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

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

CRENNAN, Mr Daniel, QC, Deputy Chair, Australian Securities and Investments Commission

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

ECCLESTON, Ms Jane, Senior Executive Leader, Investment, Managers and Superannuation, Australian Securities and Investments Commission

HIGGINS, Ms Laura, Senior Executive Leader, Financial Capability, Australian Securities and Investments Commission

IGLESIAS, Mr Carlos, Chief of Operations, Australian Securities and Investments Commission

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

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

MACAULAY, Ms Louise, Chief Supervisory Officer, Australian Securities and Investments Commission

MULLALY, Mr Tim, Senior Executive Leader, Financial Services Enforcement, Australian Securities and Investments Commission

PRESS, Ms Danielle, Commissioner, Australian Securities and Investments Commission

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

SAADAT, Mr Michael, Senior Executive Leader, Deposit Takers, Credit and Insurers, and Regional Commissioner, New South Wales , Australian Securities and Investments Commission

SHIPTON, Mr James, Chair, Australian Securities and Investments Commission

Committee met at 8.59

ACTING CHAIR ( Senator Williams ): I declare open this hearing of the parliamentary Joint Committee on Corporations and Financial Services. The committee is taking evidence as part of its ongoing oversight of ASIC, the takeovers panel and the corporations legislation. This is a public hearing and a Hansard transcript of the proceedings is being made. The hearing is also being broadcast via the Australian Parliament House website. I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to the committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee.

The committee prefers all evidence to be given in public, but under the Senate's resolutions, witnesses have the right to request to be heard in private session. If a witness objects to answering a question, the witness should state the grounds of the objection and the committee will determine whether it will insist on an answer having regard to the ground which is claimed. The Senate has resolved that an officer of the department of the Commonwealth or 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. It does not preclude questions asking for explanations of policies or factual questions about when and how policies are adopted.

I particularly draw the attention of witnesses to an order of the Senate of 13 May 2009 specifying the process by which a claim of public interest immunity should be raised. Witnesses are reminded that a statement that information or a document is confidential or consists of advice to government is not a statement that meets the requirements of the 2009 order. Instead, witnesses are required to provide some specific indication of the harm to the public interest that could result from the disclosure of the information or the document.

I remind people in the hearing room to ensure that their mobile phones are either turned off or switched to silent. On behalf of the committee, I would like to thank witnesses here today for their time and cooperation. The committee welcomes officers from the Australian Securities and Investments Commission. I now invite you to make an opening statement, not a short opening statement. At the conclusion of your remarks, I'll invite members of the committee to put questions. Go ahead, Mr Shipton.

Mr Shipton : Thank you, Chair. Firstly, I note that today's appearance will be the last for retiring deputy chair, co-deputy chair, Peter Kell. I want to thank him for his service to ASIC and the Australian public over many years. I also want to welcome to the commission, joining us very recently, Danielle Press, who you had introduce before. Firstly, I want to commend the royal commission on its important work and acknowledge the seriousness of the observations made in its interim report, including those made of ASIC. The royal commission has very effectively highlighted widespread misconduct and conduct that does not meet community standards across the finance sector. Importantly, the human impact and personal costs of this conduct have been in clear focus. The royal commission has also appropriately questioned and commented on the role of regulators in preventing poor conduct. The royal commission has also made observations and criticisms about ASIC's approach, especially in relation to court based enforcement. Whilst ASIC has always been committed and dedicated to preventing misconduct in the industry, we take these comments about our approach very seriously. We fully accept that we need to continue to make changes to our approach to enforcement to deliver more effective deterrence.

We have long recognised that the implications of misconduct in finance can have a devastating impact on individuals and families. The royal commission has reinforced that this conduct has real and lasting impact across the community, including on more financially vulnerable people. The royal commission has also clearly reinforced that the financial industry has abandoned its core role of being custodians of other people's money. At the outset, it is important to identify, as the royal commission also did, that the root causes of the matters raised in the commission ultimately are, firstly, misconduct by financial institutions and, secondly, a failure of those financial institutions to adhere to their legal obligations to ensure that their organisations and the people who work within them act efficiently, honestly and fairly.

In relation to that second word—honesty—one clear conclusion in the interim report is that the financial industry has been repeatedly dishonest in its dealings with customers, dishonest with the community and dishonest with regulators. That dishonesty must not stand. Unfortunately, whilst we are hearing important acknowledgements from the leaders of financial institutions about change, such change is not happening as quickly as it should. ASIC is still experiencing slow and delayed responses from financial institutions and, in some cases, overly technical responses aimed at delay. Due process is important but it must not be manipulated to disrupt the achievement of fair, appropriate and honest outcomes. I've said before this committee and elsewhere that it is a professional obligation of a financial institution to be timely, open and honest in their dealings with regulators. If institutions lie or are otherwise dishonest with us, we will use every power available to us to punish that behaviour. I am a firm believer in the importance and effectiveness of court based enforcement tools. They are the foundation of any conduct regulator. It is important to highlight that ASIC does utilise, and continues to utilise, enforcement tools. To this end, Chair, I seek permission to table our latest enforcement and compensation outcomes.

ACTING CHAIR: Yes, certainly.

Mr Shipton : Thank you. My fellow commissioners and I are committed to—

ACTING CHAIR: Mr Shipton, if you could give that to Mr Bell, that would be good. Thank you. Continue.

Mr Shipton : Thank you, Senator. My fellow commissioners and I are committed to adopting reforms in our agency. We want to optimise the deployment of our enforcement and regulatory capabilities and maximise their impact. To this end, we have already begun work at ASIC to enhance our decision-making structures and processes, especially in relation to enforcement. We are committed to ensuring that ASIC be as strategic as possible—that is, make the best decisions and regulatory choices it can. We have recently announced a review into our enforcement processes led by our new co-deputy chair, Daniel Crennan QC. Given the importance of this body of work, we have appointed Michael Wyles QC to assist Deputy Chair Crennan. With permission, I would like to table the terms of reference of this internal review.

ACTING CHAIR: Permission granted.

Mr Shipton : Thank you.

ACTING CHAIR: Ms Andrew has a copy of that, does she? Thank you.

Mr Shipton : Thank you, Chair. Any analysis of court based enforcement needs to also consider court processes such as timeliness, cost and likely success, especially in relation to remediation. These considerations will be dealt with in our formal response to the royal commission, a submission that I should not and do not want to pre-empt. We will, of course, continue to be informed and guided by the royal commission. It is very important to note that the interim report is an interim report. Again, our work on enhancing what we do is well underway. We have re-embraced the recommendations of the 2015 capability review into ASIC, particularly regarding the need for improved strategic governance. This new strategic governance approach has already identified two urgent priorities—namely, one, accelerating our enforcement outcomes; and, secondly, introducing new supervisory approaches, particularly tools that have not been fully utilised by ASIC previously.

I have said previously, and I say again today, that there is a demonstrable need for ASIC to immediately accelerate its interventions, supervision and enforcement in financial services and credit. This is critical to rebuilding the community's trust in the financial sector. There are clear messages coming from the royal commission, the government, parliament and the community about their expectations of financial institutions and of ASIC. It is clear that ASIC is expected to utilise enforcement tools more often, particularly against larger financial institutions, because as the interim report highlights—and I'm quoting—'important deterrents to misconduct are missing.' These missing market deterrents include meaningful competitive pressures, fear of failure or collapse of the institution and fear of failure of individual transactions. Accordingly, the absence of these deterrents means that there are limited market cleansing mechanisms to counter misconduct. These are insightful and important observations. The interim report goes on to state:

Because of these other market deterrents being absent—

and I'm quoting again—

only the regulator can mark and enforce those bounds.

This highlights not just the important but unique role of Australia's financial regulators. We have additional responsibilities and expectations because of the particular characteristics, structure and settings of Australia's financial system, particularly the absence of these market deterrents.

But expectations need to be balanced against reality—the reality of how ASIC is empowered and resourced as well as the legal and regulatory settings within which ASIC operates. We are doing what we can to meet those expectations through the strategic and structural reforms mentioned just now. In addition, there is an external piece to meeting these expectations and that relates to ASIC's powers, penalties and resourcing. In terms of powers and penalties, it is vital that increased penalties and regulatory powers, such as product intervention, design and distribution obligations as well as a directions power, pass the parliament as soon as possible. I say this as we are clearly expected to pursue higher and more meaningful penalties at court. This is what the current draft legislation will give us. In addition, we will be able to seek disgorgement of profits. With both higher penalties and disgorgement powers, there will be an even greater deterrent impact from court outcomes.

We are also expected to intervene more proactively when financial products cause detriment. That is what the product intervention power will give us. We are expected to enforce the obligation that financial products need to be designed and distributed with the end consumer in mind instead of the mind of the financial institution. This is what the design and distribution obligations will give us. We hope that a directions power would enable us to reform and remediate without negotiating with the wrongdoer. While I also note the royal commission's comments about our regulatory approaches, alongside this we must discuss ASIC's regulatory positioning as regards its size and its resourcing.

I want to be very clear: this is not about any previous budget decision. Nor is it about one government. We are very respectful of the system of government that sets our budget. Instead, this is about how ASIC has been designed over the arc of its history and how Australia's financial system has evolved over the years to have its own unique characteristics. Accordingly, with the introduction of a new funding regime this financial year, now is the right time to ask whether ASIC should be resourced differently to meet the community's expectations and the unique challenges of Australia's financial system. Now is the right time, and this is the right forum, before a parliamentary committee, to discuss whether ASIC and its peers are right sized—right sized in relation to the new industry funding model; the unique characteristics in Australia's financial system; the size of Australia's financial markets; the number of financial consumers in Australia; the number of people engaged in financial services; and the very clear expectations of the Australian community. This question, not statement or demand, is aimed at starting an important policy conversation. Such a question needs context. For me, my own experience as a regulator in Hong Kong, in a system that also has an industry funding model, is instructive. There, on an adjusted basis in terms of financial services GDP and financial services population, Hong Kong's financial regulators are three times the size of Australia's.

In closing, we hope to contribute to the important and constructive conversation around the expectations and performance of ASIC. To this end, we will continue to make changes at ASIC, particularly to improve our decision-making processes. We want to put our organisation on a footing that makes the most of our enforcement and other powers. This process will be informed by the ongoing work of the royal commission and important committees like this. Chair, my fellow commissioners and I would be happy to take your and the committee's questions.

ACTING CHAIR: Thank you, Mr Shipton. No doubt the committee would like a copy of your opening statement, if that is possible, please?

Mr Shipton : Yes. I can get that to you.

ACTING CHAIR: Before I ask you questions and move to other MPs and senators here, with your resourcing, there was a cut in the recent budget because you had wound up programs. You are also going to the user pays system with financial planners and insolvency practitioners. How is your budget looking when you take those user pays? I know there is a case where I think Mr Price told me you spent $10 million a year policing insolvency practitioners, liquidators, receivers et cetera but collected, I think, just $40,000 in registration fees. You spent $30 million a year policing the financial planning industry but collected just $2.4 million, I believe, from memory, in that industry. So you are going to a user pays system. Will that more than make up the cut in the budget? In other words, will you have more resources financially when user pays comes in?

Mr Shipton : Senator, thanks very much for the question. What we are doing this financial year is moving to an industry funding model which essentially divides the industry into 48 subsectors. In those subsectors, we are applying methodologies that will allow us to essentially charge to that subsector or sector of the industry what we believe to be the appropriate cost or amount of cost of regulating that industry. This is being put into effect this year. That, we hope, will allow us to better target the application of resources and apply costs to those sectors depending on the need, the harm, the risk, the wrongdoing and the issues in those subsectors. That will also, importantly, apply, we believe, an ongoing economic incentive to do the right thing in those sectors. Over time, if a sector is behaving well, performing as it should, acting in the best interests of the people of Australia, then the cost of regulating that subsector will decline and the charges that we have will also decline.

You also asked about recent budgets. I want to reinforce that we are very grateful and pleased that we had recent funding from the government of over $70 million over the next two years to support really important regulatory initiatives such as accelerating our enforcement outcomes and adopting and applying new supervisory approaches. This is very good news. This will allow us—and I'm happy to take questions on this later—and is allowing us to move quicker to address the many issues that have been highlighted in the royal commission and issues that we've been wanting to deal with quicker, faster and more effectively for quite some time.

ACTING CHAIR: Okay. Mr Shipton, in 2009, I launched an inquiry into the insolvency practitioners industry. From memory, we recommended that ASIC be stripped of oversight of that industry. Let me just read what I've got in front of me. I want to quote from a section of the Senate committee report into the performance of ASIC, which was handed down in June 2014, which I was involved in. It read in part, and I quote:

In particular, it showed ASIC as a timid, hesitant regulator, too ready and willing to accept uncritically the assurances of a large institution that there were no grounds for ASIC's concerns or intervention. ASIC concedes that its trust in this institution was misplaced.

I go on. In September 2014, the then chairman, Mr Medcraft, said in his opening statement to the PJC committee, this committee:

ASIC is particularly conscious of the community expectation that we take strong and swift action where the law is broken and investor funds are at risk. We are looking right across our processes to ensure we act as quickly as possible.

At Senate estimates in October 2014, Mr Medcraft said:

We have used our lessons from the inquiry, I believe, to do a better job ... The third is a commitment to strong, swift enforcement action.

Exactly four years later, in an interim report of the royal commission, Commissioner Hayne said:

When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done. The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct.

I put it to you, Mr Shipton, that ASIC remains, as the 2014 Senate report stated, a timid, hesitant regulator that has learned nothing despite all the promises to be better. I have been a long campaigner with ASIC since 2009. How far have I and this committee progressed when we go through those inquiries step by step? It's nice to hear you say today, 'We're going to come out smashing them', but actions speak louder than words. What guarantee can you give this committee that you will act quickly, strongly and take proper action that the public expects you to?

Mr Shipton : Senator, they are important words that you have said today and you said all those years ago. With regards to the assurance, I can only give you my personal assurance that I am personally dedicated to making sure that we are a robust, a forceful regulator who is prepared, willing and able to go to court to right these injustices and provide specific and general deterrence. This is really important. I have been on both sides of the regulatory equation. I have been a regulated person. I have now been a regulator twice over. I know how important it is to have deterrence. I know how important it is to go to court. What we are doing and what I am dedicated to—and I know every man and woman in ASIC is also dedicated to—is positioning ourselves so that we have the tools, the resourcing and the funding to accelerate our enforcement and other intervention type powers. My colleague Deputy Chair Crennan can speak to some of the work that he is sponsoring and leading as regards getting to court quicker, faster and in a more meaningful way. Before I hand over to Deputy Chair Crennan, I will quickly highlight that the body of legislative proposals before the parliament about increasing our penalties will be a big part in our ability to do what is being asked of us. I implore the parliament to pass that.

Ms KEARNEY: I have a follow-up question. I hear what you are saying. It is very heart-warming. Thank you for providing these enforcement outcomes. The royal commission has done some analysis of your enforcement outcomes and they concluded that there seems to be a reluctance to take on the banks, for example, or the large financial institutions. The vast majority of any of your proceedings in courts have been on, they say, low hanging fruit that you know you're going to win. I could read these out, but I am sure you know what they are.

Mr Shipton : I'm aware of them, yes.

Ms KEARNEY: I hear what you are saying about resourcing. I do. It is very important. How can you assure us that there will be a change in attitude and culture within ASIC that is not just going to continually go after the small fruit or the administrative enforcements and that is actually going to take on the really big, hard things that have the biggest impact? It is not just resources. I hear what you are saying, and that is noted. I think the culture and the effort and the capability are just as important.

Mr Shipton : I totally agree. You are absolutely right. You can have all of the resources in the world, but if you don't have the mindfulness and the willingness to do it, it's nonsensical. I know that I'm committed and my fellow commissioners are committed and I know that the men and women in ASIC are committed. We want this to happen. What we are doing—it's really important—is that we are putting our governance structures in such a place and in such a way that we can actually make better decisions when it comes to when and how we use court enforcement tools. Essentially, this is all about leadership, decision-making and culture inside our organisation. The starting point is leadership. The leadership of our organisation is committed to pursuing wrongdoing, no matter whether it is big actors or small actors. To be able to implement and execute on that commitment, we have to position ourselves in an organisational sense so that we're able to do that. That work has already started. It started when I arrived over eight months ago. I came to a very firm conclusion eight months ago that we needed better strategic decision-making structures inside ASIC. That's a long-winded way of saying we needed processes that would allow us to get better outcomes, such as the outcomes that you and the senator have just been mentioning. That will allow us, particularly the commissioners, to decide about our strategic priority. It is very clear that a strategic priority of ASIC is to make sure, especially when it comes to larger financial institutions, that there is meaningful deterrence. Meaningful deterrence means that we have to go to court. Meaningful deterrence means that we have to be robust in utilising every inch of our legislative power. It also means that we want to work with you as members of parliament and with the government to make sure that the improvements to our ability and the effectiveness of going to court are also enhanced. We look forward to working with you.

ACTING CHAIR: Mr Kell, you might answer this question. Mr Shipton, you talk about deterrence. Mr Kell, you scrubbed a financial planner out for life for fraud and forgery. His name is Ricky Gillespie. I can't believe that someone in such a responsible position, a trusted position as a financial planner, forged signatures. You then banned him for life. You referred him to the DPP. He was charged under criminal charges for forgery and fraud. He pleaded guilty and he got fined $3½ thousand with no conviction recorded. Then you appealed it. The DPP did it and a conviction was recorded last week. My question to you, Mr Shipton and Mr Kell, is: what has got to be done to deter the wrongdoing when a person in a position of responsibility, trust and faith as a financial planner forges people's signatures and commits fraud and gets fined three and a half grand? That's a farce. Do we have to put in minimum mandatory sentences or whatever to deter wrongdoing? Go ahead, Mr Kell.

Mr Kell : Well, as you can see, the fact that, with the DPP, we appealed indicates that we were not satisfied with the outcome. It was a very serious and significant matter. The penalties will be increasing in that area once the enforcement review recommendations are in place.

ACTING CHAIR: We increased the penalties. That's fine. Take it from a $10,000 fine to a $10 million fine. But what happens when the judge does that with a smack of a feather? How do you fix that? Go on. Sorry for interrupting.

Mr Kell : I think your comments reflect the fact that there is, if you like, a legal system in its entirety that we're talking about here as well. What do believe that the changes coming through in that enforcement review will be a genuine game changer with new penalties and new powers. If you have greater maximum penalties, hopefully that sends a very clear message to everyone, including the courts themselves, that these sorts of white collar crimes deserve very serious punishment when they occur. I don't know if Mr Mullaly wants to add to that. He was our representative on the review.

ACTING CHAIR: Please, Mr Mullaly.

Mr Mullaly : Well, I concur with the comments made by Mr Kell. Obviously, the fact that we encouraged the DPP to appeal indicated our concerns around the outcome. I would note that having someone's livelihood taken from them has a significant deterrent effect both—

ACTING CHAIR: You can get another job.

Mr Mullaly : Well, specifically and generally. So it is a message to the rest of the industry that behaving in that way could lead to a loss of someone's livelihood. You do say you can get another job. But, as we all know, if our livelihood is taken away, it is a significant impost. That said, we continue to push. We continue to work with the DPP to try to increase the penalties that the courts give out when we see significant misconduct.

ACTING CHAIR: Well, let's hope those deterrents, Mr Shipton, do come in. Mr Kell?

Mr Kell : I want to make one more comment on that. As you well know, Mr Gillespie was a financial planner with the Commonwealth Bank's financial planning arm, so I think what you're also hearing today is that while we need to take out those financial planners from the industry who have betrayed the trust of consumers—and we've done a lot of that; we've had record numbers removed from the industry in recent years—

ACTING CHAIR: It was 146 last year, wasn't it?

Mr Kell : Yes. That's right. We also need to have that focus on the institutions that have been responsible for putting in place the systems that allowed some of that conduct to take place. Again, some of those new penalties will enhance that, but we will also be looking at how our current powers can help with some of that.

ACTING CHAIR: Okay. I'm just going to make some comments about the royal commission. The interim report states:

When misconduct was revealed, it either went unpunished or the consequences did not meet the seriousness of what had been done. The conduct regulator, ASIC, rarely went to court to seek public denunciation of and punishment for misconduct ... APRA, never went to court...Enforceable undertakings might require a 'community benefit payment', but the amount was far less than the penalty that ASIC could properly have asked a court to impose.

You're familiar with all of them. Let's see what the future brings. I'm leaving this place on 30 June next year. I hope in four years these people aren't lined up again and nothing has happened, Mr Shipton—nothing has changed.

Mr Shipton : I hope that too.

ACTING CHAIR: I hope that change does come in. I'm going to take you to AMP with the report by Commissioner Hayne of the royal commission. On financial planning, it states:

... 196 events, across 14 AMP Advice Licensees, of advisers failing to provide customers with services for which they had paid, during the period 1 July 2008 to 30 June 2015. This resulted in $193,519 having been paid to customers in compensation...numerous events that involved an AMP licensee continuing to charge a customer fees for services that were not provided during the period from 1 July 2008 to 30 June 2015 ... AMP also acknowledged possible misconduct in its reporting to ASIC of charging fees for no service.

There was inappropriate advice and improper conduct by advisers. The commission discovered that AMP lied to ASIC 20 times. Is lying to ASIC a criminal offence?

Mr Shipton : Yes.

ACTING CHAIR: It is? Well, we would expect to see more on that very issue with the DPP involvement. I won't take you any further on that. There is one other issue I have found quite concerning that I'm going to raise before handing to others on the committee. There is a story entitled 'ASIC's plan to 'spin' the banking royal commission'. It states:

The corporate watchdog ASIC hired external spin doctors to deal with "potentially explosive issues for ASIC and its reputation" arising from the banking royal commission.

…   .   …

ASIC didn't use an open tender to hire a PR firm to deal with reputational issues from the banking royal commission.

Wells Haslem Mayhew's fee was not disclosed, but expected to be more than $10,000 a month.

The PR firm was expected to reshape some image problems plaguing ASIC for 10+ years.

Do you have any additional explanation for why you didn't tender for that PR position to assist you in your promotion? Is it true that it's costing you $10,000 a month?

Mr Shipton : Thank you for raising this, Senator. I can confirm and reassure you that Wells Haslem was appointed within our procurement processes. There was not an external tendering process. As I understand it, the threshold was not met and there was not a need for that. But the procurement processes were followed. There was nothing untoward about this appointment. As regards the appointment of external consultants, when it comes to engagement, I wouldn't have characterised it in the same way that you did. We believe it's very important that we communicate with all stakeholders through media channels in particular. This goes to the expectations issue. This is an issue that has been raised in, for instance, the capability report into ASIC. We've been told that we need to do a better job of communicating and getting our messages out there to regulated persons and the population. That is very important.

For our institution to be credible, we need to have a communication strategy that speaks to that. There is nothing untoward, in my view, about the appointment of consultants to help in that. It is not about spin. It is about best communication so that we can get regulatory messages through to the regulated population and the population more generally. It's very important, I believe, that the population knows and the regulated population knows that we are serious about doing our jobs, we are working very hard and that we want to be the most credible, forceful and robust institution that we possibly can. So thank you for raising this issue. We're very pleased to be able to speak about it because we believe that communication and the way that we enhance our communication—getting specialist experts enables us to enhance that communication—enables us, we believe, to do our job even better.

ACTING CHAIR: Who has to leave early? Senator Ketter?

Senator KETTER: Yes.

ACTING CHAIR: Would you like the call?

Senator KETTER: Yes.


Senator KETTER: Thank you very much. I'll start off with the interim report. Mr Shipton, I understand you're going to be providing a full response, I think, by 26 October?

Mr Shipton : That's correct.

Senator KETTER: I understand that you don't want to necessarily pre-empt everything that is going to be in that, but I think it's this committee's role—

Mr Shipton : Of course.

Senator KETTER: to ask about this. I welcome the terms of reference. I do note, in looking at the terms of reference, that there is no reference to the royal commission and the comments made by the royal commission. I think if this is going to be a thorough, honest review of the regulatory approach of ASIC, we need to be upfront with that and say that the organisation has been called out and this needs to be a very thorough review. I want to go to some of the aspects of the interim report that concern me and concern the royal commissioner. He was looking at the proceedings that were taken by ASIC between 1 January 2008 and 30 May 2018. There were 1,102 proceedings. He observed that many of those were administrative proceedings. In that time, there were 238 criminal proceedings, 277 civil proceedings and 194 enforceable undertakings. Of all those various proceedings, just 10 were against the major banks in that time. Of those 10, we can attribute three to Storm Financial and four to the bank bill swap rate manipulation. I fully commend ASIC for pursuing that issue. That leaves three other proceedings affecting the major banks. Did ASIC have a reticence to take on the major banks?

Mr Shipton : Let me start and then I can hand over to my colleagues, because we are looking at this. Let me also start by thanking you for highlighting the terms of reference of the review of our enforcement processes and procedures by Deputy Chair Crennan. You can be absolutely assured that those terms of reference have been informed, enhanced and improved by the important questions, recommendations and observations of the royal commission. You can be absolutely assured of that. I am happy to state on the record that they have been improved and enhanced. The context is that we have been undertaking a review of our entire decision-making processes since I began. This is a continuing, ongoing body of work. It is an evolving piece of work. It is a continuum. What we did very recently, in part catalysed by the important observations of the royal commission, is formalise through those terms of reference this important review. So please be assured that that is the case and it is very much informed by the recommendations of the royal commission.

You ask about major banks and reticence to enforce against major banks. The statistics are clearly there, and that is something that is, in part, triggering our enforcement review that Deputy Chair Crennan can speak about. We are asking ourselves the question how we can improve our decision-making whereby we are making sure that when it comes to an incredibly important part of the financial sector, which is the large financial institutions, we have a credible deterrence as regards them. That is an important question. You are right to ask it. The royal commission is right to ask it. We are working to make sure that we have a very credible, robust and responsive answer. We want, and we intend to have, real deterrents when it comes to the big financial institutions.

I would also add, before I hand over to my enforcement colleagues, that we have also identified—and I briefed the committee on this before—that we need to improve our supervisory capability when it comes to those big financial institutions. That's why we have started this close and continuing monitoring program that I've briefed this committee on before. I'm happy to go into detail later on. Our interventions, both supervisory and enforcement and surveillance, will increase and have to increase with larger financial institutions because, Senator, as you rightly know, they touch almost every single adult Australian. They are in the retail business. We are in the retail business. To be a credible deterrent agency, to be a credible supervisory agency, we are enhancing and have been enhancing our capabilities across the regulatory tool spectrum when it comes to large financial institutions.

Senator KETTER: Before I hear from Mr Crennan, I would like to hear from Mr Kell about the issue of the perception that there was a reticence to take on the major banks. What are your thoughts on that, Mr Kell? You are somebody who has been with the organisation over this period of time.

Mr Kell : Sure. I would say upfront that we accept that we need to have a greater focus in our litigation against the major institutions. We have certainly over that time, as the interim report has indicated, had a very significant focus on some other type of outcomes that we have believed to be very important for consumers. I think before this committee we have explained why we have sought to obtain very significant remediation, which is not necessarily obtained through court based processes, in excess of $1 billion. We know that in the financial services sector, because there is a lot of money at stake, that can be a very important outcome. We have had a focus on changing the products, services and business models they operate, whether that's through the sale of superannuation through branches or some of their responsible lending practices. So we have had a focus on seeking to change the way those businesses operate, get them to remove poor financial advisers and remediate their consumers where problems have emerged and so on. But I accept that that hasn't always been accompanied by court based litigation. As you have heard, that is an area where we need to increase our focus. So it is an interesting challenge, because I don't think anyone would necessarily say, 'Oh, well, you ought to reduce the focus on remediation and compensation in the financial services sector for mum and dad consumers.' How do we make sure that we continue to obtain some of those outcomes while still building on that to increase the deterrence effect through punishment via litigation? That's the active issue that is on our plate at the moment.

Senator KETTER: In the media, there are reports that the previous ASIC chair, Mr D'Aloisio, had a more active approach in terms of enforcement activity, taking on cases with the big banks. That seems to have changed under Mr Medcraft. What is your comment to that?

Mr Kell : I didn't work under Mr D'Aloisio. I haven't seen figures on that. I would be a bit surprised.

Ms Armour : I think the active enforcement at that time was corporate governance cases. There were a number of corporate collapses. For example, in the Centro collapse, ASIC took litigation. There were a number of other matters, such as the Fortescue matter. They were quite high profile engagements. They spoke of the issues at that time. I think the statistics blew out from 2008 on. So that was a large portion of the time of Mr Medcraft and Mr D'Aloisio as chair. I'm not sure that those press reports reflect the statistics.

Mr Kell : I can't recall that there was a significant difference under Mr D'Aloisio.

Ms Armour : There is one thing that is probably worth us all remembering in the context of Mr Shipton's comments about resourcing. On the three BBSW matters, where we have court endorsed settlements, don't forget that ASIC's total costs, just on those three matters, was over $50 million. We're absolutely determined to develop this seismic shift. In the last couple of years, we've been doing it. We've got court cases against the large banks on responsible lending and in connection with personal advice in superannuation matters. So we are gradually doing this, but there is this real need to look at the resourcing that is required to do that, yes.

Mr Price : I will add to Cathie's comment. I think it is important with litigation as well, particularly civil litigation, to remember that ASIC as an agency must always remember it may well have to pay the costs of another party if the litigation fails. In the case of the BBSW actions, that could easily have run into the tens of millions of dollars.


Mr Price : Yes.

Senator KETTER: The litigation war chest, I think as Mr Medcraft used to refer to it, is about $80 million.

Ms Armour : It has been replenished. I think it's been a significant signpost of the determination—it does take a while to translate to actions—by us to have more litigation. We adopted a policy, I think in 2015, of enforcing our rights under section 91 of the ASIC Act. So when we're successful in court, we have a right to issue an order to get all our costs of investigation back from that party. We've been applying that. So we've actually built in an incentive, if you like, for us to litigate. It is taking a while to go through our system because these cases take a long time to develop and produce the evidence and those sorts of things. But we have built in some incentives that will help us on this road to really focus in on litigation.

Senator KETTER: I know, Mr Kell, I was going to come back to you. Mr Kell, before I finish, thank you for your work over the period of time. I wish you all the best in your new endeavours. Do you think that, looking at those statistics in relation to the major banks, ASIC got it wrong in its regulatory approach with the major banks?

Mr Kell : As I said, I accept, and I think you've heard more broadly today, that having a greater focus on court based litigation as a key component of our regulatory toolkit is something that is needed in particular against the larger institutions. You've seen more of that begin to come through the pipeline. That needs to build on the work we've done in terms of remediation and changing practices in the industry. We need that court based litigation against the big players. I accept that.

Senator KETTER: Mr Crennan, the royal commissioner said:

When contravening conduct comes to its attention, the regulator must always ask whether it can make a case that there has been a breach and, if it can, then ask why it would not be in the public interest to bring proceedings to penalise the breach.

Do you accept that as a starting point for ASIC?

Mr Crennan : Yes. I will go to that paragraph or a version of it. It is true that the interim report observes perhaps a history of preference for negotiation. I will come back to the terms of reference and what also took place that day in a moment. I will respond to that. We are talking about banks. Pages 279 to 230 of the royal commissioner's report states:

Because holders of financial services licences must report breaches of the requirement—

that's 912D—

that the licensee do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly—

that's 912A, which is a very important section; it sets out the duty of the licensees, which are the banks—

there will often be cases where the licensee admits the facts that ASIC alleges constitute a breach of law.

And a similar phraseology:

If misconduct is admitted, the only question should be—

once again—

whether there is some public interest in not taking enforcement proceedings.

That is a test, as the royal commissioner observes, that is not new and is applied in a slightly different formulations by the CDPP. I will take you to that section. I don't mean to dwell on this for too long.

Mr Kell : It's a bit daunting.

Senator KETTER: I'm very worried.

Mr Crennan : Mr D'Aloisio used to brief me, and I have read this. In any event, this is a very serious aspect of the future. Section 912A sets out the obligations and duties. You can read 'bank' for a financial services licensee. These are very important duties. They are different from director's duties. They are different for misleading and deceptive conduct. They don't have the issues of causation and all that sort of stuff. The first duty states:

(a) do all things necessary to ensure that the financial services covered by the licence are provided efficiently, honestly and fairly.

The second one states:

(aa) have in place adequate arrangements for the management of conflicts of interest—

that is one of the most important things we've got to deal with—

that may arise wholly, or partially—

et cetera. Thirdly, they have to:

(b) comply with the conditions on the licence; and

(c) comply with the financial services laws; and—

very importantly—

(ca) take reasonable steps to ensure that its representatives comply with the financial services laws.

So there's a whole lot of laws that do carry penalties within this act that apply to the representatives, but it's the licensee's responsibility to make sure they comply with it. Now, at the moment, if you take somebody like a bank to a court under 912A, the only remedy can you get is a declaration. A declaration may be a public criticism.

ACTING CHAIR: Just explain it. The remedy—

Mr Crennan : There is no penalty.

ACTING CHAIR: If you win the case—

Mr Crennan : There is no penalty.

ACTING CHAIR: Then they can declare that they did the wrong thing. They were being dishonest, not acted properly?

Mr Crennan : Or not acted fairly, for example.

ACTING CHAIR: No penalty? No crime?

Mr VAN MANEN: So you can't even, say, suspend their licence?

Mr Crennan : Well, you can do that. You can suspend their licence. I may say this: the concept of ASIC suspending CBA's licence is not going to help anybody.

ACTING CHAIR: If you suspend their licence, you would shut the bank down, wouldn't you?

Mr Crennan : Exactly.

ACTING CHAIR: That would cause a real stir in the country, wouldn't it, to have the bank shut?

Mr VAN MANEN: The financial services licence, yes.

Ms Armour : Or their credit licence. So it affects their capacity to lend to consumers.

Mr VAN MANEN: Could you put conditions on it?

Mr Crennan : Yes. You can impose conditions.

Ms Armour : We have.

Mr VAN MANEN: So with the licence for financial advice, for example, it would be, 'This is the 10th time this has occurred. We're going to suspend. Your advisers will not be able to provide advice to any new clients, but they still have a responsibility.'

Ms Armour : Yes. And this happens.

ACTING CHAIR: I have one question. With these powers you're seeking, does that add punishments to what you're saying?

Ms Armour : Yes.

Mr Shipton : Mr Crennan is leading to that exact point. I will summarise so that you have a bit of a roadmap. The client system now is clunky. It's not user friendly. It's not as effective as it could be. There are proposals before the parliament which would make it.


Mr Crennan : This is not complex regulation. This is simple. Everyone knows what fairness means, or everyone ought to know what fairness means and honesty means. Honesty, or a lack of it, is referred to throughout this interim report. I should say before I go on that a lot of the conduct in round 2 is 912A type conduct. That's the financial services round.

Senator KETTER: What about 912D?

Mr Crennan : I'll come to that in a moment, if I may. So this is the exposure draft of the Treasury Laws Amendment (ASIC Enforcement) Bill 2018. As soon as humanly possible, I hope this will become a bill. As Mr Shipton said, we as a regulator implore all parliamentarians to pass this bill as quickly as humanly possible.

ACTING CHAIR: So the bill hasn't been drawn up yet?

Mr Crennan : It's drawn and it's out for consultation. That was two—

ACTING CHAIR: How long is the consultation period?

Mr Crennan : I'm not sure of the answer to that, but it's on foot at the moment. It came out in late September.

ACTING CHAIR: I'm very confident that as soon as it gets into the House there will be little objection, giving you more powers and more punishments.

Mr Crennan : Yes. Exactly.

ACTING CHAIR: Given the royal commission, I would be surprised if anyone—

Mr Crennan : Yes, exactly.

ACTING CHAIR: in both houses opposed it.

Mr Crennan : Exactly, Senator.

ACTING CHAIR: But this place does surprise you at times.

Mr Crennan : I've only been here a few times. My kids enjoyed it. Senator, section 912A(5) will now read that when a person contravenes—read 'bank'—all of those sections I went through, it is a civil penalty. That completely changes the litigation landscape. I will just go to my cheat sheet.

ACTING CHAIR: So what can you do with a civil penalty?

Mr Crennan : Thank you for asking me that question. This is very important because it contains more than just the change to civil penalties; it contains disgorgement. For individuals, it is $1.05 million per contravention or three times the benefit gained. For companies, it is the greater of $10.5 million or three times the benefit gained. Most significantly, in one way, particularly when we're talking about large institutions, it is 10 per cent of the annual turnover capped at $210 million.

ACTING CHAIR: So it's capped at $210 million?

Mr Crennan : Per contravention.

Ms KEARNEY: Per contravention?

ACTING CHAIR: Per contravention?

Ms Armour : And we'll have disgorgement power.

Mr Crennan : It is a very, very seismic change for us in regulating large institutions.

ACTING CHAIR: So for 10 contraventions, you could go to a $2 billion fine?

Mr Crennan : Yes.

ACTING CHAIR: That would hurt.

Mr Crennan : Yes. One would think so. It will certainly hurt more than a declaration. So my point, committee and Senator, is that this is a very significant change. It's very significant to us. It does relate to banks and it does relate to large institutions. For example, if I were the CEO of a bank, the moment this came in, I would tell all the officers, 'You know that fair and honest thing? You've got to make sure you do it now because otherwise we'll be facing billions of dollars of fines.'

ACTING CHAIR: Or the individuals are up for millions.

Mr Crennan : 'And you will be up for millions.'

Mr Shipton : I may supplement, Senator, and committee members. Provision 912A I call the cornerstone provision. It is the cornerstone protection in Australia's regulatory system. I want to make two observations coming out of my nine months back in the country. The financial institutions have not lived up to the obligations that Mr Crennan clearly articulated. They are very simple—fair, honest and efficient. They haven't lived up to that obligation. They haven't lived up to the obligation of ensuring that the men and women who work in their institutions are also fair, honest and efficient. That is a manifest failure by financial institutions.

ACTING CHAIR: However, when you bring the laws in, they are not going to be retrospective, are they?

Mr Shipton : No. But what it will allow us to do is pivot to the future so that this will not stand into the future. We want this cornerstone protection to be meaningful. It may be technical, but it's fundamentally important. Making 912A that cornerstone protection as well as having the reporting protection that Senator Ketter just mentioned will be meaningful changes. We need meaningful deterrents and we want to use those meaningful deterrent powers.

ACTING CHAIR: Senator Ketter, do you have another question?

Mr Crennan : I want to quickly finish answering on 912D.

ACTING CHAIR: Continue, Mr Crennan.

Mr Crennan : Thank you very much. In terms of 912D, there is some criticism for not having that as a test case. I've read that carefully. There has been legal advice about that. We may be able to table it. The fact of the matter is that, once again into the future, 912D is also being amended. It is being amended in that it will attach a civil penalty provision, which means that we have to satisfy a significantly lower burden of proof. Secondly, the government have agreed in principle that the test be objective rather than subjective. That is also a very dramatic change. It will improve our ability to enforce 912D in a meaningful way. I should say before I move on from this that some of the feedback about 912A and other things is 'Well, we've got this reporting and we report to you all the time. Banks might not report to you. They might not tell you what they're doing any more.' Well, if that's the case, they should perhaps read their custodial sentences for not doing so under 912D. They are very, very high. So once—

Ms KEARNEY: The new 912D?

Mr Crennan : The new 912D. It's already a criminal provision. The new sentences I'll have to check. I think they are up to 10 years. They are certainly long. So to suggest that the bank will be reluctant to be compliant with its obligations or less willing to comply with its obligations under a new 912A when there are penalties overlooks, in my view at least, that the penalties for ignoring 912A are extremely severe. We will catch them. We have surveillance. We have new powers. We will be the receiver of telephone intercepts. If they choose not to comply with their 912D obligations, people will be going to jail.

ACTING CHAIR: Commissioner, I don't pour a lot of praise on ASIC, but after meeting you yesterday and what you've just presented here, I'm glad you've been appointed to the position you have.

Senator HUME: I have a couple of questions. It looks like the conversation today is largely about three things—resources, weapons and culture. I have questions about all of them. I think a lot of the weaponry stuff, though, you've already covered.

Mr Crennan : There's more.

Senator HUME: There's more? Excellent. That's what I wanted to get to. You spoke in your opening statement, Mr Shipton, about new tools not used previously. I think you've just mentioned some. What are the others that you need?

Mr Shipton : The new tools that I was mentioning previously are in addition to the weaponry or the penalties that Deputy Chair Crennan has just taken us through. As Deputy Chair Crennan said, there are lots more in that bill that we want to see—product intervention, disclosure obligations and so on. These are important powers. Basically, my reference to new tools was supervisory tools. Let's call them the non-enforcement tools. Whilst enforcement is a core bedrock function of a conduct regulator, we also have an important supervisory oversight function. We are applying, in effect, new supervisory tools—onsite supervision and onsite inspections, which we are calling close and continuous monitoring—starting with the larger financial institutions but also being applied to superannuation firms and being applied to corporate Australia through our corporate governance review.

What effectively we want to do is increase the touchpoints between corporate and financial Australia and our regulatory officers. If you are in a financial institution or a corporation and you are more likely to interact with an official from ASIC, I believe, from my own personal experience being a regulated person, that your attitude towards regulations and, importantly—the section that Deputy Chair Crennan just mentioned—912A, that bedrock foundation of efficiency, fairness and honesty, will be heightened. This is a really important regulatory tool which, because of a whole range of different factors, mainly going in part to resourcing, we've been limited to using over many years. But what we've highlighted in the last eight or so months is a strategic priority to not just increase and accelerate our enforcement outcomes but to use new tools and apply them more often when it comes to supervisory approaches. The role of a good regulator is to use all of the different tools in combination to address harms and threats to the system.

Aa line of questioning earlier was really quite insightful. Clearly, what that line of questioning and, indeed, the royal commission has highlighted is that there are harms and threats to our financial system inside larger financial institutions. We believe that to be the case as well. What we need to do is deploy all of our regulatory tools that we can when it comes to large financial institutions and, indeed, superannuation funds in combination so that we can get real, lasting behavioural change. That will mean in many respects, like in military terms, using different combinations of forced projection, different types of powers and different types of weapons, to use your term, Senator. That's exactly what we want to do. That's why the conversation we had earlier about the strategic decision-making processes inside our organisation is so important. Today we are facing particular challenges, but when we meet next year, we will be facing different challenges. Therefore, we need the strategic ability and the decision-making ability and the structures inside our organisations, if necessary, to pivot to change to what is going to be on the horizon.

Senator HUME: The last oversight hearing that we had we spoke about having ASIC officers essentially embedded, for want of a better expression, in financial services firms. I think we were just talking about the banks at that stage.

Mr Shipton : Correct, Senator.

Senator HUME: But you're now extending that out to superannuation firms as well?

Mr Shipton : Yes. So, to clarify, we're using the expression 'onsite supervision' because embedding gives—

Senator HUME: Yes.

Mr Shipton : a notion that they are there permanently, which they are not. These folks will be on site and have a physical presence for extended periods of time. You're absolutely right, Senator: the program is starting with the larger financial institutions—the big four banks and AMP. It's underway and it's gearing up and we're very pleased about that.

Senator HUME: When you say underway and gearing up, how far away are we from having onsite supervisory capability?

Mr Shipton : We're days and weeks away. We have had—and I've been working with the team—meetings with CEOs of financial institutions. Our colleagues will be on site, as I believe, next week with one particular financial institution. That will just accelerate over time as we build up. It's important to note, actually, because this is meaningful from a supervisory perspective. We have appointed very senior members of our staff to be what we call chief supervisory officers. These senior members of staff are SEL rank, which is the most senior executive rank in our organisation. These two individuals will be leading these supervisory teams on site. That's really important, because of course we want senior people who are liaising directly with the CEOs, CROs, CFOs and the C-Suite and having face-to-face conversations with them to pass on and impart our regulatory messages. That's how keen we are to make this work. You also asked about superannuation.

Senator HUME: I did.

Mr Shipton : There is a separate exercise, because we have got funding from the government to do this, whereby we're going to be increasing our supervisory capabilities as regards superannuation trustees. That is slightly different. It's not at this stage but it will be in the future employing that more permanent or semipermanent onsite component. But it is certainly going to increase the numbers and frequency of interactions between our supervisory officers in the superannuation space and those superannuation trustees.

Ms KEARNEY: I want to ask some questions.

Mr VAN MANEN: I have two things on that. Firstly, if people are spending significant amounts of time with one organisation, I'm concerned that you get a degree of regulatory capture. How are you managing that issue?

Mr Shipton : Yes.

Mr VAN MANEN: The second question—and I'm concerned about your answer in some respects—is that these people are going to be interacting with the senior management of the company. One of the golden rules in business is if you want to actually find out what is going on in an organisation, you go and walk the shop floor. What are you doing to actually get into the inner workings of the business—get away from the senior managers and the executives and actually find out what is really going on within the business to understand how the message is coming down from the top? I've got no doubt there are people on the shop floor who have concerns about a lot of this and it gets filtered on the way up and the executive don't get the full picture of what is going on.

Mr Shipton : Mr van Manen, thank you very much for that question. I understand that Ms Kearney was going to ask a similar one. I wanted to give both of you credit for very good questions. The senior management point is absolutely right because that's not just the intention of our chief supervisory officers and the men and women who will work with them. As you are alluding to, we actually want to get right up and down the vertical of these financial institutions and across them because these are big conglomerates. You are absolutely right; the intention is to get out of the headquarters to get into the branches, if need be—to get out of the C-Suite and fewer people to be interacting with as many people as possible in the entirety of the organisation. That is the whole point about having people on a more permanent basis on site—so that they can actually follow the inquisitive mind, that they can say, 'Okay. I want to meet with the team that does this business' or, 'We will be going to regional Australia to see the regional headquarters of your particular business' because that's absolutely important. The enterprise range and exposure will be as far and as deep and as wide as possible inside these financial institutions.

Mr van Manen, you are absolutely right: the real risk for the C-Suite is that they are getting a filtered message on the way. On the point of the filtered message: another point about having our senior colleagues interacting is that they will be able to speak truth to those people. They will be able to speak in terms where it's unfiltered, where it's blunt, where it's necessary and where, hopefully, it will be meaningful, frank feedback to those senior leaders. But that meaningful feedback will only come from inquisitive inquiry up and down the chain.

Regulatory capture is a big issue for us. We have studied very closely some very interesting and important examples of regulatory capture out of the United States. We've actually already had training for our supervisory teams on regulatory capture. We will be having very frequent checks in with them and disclosures and training with the supervisory team about how to watch out for regulatory capture. That's really important. We are using a case study exercise at the moment. The case study exercise is already being carried out. This training exercise is already being carried out for the men and women who will be forming part of this team. That case study uses that New York example. It spent hours looking at the tricks, the traps and how people can drift into these types of issues even though they may not intend to be captured. There is a risk of drift. So we are very attuned to this.

Our people and development team will continue to apply what we believe to be important attention to enhancing that training. But it's not just training; it's leadership. It's leadership and responsibility. So we will have, for instance, rotations of teams in the future so that people will not be just working with one particular institution over time and run the risk of getting conditioned. We will have rotation. Above all—and this is really important—I and some of my colleagues, such as Commissioner Armour, are sponsoring this initiative. It's being run by the chief supervisor officers, but we are sponsoring this initiative. We are attuned to this important risk. We will be watching out for any risk of regulatory capture because that would defeat the whole exercise.

Ms KEARNEY: I want to ask a question on that. Is it formally in a document how you manage risk of regulatory capture? Is there a document that we could look at?

Mr Shipton : Well, we can provide you with a document.

Ms KEARNEY: On notice.

Mr Shipton : Yes, sure. We can provide it on notice because what we are doing is leveraging off our existing conflicts of interest policy, our existing code, which at the moment is for the Public Service. As we go out of the Public Service—

Ms KEARNEY: I understand that.

Mr Shipton : we are creating our own code. We would be very happy to give you a full briefing of what we believe to be the applicable provisions, which we have enhanced and highlighted in the training and which say, 'This is particularly relevant to this new exercise.' We would be happy to give you a briefing about the training if you want to do the case study.

Mr Kell : Provide the training.

Ms KEARNEY: Yes, sure. I would be very interested in that. I think you said that this is new. Is this new since the royal commission or is this an existing initiative?

Mr Shipton : I can actually say that this is not new since the royal commission. I want to actually give credit where credit is due. We have been doing this type of onsite supervision in the market space, led by Commissioner Armour, for some time. It is a tool which has been utilised overseas. When I used to run the supervision team and the inspections team in the regulator in Hong Kong, we would do it very often. The IMF, in their financial sector assessment program, has recommended to Australia on a number of occasions that we use more supervisory tools. So this is not reinventing the wheel. This is leveraging off existing work in some parts of ASIC and broadening it out. We are also looking at best practice from across the globe—from my own experience in Hong Kong and from my own experience of working and talking with the New York Federal Reserve about some of the things they've done well and some of the mistakes they've made—and leveraging it off there.

Ms KEARNEY: I know this is Mr van Manen's question, and I realise I have taken over, sorry.

Senator HUME: No. You can have it.

Ms KEARNEY: I'm sorry, Senator. I'm sorry.

Mr VAN MANEN: Ged and I have been spending a lot of time together on committees.

Ms KEARNEY: Too much. I guess the crux of my question is: do you not think that regulatory capture has been part of the problem that has been raised during the whole royal commission process? I guess the royal commission, to me, has been, unfortunately, a catalyst for people actually lifting their heads up and having a look at what is happening outside. We've revealed the impact on everyday people of the bad behaviour of financial institutions. I wonder if regulatory capture has been part of that. I don't always want to have a royal commission to have to review the risk of regulatory capture being part of the problem. Do you regularly assess that?

Mr Shipton : Yes, I do. When I took up this role, in fact, I remember having many phone calls in the middle of the night when I was in Boston, Massachusetts with the head of people in development because one of the first things I wanted to do was get an assessment of the culture of the men and women of ASIC. I must say I'm impressed with the men and women of ASIC. Yes, the royal commission has highlighted some shortcomings and they will be, and are, being addressed. That is absolutely appropriate. My assessment is that this is not so much an issue of regulatory capture. This is an issue where we need to make better decisions. Our men and women are really dedicated. They really do want to create a fair, efficient, honest and strong financial system. They are really committed. We are actually lucky to have the men and women who work in ASIC. Our job as leaders is to make sure that we make the best possible strategic decisions so that we can deploy that wonderful energy that these men and women have to do the right thing. They are all fired up and ready to go. We just need to get them on target. That is going to be our job.

Ms KEARNEY: Thank you, Senator Hume.

Ms Armour : I want to put something on the record. Whilst we are enhancing our supervising, we are retaining our very excellent teams who have specific product expertise. When we're looking at an issue, whether it is an issue in the wealth management sector or at a financial institution, the supervisor isn't going to be the decision-maker about what we do when we see a problem. The supervisor will be involved in the discussions. But those teams who make those decisions are going to be the expert teams, the enforcement teams. We do have naturally some separation. It doesn't seem appropriate to make it a formal separation, but we have in-built mechanisms so we will test whether they are working and whether they are effective.

Ms KEARNEY: It's good to hear that an important part of a risk culture is actually to assess that risk.

Mr Shipton : Correct.

Senator HUME: I want to come back to some of the other weapons in the arsenal. Before I do, I want to talk very briefly a bit further about superannuation oversight and how your relationship with APRA in particular works with that, having somebody potentially on site in a supervisory role.

Mr Shipton : Sure.

Senator HUME: There are so many superannuation funds out there that I can't really picture what it is that you have in mind.

Mr Shipton : Yes. Our senior executive leader in charge of superannuation supervisory, Jane Eccleston, has joined us on the table. She can supplement. Essentially, what we want to do is, as I said before, have a greater presence and greater level of interactions with the superannuation firms. But your specific question was about APRA. Again, another very early observation I made before I arrived back in the country and immediately afterwards is that we need to, across a whole range of different areas, enhance our cooperation and coordination capability with APRA. In the superannuation space, this is particularly important because they have enhanced supervisory responsibilities over trustees. One of the issues that we agreed with APRA was to further clarify—and this is a public document, which we can provide to you—the divisions of responsibilities and labour when it comes to the supervision of trustees between APRA and ourselves. What we are doing—

Senator HUME: That would be very handy. I will ask you to take that on notice to provide that document.

Mr Shipton : Of course. We would be absolutely delighted. What we're doing—again, it's not just superannuation; it is in the big financial institutions as well—is enhancing our cooperation and interaction with our colleagues at APRA because we know that we need to be joined at the hip in order to have effective supervisory capability and, if necessary, from time to time have facts and circumstances which we pick up or are reported to us then turn into enforcement results.

Mr VAN MANEN: Wouldn't it be fair to say, though, that part of the problem identified by the royal commission is that there is actually at the moment a degree of overlap and that stuff has fallen through the gap as a result? To take on Senator Hume's point, I would be interested in what the degree of overlap is at the moment to see where the potential issues are in the first place so we can simplify it.

Mr Shipton : Sure. That's a really important question because that is a policy discussion. Mr Kell and Ms Eccleston can pick it up. That's an important policy discussion which has also been picked up by the royal commission. We believe that there is an important conversation to be had about what is the right split of responsibilities between APRA and ASIC. To be frank, there probably needs to be some clarification in the SIS Act to clarify the roles and responsibilities. So that's a legal issue and a policy issue, which is absolutely right. It involves government, it involves parliament and it involves us and APRA.

Separately—this is Senator Hume's question—we still need to work hard. We need to cooperate. We need to coordinate. Duplication and overlap are, in many respects, often part of the game. What really worries me and what I don't want to happen in the future is not so much duplication but just things falling through the cracks. That is the real regulatory danger. That's what I'm very attuned to. I've seen it happen, working in a jurisdiction whereby, to be honest, there were probably too many regulators. Because there are too many regulators, it gets too confusing and things are more likely to fall through the cracks. I believe that APRA and ASIC work really well together, but I know from the commitment of our colleagues and the colleagues at APRA that we are and will work even better together in the future.

Mr Kell : I hope to add a few points on the issue you have raised, Mr van Manen. It is the case under the frontline sector legislation, the superannuation legislation, that APRA has a bigger conduct regulation role than it does in other comparable sectors—banking or insurance—compared to ASIC. That's an issue that we did raise in our round 5 submissions and appearance. We're making an argument that we think that that is worthy of conversation as to how best to ensure that conduct regulation, at least in ASIC's case, and the responsibilities for that can be better reflected in the superannuation legislation so some of the issues around managing conflicts of interest and the best interests of members and what not are appropriately allocated to ASIC. Our focus at the moment is very much on disclosure in terms of the tools we have, which is important. But as I think we all understand, especially in a compulsory system, disclosure has very significant limitations and we need to be able to have other tools there.

In terms of the interaction with APRA in the area of superannuation, we are looking at how we can enhance that. Part of that is moving beyond what I might call matter based interaction—a particular problem comes up in a particular fund and the two agencies make sure that we know what each other is doing—to also building a greater thematic, forward looking focus. It is where we want to see this issue in a few years across the sector and doing more joint planning of that sort. I think we would accept that we possibly haven't done enough of that in the past. So that's an area that we're going to have a focus on. That includes areas such as the way in which insurance is provided in super, which I think most people recognise is an area that should and could be improved. In complaints and complaints handling, we're about to get significant new powers. It will require super funds to publish their internal dispute resolution statistics. That's going to be a bit of a wake-up call and an interesting issue. We're going to continue to look at employers and super. The work with APRA there will be, I think, fundamental to that.

Ms Eccleston : Probably other things that I would add is that we have been increasing our resources in superannuation. We're actually dedicated to superannuation full time. That is really something that will enable us to commit more to working with APRA in this sort of more problem solving, strategic way, I think, in the time going forward.

Senator HUME: Excellent. I want to ask a couple more questions.

ACTING CHAIR: Yes. You have a couple of minutes until we have a break, Senator Hume.

Senator HUME: Thank you. The Australian Financial Complaints Authority, I think, starts next month from—

Mr Kell : Very soon. They are very important, yes.

Senator HUME: From memory. It is very important. I want to understand better your relationship with the Australian Financial Complaints Authority and how you're going to interact with them. How will they raise red flag issues for you as well?

Mr Shipton : I'm going to start off. My colleague Greg Kirk will supplement. In fact, we are having excellent interactions with the leadership group. Mr Kirk and I met the leaders of AFCA only a couple of days ago. We talked about strategic interaction and formal interaction between us; information sharing; the information gateways that will exist between AFCA that do not exist between the current dispute resolution bodies and ourselves and how we would operationalise them; and how we could coordinate and cooperate together to identify, as you rightly say, red flags and thematic themes and identify the harms that are taking place in the financial system so that we can actually deploy tools to address them. Of course, as I said, there is that legal structure in place, which we're very pleased about. There is also the exchange structure and the architecture in place. Finally—and this is very important—the human-to-human interaction between the leadership group and the operational group at AFCA and the leadership group and the operational group at ASIC is excellent. I think we're off to a great preliminary, building start. With permission, I will hand over to Mr Kirk.

Mr Kirk : Thank you very much, Chair. Thank you, Senator. To start, the new scheme begins on 1 November. Our contact with them in terms of their preparations is that they are absolutely on track. We're starting on day 1 and being fully operational.

Senator HUME: Good.

Mr Kirk : One of the big steps to be taken over the last couple of months is to get all the existing members of the existing three different schemes into the AFCA scheme. There's a small percentage remaining to be done there, but generally progress, again, has been very good and licensees have taken a step to get on board with the new scheme and become members. In the meantime, we have a few roles in relation to the scheme. One of the key ones is approving their rules. That has been done over the last couple of months. So those rules are in place to start with their new, greatly increased jurisdiction. In terms of sharing information, maybe I'll start with what the existing situation was with the previous schemes. Two of them, not three—the superannuation tribunal was separate—were under an obligation to report to us systemic issues that they uncover in their work.

Senator HUME: Which two?

Mr Kirk : FOS and the CIO. They are the two industry based schemes. The superannuation tribunal wasn't under an obligation like that. They had their own statutory confidentiality requirements.

Senator HUME: Did they report to APRA?

Mr Kirk : No. So, in terms of that obligation, there are a couple of weaknesses with it. One is that it didn't cover all three. A second is that it was only in relation to systemic issues, not serious breaches of the law, which may not be systemic across the board but are serious enough to raise concerns. A third was the obligation that they had to tell us about the issue but they were not entitled to reveal to us the identity of the entity involved.

Senator HUME: That's ridiculous.

Mr Kirk : Over the years, we've found a way to overcome that. We would end up serving a formal notice on them for their documents and we would find out the name of the entity. But that was just an unnecessary and untenable delay in the whole thing. In terms of the new arrangements, it's now one scheme and the one scheme is subject to the full details. It covers not just systemic issues but also serious breaches, and they can name the entity to us. That's greatly improved. In terms of putting that in place, we've been having discussions with them. They are very focused on the importance of that as a part of the overall regulatory system. I think we will be getting a lot more information from them. We are certainly gathering up to make good use of that information. Perhaps in the other direction—us sharing information, intelligence and understanding with them—in section 127 of the ASIC Act, there used to be serious barriers to us telling them anything. They would tell us things. We couldn't say what we were going to do about it or what we were doing about it. That barrier has been removed as well. There's much better scope for information sharing in both directions. We and the scheme are very keen to make the most of that in terms of getting better outcomes.

ACTING CHAIR: The committee is now going to suspend for 15 minutes. We'll return with more questions. Mr Shipton and others, when we return, we have a lot of work to get through.

Mr Shipton : Yes, sir.

ACTING CHAIR: The answers to the questions seem to be drawn out pretty well. Can we try to make the answers short and sharp so we are not sitting here at midnight tonight?

Mr Shipton : Yes, sir.

ACTING CHAIR: I would like to be home tonight. If we get short and sharp answers, we can. I have a lot of things to go through and I don't want to be running out of time at half past two or three o'clock.

Mr Shipton : Yes, Sir.

ACTING CHAIR: Have a break for 15 minutes, please.

Proceedings suspended from 10:32 to 10:46

ACTING CHAIR: I declare the meeting open again. I'm going to go to Senator Ketter, who has only got about 10 minutes before he has to leave us today. Please keep answers brief because we do have a lot of work to get through.

Senator KETTER: Yes. I would appreciate brief answers. I am going to go to the issue of your investigations into Mr Palmer. I understand that we don't want to prejudice anything that you're doing, but I would appreciate any information you can provide to us in respect of that. I will start firstly with whether you are aware of the development that Mr Palmer says that Mr Mensink will move to London to head up his company for the Blue Star Line for the Titanic project?

Mr Price : Yes. I am aware of that. I have read those reports.

Senator KETTER: Okay. Given that there are two warrants for Mr Mensink's arrest so he can appear before court on matters relating to Queensland Nickel, have you spoken to any organisations about arrest and extradition of Mr Mensink should he arrive in London?

Mr Price : We certainly thought about various issues around arrest and extradition. Just to be clear, our investigation into matters around Queensland Nickel and Mr Mensink's failure to attend and produce books involves looking at potential offences around those activities.

Senator KETTER: Are there any legal issues with Mr Mensink taking up a directorship of another company, given the outstanding question?

Mr Price : I would prefer not to go into that at this stage.

Senator KETTER: Can you update us on the court case in relation to criminal charges against Mr Palmer for allegedly aiding, abetting, counselling or procuring the commission of an offence by another person in relation to his Coolum resort?

Mr Price : In relation to the Coolum resort, there are various interlocutory proceedings that are happening in Queensland at the moment. Given that—

ACTING CHAIR: What does that mean?

Mr Price : Interlocutory proceedings are basically issues around if, when and how any trial should proceed. That is the simplest way I could summarise it. Because those proceedings are ongoing, it really wouldn't be appropriate for me to make a comment at this stage.

Senator KETTER: Can you update us in relation to your investigations of Mr Palmer and Queensland Nickel, particularly in relation to the allegations of shadow directorship?

Mr Price : Sure. As I have indicated previously, our investigations into various matters in relation to Queensland Nickel are well-advanced. Unfortunately, I'm really not at liberty to give much further detail at this stage.

Senator KETTER: Are there any new allegations that you've started to follow up on?

Mr Price : Broadly speaking, I've indicated to committees in the past the sorts of issues that we're looking at. They include issues around whether false or misleading statements have been made and matters, for example, in relation to the use of company money within a broader range of groups of companies that Mr Palmer is associated with. Beyond that, I would prefer not to make comment.

Senator KETTER: But there are no new allegations at the moment?

Mr Price : Certainly we are looking at various issues around Mr Mensink, as I've just indicated today. But our investigation progresses. I'm happy with the way it is progressing.

Senator KETTER: Can you tell us what other agencies you are working with in relation to the investigations?

Mr Price : I would prefer not to comment on that.

Senator KETTER: Are you able to tell us whether you've spoken with Mr Palmer himself?

Mr Price : I would prefer not to comment. We have spoken to a large number of people, but I would prefer not to go into details of who they are.

Senator KETTER: Mr Palmer apparently has indicated that he has seen his nephew in Bulgaria a few weeks ago. Are you aware of that?

Mr Price : Yes. I have read those reports as well.

Senator KETTER: So you are aware now that Mr Palmer knows where Mr Mensink is, despite previously telling the courts he didn't know how to contact him?

Mr Price : Yes. Obviously, as you would expect with these sorts of matters where there are overseas jurisdictions where people reside, and we have an interest in those people, you can assume we are in communications with the relevant authorities there.

Senator KETTER: Are you able to tell us whether you are aware that Mr Palmer has said that he has spoken to his nephew every day? Were you aware that he was in regular contact with Mr Mensink?

Mr Price : I can't recall me personally seeing any press reports to that effect, but our team has been following media reports around this issue very closely, so I am sure they are aware of that fact.

Senator KETTER: Is this information a concern for ASIC, or is it of use to you in your investigations?

Mr Price : Look, as I said, our investigations are well progressed. We are happy with the way it's going. Obviously we are following media reports quite closely. With any information that comes out of those reports that we think would be helpful for us, we are pursuing those avenues.

Senator KETTER: Are you able to tell us whether the offences being considered regarding Mr Mensink are criminal offences?

Mr Price : We are looking at a variety of possible offences. I think it's fair to say that all possibilities are on the table at this stage.

Senator KETTER: Mr Palmer has said that his nephew has done nothing wrong. Would you agree with that statement?

Mr Price : It wouldn't be appropriate for me to make a comment on that.

ACTING CHAIR: You are seeking an opinion.

Senator KETTER: Okay. Given that Mr Palmer knows where his nephew is, is he under any obligation to ask him to return home to answer the court's questions?

Mr Price : Certainly, leaving matters of law aside, I would encourage any people who are in contact with Mr Mensink to encourage him to return to this jurisdiction and answer very important questions that have been raised.

Senator KETTER: Thank you for the brevity of your answers, Mr Price. Thank you, Chair.

ACTING CHAIR: Quick questions and quick answers.

Mr VAN MANEN: I'd like to go back to your opening statement, Mr Shipton, where you make the observation that the importance of the financial services sector is that it is the custodian of other people's money. If we use that as a founding principle for all of our regulation in this space, and even, by extension, the Corporations Act and shareholders' funds and those sort of things, it's about how we protect other people's money from being utilised for the wrong reasons or the wrong thing being done with it. The royal commissioner makes an interesting observation in his interim report that if the law already requires entities to do all things necessary to ensure that they deal with other people's funds efficiently, honestly and fairly, he questions whether additional laws would therefore be necessary. He asks whether we should be looking at how we administer or enforce the existing laws differently. What work have you done to turn your mind to that? Rather than new and additional regulation and an increasing burden of red tape, what work do we do to ensure that existing laws are enforced maybe differently or better to achieve a different outcome?

Mr Shipton : That is the heart of a question that any good regulator is asking himself or herself every single day. The government and the parliament sets the laws and the rules. Our job is to administer them and enforce them. Yes, we can have a conversation about law reform. I think there are some very good thoughts in the interim report about the potential simplification of the law. The starting point is that we have rules and we have laws right now. How can we make the most of them? That is the starting point. That's what I did when I first arrived; I thought about strategic decision-making processes and structures so that we can make better decisions and deploy our tools more efficiently and appropriately so that we can actually enforce and administer those laws better.

What we've done specifically in recent times is speak to the government and get extra funding for accelerating our enforcement outcomes. Deputy Chair Crennan has spoken about our intent and our philosophy there. I think he has clearly indicated in our first round of questions, which I don't need to go over in the interests of time, that we want to use those enforcement tools. The second point is that we are looking at how we can increase and enhance that capability through the new powers and penalties. So we look forward to it passing the parliament.

As mentioned in response to questions, including from Senator Hume, about our supervisory approaches, we are applying supervisory tools in a different manner than we've done before. Every single one of those tools is aimed to make sure that that important provision, 912A, is effective. They have a singular aim of efficiency, fairness and honesty. That's what we're working towards. You are right and the royal commission is right: we need to bring life to that important cornerstone provision. I'm going to close because time is tight. But that 912A obligation of honesty, fairness and efficiency rests with financial institutions. They have to take that provision to heart. They have to embrace not just the letter of the law but the spirit of the law. If there's one conclusion coming out of the interim report, it is that they have embraced neither the letter nor the spirit of that important cornerstone provision.

Mr VAN MANEN: I will take that a step further. You have spoken in your response about the regulatory environment. What work are you doing either as ASIC or in conjunction with APRA to consider the structural organisation of the financial services sector and whether it's fit for purpose in today's environment? The reason I ask that question is I was very interested in some comments made by assistant governor Chris Kent from the RBA back in September. He made the comment in a speech, and I'll quote, where he sought to clear up what he called the degree of confusion about how money is created. He explained:

Banks create deposits when they make loans, in contrast to that what the textbooks say and most people believe.

He said:

Concerned citizens might be worried about what they see as the ability for private banks to create money via the extension of credit seemingly at will.

So what he is effectively saying is that banks don't lend depositors' funds. They create money at will. I would suggest that most of our regulation today is predicated on the fact that they are actually lending depositors' funds, which is not the case. So if, as the assistant governor has outlined in his speech, the structure of the industry and what actually occurs is different from what is actually commonly perceived to be the case, is there an argument, then, that the structure, one, of the industry and, two, the structure and direction of our regulation might be based on an incorrect premise.

Mr Shipton : I think you are raising very important but technical economic questions. I haven't read the speech of the deputy governor, so I can't comment or speak with any degree of knowledge about that. Nor should I even if I had. When I use the expression 'others people's money', I come from the premise, which I think is just a simple one, that money exists and the financial system exists for people. Ultimately, there are important purposes and functions that finance serves. Those functions serve people, not corporations or institutions. At the end of all of that food chain, at the end of the system, is a person. A shareholder is a person. A pensioner is a person. A recipient of a sovereign wealth fund is a citizen. It is all people. Money and the financial system exist to make, and should exist to make, people's lives better. That's the expression I use when it comes to other people's money.

You are raising, I think, Mr van Manen, a really important question, a step-back question, which is right to ask. The step-back questions that I've asked—these are in my opening statement so I don't have to dwell on them—are about of the structure of Australia's financial system. We do have, compared to other markets, less competitive pressures. We do have a system which is a net positive of safety and soundness. We do have a system whereby financial institutions rightly can control their risk. That in combination, as the royal commission has highlighted, means that there is an absence of market or commercial disincentives and deterrents to misconduct. We are a conduct regulator. Therefore we think an important analysis or question to have further discussion on is how the particular structure of Australia's financial sector—those characteristics which have been identified on page 269 of the interim report—impacts upon what we do, what we must do and what we're expected to do. I'll pause there.

Mr Kell : I'm not sure whether this is the territory that you're looking to cover, Mr van Manen, but the interim report, and I think the hearings, have demonstrated that there are a range of significant structural problems in the industry. In particular, I think the interim report of the royal commission highlights that conflicts of interest are embedded in many of the structures that we have in the finance sector. Without going into a lot of detail, these are questions that we're going to be looking to address in our response to the interim report. But to give you one example, it's ASIC's view that in the superannuation sector, as an example, the so-called dual regulated entities, where the trustee of a super fund is also the responsible manager for a managed investment scheme, pose a structural conflict that, frankly, can't be adequately addressed. There ought to be a structural solution to that. So our view would be that some of the questions being raised about structures are very important and may require deeper thinking as to whether things like disclosure are the answer or whether you actually need to prohibit some structures.

Mr VAN MANEN: It would be fair to say, though, that we also need to accept that there are some conflicts of interest that realistically we can deal with through restructuring.

Mr Kell : Yes, absolutely.

Mr VAN MANEN: But, ultimately, you're never going to remove every conflict of interest—

Mr Kell : Yes.

Mr VAN MANEN: from any sector, so we've got to accept that there will be different—

Mr Kell : How do we better manage them?

Mr VAN MANEN: But how do we manage those in an efficient way for all parties concerned? I'm interested to see the response from the financial institutions to the royal commission. There have been a lot of announcements by the banks as to restitution and provision for compensation et cetera. What I do note with interest, though, is that largely that appears to be focused around the provision of financial services or insurance—

ACTING CHAIR: Or planning.

Mr VAN MANEN: or planning. Very little appears to be being done in the loan space, which is of significant concern to me given that in the various inquiries we have had lots of testimony from people about poor loan conduct by the banks. There seems to be no acceptance by the banks of their poor conduct in that space and, hence, the restitution of people's lives or livelihoods that they potentially destroyed as a result of their actions.

Mr Shipton : Thanks for the question. Mr Michael Saadat, who is the SEL in charge of deposit takers and credit and insurances, has joined the table. Let me just start before I hand over to him by saying that this piece that you raise, which is essentially getting an important body of work in and around responsible lending, is very important. We have at least one significant case in the courts right now that we're pursuing. We're pursuing a very large penalty. We're taking this very seriously. There has been a number of reports, studies, supervisory efforts as well as enforcement efforts in and around responsible lending. So with that introduction, I'm going to hand over to Mr Saadat. I make the observation that the provisions, as I understand it, and the announcements of the provisions by the financial institutions have been triggered in part because of their ongoing disclosure obligations. There's a set of rules that govern them that triggered those disclosures. I can't speak for any financial institution, but I would make the observation that just because there hasn't been a disclosure of the nature that you mentioned before with fees for no service and the like doesn't mean that there isn't a problem. So with that I'll—

ACTING CHAIR: The responsible lending obligations apply only to home loans. Is that correct?

Mr Shipton : No.

Mr Kell : No. Also to credit cards.

ACTING CHAIR: But does that involve business loans and car loans et cetera?

Mr Shipton : No.

Mr Kell : No.

ACTING CHAIR: Go ahead, Mr Saadat, please.

Mr Saadat : Thank you. The question of remediation for credit can arise in a number of different ways. But the main way is when you've got a situation where a consumer has been given a loan that they shouldn't have been given. Had the bank properly assessed that consumer, they ought to have known that the consumer couldn't have afforded that loan. We've addressed that issue in a number of ways over the years that we've been the regulator for credit. We do have action in court with Westpac at the moment in relation to home loans and responsible lending. Because they are live proceedings, it's difficult to comment too much on that. But we have alleged there that Westpac did not take into account the expenses of borrowers when making home loans. So the court is now considering the position in respect of that.

We've done a lot of work across the industry to raise standards here. It's fair to say that since 2015 standards have increased substantially. The approach that banks are taking to assessing borrowers has improved markedly. That work has been done in conjunction with APRA to make sure that borrowers do get loans they can afford and to make sure that if they have been given an interest only loan, for example, that that product is suitable for the customer that is getting it. What we were seeing in the past was that many customers were getting interest only home loans. Many of them were owner occupiers. Some of those loans were for very long periods and weren't necessarily suitable for those customers. That's changed quite a lot.

ACTING CHAIR: I want to make another point. I will jump in, Mr van Manen. Are you looking at the case where the loans officer or the broker may be fudging the figures? Someone might be on a net income after tax of $60,000 a year. They put in $120,000 and so on. What about these sorts of breaches?

Mr Saadat : We have been. We've done a lot of work in that space. We've taken action against over 100 individuals in relation to that type of conduct. But we're also undertaking a broader review of loan fraud to understand what industry is doing to prevent and detect loan fraud. At the beginning of this year, we took action against ANZ for not having adequate processes in place to make sure that loan fraud was detected. Although loan fraud is often the conduct of individuals who are falsifying things like payslips, lenders also have a responsibility to make sure that they are checking things and detecting when those things are happening. What we had with ANZ was a situation where we said that they ought to have known that some of the documents that were being provided to them were fraudulent.

ACTING CHAIR: Are you telling me that someone applying for a loan is putting in false payslips and so on to their bank manager when they apply for the loan?

Mr Saadat : That could be happening. But the conduct we're focused on is when the broker or the bank officer is implicated in that conduct. In the case of ANZ, they have had a $5 million penalty as a result of conduct in relation to some finance brokers arranging car loans. Because, as I say, ANZ should have known that those documents were fraudulent. So this has been a longstanding focus for us. We continue to take action here.

ACTING CHAIR: Mr Mullaly, do you want to contribute briefly, please?

Mr Mullaly : Just very quickly. I think last Friday we did announce that a mobile lender from the CBA had been committed to stand trial in respect of a conspiracy to defraud the Commonwealth Bank.

ACTING CHAIR: A criminal trial?

Mr Mullaly : A criminal trial. And that conspiracy is in the amount of in excess of $110 million worth of loans. As Mr Saadat said, we want to focus on those at the banks because, without them, it's very difficult, obviously, to facilitate the fraud. That's not to say that all bank officers, of course, are involved in it. But we are looking to see where we can take action at that end. There are other investigations underway in respect of bankers.

Mr VAN MANEN: Whilst I'm concerned about those fraudulent cases, I'm more concerned about ordinary people. It's interesting that you've got Westpac in court, because I'm aware of a constituent with an issue with Westpac. But I know that we've got the responsible lending guidelines for consumer credit. My concern is maybe the legal conduct of the banks in relation to business credit and the moral and ethical conduct of the banks where they in the first instance decided to lend money and then, because the economy has changed or something has changed in a particular industry or the fact that they no longer like the look of that particular industry, they decide to shut up shop and say, 'Well, you need to refinance with your bank or repay the loan.' That's the sort of conduct that I find objectionable. The bank is always happy to lend you money when times are good. But as soon as things get a little bit tough, they are very quickly prepared to pull the shutters down on you with no consequence to the bank. It's the borrower that wears all the consequence and all the cost.

Mr Price : Mr van Manen, there have been some very important changes recently in relation to unfair contract terms that perhaps won't deal with all the issues that you're alluding to but will certainly deal with some. I'm sure Mr Saadat can outline some further ones.

Mr Saadat : The situation you describe has obviously been considered by the royal commission extensively. As Mr Price points out, the government introduced laws against unfair contract terms. What they do is they prevent lenders from introducing terms into their contracts that unfairly advantage them in a way that's not reasonable to kind of simplify it. So those law apply to loans that are up to $1 million. The banking code, which was recently approved by ASIC, extends those protections for loans of up to $3 million. So we think that's an important additional protection for borrowers. But you are right to say that the responsible lending laws that protect consumers do not protect small businesses. That's a deliberate policy choice that governments have made over the years because the view is that we need to balance here the question of protecting borrowers and ensuring there is access to finance for small business. Certainly access to finance continues to be something that small businesses raise concerns about. So there is a tricky balancing act there.

Mr Day : Mr van Manen, I take that point. As Mr Saadat said, it was well ventilated at the royal commission. I turn the question back to you and ask whether there a point where it's acceptable that a bank says, 'We can't lend any more money in this region because the mines have closed or because this area is suffering drought?' There has to be a point where a bank says, 'I can't lend any more.' They are not a utility in that sense where they just have to keep lending because the public wants the money.

Mr VAN MANEN: I'm not saying that at all.

ACTING CHAIR: I will just interrupt, Mr van Manen. I apologise. Earlier when the media was in here, I should have asked if you were comfortable with the media being here. I hope you are, because it's a bit late in the day now.

Mr Shipton : Thank you for asking.

ACTING CHAIR: I would have done my hair if I had known!

Mr VAN MANEN: I take your point, Mr Day, and agree with you. Banks should be able to make decisions about who and where they're going to lend. My issue is not for new loans. My issue is for existing loans in the system that are being serviced. The payments are on time and interest payments are being met—all those sorts of things. The only thing that changes is that the bank decides for whatever reason—risk profile or whatever the case may be for a particular industry, be it real estate, agriculture, mining or whatever—they no longer want to lend to that sector. Therefore, they are going to review their loan book. Even if the loan is being serviced and all the terms are being met, they're turning around to their borrowers and saying, 'We're not interested in this business any more. We need you to refinance your loan. If you don't, we're going to sell you off.'

ACTING CHAIR: Well, Mr van Manen, through the inquiry we had into impaired loans, the banks have now given commitments that if you're making your payments, regardless of the value of your asset and your loan to value ratio, they'll honour the loans and keep you going.

Mr Day : The thing I would say is that, in the inquiry Senator Williams has referred to, in the royal commission—

Mr VAN MANEN: The commission model.

Mr Day : Thank you, yes. In the royal commission, there are a number of loan circumstances where there have been other issues. There hasn't been a circumstance where it has purely been other issues rather than the inability to pay. All of them that have been looked at were circumstances where there was an inability to pay. Now, were they the grounds that were relied upon? That's a valid point. As Mr Saadat and Mr Price pointed out, unfair contract terms now assist with some of that, not all of it. We have to be clear that it is not all of it. It assists with some of it. Sooner or later some of those loans, the small business loans, are actually on a shorter term. They might be on a five-year loan. The bank is not required to roll over.


Mr Day : What we have seen is informal discussions that have occurred between the borrower and a bank manager where they've said, 'Trust us. Don't worry. In six months, this will be rolled over. That's not problem.' That lender is no longer available. Six months comes through. It's a new person. They say, 'Sorry, we're not rolling over.' They're caught in a short timeframe. That's one of the things we've been talking to the banks about—that rollover period and the rollover time.

Mr Saadat : Yes. And the banking code introduces a three-month notification period. So if a facility isn't going to be rolled over, the borrower needs to be provided with three months’ notice about that. Ultimately, the bank isn't required to roll over that facility. There will be situations potentially where borrowers are caught in a bind because—

Mr VAN MANEN: No-one will lend.

Mr Saadat : Despite a long history of having the facility rolled over, for a range of factors, a bank might decide that it doesn't want to roll over that facility. And it's open to do that.

Mr Shipton : With your indulgence, Chair, I would like to supplement with a couple of quick comments. Firstly, the question that Mr van Manen asks is similarly raised in the interim report by the royal commission. There are important questions being asked by the royal commissioner, particularly in relation to agricultural lending and small business. I think the way that those questions have been formulated and articulated is very good. We look forward to an ongoing discussion as to how to resolve and answer some of those questions.

There is a second point when it comes to the handling by financial institutions which is not so much legal but just good practice. One point that I feel very strongly about—and it's actually also raised in the interim report—is the handling by financial institutions of agricultural or farm debt under stress. One takeaway that I had from going out to the regions and meeting with rural financial counsellors in regional Victoria is that there are practices by financial institutions that could be improved to help distressed Australians in rural Australia. They concern the way that these distressed loans are handled, particularly getting the rural financial counsellors involved early before it gets to a point of enforcement. This is a point that has also been raised in an interim report. It's feedback that I had directly from financial counsellors in rural Australia who see this live. They meet with the victims. They meet with the very people, Mr van Manen, that you are concerned about. There are just ways that banks can improve their practices. We are engaging, and I have engaged, with the CEOs of these financial institutions on this very matter.

Mr VAN MANEN: One of the things that concerns me—again, we've heard this testimony before in other avenues—is if the bank decides to wind up a small business or an entity, is the activities of the administrators or the insolvency practitioners—

ACTING CHAIR: Receivers.

Mr VAN MANEN: Receivers. There are questions about the valuation of properties as opposed to the real market value. They are just trying to get it wound up and off their books as soon as possible—

ACTING CHAIR: Section 420A.

Mr VAN MANEN: which is also of concern to me. The proper value of assets is not being realised. Consequently, the financial loss to the business owner or to householders is far greater than it would otherwise need to be.

Mr Crennan : I might answer that question, if I may, or at least give you one answer. I've done cases about this in the past and I've done cases for farmers who are about to have all their bits and pieces of farm sold. This one was in Tasmania. I tried to use section 132(1) to stop it. The court refused. The court's position was 'We won't supervise the sale.' It was actually repealed in 2016. This was about five or six years ago. So it is a difficult situation because 420A might atmospherically impose duties upon the receiver, but they can be discharged very easily. There is no remedy there. The remedy is that you have to then look outside the Corporations Act for a set-off remedy or something like that. That's all a bit technical. Basically there is no remedy. It's very hard to control those sales. In that Tasmanian example, for example, they just put ads in the local shop or something. There wasn't a proper sale. It was very sad, frankly.

ACTING CHAIR: Who bought it? Their mates?

Mr Crennan : I don't think they sold in the end. It sold for a bargain basement price. In any event, he used to pay me every time he sold a cow. I told him to stop doing that. It was a very sad story. I had not seen a 420A situation in real time. I don't have an answer. Some of the other people here may put forward some possible answers. But it is a very difficult section and probably requires the legislature to have a look at it and try to work out how to improve the operation of the section and, therefore, improve the scope of the duty imposed upon the controller.


Mr Price : I agree with everything that Mr Crennan has said. There are some challenges with section 420A. The first challenge is that it is really a section that is focused on process, not outcome. The second challenge, as Mr Crennan has identified, is that there is a real difficulty, then, even if you do establish a breach, in terms of getting a remedy.

ACTING CHAIR: That's right—or punishment.

Mr Price : I think there is an overarching philosophical point that people should be aware of as well, and that is usually when valuations on properties are prepared, they're prepared on the basis of a willing but not anxious seller. Inevitably, if external administrators have been appointed, that is no longer the case. The difficulty that then arises is that people are very upset. They are surprised that there is such a variation between the valuation and the eventual amount realised for the property. But you've got to realise there's that philosophical difference there. In terms of a solution, I think it is a very difficult matter that probably the legislature needs to grapple with. I would identify that there is Queensland legislation that is similar to section 420A but includes a number of other additional factors that might be worthy of thought. If you like, on notice, I can provide you with a copy of that.

ACTING CHAIR: That would be good.

Mr Day : The other thing I would add to everything that has been said, and as has been particularly pointed to, is that by the time you get to that point, certainly with rural lending the whole thing is highly problematic. Anyone walking out happy? That's not going to happen. What we know from talking to rural financial counsellors and what we know from talking to the farm debt mediation people in Queensland—this was a discussion at the royal commission and opening for the rural lending round—is that the earlier those farm debt mediations occur, well before a receiver is appointed, well before a controller is appointed, at the point that it looks like it's going that way, that actually is the best outcome. So it's process. As Mr Shipton said, the banks can assist in this respect by not worrying about the legal processes but worrying about their bank processes. The earlier they bring on that discussion, it also requires the borrower to realistically engage with the problem. There's clearly a problem, but they've got to realise that.

ACTING CHAIR: Mr Day, hopefully the national farm debt mediation will be in place right across Australia.

Mr Day : I think that would be a good measure, Senator Williams. The point I am making is—

ACTING CHAIR: The sooner the better?

Mr Day : No. As a matter of process, don't put it at the end when recovery is in the wind. Put it earlier in the process, well before then, so that those things can be sorted out.

Mr VAN MANEN: You know, Mr Day, that you and I have had a number of discussions about a number of people in similar situations. One has to do with a farm.

Mr Day : Yes.

Mr VAN MANEN: There are other cases that I'm aware of just in the general urban area of people's houses being sold, or the allegation being made, I should say, of residential homes being sold well below market value.

Mr Day : As Mr Price said, those things are very difficult to judge because what people—normally the borrower—thinks the property is worth is often well out of kilter with what the market might think, what the bank might think or what an independent person might think. It's tricky.

Mr VAN MANEN: But the issue is the level of communication between the bank and the borrower to mediate those issues in the first degree.

Mr Day : Yes. That's Mr Shipton's point.

ACTING CHAIR: If you like, I will ask some questions. Hopefully, there are short, sharp answers. Mr Kell, Graeme Cowper was reported by NAB in 2010 for breach.

Mr Kell : Yes.

ACTING CHAIR: A few months ago, he was scrubbed out as a financial planner. That is eight years. Why did it take eight years to get rid of the bloke? It took eight years from the breach report. We note that when he left NAB or was sacked, he went to AMP. He went on in his job. Then he was breach reported to you in 2010. He was banned for four years from being a financial planner a few months ago. My question is simple. Why does it take eight years?

Mr Kell : I accept that that is a long period of time. It would have been desirable to do it sooner. As we've discussed—

ACTING CHAIR: My question is why.

Mr Kell : As we've discussed often at this committee, the reality is that there have been a lot of financial planners that we have had to focus on taking action against.

ACTING CHAIR: So the answer is that you're overloaded with work and they all take time et cetera? I've got my answer. We'll move on.

Mr Mullaly : That's right. There were some legal impediments as well in the way that it was—

ACTING CHAIR: Righto. That's why I'm bringing it to your attention. Eight years appeared to be a long time to me. The Rest superannuation fund says that it has broken the law 184 times between March last year and 13 September this year. It failed to give members reasons why it refused death payouts. What action has ASIC taken in this matter?

Mr Kell : We've got a live investigation on, Senator, so I'd prefer not to go into further details at this time.

ACTING CHAIR: That's good. We'll leave it at that. No doubt we'll hear more about that in the future. With regard to financial planning, there is Commonwealth Financial Planning, AMP and Clayton Utz. Clayton Utz did the so-called independent report. Then lots of emails changed in the report. You know what I'm talking about? What is ASIC doing about that?

Mr Mullaly : There's a wide-ranging investigation underway in relation to AMP covering a range of conduct. We are looking at that issue.

ACTING CHAIR: I can understand that. So you will be looking at Commonwealth Financial Planning, ANZ financial planning and inappropriate advice, Westpac inappropriate advice and NAB et cetera. You will be reporting on that, no doubt, in time?

Mr Kell : There's a lot on, Senator, yes.

ACTING CHAIR: I found it amazing that AMP misled ASIC. It admitted to lying to ASIC 20 times. That was one of the bombshells to come out of the whole inquiry. I want to bring you to one point. This committee is inquiring into franchises. Retail Food Group has been out there. Its shares were $6.70. I think they are about 50 cents now. The committee has asked, as the chair said last Tuesday night prior to the hearing, the former management of Retail Food Group, Mr Alford, Ms Atkinson and Mr Nell. We've asked them four times to attend this committee and they've refused to. More will come out of that in the future, no doubt. I just ask you to keep an eye on those particular names and that particular inquiry if you could, please, Ms Armour.

Ms KEARNEY: Are you looking at all into Retail Food Group?

Ms Armour : A number of issues have come to our attention over time that we've made inquiries about.

ACTING CHAIR: I want to take you to the Dollarmites issue with the Commonwealth Bank and the emails and so on that went on. We're not talking big dollars. We're talking about certainly a principle issue here.

Mr Kell : Yes.

ACTING CHAIR: When was that brought to your attention? Was it through the media with Adele Ferguson or did the Commonwealth Bank make a breach report?

Mr Saadat : There has been no breach report. There was an initial notification to ASIC in April about a general issue involving Dollarmites and some other issues raised by an internal whistleblower. At that time, no detail was provided by the Commonwealth Bank. Subsequently, a few months later, the Commonwealth Bank approached us and provided more detail about the Dollarmites issue that subsequently appeared in the media. We've made some inquiries about that conduct. But it's fair to say that the detail about that matter came to light the day before it hit the media.

Mr Kell : Very quickly, as you may be aware, we have also just announced that we're doing a broader review of school banking programs. We think, given some of the issues that have arisen around school banking programs, including the Dollarmites issue, that this is something that needs to be looked at. It's something that occurs in different ways in different schools in different states. In the first instance, we want to understand what is being offered in schools by way of school banking programs—how the students are being engaged, what sort of accounts are being established—and then look at the risks and potential problems as well as the benefits.

At the end of the day, we do want our kids to understand money. But if this is being done in such a way that raises conflicts of interest or problems, we want to look at it. We will be happy to keep the committee updated on this review. Ultimately, these banking programs have to be in the interests of students. If they are failing on that front, then that's something that we're going to have to look at.

I have a final point on that issue. I emphasise that ASIC, of course, does not control what is provided in schools. We are not the education regulator, but we believe we can work cooperatively with the education authorities as well as consumer groups and others to make sure that these programs are provided in a way that is consistent and doesn't harm the interests of the students going forward. So that will be a big review for us in the next few months.

ACTING CHAIR: Good. I just want to raise a point. A report states:

Former ASIC investigator Glen Unicomb has called for the major accounting firms hired to audit and approve sensitive company reports to be brought before the financial services Royal Commission to prove their independence.

Mr Unicomb believes the 'big four' accounting firms—PriceWaterhouseCoopers, Deloitte, Ernst & Young and KPMG—risk being exposed to pressure to approve reports to protect lucrative advisory relationships.

Who has oversight of the behaviour of accounting? ASIC?

Mr Price : Yes. It is actually complex. You wouldn't think it would be a complex question, but it is. ASIC certainly has oversight of financial reporting. We certainly have oversight of auditing. What Mr Unicomb is typically talking about is when an accounting firm has been appointed under an enforceable undertaking to do various regulatory work. In most cases where that happens, that accounting firm will be appointed with ASIC's consent. In some cases, ASIC will actually appoint the expert. But if you're talking more broadly about consulting work that accounting firms do within large financial institutions, you should not assume that ASIC is the regulator of that activity. So what I'm saying in a long-winded way is it really depends on the particular activity that the accounting firm is undertaking as to who regulates it or, indeed, whether it is regulated at all.

ACTING CHAIR: Interesting. I see why you have a bit of a workload now. Ms Kearney, would you like to ask some questions—

Ms KEARNEY: Yes, please.

ACTING CHAIR: or are you texting instead?

Ms KEARNEY: No. I am actually researching for my questions.

ACTING CHAIR: Of course you were!

Ms KEARNEY: No, seriously. I would like to go back to the royal commission and the issue of superannuation. We touched on it before. Senator Hume asked some questions. You mentioned the important issue of insurance. However, what came to light, I think, was some behaviour that I would describe as egregious by the retail superannuation industry. It was revealed, for example, that Colonial First State broke the law some 15,000 times—I am referring to an article from the Financial Review here—by failing to move a number of super fund members from high fee accounts to low fee accounts. It was revealed that CFS misled customers set to switch to MySuper accounts by asking them to provide a direction to invest in a super option that would have allowed commissions to continue. It goes on and on and lists some similarly very poor behaviour by AMP, NAB, IOOF and so on. The commissioner referred to this conflict as a collusion between the need to act in the best interests of the potential future retiree, or the customer, and the need for the parent company to make a profit. Is this conflict something that ASIC is looking at? Do you envisage giving some guidance or guidelines on how to manage that?

Mr Shipton : I will hand over to the senior executive leader, Jane Eccleston, in a moment. I want to open up and say that you are absolute right to ask, and Senator Hume is absolutely right to ask, about the superannuation space. Whilst there is an enormous amount of focus by the commentariat on banks, and rightly so, the royal commission and leaders like yourself are rightly pointing to another fundamental important characteristic of Australia's financial system, which is compulsory superannuation. That mandated structure, whereby hardworking men and women are putting their salaries into a superannuation system, means that our responsibilities are heightened. The other observation I'll make very quickly is, of course, that some parts of the question you are going to about, in effect, trustee obligations speak to the division of labour between ourselves and APRA.

Ms KEARNEY: APRA. I understand that.

Mr Shipton : So we will do what we can, and we are working with our colleagues at APRA, in relation to that. I'm going to hand over to Jane.

ACTING CHAIR: I have one question, Mr Shipton, if I could.

Mr Shipton : Please.

ACTING CHAIR: We've referred to the royal commission via Ms Kearney. People have had their super in cash and getting 0.5 of one per cent and one per cent. If you have $100,000, you would get three per cent in any bank for a 12-month period. Is there any way the royal commission can recommend compensation through those sorts of things, where people have been blatantly ripped off with their super?

Mr Shipton : Look, I think it's dangerous for me to go into territory that—

ACTING CHAIR: I shouldn't ask that question. That's asking for an opinion. But you see the point I'm making?

Mr Shipton : I see the point you're making.

ACTING CHAIR: The royal commission was not about compensation, but already we're seeing the compensation coming forward and being reassessed for financial planning and charging for no service et cetera. I suppose all I can do is wonder whether they are going to look at—

Senator HUME: Perhaps that is something for APRA.

Mr Shipton : And it's something for us. It's something that has been raised by the royal commission as well. They are important questions to ask. Just before I hand over to Ms Eccleston, which I said I would do on a number of occasions, I also want to highlight that there's a corollary issue that I want the industry to be on notice on. When the royal commission and others highlight the best interest duty of trustees, they are highlighting the individual duties on those directors on that trustee company, which, as you rightly point out, Ms Kearney, are often employees of a broader group. That is a conflict that needs to be dealt with with the utmost seriousness. I would also make the observation that there are many businesses and other parts of a conglomerate that is also run by a subsidiary who also has directors. Their duties need to be taken seriously. That is also a potential conflict of interest with these subsidiary boards. Financial institutions need to look very closely at that as clearly they should be looking very closely at the best interest duty. But I'm going to hand over.

Ms Eccleston : Thank you. So a number of the matters mentioned in the royal commission are matters that we are already aware of and taking action in relation to. There are ongoing investigations in relation to them. Others are very squarely within APRA's bailiwick rather than ASIC's. I think the issue you raise about the best interest duty is a really important one because that really sets the expectations of what trustees should be doing. But when you look at the regulatory framework around that duty, there are some respects in which it's actually inadequate. In the same way that we've been talking about—and I use this as an analogy—a declaration for the licensing obligation, it's a very similar situation in relation to the best interest duty. While it's a very important duty, the penalties and consequences of breaching that duty do not match the importance of the duty at this point in time. That's something that we think is important for people to understand and requires reconsideration. I would also comment that at the moment the regulatory responsibility for administering that duty primarily lies with APRA. We have a small role in relation to disclosure issues which might breach that best interest duty, but the duty itself lies—

Ms KEARNEY: Falls with APRA.

Ms Eccleston : Falls with APRA, yes.

Mr Kell : The other point I think we should make there is we have responded to the list of questions that emerge from counsel assisting coming out of round 5, the superannuation round. A lot of very important questions are there. Quite a few of them go to the heart of these structural conflicts of interest.


Mr Kell : As I said a little earlier, we are making a proposal that one of those structural conflicts—the position of dual regulated entities—is one that ought to be considered by the legislature as something that maybe ought to be prohibited. But there are a range of other structural conflicts where, I think it's clear further work needs to be done. An example is a superannuation fund in a vertically integrated institution that also has an insurer in-house. Lo and behold, the only insurance that is ever provided is through that in-house insurer.

Ms KEARNEY: Correct.

Mr Kell : How do you best deal with that situation? I wouldn't suggest that ASIC has all the answers to those issues at the moment.

Ms KEARNEY: But you are considering them?

Mr Kell : We are very much considering them in the context of the royal commission. The other obvious one in super is the conflict between being a super fund and having a related distribution arm. How can that best be managed? We're not necessarily suggesting that that needs to be separated in the first instance. Clearly, that conflict has led to genuine detrimental outcomes. That is another issue that needs to be confronted.

Ms KEARNEY: Indeed.

Mr Kell : So it's a big focus for us.

Ms KEARNEY: Great. Thank you. That's good to hear. We look forward to stage 5, did you say?

Mr Kell : That was round 5, which is the super round.

Ms KEARNEY: It's like a boxing match.

Mr Kell : In a way, yes.

Ms KEARNEY: Thank you for that. I appreciate the response. Ensuring fair and efficient markets is one of ASIC's objectives. I am concerned about you, Mr Shipton. I can tell you are not well. It's the nurse in me. I can't help. I hope you have everything you need.

Mr Shipton : I do, thank you.

Mr Kell : He's got a lot of drugs there.

Ms KEARNEY: Maybe we could wrap up a little early.

ACTING CHAIR: A stiff scotch might help!

Ms KEARNEY: That should not go on Hansard, because it's not good advice.

Mr Shipton : I would not want to be in contempt.

Ms KEARNEY: Approximately one-third of ASIC's staff resources, we are told, are allocated to ensuring fair and efficient markets. Is it possible to tell us what current percentage of your effort is focused on ensuring fair and efficient markets? Is that a possible thing?

Mr Shipton : Can I take that on notice—

Ms KEARNEY: Yes, of course.

Mr Shipton : and see if there's a way of quantifying that? I will make a general observation. Fair and efficient markets is not just an institutional or a wholesale question. The efficiency of the entire market system, the underlying market system, is fundamentally important to the operation of the entire financial system. So whilst it may have at first glance a note or connote the wholesale and the institutional, everything is ultimately retail. I think the bank bill swap rate case indicates that. That is a matter that you could sort of categorise as a fair and efficient markets issue, but it affects every single loan. It affects interest rates. Of course, we all know that interest rates are a key point of focus for households. But we will take that on notice and try and give you some more precise numbers.

Ms KEARNEY: That would be helpful. You answered a couple of my questions by those comments, so thank you. Do you think there need to be any significant legislative and regulatory changes regarding your role in managing efficient markets? Are you happy with that?

Mr Shipton : I will ask Commissioner Armour to supplement on this. Again, there are a range of areas that have been underway whereby our penalties and our ability to enforce in the market space have improved. As I understand it, if we were to take the BBSW cases now under different facts and now new laws, it would be a different proceeding. But I'll hand over to Ms Armour because she has responsibility in this area.

Ms Armour : There have been a number of recent changes that have really assisted us in achieving our outcomes. For example, parliament introduced some reforms on client moneys, which means that market intermediaries have to hold and use client money for their client's purpose rather than using it. In the past, it was permitted to use it for working capital.


Ms Armour : There have been changes to the market licensing regime to now allow ASIC to regulate that in a much more nimble way that reflects different sorts of markets that are developing, especially with technology. They've been positive. Obviously the benchmark reforms have been very positive. There are long-running issues which we would love to have a broader discussion about adjusting. For example, I'm not sure of the exact number, but there have been numerous inquiries about aspects of the insider trading laws which would be terrific to fix. But they have been on the agenda for a long time.

Ms KEARNEY: A long time.

Ms Armour : The key initiatives in the market space that we're focusing on now are the resolution regime for financial market infrastructure. In several clearing houses internationally, as part of the G20 reforms after the global financial crisis, a whole regulatory regime was put in place to deal with the massive derivatives markets and their impact across the world. Part of this regime was dealing with clearing houses and having a resolution regime for clearing houses. The Council of Financial Regulators is working on proposals which will come through government to the parliament to put in place that regime. So that's a key one. Another one that is very key and topical in Australia is the competition regime for clearing and settling, particularly in listed equities. At the moment, we have one clearing and settlement system and that is managed by the ASX. Any trading market has to use that clearing and settlement facility. The question is: what should be the expectations of that clearing and settlement facility? When that facility moves to a new technology, which replaces the existing technology, which is a distributed ledger technology, what should be the rules about access to that system for all the people who need access to information about equities trading and settling? So that's another area that is key on the legislative agenda.

Ms KEARNEY: Have there been some issues with that?

Ms Armour : There have been issues in the sense that there's a degree of interest in the area. There will be some participants—I use the term 'participants' broadly—in the broader market who may take issue with the amount of fees they are paying for the service and those sorts of things. The ASX is a vertically integrated group so there are also some competitive concerns about protecting intellectual property on innovations that other exchanges may be developing. We've worked through mechanisms to try to address those sorts of things, but it is an issue that we've consulted broadly on. There will be legislation come to parliament probably in the next 12 months or so that affects that. Treasury will have better timing on that. But that is an issue.

Mr Price : I will add one other item just very quickly. I'm not suggesting it needs legislative change. But the issue of directors taking margin loans from time to time comes up as a topical issue. I think it is worthwhile listed companies thinking very carefully about when that's permitted and the rules that surround that.

Ms KEARNEY: Have we seen any similar behaviours between what we've seen in the banking sector that is coming out of the royal commission and in this other area of intermediaries and brokers?

Ms Armour : Questions of conduct—


Ms Armour : and the culture have been writ large in this area. In many respects, a lot of the discussion about culture has really—

Ms KEARNEY: Grown out of this?

Ms Armour : grown out of the post global financial crisis world. Yes, we are seeing that. We have conducted a number of reviews. We put out the results of our inquiry into activities in the foreign exchange market, I think, in 2016, but we can correct the date. What we were finding was these typical cultural issues and non-observance of the rules that are key.

Ms KEARNEY: Did you take anyone on for that?

Ms Armour : Well, we did. We had five enforceable undertakings. The largest five financial institutions are under ASIC's supervision on their foreign exchange businesses at the moment. We did take the BBSW matter. When we found they were settled, we were the only regulator internationally that had taken on banks in contested court matters on that issue, on misconduct in connection with benchmarks.

Ms KEARNEY: Do you anticipate that it will come up in the royal commission, or has it come up?

Ms Armour : I'm not aware that it has come up. I think the royal commission, on their timetable, have looked at the specific products they were going to look at, so it hasn't come up.

Ms KEARNEY: Have there been any prosecutions?

Ms Armour : No. In the cases we investigated, we found grounds for taking civil penalties. We didn't find grounds for taking any criminal action.

Mr Shipton : I think I will supplement. The very good work that Ms Armour led with her colleagues in relation to the bank bill swap rate and others does clearly indicate our willingness to take on the big financial institutions. The question before us, which is a real question that we are acting upon, is how we can take that resolve and apply it to other sections and areas of large financial institutions for meaningful change in other areas of those financial institutions.

Ms KEARNEY: So does there need to be a beef-up of penalties and consequences in this area the same as what you're looking at for—

Ms Armour : There will be a beefing up. It's not as acute as the issues that we've talked about in the other areas. For example, the penalties for 912A and the penalties for things like unconscionable conduct are just as valid in this space. There's bound to be unconscionable conduct. One of the questions that I hear in the press commentary is ASIC shouldn't have these particular protections that are considered consumer protections. They should be exercised by some other regulator. But actually these protections are critical for our work, whether it's in the direct retail sector or in the market sector. They are about protecting Australians and the Australian system from poor conduct. They are absolutely critical for us to do all of our work.

Ms KEARNEY: Thank you, Senator.

ACTING CHAIR: Thank you, Ms Kearney. Who would like to ask some questions? Senator Hume?

Senator HUME: I have lots of questions, but I realise we've only got five minutes to the break, Chair. Can I ask, with the agreement, obviously, of senators and members, the secretariat and witnesses, whether potentially we could shorten the lunch break from one hour down to maybe three quarters of an hour, if you wanted to finish a bit earlier today?

ACTING CHAIR: Is everyone happy with that? If we break now and return at 12.45 pm, would everyone be happy with that?

Mr Shipton : We are at your service.

ACTING CHAIR: It's thrilling to hear that. Well, if that's the case, we'll break for lunch now and we'll resume at 12.45 pm. Thanks, everyone.

Proceedings suspended from 11:53 to 12:45

ACTING CHAIR: We will resume with the committee. Mr Shipton, you would like to make a comment about some report in the media or something?

Mr Shipton : Well, thanks, Senator. It's come to my attention—I haven't been able to digest the full report—that there are some media reports suggesting that somehow our comments this morning have been critical of the government or, indeed, the parliament in relation to getting legislation passed. I do want to clarify that our comments are not criticising anybody. Our comments are all about imploring—I have used that word, and I think a couple of my colleagues have—the parliament as soon as practicable, as I think I said, to pass these important pieces of legislation. The message that we are sending, which is a critical message, is that these are important legislative reforms. We support them. We have constructive engagements with the government. We have constructive engagements with committees like this. We have constructive engagements with senators and members of the House of Representatives. We want to continue that constructive engagement. We did want to today just underlie the importance of these legislative reforms. It is not a criticism. It is just underlining and reinforcing the importance of these reforms, which we very much look forward to.

ACTING CHAIR: Thank you. I can't read everyone's mind. I couldn't see anyone in this building opposing ASIC being given more power and more punishment, given the royal commission. Mr Crennan, you want to correct something?

Mr Crennan : Yes. It relates to the same matter. Thanks for the opportunity. I agree wholeheartedly with Mr Shipton about what he has expressed. There are two corrections. First of all, section 912D(1)(b), which I was answering some questions about, is the obligation to report a breach at least within 10 days.

ACTING CHAIR: That's right.

Mr Crennan : That applies to banks and others. The term for a contravention is two years imprisonment.

ACTING CHAIR: For that breach?

Mr Crennan : For that breach.

ACTING CHAIR: So you're telling me if someone—

Ms Armour : Will be.

Mr Crennan : Will be. Sorry. Yes, it's part of this new bill. Will be.

ACTING CHAIR: You want to comment about the royal commission and culture?

Mr Crennan : Yes, I will.

ACTING CHAIR: And then I will move to others for questions.

Mr Crennan : I should also say that the consultation period for this bill finished on Wednesday, so we are looking forward to it. In terms of culture—I think it was touched on by Senator Hume earlier—there is a number of criticisms, I think it is fair to say, in the interim report of what could be described as culture. Effectively, it is a preference, or a perceived preference, for negotiation over litigated outcomes. As I think Ms Armour said earlier, we as a commission are all very interested in pursuing litigated outcomes and focusing on litigation. I've taken steps recently to ensure that that direction is followed and understood by the entire organisation. Those steps include the terms of reference, which you have been provided. We did wait for the interim report to land on those terms of reference. We didn't want them to be inconsistent with the interim report, and I don't think they are. On the same day that we finalised the terms of reference, I issued to the senior executive leaders of enforcement—there is a number of different types of senior executive leaders—a number of interim enforcement measure notices. Those notices include direction to the senior executive leaders and their teams. I won't go through all the detail. They effectively direct them that in circumstances where there might be any departure or decision that might depart from what would otherwise be a path to litigation, they must inform me before they make the decision and I will give them effectively a finding on it.

ACTING CHAIR: Let me raise one point. There was a case—I think it might have been the Commonwealth Bank—where they could have faced $2 million for each breach and they paid $300,000 to a charity. Somewhere I was reading about that. Who can refresh my memory?

Mr Crennan : I'm not sure about the exact figures, but there are a number of issues there, obviously.

ACTING CHAIR: Mr Mullaly, are you familiar with what I'm vaguely trying to put forward?

Mr Mullaly : Vaguely familiar. We have had a number of matters, of course, with the Commonwealth Bank and CMLA.

ACTING CHAIR: I apologise if it is not them. That is from memory.

Mr Mullaly : They were resolved by way of an enforceable undertaking of an agreement. I think in the royal commission it's been indicated the potential penalties that might have been imposed if the matters had gone through litigation and compared with community benefit payments. I would say a couple of things about that. We certainly recognise the point that the royal commission is making in its interim report. I think we've talked about that and our approach going forward. It's unlikely, I think, that a court—it's not something that I am aware of—in a civil penalty matter would impose the maximum penalty for each and every breach found. Often the penalties are somewhat short of the maximum. In the matters themselves, we may not be successful.

ACTING CHAIR: That may be the case. I am sorry I don't have full details. It appeared, though it might have been from the royal commission, Commissioner Hayne, that there could have been $2 million for each breach and the total was $300,000 to a charity or community benefit or something, which appeared to be very soft. I think the point you're making is that from now on, there will be no softly, softly approach. Is that right?

Mr Crennan : Well, that is right, Senator. In terms of things like EUs, for example, I've sent out an interim enforcement measure about them. It's not just the amounts that are not going to be soft. Gone are the days where ASIC will allow a person who we perceive to be a perpetrator of a wrong in financial services to be entitled to acknowledge our concerns. We're not here to have concerns. We're here to regulate the law. If they want an EU, they will have to admit that they contravened the law. Even if they do contravene the law, they will be very lucky, in this new world, to get an EU. We are going to be litigation focused. That's what the royal commissioner has told us he expects of us and he perceives the community and the government, perhaps too, expects of us, and that's what we will do.

ACTING CHAIR: So you are putting everyone on notice now that the EU may be an approach of the past but you are saying it's too soft and there will be much more severe action in the future?

Mr Crennan : Well, the royal commissioner himself accepts that negotiated outcomes, if they are in the public interest, are an acceptable way of doing things. Certainly in the history of litigation, you don't take everything to court. You've got to accept that a negotiated outcome might get you a better outcome or at least a much less riskier outcome. In these circumstances, however, the degree of risk is not something that we will take into account perhaps in a way we did once. The appetite for EUs, and certainly any form of EU which contains a mere acknowledgement of our concerns, is far diminished.

ACTING CHAIR: Senator Hume.

Senator HUME: Thank you, Chair. I've got a number of lines of questioning here. I want to be very, very brief on a couple of them. Firstly, I want to follow up on the issue that Mr Kell and I were speaking about in the break, which is the Australian Financial Complaints Authority and the potential that is now going to be available to us for disclosure and more than disclosure of internal dispute resolutions that we haven't had before. For the benefit of Hansard and for other senators and members, can you explain to the committee exactly what that new disclosure is going to be?

Mr Kell : I will pass over to my colleague Greg Kirk in a second. One of the key elements of the reforms to complaints handling that I think has received less attention in the establishment of the new complaints authority is the requirement for all financial services participants or licensees to provide ASIC with their data on their internal dispute resolution and internal complaints handling and that that will be published. That will give, I think, a new level of transparency to consumers, to committees such as yourself and others about what exactly is happening within firms in terms of how they are dealing with consumer complaints. It will give a new level of transparency about whether a firm is out of line with its peers in the industry. I think it will have a potentially quite powerful impact on the way in which firms deal with their customers when something goes wrong. Do you want to note when that is going to commence, Greg?

Mr Kirk : Well, the legislation allow us to collect that information and to publish it. We need to develop a process, and this process has started, and a system whereby firms collect it using the same consistent definitions so the information is reliable and comparable. We have started an engagement process to do that. That won't be easy. I think it is many months work, I would say, to get that right. We think it's worth that effort upfront to make sure that the information is really consistent, reliable and usable. Once that's in place, they have to start providing us the information and we can start publishing.

Senator HUME: So these oversight hearings take place every quarter or so. Do you think if we ask again in six months you will have an update for us as to where we are on that?

Mr Kirk : We'll certainly be advanced on that path. I can't guarantee exactly where we are, but we welcome questions about it.

Senator HUME: I think that could be a game changing exercise.

Mr Kirk : Yes.

Mr Kell : We think it's valuable.

Senator HUME: I want to give all officers, I suppose, a heads-up. I know we have estimates next week. In your opening statement, Mr Shipton, you mentioned right sizing and starting the conversation about right sizing and resourcing. I think that's probably a discussion better suited to estimates than it is to this committee's oversight capacity. I will be asking you some questions about that next week. I thought I would flag that now.

Mr Shipton : Thanks.

Senator HUME: I also want to ask some questions about the terms of reference for the review of ASIC's enforcement policy. Obviously, you have given us the terms of reference. The issue date was just the day before yesterday. Mr Crennan, can you go through the timing of the review and when you expect the review to be done?

Mr Crennan : Yes, certainly. There's a tight timetable. Towards the end of the terms of reference, it was my intention to provide a draft review on 14 December to the commission, having had the opportunity to absorb the content of the policy rounds of the royal commission and then deliver it on 10 January 2019. I will provide it to the royal commission so that they've got it several weeks before they finish their job. I will give them as much time as I can to have a look at what we see internally. It is driven by what is effectively a rather transformative process, where litigation will be the paramount remedy or at least, in most cases, the paramount remedy we would be looking at.

Senator HUME: And this review will have a series of recommendations to government too?

Mr Crennan : No. It will be an internal review with recommendations to us. In terms of what that means for the government, that will be the next step. Obviously the review takes place internally, but there are a number of external factors which are very important, one of which is funding; one of which is tools, though we're getting at least the penalties quite quickly; and one of which is how the court systems are going to cope, be it the Federal Court or a criminal division of the Federal Court. All these matters will have to be addressed and addressed reasonably quickly so that we don't lose the momentum to create a new landscape for enforcement. We do have, as Mr Shipton has said, a very good relationship with those that can effect these external events. I hope to think that by the time we're here next year, it will be a very different and high functioning landscape.

Senator HUME: Thank you.

Mr Crennan : Sorry, I will go on a bit more. Even without those tools, in the near future—that is, two years, because we've got two years of extra funding; I've looked at things basically on a two-year timeframe—and even without the sort of transformative processes, we are already very much litigation focused, with accelerated enforcement outcomes and higher volume. I will give you a couple of examples without revealing anything about their identity. In the next two years, the criminal briefs that we will provide to the CDPP will increase in volume at about 82 per cent over two years. That is an estimation based upon internal work. Next year, we expect that we will give approximately 10 extra criminal briefs to the CDPP. That is on top of the basis for 32 this year. The year after, it will be 14 to 15. So you can see that there is an accelerating and increasing volume over those two years. That obviously has to be paid for. In terms of civil penalty proceedings, which is our other focus, that will increase by 21 next year and then 21 the year after. So that's 21 extra civil penalty proceedings next year and then the next year. So those volume numbers are very significant for us as an organisation. We will have to fund that, obviously. But we're putting in place the enforcement focus and a litigation focus. Everything is going to have to fit in around it, basically.

Senator HUME: Thank you. That's very useful. I have two more larger questions, Chair, if you'll indulge me for a moment.

ACTING CHAIR: Of course.

Senator HUME: I would like the commission and the Chair, if possible, to turn their minds to potential unintended consequences of some of the reactions we are now having particularly to the royal commission. Obviously the government had put into place a number of legislative changes. There are things like the BEAR and the Australian Financial Complaints Authority. Those sorts of things were well underway before the royal commission began. Obviously, the royal commission has revealed some extraordinarily unscrupulous behaviour. Already when we are seeing a focus on the need for increased compliance, we are seeing credit tightening, which is one of my concerns in this potential threat to the economy. It is necessary and in some places certainly, but I just wonder whether maybe we overstep the mark.

One of the criticisms of the BEAR, I think, and potentially some of the new penalties that you have spoken of today, is that it would be a pretty brave person to become a banker these days. These are very big organisations. Sometimes you don't have eyes across all of the moving parts. The big banks employ over 150,000 Australians. I used to be one of them myself. I am a banker turned politician. If I just sold fake watches out of my coat, I would be the least trusted and most hated person in the country. You don't want to tar all employees with the same brush.

Mr Crennan : Of course.

Senator HUME: There are a lot of very good people who work for these organisations. There are significant risks to employment now in working for a big bank or an iconic organisation. There are also new risks to investors who have trusted their investments in banks and the dividends that they get from them for decades. Is that something that ASIC potentially has turned its mind to—whether there is a potential for overreach in response to royal commission's, government's or public expectations that could have unintended consequences, be it for the markets, the economy or employment?

Mr Shipton : Senator, thank you for that question. Unintended consequences are, of course, issues that we are trying to think through with any regulatory measure. We would like to contribute to the discussion because some of the issues that you point out are not just ones for ASIC but are policy questions for government. They are policy and potentially legislative questions for members of parliament and senators. We will contribute to that debate and that conversation. A good policymaker and a good regulator is always attuned to the potential unintended consequences. I think the issues that you raise are fair and reasonable ones and certainly ones that are in my mind when we think through next steps. One point that you mention is the potential regulatory consequences of being in a financial institution. We would like to think, and the way we are working, is that there is an alignment between the accountability that is expected of a financial professional and the fact that that person is a professional. I've said before this committee and publicly that I think that's part of the great challenge. If we can raise the levels of professionalism in finance, then we will go a long way to increase the levels of trust and the accountability almost organically.

I suggested to many leaders in finance that they need to learn from other industries, other professions and other areas. For instance, I often think—and I've said this to CEOs of financial institutions—they should learn from the medical profession. They should learn from the profession of nurses and doctors that we can cross-fertilise. We ourselves as a regulator are learning about regulatory practices in other areas. I'm getting off topic a bit except to say that these are important considerations. Yes, all of us need to have these issues in mind. But we need more levels of professionalism in finance. We need to get to a point in time whereby the men and women in finance and the people who interact with finance, which is every adult Australian, looks to that profession as a noble one, a noble profession that does and should serve the community, because that is what finance is all about.

Senator HUME: Very good. Thank you.

Mr VAN MANEN: That is a very interesting answer. I was going to ask a question off the back. Do we have organisations that have become too big to regulate properly? Your analogy is with the medical profession. You can look at accountants or the legal profession. There are very few in that space who are large, integrated organisations. In the medical profession, you have people doing general practice, specialist services or whatever. Does it raise the question—this goes back to our earlier discussion about the structural organisation of the industry—whether some components of those big financial institutions arguably could be or should be hived off into separate entities? Should their core function of banking for the public at large be a separate function from stuff they do in institutional banking, merchant banking and that sort of space?

Mr Shipton : The issue that you raise has also been raised in the interim report of the royal commission and has been a conversation that has been around financial regulation and financial system policy for quite some time. There are examples in the United States and Europe where this has happened—where there is some structural separation of functions in financial institutions. At this point in time, that's not an area of focus. At this point of time, going back to your important structural question—and it ties into what Senator Hume was asking—how can we make the current regulatory system and the financial system work better? You are absolutely right; it's not a like-to-like comparison between the medical or nursing profession and finance. But what other professions have is bodies and a culture whereby there is a degree of making sure that people within the industry adhere to basic values. I am actually avoiding the expression 'self-regulation' because it's not so much self-regulation; it's just basic minimum standards that men and women in an industry or in a profession expect of each other. That's what we need to see more of in finance. We need to see financiers saying to each other, 'No. We should have been expecting more of each other.'

The other structural point, which I have said earlier and is really important, is that the Australian regulatory setting does rely on that cornerstone obligation on financial institutions—that 912A obligation, or frontline compliance function. That has failed. We have to make that work again. We are going to deploy enforcement tools. We are going to deploy supervisory tools. We can do all of that. At the end of the day, the behaviour has to change inside financial institutions. They are the ones who have to take ultimate responsibility for their 912A obligations. We will make it crystal clear that they need to. We will enforce it when they don't. At the end of the day, they are the ones who have to make the change. So that's a long-winded way of saying that our focus right now, with the powers and penalties that parliament will hopefully pass very shortly, is making the current regulatory system work better so that it is safer and serving our communities better.

Mr Kell : I will add one small point there. The medical profession is an interesting analogy; you are right. The medical professionals—the doctors—don't work for large companies, by and large. The people who manufacture the drugs are generally large multinational firms. However, those drugs, before they are released on to the market, are subject to a testing regime that is very rigorous either here or in the US and what not. We have not had something that is an analogy to that in the finance sector. You have had products that have been able to be released on to the market without any sort of testing or thinking at all. Hopefully, the design and distribution obligation will begin to correct that and we will require much more accountability around the design of those products before they get on to the market, which is what happens more often in somewhere like the medical area.

Senator HUME: This is my final question. I promise that I will turn over to other senators and members. It is about financial capability and, specifically, ASIC's MoneySmart program. I have been doing a bit of work lately in the domestic violence space. The correlation of domestic violence and economic abuse in particular is very high. I know that the MoneySmart program is terrific. I have had a good look at it over a number of years. It has been developing very well. I wonder how potentially we could use that to enhance women's financial capability above and beyond anything else? It's my belief, and academic analysis plays this out, that financial capability is one of the great preventers of domestic violence.

Mr Shipton : Thank you very much, Senator. I want to thank you for being such a great advocate of this important initiative by us. We are very proud to be the lead government agency when it comes to financial capability. I'm very pleased that our SEL in charge of that, Laura Higgins, is here today. She has joined us at the table. She will take the question. By way of introduction, the issue that you raise—financial capability, particularly for females and other segments of society—is an ongoing challenge. I believe that there actually needs to be a whole of financial community effort in relation to this. The undertaking is enormous. We're very proud of our work. There's lots to do. With that, I will hand over to Ms Higgins.

Ms Higgins : Thank you for the question. ASIC's MoneySmart is very aware of the needs that some segments of the Australian population may have. They may be more vulnerable at times. Certainly women fall into that key population group that we look at. We deliver our own initiatives that relate specifically to women. We also work with private government and not-for-profit organisations that are working to empower women to take control of their financial lives. So as part of leading the financial capability strategy, we work with people like WIRE and support and promote their initiatives.

With our own initiatives, what we've delivered recently has been a bit of a win in the Talking Money project, which Cathie Armour wrote about. Her article, like yours, was very well received and generated a lot of discussion. What we do is really offer a starting point, I suppose, for women to build their confidence. We continue to be committed to some research to understand women's particular issues around money. Sometimes absolutely they fall to significant things like financial abuse. Every month there are 1,000 searches for financial abuse. What we find is that MoneySmart consistently comes up three or fifth according to the search engine optimisation. So we continue to meet a need there for the public. We have specific resources that address what to do next with financial abuse. We do send them off to places where they do have the expertise. We have probably received about 20,000 unique visits to that information, and 70 per cent of them have been women. We continue to monitor that to pass that information on to the people who are experts and to be a place for women and for all Australians to come as a starting point to build their financial capability.

Senator HUME: It's good to know that you are conscious of that particular segment and that particular cohort of the market. One of my great concerns is that we've been talking about financial literacy for years, but financial literacy can mean anything from how to calculate compound interest to how you calculate capital gains tax and how a bond is priced. Women don't really need to know that if they're in a situation where they have economic abuse. They need to know how to find the superannuation accounts, how to find their bank accounts, how to access them, what to look for and who to speak to if they are in trouble. Is that the sort of thing that MoneySmart is providing?

Ms Higgins : We do. We do provide that. When women are in crisis, I don't think MoneySmart is necessarily the place they'd go to.

Senator HUME: No.

Ms Higgins : But we do work with those places—places like WIRE—to make sure they have the information that we can give them to improve their services. But we are conscious of what women need to understand when they are in crisis. If they are thinking about, say, leaving an abusive relationship, we have information around a checklist of things you might do if you're thinking about separating from a relationship. Again, we know that 70 per cent of users are women who are looking to that. It is a bit of a checklist. It is for action. Open your bank account. Make sure you know the passwords. Take these steps. It is something that they can come back to and that they can email to themselves, should they need to and if that's safe for them to. But we continue to monitor that to see what people are using, to see where they are getting stuck and how we can change it and make it easier. We also do continuous consumer research, including specific groups like women or young people, to see if we are meeting their needs with what we have now and the service we provide and what we can be doing to make that better. There is a huge commitment across the agency to ensure that the information that people need is available on MoneySmart.

Senator HUME: Is MoneySmart branded with ASIC's brand? I think that's so important because there are a number of programs out there but they tend to be associated with a bank or a funds manager or somebody like that that looks like they might be pushing products at the same time. I like the idea that ASIC is seen as a trusted regulator that is providing independent advice, for want of a better expression. I always associate MoneySmart as a standalone brand. Is ASIC associated with it very clearly?

Ms Higgins : It is. When you go to the website, there is ASIC branding. It is branded as ASIC's MoneySmart. But what really resonates with consumers, from our consumer testing, is the government crest. That means something to people. We do know that consumers come to ASIC as a trusted source of information. After the Productivity Commission report came out on superannuation, we had one page that had 600 hits on the Tuesday. The following Tuesday after the report, it was 6,000.

Senator HUME: Wow.

Ms Higgins : So people are coming there as a place to start to get their information. So there is a lot of trust out there for ASIC from consumers.

Senator HUME: Great. Keep up the good work. Thank you.

Ms KEARNEY: It is really fantastic. Thank you, Senator, for drawing our attention to it. One of the really at-risk groups that I've been working with recently is migrant women and newly arrived women, who, again, might be finding themselves in a domestic violence situation or they've arrived not knowing anything about a Western banking system and they've never had to access banks or anything. So language is an issue, as is being able to get translation and access to those organisations that do work with those women. How are those partnerships forged with those organisations like WIRE? How do we access you if they need to? Is there a way that we can get there?

Ms Higgins : I'm happy to give you some more information on how you can pass on our details to work with others. We have a community of practice which meets regularly and continues to grow. It has more than 1,000 members. Most of those members are from not-for-profits doing exactly as you describe. So there's a long history with those groups. We also offer some specific services in language. We have something called a simple money manager, which is set up as a very simple money managing tool offered in nine different languages. It is really aimed at women, because we know from that particular group it's often women who are managing the day-to-day finances. There are challenges there. It is not only offered in language; it's audio as well. If there is any struggle around literacy, it can be addressed in that way. So we are always looking for innovative ways to partner with the people who are at the forefront in dealings with these Australians and adding value where we can.

Ms KEARNEY: Great. I might contact you out of session.

Mr KEOGH: I am sorry I wasn't able to be with you all this morning. Thanks for being with us today. I understand that you are not very well, Mr Shipton, so we'll try to keep this as painless as possible. We have what appears to be a new ASIC. We have a new chair. We have a new deputy chair. I see from my reading of your reports that you have a new font and a new style guide. When did that start?

Mr Shipton : It started a couple of months ago. I hope you are finding our information easier to read. I certainly am.

Mr KEOGH: It is actually much clearer, though the bolding of the opening letter of a paragraph did strike me as interesting. But I'm not going to get into that aspect. I am interested to know, though, whether a consultant was engaged on that project.

Mr Shipton : Yes. There was a consultant engaged.

Mr KEOGH: What was the cost of that?

Mr Shipton : I don't have that to hand.

Ms Armour : We'll have to get you that information.

Mr KEOGH: I will ask you to provide me with that. I would also be interested to know the overall changeover cost in terms of new letterhead, business cards, collateral, updating websites and everything else. I presume that was costed in some regard.

Ms Armour : Yes. We haven't done instant change. Things that cost money to change—for example, livery at offices—we haven't changed. We're going to wait until either the lease has run out or we move to a new office and those sorts of things. My business card hasn't changed because I'm running through the current cards.

Mr KEOGH: Well, I'm very glad to hear that.

Ms Armour : We are not adding cost.

Mr KEOGH: Could you provide the detail of the cost?

Ms Armour : Yes.

Mr Shipton : Delighted to.

Mr KEOGH: Excellent. Thank you very much for that. Mr Crennan, this may have come up in an opening statement, so my apologies. When you were discussing the review, you mentioned something about a direction that you had already issued in respect of enforceable undertakings. It's internal. I want a bit of detail around what that instrument is.

Mr Crennan : Yes.

Mr KEOGH: Is that a publicly available instrument?

Mr Crennan : No. It's not an instrument. It's an internal direction or policy which we discussed at commission level. Given that we've got the terms of reference, so they are out, the review does have to take place, so nothing is finalised and we don't have any recommendations yet. Our anticipation is that we share this view that we will be moving to a litigation focused ASIC in accordance with the interim report. I think our shared view is that that is appropriate, particularly given what Mr Shipton said earlier about the failures and the failed model. Those policies are intended to form an interim measure whereby there will be reporting up to commission level of any step or decision that is being contemplated within the various enforcement arms of ASIC so that there can be direct supervision by me or another commissioner before any significant step or any step is taken. It's only about certain things. It's not every single step. That would kill me. It's things like departing from litigation path. When you are traveling towards litigation, you take a step away from it or something like that. We go and explore, obviously, how this operates.

We did the terms of reference, I think, on Wednesday morning. We issued these policy documents later on that night to the senior executive leaders. They will then be posted around on the various things that they can look at. So it is a work in progress, but the intention is—I'm not sure if you were here when we were discussing timing—our final report is on 10 January. We want to have an interim measure whereby we, in an anticipatory way, conduct ourselves in a way that will be consistent with what I more or less know will be the findings.

Mr KEOGH: That's fine. That's good. Once the review is finalised, is that a purely internal policy document or does it end up manifesting itself into an external document such as your current enforcement guideline process or whatever?

Mr Crennan : What it will do is a number of things. It will effect a change of a number of the policies. It will affect things like manuals and so on. There will be a whole lot of amendments that will populate various different documents which we have.

Mr KEOGH: In terms of an internal manual?

Mr Crennan : That's right. It's our intention to provide this to the royal commission.

Mr Kell : Some of those will be public. The public component of our enforcement policy will reflect this. You don't tell them everything.

Mr KEOGH: No. I understand that. Thank you for that. You also referenced in one of your previous answers just when I was coming in the concept of a criminal jurisdiction in the Federal Court.

Mr Crennan : Yes. That's not part of this policy. I was talking in a more broad, conceptual way about—

Mr KEOGH: Do you think that may be something that comes out of the royal commission as a separate issue?

Mr Crennan : I don't have any idea. I don't. I've read the paper by Justice Weinberg that he delivered last year. I also read the paper advocating for a federal criminal jurisdiction. I've also read the paper by Justice Michelle Gordon in the Federal Court, as she then was, in 2009. That was about the introduction of the cartel criminal jurisdiction.

Mr KEOGH: Yes.

Mr Crennan : She made a very interesting observation, which you, being Western Australian, would be aware of. The committal system in Western Australia has been very different from the rest of Australia for quite a long time.

Mr KEOGH: Yes.

Mr Crennan : Sydney has recently developed—and I think someone in our organisation called it WA 2.0—a similar committal system. There is a very heterogeneous committal system. That's just something I know about as a former barrister, although not necessarily a criminal barrister. If there are steps to be taken to form an external architecture that can cope with large amounts of litigation coming out of our organisation, that's certainly one option. One thing that concerns me—

Mr KEOGH: And it's probably useful to note the discrepancies and disclosure obligations that appear between jurisdictions as well.

Mr Crennan : Yes.

Mr KEOGH: Which have been known to trip up yours and other Commonwealth agencies.

Mr Crennan : Yes. Exactly. So it's not something that we have full control over.

Mr KEOGH: No. Other than what we are in government for.

Mr Crennan : Yes. But we are acutely aware that all the steps we take to change our organisation have to be complemented by either the CDPP or the external other things we deal with, which is obviously particularly courts.

Mr KEOGH: Flowing on from that, is something that you have looked at or are looking at in the future the concept of a Commonwealth sentencing regime?

Mr Crennan : Well, it's certainly something that should be contemplated. One of the problems that will be raised is that ASIC and other organisations rely both on state code and our own criminal contraventions. If there is a federal code, that would be a good start. I'm not a criminal lawyer, so I'm not an expert in this area, but I'm really—

Mr KEOGH: You're starting to become one, aren't you?

Mr Crennan : Well, yes. I started at the war crimes tribunal, so I have been involved. What I mean is that I don't know as much as perhaps others about criminal rules of procedure and practices and so on. But I perceive that any steps taken towards homogenisation of them on a federal basis will greatly assist our organisation regulating through the criminal pathway.

Mr KEOGH: Thanks. The issue of enforceable undertakings, which you mentioned had come up before, was also raised in some of the Economics committee hearings with the bank CEOs. In particular, I believe the Commonwealth Bank was asked about a $3 million payment for financial literacy in respect of the $90 million of overpayments which they had to repay. That's three per cent, roughly, of the profit that they would have otherwise made. An issue also arose as to how that quantum was arrived at. It was suggested by the bank that they asked for less than that amount but also that ASIC had initially sought a higher amount and that that $3 million was then the agreed amount. I'm interested to know why it is that, in circumstances where clearly at the very least ASIC had concerns about the conduct in that case and there was a decision that repayments had to be made—there must have been a breach—there would be any acquiescence to a lesser amount?

Mr Crennan : I'm probably not the best person to ask that question.

Mr KEOGH: I'm happy for anyone who knows the answer to that question to respond. I take on the point that you are saying—that the approach is now changing—but I still want to understand why the approach was as it was.

Mr Mullaly : Mr Keogh, as you are aware, we have had a lot of investigations, and continue to have a lot of investigations, in relation to fees for no service. The EU with the Commonwealth Bank that you're referring to is in relation to that. I should say that community benefit payments of this nature are not proxies for penalties.

Mr KEOGH: Well, they sort of are, actually, aren't they, because you've decided to not proceed in enforcement? So they are actually a proxy for penalty.

Mr Mullaly : Well, they are not calculated by simple reference to penalty. We see them more in the nature of a community benefit obligation or community obligation under section 12GLA of the ASIC Act. So when we were determining how to respond to this conduct, we considered that a community benefit payment by the Commonwealth Bank and by the ANZ was appropriate. We took into account their cooperation or their involvement with us and how that was demonstrated. We took into account the knowledge in the bank in terms of the actual conduct that was occurring. We took into account their approach to remediation. We took into account the extent of the conduct. The view that we formed, the judgement that we formed, was that a community benefit payment in the amount of approximately $3 million was appropriate.

Mr KEOGH: So clearly you had formed a view that an amount higher than $3 million was the right amount. Then, in the course of the discussions and negotiations of the EU, you agreed on the $3 million amount. What was it that was additional that they were able to put to you that led you to say, 'Oh, yes, actually we should reduce this amount?'

Mr Mullaly : No. I think it's more in terms of a negotiation. So we needed to get to a point. They put to us a figure. We wanted to get to a point higher than that. We went above that and we reached the point that we needed to.

Mr Kell : I should make the point here as well that with enforceable undertakings as they have occurred—not necessarily going forward—in a situation like this, the community benefit payment is not the primary focus. In this case, given the amount of money that was involved in remediation, that was the major focus here. We wanted tens of millions of dollars back into the pockets of the consumers that had been taken from. That was very much our focus.

Mr KEOGH: Look at that example. How would the bank ever avoid being able to say, 'Yes, we're right. We're going to do that?'

Mr Kell : Well, they haven't been able to avoid it. And that's what we're working with the others on.

Mr KEOGH: But there's an implication in what you are saying—that we had to get the bank to agree to repay the $90 million and they wouldn't agree if we made them pay, I don't know, $5 million or $10 million.

Mr Kell : No. I think you are misunderstanding that. These remediation programs are large-scale and complex. How far back in time do they go? What is the range of licences and conduct that they consider? We want that, from ASIC's perspective—and we've been doing a lot of work on this in the past few years—to be as broad as possible. But there still has to be some scope around the remediation program as well. We're now roughly—we're still working this out based on some of the recent announcements by the institutions—up to about $1.4 billion in fees for no service remediation in terms of what is being paid but also what has been estimated. That has been our focus. As we've said in response to the interim report, we want to make sure going forward that we have that focus on not only remediation but also the punitive aspect. We accept the fact that that hasn't been given enough prominence in the past. But that remediation was the focus.

Mr KEOGH: But how do you feel about the timing of this remediation being paid in terms of how long it has taken for this to roll out?

Ms Armour : The enforcement review recommendations and the draft legislation are immensely helpful because we'll be able to give directions about remediation. There's a lot of discussion in very pejorative terms about enforceable undertakings, but they have been the vehicle available to us to try to negotiate a remediation regime. We haven't had that same vehicle. This is in a world where there isn't a pecuniary penalty attaching to a breach of section 912A. So I think that, with a new change, being able to give a direction and impose time and supervision constraints will be immensely helpful to us.

Mr Shipton : So our toolkit will be very different in the very near future.

Mr KEOGH: It sounds like your toolkit has been very lacking in tools for quite some time?

Mr Shipton : Yes.

Mr Kell : Well, a lot of these tools, as you know, or these reforms were very clearly laid out in the financial system inquiry.

Mr KEOGH: Yes. Remind me when that was.

Mr Kell : The final report was 2014, but obviously these take some time to work out. But that's where we're heading, and we're very pleased about that.

Mr Mullaly : Mr Keogh, it might also be instructive to understand that we did reach the point of accepting EUs from ANZ and CBA. In our view, they were well progressed at that time with the remediation as compared to some of their peers. We haven't entered into any enforceable undertakings in relation to those other entities. Indeed, we've commenced proceedings against NAB in respect of concerns about fees for no service. We have a lot more investigations underway in relation to that conduct. So we did take into account the fact that those banks were proceeding in a way that was certainly more advanced than their peers in relation to it. That said, as has been said earlier, we fully accept the sentiments that have been expressed in the interim report of the royal commission about the approach that we've taken. I think it's fairly clear that we're looking to change that and change immediately.

Mr KEOGH: Mr Crennan, you mentioned that there is going to be an 82 per cent increase in the amount of work going from yourself to the Commonwealth DPP.

Mr Crennan : Yes. That's my calculation.

Mr KEOGH: My first question to you is: have you told them that yet?

Mr Crennan : Yes.

Mr KEOGH: To what extent does that involve matters that have arisen through or have been raised in the royal commission, or are these matters that pre-exist that?

Mr Crennan : Many of the matters raised in the royal commission in this area pre-existed or were part of existing investigations. Given that they are criminal matters, I'm not going to descend into any numbers or anything like that. I am not sure, but I think almost all of them were known to ASIC prior to the royal commission. I would have to check, I am sorry. I will take that on notice.

Mr KEOGH: You have said that the Commonwealth DPP is aware of this. What sort of notice are you giving the Commonwealth DPP in terms of the pipeline of work coming from you? Is it, 'We're about to finalise a brief, by way the way, and it will be here next month' or 'Hey, we've actually started a few investigations around this breadth and there's work coming your way?'

Mr Crennan : At my level—

Mr KEOGH: How much notice are you giving them?

Mr Crennan : At my level, I have spoken to the CDPP several times since I've started. We have a senior person at ASIC who is a former CDPP employee. He has a very intensive relationship with them and keeps them updated about all our criminal matters. He has given them data such that, as you would know, being formerly from there, the complexity level can be calculated over the next two years, the number within a range of two or three, and the number per year that we anticipate. It is an imperfect science, but we've done our best. As far as I know, we have a very good information flow. That's what I understand is happening.

Mr Mullaly : I will add to that. In each state, and it works on a state basis for jurisdictional purposes—

Mr KEOGH: Regional liaison.

Mr Mullaly : Regional liaison—there is a liaison meeting every four to six weeks. Some might go out to two months. At that, there's a case report produced. That case report has all the matters that are under investigation at ASIC that might potentially end up in a criminal prosecution. Then it works through those matters that are in assessment with the DPP, those matters that are in some form of committal process or pre-trial, those matters in trial, those matters in appeal phase and those matters that are in arrest warrant phase. So those liaison meetings go through and are part of the process of ensuring that the CDPP is aware of what is coming through. They can make assessments on the timing of those matters. We try to be as precise as we can around when a brief will be delivered. That's important for the resourcing side of the DPP. I can't sit here and say every single matter is on that schedule. We certainly, as enforcement SELs, encourage our people to ensure that they are talking as early as possible to the DPP for both resourcing purposes and so there is an understanding of what the matter is about.

Mr KEOGH: And is that motion also discussed at maybe a slightly higher level at the national liaison meeting?

Mr Mullaly : Not in the same—

Mr KEOGH: Obviously you know within your agency and you're relying on them to feed that information up in their agency?

Mr Mullaly : Well, it's not that same level of detail. But, on a quarterly basis, there is a senior executive level meeting with the DPP. So we run through. That's a lot about policy. But it certainly looks at those matters that are high profile either that we've got under investigation or that are with the DPP and those matters that are perhaps not as progressed as we would have liked. We try to ascertain where the blockages are, what we might need to do from an investigatory point of view or what they might need to do from that prosecution point of view.

Mr KEOGH: With the matters that you would discuss, whether they are at the national or regional level, you mentioned matters that are currently being investigated by ASIC. Will that include matters that may go either way in terms of whether they end up going down a criminal prosecution route or where you may end up wanting to have a discussion about whether civil litigation is the more appropriate pathway?

Mr Mullaly : It should be systems based. So when we set up an investigation on our system, we put down the potential outcomes—civil, criminal, administrative et cetera. The report is generated generally from that system. So if there is the potential for a criminal outcome, it will be on the report. We can have the discussions about where the evidence is leading us. Is it leading to a criminal outcome? Is it leading to more potentially a civil outcome or no action because there's not sufficient evidence? So we can have that discussion and we encourage our people to do that from an early point.

Mr KEOGH: You mentioned that the quarterly national level meetings are more of a policy discussion. You mentioned issues around civil and criminal matters and, in particular, difficulty with the use of legal provisions. You said that there's a lack of penalties in some areas or that it is difficult to interpret certain provisions of the Corporations Act when slotted in with the criminal code. Are those matters being discussed there?

Mr Mullaly : They can be, yes. A particular issue might be concerns around how we interpret section 912D. That might be the sort of thing that is discussed at that level as well as at lower levels in a practical sense.

Mr KEOGH: You mentioned that blockages might also be discussed. To what extent is resourcing an issue that comes up in respect of blockages?

Mr Mullaly : It comes up at different times because it's never a steady, constant flow. There might be periods of time in which a particular office has a heavy workload or particular types of matters that are more complex. It will be picked up that at that point in time there might be a lack of resources to be able to get to things in a manner we think is appropriate. As a general rule, and particularly over the last couple of years, the manner in which the DPP and ASIC have approached this is to reduce that time lag dramatically. Where we had a concern in relation to matters that were with the DPP, say, for nine months or more, that's dramatically reduced. Now we're looking at matters that are with the DPP for six months or more. The DPP have been able to manage those issues through changes in the way they go about their work more on a national level.

Mr KEOGH: So that improvement has come about through their national practice model?

Mr Mullaly : I think so. Things will always be quicker if we're able to produce a good brief for them. So we need to make sure we're concentrating on our side of the fence there.

Mr KEOGH: I want to ask one more question in this respect. I understand that Mr van Manen has some more questions. The Commonwealth DPP raised with us yesterday that they were having discussions about resourcing with referring agencies. Mr Crennan has just made the observation that there is going to be a significant increase of work coming from ASIC. Is there a live discussion around whether funding from ASIC is used to support the Commonwealth DPP with its increase in work? There is a precedence for that from a number of different agencies through the Commonwealth to part fund the Commonwealth where there's a spike in work? Is that an issue that the Commonwealth would have to raise directly with the Attorney?

Mr Shipton : We are having productive conversations with peer agencies when it comes to funding arrangements. Because they are essentially in train, it would be inappropriate for Mr Crennan, I or others to comment on that except to say they are very constructive conversations.

Mr KEOGH: Is it your view that the industry funding model that applies to ASIC—the funding that is collected by ASIC—could support operational work undertaken by the Commonwealth DPP as the outworkings of your work?

Mr Shipton : That's a separate question. As I understand, there are a number of different potential sources for funding. I know there are different sources of funding for our enforcement work. Firstly, there is industry funding, which is our base funding moving forward, and then the enforcement special account, which is separately funded. It's still industry funded but it's a separate bucket.

Mr KEOGH: Yes. Go on.

Mr Shipton : This is where my understanding comes. There are restrictions on our ability to utilise our enforcement special account for other agencies.

Mr KEOGH: I'm interested in non-special account industry funding that ASIC receives. Can it reappropriate it across to another Commonwealth agency for matters?

Ms Armour : I believe industry funding is to recover the appropriation made to us. So the question, I guess, would be whether it was proper and appropriate for us to effectively hire—

Mr KEOGH: I'm not trying to ask a tricky question.

Ms Armour : I know.

Mr KEOGH: I just want to know how you people work.

Ms Armour : But I think that's where you end up in that.


Mr KEOGH: Quite possibly. Thank you for that answer.

ACTING CHAIR: I said one more question. I've counted three you've asked.

Mr KEOGH: We have had multiple subparagraphs. Thank you, Chair.

ACTING CHAIR: Mr van Manen, you have the call.

Mr Shipton : I think we have the ability to give a definitive answer to that last question. We have with us Carlos Iglesias, who is our chief operating officer.

Mr KEOGH: That would be most helpful.

Mr Shipton : With your indulgence, Mr Chairman.


Mr Iglesias : In the interests of keeping the answers short, the answer is no. The money that we recover in the industry funding model is the money that is appropriated to us through appropriation bills No. 1 and No. 2. We can't transfer that money to another agency.

Mr KEOGH: To another agency?

Mr Iglesias : To another agency.

Mr KEOGH: Even if it's within your purposes?

Mr Iglesias : If it's within our purpose. But it would also be in a different portfolio. They are in A-Gs. We're in Treasury. So that adds another issue.

Mr KEOGH: Thank you for clarifying that. That's great.

ACTING CHAIR: Mr van Manen.

Mr VAN MANEN: Thank you, Chair. Firstly, I'd like to go back to Senator Hume's question around financial matters and, in particular, the MoneySmart website and the discussion around superannuation. One area with respect to superannuation I don't think gets a lot of attention. I think it can be, and probably has been, a major source of concern for people, particularly in situations of marriage breakdown or, more importantly, if people have had a marriage breakdown and moved on to another relationship and not updated or dealt with it. It is the issue of superannuation beneficiaries. As a matter of interest, I've just done a quick search on your MoneySmart website. Whilst it has an enormous amount of very good information to do with super, it has one line to do with superannuation beneficiaries and nothing else.

Mr Kell : That's a challenge.

Ms Higgins : Indeed.

Mr Kell : Sorry, Ms Higgins.

Ms Higgins : That's all right. I think that the superannuation messages are complex. We're actually working very closely with Jane's team to update those to make sure we are speaking the language that resonates with consumers in trying to get some consistency in that space. It is an interesting bit of superannuation that comes up quite regularly in our discussions with women and how they manage that. Far too many women are willing to kind of walk away and not have that conversation about superannuation. So in our recent project of women talking money, we sat down and talked to people like Jane Caro and Kate Ritchie; we talked to some well-known Australians about their own personal stories with money. Jane Caro spoke a lot about superannuation and women speaking up about that and understanding their super. MoneySmart cannot give you all of the answers that might address your personal circumstances.

Mr VAN MANEN: No. I understand that.

Ms Higgins : But it is that place to start. What we really want to do is make sure we have people asking the right questions about their superannuation. But we will look to that and see if there is something else we should be doing.

Mr Kell : I think we can make a commitment to get another section on beneficiaries up there. As you would well know, Mr van Manen, if something goes wrong in that area, it can get very messy and very difficult.

Mr VAN MANEN: And for both types of beneficiaries—your normal standard beneficiary and binding death nominations, which is another piece.

Mr Kell : It's a very good call. I don't want to encourage you to keep strolling through the website, but I'm very happy to take that on.

Ms Higgins : Absolutely.

Mr VAN MANEN: I will move on to another of my favourite areas—life insurance. In a previous answer discussing banks and the importance of having reliable and comparable information, I believe that ASIC, from previous testimony, is doing some work on the veracity and consistency of the life insurance claims process. Could you please update the committee on where you're at with that particular piece of work?

Mr Kell : We're about to provide a major update with APRA. We might be breaking news here.

Mr Saadat : ASIC and APRA will be shortly issuing a media release to update the public on the progress of that work. The short answer is that APRA is finalising the binding standard which will apply to life insurers as part of the data collection that will become mandatory under the reporting regime. As part of the reporting regime, it has been decided that the information about claims handling will be made public and will be public according to insurers. So it won't be industry aggregated only. It will also identify the insurers and the relevant claims and statistics around the insurers.

Mr VAN MANEN: So it's effectively getting the same treatment as the internal complaints resolution process?

Mr Kell : A bit like that, yes.

Mr Saadat : So that standard will be finalised very shortly. The media release will go out, I think, next week. The public reporting regime looks like it will start next year.

Mr Kell : It would be at the risk of stepping into my fellow regulator APRA's territory, it might be a good thing to discuss with them at estimates. Obviously, there has been a lot of work behind the scenes here. But we're pretty pleased at the way that's now coming along.

Mr VAN MANEN: Being a member of the House of Representatives, I don't have the pleasure of Senate estimates.

ACTING CHAIR: We'll be there until 11 o'clock at night. They will be knocked off by then.

Mr KEOGH: Oh, I wish I could come.

Mr VAN MANEN: I have one final question, if I may. I note from your enforcement outcomes report that you gave us earlier today that you have had 400 plus company directors disqualified or removed from directing companies since 2011. Can you provide us with any information as to what number of infractions or otherwise were incurred by those directors prior to them being disqualified or banned? The second part of that question is: how are these people now policed to ensure compliance, including through their involvement in companies through related parties?

Mr Price : We'll take that on notice. One thing I can perhaps address now is that one of the difficulties we have in terms of dealing with people's previous infractions of other legislation is there is no single national register of breaches of the laws that might be attributed to particular people. That is quite relevant to us. For example, there is a provision in the Corporations Act that allows for automatic disqualification of a company director in the event they've been convicted of a serious offence relating to dishonesty. So that is a challenge for us. But let us take your question on notice and we'll come back with a more complete answer.

ACTING CHAIR: Thanks, Mr Price.

Mr VAN MANEN: I want to ask a supplementary question. It brings me to a topic that I know we've discussed before, and that is the issue of director identification numbers.

Mr Price : Yes.

Mr VAN MANEN: And the identification of directors. It's my understanding that you don't need to produce 100 points identification to become director of a company.

Mr Price : Correct.

Mr VAN MANEN: Yet for virtually everything else in life you do. Where is that piece of work at?

Mr Price : Treasury are consulting on those measures at the moment as part of the modernising registers work that is going on. We strongly support the concept of a director identification number. We think that would be a good idea. I should add, though, that it will not necessarily address the problem that I mentioned because many of the offences that people might be convicted of are state offences. You still run into the same problem around there being no central register that someone might be able to refer to to work out whether the John Price who has been convicted of an offence is the same John Price who is appearing here today. I hasten to add he's not, but that's the issue.

Mr VAN MANEN: I'm pleased to hear that.

ACTING CHAIR: Would you like a second supplementary, Mr van Manen?

Ms KEARNEY: 'We are looking at that'; is that what you are saying?

Mr Price : We are supporting the idea of a director identification number. On the broader issue about a register of who has been convicted of particular offences, I'm not aware that is being progressed. It would need to be progressed with the input of the states as well.

Ms KEARNEY: With the states. Okay.

Mr Price : Because a lot of these offences are state based.

Mr KEOGH: To follow up on that point: is there someone or persons within ASIC who do check the various state criminal record registers against the list of directors that you hold? How does it come to ASIC's attention?

Mr Price : We have had a thematic process recently where in Queensland—Mr Day can speak to this a bit further—we had a look at various people in prison. We referenced those names against our company register and did some cross-matching. There were some interesting hits. Where we found those hits, we did progress with them. In some cases, people have been removed as company directors as a result.

ACTING CHAIR: You have the call, Mr Keogh.

Mr KEOGH: Thank you very much, Chair.

ACTING CHAIR: You have the last lot of questions. We're all finished. When you finish, we're going.

Mr KEOGH: Happy day. Mr Price, there is an implication in what you've just said that suggests that there is no systemic way that ASIC currently enforces the law around it being unlawful to be a company director if you commit a serious offence.

Mr Price : Well, as I say—

Mr KEOGH: I get the difficulty, but—

Mr Price : The company registration system at the moment is just that—it is a registration system. It's not a checking system. As I've indicated, there is no central register of people who have been deregistered.

Mr KEOGH: But even with the eight registers that currently exist, or nine?

Mr Day : Which aren't very good.

Mr KEOGH: I'm not going to have a crack at the state police force.

Mr Day : But the way you're asking the question, it is as if it's our fault. I want to be really clear about that.

Mr KEOGH: Well, it is.

Mr Day : No, it's not.

ACTING CHAIR: Hold everything. One at a time. You have the call, Mr Day. We're not in the chamber now.

Mr Day : I don't know that I could get the call, but I will take it.

Mr KEOGH: You made the point about whether it is your fault.

ACTING CHAIR: Hold everything.

Mr KEOGH: I want to clarify the point.

ACTING CHAIR: You need clarification.

Mr KEOGH: Am I making it your fault? No. You are the one responsible for enforcing that part of the law. I get the difficulty that there's no central register. Any individual can go and apply for a national police certificate. That service will tell me all the offences that an individual has been convicted of in Australia.

Mr Price : Yes.

Mr KEOGH: So there's clearly a mechanism of accessing all the criminal records.

Mr Price : Yes.

Mr KEOGH: So my question is—

Ms Armour : But they want a realistic one.

ACTING CHAIR: Hold everything. Who is your question to?

Mr KEOGH: Whoever within ASIC is appropriate. Is ASIC enforcing that part of the law in a systemic way or is it reliant on others drawing it to ASIC's attention?

ACTING CHAIR: Commissioner Price?

Mr Price : I will start off. Then I'm sure Mr Day may have some further comments. In some ways, this conversation reminds me of a key thing that has come out of the interim report into the royal commission. The primary role for complying with the law does not sit with the regulator.

Mr KEOGH: I didn't say it was.

Mr Price : I just want to be quite clear at that point. It sits with the people on whom the obligation falls.

Mr KEOGH: And Mr Shipton was very clear about that in his remarks earlier.

Mr Price : That's right. The same applies for company directors. There is then a question about what level of checking and by what means of checking does a regulator follow through and look at those particular issues. What we've said today is that there are various issues that mean a systemic level of checking right across the board is actually not something that would be able to achieve the outcomes that I think parliament is trying to get. So we try to use measures in a targeted, risk effective way to do the best we can in the situation we have. In the case that—

Mr KEOGH: And that would be improved if there were other changes?

Mr Price : Of course. In the case that Mr Day was mentioning, what we have decided to do is some sort of thematic searches, where we'll have a look at people who are detained at Her Majesty's pleasure. We'll run cross-checks against our registry. We've done that in the case of Queensland. It has yielded some results, including some people who purport to be company directors who appear to be members of outlaw motorcycle gangs. So you can expect us doing some further work in that area. But the fundamental point still remains at the start, I think. The frontline legal obligation can't be on the regulator. Otherwise, what you are doing is nationalising whatever you're talking about. The frontline—

Mr KEOGH: No. But, equally, I'm not going to rely on it.

ACTING CHAIR: Mr Keogh, let Mr Price finish, please.

Mr Price : The frontline regulation must fall on the people to whom the obligation applies. Obviously, we'll be—

Mr KEOGH: The frontline compliance—

ACTING CHAIR: Mr Keogh, let Mr Price finish, please.

Mr KEOGH: Well, no.

ACTING CHAIR: No. Hold everything. One at a time. We're not in the House now. We're under Senate rules. Continue, Mr Price.

Ms KEARNEY: They're so nice in the Senate.

Mr Price : Obviously we'll do whatever we can within the resourcing envelope we've got. That includes people and powers to achieve what parliament is trying to achieve.

Mr KEOGH: Mr Price, you made the point that the frontline regulatory response is with the individual. I think you mean frontline compliance is with the individual. You are the frontline regulator.

Mr Price : Well, frontline regulatory compliance, if I can respond.

Mr Day : The frontline responsibility.

Mr KEOGH: Yes, absolutely. Mr Day?

Mr Day : I will add some comments to Mr Price's. As he said, if a director identification number comes in so we can be certain that the person in front of us requesting to be a director is that person—at the moment, we can't have as much certainty as we would like—that facilitates us checking everybody.

Mr KEOGH: Yes.

Mr Day : We check, obviously, against our own disqualifications. So we will check anyone who has been disqualified by ASIC. The other thing I would add, just to clarify something Mr Price said, is that there is work on the go at the moment done between the ACIC, which I still refer to as the Crime Commission, the AFP and other agencies to bring together a database of that.

Mr KEOGH: Okay.

Mr Day : We are supporting that. ASIC's work is supporting that. They are very excited about a director identification number because suddenly we will see all these people who should not be directors, as Mr Price said, have automatic disqualification. So there is work there. We know that will benefit. As Mr Price said, we have had a program in Queensland that produced some very interesting results. We're about to roll that out again, I think, in Western Australia. We're in discussions with Victorian police as well. We're moving through all the states on that as well.

Mr KEOGH: Thank you.

ACTING CHAIR: Mr Keogh, can Mr van Manen ask a supplementary on that issue?

Mr VAN MANEN: By extension—this is the second part of my question about related party interactions and relationships with those people who are disqualified—are you able to track that to ensure that those people are not having an influence on companies through third parties or indirectly?

Mr Price : So that's a much more difficult question. I think what you're talking about is what are sometimes referred to as shadow directors—that is, people who are not necessarily on the record but behind the scenes they are directing the will and mind of the company. I think there's a general recognition that the approach that needs to be taken in those cases is one of traditional enforcement. It is very evidence heavy. There's a high degree of evidence that you need to establish that someone is a shadow director. Nonetheless, it is an area of ongoing interest to us. There's a series of examinations in Victoria at the moment involving a fellow called Philip Whiteman. It's looking at some of these exact issues.

Mr KEOGH: I will direct this to Mr Shipton, but I'm happy for anyone to answer the question. Was there anything out of the evidence that the Commonwealth DPP gave yesterday that surprised you?

Mr Shipton : I have not had the ability to look in great detail at the evidence of the Commonwealth DPP. I'm not aware whether my colleagues have. I would be happy to come back to you once I've digested that evidence. Presumably, a supplementary—

Mr KEOGH: Nothing has been brought to your attention?

Mr Shipton : Nothing has been brought to my attention, but presumably you may have a supplementary question that we'd be happy to take if you would indulge us and brief us as to the issue.

Mr KEOGH: I was quite intrigued that Mr Crennan is offering up that there is going to be an 82 per cent increase in workflow.

Mr Crennan : That's my calculation.

Mr KEOGH: Well, that may be, yes, but I did ask them directly about this issue and they didn't seem to have any of that information. But I'm very glad that you've been able to provide it to us. So thank you for that. One observation that has come out of the interim report of the royal commission, made quite early on by the commissioner, is that the issue is not about needing new laws. The issue is about enforcing the law. He is very critical, obviously, about the banks' failure to comply with the law. There is criticism about the approach that regulators have taken. Obviously you're responding to that already. There is one thing that I would like your view on, though. It's one thing for things to be contrary to the existing law. It's another thing to have laws that can be easily enforced. I don't want you to go through every provision in the Corporations Act with us now. I would enjoy that and you would, Daniel, but I don't think everyone else would. As a general proposition, is it an issue that you've been raising with the Commonwealth and others about trying to make the law—I don't mean downgrading things by making criminal sanctions something that you can get a civil penalty for—more crystalline to enforce the criminal law?

Mr Shipton : Without a doubt. Mr Crennan gave some examples—unfortunately, you missed them in the morning session—on exactly this point. We cross-reference Mr Crennan's, I think, excellent explanation using the case study of section 912A and the limited penalties as they stand now—in fact, there are no penalties as they stand now—versus the ability, once the legislation gets through parliament, for that provision to be more effective as regards penalties. The same can be said with legislative proposals in relation to 912D, which is the section relating to breach reporting. Mr Crennan may wish to add other examples. But, yes, we are in active dialogue with members of parliament, senators and the government about how we can actually bring and give effect to the existing body of laws to make that more effective.

I believe that I was remarking this morning that our aim right now is to make the existing body of laws work better. Our aim internally is to make sure that we can enforce and administer—I believe that was a question by Mr van Manen this morning—the current law. Yes, of course, there are areas where we think there could be improvements. I noticed and remarked this morning—I'll quickly recap—that there are proposals in the interim report about potential simplification of the law. That is a conversation worthy to be had. Right now, our proposal, focus and commitment is about enforcing and administering the law as it stands.

Mr KEOGH: I will refer to it as the 912 suite. One of the issues that has been raised with that is that effectively the only mechanism you have there—and it's not properly a penalty—is to cancel the licence.

Mr Shipton : Yes.

Mr KEOGH: Is there a reticence, or have you turned your mind to the provisions around an individual being knowingly involved in a contravention? We see that the licence usually sits with the corporate entity, but there are individuals involved in those contraventions and who usually have a controlling view in those matters. There are accessory provisions. There are some specific accessory provisions in the Corporations Act as well as the general law. One of the big issues that comes out of a lot of the misconduct, and in the royal commission particularly, is that of culture. While culture is a creature of an organisation, it comes from the individuals. There seems to have been a lack of holding individuals and, in particular, senior individuals, to account. Is that something that ASIC have looked at and have a view about?

Mr Shipton : Most certainly that is something—

Mr KEOGH: There are difficulties with that.

Mr Shipton : To start with, there are difficulties, as I understand it, right now with individual accountability. In fact, Senator Hume asked a question from a different angle just before about this. But, without a doubt, we welcome the accountability regime, for instance, that has been recently implemented through the BEAR, the banking accountability regime, and is administered and enforced by APRA. We think that is an excellent set of rules because it places accountability on individuals and makes the connection between individual responsibility and legal responsibility a greater one. So, as a subject matter about individual accountability, yes, that's really important.

I'll make another observation. I've spent the last 25 years living outside the country. The focus on enforcement or the clarion call around enforcement in the jurisdictions that I've worked in and observed outside of Australia has been in relation to holding individuals to account. So my personal regulatory experience is that that is really an important tool because you're absolutely right; we can and will use civil and criminal actions against corporations, but it is an equally important regulatory tool to take it against individuals as well because individuals run companies.

Mr Kell : And we are on the record, to be clear, that the BEAR should be extended at an appropriate time to cover conduct as well as prudential breaches. In other words—

Mr KEOGH: Yes. And all the CEOs and the like have agreed with you.

Mr Kell : Yes.

Mr KEOGH: Thank you for that. Ms Press, welcome.

Ms Press : Thank you.

Mr KEOGH: I have some questions for you. Do you think that payday lenders and consumer leases are presently regulated appropriately?

ACTING CHAIR: You are asking for an opinion, Mr Keogh. You can't ask witnesses for opinions.

Mr KEOGH: I've spent a lot of today asking for opinions.

Mr Kell : ASIC is of the view that it should be reformed in this area, yes.

Mr KEOGH: Yes. The view is that it should be reformed. You're holding that view. What do you see are the consequences of the law continuing to not be reformed?

Mr Saadat : One of the challenges is around the obligations that apply specifically to payday loans. At the moment, there's not a bright-line test that applies when payday loans are provided to consumers. One of the things that we think is important as part of the reform of that industry is the creation of much clearer obligations so that the types of loans that can be provided to those consumers don't end up putting those consumers into a debt spiral.

Mr KEOGH: So the absence of that is creating a situation where consumers are ending up in a debt spiral?

Mr Saadat : That's right. We have at the moment what are known as presumptions of unsuitability, but they are only presumptions. You can counteract or rebut the presumption at the moment if you're a payday lender. The other area that we think is quite important is the regulation of consumer leases.

Mr KEOGH: Yes.

Mr Saadat : And the reforms that have been put forward and consulted upon include additional regulation of that sector as well, which we think is quite important.

Mr KEOGH: Is the lack of change there having a similar effect? Are you seeing similar effects in the market in recent times?

Mr Kell : There is a lot of problems in the consumer lease space; there's no two ways about it. You can see that in our enforcement action.

Mr KEOGH: What is the impact on the consumers themselves as a consequence?

Mr Kell : Effective interest rates of hundreds of per cent being charged for common household goods.

Mr KEOGH: Which, in terms of their financial position generally, I imagine is quite deleterious.

Mr Saadat : They are vulnerable consumers who may not have access to other forms of finance and, therefore, are ending up having to pay significant amounts for those types of products.

Mr KEOGH: So that will be an ongoing problem until this area of regulation is resolved, presumably?

Mr Kell : Well, our view is that there should be a level playing field between the regime for small amount credit—payday loans and consumer leases. Otherwise—

Mr KEOGH: I don't know if that necessarily answered my question.

Mr VAN MANEN: With your enforcement action and enforceable undertakings, which have been a couple of large providers of those products—

Mr Kell : And small. Large and small, here and there, yes.

Mr VAN MANEN: Have you seen any changes in the industry as a result? Have you got any ongoing enforcement actions in place, because they are also caught by the responsible lending guidelines?

Mr Kell : True.

Mr Saadat : We have a number of investigations underway at the moment.

Mr VAN MANEN: Okay. Sorry.

Mr KEOGH: No. That's fine. The other week the Australian Banking Association said that it was looking at amending its banking code apparently to tell banks to not charge dead people fees. What is ASIC's view of the banking code being changed so quickly after you just went through all the work of approving one only months ago?

Mr Saadat : One of the benefits of a code and self-regulation is that it can be more responsive to emerging issues. So, talking more generally, we don't think it's unusual for an industry to want to make changes to the code. We think it's a good thing that the industry is prepared to respond quickly and that the ABA has approached us and asked us to consider the changes. We are in the process of doing that.

Mr Kell : We haven't formed a view on them as yet.

Mr KEOGH: Do you have an idea of how long it will take you? It's not a wholesale change, as I understand it. How long will it take ASIC to then be able to respond?

Mr Kell : We haven't got a firm timeframe. Obviously, this is an area of considerable interest. It's been highlighted in the royal commission and elsewhere. We have some investigations underway. But we want to make sure that if the code is one place to deal with this—frankly, there is also the law as well—one of the key principles of a code is that it goes beyond the—

Mr KEOGH: The more you adjust—

Mr Kell : minimum requirements in the law. It effectively offers more than you would get there. I think that's one of the issues we need to work through with this recent proposal.

Mr Saadat : But it isn't holding up anything in terms of the implementation of the code.


Mr Saadat : So that's proceeding.

Mr KEOGH: It seemed very hot on the heels of the one that was just released. I note the report that you did recently on breach reporting and the delays in that process. Is there an ongoing engagement now with those banks around trying to remedy their systems to improve that? They all tell me that they are going to fix it, but is that something that they are engaging with you on?

Mr Shipton : There are a number of experts at the table who can speak to this exercise in addition to me. There is an alignment. We're actually aligning the body of work, which was on Mr Kirk's team, on breach reporting with our new supervisory initiative, which is close and continuous monitoring, which is sometimes referred to as embedding. We prefer onsite monitoring. But that exercise is an alignment of those two processes. What we're going to do as one of the first orders of business of these supervisory teams going into the large financial institutions is essentially look at the follow-up and the next steps when it comes to breach reporting. The reason why we do that is, firstly, this is an important subject matter, clearly. Section 912D is another cornerstone, as you have rightly alluded to, Mr Keogh. Secondly, we believe that it is a very good indicator of management attention, systems and culture when it comes to conduct issues. There is no better, we think, example or indicator of a subject matter that captures, as we said, systems, processes, culture of escalation, culture of identifying issues and then management attention.

One thing that is really important—and I believe these numbers are right, so I'll correct them afterwards if I'm wrong—is we looked at 715 incidents of breaches across a number of financial institutions. Approximately half of them were self-identified by employees of the financial institution. Let's just say about 340. Only in four or five cases of those 340-odd were the individual employees either rewarded or acknowledged for identifying that breach. That, to me, speaks to a cultural issue. There should be a culture of at least acknowledging, if not rewarding or thanking, individuals inside financial institutions for finding things that shouldn't have happened in the first place. That's why we're taking this very seriously. We think this is a really point beachhead for our first thematic exercise when it comes to our close and continuous monitoring program.

Mr KEOGH: So given the real importance of that reporting, and, as you said, culturally it would be very helpful if there were a carrot in organisations to encourage this reporting, what is your response to the observation from the royal commissioner, where he draws out the fact that there seems to be no stick applied whatsoever for a failure to report within the 10 days as required?

Mr Shipton : He highlights in very bare terms—

Mr KEOGH: I know. I've got it right here. I can read it out. What is the response?

Mr Shipton : The response is that the comments are fair. But—

Mr KEOGH: The comments might be fair, but it seems to imply that the conduct by you and the—

Mr Shipton : Mr Crennan can supplement because he is an expert on this area. The one point to note is that we are working with members of parliament and the government—it's going to happen soon—about meaningful change to the wording of 912D.

Mr KEOGH: So is there currently a problem with the wording that makes it hard to prosecute?

Mr Price : Yes.

Mr Mullaly : It's a very subjective provision at the moment. So the licensee needs to form a view that there's a breach—this is in simplified terms—and, importantly, that it's a significant breach. There's some guidance within the legislation that might indicate what might be significant. If they don't form a view that the breach is significant, then it is very difficult for us to prosecute that. We have very clear advice in respect of that provision. That advice essentially says it's going to be very difficult on any occasion for you.

Mr KEOGH: How long have you had that advice?

Mr Mullaly : We've—

Mr KEOGH: How long has it been ASIC's view that there's a real difficulty in prosecuting?

Mr Mullaly : For quite a while. I wouldn't know exactly.

Mr Kirk : Certainly it's something that we raised in the financial system inquiry.

Mr KEOGH: Is it something you've raised before, then?

Mr Kirk : It was raised as part of the enforcement review that came out of the financial system inquiry. It's one of the issues we pressed.

Ms Armour : It was discussed—

Mr Kirk : They made recommendations about change which the government has accepted in principle with the proviso that they'll wait and see what comes out of the royal commission and implement afterwards.

Mr Mullaly : Anecdotally, we have been told that organisations set themselves up to ensure that the decision as to whether or not something is significant is made by a particular person who must go through a whole range of steps and so on and so forth. I think our report indicates—

Mr KEOGH: It is effectively being gamed.

Ms Armour : It exacerbates cultural issues. It means that there's not an encouragement to elevate to senior managers in the firm that there's a problem because you trigger these things.

ACTING CHAIR: Do you have any more questions?

Mr Crennan : Senator, I will interrupt for a bit.

ACTING CHAIR: Yes, please.

Mr Crennan : Because Mr Keogh missed out this morning, I will give a very brief precis of how I see the future operating, I hope. With 912A civil penalties, there has been, I have heard, commentary that, 'Well, there are civil penalties. The appetite for breach reporting will diminish.' I pointed out this morning that I hoped that would not be the case if the people who owe the duties were sane because the consequences of not reporting are extreme. They are up to two years in prison under the new regime. So that interlinks. So you had this civil penalty provision and then extreme penalties for not doing it coupled with what Mr Mullaly is talking about, which is agreement in principle—we look forward to that legislation as soon as we get it—which alters it from subjective to objective. That is part of a panoply of Corporations Law reform moving away from subjective tests to what is sometimes called in some contexts the PS test.

Mr KEOGH: Which is what applies in the common law.

ACTING CHAIR: I'm checking, Mr Keogh.

Mr KEOGH: I'm done with my questions, thanks, Chair.

ACTING CHAIR: You're finished?

Mr KEOGH: There are many, many things that I could ask about the interim report, but I feel like I'll just wait to see ASIC's response and then ask you about them when you come back afterwards.

ACTING CHAIR: We will meet again for sure. Any further questions?

Mr VAN MANEN: We were discussing earlier the impairment of loans. We touched on the impaired loans report that this committee did two or three years ago; it was a little while ago. Recommendation 9 of that report reads, and this is in relation to businesses being wound up:

The committee recommends that if an authorised deposit taking institution is intending to appoint a receiver:

a. that is from the same company that was engaged as an investigative accountant, the borrower should be given an opportunity to request an alternate company if the borrower is concerned about a conflict of interest;

b. in addition to the requirement to sell assets for fair market value under section 420A of the Corporations Act 2001, receivers should be required to sell a business as a going concern where possible if this will result in a higher return rather than separately selling the assets within the business; and

c. that receivers or similar entity selling assets under section 420A be required to take every reasonable step to ensure those assets are sold at or as close to listed market value as possible under the following conditions:

   i. proof of marketing through but not limited to mainstream media, catalogues and online;

   ii. in cases with no monetary default, marketing periods consistent with Prudential Standard APS 220;

   iii. in the case where monetary defaults have occurred, the marketing period can be reduced below the APS 220 standard where a shorter marketing period can be demonstrated to be in the borrower's best interest; and

   iv. that a strong penalty regime for breach of section 420A be administered by the Australian Securities and Investments Commission.

Can you elaborate on whether any work has been done in that space around that recommendation?

Mr Shipton : The answer is no. The main reason is a lot of those things are not things that ASIC can do. Some of the things that are within that recommendation are things that would require significant legislative reform to 420A. I think we talked about 420A earlier today and the problems with it. Others probably are things for the banking code of conduct. In fact, it's on things that the banks have to decide how to behave and how to act. So, as it stands at the moment, we don't believe there's anything we can do. The thing that it would need is for that reform to go through. To be blunt, I think some of those things may be unachievable. I know that's the finding of that committee, but I don't know that some of those things are actually achievable.

ACTING CHAIR: Final question, Mr Keogh.

Mr KEOGH: It does come off a similar issue. A lot of the victims of banking misconduct that I've met with recently have raised the issue of receiver managers being appointed. It's not an issue that gets a lot of airing in the interim report from the royal commission other than they could loosely fall into the concept of an intermediary, but I don't think that's really where the commission was driving at. There are the issues that have been raised by Mr van Manen. But there is a broader issue, I think, that sits there about the proportionality of the appointment of receiver managers and the fees that are involved in that engagement to either the level of the debt or, at worst, the size of the overall assets that they are being appointed to manage and then the work that they do. There are powers where someone who is in this position can go and seek an inquiry through the Federal Court. We all know that that is incredibly expensive. At the end of the day, if you're in a situation where a receiver manager has been appointed to your farm or your business, you're probably not in a position to run a Federal Court action. Is this a live issue within ASIC that you might be looking at or prepared to look at—the proportionality of the fees and nature of work performed by receiver managers as against the asset type, especially where it's bank lending that it is appointed for?

Mr Price : We do have a focus on remuneration issues as part of our supervision in the insolvency profession. More importantly, there have been some significant recent changes to the legislative framework for insolvency practitioners—

ACTING CHAIR: It took a long time to get it, didn't it?

Mr Price : through the insolvency legislation reform act. That includes various measures that empower creditors and others to have a much larger say in the remuneration that is paid to insolvency practitioners. I don't have the exact detail of those changes to hand, but if I can offer to take that question on notice, I would like to give that to you.

ACTING CHAIR: One change, for example, is that when a liquidator has been placed in control to liquidate the company, a majority vote in value of a creditors meeting can sack the liquidator on the spot. That is a huge, powerful arm.

Mr KEOGH: My question is actually about the debtor, because this is an issue where really there's one creditor. It's usually the bank. We're talking about basically small to medium size or family businesses, be it a farm or otherwise. The creditor has decided how much they are going to pay the receiver—that's great—but who actually pays for that? The debtor. The proportionality of that is the issue. Appointing some high-level receiver manager company for a farm worth several million dollars where a fifth of the value of the farm ends up in fees to a receiver manager is wholly disproportionate.

Mr Price : I will make a point. In my experience, where external administrators are appointed, the appointor—the bank—doesn't actually get all its money back. It doesn't actually get all its money back. So it is not economically rational to be paying a receiver and manager more than you should be because you're taking money out of your own pocket in terms of the bank's recovery. So that's one of the reasons why these reforms, I think, are so important. But, as I said, I'm more than happy to take those questions on notice.

Mr KEOGH: And I think as a general proposition that's right. But we've seen a number of examples come before us where what ends up happening is related to the way those loans have been administered. They have to sell up. It is a fire sale. There's a loss taken absolutely on the asset, but they do get the money back and so—

Mr Price : I'm sympathetic to that point. I made the point earlier today. I think one of the challenges in this area is that often the reason why there is a lot of angst and a lot of upset, which is perfectly understandable, is that people have a view that their assets might be worth a certain amount of money due to valuations for various other things. Remember that most valuations are prepared on the basis of a willing but not anxious seller.

Mr KEOGH: Yes. I understand why there is a discrepancy.

Mr Price : As soon as you appoint an external administrator, that's no longer the case.

ACTING CHAIR: We could go on for hours about administrators, couldn't we?

Mr Price : We could. Some of these issues are picked up, actually, in questions in the interim royal commission report. I think they are important questions to ask.

Mr KEOGH: The short answer, I think, seems to be that through your supervision role you are looking at this generally?

Mr Price : We have a focus on three general principles as part of our focus on insolvency practitioners. There is a focus on competence, on remuneration and on independence. We can provide you with various reports we do on the supervision of that industry. But we certainly have taken action, including court action, where we feel insolvency practitioners have charged an amount that is not proportionate to the amount at issue.

Mr KEOGH: I think there is an issue. There is a crossover—it might come up in your embedding—in how the banks are using them as well. That is a certain direction.

ACTING CHAIR: Thank you, Mr Keogh.

Mr Shipton : With your indulgence, can I make one clarification?


Mr Shipton : I'm led to believe by my colleagues that when I was talking about the breach reporting response I should have said there were 331 significant breaches identified by staff but only nine of those where there was formal recognition or reward. So that is nine out of 331.

ACTING CHAIR: With that, folks, we're coming to the end of the hearing. Before closing, I want to say to Commissioner Peter Kell that this is the last time we'll see you here. Good luck. All the best for the future.


ACTING CHAIR: Thank you for your work. We've given you a bit of a touch-up here, but you've come out with very few battle scars.

Mr Kell : There's never been a dull moment. Thank you very much for your input and for your interest.

ACTING CHAIR: Good luck. We wish you all the best.

Mr Kell : Thank you very much.

ACTING CHAIR: Answers to questions taken on notice should be provided by 9 November. That concludes this hearing. I thank all the witnesses. I thank very much everyone who has come along today to give evidence to the committee. Thanks also to Hansard and Broadcasting. Thanks again for your great work. The committee is now adjourned.

Committee adjourned at 14 : 31