your process. It provides a far more useful context.

Mr Medcraft : It is agreed.

CHAIR: Okay.

Mr Medcraft : We are a learning organisation!

CHAIR: Can I have a member of the committee move that we accept the submission from ASIC?

Ms OWENS: Yes, so moved.

CHAIR: Thank you. As noted, we do read the things you provide us, even the annual reports—so, getting that information ahead of the hearing would be great, in future. I ask that the things you have taken on notice be provided to the committee secretariat by 10 April. I would like to thank you for attending the hearing today, commissioners, and your officers who have attended. Thank you to the committee and to Broadcasting. The committee will now adjourn.

Committee adjourned at 14:53