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Standing Committee on Economics
Australian Securities and Investments Commission annual report 2017

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

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

ECCLESTON, Ms Senior Executive Leader, Australian Securities and Investments Commission

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

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

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

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

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

SAADAT, Mr Michael, Senior Executive Leader, Deposit Takers, Credit and Insurers

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

Committee met at 08:30

CHAIR ( Ms Henderson ): Good morning everyone. I declare open this hearing of the House of Representatives Standing Committee on Economics and welcome representatives of the Australian Securities and Investments Commission, members of the public and media. The role of ASIC is to promote investor and consumer confidence in Australia's financial system, to maintain and improve the performance of that system, and to facilitate efficient registration for financial services providers.

At the committee's last hearing with ASIC on 14 September 2017, the committee examined ASIC's role in corporate market financial services and consumer credit regulation. Of particular interest to the committee were statements by the major banks attributing interest rate increases to regulatory requirements, competition in the banking sector and the establishment of a new dispute resolution framework—the Australian Financial Complaints Authority. Since the previous hearing with the committee, ASIC pursued all four major banks for unconscionable conduct and market manipulation in relation to their involvement in setting the Bank Bill Swap Rate, and the government passed laws to prevent such conduct occurring in the future.

The Turnbull government is taking action to strengthen ASIC, including by improving ASIC's ability to gather information, boosting its licensing and banning powers, and increasing criminal and civil penalties for corporate and financial misconduct. These reforms represent the most significant increases to the maximum civil penalties, in some cases, in more than two decades, thereby ensuring Australia's penalties are a credible deterrent to unacceptable behaviour. The government has also announced powers that will allow ASIC to strip wrongdoers of profits and a product intervention power to protect consumers. The product intervention power would allow ASIC to temporarily ban financial products that are likely to give rise to poor consumer outcomes because of the way they are sold.

The government has already provided $127 million in additional funding to ASIC to strengthen its investigative and surveillance capabilities, introduced an interest funding model to give ASIC secure funding and announced a new second deputy commissioner with an enforcement focus. The government has also established a new standard-setting body for financial advisers and established a new one-stop shop for consumer complaints that is free for consumers, binding on financial institutions and compensation where appropriate.

In January, ASIC released the report of its investigation into to how the financial advice arms of Australia's largest financial institutions manage conflicts of interest. It found that the vertically integrated business model of ANZ, AMP, CBA, NAB and Westpac's financial advice licensees held an inherent conflict of interest. This conflict is between advising clients to switch to in-house products and the duty to act in the best interests of those clients. ASIC's investigation found that advice to switch to in-house products was not in the best interests of clients in 75 per cent of the files reviewed.

Evidence provided to Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry suggests that ASIC has not been strong enough in protecting consumers. There have been claims that ASIC's preference for using enforceable undertakings rather than seeking court-imposed penalties for breaches of the major banks' legal obligations has been too soft and risk-averse. The committee will examine these issues in more detail and ask ASIC whether it is confident that it has the resources and appropriate powers to meet its evolving challenges.

I would like to welcome representatives of ASIC to the hearing this morning, in particular, the new chairman, Mr James Shipton, who is appearing before this committee for the first time. I remind you that, although the committee does not require you to give evidence under oath, the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament.

Mr Shipton, would you now like to make an opening statement before we proceed to questions?

Mr Shipton : Yes, thank you, Chair. Thank you very much for the welcome. I'm very pleased to appear before the committee today for the first time, along with deputy chair, Peter Kell, and fellow commissioners Cathie Armour and John Price. Also appearing are our senior executive leaders Warren Day, Jane Eccleston, Greg Kirk, Louise Macaulay, Tim Mullaly and Michael Saadat.

I would like to acknowledge the work of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. I expect the committee to have questions about issues raised at the royal commission hearings, including matters derived from ASIC's own work and investigations. I want to highlight that the royal commission is yet to make findings or recommendations, and so I am mindful that ASIC should not comment or speculate on what the royal commission might either find or recommend. Moreover, ASIC has a number of ongoing investigations related to issues covered by the royal commission. Accordingly, there are limits as to what we can publicly disclose about them today. We do, however, appreciate the opportunity to speak about the public outcomes ASIC has already achieved in matters that are the subject of the royal commission hearings. Accordingly, with your permission, Chair, I seek to table a folder of public statements and reports by ASIC that relate to matters which have been raised by the royal commission as case studies.

CHAIR: Thank you.

Mr Shipton : I also table for broader context information on ASIC's total enforcement outcomes. I believe this document on enforcement outcomes shows ASIC has a strong enforcement record and shows our utilisation of that important regulatory tool. Since 2011, ASIC has obtained 160 criminal convictions, and 19 of them have occurred this financial year. ASIC has completed 140 civil penalty proceedings, and 24 of them have been this financial year. ASIC has banned over 800 people from providing financial services or credit. ASIC has banned over 390 people from being directors. And, importantly for Australians, we have recovered more than $320 million in compensation for consumers so far this year. Since 2011, we have secured compensation of nearly $1.8 billion.

ASIC work within a defined legislative framework set by parliament, and we use every regulatory tool available to us within that framework, whether that is litigation, bans, removal of licences, infringement notices, court enforceable undertakings, guidance notes, reports, interventions and so on. To this end, we welcome the government's April announcement about the recommendations of the task force that reviewed ASIC's enforcement powers, and we look forward to the strengthening and expansion of this legislative framework soon.

The changes proposed include significantly stronger and clearer rules about the obligation of licensees to report breaches to ASIC honestly and in a timely manner; a stronger ability for ASIC to take regulatory action against senior managers or controllers of financial services businesses; a new directions power that will enable ASIC to direct licensees to undertake remedial actions, such as consumer compensation programs; and, finally, stronger penalties against licensees in breach. For example, section 912A of the Corporations Act that requires firms to deliver financial services efficiently, honestly and fairly does not currently incur a criminal or civil penalty. It would under the proposed reforms. Once implemented, these changes would assist ASIC in achieving its vision of a fair, strong and efficient financial system for all Australians. Thank you, Chair. We look forward to your and the committee's questions.

CHAIR: Thank you very much, Mr Shipton. I would like to start with a number of questions before moving to the deputy chair. Mr Shipton, the Australian people, through the royal commission, have heard a litany of stories of: cover-up; misconduct; gross failings of compliance; consumer injustice; unlawful—arguably—profiteering; and even deliberate deception to ASIC itself in the case of AMP. How serious do you believe the failings of the banks and other financial services companies in Australia are at the moment, given what all Australians have now heard?

Mr Shipton : Thank you for that question. You are absolutely right. The issues confronting the financial services industry right now are deep, they are significant and they are extremely confronting to me. What we are seeing by way of the royal commission is in many respects exactly what ASIC has been dealing with for many years and has been confronting for many years. We welcome the royal commission and the window that it has provided for the broader community on the important challenges that ASIC has been confronting for quite some time. We are firmly committed and dedicated to dealing with the issues that we are seeing and have now been seen by the royal commission to ensure that we get to a financial system in Australia that is fairer, stronger and more efficient. We are postured in a forward deployment setting. We are prepared to use all of our regulatory tools, including enforcement, to deal with these issues that you rightly point out. I would also like to underline something that you said, Chair, in your opening statement, which is that ultimately we at ASIC are here to ensure the confidence of the Australian public in the financial system, and it is fair to say that that confidence is in doubt. That confidence is under threat. We take these responsibilities incredibly seriously. The task before us is paramount and fundamental, and we now call on the financial services sector not to wait for any recommendation of the royal commission and not to wait for our enforcement or intervention powers and actions but to lean into the issues and highlight, as you also pointed out in your opening remarks, the inherent conflicts of interest that exist right now in finance and deal with them. They have a responsibility also. We take our responsibility incredibly seriously and you will see us execute on that responsibility, but it really behoves the financial sector itself to recognise, now and immediately, the challenge and the task at hand.

CHAIR: Mr Shipton, in your speech, 'The Trust Deficit and Corporate Australia', which was given to the Australian Council of Superannuation Investors' annual conference on 17 May, you said Australia's corporations and the finance sector in particular are suffering from trust deficit, and you again referred to that today. This is a predicament of the sector's own making. We've spoken about, and you've referenced, some of the lack of trust that the Australian people have in this sector, so what needs to change? Most importantly, what does ASIC need to do differently to ensure that the trust in our financial institutions improves permanently and profoundly?

Mr Shipton : Turning to the first element of the trust deficit: I believe that there has been a lost opportunity, almost a lost decade, of awareness by the financial sector to learn from the mistakes and the lessons that we saw in the rest of the word, where the whole financial system moved to recognise inherent conflicts of interest, non-financial risks as well as financial risks, and deal with them, remediate them and to put in place structures and responses within the system itself that would enable an industry-promoted response. We are calling on the industry—and I called on them in that speech—to embark upon that endeavour immediately, right now, in Australia. We are calling on them to identify and do a wholesale review of where conflicts of interest exist inside institutions and the system more broadly and to deal with them, remediate them and mitigate them. That is an urgent call to action, and that is desperately needed by the system for it to regain the trust and confidence of the Australian public. I also called on greater levels of professionalism inside financial institutions and by the men and women in finance. They need to be proud in the execution of a very valuable purpose that finance serves for the community and society. That purpose has been lost. That purpose has been lost, in my mind, because there's been a focus on revenue targets and profitability as opposed to serving communities, society and a broader economy.

Chair, I know you're interested in what we're going to do about it. What we want to do is be proactive, and we want to be strategic. We want to be aware, as we have been aware, and conscious of these inherent conflicts of interest and the lack of professionalism in the industry, and apply all of our different regulatory tools to deal with them. That will include enforcement outcomes. That will include investigations. Right now we have over 1,000 regulatory interventions underway. We have around 800 surveillances and nearly 250 investigations. These are important exercises that we are embarking upon for the purpose of getting the industry to a position where they have earned the trust and the confidence of the Australian public. I am firmly committed, as the new chair, four months in the job, of making sure that ASIC is proactive, strategic and mindful of the concerns of the Australian public. We will do our very best to represent the Australian public to get a professional and efficient financial system that serves communities as opposed to being the master of the economy.

CHAIR: Mr Shipton, I appreciate you've been in the role of chair for a very short period of time; but, in terms of this trust deficit, what responsibility does ASIC take for what has occurred in the financial services industry across this country?

Mr Shipton : ASIC is an important if not the lead regulator when it comes to financial conduct and the good order, functioning and integrity of the market in Australia, so ASIC takes its responsibilities incredibly seriously. I know from speaking to the fine men and women at ASIC that they have been working extremely hard over many years to execute those fundamental responsibilities.

CHAIR: But, in terms of the trust deficit, do you recognise that ASIC in the past has also been responsible for not appropriately acting as it should have, in terms of protecting consumers, in particular in dealing with banks and other financial services institutions?

Mr Shipton : I would not cast it that way, with due respect. ASIC has been doing its extreme best under the circumstances over many years to, as you rightly point out, look after the best interests of consumers. Of course there are always lessons to be learned. Of course there are always ways of redeploying and redefining and reconfiguring the way that we do things. But I would not lay blame at ASIC. I would not put the burden on the shoulders of the fine men and women who I believe have been doing an excellent job over many years. I will say that I have been observing the work of ASIC from different perspectives—from an academic perspective, from the perspective of a regulated person and also as an overseas regulator—and I've always looked with great admiration at the work of ASIC. But we are always—and I am—constantly learning from previous experiences, and that's what we're going to do.

What I would like to do—in fact, what I'm firmly committed to doing—is to put ASIC in a posture which is forward-looking, leaning in proactively to the challenges that are confronting us today: that lack of professionalism in the sector, that trust deficit that clearly exists. That's what I'm focused in on. That's what I want to solve. I want to lean in, in a strategic, proactive and, if necessary, forceful way to ensure that we get the financial system that the Australian public deserves—one that is fair, strong and efficient.

CHAIR: There has been some commentary that ASIC in the past has not been the tough and feared regulator that it should be. I've referenced—and you have also, in your opening statement—the range of tougher powers, penalties and resources that have now been announced by the Turnbull government. For instance, the penalty for a failure to notify ASIC of a breach is increasing from $52½ thousand to up to 10 per cent of turnover, which is capped at $210 million. That's an example of the ways in which the government is addressing this issue with regard to the penalties not being tough enough. What difference will this make, and do you believe that ASIC now has the tools it needs in its tool kit to become a tougher and more feared regulator?

Mr Shipton : We very much welcome the government's announcement to bring forward these reforms, and we look forward to them being legislated. I commend them to you, the members of the House of Representatives, to move them forward. They will be extremely important tools in our enforcement tool kit. We will utilise them. I have the intention of us using every inch of our powers, because we are going to be very deliberate, very minded and very forceful in meeting the challenges that I outlined before, in meeting the challenge of rebuilding the trust deficit in the financial sector. We will use every inch of our enforcement powers to achieve this goal. I want the message to go out to the financial services industry that they need to be proactive in responding to these challenges themselves, because we have a very forward-deployment mind set right now as regards the utilisation of all of our tools: enforcement, surveillance, supervision.

I also want to highlight that we are in very productive talks with the government about executing on new ideas and new strategies to deal with these challenges moving forward. We would like additional funding for our enforcement capabilities. We would like to have the ability to put supervisory teams into the large financial institutions. We would also like to have supervisory focus, or added supervisory focus, in superannuation. We would like to utilise regulatory technology more broadly in the financial sector, including ourselves. These are ideas that we are having very productive conversations with the government on. Of course, I must add that any decision is ultimately one for the government, and we respect the processes of the government, but we have these ideas. We are looking forward. We are being proactive. We are not being static. We want to address in a strategic and tactical way the challenges that are clearly confronting the industry and have caused a deficiency in the trust and confidence by the Australian public. That is a very sad thing to acknowledge—that the Australian public do not have that trust and confidence, to the extent they should, in the financial system that serves such an important role and function for society and our economy.

CHAIR: Mr Shipton, can I raise one case which explains perhaps why consumers in particular don't have that trust. It's a case which has been referred to the royal commission involving Suncorp and insurance policy holders in the wake of the terrible Wye River bushfire, which occurred in my electorate of Corangamite on Christmas Day 2015. More than a hundred homes were lost. It was a miracle no lives were lost. Through AAMI Insurance, Suncorp succeeded in subjecting its policyholders to a terrible injustice. These policyholders held complete replacement cover insurance policies and were told they didn't have to worry—that their houses would be rebuilt and it didn't matter what the cost was. But these policyholders were put through hell. They received offers to rebuild their houses with a shortfall in moneys of up to half a million dollars. The insurance policy was deeply flawed. The process of assessing the cost of rebuild was unilaterally decided by AAMI Insurance and also totally flawed.

I raised these matters with your minister, who directed ASIC to conduct an investigation. While these matters were fixed and these particular consumers did receive justice, I raised this in the parliament and in the media; I gave speeches and I also spoke with the ACCC. I would suggest that stories in the Geelong Advertiser played a greater role than ASIC in delivering justice. In the inquiry by ASIC that followed, I have to say—and this was one case in which I was of course deeply involved—that ASIC's inquiry was a whitewash, and we now have this insurance policy being offered around Australia with the same flaws, with ASIC not having addressed the fundamental problems with this that resulted from a terrible disaster. I ask you to comment, to the extent that you can, on why ASIC did not take a tougher stance in addressing this very flawed insurance policy.

Mr Shipton : Thank you for raising this issue. You are absolutely right. The circumstances around this tragic occurrence, the Wye River fires, are incredibly confronting. In fact, only this week I met with one resident who lost his family home entirely. It's yet to be rebuilt. He had to sue his bank and his insurance company to get a level of redress. That to me was a personal trigger to a broader issue, which is that insurance companies, when it comes to natural disasters, need to be incredibly mindful not just of their legal obligations but their human and social obligations. I was in Brisbane yesterday, meeting with industry leaders and community leaders, and I raised this issue with the insurance leaders in the room—the importance of regarding the human element when it comes to these disaster situations and the insurance coverage there. Mr Saadat has just joined the table. He will be able to comment in greater detail on the particular case that you have at hand.

CHAIR: What I'm particularly asking you about is ASIC's conduct here. ASIC committed to inquire into these matters and no result flowed, no action was taken.

Mr Kell : That's not accurate.

CHAIR: I know that there was some action taken on misleading advertising, but, in relation to the actual insurance policy, we haven't seen it addressed by ASIC.

Mr Shipton : It might be appropriate now to ask Mr Saadat to go into detail on that particular matter and give you a briefing. We would be happy to give you a further briefing on this particular case in the future if time doesn't permit now.

Mr Saa dat : This particular case I think highlights the problem that exists in Australia with underinsurance and home-building coverage when there is a total loss. ASIC has had a longstanding focus on this issue. In fact, when we had the Canberra bushfires in 2004, ASIC wrote a public report in 2005, highlighting some very serious issues associated with insurance coverage for home owners. Back in 2004, home owners were underinsured by between 27 and 40 per cent, so there was a significant shortfall for those consumers in Canberra. One of the things that ASIC recommended at the time was that insurance policies need to better respond to the needs of consumers. Complete replacement coverage is a type of policy that we think can reduce the risk of underinsurance. It's a policy that's been available in other countries and wasn't available in Australia back in 2005. A limited number of insurers now offer this type of policy in Australia. We think there is value in this type of policy because, with a sum-insured policy, if there is a total loss, the most the consumer will receive is the sum insured on the policy. The work that we've done has highlighted that consumers are not good at identifying what that sum-insured should be. In most—

CHAIR: Mr Saadat, can I intervene here, because I'm also conscious of time. The flaws in this particular policy were raised with ASIC—that the insurer was unilaterally deciding the amount that was required for rebuild, and, as I mentioned, in some cases there was a shortfall of up to half a million dollars—and my concern is that ASIC has not addressed the fundamental flaws in this policy. I recognise that there are some positives in relation to these types of insurance policies, but we saw systemic failure by AAMI Insurance to treat consumers with justice, consumers who'd lost their homes in the Wye River bushfire. Did ASIC ever take any action to address the flaws in this policy?

Mr Saa dat : I think the issue that you've highlighted is not unique to the type of policy that AAMI provides.

CHAIR: Can you just address the question: did ASIC take any action whatsoever to address the flaws that I've identified in that policy?

Mr Saa dat : The claims-handling process that AAMI used for those particular cases, the seven cases that you highlighted to us, was certainly flawed. The way that AAMI communicated with its customers and went about handling those claims—we agree that there were serious deficiencies with AAMI's process.

CHAIR: Yes, but I raised these matters with Mr Medcraft at the time. I'm just wanting to get clarity—did ASIC ever take any action to address the flaws in this policy?

Mr Saa dat : The reason we haven't been able to take action in relation to the flaws in claims handling that were highlighted through the AAMI experience is that there is currently an exemption in the Corporations Act for claims handling. Claims handling is not a financial service over which our jurisdiction applies. We highlighted that in 2016 when we did a review of life insurance claims handling, and we made a recommendation to the government that the government remove that exemption. The government has accepted that recommendation but is now awaiting the royal commission before proceeding with the removal of that exemption.

Mr Kell : There is an explicit exemption; it's not an oversight. It's an explicit exemption in the settings that parliament has put in place under the Corporations Act to exempt claims handling from, in effect, the consumer protection provisions of the Corporations Act. The parliamentary joint committee, in its recent report on life insurance, recommended that this exemption be removed. We would also like to see it removed, not just for life insurance but also for general insurance claims, and we are very pleased that the minister has committed to doing that. We also think that unfair contract terms should be extended to insurance products as well.

Mr Saa dat : In practical terms, what that means is that, when an insurer is doing claims-handling activity, that activity does not have to meet the requirement of being efficient, honest or fair, which is the obligation that applies in the Corporations Act for all other financial services activities. So, there is a real gap in terms of the way that claims handling is regulated. We have highlighted—

CHAIR: Do you believe that ASIC acted appropriately in dealing with this particular case, though? There are Australians holding this insurance policy around the country. Could you perhaps have done more to address these issues with Suncorp and also to make consumers aware of the flaws in this policy?

Mr Saa dat : I think we considered all of the regulatory options that were available to us. We conducted an onsite surveillance at AAMI. We reviewed all of the Wye River claims. We looked through the files that AAMI had prepared in response to those claims. We considered all of the legislation that we currently have responsibility for, to consider what action could be taken. I think that, once AAMI had finally settled those seven claims, the work that we were doing was to identify: what action should ASIC take in response to the conduct that we saw? We saw that the conduct in relation to the promotion of the policy was misleading, so we issued fines for that conduct.

But we would have liked to address, I think, the problems with the claims-handling process. That is something that we weren't able to address with the legislation that we currently have in place, which is why the removal of that exemption is very important. And, although this was an example in relation to AAMI's complete replacement cover, I would say that there are many other types of home insurance policies where we do hear cases of insurers underquoting or providing responses to claims that fall short of what the consumer believes is an appropriate amount to settle that claim. So, again, I would say that it's not really an issue that's only unique to AAMI and that type of policy.

CHAIR: Thank you very much. I will now hand over to the deputy chair.

Mr THISTLETHWAITE: Welcome, Mr Shipton, and your colleagues. I want to ask some questions about AMP and the royal commission. When the previous Labor government introduced the FOFA legislation, it was the Parliamentary Joint Committee on Corporations and Financial Services that conducted the initial inquiry into that legislation. The organisation that argued and whinged and screamed the loudest about FOFA, claiming that it shouldn't be introduced and that it would destroy the financial services industry, was AMP. We now know why. Ironically, it was the current finance minister that used the evidence of AMP also to argue against the introduction of the FOFA legislation. Was ASIC shocked by the revelations from the royal commission about AMP?

Mr Shipton : Thank you for the question. There are obviously sensitivities around any commentary on the royal commission. What I will say, though, is that the matters identified by way of testimony in relation to AMP at the royal commission were known to us. We have—and we have now said this publicly—an ongoing investigation into AMP that includes the matters that were raised at the royal commission, and of course there is a very limited amount more that I can say in relation to that. So we were not surprised at all—at all—about the confronting matters. They were matters that were a part of a long, sophisticated and still ongoing investigation, which we intend to carry on and carry through.

Mr Kell : When you say 'shocked', I think I would characterise it this way: this is a very, very serious matter from ASIC's perspective—a very serious matter. You have the issue of charging customers fees without providing advice, which we have now published several reports on. We're up to around $250 million across the largest five firms in the industry by way of compensation, with likely more to come, and AMP is part of that. And in addition, in the AMP case, you have the nature of their response to ASIC's investigation into fees for no service, which is the subject of our current work. We are taking that very, very seriously. It is one of the largest financial firms in the country. We need to ensure that that firm is operating fairly and efficiently for all Australians that are its customers.

Mr THISTLETHWAITE: There were 20 times where AMP portrayed the fee-for-no-service scandal as a process error rather than deliberate decisions. They mischaracterised the findings of an external PwC audit. Why didn't ASIC pick that up?

Mr Mullaly : We did pick it up. We were aware of these things.

Mr THISTLETHWAITE: Okay. When did you inform the public of that?

Mr Mullaly : These are matters that are ongoing investigations. We don't comment publicly on ongoing investigations.

Mr THISTLETHWAITE: But they've got literally thousands of customers who are paying fees for services that they're not getting, particularly around legacy products. Don't you have an obligation to at least inform those customers—

Mr Kell : Sorry, just to be clear here, there are two elements in the AMP case. There is the amount that they've charged customers and the extent to which they've charged customers fees without providing advice. We issued an extensive report on that issue. We've had a series of updates subsequent to that that inform the public about what we've found to date, what remediation has been paid back and how that is going. So we have been very, very public, including with quite a detailed report, on fees for no service and the actions we've taken. We've already had some enforcement actions against other entities. The subject that is—

Mr THISTLETHWAITE: Okay, I understand that—

Mr Kell : the issue of the investigation is, under our legislation, subject to confidentiality.

Mr Mullaly : We are subject to confidentiality, but we also are acutely aware that the mere announcement of an investigation—I'm talking about the 280-odd that we've got on at the moment. A number of those will find that there are in fact no breaches of the law. But, if we announce that publicly at the beginning, it can have fairly detrimental effects on entities or people. It's a longstanding position of ASIC that we don't comment publicly on investigations unless there are some extraordinary circumstances. Once these matters were ventilated in the royal commission in relation to AMP, we've said some brief things about the fact that we are aware of the matters and that we have an ongoing investigation underway. The potential outcomes are both civil and criminal, and that will continue.

Mr THISTLETHWAITE: When did you discover that the board had mischaracterised the PwC report?

Mr Mullaly : If you're referring to the Clayton Utz report—the matter that was ventilated in quite some detail at the royal commission was in regard to a Clayton Utz report that was provided to the board and then to ASIC and referred to as independent. Is that the—

Mr THISTLETHWAITE: Yes. When did you discover that?

Mr Mullaly : Well, we were aware from November, I think, last year. We were provided with that. We were generally aware of the circumstances surrounding that investigation by Clayton Utz and the subsequent report from May of last year, when they commenced that. I think it was May 2017. We were provided with that report in October or November. I think it was provided to Mr Kell and the former chairman. We've been aware of that since that time.

Mr THISTLETHWAITE: So those board members were allowed to continue on that board despite the fact that you were aware that they were potentially breaking the law?

Mr Mullaly : Well, there are a couple of things. I'm not going to confirm or make any suggestions around breaches of the law by any individuals. That's going a little bit too far for us.

Mr THISTLETHWAITE: But the royal commission recommended criminal prosecutions.

Mr Mullaly : I think there are a couple of things to keep in mind. One is that we have a substantive investigation into the underlying issues, and those underlying issues are deliberate conduct around fees for no service and misleading ASIC. Those are the significant matters. When I say 'misleading ASIC', that's in relation to the 20-odd situations where they provided information and we have concerns, and it's under investigation, so nothing's been proved. We have concerns around that conduct. The provision of the Clayton Utz report and the characterisation of it as being independent haven't been a significant part of our investigation.

Mr THISTLETHWAITE: When do you anticipate that the current investigations will conclude and you'll be able to say something publicly?

Mr Kell : We get asked this regularly, and it's hard—

Mr Mullaly : It's hard to say. We at the moment, over the last month or so, would have been provided with somewhere around 600,000 documents. In relation to these—

Mr THISTLETHWAITE: How many staff do you have working on it?

Mr Mullaly : Probably a bit over half-a-dozen, and we've got external counsel. We've been consulting with the DPP in relation to it. I would have thought that we'd be in a position to finalise our aspect of the investigation after September. That would be the—

Mr Shipton : But I must emphasise that there's only so much we can say, and the sanctity of the process is very important. The ability of our teams to investigate thoroughly, diligently and appropriately is of paramount importance to us. But I will give you my assurance that we at the commission are taking this matter with the utmost seriousness. It is fundamentally important to us. And I have every confidence in the men and women who are on that investigation team that they are doing a thorough and excellent job and will proceed in the appropriate way with what we believe should be the appropriate outcomes.

Mr THISTLETHWAITE: A lot of the issues with this case with AMP relate to legacy products. As far as I understand it, some of them relate to grandfathered commissions—is that right?

Mr Kell : We might be having a definitional—well, I'm not sure quite what you mean by 'legacy products', but—

Mr THISTLETHWAITE: Grandfathered commission products.

Mr Kell : The issue here is not so much a traditional trail commission; it's when the institutions moved to charge fees but did so on a basis that had automatic deductions year after year—so a fee, and for that fee you were supposed to get an advice review and potentially other services. In some ways they had characteristics of commissions, but they were characterised as something different.

Mr THISTLETHWAITE: And they weren't occurring?

Mr Kell : AMP and others moved to a model where they were charging fees on a regular basis but not providing services, and this turned out to be systemic across these institutions.

Mr THISTLETHWAITE: In your submission to the royal commission round 2 on financial advice, at paragraphs 9 to 12 you talk about grandfathered commissions—

Mr Kell : Yes.

Mr THISTLETHWAITE: and ASIC's views that they should go.

Mr Kell : Yes. That is a slightly separate—

Mr THISTLETHWAITE: Yes, I know that's a separate issue; I'm just running out of time. But you don't specify a time line. When do you think that grandfathered commissions should go in Australia?

Mr Kell : We haven't had the opportunity to consider a time frame, but we said 'as soon as practicable'. That is our preference.

Mr THISTLETHWAITE: But, on 'as soon as practicable', if you ask a financial adviser that, they'll say 'two or three years'; if you ask the client, they'll say 'within six months'.

Mr Kell : Sure. It's—

Mr THISTLETHWAITE: I'll put it another way: is it something that the government should turn its attention to immediately in terms of looking at phasing out grandfathered commissions?

Mr Kell : I don't want to second-guess it, but it may well be something that the royal commission wants to comment on, so we would wait to see whether it is one of the issues that arise out of the royal commission.

Mr Shipton : And that's exactly why we made the submission to the royal commission—because, as you rightly point out, Deputy Chair, it was a submission by us to the royal commission for their due consideration, and we will of course respect their deliberations in this regard.

Mr Price : And, just further to that, there may be some complex issues around constitutional rights in looking at that particular issue as well—the position of trust—

Mr THISTLETHWAITE: Yes, I understand the contractual issue there. The chair mentioned Report 562: financial advice: vertically integrated institutions and conflicts of interest in her opening. About 75 per cent had not demonstrated compliance with the best interest duty. I take the point that only 10 per cent of those cases may have resulted in someone being worse off, but is ASIC saying that, in those 75 per cent of cases, the financial adviser didn't meet the obligations under section 961B of the Corporations Act? Is that right?

Ms Macaulay : The files that we looked at during the course of our review did not demonstrate that the advice that was provided in those instances put the client in a better position—


Mr Kell : And therefore didn't.

Ms Macaulay : and therefore was not in the client's best interest.

Mr THISTLETHWAITE: If it's not the client's best interest, that, in my view and to the layperson, would seem to be a breach of section 961B of the Corporations Act.

Ms Macaulay : It's a failure to comply with it on what we looked at, which was the client's files. That's why we called it out in the report. We identified—and we explain this in the report—that there were a group of clients who were financially significantly detrimentally affected by that and we've engaged with those licensees—

Mr THISTLETHWAITE: That was the 10 per cent, yes?

Ms Macaulay : around that remediation. The other clients may or may not have been financially affected. If they were, it was only to a very small extent. The fact remains that the advice that was provided to them didn't meet the standards of the law.

Mr THISTLETHWAITE: And that inquiry looked at five of Australia's largest banking and financial services institutions; is that right?

Ms Macaulay : That's correct. And that's why we engaged at the time we started that work—

Mr THISTLETHWAITE: For the largest banking and financial services institutions in the country, ASIC is saying that, in 75 per cent of the cases that you reviewed, they didn't meet the best interest duty under the Corporations Act?

Ms Macaulay : They didn't demonstrate, on their files, that they had met that obligation.

Mr THISTLETHWAITE: How can anyone have any confidence, when they're going to get financial advice, particularly around the biggest institutions in the country that you would think would have the best processes in place, let alone the smallest players, that they're going to get advice that's in their best interests? That's quite shocking.

Ms Macaulay : That's why we called it out in our report. There was a previous report that also looked at the quality of supervision of those licensees of their advisers. So we put it very much on the public agenda that we've got concerns about that. We have engaged with each of those licensees around not only remediation across the board for clients who may have been affected but putting in place proper compliance procedures. We've also made it very clear to the industry that what we have seen in relation to these institutions is not unique to those institutions. We have seen it in the surveillances that we have done in other licensees across the board, and there are very much messages for the whole of the industry in these reports. At the back of the reports, you'll see we give quite specific and practical guidance to the industry about how to do that, beyond the published guidance that we've had in place for some years.

Mr Kell : And there's further follow-up, in terms of both getting these institutions to significantly raise the standards around their advice businesses and looking at the potential enforcement outcomes, including bannings of particularly poor advisers that have emerged as a part of this process, and, in fact, more broadly, we've had record numbers of bannings of poor financial planners in the last year or so. So, there are a range of outcomes to take out poor players, to lift standards within the institutions, to have consumers remediated and to ensure that these institutions get their act together, frankly.

Mr THISTLETHWAITE: That was going to be my next question, Mr Kell. Is ASIC looking at taking action against the organisations involved here, where there are clear breaches?

Mr Kell : As part of our broader wealth management project, we have a series of actions underway in relation to the large institutions around aspects of their advice businesses, and there is further work underway. I would also emphasise—and I think this is important to understand—that we have sent a message more broadly to the industry as well that they shouldn't imagine that all of these issues are just restricted to the largest five entities. We want to make sure that other financial planning firms take the lessons from these reviews.

Mr THISTLETHWAITE: In that report, you say:

We will … ensure that appropriate customer remediation takes place …

On page 10, you say:

The outcomes of this work will be reported on separately.

Has that happened or when will it happen?

Mr Kell : We've been providing reasonably regular updates on remediation, both for fees for no service and also for advice compliance. I'm not sure what the latest figure is, but we can get that to you fairly quickly.

Mr THISTLETHWAITE: I want to ask some questions about report 516 on mortgage brokers. I know it's over a year old. Is it an obligation for a mortgage broker to disclose verbally to a client that they're receiving an up-front commission and a trailing commission from the lender?

Mr Saa dat : No, there is not. The obligation to disclose commissions arises once the credit contract has been provided to the customer. So, the home loan documentation will contain information about the commissions that are paid to the broker by the lender.

Mr THISTLETHWAITE: A lot of people don't read those documents. You'd be well aware of that, unfortunately. Do you think it should be a requirement that, when you sit down with one of these brokers, they disclose verbally that they're getting a commission from the lender and that that may include a trailing commission for keeping them in that product?

Mr Saa dat : We do think there's a role for better disclosure around commissions, but also a number of other things we highlighted in our report on broking suggested that it's not just the commissions that play a role here. We think it's important for consumers to know which lenders a broker is actively recommending. There's often a suggestion that brokers have a choice of 20 or 30 lenders to recommend. What we found, in practice, occurs is that they will typically recommend around four lenders to most of their customers. We think disclosure of that is important. We also think disclosure of ownership structures is important to customers because there are several large mortgage-broking businesses that are owned by banks, and we think disclosure of that information is also important.

At the same time, I think disclosure has its limitations. We've seen, in other contexts, that disclosure doesn't really assist consumers to make good decisions. And, in some situations, we've seen that disclosing your conflict of interest actually results in the consumer having more confidence in you because you're seen to be trustworthy. So, again, I would say disclosure is important, but, on its own, it isn't going to be enough to make sure that there are good consumer outcomes, which is why we've made a range of recommendations about how we can improve the remuneration of brokers and consumer outcomes.

Mr THISTLETHWAITE: At paragraph 396 of that report, on page 78, you say:

In our view, bonuses—including volume and non-volume based bonus commissions, campaign-based commissions and soft dollar benefits—present an increased risk of poor consumer outcomes.

Is this an area you think that perhaps should come under the umbrella of the best interest duty—that the best interest duty should apply to mortgage brokers, given the findings that you've got in this report about poor customer outcomes?

Mr Saa dat : That is a matter for the government to decide on. We have publicly said that we think that, in relation to the standard that exists at the moment for brokers, which is that they need to provide a service which ensures that the loan is not unsuitable, there's scope for raising that standard. Whether that should be a 'best interest' standard, I think, is something that is worth considering, but we don't have a firm view on whether best interest is the right standard or whether a more tailored obligation should apply to brokers, given that they are recommending different types of products to financial advisers. The other thing I would say is that, on those bonus commissions and volume based commissions, we came out pretty strongly and said that the industry should move away from those types of commissions because they do exacerbate the conflicts of interest that exist. The industry has accepted that recommendation, and they are now moving towards removal of volume based commissions and bonus commissions, and we think that's a very positive step.

Mr THISTLETHWAITE: Fee-for-service type arrangements—is that what you're talking about?

Mr Saa dat : That's a different thing.

Mr Kell : Just very quickly, we set out that there are, if you like, three levels to the way that mortgage brokers are remunerated. There's the basic model, the up-front commission and trail. Then there are a whole set of bonus- and volume-related payments.

Mr THISTLETHWAITE: Including holidays and all that sort of thing?

Mr Kell : And then there are the soft dollar payments—the holidays and so on and so forth. We strongly recommended that the soft dollar payments and the volume-related payments be taken out of the remuneration chain and that we look at ways of strengthening the protections around the basic commission model, so that it reduces the risk of inappropriate outcomes. So, we've recommended that a series of the current remunerations that create conflicts be removed.

Ms BANKS: Mr Shipton, I appreciate you've taken over the reins in recent times this year, but you refer to a lost decade. However, in that lost decade, we've seen systemic, serious failures in the finance sector that have done a lot of harm to a lot of Australians. And, in talking about cultural change, I'm sure you'd agree that, to bring about any cultural change in any organisation, large or small, private or public, that cultural change has to come from the top and from the leadership, and the leadership has to be accountable for bringing about that change and has to be accountable for the failures of the culture in the finance sector. Where do you see ASIC's accountability in terms of ASIC's culture in terms of their connection to these systemic failures?

Mr Shipton : Thank you very much for that question. If we are—and we are—advocates for cultural reform and renewal, then of course we need to lead by example. This is something that I'm firmly committed to: that ASIC and the men and women at ASIC are exemplars of the professional mindset that we are expecting of the financial services sector. That is something I'm firmly committed to.

I must admit that I have every confidence that ASIC will continue to be an example of fine professionalism. The men and women at this organisation are firmly committed to the challenges that we've been discussing, and which are confronting. I can give you my personal assurance that these fine people work as hard as they possibly can to address the issues. They feel the hurt that you feel. They are confronted as you are confronted. They are not sitting in an ivory tower; they are firmly committed every single day to doing what they believe is just and what is right. I see my role, and my fellow commissioners see their roles, as harnessing that very positive energy inside the organisation to make us even more efficient, to make us even more professional and to make us even more effective in confronting the challenges before us.

You also mentioned in your question about the failure in recent years of the financial services sector. I am surprised, having spent a significant time working in, regulating and observing overseas financial sectors, that the lessons learned from those other jurisdictions were not applied sooner in Australia—that those lessons were not embraced sooner by the sector's leaders. Unfortunately, we are where we are and it is what it is, and, hence, that is why there is an enormous urgency right now for these leaders and for all of the men and women in finance to embrace this concept of professionalism that you asked me about.

Ms BANKS: In terms of everyone in ASIC being committed, that's great, but have you done an after-action review within ASIC in terms of ASIC's accountability and responsibility for where these systemic failures have occurred?

Mr Shipton : Sure. What I have done in the last four months was, firstly, to make an assessment of what I believe are the fundamental challenges in the sector. Secondly, I made an assessment of how ASIC is positioned now and how it can deploy into the future in meeting those challenges. Those two parallel tracks are absolutely fundamental so that we can then respond accordingly.

I've also been very mindful of parliamentary reports, and also the capability review into ASIC, which provide excellent guidance and excellent direction—strategic and tactical—for our organisation. As I mentioned earlier in response to an earlier question, we are engaging with the government on some ideas that we believe will position the organisation to respond to the challenges that you as a committee are concerned about, rightly, and have identified. We've presented these ideas to the government, and I'd be happy to outline them to you in greater detail if time permits. But, amongst other things, they would—in response to an issue raised by the deputy chair—provide for greater supervisory focus on the very financial institutions that touch most Australians and would focus on issues that have been of systemic concern, including conflicts of interests, for many years. We want to be, and we will be, part of the solution. And that's something that we're firmly committed to. So, yes, we are forward looking; yes, we are responding to the challenges that we are confronting; and, yes, we are looking at making sure that we learn from experiences and read and apply the recommendations that come from reports, such as those of parliamentary committees and the capability review, so that we can be the best that we can possibly be.

Ms BANKS: I refer you to the case of Westpac. It was reported that, of the four big banks, Westpac seemed most resistant to ASIC and the laws that ASIC administers. These were noted in notes. In 2015 ASIC had approached Westpac's chairman after raising concerns with Brian Hartzer and other executives at the way the bank was issuing credit card increases that could cause financial hardship. There was no action taken in relation to that reporting and Westpac didn't follow up to address the issue until two years later, and only after ASIC had threatened to take legal action. Don't you agree that ASIC was part of the problem in terms of not following up earlier? The report was done, the questions were asked and two years passed. In terms of those reporting requirements, that's where the accountability has to be evenly balanced. Don't you agree that that could have been done a lot better? The second part of my question is: if that scenario were to take place today, how would it look different to how it did back in 2015?

Mr Shipton : I will ask my colleague Mr Saadat to respond on the particular details of that case, but because I believe that you're getting at the important issue with regard to timeliness and responsiveness of ASIC I will at least give you my viewpoint. We will move as quickly as we possibly can in situations that are confronting and concerning. I am not briefed on the particular details of that matter at hand, but I would have absolute confidence that we exercised our different tools at different times as we saw appropriate. I've been a regulator now for quite some time, I've been observing regulatory practice and I've been a regulated person myself. Unfortunately, even as a regulator we don't get outcomes that we would like in the speed we wish them to be executed. That said, I am sure that in these cases we would explore as quickly as possible all of the tools we have and apply them as quickly as possible. That is something that, unfortunately, takes longer than the average person may like, but nonetheless there are steps to be followed and procedures to be respected.

Please let me assure you that when we identify problems we are committed to solving them as quickly as we can. That's my assurance to you moving forward. If a scenario comes along, it may not seem on its face that we are moving quickly but, trust me, my commitment is that we will move as quickly as we can using the tools that we have and, if necessary, those tools will become more apparent and more public as we move in serious situations to enforcement outcomes.

Mr Kell : I will just make one comment before passing to Mr Saadat.

Ms BANKS: I think that really addresses my question. I have one final question on the same matter. Westpac's general manager of credit Mr Malcolm told the commission that there was not a problem with Westpac's culture but rather its processes. You, Mr Shipton, talk a lot about self-regulation in relation to the banks and, understandably, that it should be their responsibility and that there is a need for professionalism and them to change as well. But when asked by Commissioner Kenneth Hayne how Westpac would respond to requests from ASIC in the future, he said, 'I think we would obey the law, unless we made the case otherwise.' My question so you is: how much confidence have you got in relation to that culture change happening when it's aligned to your expectations of the degree of culture change that needs to happen in terms of self-regulation?

Mr Shipton : There is a tremendous amount of work to be done by the financial institutions. Those vignettes, those case studies that you mentioned, are very good ones for the industry more broadly to reflect upon. I have said publicly, and I will say again today, that there is far too a legalistic approach by many organisations, and many people inside those financial organisations, when it comes to responding to issues and to questions. Yes, of course, legal processes are important. We take those legal processes very seriously as well but there is a need for a more professional, a more human minded and a more community oriented response by financial institutions. There is much work to be done.

Another point of assurance for you is that I will continue both publicly and directly—one on one—to advocate for that reform, that improvement and that change, because the nation, the community in this country, desperately deserves a financial sector that it can trust, that is servicing its needs and servicing the community and the society. As opposed to wrapping itself up in legalistic language and, to be honest, in often cases an obstructionist response, which in our view is totally unacceptable.

CHAIR: Thank you very much.

Mr KEOGH: Thank you for joining us today everybody. I want to go through some questions around the industry funding model that you've now got operating. How much of the money that ASIC collects through this industry funding model does ASIC get to keep?

Ms Armour : ASIC doesn't get to keep any of that money. That is money that goes to the government—effectively reimbursement for the appropriation to ASIC.

Mr BUCHHOLZ: Do you get to keep the costing part of that?

Ms Armour : If there are recoveries of court costs or some of our investigation costs, if they relate to matters in our enforcements special account, we do retain that.

Mr KEOGH: All of the funding that ASIC is receiving actually government funding and dictated by government, as opposed to it being—

Ms Armour : It's reimbursing the taxpayer. It's a user-pays principle, so the concept is—

Mr KEOGH: The industry funding though is not 100 per cent of the funding that ASIC receives from government?

Ms Armour : Industry funding for this current financial year is a percentage—

Mr KEOGH: What percentage is it?

Ms Armour : It is about 230-something out of about 350. The bit that isn't being collected relates to transaction levies. There's legislation that passed through the House this week—and it is before the Senate—to impose industry funding levies.

Mr KEOGH: Is the overall intention then, as this rolls out, that 100 per cent of the funding for ASIC is effectively being offset by some form of industry levy recovery?

Ms Armour : That is right—in relation to our regulatory operations as distinct from our registry operations.

Mr KEOGH: Yes. Which is already being paid for 100 per cent by fees collected through the registry services?

Ms Armour : The costs of that are appropriated by parliament, yes.

Mr KEOGH: Why is ASIC projecting, or at least why does the budget for ASIC project, declining expenditures going forward?

Ms Armour : The industry funding model is based on the fact that it is still government's decision what the appropriate overall funding model for ASIC is.

Mr KEOGH: Why is it the case that ASIC is expecting to be spending less over the next four years?

Ms Armour : It is a decision that government makes as part of its budgetary—

Mr KEOGH: Given what we've been discussing about the increased powers that ASIC will be receiving, and what seems to be an increasing workload that ASIC is going to be pursuing as a result of having those powers—the inevitable consequence of some activity that will be spurned by some recommendations that come from the royal commission, even if you don't want to comment on what they are—does it seem likely to you that you're going to have less work to do over the next four years?

Ms Armour : I think, as the chairman has already mentioned, we are having productive discussions with government about specific funding initiatives and we have had, even in the last—

Mr KEOGH: Is that a concern to you that you have to go to government for each specific issue to say, 'We want more money to do X,' as opposed to, and what I think we were sold on in terms of industry funding, being ASIC being able to say, 'This is a big issue; we're now going to pursue it.'

Mr Kell : It is the system that has been inherited for quite some time. I understand it's also the system that applies to industry funding fee bases.

Mr KEOGH: Not all of them.

Mr Kell : But we are structured by way of our funding on NPPs—new policy projects, they are termed—and some of the forward estimates, I understand, show a decline because these termed funded new policy projects come to an end. As Commissioner Armour just said, we are engaged in very productive conversations with the government and we have, what I believe, are some good, strategically-oriented, forward-looking ideas.

Mr KEOGH: I think that is good. I just want to get more to the mechanics of it. On that particular one, I know one of the things you approached government about was getting an increase in funding to be able to fund having embedded supervisors in the banks. Do you think it is appropriate that the taxpayer as opposed to the banks has to foot that bill?

Mr Shipton : The industry funding model, as my fellow commissioner just highlighted, ultimately will be funded by—

Mr KEOGH: So your anticipation is that if the legislation that's gone through the House makes it through the Senate, that will allow you to pick up recovery from the banks to pay for these supervisors?

Ms Armour : Yes. Even now, if we spend more of our regulatory time on a particular sector, that sector—

Mr KEOGH: Absolutely, but if you are doing it on a sectorial basis, which is what the current legislation allows, it means that a customer from Bendigo Bank is paying for you to put a supervisor into the Commonwealth, which seems pretty unfair. But the current legislation is more about specific action for an individual entity.

Ms Armour : The current legislation is actually addressing something differently. It is the costs for us of managing specific transactions.

Mr KEOGH: So this wouldn't fit into that category?

Ms Armour : No.

Mr KEOGH: So what you're saying is that, ultimately, yes, industry funding will offset the costs of putting these supervisors in but it will be borne across the entire banking sector as opposed to the four or other banks that you see the need for supervisors to go into?

Ms Armour : As each new policy proposal is considered—

Mr KEOGH: I want you to answer.

CHAIR: Excuse me, Mr Keogh, could you give her an opportunity to answer the question that you have asked.

Mr KEOGH: That's exactly what I was going to ask her to do.

CHAIR: Excuse me, Mr Keogh, just show Ms Armour some respect.

Ms Armour : The funding arrangements will be part of the discussion of a new policy proposal so it may default, if you like, to the existing model that's been legislated or there may be something that's more specific that comes up, so it will be determined case by case.

Mr KEOGH: We will keep watching this space, thank you. I want to turn to enforceable undertakings. Many of the enforceable undertakings that ASIC entered into over a number of years, especially with our banks, have seen payments made to charities, largely around financial literacy. What does ASIC do to satisfy itself that the payment has been made by the bank to the charity?

Ms Armour : We do have a process in place where we actually engage with the particular charity. We speak to them. We have them report back to us what they've been doing with the money. We have them confirm that the money's been received. We go through that process.

Mr KEOGH: And what's the general policy, then, about compliance with these EUs? Is there a proactive approach of ensuring each step has been followed and each thing occurred, or is ASIC sitting there waiting for someone to report to say, 'Hey, they didn't do that thing?'

Ms Armour : No. We supervise each of the enforceable undertakings because, as you know, if they were breached, we would be taking action in court to ensure that they were complied with.

Mr KEOGH: Is there a particular group within ASIC that has responsibility for supervising these EUs, or do they sit across different groups?

Ms Armour : They sit with the group that is responsible for, if you like, the underlying problem. For example, the court enforceable undertakings that we took from the larger institutions in relation to the wholesale foreign exchange businesses sit with the group that's responsible for managing conduct in the wholesale foreign exchange business.

Mr Kell : The commission itself receives a regular report on the progress against all of the enforceable undertakings across the organisation: how they are being implemented and where they are up to. We have the Australian National Audit Office conduct a review of our use of enforceable undertakings—

Mr KEOGH: I've been told I have one minute left—

Mr Kell : We are happy to provide follow-up. It's quite a detailed policy.

Mr Saa dat : And also the public register about EUs. We put on the public register updates in relation to those EUs.

Mr KEOGH: When money is going to a charity under an EU, who selects the charity?

Ms Armour : An enforceable undertaking is one that is offered by the particular firm or individual to ASIC.

Mr KEOGH: They propose it?

Ms Armour : They propose it.

Mr KEOGH: Then, does ASIC have criteria to assess it against?

Ms Armour : Yes, and if there is a proposal to make a community benefit payment ASIC may well make suggestions—

Mr KEOGH: As part of the criteria, is the tax status of that entity considered?

Ms Armour : Yes, it is. We're very concerned to ensure that this is a true community benefit payment. Not only do we consider the tax status but we ask the organisations who are making the payments to confirm that they will not claim a tax deduction for that payment.

Mr KEOGH: But that's not included in the EU?

Ms Armour : No. We do that separately.

Mr EVANS: Mr Shipton, there has rightly been a lot of public discussion about culture in the banking and financial industries, both in recent months and including here today. I looked through the pile of media cuttings since the last time we met and I see hundreds of references to the culture inside financial institutions, and many of those references are quotes from yourself and ASIC. Of course, I think most of us here and around Australia would applaud your strong words highlighting the importance of culture inside firms like the banks. I want to pick up where my colleague Ms Banks left off before when asking about culture inside your own organisation—within ASIC. You are a new chair, as has been pointed out here today, and that does mean that you have this opportunity here in front of you to set the course of your regulator's culture, as it runs into its next chapter.

The chair and Ms Banks both asked you some questions earlier about how much of the blame ASIC might take for this identified trust deficit and the failings being uncovered in the financial sector. That's because, I suppose, whether you like it or not the community does allocate a portion of that blame to ASIC. Without in any way taking away from your earlier comments about the professionalism of your team at ASIC, can I get you to expand on your understanding that the public might not be satisfied with an answer that the culture at ASIC doesn't need to change?

Mr Shipton : To clarify, cultures inside any organisation need to be actively worked on. I've studied organisational culture for quite some time and one thing I know very well is that if a leadership group of any organisation does not take active leadership of the culture of its organisation, that culture will drift. There are a number of studies that I've read, one in particular from Colombia University, that identify this. So, my fellow commissioners and I, and the senior leadership group, many of whom are represented here today, need to be active leaders and guardians of the culture of our organisation. That same message should go out to all of the financial services firms: that they need to be proactively, every single day, managing, leading, defining and guiding their culture.

What have I been doing in recent times? I have been articulating and highlighting, to my fellow commissioners and to the men and women in ASIC, what I expect to see. I expect our organisation to be professional. I expect our organisation to be forward-looking. I expect our organisation to be leaning into issues. I expect our organisation to be inquisitive. But above all, and I think this is what you are asking me about, Mr Evans, we need to be mindful of the community's expectations of us. We constantly need to be doing that. I have been encouraging my colleagues at ASIC to be very mindful the human element—to listen to what their friends are telling them about their expectations of the financial services industry and the expectations of ASIC.

Mr EVANS: Having said that, do you think that what you've just said represents a break or change with the past in terms of ASIC's culture?

Mr Shipton : Any organisation is evolving. I am firmly committed to the positive evolution of our professional culture. I gave my very first speech as a regulator many years ago in Hong Kong. I was speaking about the importance of culture inside financial institutions. The very first public question I ever got as a regulator was, 'Mr Shipton, it's all well and good for you to tell us about culture, but what about culture inside your regulatory organisation?' I said to the person who asked me that question, 'That is the best question I've ever been asked as a regulator.' You are reiterating that very good question. It is something I'm very focused in on. I have absolute confidence in the men and women I work with. I have absolute confidence that I can work with them to ensure that that cultural dynamic that I articulated can and will be achieved.

Mr EVANS: Can I dive into an issue that to my mind is closely related to regulator culture, both in your regulator and others around Australia. In my experience there is a natural tension inside regulators about the allocation of limited resources to different areas of complaints and areas of responsibility. That plays out, in particular, when a regulator chooses between pursuing small, easy cases which might provide a quick win and a press release, versus large complex cases which might take an entire team and a long time to prosecute, with no certain prospects of a victory. That tension exists for senior managers in terms of how they allocate decisions and for each individual investigator and officer inside an organisation. What are your thoughts on that tension in your regulator going forward from here?

Mr Shipton : Thank you for highlighting what I call the regulatory dilemma, which is that any regulator in any agency in any industry anywhere in the world has limited resources and they must do their level best to apply those resources in the most strategically efficient way. That's another element I feel very strongly about. I want our organisation to be strategically efficient. What we are doing is we are looking at the way that we make these decisions, how we deal with the strategic dilemmas, at every level, so that when recommendations or choices have to be made at every level the officers, from the case officer all the way up to the commission, are aware of the potential options that are available and that we consider them. Often, when I'm asking a question, I say, 'What is the alternative option? What is the red team? What would the red team say in this particular exercise?' Ultimately it comes down to our very best professional regulatory judgement. I have every confidence that we are going to exercise that appropriately and successfully. Of course, with 2020 hindsight, often decisions would be made differently. That's always going to be the case. I would also caution against looking at numbers in black and white, because of course some numbers, some statistics in the world of regulation, do not appropriately convey the complexity, the sophistication and the time taken on many issues and many undertakings, whether they be enforcement undertakings, surveillances, supervisory actions or writing reports. I was briefed the other day on an action we have in court which has been running for a decade. That is just one enforcement action, but it is ten years of work.

Mr EVANS: Can I take you up on that point? In your first appearance in front of some of our colleagues in the joint committee on corporations, you set out your expectations that Australia should see an increased number of legal actions. That was then widely reported in the press. Even today you've come here and talked to us in your opening statement about tabling a long list of undertakings, media releases, scalps and so on. That approach worries me somewhat, for some of the reasons you've outlined. I strikes me that pointing to scalps and easy wins in one sense might satisfy a shallow media day in day out, but it might not ever directly confront some of the issues and problems in the sectors you're responsible for. I put it to you that the actual compliance rate in the industries that you're responsible for is much, much more important than these sorts of measurements. I would have preferred to see an approach that concentrated on that compliance rate. To put it in layman's terms, I guess people would prefer to live in a society with low crime rates and low conviction rates rather than live in a crime hotspot and be reassured that officers are making 100 murder arrests every single day. So can I ask what steps you're going to take to measure actual compliance rates?

Mr Shipton : Thank you for raising this important issue, because you're absolutely right. Enforcement is just one of the available tools that we will utilise and deploy in different situations. As I mentioned in my opening remarks, our goal is a fair, strong and efficient financial system for all Australians. That is what we're aiming for. Essentially, what we are doing as a body of work also, which we will come out more publicly with, is to further articulate what a good financial system looks like, a financial system that does serve the community, that is efficient, that is strong. We are working backwards from that. This is why I was cautioning in my earlier comments. The headline numbers of surveillance actions or enforcement actions are important and are good metrics for us to keep in mind, but, as you've clearly indicated, they do not indicate that the ultimate goal is far more qualitative than quantitative.

Mr EVANS: Can I ask you to take on notice, please, to come back to the committee with some ideas about the steps that you will take to ensure that your team will not be led down the path of chasing scalps, but will be focusing on some of the larger, more complex cases, such as we have seen with the banks. My last question picks up on the last point you're trying to make. We're seeing reported that ASIC is looking at embedding officers in businesses to internally monitor processes and compliance. It's an approach that I've long been an advocate for. I think it's a style of collaboration which would be less legalistic, quicker, more efficient in the use of regulator resources. Instead of arm's-length legal tussles, with the cooperation of a lot of businesses it would hopefully tease out a lot of the non-compliance that sits here in a non-deliberate, minor, systemic way. I hope that you've learnt that from some of your overseas and international experiences, because some other countries are charging down that path and taking strong steps. Can you tell us about where that's up to?

Mr Shipton : Yes. We are seeking support and funding from the government. That is a productive conversation, but of course I absolutely respect the processes that need to go through for that, particularly since it is a request that is new, and a very recent one. Secondly, we have been very mindful of the experiences of overseas supervisors in this regard. There are a number of lessons to be learnt and to be aware of, such as the risk of regulatory capture, which I'm very mindful of. But I agree with your sentiments that this approach can apply and provide for regulatory and supervisory teams that are more knowledgeable and understanding of particular institutions, have a better, more real-time, on-the-ground assessment of their risks, both financial and non-financial, and are better able to speak the same language back to the financial institution that they use so as to get effective change. Finally—and I've experienced this personally as a regulated entity, working inside an organisation that before the financial crisis did not have this ongoing supervision, with an experience after the event—it helps with cultural change and cultural reform inside financial institutions, which, again, is one of our key goals.

Mr EVANS: Can I close by making the comment that I think discussions with the Treasurer around extra funding miss the main point. This could be core regulatory business. I think ASIC already has all the powers and authorities it needs to enter into agreements and MOUs with businesses.

Ms KEARNEY: You've mentioned today that there are a lot of investigations underway by ASIC, and I'm sure you are incredibly busy, but can you confirm whether or not there is an investigation into matters concerning the collapse of Queensland Nickel at the moment?

Mr Price : Yes. We have confirmed on the public record previously that that is the case.

Ms KEARNEY: Are you able to tell us the potential offences or contraventions that are part of that investigation?

Mr Price : Yes. Again, we've previously provided that information to another committee—bear with me, and I can give some high-level observations in that that regard. Our investigation concerns suspected breaches of provisions on directors' duties and provisions dealing with lodgement of misleading documents. Broadly speaking, it relates to the use of company funds to fund the Palmer United Party, the transfer of assets without payment of due consideration and how those transactions were accounted for, the disclosure of information to company auditors and to the regulator, and the extent of related party transactions. As these inquiries are ongoing there is some difficulty in getting into more detail.

Ms KEARNEY: I understand. Thank you, that's very helpful. Are you able to tell us what the maximum penalties are for those offences? They sound quite serious.

Mr Price : I'd like to take that question on notice. But I'd just like to reiterate that these are investigations at this stage. Our investigations are well advanced, but these are investigations at this stage.

Ms KEARNEY: Are you able to tell us if Mr Clive Palmer himself is a person who these offences are being considered in regard to?

Mr Price : I'd prefer not to go into the level of detail about the exact persons who might be involved, other than to say we are looking at potential issues around shadow directors, as well as directors on the record.

Ms KEARNEY: So you are looking at other directors as well?

Mr Price : We are looking at a range of persons.

Ms KEARNEY: You may or may not be able to answer this question either: are you thinking of preparing a brief for the office of the DPP with regard to criminal prosecutions?

Mr Price : All regulatory options are on the table for us.

Ms KEARNEY: Have any charges been laid to date?

Mr Price : To date, there have been no charges laid in respect of our investigation, although I'd reiterate our investigation is well progressed.

Ms KEARNEY: I'd like to move back to the issue of remuneration and culture within organisations. There's been a lot of discussion about that here today, and I thank you very much for your ardency with regard to addressing it. I think it's incredibly important. We've certainly heard about remuneration for financial advice with trailing commissions and grandfathering commissions, and you've spoken a lot about that. I'm interested in internal remuneration policies for staff. There's been quite a bit done recently. I know from my colleagues in the Financial Sector Union about sales targets for staff and the culture that that drives. It certainly doesn't bring about good outcomes for consumers. I'm wondering about your view on that. I know some of the banks have changed their practices with regard to that. Have you seen any changes or positive outcomes from that?

Secondly, I'm also very interested about organisations that use bonuses for their executive staff and their senior, say, investment staff—bonuses for performance—and whether or not you think that is an issue of concern with regard to culture and poor outcomes for consumers. Is that something you are looking at and will be looking at in your conversations with the institutions?

Mr Shipton : The answer is absolutely, yes. I'll elaborate on my thinking and my philosophy, and then I'll ask colleagues to supplement on some of our work. I've had a number of conversations, both publically and directly, with large financial institutions and smaller financial institutions about the risk of behaviours that are skewed not just with remuneration, by the way, but with measurement. Anything inside a very quantitative organisation like a financial institution which is measured will—in my observation, having worked inside a financial institution—skew the behaviour of the employee. So I have put to the industry that they need to look very carefully not just at their remuneration structures but at their MIS structures in and around measurements of performance.

I have put to the industry that they need to look very carefully not just at their remuneration structures but also their MIS structures in and around measurements of performance. I've put to them that the next generation that they as a business should evolve to is targeting and measuring behaviours that they want to proactively promote—particularly, as you rightly point out, behaviours that increase the experience of the consumers and the customer outcome. I have put that to them as one of the challenges of the new frontier. It's not just remunerating performance in a quantitative metric; it is rewarding, highlighting and identifying cultural and human behaviours that we believe will help that financial institution and the sector more broadly get to a point where the system itself is fairer, stronger and more efficient. I'd be happy to ask my colleagues to elaborate on some of the initiatives that we have underway.

Mr Saa dat : In response to your direct question about the changes that the financial institutions have made, we're looking very closely at those, but it is too early to say whether they have been effective. A lot of those changes have only recently been implemented.

Ms KEARNEY: You are monitoring that?

Mr Saa dat : We are monitoring that. The industry made a series of changes in response to a review that they commissioned by Mr Stephen Sedgwick, a former Public Service Commissioner. He recommended that a whole range of incentives be overhauled, and the banks have agreed to do that. I would echo what Mr Shipton has said about the way that performance is measured in these institutions. We continue to see cases where poor behaviour has been caused not by large financial incentives but by the way that staff performance is measured and assessed by the organisation. I think it's a case where it won't be enough to just remove the financial incentives; it will be about the cultural change that's required to reinforce the behaviours that you're looking for. There remains a risk that, even without the sales incentives, certain behaviours will continue because of the way that staff are measured and assessed in their performance.

Ms KEARNEY: That's right. I know that your main concern is the consumers, the ultimate users of the services, but these sorts of cultures within organisations set worker against worker, employee against employee. It creates a culture of competition, which ultimately is bad for the employees' own health. We've seen a lot of negative implications of that. That, of course, flows over into the consumer experience as well. It may be too long a bow for you, but is the welfare of the employees that are subjected to these remuneration issues part of your concerns?

Mr Shipton : Absolutely. Hundreds of thousands of Australians work inside financial services. They are a part of the community as well. What gives me confidence in this job, working with the fine people I work with, is that I ultimately believe that those hundreds of thousands of people in finance are keen, willing and able and would like an environment, culture and financial system that they're proud of working in. I think that's the ultimate goal. We want a goal where the men and women—those hundreds of thousands of people who work in finance—are proud of what they do and are pleased to work inside financial services because they are serving the community. I want a situation where these good-hearted and good-minded men and women inside financial institutions are looked up to as professionals, but all of us have to collectively work towards that. If we can get that professional mindset whereby there is care and conscientiousness as well as competence then I think we can get to that environment that you rightly point out is our ultimate goal and is consistent with what we want to achieve, which is a fair, strong and efficient financial system for all Australians.

Ms KEARNEY: That's good to hear—thank you. I will make one final comment. I just want to make you aware that the people who often bear the brunt of the consumers' mistrust and anger are those people at the shopfront, who have little or no control whatsoever over the decisions that are being made about the organisations they work for. That is a big concern.

Mr Shipton : You're absolutely right. We are informed that the levels or incidents of concerning behaviour inside branches has increased in recent times.

Ms KEARNEY: It has, indeed.

Mr Shipton : But I've said to the leaders of these financial institutions: this increases the urgency of a response. We need solutions to be done and applied very quickly because, in addition to trust and confidence, it's affecting real people and affecting people who are, in effect, innocent.

Mr Kell : It is also one of the reasons why we have sought greater powers to take action against senior executives, not just the front-line advisors or sales staff. The government has agreed to that, as part of the enforcement package that is proposed to be introduced. I think that's a very important move because it signals that right to the top of the organisation there needs to be accountability for consumer outcomes, not just at the front line.

Ms KEARNEY: Most definitely.

CHAIR: I would now like to invite Mr Kelly to ask questions.

Mr CRAIG KELLY: Mr Shipton, you have talked about the financial sector suffering from a trust deficit. Could I put it to you that that's the result of an imbalance of the incentives in the system and the potential consequences, penalties, sanctions that are available to you. Would you agree with that?

Mr Shipton : What you're highlighting, Mr Kelly, most certainly has to be a contributing factor or a series of contributing factors.

Mr CRAIG KELLY: If we look across the economy, I can't think of any other sector of the economy that would have such a trust deficit. Even the car sales sector, which traditionally used to be an area where you thought of the dodgy car salesman—

Mr Buchholz interjecting

Mr CRAIG KELLY: Well, second-hand!

Mr Buchholz: Second-hand only!

Mr CRAIG KELLY: That was an area of the economy where there was often a trust deficit. I would say today that that trust deficit is not there. It seems to be that financial services would be the worst offender across the economy. Would you agree?

Mr Shipton : There are some studies that indicate a range of different sectors. You're right. The financial sector—and I'm going from memory—is a sector that has particularly high levels of trust deficit. I believe the Australian Institute of Company Directors did a trust survey, and I would commend that reading to you. But your general point is correct. There is a trust deficit of significance with the financial sector.

Mr Price : There was a study presented at our annual conference by a group called Edelman, who made the observation that there is a widespread downturn of trust in institutions generally—government, large business and so on. It did highlight the financial sector as an area where particular attention might be warranted.

Mr CRAIG KELLY: If we're talking about an imbalance of the incentives and the penalties, do you think some of the changes that have been proposed by governments and some of the things that you're talking about will address that imbalance?

Mr Shipton : Yes. We are very much looking forward to the passing of these increased powers, these increased penalties. They will position us to be, I think, more forward-looking in addressing the imbalance that you highlight. Importantly, this is an opportunity for me today to highlight that, because I know leaders in the financial sector are listening. We will use every inch of these powers to ensure that we are aiming for a fair, efficient and strong financial system. We want to put these financial leaders on notice that they need to identify the imbalance that you highlight, Mr Kelly, and identify their failings and redress them, because that is the way that we're going to get to a point whereby we have that increased confidence and trust by the community in what is again a fundamentally important function, which is the financial services. They perform such an important role. Our whole economy, our whole society, relies on the proper functioning of that financial system. That's why it's so important that we have these powers, but that's also why it's so important that the financial sector start moving quickly to rebuild that trust.

Mr CRAIG KELLY: So, it's not a matter of—the incentives are still there in the system, but we're equalising a bit more where, if things go astray or someone does something wrong or oversteps the mark, the consequences have to be quite significant for that person—

Mr Shipton : Yes. There are two streams. I think you're rightly identifying these two streams. The committee has clearly questioned us appropriately about our body of work and what we're going to do and how we're going to use these powers and how we're going to be strategic, and we look forward to future questions, because you're absolutely right: we need to be held to account. The second stream, the second body of work, is the industry self-correcting, identifying the challenges. You used the example—

Mr CRAIG KELLY: If I could just interrupt: that so-called self-correcting has to be driven by the sledgehammer that you hold.

Mr Shipton : I am very happy to be a forceful, positive catalyst, and I know—this is what gives me confidence—that the men and women I work with also want to be a forceful, positive catalyst for that change. And yes—you talk about blunt instruments—we are getting blunter instruments, which is good. But we will also apply other regulatory tools and other regulatory approaches to make sure we have that ultimate goal in mind.

Mr CRAIG KELLY: Also going back to that imbalance we've been talking about, doesn't that also exist at the consumer level? In the past, if the consumer had a dispute with a bank, for example, of which we've seen numerous cases during the royal commission, that consumer had very little ability to bring that dispute before a competent court or a tribunal, but they couldn't actually have their case heard.

Mr Shipton : This is why some of the reforms that were been legislated and proposed by the government, particularly the creation of AFCA, are very positive steps in this direction. You're absolutely right: there's a role for the regulator, there's a role for the financial sector and then of course there are important dispute resolution mechanisms that are being provided for and being improved, including AFCA. My colleagues would be happy to speak about those mechanisms.

Ms Armour : We also have a very vibrant class action regime in Australia which does practically give good redress through the court system as well, which has developed over recent years.

Mr Kell : We've been strong supporters of the establishment of the new Financial Complaints Authority, which is due to be up and running on 1 November. We've advocated for some time bringing the different ombudsman schemes that are out there together, to strengthen the powers of the new complaints authority, to increase its jurisdiction and I think quite importantly also significantly increasing its jurisdiction of the small business matters.

Mr CRAIG KELLY: Can you just confirm the numbers on that?

Mr Kell : For small business it will include small business lending of loans of up to $5 million in dispute, and they'll be able to award amounts of $1 million, and $2 million in the case of rural lending. That's a very significant increase.

Mr CRAIG KELLY: Can you see this as levelling the legal playing field between a small business and their financial institution where there's a dispute that may not have been there in the past?

Mr Kell : Certainly if you include that reform and also the decision to extend unfair contract terms to small business and potentially some of the issues that are also going to be in the code you have a package that we believe will certainly help small business. AFCA is a very important reform in our view, and we're working actively with the different bodies at the moment to make sure it is up and running for November this year.

I would also note that one of the other aspects of that reform process the government introduced that hasn't received as much attention is the requirement for all participants in the financial services industry to report their complaints and disputes statistics—and putting some sunlight on that—and they'll report it to ASIC, and we will in turn publish it. I think that will really help to highlight where we're seeing some of the trends or problem areas across different parts of the finance sector. I wouldn't underestimate the significance of that reform.

Mr CRAIG KELLY: Where a case is brought before the new tribunal that involves issues that ASIC may be interested or involved in, what is the potential for some type of harmonisation? Do you have a watching brief on the tribunal? How will it work with the tribunal?

Mr Kell : That's a very good question. The first and foremost role of the new authority is to deal with and resolve those individual complaints, but we would not be getting the value out of it that I think we would all want unless it also helped to identify systemic problems or more serious underlying conduct. There will be a requirement for it to report those sorts of issues to ASIC to build on the current requirements that are there so that we get more rapid information about whether there is a trend in complaints or there's a particular institution that seems to be overrepresented and so on. That then gives us the ability to get on the case faster.

Mr CRAIG KELLY: So, in conclusion, you're confident that the methods that are being put in place can address the imbalance that we've seen over the past number of years?

Mr Kell : If you combine the series of reforms proposed through the enforcement review, greater penalties, new powers such as the ability to seek disgorgement by firms of the profits they might have obtained from misconduct, more serious penalties for breach reporting, which the chair mentioned earlier, with the establishment of the authority and the professionalism agenda in the financial advice industry—we're very pleased with those reforms and we're very much looking forward to having those powers and also the product intervention powers.

Mr BUCHHOLZ: I've got three lines of questioning. I'll quickly give an overview of what they are and then give you time to absorb it. The first one, while we're broadcasting, is about aggrieved Australians who are looking from afar at the royal commission thinking they have an issue they want to take up. I want to outline for the benefit of those Australians: is the royal commission their best bet, or should they be looking at the Australian Financial Complaints Authority, and what is the difference between the two? The second part is that I want to have a quick chat about some of the findings of the Murray review, and some other reviews that are around, and what you're doing as an organisation in terms of implementing them. Finally, I want to pick up on one of your comments earlier on, Mr Shipton, about your request for more money for ASIC. I want to know what that looks like and also get a better understanding, when fines are being handed out, of where that money goes. That's it in a nutshell.

So, for an Australian who feels aggrieved because of a bank, in relation to a financial or superannuation deal or whatever, where's the best place for them to park? Most of them are looking for compensation, and they believe that the royal commission is the place that they need to park because it's what's taking headlines at the moment.

Mr Shipton : I will ask Mr Day, the regional commissioner for Victoria, who also oversees our unit that handles, receives, identifies and analyses complaints, to comment. But I would advise Australians that they should firstly be raising complaints directly with the financial institutions, the internal mechanisms. If they feel minded, I understand that the royal commission has invited submissions and representations. Then, as you identified, there are external complaints platforms that are in existence at the moment, transitioning to AFCA in the future. Of course we also receive complaints. Mr Day will be able to give you the numbers, but the number of complaints that we are receiving from the general public has spiked in recent months. It is a good thing that we are receiving this information. We can't handle each and every one, because we may not have jurisdiction, but this is clearly an issue—

Mr BUCHHOLZ: What would you do with a complaint that you received that you didn't have jurisdiction over? Would you forward it?

Mr Shipton : Yes. I'll ask Mr Day to answer.

Mr Day : To answer the last question—if we don't have jurisdiction, we'll tell people, and we'll tell them as quickly as we can.

Mr BUCHHOLZ: Go that way.

Mr Day : Well, it may be that no-one has jurisdiction. Unfortunately there are still matters that people would think they could bring to us that relate to banks or other financial institutions or licensees, but they can't. Effectively there isn't anywhere. A good example is: there's a very limited jurisdiction in relation to small-business lending. Effectively there isn't a licensing regime for small-business lending in Australia. There isn't a requirement for disputes about small-business lending necessarily—if the person is not already a financial services licence holder—to be looked at by FOS previously or by AFCA as intended. We will walk them through what their issues are. We will point them in the right direction. We will also point them in the direction of financial counselling, legal counselling and other services that are available and that are in their area that they may avail themselves of. We want to tell them that very quickly. We don't want to leave them hanging and say, 'It's not us; you're on your own.' We want to make sure they know, as best as we can tell, where they should go. It might be another government agency they might want to speak to. We'll talk to them about that.

Mr BUCHHOLZ: I'm finding even in my electorate, which would be a relatively small sample size, that, in light of the royal commission's findings, some people who have been aggrieved and who have taken their complaint up with the Financial Ombudsman Service and had their case ruled on by the ombudsman are assuming, 'I can go back and have another crack at this now, because the royal commission is bringing stuff to light which was the same as my case.' Where would they go? Do we send them to you guys?

Mr Day : No. I'll echo our chair's comments that we have seen an increase in reports of misconduct, or alleged misconduct, coming to us. In that, there is a component that relates to what I might call people who've come to us before or had their matters considered before by the proper processes and, because anecdotally a case study has been looked at at the royal commission, as you say, they say, 'I have exactly the same set of facts and I think this needs to be looked at again.' That is possibly not the case and quite likely not the case. The reality is that, if that matter's been adjudicated by FOS, and a decision has been issued by FOS, most likely there's nothing further. In fact, what we find with a lot of these cases is that either they have had some finding in their favour but not to the full extent that they believe that they are due, or they're not happy with the nature of that decision completely. They think they should go back for a second time round so that they can get a better outcome on top of what they already got. We are seeing examples of that. I think the advice to people in those circumstances is: if those cases have been looked at and if a change of law comes out of the royal commission, or other changes come out of the royal commission, it is cold comfort to them, but their circumstance likely is not to be assisted because of those findings.

Mr BUCHHOLZ: The royal commission—just for Hansard—is still accepting evidence from those who believe that they've been aggrieved by—

Mr Day : It's still accepting submissions, yes. The other thing I would say, and the proviso I would make to what I just said, is that, if people are unhappy with the decision of FOS, they can exercise their private legal rights and take the matter to court, if that's what they choose to do. A number of people who are unhappy with outcomes at FOS come to us and ask us to review FOS's decision. We don't have that role. We have an oversight role of FOS. It will be similarly the case with AFCA. We have a more enhanced oversight role, but we still won't be in a position of reviewing AFCA decisions. To go back to your first question and to reiterate and emphasise what our chair said: if you've not made a claim before because of what you think has been poor advice, poor service or misconduct, you should go and speak to that financial institution first. If you're not happy with the outcome of that, then you can look at the external dispute resolution service of FOS, to AFCA, as an option for you. If you still think that there is misconduct there, if you want to let us know that's fine but, as our chair emphasised, we are not necessarily a complaints resolution body. Yes, we receive what we might call complaints from the public, but we look at it from a point of view of saying: 'Are there systemic issues? Are there other issues of misconduct that we think are serious enough that we need to take action?'

Mr BUCHHOLZ: Can I go to the second point now, in the interests of time. The Murray review made some recommendations in terms of competition and ASIC. Do you want to give a quick overview of some of the recommendations that came out of that review?

Mr Kirk : There was a broad range of recommendations. One of them was about the penalties and ASIC's enforcement powers, and that's what led to the government putting in place that enforcement review. That's made recommendations. The government's taken a position on those, supporting them in principle, and will legislate on those. There were additional things in terms of giving ASIC an ability to intervene in relation to products and having broad governance requirements about the design of products and the distribution of products—really making sure that people are making useful products and they're targeting the right sector. The government committed to both of those, coming out of the financial system inquiry, and legislation is currently being consulted on in relation to those. Some of the other ones include the competition mandate. The financial system inquiry recommended that ASIC be given a competition mandate. That's been legislated for. That's come into effect. So we can take into account the impact on competition when we're making decisions using our existing functions and powers.

Mr BUCHHOLZ: On the point just before that, on the CommBank situation, does ASIC have an opinion on whether banks should be either banks or financial advisers? How do they manage their bias between pushing their own products or doing what's potentially best for the client in generating wealth?

Mr Shipton : Let me start. That is a very good identification of the inherent conflict of interest inside a financial institution. Our focus is on the conflict, not so much the structure. What we do, of course, is identify and diagnose the structural elements, trying to better understand why these conflicts of interest exist. We have highlighted in reports the consequences of vertical integration and how that has a conflict of interest outcome. Our focus is on trying to eradicate the conflict and the poor consumer outcome. The structure is another conversation at a policy and a legislative level. Our focus is on, as I said, the manifestation of that conflict and the mitigation and, potentially, the eradication of that conflict.

Mr BUCHHOLZ: Thank you. I will quickly go to the last point about funding. How much do you need?

Mr Shipton : We are having productive conversations with the government.

Mr BUCHHOLZ: Sorry, if you're not going to tell me a number—

Mr Shipton : With apologies.

Mr BUCHHOLZ: I just want to understand. We gave funding of around $127 million in April 2016 for a government response to the ASIC Enforcement Review Taskforce. The request is over and above on that?

Mr Shipton : Yes. My understanding is that some of that funding, which was gratefully received at the time, is coming to an end. As we were mentioning before, the funding structures are project based. Those projects are coming to an end or nearly coming to an end, and we have presented what we believe to be robust new projects, which are now being considered.

Mr BUCHHOLZ: Where does the money end up when you do settlements? In May 2018, CBA agreed to pay ASIC $25 million to settle a case for unconscionable conduct in market manipulation. Where does that go?

Ms Armour : Any civil penalties or criminal penalties go to consolidated revenue. ASIC doesn't keep that.

Mr BUCHHOLZ: Do you keep a cost?

Ms Armour : Yes. That matter had a bunch of components. So $5 million was the civil penalty to go to consolidated revenue and $15 million was a community benefit payment, which will go to a new fund that's been set up to deal with consumer financial protection.

Mr BUCHHOLZ: Like a compensation package?

Mr Kell : Financial literacy.

Ms Armour : Financial literacy and a range of initiatives. That is a separate organisation. The final component is $5 million, which does come back to ASIC. It covers our court costs, and we're permitted to recover, under the ASIC Act, the cost of investigation. That's included. So that does come back to us.

Mr BUCHHOLZ: In November 2017, ANZ and NAB agreed collectively to a $100 million settlement, which was accepted by ASIC—same type of thing?

Ms Armour : That's right. Same sort of thing, yes. There was $10 million each that were civil penalties, back to consolidated revenue, and then the other components were donations and recoveries of ASIC's costs.

Mr BUCHHOLZ: Thank you.

Mr THISTLETHWAITE: Mr Shipton, following up from Scott's question then, is it ASIC's view that a better approach to funding would be that, rather than the project based and piecemeal funding, you agree with the government on a set amount every year that would cover your operations for the coming year, or even further out—that you're provided with that funding and then you manage that?

Mr Shipton : That's a conversation that we can possibly have. My understanding is that these processes, which are not unique to ASIC, are set in their ways and involve a number of different government departments. I respect that process and I'm working with that process. If there were a broader conversation across different sectors and different departments we'd be happy to engage in that conversation, but it's not really for me to catalyse a discussion.

Mr THISTLETHWAITE: Is that conversation happening with the government at the moment?

Mr Shipton : Not that I'm aware of.

Mr THISTLETHWAITE: You're not involved in any of those conversations?

Mr Shipton : This is now getting to the realm which is well beyond my jurisdiction, my standing and my stature!

Mr THISTLETHWAITE: If you can't have that conversation with the government, I don't know who can! I want to ask some questions about Cash Converters. Is anyone coming up to deal with that? You're dealing with that, Mr Saadat?

Mr Saadat : Yes.

Mr THISTLETHWAITE: There's been some obvious media commentary about the debt collection guidelines and the case of Cash Converters. You've suggested in a media release that their behaviour was tantamount to harassment and coercion. Is that correct?

Mr Saadat : Yes. There is a prohibition in the ASIC Act against harassment and coercion. Jointly with the ACCC, we published guidelines which explain to the industry how we will apply that prohibition when it comes to debt collection practice. Those guidelines provide quite a lot of detail around the conduct that we expect, but the key prohibition is the prohibition on harassment and coercion in the ASIC Act.

Mr THISTLETHWAITE: Should Cash Converters apologise to their customers for their behaviour?

Mr Saadat : Yes, I believe they should. I understand that the customers who were impacted by those debt collection practices have been remediated.

Mr THISTLETHWAITE: Okay. Why was a community benefit payment the preferred solution, not a fine as well?

Mr Saadat : We balance a range of things in these cases. Cash Converters has made some pretty fundamental changes to their debt collection processes as a result of the concerns that we raised. They've completely outsourced all of their debt collection to a third-party specialised debt collection organisation that is separately licensed by ASIC. As part of the outcome that we've agreed with them, they will not bring debt collection back in-house without seeking our consent. We felt that approach was a good one, and not necessarily one that we could easily achieve through a court outcome. Coupled with the $650,000 community benefit payment, we thought that was an appropriate outcome in the circumstances.

Mr Kell : I might also note that quite recently we've had additional action against Cash Converters around responsible lending, where they've paid a $1.35 million penalty. They've also refunded close to $11 million to consumers. So we've had a series of actions, and they've entered into a very substantial review of their business practices. So it's not just this one matter; we've had a real focus on this sector and they are a significant player in this sector. We've got penalties, remediation and changes to the way they go about their business.

Mr THISTLETHWAITE: Mr Saadat, you mentioned that Cash Converters had entered into an arrangement with an external debt collector provider. I'm assuming that is a contract with them. Do you know how long that contract with the external provider runs for?

Mr Saadat : I might have to come back to you on that. As far as I understand, it is indefinite at the moment; they have entered into an ongoing arrangement. As I said, they won't be able to bring the debt collection activity back in house, within Cash Converters, without our consent.

Mr THISTLETHWAITE: What redress has been taken in respect of reporting incorrect information to Equifax?

Mr Saadat : Those incorrect listings have all been corrected. To the extent that consumers had negative information placed on their credit files with Equifax, Cash Converters has corrected that.

Mr THISTLETHWAITE: There have been proposals to provide additional powers to ASIC in respect of payday lending and rent-to-buy schemes. Can you give us an update on where that is at? The government promised this would be introduced by the end of 2017, but that hasn't occurred. Are you consulting Treasury about this? When can we expect that something to come to the parliament?

Mr Kell : Ultimately, I think that is a question best put to Treasury and the government as to where those reforms are up to. We are supportive of the direction of those reforms. Treasury have certainly spoken to us about those reforms, but I think the timing would be best put to government and Treasury.

Mr THISTLETHWAITE: When was the last time you spoke to Treasury about it?

Mr Kell : Fairly recently—about our views on particular aspects of the reforms. We know that it is a priority, and we are supportive of the reforms, so we will see where it gets to. But obviously it is not our decision, as the regulator, as to when that will be introduced.

Mr THISTLETHWAITE: I understand. You said 'fairly recently'. Is that within the last month, the last six months?

Mr Kell : I would have to take that on notice.

Mr THISTLETHWAITE: Okay. You can take that our notice and get back to us. Could you give us an update on the Financial Adviser Standards and Ethics Authority?

Ms Macaulay : The authority, as you know, is a separately set up government authority. We do engage with them significantly; obviously we are very interested in the outcome of their work. They have put out for consultation a draft code of ethics. I believe the consultation has finished. So they will be working towards finalising that. They have also put out some consultation around the degrees that will be required by advisers and different pathways to obtaining degrees for those who don't have degrees or may have some alternative form of study.

There are two aspects to the work that ASIC is doing in terms of professionalism. The first is that we are tasked with approving entities that want to become responsible for monitoring and supervising adherence by advisers with the code of ethics. We recently published a consultation paper about our approval processes. I think consultation is open for another few weeks. We will be moving ahead to engage with industry about those submissions and put out final guidance about what we will require for those entities, and then there is an approval process that will be gone through. The other aspect of the work we are doing is that we will need to make significant adjustments to our Financial Advisers Register, because different information will be displayed on that register as a result of these reforms.

Mr THISTLETHWAITE: I understand that financial advisers will have to have certain qualifications by 2024. That means some of them will need to start studying soon. When can they expect the final details of the qualifications that they need?

Ms Macaulay : I will have to take that notice. That is a timetable that is set by FASEA. As I said, they have put out into the market some points of discussion about that. They have a bit of a pathway for advisers who fit within various categories and they are in active discussion with the industry. I can't tell you off the top of my head the time of finalisation for that.

Mr THISTLETHWAITE: Mr Shipton, I might be wrong here, but I thought that, when I asked you about AMP earlier, you said you weren't surprised by the behaviour of AMP. Is that true?

Mr Shipton : To clarify 'surprised', I took the question to mean surprised by the behaviour at the point of time that it was disclosed to the royal commission. Thank you for that clarification. I did not want to mislead you. We weren't surprised at what we heard of the royal commission, because of the points that Mr Mullaly pointed out.


CHAIR: I have a couple of questions in closing. I'd like to just briefly touch on the appointment by the Minister for Revenue and Financial Services of ASIC's second deputy chair of enforcement, Daniel Crennan QC. Can you tell me about his role and how important that will be in establishing the reboot of ASIC, if you like, under these new powers and resources and penalties that you now have.

Mr Shipton : Thank you, Chair. We as a commission, and also as the organisation, are very much looking forward to Mr Crennan joining us—hopefully shortly—as deputy chair. He will bring significant experience from the bar and also from the corporate world, and we believe that he will be able to enhance our strategic approach with regard to the deployment of our enforcement tools. As I mentioned before, this is just one stream or one set of the tools that we have, but having Mr Crennan's experience, particularly at the coalface as an advocate at the bar, will be very useful to us, and we very much look forward to his arrival. I know the commissioners collectively look forward to working with him as a co-commissioner. One of the points that we as a commission are trying to execute is that strategic approach, and another input that Mr Crennan will bring is that experience that he has from the bar—to be honest, the strengths and weaknesses of pursuing matters in court. His input will be very useful and will complement the existing resources—which are significant—that we have by way of our enforcement teams and our litigation teams. This is going to be extremely complementary. It's going to be strategically additive, and we're very much looking forward to it.

CHAIR: In many respects ASIC now has the capability to become a whole new cop on the beat with much greater powers and resources. Coupled with the role that Mr Crennan will play, will Australians really notice a difference? Are you determined, using these new penalties and resources, to see a real change in how you are operating such that Australians will notice a change in your business model—perhaps moving away from enforceable undertakings, litigating with much more determination and focusing on becoming a more feared and tough regulator?

Mr Shipton : My intention is to ensure that we are the most strategic, forceful and effective financial regulator that we can possibly be. That is my absolute intention, and I know that we have the commitment of the commissioners and of the fine men and women inside ASIC. We will utilise every single tool that we have available to us.

CHAIR: What practical changes do you think this will make in terms of how ASIC operates?

Mr Shipton : We're going to be increasingly strategic. What we are going to do is apply—

CHAIR: Does that mean increasingly tough as well?

Mr Shipton : Of course, absolutely. We have a resolve to use these very significant powers to their full extent. The significance of that is very powerful. I am firmly committed to utilising these tools, and we will use them appropriately and effectively. I want to put the financial sector on notice that we will use them if and when they are required. It won't be a matter of a matter going away or being lost in the mists of time. We will use these powers. One power that I think is going to be particularly useful is our product intervention power. That is something which will enable us to be very strategic and proactive.

You asked about what I meant by 'strategic and proactive'. If we had a power to intervene on a product that does not support good outcomes for consumers, which hopefully we will soon based on the announcements made by the government, then that would enable us to intervene quicker and in a more timely fashion that I believe will be expected by the Australian public. In my time, I will be committed, as will be my fellow commissioners and the men and women I work with, to making sure that we have demonstrable outcomes to improve the financial system for all Australians so that it's fairer, it's stronger and it's more efficient for them.

CHAIR: And for Australians listening or watching right now, many of whom may well be aggrieved by the way they have been treated by banks and other financial institutions, will this mean a greater sense of consumer justice will be delivered to all Australians?

Mr Shipton : Of course. We understand that concern. We understand that angst. We understand that frustration. We are firmly committed to harnessing that energy, that concern, that frustration and then applying it in such a way that we are making demonstrable change for those Australians. That is what we are committed to, that is what I'm committed to. I hope that you will continue to hold us to account in that aim, because that is our clear aim. We understand the concerns that the Australian public have. We understand their very clear desire for a more professional, a more serving oriented and a more consumer oriented financial system, and that's our goal. That is clearly our goal, and we're going to use every inch of our powers to achieve that.

CHAIR: Mr Shipton, thank you very much. And thank you to everyone for your attendance here today. If you've been asked to provide additional material, could you please forward it to the committee secretariat. You will be sent a copy of the transcript of your evidence, to which you can make corrections of grammar and fact. Again, thank you very much for your attendance.

Committee adjourned at 10 : 57