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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

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

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

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

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

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

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

SAADAT, Mr Michael, Senior Executive Leader, Australian Securities and Investments Commission

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

Committee met at 9:01

CHAIR ( Senator Fawcett ): Ladies and gentlemen, I declare open this public hearing of the Parliamentary Joint Committee on Corporations and Financial Services. Today the committee is taking evidence as part of its ongoing oversight of Australian Securities and Investments Commission, the Takeovers Panel and the Corporations Legislation No. 2 of the 44th Parliament.

This is a public hearing and a Hansard transcript is being made. The committee prefers to hear evidence in public. We may agree to take evidence confidentially if it is relevant. The committee may publish confidential evidence later, but we would ask before doing this where possible. It is important that witnesses give the committee notice if they want to give evidence in private. In addition, if the committee has reason to believe that certain evidence may reflect badly on a person, the committee may direct that that evidence be heard in private.

I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is against the law for anyone to threaten or disadvantage a witness because of evidence given to a committee. If they do, the action may be treated as contempt by the Senate. It is also a contempt to give false or misleading evidence to the committee.

Witnesses should be aware that, if they make adverse comment about another individual or organisation, that individual or organisation will be made aware of the comment and given reasonable opportunity to respond to the committee. If a witness objects to answering a question, the witness should state the grounds of the objection and the committee will determine whether it will insist on an answer.

I remind committee members that the parliament has resolved that an officer of a 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 and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Officers of departments are also reminded that any claim that an answer would be contrary to the public interest must be made by a minister and should be accompanied by a statement setting out the basis for that claim.

Today the committee welcomes officers from Australian Securities and Investments Commission. Mr Medcraft, thank you for attending today's hearing with your team. We have received your written opening statement. Thank you for that. Would you like to make any opening remarks before we proceed to questions?

Mr Medcraft : Yes. Thank you, Chair. Thank you for having us here and for the opportunity to address the committee. And thank you also for supporting the commission.

I have a very brief opening statement in which I want to discuss two things and mention one further thing.

The first thing is ASIC's corporate plan. I hope that you have a copy. In late August we published the corporate plan for 2015-16 to 2018-19, in particular with a focus on 2015-16. The corporate plan communicates our thoughts on how our long-term strategic priorities and challenges will shape ASIC's strategy and responses over the next four years. In achieving those strategic priorities—which, as you know, are investor and consumer trust and confidence, and fair, orderly, transparent and efficient markets—we see a number of challenges or risks that could threaten them. It is based on the risks and challenges we have identified.

We have identified five key challenges or risks. One is clearly conduct risk, and that is balancing the free market system with investor trust and confidence or protection. The second, very importantly, is cyber resilience and digital disruption, clearly shaping the future. The third is structural change, particularly driven by superannuation, which affects many of the areas we look at. The fourth is complexity, particularly that driven by financial innovation in products and markets. The final one is globalisation, clearly shaping products, markets and technology. That is what we see as challenges over the four-year horizon.

Specifically in 2015-16, in those five key areas identified, we are going to focus on the following. On conduct risk, we are clearly going to continue to focus on gatekeeper conduct. On cyber resilience and digital disruption, we are going to be looking at cyber attacks and risk management but also what we can do in helping companies in relation to digital disruption. On structural change and the growth of superannuation, one of the key aspects there is clearly the focus on financial advice, which is critical in superannuation. Fourth, in complexity, we are going to be looking next year at the misalignment between the retail product design and distribution and consumer understanding. Finally, on globalisation, we continue to look at cross-border businesses, services and transactions. The corporate plan also, importantly to this committee, has highlighted how ASIC will evaluate our performance over time and strengthen our capabilities to meet those future regulatory challenges.

The second point is specifically in relation to digital disruption and ASIC's innovation hub, which we set up this year to help fintech start-ups in their engagement with ASIC. Clearly new start-ups often are small businesses and they have limited time and limited money, and they often have limited access to professional advice. They also may lack experience in interacting with ASIC. What we are trying to do is to work with them to help their business and to cut red tape. That is our focus. We are committed to encouraging innovation, while not compromising our strategic priorities. Where we have a new business model, we look to see how we can try to fit it within the regulatory framework. Fintech models, particularly, can often test legal boundaries. The innovation hub is there to look at new developments as they are happening and, hopefully, inform our work and try to help that particular business but also help similar businesses.

With our innovation hub, we have got a five-point approach. The first is engaging with fintech initiatives, with either the physical hubs or with co-working spaces that have been established for start-ups; for example, Stone & Chalk in Sydney and Tyro in Sydney—and we probably should be thinking about Melbourne, John. Second is streamlining our processes for innovative business models that want to get help from us. So we are looking at processes. Third: one of the things we have done is looking at a new page on ASIC's website, a one-stop shop for businesses where we can give them information but also where they can request information if they are start-ups. Fourth: this initiative internally is being led by John Price, and he leads an internal task force across the parts of ASIC that is focused on fintech.

Fifthly, we have established a digital finance advisory committee, or DFAC, which is a body which is basically a cross-sector of those in the fintech community. They are providing ASIC with strategic advice and information about the industry. On top of that, we have invited Treasury and other agencies to participate in that digital finance advisory committee.

Just briefly, I wanted to mention some recent enforcement success. This month the former Kleenmaid director Gary Collyer Armstrong was sentenced to seven years in jail for his role in the collapse of the national whitegoods distributor Kleenmaid. In August 2015 he pleaded guilty to insolvent trading and fraudulently obtaining $13 million from Westpac. This outcome, we believe, should serve as a warning to corporate Australia that ASIC will not tolerate directors and company officers who conduct their business dishonestly to the detriment of creditors and consumers. Our message is: if you chose to act in this way, there is a very good chance you will be caught and there is a very good chance you will go to jail.

I also want to mention, finally, that since we met in September last year some of the ASIC lawyers have won an award for pro bono volunteering work helping young people. The award from the National Association for Prevention of Child Abuse and Neglect recognised the work of 38 of our lawyers throughout the country. I wanted to just mention those three particular main issues and I am happy to take your questions.

CHAIR: Thank you very much, and congratulations to your staff who have won those awards.

Mr Medcraft : Thank you.

CHAIR: It is good to hear of the good recognition of the work they do. We will spend a short period addressing some of the aspects of your opening address and then following up on questions on notice and issues that we have been following for some time. We have received your corporate plan, and you can expect a deal of discussion around some of the points in your corporate plan.

I will start off with the enforcement successes you mentioned. Having seen those listed in your opening address, I looked particularly at the banning of financial advisers Jamieson and Kolody. I have had a look at your media releases. I then had a look at your register of financial advisers. Putting myself in the shoes of a consumer, I did not find those names listed on your register. I recognise that the register is still new, but could you speak to the committee about your intent in terms of transparency and disclosure to the consumer, because we have a situation here where one of these advisers was banned in part because he did not disclose to a new employer his previous record, which had included sanctions. So the potential is for one of these individuals to seek further employment, and yet, as a member of the public, with their name not being on the register and with no indication of their banning being on the register, the register would appear to fail the very purpose for which it was established.

Mr Kell : We obviously have a strong commitment to ensuring that consumers understand a bannings action in the financial advice space. I might note that since we last met we have banned a further eight advisers across the industry from a range of firms, so we have been very active in enforcement in that space. In terms of what is on the register, that is determined by the regulations that were promulgated through the parliament earlier this year, and there is a degree to which there is a retrospective element that is not included in the information on the register. So, for example, if someone was banned prior to the register being set up, then they will not be included on the register, or if they ceased engaging in financial advice activity, then they do not have to be on the register. But I might invite Louise Macaulay from our financial advice area to talk about those two matters that you have mentioned.

Ms Macaulay : In one instance, the adviser ceased to give advice before 31 March, so was not required to be on the register. That adviser has subsequently been banned. That banning is the subject of a media release, and it is also included on ASIC's register of banned persons, but because since 31 March of this year that person has not been authorised to provide financial advice, he is not on the financial advice register.

Mr Kell : Just to be clear, that person is identified in two places on the ASIC website—on our register of banned persons and in the media release—but they are not, in addition, on the financial advice register, because the register, as determined by the regulations, is not retrospective in that sense.

Mr RUDDOCK: The question I always ask is: if the regulations do not permit something that you think ought to be done, what are you doing to recommend that the regulations be revised?

Mr Kell : That is a good question. In relation to the register, because it is still relatively new, we are gathering suggestions that members of the industry and members of the public have made or are making at this early stage about potential additional fields and information that might be on the register. That includes fairly simple information around being able to search for the location of the adviser, through to more complex policy matters, such as whether a decision that goes against the adviser in the ombudsman service should also be included on the register. We have signalled that our intent is—once we have gathered those suggestions for additional information—to present them to government after the register has been up and running for about 12 months, to allow consideration of whether the fields and information should be expanded. Obviously, there are some areas where people clearly see further scope for that register to provide additional information.

Mr Medcraft : Sorry, have we actually decided—as one of the issues; the one that Mr Ruddock mentioned—that we would make the recommendation, or—?

Mr Kell : We have not made a recommendation at this stage because, as I have said, we are gathering information.

Mr Medcraft : Sorry; is this one that has come up where we will look to make a change?

Mr Kell : We are happy to take that one forward as one of several recommendations around potential additional information.

CHAIR: If we come back to the two individuals: Ms Macaulay has said one of them had ceased to practice before 31 March, so I understand that under the current rule set, that they would not be on the register. The other one, I am assuming by default and by the fact that he has only been recently banned—that means that he was practising after that date, and yet his name still does not appear. There is already a field to record those kinds of disciplinary actions. At the moment I know the instructions are that it is a licence-holder's responsibility to populate the field, but can I ask ASIC: what about in a case like this where the person may well have been dismissed by the licence holder and you have just banned them? We know there is a pattern of conduct for some people where, despite the banning or other action, they will still go and seek employment, or seek to influence the public. What steps are you taking to adjust your internal processes so that, in relation to individuals that you ban, you take the responsibility to make sure that that name and that banning is available on the public register?

Ms Macaulay : We have got internal protocol so that when someone who is on the register is banned by us, the financial advisers register notes that. Now, in the case of the first instance, that man was not on that register. So we simply noted that he was banned on our register of banned persons.

CHAIR: Okay, that does not answer my question. What we have put to the public is that this register is a way to give them confidence in the system. So here we have an adviser who should be on the register but is not—so there is the first flaw. Secondly, he has just been banned by you. His licence-holder has not put him on the register and indicated that ban, so perhaps he has left the employ of that person. My question to you is, what are you doing to change your internal process so that you put that person on the register—so that the public can have confidence that it is an accurate reflection of the status of any individual who may put themselves forward as an adviser?

Mr Kell : If someone has been banned, and that should be reflected on the register, then one of the things that we do is—we obviously put that there—in effect, their name is red-flagged, if you like. If another licensee comes forward and says, 'This is someone that we want to put on the register, because we have just employed them,' and it turns out that it is the person who has been banned and they have not informed the employer, then that name will come up. We have been ensuring that that can occur through our internal systems and IT processes. That has been very much at the top of mind about how we can use this new register to track the movement of bad apples around the industry, which, I think, in a colloquial sense, is what you are getting at here.

CHAIR: I am glad it is top of mind. I am flagging the point that we have a case—real time, very recent—of someone who has been banned, and that is not on the register.

Mr Kell : That is because—

CHAIR: One of the two cases is because he had ceased to practise before 31 March; I accept that. In the other case, I am assuming, by omission, that he was therefore practising. I am happy for you to take it on notice to come back to the committee—

Mr Kell : We might take that on notice to check the second one's circumstances.

CHAIR: but, what I see at the moment, is that, despite it being top of mind, clearly there is not yet a closed feedback loop in the system so that the public have confidence that they can go to that register and get an accurate picture of someone who—

Mr Kell : I can assure you there is a closed feedback loop, and the names that do not appear on that are because of the way the regulations were constructed and promulgated so that there is that element of retrospectivity that is not captured. But we will check on that second adviser and come back to the committee.

CHAIR: Thank you very much.

Mr Medcraft : There is an issue of lack of retrospectivity. Is that correct? That is what I am hearing.

Mr Kell : We will check on the second adviser.

Senator O'NEILL: It is certain in one case but uncertain in the second.

Mr Kell : We will check on the second adviser.

Mr Medcraft : We will come back. I would like to hear—

CHAIR: We will move on. I have one more area before I hand over to Senator O'Neill.

Mr Medcraft : I think it is good to get this back, because if there is a problem we will address it.

CHAIR: During our last hearing, I was raising with you the issue of the ANAO report into enforceable undertakings. You undertook to provide an answer on notice, Mr Kell, regarding your reporting of KPIs and how you assess them. You have indicated here that ASIC does not report externally against the KPIs Nos 3 to 5 in the list that you provided. Given the statement in your corporate plan about wanting to increase transparency, why don't you report those externally?

Mr Kell : I think our answer indicates that we do not report against those KPIs specifically against enforceable undertakings, or, for that matter, specifically against civil litigation, or specifically against criminal litigation. We look to provide reports against the standards across the industry on a broad-based measure, not against particular enforcement tools. However, we have also noted that the ANAO report contained a formal recommendation about periodically assessing and reporting on the effectiveness of EUs, in terms of how they contribute to improved levels of compliance. We are certainly looking at how we can better do that. We think that might be something, for example, we do in conjunction with some academic researchers, so we are working through addressing that recommendation, which we have accepted. But, with the reporting on the KPIs, we have not done that in relation to saying, 'This is how this works with EUs; this is how this works with bannings; this is how this works with criminal actions,' but rather looked to report it at a global level.

CHAIR: The context of my original question was about the effectiveness of enforceable undertakings. I accept the fact—and you say in here—that your KPIs are not designed to be a report on the relative effectiveness of a particular enforcement tool but rather the global outcome. But my original question was: if you are going to use enforceable undertakings—and increasingly that appears to be a path you are going down and that is fine—obviously there is no point persisting with them unless you know they are effective, and you will not know they are effective unless you are measuring their effectiveness. I see the ANAO's recommendation. My question to you last time and again now is: what are you doing to change your processes so that you measure the effectiveness; how does it contribute to the KPIs; and will you report publicly against the effectiveness of each individual EU so you know whether they are being an effective tool contributing to your global outcomes and the public can have confidence that, for this particular entity, the EU is having the desired outcome?

Mr Kell : To start with on the last part of the question, we have changed our policy relatively recently, and I think we might have discussed it previously here, around enforceable undertakings so that there will now be a public report at the outcome of each enforceable undertaking. For some larger and more significant enforceable undertakings, there may well be reports along the way. There will be a public report explaining what the enforceable undertakings achieved, explaining how the firm has actually implemented the commitments it has given under the undertaking; how much, for example, might have been paid out in compensation or remediation as a result of the undertaking. That will be published after each undertaking is concluded. So that is a very significant step forward in terms of transparency and explaining to the public and to this committee what our undertakings achieve.

Mr Tanzer : In addition to that, the commission has a formal report at each monthly commission meeting that lists all of the EUs and any changes under it, whether or not all of those things have been achieved within the particular time frame or if there is any particular red flags. That does both things: one is about informing the commission but also getting our staff to focus on the ongoing monitoring of those EUs and that they had been complied with with respect to the particular entity.

As the answer to the question on notice also notes, in our annual report we have committed to including an analysis of the overall status of EUs over the particular year. The broader and more difficult question is the extent to which the particular EU, which may impact that particular entity and needs to be monitored to make sure that it has been carried through, then flows through to the broader type of KPI that you see here about whether product issuers meet required standards in the more general sense; whether the EU has had an impact not just on that particular licensee but more generally in the industry. That is the type of thing where we have said, in response to the ANAO report, that we think the best way to do that is a more holistic review, including perhaps academic research, to get a better sense of that. Just by looking at each one individually and providing transparency about that may not get you there. We do, of course, have our ongoing stakeholder surveys, which we do every two years which seek to give us some information about the extent to which different stakeholder populations and, indeed, the general investing public perceive we are performing against those larger objectives.

CHAIR: Can I ask you to give me an answer on notice that details your plan for how you are going to evaluate EUs, how you are going to link those to your broader KPIs and, importantly, how you are going to link your evaluation of the EU with the independent expert's report on the EU. Global aggregated results are all well and good, but they can easily mislead the efficacy of individual measures against an individual business which affects individual consumers. At the end of the day, the committee is concerned to make sure the system as a whole has outcomes for individuals not just meeting aggregated global KPIs.

Mr Tanzer : I quite understand. I apologise if the last part of my answer gave you the impression that we only look at these in the aggregate. I thought actually that where you wanted to go. We do look at them very closely in terms of whether they are being carried through with respect to the particular entity and individuals concerned.

Mr Medcraft : We look at it from a micro and a macro perspective.

CHAIR: Coming back to the micro level, the other specific finding by the ANAO audit sample was that some 25 per cent of the independent expert reports were not assessed. You said in your answer to the question on notice that that was actually a reflection of there being no documentation to say they had been assessed. I accept that, but how do you know they were assessed if there is no documentation?

Mr Mullaly : You are correct. Obviously that is the finding of the ANAO audit. Those matters where there is no documentation are still subject within the organisation and certainly within enforcement, where most of these are generated, to follow-up and discussion within the team. As the finding says, the documentation around that was not available for the ANAO officers. However, we are confident that the processes that we have in place, and certainly the processes that we have now to document, will ensure that there is confidence that all these are followed up.

Senator O'NEILL: I want to go to some commentary in your opening statement around a director's responsibilities in which you speak about the sentencing of Mr Gary Collyer Armstrong with regard to Kleenmaid. You make a point that it is a warning to corporate Australia that ASIC is not going to tolerate company directors and officers conducting their business dishonestly with regard to detriment to creditors and consumers. I ask for your response in the light of the revelations about 7-Eleven with regard to their directors' responsibilities not only to creditors and consumers but also in terms of wage safety and their responsibilities as employers to operate within the law with regard to the Fair Work requirements.

Mr Medcraft : I know that we have discussed this. It was raised with me by Fair Work Australia a few months ago.

Mr Price : In the particular manner that was brought to your attention, of Mr Gary Armstrong in relation to Kleenmaid, he pleaded guilty to insolvent trading and fraudulently obtaining a substantial sum from a financial institution. That is the context against which those particular quotes were made. Certainly, my understanding of the situation in relation to 7-Eleven is that there are slightly different concerns. Those concerns go to the alleged underpayment of certain staff at 7-Eleven. Typically those are laws that ASIC would not have a direct interest in unless there were particular circumstances that were satisfied. Generally speaking, on this question of when ASIC has an interest when companies breach the laws of other regulatory agencies, you can summarise the position as this. Directors may have a liability if a company breaches the laws regulated by another entity if you can establish the following things: firstly, that the primary law has been breached; secondly, that the directors either negligently or knowingly were involved in the breach; thirdly, that the company has as a result suffered loss. As you can see, all of that is actually contingent on proving a breach of what I would call the primary law, the law administered by the other regulator in the first place. Until that can be established, in all likelihood ASIC will not have jurisdiction.

Mr Medcraft : For example, we work with Fair Work Australia in relation to phoenixing of corporations where potentially employee entitlements are at risk.

Mr Price : Absolutely right.

Mr Medcraft : That is where we do a fair bit of work with them in that area.

Mr Price : Absolutely right, and that is particularly the case. We have a particular interaction with Fair Work Australia around a number of issues, one of which our chairman has mentioned, but the other is that in some circumstances the Fair Work Ombudsman administers a scheme that was previously called GEERS and is currently called FEG. The purpose of that scheme is actually to provide employees with payments of their entitlements—minimum payments around entitlements—when otherwise they would not be paid because of the insolvency or the financial difficulty of the company. For those payments to be triggered, the company actually needs to be in some form of external administration. In some circumstances where companies are in severe financial distress, directors will actually walk away from the company. In the absence of someone stepping in to wind up that company, employees will not get the ability to access their FEG entitlements. In those circumstances ASIC has the power to wind up particular companies, and we have done that on a number of occasions. We actually issued a media release within the last couple of months that details the number of occasions on which we have used that power and the amount of entitlements that have been paid out through the FEG scheme as a result.

Senator O'NEILL: My question goes not to the process, which you have clearly outlined, but to community expectation about the educative capacity of ASIC in this space as well. Can I just make a couple of points, Mr Price?

Mr Price : Yes.

Senator O'NEILL: Firstly, given the high profile of the 7-Eleven case, it seems an incredible opportunity for ASIC to remind directors of their responsibilities not only to stay within the law but to actually think about having a look at the books in terms of who is getting paid what. We have seen Mr Withers and the other members of the board remove themselves from the position because clearly there is incredible public outrage at a failure of responsibility at board level, at governance level. I guess my question—and perhaps it is a suggestion to you—is that this seems an opportune moment for boards to start to pay attention not only to the profits that are made but to the legal obligation they have to provide safe wages to their employees, and I am wondering if that is something that ASIC has given any thought to in terms of a reminder. It is a timely opportunity, in my view.

Mr Price : I am very happy to take that idea up. I regularly write a column for the publication that the Australian Institute of Company Directors sends out to all its director members, and I am happy to think about an appropriate message in the context of a forthcoming publication for that.

Senator O'NEILL: We have heard in that instance, in another committee that I am a part of, that the reports to the board around these matters can be extremely brief—

Mr Price : Yes.

Senator O'NEILL: and, it would seem, completely inadequate in this instance. I hope it is not widespread, but it said to me that that might be the case in many other contexts as well.

Mr Price : More generally, on the important area of community expectation, just around what ASIC can and cannot do in terms of our regulatory responsibilities, we are intending to publish material for complainants to make it clear just where we do and do not have jurisdiction, where there has been a breach of other laws administered by other regulators, so hopefully that should help bridge some of that expectation gap as well.

Mr Medcraft : Just to add: I had a discussion with the corporate governance institute recently, and we will follow that up as well with the corporate governance institute.

Mr Price : The Governance Institute of Australia.

Mr Medcraft : Yes. But, just to remind you, I think it is probably a timely reminder that the principles from the Centro case, which are very relevant, are that, at the end of the day, boards have responsibility overall for the system of internal control in the company, which includes the risks that could occur. Delegation is delegation, but it does not remove accountability. I think it is probably a timely reminder, Mr Price.

Mr Price : In addition, the issue that you raise is consistent with messages that we have been sending more particularly to financial services licensees around culture and the important of culture impacting on conduct. This is a little bit different to the types of examples that we have talked about before, but I think it is consistent with the point that, for boards, it is critically important to consider not just whether there are aspects of their operation that might be noncompliant with particular parts of the law. As you say, the experience of the company, I think—I am sure the directors are reflecting on this—is the reputational damage that is done by something of this nature. Obviously, I am not asserting that this is compliant, noncompliant or whatever, but, whatever the situation is, there is a considerable cost and considerable reputational damage for the company that might impact on the company more generally. That is something that we have certainly been sending a loud message about in the financial services area, and the point is consistent.

Senator O'NEILL: Can I go then to matters arising with regard to the financial services sector and ask my ever-present question at these meetings: what is happening with Trio?

Mr Price : As you might recall from the last hearings where we discussed Trio, the liquidators' reports have now been finalised. ASIC's investigation is largely finalised, with a couple of caveats that I would prefer to discuss in camera, if that were possible. I think we did the same thing at the previous meeting. But our enforcement action has—with those potential caveats—now really come to an end.

You may also recall from our last meeting that I discussed ASIC's forward plan. Apart from the various inquiries that came out of the inquiry into the collapse of Trio, ASIC had a forward plan about how to strengthen the financial system to try to make sure it was as robust as possible and reduce the prospect of anything like Trio happening again. You may recall that part of ASIC's work included things like increasing the financial requirements for managed investment schemes; issuing regulatory guidance to improve disclosures of hedge funds, such as Trio; strengthening guidance that applies to research houses; reviewing the custodian industry, and we issued a public report on that; and also reviewing the compliance plan for managed investment schemes. That work now is also largely complete.

What I am saying, in summary, is that our work in relation to Trio is now finalised, bar some careful review activity we are doing in relation to a matter that I would prefer to discuss with you in camera, if that is acceptable.

Senator O'NEILL: I think the chair has a proposal about when we might be able to accommodate that.

CHAIR: Yes. We are due to have a break at 10.45, so at 10.30 we will go in camera and ask people who are not part of the committee or ASIC to leave the room. We will go in camera for a short period and then have the break at 10.45.

Mr Price : Thank you.

Senator O'NEILL: Have you had any engagement with advocacy groups who are still acting for people who were caught up in the Trio scandal?

Mr Price : Yes. There is ongoing engagement with some advocacy groups. They include groups such as VOFF and Mr Paul Matters, but there are also various other advocacy groups as well, such as the Association of ARP Growth Fund Unitholders.

Senator O'NEILL: What engagement have you had with them since we last met?

Mr Price : If I can, I would like to take that question on notice. I do not have that briefing material before me just at present.

Senator O'NEILL: I understand that there were meetings with this group.

Mr Tanzer : There was a meeting held with those groups and the minister, which ASIC attended, which was to provide an opportunity for those groups to put forward their views about compensation.

Senator O'NEILL: On what date did this meeting occur, and who was in attendance, Mr Tanzer?

Mr Tanzer : I was there. I do not recall the exact date, but I was there. It was a meeting with the industry groups, organised by the minister, with—

Senator O'NEILL: The minister being?

Mr Tanzer : Not the industry groups; the investor groups.

Senator O'NEILL: Who is the minister that you are referring to?

Mr Tanzer : It was the Assistant Treasurer. At the time, it was Minister Frydenberg.

Senator O'NEILL: Were there any other government ministers in attendance?

Mr Tanzer : No. This was a meeting of the minister with ASIC and APRA to hear the views of these investor groups.

Senator O'NEILL: You said it was with regard to compensation; is that correct?

Mr Tanzer : It was around the issue of compensation, because compensation has been paid with respect to certain investors and not certain other investors.

Senator O'NEILL: Was there any indication that the government intends to provide compensation to these groups?

Mr Tanzer : This was part of the government's process of understanding the claims that people were making with respect to the availability of the statutory compensation that has been paid to certain investors arising out of APRA regulated funds and whether there was any availability for that more generally.

Senator O'NEILL: Could I ask you to take that question on notice and provide me with any further information that you can.

Mr Tanzer : I do not think I can provide you with much more information. You asked about whether there was a particular meeting. That was the meeting that I attended, but the purpose of the meeting, I think, is better directed to the minister.

Senator O'NEILL: Thank you very much. If you could, though, provide me with those who were in attendance, from your memory, Mr Tanzer—and I will take this question up with the minister as well.

Mr Tanzer : Sure.

Senator O'NEILL: I am very interested to hear the word 'compensation' in that context. Also with regard to Trio—and thank you for your answer on notice regarding ASIC and your correspondence with accounting bodies, and more generally thank you for your answers on notice, which were fulsome and very helpful in preparation for today—could you just fill out a little bit more information there, particularly with reference to legislative changes that you indicated might be required and how you are proceeding with that with the government?

Mr Price : You may recall that the Trio inquiry made several formal recommendations, some of which touched on legislative changes. The government responded to that at the time. As I understand, there has been no further movement in respect of the various recommendations and what the government had indicated would happen. In fact, there was a change of government. So really I am unable to provide you with an update much further from that.

Senator O'NEILL: This is one of the concerns that I have, particularly with regard to Mr Holt. People have an expectation that there is a conversation that goes on between such bodies as the accounting bodies. In essence, despite Mr Holt being banned and some pretty serious implications for him in terms of his financial services registration, at the moment there is no facility for a connection of information flow about people or penalty more broadly for people working in the area.

Mr Price : We have certainly discussed with the accounting bodies and expressed a desire that we know as soon as possible if they are taking disciplinary action against their members. They have expressed concerns that, because of contractual and other reasons, they are unable to share that information. Really, we are unable to take it much further from our end.

Senator O'NEILL: So you really do need some change in the regulation or legislation?

Mr Price : I am not sure. Some change to regulation may assist, but fundamentally the accounting bodies need to be satisfied as to their own position and the appropriateness of their sharing information and what that might mean for their membership base and also liability.

Senator O'NEILL: One of the things, just coming from the perspective of a member of the public, is that perhaps it is a false assumption that ASIC would be getting alerts from people who might be closer to the gatekeepers, really, of the profession—the liquidators, the research houses—and that, in addition to whistleblowers—and I want to ask about that as well—from the bodies that are responsible for the professional codes of behaviour there would be an automatic feed to ASIC to say, 'Look.' An early intervention strategy is to say, 'We've got a bit of a problem here; this is what we're noticing,' just to alert ASIC to what is going on. I am surprised. That is not the way it is; is it?

Mr Price : It is a fair point to raise. I suppose, against that, you have to weigh it up. I suspect that, from the accounting bodies' side, they would say things like, 'Well, people have the right to be presumed innocent until they are proven guilty, even under our rules, and there may be real legal ramifications were we to provide this information to you at too early a stage and were it to cause loss and damage to a person's business and/or their reputation.' That is the sort of policy balance that you are dealing with.

Senator O'NEILL: I know that that is a balance, but it seems to me—and seeing what we have seen happen in the financial services industry over the last several years—that the favour is weighted pretty heavily in terms of the business and not the people who are putting their money into these businesses, who we have seen lose everything. I do not know if there is a way to find a mediated path through that that is just an alert. In that way, that might even act as a powerful and quick disincentive for people to put themselves in a situation where they are called into question.

Mr Price : We certainly have raised the issue with the accounting bodies. I am more than happy to indicate that I will do so again, but, as I say, really there are legal issues here. There is also, I suppose, a view that the accounting bodies need to form that it is appropriate to share information at an early stage when no finding has been made through their own disciplinary process, and that goes to fundamental issues like the presumption of innocence and other things. I fully understand and appreciate what you are saying. I suppose what I am trying to convey is that I think there is a balancing of competing policy factors here, and it is perhaps not a straightforward question.

CHAIR: Have you engaged with the Code Compliance Monitoring Committee at all on this topic?

Mr Price : I must admit that, no, I have not.

CHAIR: Why not?

Mr Price : I cannot answer—actually, if I can be clear about that: I am not aware that ASIC has engaged with the code committee. I would like to go away and check that.

Senator FAWCETT: Sure. And to see if they are a logical group—if they are overseeing codes of conduct in banks and other professional groups like CPAs or whoever—

Mr Price : I would like to go away and look at exactly what their jurisdiction is. They may have jurisdiction; they may not. I do not think we have contacted them, but I should not give an off-the-cuff answer—

Senator FAWCETT: Take it on notice.

Mr Medcraft : I think what we should do is take that on notice.

Senator O'NEILL: I would like to ask a question that is related in some way at least to the RG146, about which you gave us information. Can I say that I am getting a lot of representations of concern about the government's delay in response to the Murray inquiry, the bilateral report from this committee and other sources that have been feeding into the government—and they have been in government for two years now—looking for a change in the financial sector. Mr Price, you mentioned that there has been a change of government. In fact, there has not been a change of government; there has been a change of leader. Did I misunderstand you?

Mr Price : I think I was referring to the Trio inquiry report, and my understanding and my recollection is that the government's report to that was under the former Labor government rather than the current government, but I am happy to go away and check.

Senator O'NEILL: No, that is correct. At the moment, though, we have had a change of leader and we have many committees in suspension and we have changes in the leadership roles there. Have you got any indication of a time line in which this critical reform that has been long promised is likely to be delivered?

Mr Kell : I am tempted to take that as a comment, in that ultimately the time frame is not ASIC's to determine. We are obviously looking forward to the response to the Financial System Inquiry and, related to that—

Senator O'NEILL: My question is: have you had any indication from the government about the time in which they will respond?

Mr Kell : I think that is a question best put to the government.

Mr Medcraft : I think the government has been very engaged with the subject, and I know the previous minister consulted extensively with industry. I attended a round table and I think that round table indicated that there was pretty general consensus about the way forward. I know that they have been considering it quite extensively. And we are obviously very supportive of most of the recommendations.

Senator O'NEILL: In the interim, though, the requirement for people to be able to practice as financial advisers remains the RG146—is that correct?

Mr Medcraft : That is correct.

Senator O'NEILL: It is as long ago as a year that we had evidence to say that the RG146 is an extremely inadequate tool to properly prepare people. We had evidence in our Sydney hearing that people were able to get this online in eight hours, and with that qualification they have remained for a whole year since. When did we table our report? Was it December? For a whole year, they have been able to continue to get in and work in the financial services industry on the back of an extremely flawed tool for right of entry to the profession.

Mr Medcraft : That is the current system, and we do our best with the system we have. To that extent, as you know, we have a wealth management project underway at the moment with intensive surveillance and enforcement with probably a significant percentage of the financial advice industry. In fact, the government has supported us in allocating money from the enforcement special account to actually putting more resources to that. So I acknowledge what you are saying, but we are doing very much the best we can with what we have at the moment on this area, which is our No. 1 priority, frankly.

Senator O'NEILL: It might be your No. 1 priority, but, in the absence of government action, it does not seem that anything can change.

Senator FAWCETT: Senator O'Neill, may I suggest that, if you want to pursue this line of questioning, you do it with the minister at estimates next week, because it is obviously beyond the remit of ASIC to deal with a policy decision that has not yet been made by government.

Senator O'NEILL: Can I just ask how many—I think it is on the record here in your answer—financial advisers have got themselves on the register?

Mr Medcraft : About 22,000—I think Louise has the exact number.

Ms Macaulay : 22,650 are currently on the register—that is as at 13 October of this year.

Senator O'NEILL: The number who have become financial advisers in the last year—

Ms Macaulay : I think that was the number we provided—I do not have it to hand—in our written responses after the last hearing.

Senator O'NEILL: According to what I have before me, there are 1,208 advisers on the register who first provided advice in 2014. That would have been under the RG146 requirement of entry. There are an additional 1,053 advisers who first provided advice in 2015. In the time that the government has been in, more than 2,000 new financial advisers have come in under what everybody agrees is a completely flawed and inadequate licensing structure—is that correct?

Mr Kell : You are correct about the numbers that we have provided. Those were the numbers that were sent through recently.

Mr Medcraft : They are correct, those numbers.

Senator O'NEILL: So that is a matter of fact.

Mr Medcraft : We can confirm the fact of the numbers.

Mr Kell : Those were the numbers we sent through.

Senator O'NEILL: And I can confirm the fact of the community's outrage that this continues.

Senator KETTER: Can we just confine ourselves to the opening statement at this stage?

CHAIR: Or to following up other matters from previous hearings or new topics. We will go to the corporate plan after the break, or when other things are exhausted.

Senator KETTER: Can I just follow up, firstly, with your opening statement in respect of enforcement action. I think, Mr Kell, you started to tell us about some of the advisers who have been banned so far. I think you gave a figure for this year.

Mr Kell : Since we last appeared before this committee there have been eight additional bannings. That was the figure I noted.

Senator KETTER: Can you provide us with further information?

Mr Kell : I will just hand over to Ms Macaulay to run through it quickly.

Ms Macaulay : Would you like the names of those advisers?

Senator KETTER: Yes.

Ms Macaulay : There was Mr Jamieson, who was with Commonwealth Financial Planning Ltd; Ms Kent, also with Commonwealth Financial Planning Ltd; Mr Zelka with Neo.

Mr Kell : Mr Zelka's banning was, in particular, related to his conduct around the provision of life insurance.

Ms Macaulay : There was also Mr Chong, who was at Meritum, which is a NAB licensee; Mr Kolody—I am not sure of the name of the licensee; it was essentially his own business, so it was a small licensee. There was also Mr Nicholas, who again had been a representative of a number of smaller licensees. I think the last one was Spring Financial. I do not have the details of the eighth—I am just tracking that down.

Senator KETTER: In terms of other enforcement activities, just generally, would you like to give us a bit more detail about—

Mr Tanzer : Perhaps if I give you one that happened yesterday, which was in the area of self-managed super funds and real estate advice. This committee will be aware that on various occasions we have talked about the potential problem of property spruiking to self-managed super fund investors, including perhaps recommending that people change from their existing super fund to create a self-managed super fund in order to invest in real estate. Yesterday in the Federal Court we received judgement in the matter of Park Trent—one of the matters that we had mentioned here before. Park Trent was a business that operated a model where they were advising people to set up self-managed super funds and also offering them investments in real property. We asserted that they needed a financial services licence in order to do that. The court found, in a 170 page judgement yesterday by Justice Sackville, that ASIC's case was upheld. That is an important case from our perspective. It follows on from the case that we discussed a little earlier this year in Royale or Active Super, a matter involving Craig Gore and Marina Gore, which also involved inducing or advising self-managed super fund investors to invest their funds in a particular way. It is also around the fact that that requires a licence. In fact, that case led to substantial bans for both Mr Gore and Mrs Gore and others associated with the scheme. The importance of it, I guess, is to establish the fact that even if advice about self-managed super funds and setting up a self-managed super fund goes to the self-managed super fund investing in products that are not covered by the financial services regime because they are not financial products as defined—and real estate is one of those, which is why ASIC does not directly regulate real estate agents—we have asserted, and this case has won judicial acceptance of the proposition, that, if you seek to induce people to either set up or use their superannuation funds in a particular way, it is the advice about superannuation that is financial product advice and requires a licence.

Senator KETTER: So there is not going to be any need for legislation to reinforce that?

Mr Tanzer : I think that was something that we were very keen to test the law on. We do still have some other cases on foot, and we have investigations. They are not all just civil matters, by the way; some relate to defrauding self-managed super fund investors, with prosecutions on foot. Leaving aside fraud, which is obviously covered by the law, there are really a number of cases that are aimed at testing this proposition and making sure that, where people want to give advice about real estate, they do not dress that up as advice inducing people to use a self-managed super fund to do that, because your superannuation should be about your superannuation, and then where you want to invest that is up to you, but we do not want unlicensed people giving advice about superannuation.

Senator KETTER: Property spruikers.

Mr Tanzer : Especially property spruikers.

Senator KETTER: That sounds like a victory for ASIC. Congratulations on that. In terms of following up from that to advise the industry that that business model is no longer viable, what are the nest steps with that?

Mr Tanzer : We did write to all of the real estate institutes—and in fact we have had quite some support from real estate institutes—to get the message out to real estate agents in particular that this was ASIC's view. Obviously we will follow that up, and we will use the normal sorts of processes that we use—speeches at industry conferences and our own communications with the industry associations. The communication back through the industry associations is, we find, a pretty important and effective mechanism, including through continuing professional education where that exists for particular entities. But we have found, particularly with real estate agents, that using the real estate institutes has been a useful way of conveying information to them.

Senator KETTER: To what extent does that open up further legal action in other cases with similar facts and circumstances?

Mr Tanzer : We have a couple of other cases that are on the books at the moment, and we will pursue those, as we do. One would expect that one of the points of taking this type of action and taking it up to the Federal Court is to establish the precedent so that then it is reasonably clear what the law is. Of course, each set of facts may well be different, but a key objective that we had in this was to establish, for the vast majority of the population that wants to comply with the law, what the boundaries are.

Senator KETTER: Thank you for that. I suppose my question initially was more seeking high-level information about the enforcement activities. You have given us information about the advisers that have been banned since the committee last met. Are there any other stats on your enforcement activities since that time?

Mr Tanzer : We publish a six-monthly enforcement report that has all of the general statistics, and we try to draw together the key themes in that. The last of those reports we published was back at the end of July. I might dig that out and provide it to the committee secretariat. It is a public report accompanied by a media release. But the whole point of that is to collect together an indication of the number of bans and enforcement undertakings that have been achieved and categorise them in the particular areas—whether they relate to credit licensees, loan fraud, mortgage brokers, market matters, insider trading, director duties type matters and the like. Perhaps what I might do, rather than give an unstructured answer now, is get that material back to you.

Mr Medcraft : Actually, one thing we are going to do, which Mr Kell was just saying, is from now on we are going to publish monthly enforcement statistics. So we will have a snapshot every month in addition to six-monthly so that people are up-to-date. We think it is critical that people know what we are doing in enforcement. We appreciate that you raised the issue.

Mr RUDDOCK: I want to foreshadow potential areas of inquiry. You know that we are undertaking the review in relation to impaired loans, and my understanding is that you are the agency that has primary responsibility for protecting the consumers dealing with banks, in particular. I do not know whether you are at the stage where you are comprehensively reviewing the published submissions that are coming to us, but I hope that you are.

Mr Kell : I can assure you that we certainly are looking at each and every one.

Mr RUDDOCK: Because I really want to put you on notice as to the nature of the inquiries that I will be pursuing in this matter. There are already some suggestions in relation to the Bankwest matter, for instance, that the great preponderance of their commercial loans were found to be impaired—quite a different experience to all of the other banking institutions at the time of an international financial crisis. So, on the view that it may have been financial crisis engineered, it seems extraordinary that that happens to one bank and not to all of them.

I would be particularly interested in whether people were aware that your agency may have been able to help them in relation to the matters that were being dealt with. I would want you to be thinking about your capacity to deal with these issues and the nature of complaints that people might have been bringing and whether the framework law which you are oversighting was adequate to address those issues. I would be particularly keen for advice as to whether you think there are shortcomings, if your oversight role was not as full and complete—or even accessed by people who may not have known that it was there. I am interested in those particular matters. I am also interested in whether or not financial institutions might be required, by amendments to the law, to deal with these matters of impaired loans differently. In other words, whether it may be desirable for us to be looking at the US system where banks and financial institutions are required to keep people trading, if at all possible, so that they can trade their way out, if there are difficulties.

Mr Medcraft : Are you assessing the chapter 11 style—

Mr RUDDOCK: That is right. I am very interested in whether that is something that we should be looking at. I do not see today as being the day to pursue these matters, but I wanted to put you on notice that I am particularly interested in these questions. Can you tell me about the banking codes of conduct?

We are seeing an organisation later that is going to comment that the code of conduct addresses some of the issues that I might be interested in but only after 2014—I think that was the view. The Code Compliance Monitoring Committee—I think we are going to see them later—talks about a requirement for banks to provide small business customers with at least 10 days notice to change your terms and conditions. I do not know what that means. Does that mean that, if they revalue your loan and then require you to pay up, you have got to be given at least 10 days to pay up rather than 24 hours?

Mr Saadat : That is the Code of Banking Practice and it only applies to small business borrowers—

Mr RUDDOCK: Small business people might be developers.

Mr Saadat : The clause that you have just mentioned operates to require the lender to provide 10 days notice of a change to the contract. So, if the contract already allows the lender to exercise certain rights under that contract, then it would not be a change to that contract if the lender was merely exercising those rights.

Mr RUDDOCK: It is being suggested that the code addresses some of the issues that might be of concern to me. It does not, in fact, address them.

Mr Saadat : I does not, potentially, address the specific issue of lenders being required to provide—

Mr RUDDOCK: This is the one that brings it back to your organisation about whether consumers are being treated fairly by the contract terms and conditions. Anyway, that is the issue I am going to ask you to look at to be able to advise me at an appropriate time, because I am very much focused on the reasonableness of the contracts which enable very considerable variations.

Mr Medcraft : The other thing that comes into focus when we talk about codes is the enforceability at law of codes, or the influence at law of codes, and that is also quite relevant because—

Mr RUDDOCK: But we are responsible for law and if the law is not adequate I need to know.

Mr Medcraft : The point I am drawing out is that, if you have a banking code or a Code of Banking Practice, a lot of consumers feel there is some sort of quasi-legal influence there. Sometimes there is an issue of really understanding how—

Mr RUDDOCK: What I am interested in is whether your organisation is able to protect customers and consumers in the way in which I understand the ACCC tries to do in relation to other areas of activity. My understanding is that, in relation to the oversight of banks, it was taken away from the ACCC and is with you. What I am interested in is whether you have the same focus on those issues and whether you have the same powers to adequately address those issues. I want you to know that I am looking at the nature of the submissions that are being made to us. What I think in terms of what is being put to me—I may be wrong—is that it seems to be unconscionably exercised in relation to some of the people. I look at situations—we are going to get the evidence in relation to this—where some people have made extraordinary large amounts of money by being able to complete projects that others had underway but were terminated.

Mr Medcraft : We have noted down everything that you have said.

Mr Kell : I appreciate very much the indication of the areas that you are interested in. Some of them, at least, we sought to address in the submission that we have already made to that inquiry. Your comments will help us to provide some additional information, including about the US regime. I suppose I would note at the outset that there is a difference between our powers as they go to being able to deal with individual cases and the particular facts of a case, and being able to deal with systemic practices across an industry. I think that is where we see some deficiencies or limitations that we would be very keen to discuss with the committee.

Mr Medcraft : We are, particularly on chapter 11 where we have made recommendations on, I think, the Financial System Inquiry in particular, where we felt there should be modifications to allow more flexibility.

Mr Price : I should also note that the current Productivity Commission review into business set-ups, transfers and exits is specifically looking at various issues around business failure. The draft report, which was issued mid this year, specifically covered off some of these issues around the US regime. ASIC has previously been on the public record, including before parliamentary forums, saying that we support various elements of the US chapter 11 style regime, but not a wholesale adoption of that regime because of the different nature and size of our market. So there are specific elements that we think—

Mr RUDDOCK: I would like to have a look at it. I do not know whether the secretariat has focused on it, but you might like to bring my attention to the relevant sections of the Productivity Commission report that you think I should be aware of.

Mr Price : Yes, I am happy to do that.

Mr Medcraft : And we will give you an idea of what we proposed to the FSI.

Mr Price : We can also give you our public submission to the Productivity Commission, which touched on some of the issues.

Mr RUDDOCK: If we are looking at where we should go—assuming we found that there were substantial issues here—it may be something that we would like to take up. Finally, do you have any role in relation to oversighting other practitioners—that is, property valuers—who are involved in the consideration of impaired loans? I am interested in some of these suggestions that there are cosy deals; or that you get valuers to value on the basis of particular circumstances; or valuers being asked to value on the basis that this is an exciting development prospect where they want a high value so they can lend on it; or those who may want to close somebody down and sell them up, where they are telling them it is impaired and the suggestion is that the valuations ought to be lower. I do not know if these suggestions are true or not. I am just saying these are the sorts of allegations that are made to us. Who deals with it?

Mr Price : Generally speaking, property valuation is dealt with through state based legislation. ASIC may have an interest in various valuation issues, but that almost inevitably centres around whether or not what is being valued is a financial product, and real property is not a financial product.

Mr Tanzer : For example, if the property was an important part of a managed investment scheme, which is a financial product, then ASIC may have a role with respect to the accuracy of valuations or predictions made. But, more generally, with respect to the competence of valuers, it is something that is not—

Mr Medcraft : But we do maintain engagement with the Australian Valuers Institute. We engage with them and talk to them.

Mr Tanzer : Particularly with respect to property schemes.

Mr Medcraft : We do not regulate them, but—as Greg Tanzer said—in relation to MIS they are often quite relevant.

Mr Price : The key question you need to ask yourself is: is what is being valued a financial product?

CHAIR: Can I put, Mr Price, that the key question ASIC should be asking themselves—in light of your corporate plan, which goes to culture—is: are financial institutions who are directly under your supervision playing the market with valuers in terms of instructions they give? In your corporate plan you talk about shaping culture and removing conflicts of interest. Are lenders engaging someone who is both a receiver and a valuer to do a valuation and then pick up the work? To a layperson, this would be a clear conflict of interest. You may well be right that it is not a financial product, but there is a very clear intersection with the behaviour of lenders, who are gatekeepers that are directly under your supervision, and in the context of your corporate plan, I would invite you to consider deeply whether or not the behaviour and conduct of the sector that may not be directly under yours intersects with lenders who are—because the evidence we are receiving is that very clearly they do.

Mr Price : Some of what you have raised has already piqued my interest greatly, particularly around receivers being the same people who are valuing the property. I think there are some useful further discussions to be had there.

Mr RUDDOCK: I just really wanted to put you on notice, because there is a lot of evidence coming to us and we are going to test it. There will obviously be others, like the financial institutions and their representative bodies, that will not attest it, but we will need to understand how you have seen these matters as well, given you have the oversight function. We are particularly interested in how effective that oversight role is.

CHAIR: I will just follow up on that point before we go in camera. Again, this links back to your focus for 2015-16 on culture. You are looking to try to influence the culture from a board level down to make sure gatekeepers do the right thing. In the lending space, they sign up to a code which was one of the things that we expect would start shaping culture. Looking at the Banking Code, section 3.2, this is the key commitments and general obligations banks make to consumers, they say:

We will act fairly and reasonably towards you in a consistent and ethical manner. In doing so we will consider your conduct, our conduct and the contract between us.

Which sound great. The very next paragraph, 3.3, says:

In meeting our key commitments to you, we will have regard to our prudential obligations.

Having looked at the Murray inquiry and the comments about the prudential framework—I recognise that is not directly your remit—but some of the evidence that is coming through to us is that there is a duplicitous use of this concept in that their prudential obligation to their shareholder is to maximise return, which means that they will give high valuations where they can lend more and gain more business, but they will then use exactly the same clause to say, 'If we think we can foresee risk, even it is in the future'—so somebody is not currently in a distressed situation but the bank envisages that it can be, they will use this as the basis of their legal exercise or options and rights to then impair a loan, prudential obligations, to protect the various rafts of different tiers right down to the depositor, at the very bottom of that list. Can I ask you to consider your interaction in terms of your dealing with culture and the conduct of the lenders, as gatekeepers, with the codes and whether or not we need to be looking at making recommendations for standard practices around things like valuations, whether or not despite Murray's comment that broadly our prudential structure is sound and does not need large reform. Are there areas where we need to be providing better a definition that goes to this issue of culture and conduct so that the outcomes for the consumer, whether they be individual or particularly small business—which is the focus of this other inquiry—are what the reasonable person in the street would expect?

Senator O'NEILL: I just want to indicate, as have the Chair and Mr Ruddock, that all senators are extremely concerned about the evidence that is emerging before us. We talk about culture in the broadest terms, and I would like to ask some more questions about culture if we have time, and I think it does integrate later on. To reveal some of the culture, I just want to read a statement that raised concern for me and just get your reaction. If you were in a position to provide evaluations and you received communications that said that the bankers will be wanting 'quick and dirty IAs for $10,000 to $15,000 with the hope that the recommendation is to do nothing more', would that raise concerns for you?

Mr Kell : In all fairness, I think, we would need to understand a little bit more about the case, the context and the issue, rather than just jumping in. We are looking forward to addressing these matters when the loan impairment inquiry kicks off and we really appreciate that. We would be happy to deal with it then, rather than comment on the fly. You pointed to some concerns about culture around that and I am happy to deal with it in that context.

Senator O'NEILL: We can perhaps discuss this further in camera and certainly in further hearings. You know we are kicking that hearing off this afternoon here, but the level of concern we have I do not think we can express too heavily today. I am pleased to hear that you are across the submissions. Indeed, I wonder whether it would be helpful for the committee to receive any evaluations of the materials that you have undertaken using your resources, that may be of some assistance to the committee in our preparations for the hearings as well.

CHAIR: Can I ask that people who are not part of ASIC or the committee leave the room and I ask that cameras and recording devices be cleared from the room.

Pr oceedings suspended from 10:26 to 11:09

Senator KETTER: Mr Medcraft, continuing on with the discussion about improving culture. Referring to your response to questions on notice, you talked about the fact that ASIC's response here, and what it has been considering, is that:

… when an employee breaches the law ASIC administers and culture is responsible … the officers and the company should be responsible.

How do we determine a situation where culture is responsible, and how are we going to define culture in this type of situation?

Mr Medcraft : Culture at the moment is actually defined under the criminal law. It is actually defined as 'an attitude, course of conduct, practice or procedure'. Essentially, if you think about it, that legal definition really reflects if you want the mindset or the culture of an entity. So it is defined in the criminal law at the moment. Under the criminal law, if in fact a company is seen to have a culture that actually enables or assists an employee to break the law, the entity can be held liable. That is the criminal law—I am summarising here. That is often used in areas like occupational health and safety and environmental law, where basically I suppose a simple analogy is that it is not just a matter of your having a bad apple or lots of bad apples, because at some point where is there a problem with the tree?

What we have suggested, and it is obviously a matter for government, is that perhaps this provision should extend through to chapter 7, 'Financial products and markets', of the Corporations Law. What is more important is that it actually extends through to individuals, because at the end of the day companies are the sum of a bunch of individuals, particularly management. So it comes back to individual accountability of management. That is where it is really important. The Financial System Inquiry has already recommended an element of that, in terms of actually having the ability to ban management of certain financial service licensees, so it is starting to pick up on that individual accountability.

As I said, the second aspect that I think is important in terms of dealing with strengthening this law around having the right set of internal controls is actually strengthening whistleblower laws. So it is not just about having the right internal controls, but equally it is about having a situation where whistleblowers are not acted detrimentally against but are actually properly supported and compensated, potentially, for their lifetime earnings.

The third element of what I said was actually thinking about how we can strengthen peer-review panels, perhaps in a co-regulatory situation, as we have done with the Markets Disciplinary Panel—expanding that concept to perhaps a financial services disciplinary panel that can be an option to pursuing civil cases through issuing of infringement notices. I believe the powerful thing about that is the peer aspect. Your peers actually sitting in judgment of you frankly is a very powerful tool, I think. They are the three elements I would suggest to think about.

At the end of the day, as I said in our session before, we cannot regulate culture. Culture is basically the mindset of a firm. What we can do, though, is say that if your culture is enabling a breaking of the law then often when we see poor culture it is a very good indicator to us that there is probably poor conduct, and that will be a big red flag to us to investigate.

Senator KETTER: Returning to the extension of the provisions to include individuals, you say that the officers and the firm should be responsible. You have also said, 'We think ASIC should have the power to hold the senior management of an entity responsible.' How far down are we going do you think, in practical terms? How do you define 'senior management'?

Mr Medcraft : What we do not want to do is micro-manage companies. It is the responsibility of the entity to have in place the right set of internal controls. I do not believe that, for example, we should be going down the route of the UK senior manager regime because I think that is micromanaging companies too much. Frankly, I think it is up to companies to have the right set of internal controls that actually make sure that, basically, they are comfortable that their employees are not breaking the law. Wherever it is in the management structure, that is up to the company. Again, I think it is important not to try to micromanage companies. I think it is important to make sure that they have that obligation to make sure that that mindset results in the right outcome.

Senator KETTER: In the law at the moment, would it be clear as to who would be responsible for that culture?

Mr Medcraft : The responsibility for, as I say, the mindset of a firm comes back to the board. If we go back to the Centro case, the board sets the strategy, the direction and the internal controls of the company. Also, what Centro said—as we know, it goes back to fundamentals of management. Delegation does not remove accountability. It does come back to the board and back to making the board feel comfortable that it has the right set of internal controls within the company. We saw this with the Volkswagen case recently, where the CEO did not have any awareness of what was going. Clearly, there was an issue with the internal controls in the organisation. It goes back to the top. It must always go back to the top.

Senator KETTER: In terms of your suggestion that whistleblowers be compensated—I suppose that is the best term for it—how would you see that? Can you provide a bit more details to how you see that?

Mr Medcraft : Clearly, it is a matter for government. But I do not think that a reward system is appropriate for Australia. I do not think that that is consistent with our culture as a bounty-type culture. However, I do think that there should be a discussion about, perhaps, compensation for somebody who has whistleblown and has a loss of lifetime earnings as a result. To the extent that there have been fines or recoveries from the breach of the law reported, then there should be, perhaps, a thought about compensating that particular whistleblower. It is something that we do not have today. If you think about it, the biggest problem for a lot of whistleblowers who see poor things happening is that they go home to their spouse and say, 'I'm not happy about what I am seeing; I'm not happy about it,' and the spouse says to them, 'Well, we've got a mortgage. We've got children. You can't do anything about it.' We need to take that off the table and say, 'You actually won't be acted detrimentally against as a result of whistleblowing. In fact, you will get compensation.' I do think we need to think about changing the equation a little more, frankly. Often the best whistleblowers are those people already working within a company.

We are seeing in the United States that the whistleblowing laws that actually reward people are proving to be very successful, particularly in the pharmaceutical and financial sectors. But, equally, I do not think that their approach to it is as consistent with, I think, our culture. I do believe that we probably could do more to help whistleblowers. Franky, I think that they can strengthen the system. Also, companies should think about rewarding whistleblowers for coming to them. It is not just about what government can do. If somebody is doing the wrong thing, that affects your brand. Then, frankly, you should be rewarding the whisteblower. The person doing the wrong thing is potentially attacking the fundamentals of your business. Why shouldn't you reward the whisteblower?

Senator KETTER: Are there any examples of best practice in that regard?

Mr Medcraft : We were discussing this. I do not know whether any of the commissioners have seen good practice—

Ms Armour : There are some financial institutions that have instituted remuneration practices that positively reward good practice—so quick escalation of issues, turning away transactions for the right reasons, and those sorts of the things.

Mr Medcraft : I think Citibank, globally, has pushed in this direction. Citibank has actually created a board-level ethics committee, I think.

Ms Armour : Yes. I am not sure what it is called.

Mr Medcraft : If we have public ones, we can bring them back to the committee. But, for the future, we have got to think about this, because, as I said, we cannot regulate culture. There is certainly an issue here and around the world of a drift in culture, a drift in ethics in particular, of not doing the right thing.

Senator KETTER: You say the US approach is not appropriate to Australia. Are there any other jurisdictions where you have looked at models that apply and see them as being more appropriate?

Mr Medcraft : Again, we can come back to you on that. This is an issue that is being looked at right around the world at the moment. Globally, in financial services, conduct and culture is something that is being examined very closely because of what we have had with the Libor scandals, with the foreign exchange scandals et cetera. So it is very much front and centre globally at the moment. But we will come back to you on that. There is also, for example, IOSCO, which I lead globally. We have just recently established a task force to look at conduct in wholesale markets and looking at setting standards or guidance. This is not just an Australian issue; it is a global issue.

Mr Day : If I might assist, Senator. ASIC is supporting an Australian Research Council grant piece of research, which is being led by Professor AJ Brown from Griffith University, who appeared before the Senate inquiry hearing into the performance of ASIC. He gave evidence to the committee with regard to the issue of whistleblowers. ASIC, amongst other institutions, is supporting that. A number of the Commonwealth Ombudsman schemes as well as some state Ombudsman services are supporting our piece of research. It is looking at organisational practices in whistleblowing and similar. We are supporting it. We are interested to follow that and to consider better frameworks and those types of things.

I might add just as another observation that you might want to step back even before whistleblowers. On one view, you would say: if you have a whistleblower or there is a need for whistleblower in your organisation then that is an example of system failure. It should not come to that. So when you ask the question, 'Can we give you good examples of whistleblower programs?' I would say, 'If I have to give you a good example of a whistleblower program, I'm giving you an example of a company that has problems.' In fact, the companies that do very well in this space do not need whistleblower programs because their people feel that they are able to speak up about matters that concern them. I think to focus on the end issue, which possibly, as I have said before, is the outworking of a system failure, is potentially the wrong way of looking at this problem.

What you need to look at is, in fact, the health of the whole system in ways that internally staff feel empowered, safe and able to identify those things that are an issue to the company. When you talk about rewards, that is where the rewards program should be—at an early stage. In the work that we do at ASIC in looking at whistleblowers' matters, people who identify themselves as whistleblowers are whistleblowers. Psychologically, they are in a very highly anxious and very, very difficult position. They find themselves, if you like, at odds with the world. It is a very lonely and difficult place for a whistleblower to be. So my position on that is that I agree with everything the chairman said: with a whistleblower, we should be looking at what things we should do to support them and facilitate the information they are providing.

But I would dial back even further and say: 'Why has it come to that in the first place? What is it that the organisation has done so badly that it requires someone to think that they have to step up and be so brave in those circumstances? If you are talking about culture, that is the thing I think we should be focusing on, not primarily and solely on whistleblowers but more on that broader culture of the organisation that allows that to be brought up as just part and parcel of how that business operates.

Senator KETTER: Mr Day, I could not agree more. I think it comes back to the culture in the first instance. We want to ensure that is right.

Mr Medcraft : I agree with Mr Day, but, at the end of the day, having been in big organisations, the biggest problem for people who want to be whistleblowers is: who can they trust? The problem is that they may be putting their whole career at risk by going to somebody who cannot be trusted. That is often why it is important to have a whistleblower function. Again, for a whistleblower, there has to be somebody that they know that they have no doubt that they can trust. That is why sometimes it is somebody completely outside of a firm that is the whistleblower. They know that they are going to be safe reporting to that person. I do think that it depends on the culture. Unfortunately, in some organisations you need to have it so that it is somebody that you know is not going to just turn on you so you lose your job and everything like that.

Senator KETTER: So, just going back to the individual firms within the financial industry, do you see that there should be reporting by firms on their culture—how healthy it is and what efforts have been taken to improve the ethics within the firm?

Mr Medcraft : Again, I do not think you can regulate culture.

Senator KETTER: No, you cannot.

Mr Medcraft : If a company wants to tell its employees, its shareholders and its stakeholders what it does to have a good culture, I think that is probably a good thing. But I do not think we can regulate it. If you think about it, companies that have good culture usually celebrate it and say, 'Here's what we are doing.' I know that Citibank, for example, have done that. I know that in the United States state one that is always cited is Wells Fargo. It has a very good corporate culture, and everyone knows that Wells Fargo has a good culture. Interestingly, they have a good culture and, interestingly, they now have one of the best cross-sells in banking. I think they sell on average three or four products. So having a good culture is generally consistent with a good business, and I think those sorts of people can be celebrated.

Senator KETTER: In answer to one of the other questions in relation to what powers you need to do your job more effectively, and just coming back to this issue, you said that would like a broader intervention power or product intervention power. How would you determine the circumstances where you would seek to—

Mr Medcraft : I will let Peter Kell comment on that, but I think there are two things that are really important. The recommendations of the FSI on the manufacturer obligation—in terms of how they manufacturer, design and distribute—combined with the product intervention power, to me, go together. The important thing on them is that we are no longer just focused on point-of-sale disclosure; you have to look at the whole value chain. I do think that these two tools are very important for the future of regulation because, particularly in a digital economy, you cannot micromanage everything. I think that obligation and the product intervention power are very important tools for the future, particularly in a digital economy, because you cannot micromanage everything. I will pass over to Mr Kell.

Mr Kell : Yes, it is one of the recommendations in David Murray's Financial System Inquiry report. So, obviously, it is a decision for the government as to how that is taken forward. If it were taken forward, we would anticipate that there would be a process of consultation around what a product intervention power would look like in practice. The FSI report does not go into enormous detail around that issue. If it were to go forward, ASIC would envisage that there would be guidance around the circumstances in which it were used. So, for example, we might consider it if there were a systemic problem in an industry where taking individual enforcement action was not necessarily going to assist with rectifying market problems say around the design of a product. We would look to consider it where the industry themselves or industry players were proving incapable or unwilling to address a problem around product design.

We would look to ensure that, where we went to use, we had undertaken adequate analysis of why a product intervention would, for example, be better than disclosure. So it might be a power that is used in some areas where disclosure is not a particularly effective tool, say, for some of those products that are designed for less financially sophisticated consumers. It might be a power that is, for example, used to enable us to get in faster to deal with what we saw as a product design flaw, rather than wait for the problems to emerge down the track. So we might also use it where we saw the need to intervene in a timely fashion.

Some of those considerations would come into play. But, as I said, I think if it were to be taken forward, there would need to be a fair bit of discussion around how it could be designed to achieve those outcomes and also to have accountability around its use. We envisage that such a power would require significant accountability for ASIC in terms of how it was implemented and where it was used.

Mr Medcraft : Do you want to comment about the product design? I think that goes with it as well.

Mr Kell : Yes. That recommendation in around the product intervention power sat alongside another recommendation that went to suggesting additional responsibilities for product manufacturers and distributors around ensuring that their products were appropriate, suitable and appropriately targeted—that is, they ended up in the hands of the people they were best suited for and they were most appropriate for. You can see that in some ways those two powers would go together if there was a situation where there was a clear failure in relation to product accountability and the product was ending up in the wrong hands or it clearly was designed in such a way that people did not understand the risks. If it had failed on that count, you may well then look at product intervention to fix the situation.

Senator KETTER: So you see these broader intervention powers relating more to systemic problems rather than failures of an individual firm?

Mr Kell : I should have been clearer. It may well be quite appropriate in relation to an individual firm as well. If there is a product that has a significant design flaw or that is obviously going to lead to consumer loss, the way that the product has been characterised and the way that we understand that it would potentially work is that it would allow you to take actions for individual entities as well.

Mr Medcraft : What is important is that it takes the pressure off just simply disclosure if it is the way that it is marketed or targeted. I think in a digital age this is quite important, frankly. The attractiveness of this is that it does potentially allow us to think about dismantling a lot of disclosure and actually having something that is far more principle based, which I think in a digital economy—

Senator O'NEILL: Sorry, Mr Medcraft; something that is more—

Mr Medcraft : Principle based, so that we do not try to micromanage manufacturers. At the moment it all defaults to the disclosure—which we know most people do not read. This actually combines the two and say, 'Well, we're not going to micromanage you but if we see that it does not fit the principle, which is the product design obligation, there is that power to intervene,' and it may not necessarily be in the way that you are disclosing it; it could be in the way you are selling it. For the digital age, I think it is quite important to think about these two. If you went with these, you can then start to think about perhaps dismantling a lot of the disclosure we have today, which often people do not read anyway. So I do think it is an interesting combination. What has come from the FSI is potentially very powerful for the future—and perhaps people do not appreciate how powerful.

Senator O'NEILL: I am very pleased that the senator has covered off some of those areas that are of a real interest to me as well. I thank you for your response to a suggestion from Senator Williams in our last oversight hearing about things that needed to improve. You have gone into some detail about the broader intervention powers. In the fullness of your answer you talk about the areas of the law where you need reform—powers, licensing, penalties and compensation. We have not really spoken too much about those matters. Is there someone here who could speak about licensing and testing and where we are up to?

Mr Kell : The issue that we have been raising for some time now, as you may well be aware, is that the barriers to entry for getting a licence have, in our view, not been robust enough and then, on the other hand, the ability to take away a licence is more difficult than it should be—which is the opposite of the combination that you would wish. What we have raised as part of our submission to the financial system inquiry is that, in looking generally at ASIC's enforcement toolkit and powers, we believe that having a more rigorous test before a licence is granted and having a greater ability to knock back a licence if we do not think the firm is equipped to satisfy the requirements would allow us to, in effect, knock some of the poor players out at the entry gate rather down the track.

Mr Medcraft : We have said that we need to move more to a system where it is a privilege and not a right in principle.

Senator O'NEILL: You also talked about the need for powers allowing you to ban people from managing financial services businesses. You can ban then directly from doing the advising but you cannot ban them from managing a group of people doing it.

Mr Medcraft : That is correct. That goes back to the point that we were just discussing around making individuals accountable. An element of this has sort of been picked up in that recommendation.

Mr Kell : The financial system inquiry supported the proposition that ASIC put forward, which is that we ought to have a much greater capacity to deal with the manager of financial advice firms. It is easier for us to ban the front--line advisers, but it is far more difficult for us to take action against the person who was responsible for the way in which they worked and the environment in which they operated. We have argued that that would be a useful reform.

Senator O'NEILL: You also made comments about independent reviews. I know that the FSI and ASIC have talked about the ownership of licences and that there is no requirement for notification of a change of ownership.

Mr Day : Ultimately we become aware of that sort of thing, but it is not of itself treated as a fresh application. In a lot of circumstances we do at least practically treat it as such. Certainly a number of financial services businesses have gone into administration and we speak to receivers or liquidators about the change where they might be trying to sell the book of clients and that type of thing. So we will talk to them about that, but of itself it is not a fresh application. What we find—and we have made mention of this in previous public statements and in the licensing report that we have not put out and we put out every six months—is that we do see situations where people who cannot get a licence, because they have applied and we have knocked them back, act to buy a licence. We know that the cost of a licence has been going up for the type of trade sale over a period of time.

Senator O'NEILL: How much are we talking about?

Mr Day : It depends. In the licensing reports we have been talking about the good work that the organisation has been doing from start to finish—from licensing all the way through to enforcement—in hardening the environment around the foreign exchange area of financial services. We have not granted a licence for well over 12 months. That is not because we just have a blanket ban; it is because we have not seen an applicant that we would think is appropriate to give a licence to. To answer your question, Senator, we have seen at the moment that there are offers in the market to buy licences approaching $1 million. Twelve months ago we were informed that that amount was closer to $200,000.

Senator O'NEILL: Let me be clear about what you are saying.

Mr Kell : This is retail FX.

Senator O'NEILL: Mr and Mrs Normal, who do not have much to do with this financial sector, who are going to be dealing with companies where they see them as licensed and they believe that, like when you get your own licence—

Mr Kell : I want to be clear that the area I am talking about would not be somewhere that you would expect the average mum and dad, as you say, to effectively walk along and knock on their door. We are talking about people who want to get licences in respect to trading at the retail level of foreign exchange. That is not your average mum-and-dad activity. What we do know is that the people who are seeking these licences, by and large, are operators who are not based in Australia; they are offshore. I do not want to have it taken that they are scam operators or anything else like that.

Senator O'NEILL: But there is potential for that.

Mr Day : There is a potential for that, and those are the things that give us concern and pause for thought as to the bona fides of these people when they apply to us for licences. What we do see is that they are approaching existing licence holders in the foreign exchange space—legitimate operators trying to buy their licences—because of the fact that we have hardened the environment, in that area, over the last 12 to 18 months and it is—

Senator O'NEILL: Do you know how many have been sold in the last 12 to 18 months?

Mr Day : It is difficult for us to say, because of the nature of the lack of detail around notification of this. We are doing work about that.

Senator O'NEILL: You are the ones who give out the licences, in the first place.

Mr Day : Correct.

Senator O'NEILL: Once they have gone from your purview, basically, they are up to the individuals to sell.

Ms Armour : Yes. A change of control of licensee is just a notification requirement to ASIC. There is actually—

Senator O'NEILL: Once it is done.

Mr Day : That is right.

Ms Armour : Unlike many other jurisdictions, there is not an approval required from the regulator. It is an issue.

Mr Medcraft : Just to give you a global input, it is quite troubling. In the retail-FX space, which is almost gambling—it is gambling—there are two issues. One is that it is complete fraud or stealing people's money. The other is, basically, inappropriate parties participating in retail FX. Some jurisdictions are pointing out to us that many of these global retail FX licence holders are using an Australian AFSL licence. To a certain extent, it troubles me that our jurisdiction is being taken advantage of to undertake this sort of business in our country. There is already an example in Japan, I think, where we took action.

I had not mentioned the commissioners, but at the IOSCO board meeting, last week, this did come up. Many jurisdictions are concerned about retail FX, globally. Some jurisdictions, regimes, are being taken advantage of to create credibility that this party is licensed. Particularly, in retail FX, this is quite an issue. We have to be careful as a country. We do not want it, necessarily, to be seen that our regime is so light that you can exploit it, to others' advantage, around the world. It is something we should be cognisant of as a country, because if other countries are pointing out to us that these parties are coming into their countries and taking advantage of our credibility as a country—

Senator O'NEILL: Have you spoken to the government about this concern?

Mr Price : If my memory is right, this was a recommendation that came out of the collapse of Trio, that these requirements should be tightened up; that report goes back several years.

Senator O'NEILL: It does. I remember when it got tabled. We have a failure of action, here. Is it because, like so many things we have talked about today, the Murray report, our report, is still sitting on somebody's desk in the ministerial wing and nothing is—sorry, you cannot answer that question.

Mr Day : No.

Senator O'NEILL: Let me just bring it back. Can you explain, what seems to me, an inordinate delay in responding to this problem, which is more than just smoke, now? If we have licences going from $200,000 up to $1 million in the course of a year, that is pretty serious action.

Mr Day : I would take issue with one way you categorise that. It is not a failure of action. ASIC has been very clear, here, that we are acting to the extent that we can. From the start to the finish—

Senator O'NEILL: It is not a failure of action by ASIC.

Mr Day : It is a matter for government as to how they respond and the time frames they respond to reports, be it from your committees or from Mr Murray. I do not think we would want to buy into that. What I would say is ASIC has been very clear, here. Its strategic outlook talks about this as being a risk and an area of focus. We have furthered that through. When our first licensing report came out, in May this year, which is the first time we have issued a licensing report—we are going to do this every six months; we have just recently put out the second one—we made it very clear that this is an area of focus. We picked up on those recommendations in doing what we can, in this space.

We put out a lot of media releases to show people where we have cancelled their licences or suspended licences. In the licensing report we show the areas where we have not given licences, in this space. There are a lot of accusations, often, put to ASIC that we are asleep. On this problem, we are red hot. We are doing what we can. Whether or not other people who have those reports want to respond, that is a matter for them. But we, in this space, have been quite good.

To pick up your point about the cost of licences and isn't that a bad thing, you might say that is a very good thing. The fact that we are pushing this hard, in this space, shows that the people who want these licences are now being forced—nearly in a market, you might say—to pay a lot more money for these licences. They do not like that. In its own way that has a deterrent effect as well, because if they are going to pay $1 million rather than a couple of hundred thousand dollars, they have to make a hell of a lot more money to make it worthwhile getting that licence in the first place. I want to be really clear: we think that here we have pulled out all the stops in this space and are doing a very good job—as I said, from start to finish.

Mr Medcraft : We are actually telling those regulators elsewhere in the world what we are doing about it—we are actually doing something about it. Also, when we get intelligence from them, they see this occurring and we do what we can to try to deal with it—which we did do in, say, Japan.

Senator O'NEILL: My concern is that something like Mr Flader, in this 24 months of wide open space, could say Australia is not such a bad place to make an investment of, maybe if you got in early, $500,000 instead of $1 million, get a licence and know what to do in this space and put people at risk in the way that we have seen with those who were the victims of Trio. That could be happening now—

Mr Day : I cannot speak for Mr Flader. I am sure Mr Flader can speak for himself. In the work we are doing in the Serious Financial Crime Task Force and other areas, these are matters we are considering about where we see serious financial crime. I want to be at pains to say that retail foreign exchange business is not solely, if at all, an area of financial crime—I am just saying that there are elements that we are concerned about. We are doing work in that space to then speak through serious financial crime about what extra we need to do. I want to give you some assurances that it is not just again that we are sitting there doing nothing in that space and if someone of the ilk of Mr Flader thinks they could then come in and get access, they will find the environment very hard. Within the limitations of what we have, the environment is very hard. We will then work with our partners in the Serious Financial Crime Task Force so that we can share the intelligence across those agencies to make this area much harder again.

Senator O'NEILL: The question I am asking is in the context of the original question, which is what do you need to have to do your job better. I go back to that, and you have made a good defence of your actions in this space. What have you asked to be done, how long does it take to do what you need to do—

Mr Medcraft : Basically we need licensing to be a privilege, not a right, and what comes off the back of that are some of the recommendations of the Financial System Inquiry.

Senator O'NEILL: Which requires the government to do what?

Ms Armour : Just a change to the legislation so there is a prior approval obligation where there is a change in control of the licensee—so you must come to ASIC for prior approval.

Senator O'NEILL: A trigger for notification for you—that is all it requires?

Ms Armour : No, we have notification at the moment but we cannot do anything with that notification. We cannot prevent the change of control occurring.

Senator O'NEILL: At a trigger not at the point of sale but the point of intent to sell?

Ms Armour : Yes, exactly.

Senator O'NEILL: So as soon as you think you are going to put your house on the market you have to let ASIC know?

Ms Armour : And you have to seek ASIC's approval.

Mr Tanzer : We do not want to be involved in property transactions.

Mr Day : I want to be very careful because there will be those who hold financial services licences right now who would be quite concerned that it would seem to be another piece of red tape in the way of them selling legitimate businesses and those types of things and the more time it takes to sell that business and the more clearance is required from another government department before they can do those things. There is a balance here. There is a balance with ASIC vetting that change—is the person getting that licence the appropriate person and business who should be running that business, compared to facilitating trade and commerce. There is a cost involved, because it suddenly gets treated like a new licence application, and so there are more of my staff who are going to be required to check those as well as, then, checking the ones that are asking for licences right now. Again, we do not want to get in the way of business and put unnecessary barriers to entry, if need be, but we are saying that we have seen instances where in that circumstance we would like to check those a little bit more closely. So it is not going to be just a change; it is also going to then be some funding so that we have the staff in real time to be able to deal with that so that we do not hold up legitimate trade sales. And we do see legitimate trade sales all the time.

CHAIR: Coming back to the fundamentals, if you deem it appropriate to have a fit and proper person check for a new licence holder, then a new entrant to the market should be treated no differently.

Mr Kell : Yes.

Mr Medcraft : I think that is a weakness of the current system—I think you are absolutely right.

CHAIR: For our information, what is the percentage of identified regulatory arbitrage that is occurring?

Mr Day : We would have to take that on notice. We will go away and see if we can find it. That, again, is difficult to say. We do have some ideas about that, but it might be difficult to answer it directly. We will give the closest answer that we can.

Mr Medcraft : Would the way you measure that lead to those that give us notification?

Mr Day : It is not just notifications; it is where their location is so, in terms of regulatory arbitrage, it may be that they register a special purpose vehicle.

CHAIR: Correct. You have to assume there is—I am plucking a figure here—50 or 60 or 80 per cent of legitimate sales from people who just want to enter the market. There will be a percentage who are creating a vehicle to avoid a regulatory environment elsewhere. I would like to know the size of that, if you have an understanding of it.

Mr Day : We will do what we can.

Senator O'NEILL: Going to your next plea: the search warrants. You made points about the need for more effective search warrant powers, particularly for general search. What are you asking for there?

Mr Tanzer : Again, it is a change of legislation. Generally speaking, there are certain powers under the ASIC Act to seek search warrants, and the execution of those search warrants is always done by the Australian Federal Police. Our ability to obtain search warrants for our own investigations exists, but there is an inability to use information obtained by other agencies under a search warrant, notwithstanding that that information might disclose evidence of a criminal offence against legislation that ASIC administers. We do not get around this, but we deal with it by having good cooperative arrangements with bodies such as the Australian Federal Police. It does mean that where the investigation commences using search warrant information, or if it is necessary in particular to obtain telecommunications intercepts to further the investigation, then that needs to be done by the AFP and under the auspices of an AFP investigation.

The most recent case, which you will be well aware of, was the insider trading matter involving Mr Kamay and Mr Hill. The key evidence that was necessary in that matter, and which we were able to obtain through cooperation with the AFP, was telecommunications interception evidence. ASIC staff were seconded, effectively, to the AFP to undertake that investigation because we have an inability to use telecommunications intercepted information for the purposes of our investigation. This was something that was considered a couple of years ago by the relevant parliamentary committee. They recommended that ASIC should have this power, but the legislation that came forward did not give us the power with respect to our investigations; it only gave us the ability to cooperate with other agencies for their investigations.

Mr Medcraft : One of the issues we have raised with the capability review is that this is an area where we could be more efficient simply through a change in law to allow better sharing of evidence so that we do not have to duplicate the gathering of evidence and so we can gather evidence directly on our own behalf.

Senator O'NEILL: Have you had any indication of a likely response to this?

Mr Tanzer : To be clear, the policy that we are seeking to implement is the same as what we use for other direct search warrants that we seek, which is that the AFP would be the entity that actually executes the warrant and we would do that cooperatively with them. But then we can use that information for the purposes of our investigations. We are looking to do exactly the same thing with respect to telecommunications.

Mr Medcraft : Isn't the key point that we do not have to create a joint investigation?

Mr Tanzer : Yes. So not only do we not need to create a joint investigation, but we do not have to second our officers to the AFP to do that investigation—simply to access the ability to use telecommunications intercepts.

Mr Medcraft : It is very clunky the way it is.

Senator O'NEILL: And you are still awaiting a response; have you made any recommendations to the government around this?

Mr Tanzer : That was something again that was the subject of the previous parliamentary inquiry. It was phrased in the context of—I think it was covered by the general recommendation by the FSA, that if it might consider improvements to the powers.

Senator O'NEILL: And still no response on that one. Finally, on the penalties and compensation, you gave us a fulsome answer and you just gave us a summary here in this section, but you gave a list of a broad review of penalties that needed to happen across corporations legislation.

Mr Tanzer : Yes.

Senator O'NEILL: Your concern, as I was reading it, was 'inconsistent and inadequate penalties'. Is that correct?

Mr Medcraft : That is in the civil area, yes.

Mr Kell : And one of the key mechanisms that we have argued for is there is a disgorgement power, which you do find in quite a lot of other jurisdictions, the ability to require an entity that is engaged in this conduct and has financially benefited from doing so to in effect pay out a multiple of that benefit. So we think that would be important in our in our regime but, again, this has been picked up in FSI, a recommendation to look at ASIC's penalty and enforcement tool kit more broadly. So we think this positive.

Mr Medcraft : Or simply just index them to inflation.

Senator O'NEILL: That would help.

Mr Medcraft : Yes, at the simplest level.

Senator O'NEILL: I would like to ask more questions about that but I sense that we are running out of time. And there is material here where you talk about liquidators and also voting that I would like to explore. We just will not have time for all of those things. I want to talk about those in the next hearing and, if time permits—

CHAIR: We have about 50 minutes. So we will ask a few more and if we have time we will come back.

Senator O'NEILL: Great, and I would like to indicate some questions around high-frequency trading, if there is adequate time today. Thank you.

CHAIR: Mr Medcraft, can I take you to your corporate plan. We have addressed a number of elements of it already in discussion about the culture and other things, so I will not go over that ground again except to highlight that your plan points directly to a number of interactions between gatekeepers you monitor—lenders for example—and talk about behaviour and conflicts of interest that go directly to the questions Mr Ruddock was asking.

On page 18, you start getting into the challenges of disruption and you are talking about the promotion of cyber resilience. In the response on page 19, you talk about a number of areas where you have been working with people and one example you give is dealing with companies where issuers provide insufficient information on cyber threats. What that immediately brings to my mind is a PDS that has an extra 15 or 20 pages in it with every conceivable impact that the cyber threatens. I wonder can you explain what you mean there and how you will make that a tangible benefit to the consumer as opposed to another 15 pages that they never read.

Mr Medcraft : That certainly was not the intention, as I am sure you know. John, do you want to comment on this?

Mr Price : I am just trying to locate the relevant—

Mr Medcraft : Page 19 on the—

CHAIR: Talk to me more broadly, Mr Price, about what you are seeking to do to engage with—

Mr Medcraft : Disclosure.

CHAIR: You have set up a department, so I am assuming ASD. You said you are going to engage with industry, so at least you are in the big picture, but the one example you have given in response, the potential for non-value-adding activities, looms large. So I am interested to know broadly what you are planning to do and specifically give us an example of how you are going to add value in that space.

Ms Armour : We put out a cyber resilience health check report earlier in the year and one of the things we flagged is that, where a company has a particular dependence on its technology for its key business, we are expecting the directors and the other key officers of the company to think about how they are dealing with cyber resilience matters. Likewise, we expect, and so do other regulators in similar positions, that when there is a disclosure, either to the market in the normal course of business or, as you mentioned, where there is a capital raising or other new product, if cyberresilience is relevant to the key risks of investing in that company—obviously there will be many companies where it is not relevant to—that risk needs to be addressed. It is really saying to boards, 'When you are thinking about your key risks, make sure you are thinking about this one.' We are not saying that there should be another 25 pages, as you have quite rightly corrected, but it is heightening the awareness that boards need to address that. If we see a business that really is a technologically dependent business coming to the market and it has not identified as its key risks that question, that will be the sort of thing that our team will say to the company, 'Could you please explain why you have not addressed that risk.' It is not an intention to add unhelpful disclosure.

CHAIR: How do you define, in this age of digital disruption and fintech where every banking product you can think of you can do on your smart phone or online now, what financial service business is not heavily exposed to the digital domain and the potential for cyberattack?

Ms Armour : That may well be the case that this is an issue that many financial services businesses do need to address. It does depend on the circumstances—for example, banks already have obligations under the prudential rules about managing risk. That, effectively, picks up these things. We would obviously look at what the product is, what dependences are and what existing regulation or regulatory framework is. It may not be necessary, in the context of that particular product, to have to have additional disclosure.

Mr Medcraft : AFSLs have a risk management obligation as well. As a subset of that, clearly, if cyberresilience is important we are saying to them that we want to make sure that in their risk management cyberresilience is being considered if in fact it is a critical risk. It is nothing more than saying this is something that is clearly an important and growing in importance element. We have given guidance to perhaps how companies think about it, about how they may be assessing themselves in terms of the standard—whether they want the US standard, or whatever—to get companies to start thinking about it instead of—

Mr Price : That is a fair comment. It is useful to contrast the situation with the financial institutions—for example, someone in the resources sector, which you would think would have a lesser dependence on technology and so exposure to some of the cyberrisks that are prevalent in the marketplace. The obligations, disclosure and otherwise, around cybersecurity and the cyberrisks really do very much depend on who you are and what you do. If you have a very heavily technology-dependent business, then your risk management systems and issues around disclosure, obviously, we would be looking for a far greater focus in that sort of business than in one that has far lesser exposure to financial technology.

CHAIR: Does it not also depend on who owns the risk? To take your example of a resources company, if I choose to buy shares in the company, and things go south, then I own the risk. I have bought the shares. I need the disclosure. But if I put my money in a bank or my business depends on the availability of an online service and the bank is hacked and shut down, who owns that risk, the bank or the consumer?

Mr Price : That is a good question. The shareholder of the bank may well be exposed to that risk because in the circumstances that you are talking about that could well be a material event for the company—that is, an event that materially affects the share price. Clearly, the institution itself, the bank, will have a direct interest as well because as well as various obligations that APRA imposes in terms of risk management, there are also broader licensing obligations that ASIC has that apply to. The sorts of considerations around cybersecurity really do very much depend on who you are and what you do.

CHAIR: I will just come back to my question. You have answered in terms of the shareholder and of the entity, but what exposure does the small business or the retail consumer have to risk in that event?

Mr Price : If their information is hacked and then becomes more generally available, is that the question?

Mr Kell : You are talking about the ability to use a payment service.

CHAIR: Yes. I am running a business and I lose $20,000 of business because the system goes down for two hours—

Mr Price : Yes, I understand. Mr Kell.

Mr Kell : Some of those issues, at least, are covered in the ePayments Code. It is one of the recommendations in the financial system inquiry that that be updated and expanded to cover the wider range of entities now in this field and the new technology coming in, but that is where there are some of the issues around who bears the liability for losses that might emerge as a result of payment systems going down or personal identification being compromised and accounts being accessed. That code has now been in place for quite a while, but it is a very important vehicle for helping to establish the liability regime for those sorts of instances.

CHAIR: Could you take a question on notice to give us an update on where a small business would be at in an event where that system were shut down due to hacking—

Mr Kell : Sure.

CHAIR: or some other significant disruption?

Mr Kell : And they lose—

CHAIR: It goes to the question: if the liability rests with the entity, then the degree of disclosure is not a huge issue, but, if the liability rests with the consumer, then that should be a key element in the consumer's choice of provider—to understand what protections are being provided.

Ms Armour : I think equally it is potentially a question not just about liability, because obviously failure of systems can impact on the business's continuity. One of the issues I think we would encourage small businesses to do is to think about their own business continuity plans in the event that that happens. Maybe they need to have a different approach to the number of banking relationships they have, for example.

Mr Medcraft : It is an area we have been trying to do a lot more engagement with the community in, because, irrespective of liability, you do not want your business disrupted. One of the things we have been saying is that companies should be thinking about this issue in terms of counterparty risk. You may want to think about what level of capability and maturity the entity you are dealing with has, because they may just blow up themselves but they actually could blow you up because of their interconnectivity. That is one of the reasons that we have said: you cannot really stop cyber attacks; all you can do is be resilient, and understanding some counterparties' level of resilience is quite important. To that extent, what we have been talking about is something like the NIST framework, which is a way of assessing an entity's level of resilience in terms of cyber resilience. Essentially it is about how well they identify, evaluate and respond to cyber attacks. That is going to become quite an important tool in the future. I do think we have a role to play in terms of assisting with the education in this area, and we are, but we will respond to your question on notice.

CHAIR: Can I move on to page 20, under the subtitle 'Action in 2015-16'. You are talking about improving the quality of financial advice. You are looking at conflicted advice, misaligned incentives and inadequate risk management, particularly in large vertically integrated institutions. Can you talk to us about what specific measures or actions you are looking at in that space?

Mr Kell : In relation to the large institutions, the major work we are doing is captured under what we have called our Wealth Management Project. As we said, the government has enabled ASIC to access additional funding through the Enforcement Special Account for that work. That has a number of streams underneath it, including an examination of how those large institutions have dealt with advisers engaging in poor conduct—how they have identified them, how they have potentially breach-reported them to ASIC and how they have then remediated clients, if that is appropriate. That project is also looking at instances where those firms have charged fees to clients but in circumstances where they have not actually provided the advice or service that they have promised to provide. There is also a stream of that project looking at the sale of particular types of products, particularly in the superannuation space, and how that is being undertaken—what sorts of conflicts managements are in place around that within the large firms. So that gives you a sense, as well as a series of actions against individual advisers that fall out of that.

CHAIR: That gives me an idea of your focus areas. What I am trying to understand is the vehicles that you are using—shadow-shopping, audits, education. How are you approaching it?

Mr Kell : There are some very significant surveillance exercises underway. That entails ASIC obtaining significant amounts of information from the firms using our compulsory information gathering powers, including the way they have dealt with past conduct and current compliance systems and plans. That would be the major vehicle.

Ms Macaulay : And reviewing advice that has been received. Once we have done that analysis, we will be engaging with the relevant licensees about what we have found.

Mr Kell : We are not undertaking a shadow-shop, as such, this financial year in this space. Those are large, complex and expensive exercises, but that is something that we will do on a less frequent basis.

CHAIR: Sure. On page 21, under the key activities 'respond, education section', you mention 'promote the financial advice register'. In the context of education, I understand the use of the word 'promote'. But I do not see anywhere on your website or in other information an emphasis on the mandatory nature of listing advisers. There are time frames that people need to meet, but I do not see a general message saying, 'This is a mandatory part now of being an adviser,' that is a consistent message. Am I missing something? Does that exist elsewhere that I am just not seeing?

Mr Tanzer : No. One thing you will probably see a bit more of is that the obligation to pay a fee, in particular to pay a late fee if you have not lodged, was something that was deferred. The original implementation of the register started in March. The implementation of the fee regime started in September. So you will see it. That fee regime, quite often, actually does motivate your normal licensee to remove these things. We have certainly seen that in the company space as well. For those sorts of updating of register obligations, in particular, the late-fee type arrangement, it makes a big difference.

Mr Kell : I am happy to take on board the suggestion that we can put some more information around that on our website, but I can assure you every communication that we have had with the industry through industry associations and directly, we have emphasised that they have to do this and they have to do this within this time frame. So they should be on notice. That is the education of the industry.

Mr Medcraft : Maybe I misunderstood, but I thought the chair was asking whether on the website we indicate that this is something that is mandatory.

CHAIR: Not just on your website. In terms of people in the industry, do they know beyond doubt that this is something they must do?

Mr Medcraft : That it is mandatory, not optional.

CHAIR: Okay.

Ms Macaulay : At the time the register was being constructed, pre 31 March, we had a lot of engagement with industry. We wrote individually to licensees letting them know of their obligations. We engaged through the industry associations and then, subsequently, there has been a lot of discussion and talk about the register.

CHAIR: We had the discussion earlier about how many advisers are on it, and there are 22,000 or whatever. If it is a mandatory system and now that we are beyond 30 days from its introduction, that should represent the totality of financial advisers in Australia.

Ms Macaulay : Yes.

Mr Kell : Providing personal advice on [inaudible] products.

Mr Medcraft : And those who are not there will be in breach.

Mr Kell : I think there is also an obvious incentive to be gone that register, unless for some reason you want to hide your business. We are also assuming that that provides a mechanism to help get people on. Licensees clearly want to have all their advisers on there. They do not want to be in breach.

CHAIR: Going to the surveillance paragraph on your performance indicators, and I am talking about the culture of ASIC. It says, 'where the leadership reports on surveillance' et cetera. I am interested to explore what that means, because, in the light of your desire to increase transparency, I would like to think your default culture is that you will publish unless there is a really good reason not to. The way that reads it is like, 'In some cases, we may publish.' I just want to establish what your culture is and what the expectation within ASIC is about publishing?

Mr Medcraft : I will let the others answer, but I think our default culture is to be transparent and to publish.

CHAIR: It has not been in the past, though, has it?

Mr Medcraft : It has been under my chairmanship, I can assure you.

CHAIR: But, as we look at things like enforceable undertakings, we have had to poke and prod to get some of those reports out into the public space.

Mr Medcraft : The enforceable undertakings that you are referring to, I think, are the ones that were not done under my chairmanship. The ones that reported to were actually largely previously.

Mr Tanzer : But what you are getting to is, with respect, those things that go to a particular licensing amenity where there may be confidentiality issues around the publication of a report. Generally speaking, with respect to thematic surveillances, we definitely do produce either a media advisory or some sort of report that talks about the overall findings and tries to come up with some best practice guidance or whatever. With respect to individual reports on individual surveillances, that is where we tend to be much more reserved about guaranteeing that we would do one in every case. But, as the chairman mentions, with respect to enforceable undertakings, one of the undertakings we gave following the Senate inquiry was to say that we would publish enforcement undertakings and we would publish studies in reports. So that is a change.

CHAIR: On page 22 you mention:

… we will particularly focus on the misalignment in retail product design and distribution with consumer understanding …

This goes, in part, to one of the Murray recommendations about product intervention. I am just wondering if you can explain a little more, in advance of the implementation of the FSI recommendations, what your intentions are in that space?

Mr Kell : We have had a focus, in recent times, on targeting those areas where we think there is misalignment between the design or features of the retail product and consumer understanding, and, in particular, where there is a misalignment around the understanding of the risks involved. For example, one of the areas that we have looked at in recent times—and we have had some follow-up banning actions very recently—concerned retail structured products, where there was some sort of alleged or supposed guarantee or protection around those products, but actually, in some cases, consumers could lose large amounts of money. So we did a major piece of work around that, looking at how and why firms were, frankly, failing to ensure that their clients understood the level of risk that was actually involved. We have taken some follow up action, including banning actions, against individual advisors in that space.

Also, in some areas in the insurance area—so not necessarily in the investment space—we have seen examples of products where the sort of cover and protection that consumers thought they had was simply not offered by the product, with perhaps the most extreme example being in the successful Federal Court outcome we had in the Cash Store case, where consumer credit insurance was sold to around 180,000 vulnerable low-income consumers and there were in the order of 43 successful claims. The court found that to be unconscionable. So that is another example of where we have looked at what the product purported to offer and what it actually delivered. If the gap is big and causing detriment, we are going to step in.

CHAIR: Do you look purely at sectorial product intervention? Do you randomly select individual products to test and assess? How are you approaching that task? Clearly, you do not have the resources to individually examine every product.

Mr Kell : This is an area where we would look at feedback from a range of sources—from industry participants, who often try and give an alert about competitors' products that they are seeing and think are failing on this test; consumer complaints, or, in the case that I have just mentioned, complaints from consumer legal centres; and our own analysis of what we are seeing in the market. All of those sorts of things would feed into an assessment of the types of products that are out there that are generating these sorts of risks of misalignment. In many cases they are not exclusive to Australia, either. We are seeing similar issues overseas. In the insurance example I talked about, you had that on a much larger scale in the UK. That then feeds into our analysis of the areas that we need to target. Normally this will require something other than just making an assertion. We will have to go in there. We will have to look at a range of products. We will have to test what they are doing in terms of whether they deliver what they promise, and, if not, what we can do about it. So you are right: we cannot look at the whole market. But this is an area where there is a lot of engagement with industry participants and others.

CHAIR: Most of what you have described there is reactive based on reports that are coming through. You make the comment in here that you are seeking to drive behavioural change with product providers. The logical follow-up to that last question is: what proactive steps are you going to be taking to drive behavioural change? You said before that you cannot legislate culture to drive behavioural change. Are you looking to have the equivalent of design standards that people design products to within a framework, taking account of the risk versus intended target group? How are you approaching that?

Mr Kell : Let me just ensure that I understand the question you are asking. Are you saying: if this power was to come into play, how would we go about administering it?

CHAIR: There are two questions. The first is: if FSI comes through, there is a powerful product intervention. But you already say in your report that you are going to drive behavioural change. I am interested to know, in the absence of the Murray recommendations, how you are going to do that. Secondly, once they are there, what will change?

Mr Kell : Some of the examples around that include providing guidance to the industry and then engaging very directly and extensively with the industry about the sorts of standards we expect. We have been doing that now in a quite intensive manner around advertising and marketing, especially advertising and marketing online, the sorts of standards we expect to see in that area and the way in which products are explained and presented in that space. We have used the opportunity of signalling to industry sectors the areas that we are going to be targeting, so they are on notice, telling them the sorts of issues we are going to be looking at and, if they want to avoid our attention, that they should seek to improve some of their product design processes. We have done that extensively in the insurance space, saying: 'We do not want to see worthless, rip-off, add-on insurance products out there. These are the sorts of features we see. Go out and have a look at your product portfolio now.'

CHAIR: Does that take the form of a regulatory guide? You have mentioned you want them to meet certain standards. Can they go to somewhere on your website to find them?

Mr Kell : It will depend on the matter. For advertising: most certainly yes. For add-on insurance: we have set that out in a series of speeches. We have also published reports on insurance, such as reports on home and contents insurance and other sorts of insurance, where we have said, 'These are the sorts of standards and features we expect to see.'

CHAIR: If you are going to start using that word 'standard', are you going to publish a standard or a regulatory guide that somebody who is starting out to design a product can refer to and say, 'This is what ASIC expects of my process'?

Mr Kell : Wherever possible, yes. Sometimes we will not have the direct legislative ability to say, 'This is a mandatory standard', in all cases. That might be at one end. We will also seek to say, 'This is what we expect by way of best practice', as well. So you will see that as an example in the life insurance report we published late last year, where we set out a guide to how we think advisers in that space can provide better quality information.

CHAIR: For about the third time now you have talked about a report. So I am assuming there is an annex to a report which is somewhere on your website. If I am a developer of a product, if I am designing an aircraft for passenger use, I can go the FAA's website and immediately get a pdf of the federal aviation regulation number 25 or 27, depending on the category, and I will know how to design the aircraft.

Mr Kell : Life insurance is a good example of that, because you can now—I think as of yesterday—go to the FPA's website where they have also published additional guidelines for their members based on the guidance ASIC issue.

CHAIR: Okay. But, if you are going to be the regulator, driving behaviour and holding people to account for inappropriate products or advertising or anything else, surely the starting point—whether it is a best practice guide or a regulatory guide for things that are in place, or post Murray perhaps you will have regulation—surely that is the starting place, where you should actually put up the framework you expect people to work with.

Mr Kell : And we often do.

Mr Medcraft : That is actually what we do. Our guidance is a key part of how we shape behaviour.

CHAIR: But everything Mr Kell has just been telling me is: 'Oh, yes. We've done that. It's in an annex to a report'. What I am asking is: where is the portal that somebody can come to at ASIC and see that information?

Mr Medcraft : I think it is really important to go back to first principles—if we go to pages two and three—of how we try and shape behaviour. I agree with you, it is a gatekeeper responsibility in particular. What we say there is our role in creating the right nudge is guidance, and that guidance, that portal—our guidance and our reports—are all available on our website, and they are broken down by sectors. So it is there. And it is actually a key part of what we do. It is the central part of what we do.

One thing also I will say is we are investing heavily in behavioural economics at the moment with our behavioural economics team. In addition to looking at how we can be smarter, we are actually trying to deal with how industry gatekeepers actually deal with behavioural biases—understanding behavioural biases. That is another overlay that is going to be very important for the future. But, Greg, did you want to comment?

Mr Tanzen : Just to give you another example of the type of standard that you are talking about: we have been doing a similar fees and cost disclosure with respect to superannuation products. There is a lot of detail there about how certain fees are not disclosed by some funds and are disclosed by others. The link to behavioural change here is that we will come up with more specific rules around, for example, what types of fees paid to interposed entities within a group have to be disclosed. We will make it quite clear what our view is. We may go as far as issuing a class order that says, 'you have some sort of safe harbour if you fit within these types of rules'. But, generally speaking, it is enough for ASIC to say: 'This is what we expect. We may take action against you and regard what you are doing as misleading if you do not follow that up'.

That will be a report that is published. It might be a regulatory guide; it might be accompanied by a class order, but it follows a long process of consultation. A consultation paper was put out in February this year. Formal feedback and a feedback report came out. We are currently doing some soft consultation on the final nature of that before we finally publish it.

CHAIR: I would like to move on from this point, given the time, but I will just make the final remark that, in my experience, best practice regulation would not require a designer to go and look for, in the aviation case, accident reports or flight test reports to get regularly guidance; they would go to the regulators' guidance—

Mr Kell : And they do—

Mr Medcraft : Sorry, Chair, if you go to our website, we have all of that guidance. There is a section there for business, and for business and finance professionals. It basically is broken down by sector and actually sets out our guidance. I would suggest the committee have a look at that, because there is very detailed guidance there across all the sectors. If I look at the regulatory guidance, it goes: companies, business names, financial services, superannuation, credit, financial reporting, fundraising, takeovers, financial markets, auditors, insolvency. Basically—

CHAIR: Mr Medcraft, I do not dispute that, but you already have some products called regulatory guides—correct?

Mr Medcraft : Yes, we have several hundred.

CHAIR: And what I am hearing from Mr Kell is that there are a number of other areas where you do not have a regulatory guide; you have an annexe in a report.

Mr Kell : That is correct—

CHAIR: All I am saying is there should be consistency. I will leave it there.

Mr Medcraft : We will take that.

CHAIR: We have talked in the past about personnel and you talk in your plan about personnel. You are doing your workforce planning—I am referring to page 29:

… to determine the capabilities we will need over the longer term to meet our objectives.

We have talked about that matrix of qualification and experience that highlights competence. I am wondering where you are up to in, essentially, doing a gap analysis of your existing staff and where you are at with putting in place your professional development programs so that, as you are growing towards that future workforce plan, you are taking your existing staff to the levels of competence you have identified for their positions. Would you talk through your workforce side of things a little.

Ms Armour : We are going through an exercise, in many ways like you have described, where we are breaking down our various workforces into convenient groups and assessing what we think are the key future core competencies that we need to provide the regulatory services in the near to medium future and what other specialist requirements we need. The reason I am answering this question is that the group that I work with is perhaps a little further along this path—because we are doing it in a graduated way. We have asked our staff to assess themselves and where they see gaps. We have had the senior leaders and a personal and development team review that and we have put together an area of our gaps. In the case of the markets group, we have identified three areas of gaps that we think it is important for our group to address as a matter of more urgency. So we have now set up working teams with a view to having a series of recommendations and reasonable things that we can do to address those areas of gaps.

For example, we have identified that we need to learn more about how behavioural economics may be relevant in the market space; we have identified that we need to ensure that our staff understand better the global interrelationships in the market space; and we have identified that we need to have better analytical and data analytical skills. So we have a project underway to identify what we can do for the people in the group to expand their professional development. Each part of ASIC is doing a similar program.

CHAIR: I have one last question on the personnel side of things. You say:

… we remain committed to securing a broader ability to attract and retain staff beyond the constraints of the Public Service Act 1999.

What is the status of your endeavour to be free?

Mr Medcraft : It was a recommendation, as you know, of the financial system inquiry. It is, again, an issue that I have raised with the capability review team—people are critical and, frankly, we need to have more flexibility. We do not recruit from the Public Service; we recruit from the financial services sector, as do the RBA and APRA. So our fellow regulators are not constrained by Public Service recruitment. It would help us to be outside the Public Service because it is not an appropriate place for us to be; it is not where we target; we are a financial services organisation. I think the government is sympathetic to our view. I guess we will just have to wait and see the outcome. As I said, I have raised the matter. It is becoming more and more important because we do compete and we do have staff being constantly taken from us. Often, we are completely outbidded. So it is critical for both retention and recruitment that we are freed.

CHAIR: I have more questions which I will bring up at the next oversight hearing—on the corporate plan and on your engagement with overseas regulators, particularly as ChAFTA, TPP and other trade agreements that give more transportability of financial services come into place.

Mr Medcraft : As you know, under our leadership we have created an international secondment register globally. I am very in favour of this. To put it into practice we have actually created this register, which has been welcomed around the world. Thanks for raising that. We will be good!

Senator O'NEILL: As a Labor senator who believes in the collective, I think the collaboration that would flow out of such a thing would be wonderful—sharing the information. I want to ask a question from left field. We were talking about culture before and people's incapacity, in many contexts, to feel safe about letting the chain of command further up know about things they see. There could be a socio-cultural dimension about the Australian identity—'Don't be a dobber' is a part of the culture—but maybe those days are wearing out because too many people are paying the price. Are there any organisations in which there is almost an internal ombudsman, independent of people's promotion changes, where there is a reporting capacity? You talked about a couple of innovative businesses. I will ask you to take it on notice. You are talking to people who are doing this and there are places where it is happening well. What are the mechanisms—if they exist—that help that culture grow? There is the chicken and egg thing: do the processes and structures need to be in place? Is it the culture? Or is it some interplay of the two? I will leave you with that question on notice for further discussion.

Mr Medcraft : I am being told by Cathie that Macquarie Bank has an integrity office.

Ms Armour : Yes, it has senior executives in each of its major offices who are charged with being a person with whom people can feel comfortable having a conversation about matters they see that raise questions of integrity.

Senator O'NEILL: I would like a little bit more information about that—when they arrived and what they look like. Frankly, people who want to advance in a company are unlikely to report upwards if they are not going to be significantly advantaged. So I just wonder about what sort of—

Mr Medcraft : We will come back to you. I would be curious to see whether we have some good examples.

Mr Day : The committee has previously had Professor Brown appear before it. Professor Brown has done a wide study, and the current work, the research piece that I have mentioned before, is looking at a number of private organisations. So it may be that the committee may want to make contact with Professor Brown. I am sure he would be happy to come and talk about that and the organisations that he thinks do it very well—and I know that he has a view about that.

Senator O'NEILL: Can you give us an update on high-frequency trading and dark pools. Technology takes off on an exponential curve and this is a field where there is obviously a need for close monitoring.

Ms Armour : Yes. We are probably just a couple of weeks away from releasing our report on the most recent review of both high-frequency trading and dark pools in the Australian market. Broadly, we have seen that the level of high-frequency trading as a percentage of total volume in the equities market is about the same—around 27 per cent. I think the most notable thing from my perspective—it will be interesting to see what others think—we looked at high-frequency trading in the futures market, and there is a significant amount of high-frequency trading in the futures market. There were some elements of behaviour that we were a little concerned about in the futures market, and we are addressing with the market operator the things that can be reasonably addressed; but generally we have not had an increase in the level. We have seen, if you like, the 'buy' side, and the investment managers are becoming much better attuned to executing their own trades in a more sophisticated way so that there is less exposure to them from high-frequency trading. There is still a perception that high-frequency trading has predatory outcomes, but we are not seeing significant evidence of bad outcomes in that respect but we have taken action to disrupt poor practices when we have seen them. We really have not seen evidence of those that perceive concern. We are looking at it.

On dark liquidity, we are quite comfortable that most of the rule changes that we brought in in 2013-14 have had the desired effect. That means that the smaller trades are happening more on the lit market. We feel that that is working reasonably well. There has been movement from using what we call the broker dark pools to actually using the exchange. The exchanges have their own dark pools, and they are generally subject to similar rules. There has been a little bit of a movement into those dark pools. The perception by many is that they are less likely to find themselves dealing with broker proprietary trading and people that they are not anticipating they might be dealing with, if they are dealing with exchange dark pools. From our perspective, we see all the orders, all the amends, all the cancellations for the exchange dark pools, so we are able to do real-time surveillance of those dark pools. And again we are broadly comfortable with the behaviour we are seeing in those dark pools as well.

Senator O'NEILL: So things are a lot better than when we talked about it all the time in 2012.

Ms Armour : That is right.

Senator O'NEILL: Your technology capacity significantly changed in that period of time too.

Ms Armour : Our technology capacity has dramatically changed. The new surveillance system that we now have really does give us a much greater capacity to really monitor the market to slow it down so we can see what is happening, notwithstanding the great speed of the market. We are also now, through the trade reporting regime for derivatives, building that technology capacity so we can look at what people used to call the over-the-counter markets. We are looking to developing the capacity to look at them at the same time.

Mr Medcraft : And also, the system we now have is not just monitoring. In the markets area the system we have to access information, share information and use it is dramatically different than ever before. We have now installed Microsoft MS Dynamics in the markets area, and it really allows us to much more quickly connect the dots.

Ms Armour : We have found that with the MAI system, the surveillance system, combined with having client identifiers—the brokers provide the client identifiers for trades—we have been able to reduce the number of notices we send to the brokers asking for information by 50 per cent, and, for those that we send to brokers, the brokers are reporting back to us that it is taking 30 per cent less time to answer. So there have been some real productivity benefits for market participants as well from the changes.

Mr Medcraft : The system now is completely interactive—right on line with the brokers.

Ms Armour : Yes, the brokers now have a portal they can access to ASIC, and they maintain all their correspondence with ASIC online and they have a complete history of their dealings with us.

CHAIR: The time being 12.45, are there any questions you want to place on notice before we adjourn?

Senator O'NEILL: Can I indicate that I may have some, on reflection, after lunch—to the secretariat? I have indicated things that we want to explore at the next session anyway, so we will be seeing you soon.

CHAIR: That concludes the hearing today. Mr Medcraft and your team: thank you for being here and for your evidence. For those questions on notice you have already received, if you could have a response back by 6 November—and, as Senator O'Neill has indicated—there may be a few more for you later today.

Committee adjourned at 12:45