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Economics Legislation Committee
11/02/2016
Estimates
TREASURY PORTFOLIO
Australian Securities and Investments Commission

Australian Securities and Investments Commission

[09:03]

CHAIR: The committee will continue to hear from the Treasury portfolio with questions for the Australian Securities and Investments Commission followed by the Productivity Commission. I welcome the Assistant Cabinet Secretary, Senator the Hon. Scott Ryan, representing the Treasurer, and the officers for the Australian Securities and Investments Commission. Minister or officers, would you like to make an opening statement? Before that, do we have permission from everybody here, on this side, for the press to be present? Okay, no worries. Welcome, Mr Medcraft and Senator Ryan.

Mr Medcraft : Thank you, Chair. Good morning, everyone.

CHAIR: Do you have an opening statement?

Mr Medcraft : I do not have an opening statement. Just to say that today the commission is here and I am happy to take questions.

CHAIR: You are all very well known to us for your work and your participation with this committee. Thank you for being here. Senator Williams, if you could kick off, and I will seek guidance from other senators while Senator Williams is proceeding.

Senator WILLIAMS: Welcome, Mr Medcraft and your team. Mr Kell—I have some questions for you. ASIC released a report into the life-insurance industry in late 2014 which said that 37 per cent of advice was in breach of the law. That is pretty damning—37 per cent. What have you done to address this issue?

Mr Kell : Thank you, Senator. There has been quite a lot of action undertaken to address those fundamentally unsatisfactory results. There has been a reform program announced by the industry, with significant input from ASIC, and also an announcement by the government, primarily aimed at reducing the very high up-front commissions which ASIC found correlated with poor-quality advice. In other words, high, up-front commissions that create conflicts of interest between the adviser and the consumer were the primary source of poor advice.

As a result, there is a process now in place to reduce those commissions, to remove other volume-related conflicted remuneration from the industry and to introduce other reforms, such as a requirement for insurers to be able to offer policies on a no-commission basis as well. That will be introduced over the next few years, up to 2018, when ASIC will undertake another major review.

Senator WILLIAMS: When?

Mr Kell : In 2018, as the reforms come into place over the next three years.

Currently we are also talking to the life insurers about collecting data from them—a new set of data that will help us track improvements in the industry but which will also, importantly, help us track problematic practices—where there is churn taking place and where there is inappropriate advice being provided.

That is the big picture. We have also taken individual enforcement action against licensees—so we had a major action against Guardian Advice, which is owned by Suncorp, following surveillance which uncovered significant deficiencies there—and we have banned several advisers in relation to their life-insurance advice, following our review.

So there is a lot of work on. This is an area where you might ask, 'Why did you undertake the review?' It was because we kept finding poor-quality advice in relation to life insurance. We put the industry on notice, we published that report and we are now following through. It is a very important product for consumers; we want to make sure that it is provided in such a way that people are getting the right product at the right price.

Senator WILLIAMS: Mr Kell, it is a $40 billion industry in Australia. Is there need for more regulation in this industry?

Mr Kell : Some of the changes that are being put into place are going to require legislative support—for example, the ability for ASIC to impose an industry-wide limit on up-front commissions. So there will be some legislative changes. And in some ways the 2018 review that we undertake will be a test of whether these reforms go far enough. It will be a test of whether the industry has managed to change its culture, both at the insurer level and at the adviser level, to improve outcomes. Let's see how these reforms go over the next two years or so and then we can test that.

The other outcome we are looking for here, frankly, is to move from the situation that we have seen too often in the past, where the advisers point their fingers at the insurers and the insurers point their fingers at the advisers. We actually all ought to be working in the interests of the end consumer and that is what we also want to see.

Senator WILLIAMS: Okay. In your research and in what you have done to the industry in looking at it, did you identify any problems with claims and claim managers delaying or denying claims on policies?

Mr Kell : That is a good question, but that was not the focus of our 2014 review.

Senator WILLIAMS: I think it will be soon.

Mr Kell : It is an important area, and it is an area that we actively monitor. We spoke to the industry last year and indicated to them that as they were experiencing some challenges with profitability in the life insurance cycle, if you like, we did not want to see that translated into unreasonable claims-handling practices. So we did put the industry on notice at that stage. It is something that we monitor, and we also talk to the Financial Ombudsman Service about that issue, but it was not the focus of our 2014 review.

Senator WILLIAMS: I am amazed to learn that there is no code of conduct in the life insurance industry. Are they pursuing one now?

Mr Kell : Yes. There once was a code of—

Senator WILLIAMS: A voluntary code of conduct, is it?

Mr Kell : There once was a code of conduct, about 10 or 15 years ago, but it was abandoned. But they are now looking at—

Senator WILLIAMS: We are talking voluntary codes of conduct here, obviously, not mandatory, because you cannot abandon a mandatory code of conduct.

Mr Kell : There is a code of conduct that is being developed by the industry in response to the reforms.

Senator WILLIAMS: Yes, but I will ask you again: is it a voluntary code of conduct? Of course it is.

Mr Kell : At this stage, it would be voluntary, but we have no indication at this stage from the industry as to whether they may wish to seek ASIC approval for that code. But it would be voluntary.

Senator WILLIAMS: Have they been in correspondence with you about the code of conduct? Have they hinted that they are going to seek ASIC approval?

Mr Kell : They are undergoing a consultation process at the moment. They have recently provided us and, I believe, other stakeholders with a copy of the current draft of the code. We have only just begun to look at it, so I really cannot give you a view right now on that. But it is always open to the industry to seek formal ASIC approval, which means it would have to meet the standards that ASIC have set out in our code approval policy.

Senator WILLIAMS: Perhaps we might be looking in the future at a mandatory code of conduct, from what information I have been given. I am concerned about this self-regulation. You have had no feedback whatsoever about this proposed code of conduct they are dealing with? What I am hearing is that it is pretty weak.

Mr Kell : It is still early days, I would say. It is one of the elements that have been put forward to address the problems that ASIC and others have identified in the industry, and I think it is still in the consultation phase. But the message is clear; if the code is not robust, if it does not actually improve outcomes for consumers and set higher standards, then it is not going to do anyone any good, including the industry.

Senator WILLIAMS: Especially customers.

Mr Kell : That is right. It will not have credibility. It will not deliver better outcomes.

Mr Medcraft : Peter, we have never approved a code of conduct—is that correct?

Mr Kell : There are no mandatory codes of that sort in the financial services industry. There are codes that have operated for many years successfully in some parts of the sector, such as the banking code and the electronic funds transfer or ePayments Code. But this is a new code. ASIC in our feedback will certainly—and I am sure others will be doing the same—want to ensure that, if it is in place, it is robust and delivers good outcomes. Otherwise there is no point in having one.

Senator WILLIAMS: Mr Kell, I disagree with you about the codes of conduct working well in the banking industry. In the Parliamentary Joint Committee on Corporations and Financial Services, we are currently doing an inquiry into impaired loans and the forced sale of people's assets in a situation where they have not missed payments, and I would disagree. That code has not worked very well at all.

Mr Kell : Just on that point, as you would know from our submission to that inquiry, we do suggest and have suggested that there is scope for extending that code to cover the sorts of issues that came up in that committee. We would support that.

Senator WILLIAMS: Perhaps I am a pessimist on this issue, but I do not have much faith in voluntary codes of conduct at all. I think they should be mandatory so that they actually have to abide by the code of conduct.

Senator WHISH-WILSON: Well said, mate.

Mr Kell : You are not the only one who has expressed that view, Senator, and that is, I think, one of the challenges in this area. Our code approval standards are quite rigorous and quite robust. That might be one of the reasons why people have not sought approval by ASIC. But our view, which we have stated for many, many years, is that codes that do not improve outcomes, that are just window dressing, are worth very little.

Senator WILLIAMS: I could not agree with you more. Mr Medcraft, let's say I have an insurance policy and I put a claim in and I think I have been dudded—I did not get paid what I think I should have been paid, or my remuneration was not what it should have been. Do you take any oversight of those payments to claims and how the industry actually responds to claims?

Mr Medcraft : Sure. As the conduct regulator, certainly that falls within our sphere of influence. I will ask Peter Kell to address that.

Mr Kell : Typically this is an area where ASIC does not handle individual cases. It is a very important area for the Financial Ombudsman Service. They deal with several thousand of these sorts of complaints each year. But it is an area that we certainly focus on in terms of tracking whether there are increasing complaints in that area, whether concerns are rising, and talking to the industry about it. It applies in the general insurance area—it has been an issue in the last few years around claims handling in response to natural disasters—and it also arises in the life insurance area, particularly around income protection and total and permanent disability claims.

Senator WILLIAMS: Mr Medcraft, there is a lot of talk in the financial institutions about ethics and culture. Is this fact or fiction?

Mr Medcraft : I think there is talk about culture in financial services and banking in Australia and around the world at the moment as a result of what we have seen with the Libor scandal, the foreign exchange scandal and other scandals. Clearly culture is very much front and centre. To that end—

Senator WILLIAMS: What is driving that culture? Is it just profit above all?

Mr Medcraft : Having just seen The Big Short, it reminded us of perhaps cultural problems that existed on Wall Street. I think some of the drivers are perhaps the incentives that were within banks—the financial incentives.

Senator WILLIAMS: Financial incentives—just saying to the staff, 'You meet targets, you deliver us profit, and we will give you a good bonus'?

Mr Medcraft : I know many banks are still looking at making sure they have the right incentives. What I have said before is that you cannot regulate culture, but you know bad culture when you see it.

Senator WILLIAMS: If the culture is bad, if people are doing the wrong thing, if we had decent punishments—proper fines instead of a slap on the back with a feather as a way of—

Mr Medcraft : I think I have commented before about that issue actually.

Senator WILLIAMS: Senator Xenophon just said, 'Penalty shapes culture.' The penalties are far too soft.

Mr Medcraft : I think it is a multipronged approach. With culture, first of all, there is the positive side—and one of the things we have been doing is working with boards of banks to identify when we see problems from our surveillance and highlighting them and basically alerting them to the fact that they need to take action. We have also said, on the positive side, 'Culture starts at the top.' If you think about it, culture is actually defined in law. It is defined as the attitudes, practices, procedures and policies. It is the mindset of the firm. It starts at the top, and you have got to make sure that, at the top, you have got the right culture and that culture flows down through the organisation and you are constantly challenging whether the culture that you are setting at the top is actually working down the bottom. I think many banks and companies face this problem. Even though at the top they have the right view, it is not flowing down and you are still getting problems. So I think it is working with companies to make sure they have the right culture.

On the negative side, at the end of the day, we can do this the easy way or the hard way. The hard way is enforcement, and we have actually said that, in our surveillance, as always, poor culture is a significant indicator to us of poor outcomes, potentially, for consumers. It is something that we are focusing on, and always have, in our surveillance. If we see poor culture, it is a big red flag. That is something that we are focusing on.

The second thing you have to do, which I have said before, is to also make sure that it is not just about penalising companies. You have to make sure that individuals are held accountable in management for poor culture. Some of the recommendations from the financial system inquiry have gone a long way to help if you are dealing with that, and they have been adopted by the government. So that is another step.

On the issue of penalties, we have said before that civil penalties are something that need to be looked at because they probably do not provide the right deterrent.

Senator WILLIAMS: Nothing like America.

Mr Medcraft : No, and that has been recognised again in the financial system inquiry—that is, they need to review penalties. As I have said before, it is fear versus greed for some people, and you have to make sure that you actually lift the fear to suppress the greed. This is not a single thing. There are positive things to do, but for those people who need deterrents, you have to make it that they do not even think about it. It is something that is really important because companies complain about spending a lot on compliance, but, if you think about it, if you get your culture right you do not need to be spending a lot on compliance. If you have the right culture, people know when to do the right thing, and that is important.

Senator WHISH-WILSON: If I could just add, with your indulgence, Senator Williams, this was actually one of the recommendations from this committee's report into ASIC—that government actually has a close look at this issue, and I do not believe it has. We do have a Senate inquiry coming up, once again in this committee, into white collar crime penalties, which will be starting in a couple of months. Hopefully, we will actually get to the bottom of this.

Mr Tanzer : Just on that, on the financial system inquiry: the government did accept that recommendation and has committed to a review of penalties in 2017.

Senator WHISH-WILSON: We will make sure we get in there first.

Senator WILLIAMS: Mr Medcraft, you said culture starts at the top. If you have a big institution and the culture is wrong feeding down through, how do you fix that? If the culture is right at the top, and let us hope it is, but as it feeds down through the levels of the institution it turns sour, then how do you fix that?

Mr Medcraft : As I said, we are regulators. We do not regulate culture. When companies face a problem further down—often if you talk to companies the issue is often tail risk. There is a small group that actually can blow up the rest of the company and culture. One of the ways of dealing with it is what we do: we meet now with the boards and alert them to where we see poor behaviour in divisions and say, 'You've got a problem here.' What we find at the board level is that often they are quite shocked, and our commissioners can actually reflect on that. We do not just go and have a cup of coffee; we actually say to them, 'You've got a problem here.' We can help.

Equally, actually making sure that you get third-party—some companies have stakeholder surveys where they get out there and ask people what do they really think. There are multiple tools to try, to use. The other thing is making sure that your complaints mechanisms are working properly. Whistleblowing is so important—

Senator WILLIAMS: That is a big issue in itself.

Mr Medcraft : so making sure that you celebrate whistleblowing and you have a culture that welcomes it. Where people in the organisation see the wrong thing happening, making sure they are rewarded and celebrated for highlighting the wrong thing happening. Whistleblowing is absolutely critical. So there are a number of mechanisms where if you have a problem with your culture or—it is actually knowing whether you have a problem that feeds up quickly. There are mechanisms you need to think about in terms of your governance to make sure that if poor things are happening, then you are alerted. Also, you need to watch social media. Often social media may alert you to problems these days. I say to people, 'If you don't care about anything, the front page list today is in social media.' I think there are many mechanisms.

Senator WILLIAMS: I am getting the wind up from the chair, Mr Medcraft, so just one last issue. I think you are going to see the spotlight put on the insurance industry in a big way soon. Unfortunately, Chair, there will probably be another Senate inquiry. We already have 83 going, and the committees are way overloaded with work. I want to bring you to the point that Graeme Cowper was a financial planner at NAB. In internal documents NAB said he was one of a number of planners terminated for reconstructing files. They filed a brief report with you, but nobody knew and he went to work at AMP. When he was at NAB, Jeff Morris had a friend, Veronica Coulston, who was a victim of Cowper. She lost her life savings. Jeff wrote to the company and she got some compensation. At the time, NAB also paid compensation to 52 other customers of Cowper due to inappropriate advice. After the story broke, AMP suspended him and checked his files; they checked him out. They recently sacked him after completing their investigations. You have received brief reports. Where is it up to with Mr Cowper?

Mr Kell : As you have indicated, Mr Cowper is not currently in the industry.

Senator WILLIAMS: He is not in the industry?

Mr Kell : He is not providing advice. We have an ongoing investigation and surveillance into the advice he has provided. That crosses over several licensees. It also involves an examination of remediation and potential compensation to a range of clients, and some of that has already commenced. I would like to provide you with a more comprehensive update a bit down the track when we have more fulsome information on where that lands, but I can assure you we are taking it very seriously in terms of both the advice, assessing the advice that was offered, and also any remediation and compensation that needs to be provided.

Senator DASTYARI: Thank you, Mr Medcraft. I want to start by asking about the bank bill swap rate investigation. At an earlier Senate estimates in June, you said on five occasions, 'We have a war chest and we are not afraid to use it.' Since that time, ANZ bankers or brokers Etienne Alexiou and Patrick O'Connor launched a publicity campaign against the bank in January. It has now also been reported that ANZ are cooperating with ASIC, as part of its investigation. Just before we get to some specific questions, can you give us a helicopter view on what the bank bill swap rate is.

Mr Medcraft : Okay. Cathie.

Ms Armour : Okay. The bank bill swap rate is an interest rate benchmark. It is set each day by reference to trading in Australian bank bills. So it is used as a benchmark for other financial products for interest rates and pricing of other financial products. There are futures products that depend on the bank bill swap rate, there are interest rate derivatives that depend on the bank bill swap rate, and then typically the interest rates on commercial loans are priced by reference to the bank bill swap rate by some margin.

Senator DASTYARI: I want to get if this is the right analogy—that we are talking about effectively the wiring of a house. The role of the bank bill swap rate within the financial sector—

Ms Armour : The more direct analogy is loans for businesses. Corporate loans and business loans are generally directly priced by reference to the bank bill swap rate. On the pricing of loans for houses it is a more indirect effect, because the bank bill swap rate is relevant to the cost of funds for banks.

Senator DASTYARI: But, Mr Medcraft, is it fair to say that the bank bill swap rate is an integral part of pricing loans within the financial market?

Mr Medcraft : Yes. As Cathie said, for wholesale financing, basically it is the benchmark for wholesale financing for banks and the financial industry, and it does indirectly flow through to consumers, because basically wholesale feeds to retail, so it is essentially the source of many institutions' capital funding. The interesting thing about the bank bill rate is that, as you may know, bank bills are not really traded much these days, so over time the relevance of the actual bank bill rate has declined.

Senator DASTYARI: But it is the reference to it that matters?

Mr Medcraft : Because people do not really trade much in bank bills these days, so the level of trading—and there has been an issue globally. As you know, in my role as chairman of IOSCO, an area that we have been looking at closely is benchmarks—

Senator DASTYARI: Yes, of course, with LIBOR and that.

Mr Medcraft : and setting the standards for them. So it is something that everyone is looking at around the world.

Senator DASTYARI: Ms Armour, is your division still conducting an ongoing investigation into potential rigging of the bank bill swap rate?

Ms Armour : Yes, we are testing whether we have any conduct issues, if you like, broadly, with how the bank bill swap rate was operating in Australia.

Senator DASTYARI: How long has that investigation been going on?

Ms Armour : It has been going on for a number of years. I believe we first started inquiring about this issue just after the LIBOR scandal, which is an equivalent rate in another jurisdiction, broke. We have been inquiring for a number of years and, as I think we have discussed before, three organisations provided us with enforceable undertakings, reflecting concerns we had about their conduct in connection with the setting of the bank bill swap rate, and we are continuing to investigate a number of other organisations.

Senator BUSHBY: Did you say that you started looking into this immediately following the LIBOR—

Ms Armour : Roughly, approximately, the end of 2012 was the first time we started looking at the question.

Senator BUSHBY: As I mentioned last night with APRA, I recall—I think it was during the banking and competition inquiry that this committee conducted—we were in the middle of that when the manipulation of LIBOR broke. I raised that question, I think with the Deputy Governor of the Reserve Bank and possibly also with ASIC, and I was assured at the time that the BBSW was not liable to manipulation because the rates are different.

Ms Armour : That is true—they are different. The rates are set differently, so questions about whether there would be rigging or manipulation of the rates depends on different factors. With the way BBSW was set, we did not have exposure to poor submission conduct to the same extent.

Senator DASTYARI: That is a different calculation.

Senator BUSHBY: The submission conduct needed to be a bit more sophisticated with the BBSW than with LIBOR?

Mr Medcraft : Correct. I am sure that if you had asked ASIC at the time—I am not sure that we were as confident, to be honest. I will say one thing, and this is important: we work very closely with our fellow regulators around the world and the benefit we have had is we have been able to leverage of the experience they have had in investigating LIBOR, in effect. Many times banks say, 'We don't think there's a problem,' but we come with a much broader experience than a single bank.

Senator DASTYARI: It is hard to believe they would come to you and say that they do not think that what they are doing is illegal. I am sure that happens quite often, Mr Medcraft.

Mr Medcraft : They have their own compliance systems, but we look at it through a completely different lens because we have the benefit of having been able to exchange intelligence with market regulators around the world. It has actually been very helpful.

Senator BUSHBY: I am glad to hear that you did start this back in 2012. Given that it has become apparent that there has been manipulation of the BBSW, I am glad to see that our regulators were not caught napping, in a sense, given the assurances that I was getting three or four years ago that there was no real potential for manipulation of this.

Senator DASTYARI: Just to touch on that: so there is an ongoing investigation?

Ms Armour : There is an ongoing investigation in relation to past conduct. I guess this is a relevant fact. With the way BBSW is now calculated, the methodology has changed. It changed in 2013. In addition to that, the Council of Financial Regulators have been working with the administrator of BBSW, which is AFMA, the Australian Financial Markets Association, about the current methodology for setting the BBSW. We are all very focused and interested in making sure that the methodology that is currently employed is the best methodology that we can have in place.

Senator DASTYARI: Roughly, what percentage of your division's investigative resources would you say are devoted to this one investigation?

Ms Armour : We have two investigations that relate to financial benchmarks. One relates to conduct in connection with BBSW. The other relates to conduct in relation to foreign exchange benchmarks. We have a significant team working on those investigations. It is a little bit hard to give percentages to you—

Senator DASTYARI: But roughly half?

Ms Armour : It is hard because we have a war chest—

Mr Medcraft : And we still have a war chest.

CHAIR: It will reassure the banks actually.

Senator DASTYARI: I am sure they are delighted to know that you have a war chest and you are prepared to use it, Mr Medcraft.

Mr Medcraft : Yes.

Ms Armour : What we are able to do is to introduce significant other resources from outside of ASIC to be part of our teams to do this, so it is very hard to really give a meaningful percentage in light of that.

Senator DASTYARI: Where in terms of the process are we? Are we getting to the end of the process?

Ms Armour : Our investigations are at an advanced stage. We have not come to a final conclusion on whether there is a need for us to take action to enforce the law, but we are at a very advanced stage. The way the BBSW investigation sensibly can operate is we tend to look at the conduct of individual financial institutions so it is rather sequential, but we are getting to quite an advanced stage.

Senator DASTYARI: Mr Medcraft, last year you expressed frustration—they are my words, not yours—at what you felt were intentional actions by institutions with a view to delay or stymie your attempts at getting to the bottom of this matter and other matters. Yesterday we heard the tax commissioner effectively say that he felt that in similar kinds of situations on different matters they were being frustrated through delays in terms of process and obstruction. Is that a concern that you have? Has the behaviour changed? Are you getting the level of cooperation you believe you should be getting on this matter?

Mr Medcraft : Actually I did see the comments from the commissioner yesterday and I do sympathise with his comments. One of the issues for us is the delay in some of these things because of the statute of limitations eliminates causes of action, so you sometimes get a bit sceptical because you go: 'Hold on. The longer you are taking the fewer charges we can lay against you.' So often there is a bit of a game that goes on, but you could be sceptical. I think it is fair to say that it has improved dramatically. I still think it has a way to go. I am not sure whether they realise that we are actually quite serious. Let us see what happens. As I said, we can always do this the easy way or we can do this the hard way.

Senator DASTYARI: And the easy way is enforceable undertakings—

Mr Medcraft : No, plead guilty.

Senator DASTYARI: Is that your message?

Mr Medcraft : Yes.

Senator DASTYARI: So your message, Mr Medcraft, to the—

Mr Medcraft : We can either have a contested outcome in the court or we can have an agreed outcome in the court. There is guilty or we can contest it and it can all go to the courts. That is it: either way. As I said, we are happy to go to court and, as I said, we have a war chest.

Senator DASTYARI: How big is your war chest, Mr Medcraft?

Mr Medcraft : At the moment it is $80 million.

Senator DASTYARI: You have an $80 million war chest?

Mr Medcraft : Yes.

CHAIR: And rising.

Mr Medcraft : Both governments have given us this money to be there to not be reluctant to take action on behalf of Australians, which is what I am doing.

Senator DASTYARI: And you are saying that in the case of the bank bill swap rate you are not reluctant to take action if that is the determination you make?

Mr Medcraft : No, not at all, but we have to be a model litigant. We are required to be a model litigant. We need to make sure that we do not launch these legal actions without everything being lined up and there has been fairness. We have been very fair in the way we have approached this. We have actually gone beyond what sometimes is recommended in terms of sharing pleadings with participants because, as I said, I would rather not necessarily go to a contested matter in a court, but if we have to then we will—of course we will.

Senator DASTYARI: I have one or two very quick questions on this and then I am happy to move around because I know other people have other questions about many matters. The rigging of the rate, or potential manipulation of the rate—and I know that how we calculate it here is different than how LIBOR is calculated. As you rightly said, Mr Medcraft and Ms Armour, this is a like comparison; it is not the same comparison. But does it require two or more banks to actually be acting in collusion, or can a bank be doing it on its own?

Mr Medcraft : Basically, a bank could do it on its own, or it could do it in collusion. My background is in markets, so 'yes'.

Senator DASTYARI: Secondly, LIBOR and the like cases, internationally, as I am sure you are well aware, resulted in fines in the billions. What is the maximum fine or penalty available to you should a court choose to go your way?

Mr Medcraft : I will let Cathie comment on that. It is a maximum—it depends what the charges are, and there are a number of charges. Is that a fair comment?

Ms Armour : Yes, we should probably take that on notice so we can easily give you that information.

Mr Price : It is a little complicated, the way it is—

Ms Armour : It depends on—

Mr Medcraft : It depends on the charges, and the number of charges.

Senator DASTYARI: So it becomes a multiply-out effect?

Ms Armour : Yes, but ASIC does not have a fine power. Unlike those other regulators, we do not. For equivalent allegations, whether or not they are established would be a matter that would need to go to a court.

Senator DASTYARI: Mr Medcraft, do you have the power to put conditions on the licences of the banks?

Mr Medcraft : Yes.

Senator DASTYARI: Could those conditions you place on the licences of the banks be fines?

Mr Medcraft : You cannot put a fine as a condition on a licence.

Senator DASTYARI: Or a penalty—a financial penalty?

Mr Medcraft : No.

Mr Price : We will take it on notice.

Mr Medcraft : We will take it on notice, but—

Mr Price : I suspect the answer is 'no'. It could be that any condition on a licence needs to be consistent with the overall regulatory framework.

Senator DASTYARI: At a macro level, is it correct to say that your ultimate power is should you feel, in a circumstance, that you need to use this power, you can put licence conditions on a bank?

Mr Medcraft : We can. The solution on all this could be an outcome in a court, a fine as a result of that. It could include, as well, an enforceable undertaking, because that is about improving future behaviour. So it could be a package of a solution.

Senator DASTYARI: And your message here today, Mr Medcraft, just to finish up, is: there is an easy way and a hard way. You would much rather see them take the easy way than be prepared to go the hard way.

Mr Medcraft : I would like to be efficient and get outcomes. At the end of the day, the outcome here, I believe, will have to be a guilty plea. This goes to the fundamentals of what we do, which is making sure that Australians have trust and confidence, and making sure that the markets, most importantly, are seen as fair, orderly and transparent. The fairness of that benchmark rate, people can have confidence in it. It really goes to the heart of what we do, frankly. It goes really to the heart, and that trust and confidence.

CHAIR: We just have a follow-up question from Senator Ketter.

Senator KETTER: I have heard Ms Armour say that the investigations are nearing a conclusion. So you have not made a final decision?

Ms Armour : No. We have not made a final finding, if you like.

Senator KETTER: Yet Mr Medcraft has said today the easy way is to plead guilty. So I am getting a very strong message out of that that the result of the investigation is likely to be a positive conclusion. It sounds to me that there are banks out there that should be somewhat nervous at the moment.

Mr Medcraft : I think we have actually highlighted in the last year, and this committee has even highlighted to us, that enforceable undertakings are good, but, generally, we should try where we can to get court outcomes. I guess that reflects the approach of the commission in the last 12 months. It is really reflecting our philosophy of: we are happy to get enforceable undertakings, but, equally, we generally want to see a court outcome. That is really what I am reflecting—to clarify. Is that a fair comment?

Mr Price : Particularly, having to regard to the seriousness of the alleged—

CHAIR: Senator Whish-Wilson.

Senator KETTER: I think Mr Price is not done.

Mr Price : Yes. One factor in deciding whether or not to accept an enforceable undertaking is the seriousness of the alleged misconduct, particularly given that in this case.

Mr Tanzer : It all depends on the evidence and the facts in each case.

Mr Price : Correct.

CHAIR: Senator Whish-Wilson.

Senator WHISH-WILSON: Are you saying the world is complicated, Mr Tanzer! I have a couple of fairly simple questions to start with, following up on things I have asked at previous estimates. One relates to client handling and money—section 981D of the Corporations Act. Could you provide an update on progress towards addressing the issue of clients' moneys held in trust? You suggested last estimates that you would like to see a change in legislation.

Ms Armour : Yes, we very much would. Treasury has issued a policy paper for general consultation about potential changes to those rules. We are very supportive of the proposals in that policy paper. Broadly, the proposal for retail clients in over-the-counter derivatives—things like contracts for difference, foreign exchange, binary options—would restrict the use of clients' moneys so that they were not available for the general purposes of the business and they were not available to be used for hedging, for example, of other clients' exposures.

Senator WHISH-WILSON: Like a traditional trust account? Yes.

Ms Armour : Much more like a traditional one. It still would not be individually segregated, so there still would be some, if you like, pool of client moneys, but the moneys could not be utilised for those general purposes. The other part of the proposal which we think would be very beneficial is that ASIC have a power to issue some rules, like the rules that we have for client money provisions for exchange traded products which require some sensible procedures like regular reconciliations of the client money accounts and those sorts of things.

Senator WHISH-WILSON: Just very briefly, could you tell the committee how important this issue is?

Ms Armour : We think it is very important. I am sure you are familiar with the fact that a broker, BBY—

Senator WHISH-WILSON: Burdett Buckeridge Young, yes.

Ms Armour : yes—collapsed last year, and the matter that is before the courts in relation to BBY is how should client moneys be dealt with amongst various groups, and it is quite interesting to look at the material the administrator has put out there. It is apparent that, in the various scenarios suggested by the administrator, the clients of the over-the-counter products are much more likely to have very small recoveries of their moneys compared to the clients who are in the exchange traded regime. We think it is really important.

The other reason we think it is really important is that we have a concern that, in the Australian regulatory system, there has been a degree of regulatory arbitrage. Our regulatory system, particularly for retail FX products, is in some respects a more relaxed regime than many overseas versions. Two areas are that there are no rules limiting leverage, and our client money rules. We think that it would help our regime to not be utilised by operators who are really taking advantage of these regulatory differences if we had rules that were similar to other G20 nations.

Senator WHISH-WILSON: Okay. So you are comfortable that there is some progress following that Treasury policy paper?

Ms Armour : We are comfortable. We understand that there are some industry participants who are concerned about this. This will obviously change how some businesses are funded. But we do think it is more important to ensure that clients have the protection for their money that we think they expect than allowing some of these sorts of existing business models to continue.

Senator WHISH-WILSON: Fantastic. My next question is about the FOS, the Financial Ombudsman Service. My office has been talking to stakeholders and constituents around issues with the FOS. Would you agree that FOS is a self-regulating body? In other words, is it governed and funded by the banks?

Mr Kell : All licensees or participants in the Australian financial system who deal with retail clients have to belong to an ASIC approved ombudsman or dispute resolution scheme. FOS is the largest scheme that is approved by ASIC. There is one other. So FOS is funded by its members, which include banks, insurers, insurance brokers, credit unions, so on and so forth. So it is industry funded, which is entirely appropriate given that it is dealing with complaints about the industry. Its governance, under our approval guidelines, is required to be independent—an independent chair and equal numbers of consumer and industry representatives on the governing board. It has to satisfy ASIC's approval standards, which we set out in our Regulatory Guide 139.

Senator WHISH-WILSON: You said you felt it was appropriate that it was industry funded. What is the incentive for banks to adequately fund FOS if it is for complaints about them?

Mr Kell : It is a good question because, I suspect, it would not necessarily be the first priority of most financial services providers to fund the resolution of complaints. But I think any sensible member of that industry—and this has been demonstrated over a long period of time—can see the benefit in having an independent body to deal with customer complaints. Last year, it resolved or closed almost 35,000 disputes, and it is recognised as one of the leading financial services dispute resolution schemes right around the world. So there is actually a significant benefit for industry in having an independent forum that has an established track record. One of the issues, though, that ASIC looks at—and this comes up every few years, when we require the scheme to undergo an independent review—is whether they do have the resources to—

Senator WHISH-WILSON: Just as a matter of interest, who sets the budget for FOS?

Mr Kell : The budget is ultimately set by the board and the chief executive—by the organisation itself. They consult on membership fees, and I think they have a tiered structure so that smaller players pay less and larger players pay more. They also have, and this is quite important, a fee structure so that if you generate more complaints then you pay additional fees. You pay a fee as complaints go to the scheme, so the fee structure is designed to act as an incentive for firms to resolve complaints sooner. So that is quite important. But ASIC also requires schemes to have sufficient resources to deal with things in a timely manner, to communicate properly with constituents, so and so forth. If it is apparent to us that they do not have the resources to do that, then that is going to call the scheme into disrepute.

Senator WHISH-WILSON: I understand that there was certainly one high-profile case where FOS made it clear that they had resource constraints. I know that the committee has talked about that before. Have you seen other examples or any evidence of resource constraints at FOS?

Mr Kell : Certainly, several years ago this was a significant issue with FOS. That was partly as a result of the growth in complaints coming out of the global financial crisis and matters there and partly because several schemes had been brought together and amalgamated under FOS, which was a good idea, but those two things sort of came at once. There was a backlog, and matters were taking too long to resolve. We required that how to get rid of that backlog be one of the major areas of focus for the review that reported in 2014, because it was not sustainable, it was not appropriate for it to continue, and it was generating complaints from both industry and consumers.

There were a series of recommendations about revamping the procedures—streamlining some of the procedures—in the FOS. They were introduced, and, as a result, by about June last year, 2015, the backlog was eliminated at all stages of the process. Frankly, that was absolutely fundamental; that was absolutely necessary. Has this been an issue in the past? Yes, it has, and in some ways the requirement to have the independent review, which focused on that and came up with some recommendations, worked.

Senator WHISH-WILSON: I have a couple of quick questions on robo-lending and robo-advice. You recently took action against Westpac for not following responsible lending rules when they used automated processes to assess customer applications for credit card increases. Can you please explain what you believe Westpac were doing when they failed to properly assess applications for credit cards?

Mr Saadat : In that particular matter, our concern was that Westpac was not obtaining information from the consumer about their financial situation. What they were doing instead was looking at the spending patterns and repayment patterns of the consumer, and using various systems to determine whether the consumer was in a position to afford more credit. Although those systems can help with determining whether somebody can afford more credit, our view was that the responsible lending obligations required more than just that, and that they required some inquiry of the customer about their income and employment status.

Senator WHISH-WILSON: What action did you take for your inquiry?

Mr Saadat : As a result of identifying those concerns, we engaged with Westpac. Westpac agreed to make changes to their processes and they have now suspended the sending of limit increase invitations for some period. They have now agreed to make changes to that process so that they are making inquiries about income and employment status. They are also committed to undertaking a remediation program which will look at consumers who potentially were provided with extra credit that they could not afford, and, depending on the individual circumstances of those consumers, refunds will be applied to those customer accounts.

Senator WHISH-WILSON: Do you think from your experience that this is limited to Westpac? Have you done a broader evaluation? Or do you think this kind of thing can happen, or will increase more in the future, under automated processes?

Mr Saadat : This particular matter was identified when we did a review of the industry. We looked at the processes of all the major credit card issuers to make sure that all of them were making sufficient inquiries, and so we do not think this is a widespread issue but we continue to look at this. Although we were concerned with Westpac's automated processes in this particular case, I do not think we would say that automated processes in general are problematic; it is really how they are used and the reliability of those processes.

Senator WHISH-WILSON: Following on from that, you have established a robo-advice taskforce which is investigating the use of computer algorithms to match investors with suitable assets, obviously, presumably, at lower cost than human advisers. Can you provide an update on the status of the robo-advice taskforce. What are your findings so far?

Mr Price : The ASIC robo-advice taskforce is part of its broader work in setting up an innovation hub within ASIC, so that is an area that has a number of staff which are particularly focused on new business models, as a result of digital disruption that we are seeing in our economy. Having regard to the areas of interest from that innovation hub, one of the very strong areas of interest is around so called robo-advice, or the provision of financial advice by digital means. There are a number of different business models that are relevant to this provision of digital advice. Some advice is merely around asset allocation and what appropriate holdings in, for example, diversified funds like ETFs might be, given a particular customer's risk profile, and some them are more sophisticated, with an end goal, for example, of providing quite holistic and sophisticated financial advice.

Senator WHISH-WILSON: Mr Price, could you just give the committee an idea: what are we talking about here? Are we talking about people phoning up and getting an automated response on the other side of the phone? Is it literally a robot?

Mr Price : The business models vary depending on what the particular aims are, but typically they involve the entry of information through a website and then the making of various statements of opinion, recommendations or advice as a result of that information. That may be advice that is general in nature—so it does not take into account the particular client's own personal circumstances—or it may be very tailored to the information that has been entered into the website. The law as drafted at the moment is reasonably flexible in terms of recognising these sorts of business models, but there is some uncertainty in the market about how very important legal obligations might apply. For example, the future of financial advice reforms introduced an obligation for personal advice to make sure that the advice was in the best interests of the client. So how does that translate into a digital environment? These are some of the issues.

Senator WHISH-WILSON: So you press this button if you own this much in assets, or press this button if you want higher growth stocks?

Mr Price : Yes. The robo-advice task force is really around looking at some of those areas of uncertainty or where there might be further need for guidance. We are proposing to release a consultation document with draft guidance to the market in the not-too-distant future to try to deal with some of these issues.

Mr Kell : The key point Mr Price has made is that robo or not it still has to be in the best interests of the client.

Mr Price : That is right.

Mr Kell : It still has to be appropriate. We want to make sure that some of the potential new entrants understand that. It is not suddenly the case that new rules apply because you happen to be robo. On the other hand, there seem to be some very good opportunities for some existing players to incorporate robo-advice into their models and potentially reach a wider audience with a better priced product around advice as well.

Mr Price : I think that is an excellent point that the deputy chair has made. ASIC welcomes these sorts of developments where they comply with the law. There was a study that ASIC did several years ago which showed that only one in five people get financial advice. Part of that may relate to cost and accessibility, so there is an opportunity for these types of tools to provide financial advice—be it tailored advice, general advice or broader advice—to a larger range of people, hopefully for the benefit of all.

Senator WHISH-WILSON: Presumably, the financial services companies that are offering robo-advice do not have to pay commissions to robots.

Mr Price : One would think so!

Senator WHISH-WILSON: Choice has released an analysis showing that ASIC has reduced its high-intensity surveillance activities by 42 per cent from 2013-14 to 2014-15. Are the figures compiled by Choice an accurate representation, in your view?

Mr Medcraft : I will let Peter Kell comment, but we have had our funding cut by 20 per cent over the last few years. What I have said is that generally what that offer means is that we do cut proactive surveillance because, clearly, what is really important is being reactive where we really see a problem. So proactive surveillance has been cut. But at the end of the day, as I have said before, our funding is a matter for government and we will do the best with what we have, and I believe we do. If you look at that Choice report you will see that in some areas we have increased the number of outcomes where we are focused. Equally, we have tried to be lateral, and with the support of this and other committees we have proposed the user-pays funding model to try to address budgetary issues with our funding. We do acknowledge that.

Mr Kell : I will add to that, though have provided a comprehensive answer. We have not had an opportunity to fully look at the figures Choice has put forward, but our understanding is that they have taken them from our annual reports, so it is public information.

Senator WHISH-WILSON: We understand your resource constraints; the committee has looked at this until black and blue. Given that drop-off in proactive surveillance, do you feel it has had any impact at all on the conduct of the financial industry or on consumer confidence? This one is a very broad question.

Mr Medcraft : As I say, it depends upon the level of resilience you want. Our objective is to get the best resilience we can for the dollars we spend, and it is a matter, I guess, of measuring that level of trust and confidence. It is very hard to say, actually. We have talked today about issues in the financial services industries, but, again, we are doing the best we can with what we have. For example, financial advice is an area where we have increased resources. The government has allowed us to use some of that war chest to develop more in that area. We do the best with what we have.

Senator McLUCAS: Good morning. Is ASIC investigating any possible breaches of the Corporations Act in relation to the Queensland Nickel administration and the behaviour of Queensland Nickel's directors?

Mr Price : ASIC has a number of current inquiries concerning a range of issues in relation to Queensland Nickel. In particular, we are working closely with the administrators of Queensland Nickel regarding the reasons for the collapse, whether there are any potential conflict issues with regard to senior officers of the company, and issues around corporate donations. We have liaised with relevant regulators responsible for unpaid employee entitlements. We are looking at allegations around shadow directorships. We are looking at some issues around security interests that were taken close to the time of insolvency. We are also looking at various issues around financial reporting.

The statutory obligation to investigate these issues rests initially with the administrators; and, if they identify offences, they must report those to ASIC as soon as practicable; but we are making some independent inquiries into various of those matters, I suppose just so that we are able to act quickly, depending on the final outcome of whatever the administrators report.

Senator McLUCAS: Can we go through those elements, please.

Mr Price : Sure.

Senator McLUCAS: The first one was the reasons for the collapse.

Mr Price : That is right. As to the potential reasons for the collapse, it is still far too early to come to a concluded view on that. I would perhaps point to a couple of things that may be relevant. In an affidavit in relation to some separate litigation, a gentleman by the name of Mr Wolfe, who is the chief financial officer for a group of Palmer related companies, indicated that some reasons for financial stress for Queensland Nickel included the falling nickel price—and the price of nickel has fallen very substantially over the last little while—a related company, Mineralogy Pty Ltd, not being able to provide ongoing financial support, as it had been able to do in the past because of litigation with some third parties; and also some failed attempts at bank support. The administrators held an initial meeting of creditors not so long ago, and they indicated some preliminary thoughts around the financial stress of Queensland Nickel that were pretty much consistent with what I have just indicated.

Senator McLUCAS: The second element was that you were investigating conflicts within, did you say, senior—

Mr Price : Conflicts of interest. To put it in context, Queensland Nickel is one of a series of companies that have various links to Mr Palmer, so we just want to ensure that, when decisions have been made, they have been made in the best interests of Queensland Nickel rather than any other factors coming into play.

Senator McLUCAS: I imagine you look at who had what powers at certain points over a period of time, and there has been some commentary about that in the media.

Mr Price : Certainly. There have been a number of changes to directorship, but we will be looking at who made particular decisions at what period of time and whether they were in the best interests of the company. Again, that is a strong focus of the administrator's analysis of the circumstances as well. We have been in very close contact with them.

Senator McLUCAS: That relates also to your inquiry about shadow directors, I expect?

Mr Price : Correct.

Senator McLUCAS: How do you go about investigating whether or not there have been shadow directors and, in fact, what those directors may or may not have done?

Mr Price : The critical issue in terms of shadow directors is establishing whether there is sufficient evidence to indicate that someone has been acting as an officer of the company. There are particular legal tests in terms of whether someone is a director. What the law says is it is not the case that you are only a director because you are recorded on ASIC's register as a director. Under the Corporations Act, anyone who makes or participates in making decisions that affect the whole or a substantial part of the business of a company, or anyone who has the capacity to significantly affect the company's financial standing, or anyone in accordance with whose instructions or wishes of the directors of a company are accustomed to act, may in fact be a director. But it really does depend on the evidence. That is the critical thing that the inquiries of the administrators will be focusing on in the not too distant future.

Senator McLUCAS: You would have seen the commentary in the media about Mr Palmer using a pseudonym as his email account?

Mr Price : Sure.

Senator McLUCAS: How does that pan out in terms of your work?

Mr Price : First of all, I think it is quite important to be aware that in terms of offences—and here I am talking about criminal matters—using an alias per se is not an offence unless it is prescribed in specific cases, but there are exceptions to that. For example, you cannot book a flight on an aeroplane using a name other than your own name. That is a specific example where there is an offence. For ASIC's purposes it becomes relevant to things like: has there been a false statement that has been lodged with us where an alias has been used? The general rule is it is not a criminal offence to use an alias but there are some specific exceptions, and so you need to go through all the facts and carefully analyse whether there is an issue.

Senator McLUCAS: To this point in time, has ASIC received submissions or reports that have used that alias?

Mr Price : In related court hearings, there have been some indications that there may have been aliases used, but we are still in early days in terms of our inquiries in this matter.

Senator McLUCAS: You are investigating corporate donations?

Mr Price : Yes. So this is an important point: unlike in some other jurisdictions, in Australia it is not a specific offence to provide donations for political purposes. For example, my understanding of the laws in the UK is that shareholders must approve political donations. That is not the case in Australia. Whether or not a political donation may be an issue is quite complicated. You then need to look at it through the prism of existing obligations of companies. For example, if a political donation is made, and it does not directly or indirectly benefit a company, that may be an issue. If a political donation is made and an officer who is involved in that decision may benefit from that donation, that may be an issue. But it is very fact specific and dependent on the evidence.

Senator McLUCAS: The issue that concerns me most of all is the potential for unpaid entitlements of the 237 people who have lost their positions at QNI. What role does ASIC play in sorting that out?

Mr Price : Primarily our role in that regard is one around education and providing guidance to employees who may be affected. That is up until the point where a company might be in liquidation—I will come back to the liquidation question a bit later. In that regard, we are aware that the administrators have been in close contact with the Australian Workers' Union, which is the union which represents many of these workers. I have also corresponded directly with the Australian Workers' Union, providing various pieces of information and guidance that may assist them.

Now, if any company proceeds into liquidation and certain other thresholds are met there is an ability for the government to provide a safety net for entitlements, if you like. That is through something called the Fair Entitlements Guarantee, or FEG. ASIC does not administer that but, obviously, we are in close liaison with the government bodies that do.

Senator McLUCAS: Going to the Fair Entitlements Guarantee: I understand that there is a six-month window from the date of losing your job to any potential going into receivership. If the company is placed in receivership more than six months after the worker has lost their position then there is no access to FEG. Is that your understanding as well?

Mr Price : I would need to take that on notice. That is fairly technical.

Senator McLUCAS: That is a concern to workers, that if this goes on then their potential to be supported through the government guarantee may be limited. I put that in front of you and I would like your advice—on notice is fine—to find out what is happening there.

Mr Price : Yes. I know from discussions with the administrator that they are keenly aware of some of the issues and difficulties that workers are facing. They are in close liaison with the Australian Workers' Union which, as I said, represents a number of these employees. Indeed, I understand that a representative from the Australian Workers' Union is on the creditors' committee, which the administrator is talking to on a regular basis.

Senator McLUCAS: There are three unions that are involved, but they are working very closely together.

Mr Price : Yes.

Senator McLUCAS: I have just a couple more questions. Will ASIC investigate whether Mr Palmer has met his obligation as a director to 'avoid conflicts between the interests of the company and his own interests'?

Mr Price : As I said, we are making a number of enquiries into these matters at the moment. I should point out, just for clarity, that while we are making these enquiries, we have not yet—I will go back a step!

We are making these enquiries. I think that any normal person would characterise those as us looking carefully at this matter and investigating this matter. From a very technical, legal standpoint—in terms of corporate law—we have not set up an investigation under section 13 of the Australian Securities and Investments Commission Act 2001, but we do not think we need to do that at this time to make the enquiries that we feel we need to make.

Senator McLUCAS: So in your view, the administrators are cooperating very fully?

Mr Price : We are very happy with the contact and cooperation we have received from the administrators to date. Just by way of background: one of the benefits of an investigation, amongst other things, is that you are able to obtain various documents through the use of compulsory powers. In circumstances where you are dealing with administrators who are willing to provide you with those documents on a voluntary basis it becomes a bit of an academic exercise—

Senator McLUCAS: Sure.

Mr Price : whether you have an investigation under section 13 of the ASIC Act or not.

Senator McLUCAS: The final point you made was that the administrators are required to report certain matters to ASIC.

Mr Price : Yes.

Senator McLUCAS: Has that happened?

Mr Price : If I go back—

Senator McLUCAS: Because of the nature of the cooperation, it has not happened?

Mr Price : Yes. If I go back to the general circumstance: yes, we regularly receive reports from administrators—and I am talking now about matters other than Queensland Nickel; where there have been any corporate failures—indicating there may be potential offences of the Corporations Act. In this particular instance we have received no such report yet. And, given the size of this business and the complexity of some of the business dealings, I anticipate that it may be some time before we receive any such report, if one is lodged with us.

Mr Medcraft : That does not mean to say that we are not talking to them.

Mr Price : Exactly right. And it also does not mean that we are not making our own independent enquiries, which we are.

Mr Medcraft : So it is a multipronged approach.

Senator McLUCAS: I think I might be coming to talk to you fairly regularly around this one in the future.

Mr Price : That is okay.

Senator McLUCAS: I might leave the questions there, but I suppose my real concern is this time-frame question around getting the guarantee. That is not where we want to land, but either those entitlements need to be paid—

Mr Price : Yes.

Senator McLUCAS: or we need to get to a point where people will get some entitlement through the government guarantee.

Mr Price : I am very happy to raise your concern directly with the administrator and I am also very happy to liaise with the other government bodies that are responsible for the administration of that guarantee to see whether there might be anything that could be done to assist this situation of people who are—

Senator BUSHBY: I have a question on the ESA that we were talking about before. You have got about $80 million in it from what you said earlier. How regularly is that being topped up? It used to be sort of kept at around $30 million.

Mr Medcraft : It is still $30 million top but obviously it has been subject to efficiency dividends so $30 million less the efficiency dividends so $27 million last year net.

Senator BUSHBY: So that means it has accumulated to $80 million?

Mr Medcraft : Yes.

Senator BUSHBY: So up to this stage or over recent years that suggests you have not been spending a lot?

Mr Medcraft : When I first became chairman, it was just about down to zero.

Senator BUSHBY: Yes, but does that mean in the last few years there has not been a lot of expenditure out of it?

Mr Medcraft : Not usually so that is correct because the objective of that is building that up.

Senator BUSHBY: Is that with a view to picking priorities of what you are going to go after?

Mr Medcraft : And basically, being very clear, to be able to say we are happy to find it if we need to.

Senator BUSHBY: With the question on Queensland Nickel and BBSW and your normal activities, there may well be some need to call on it in coming times and another area that may well attract a need to spend a little bit out of the ESA is the trade union royal commission. That royal commission, as I understand it, has identified numerous possible breaches of laws which, on the face of it, look like they would be subject to ASIC oversight such as the alleged breach of the Corporations Act by CBUS employees, which, I understand, has been referred to you. Have there been other matters referred to you out of that royal commission?

Mr Medcraft : Yes certainly.

Mr Tanzer : We have a referral of the particular matter that you have raised. We are also participating in an intergovernmental working group, which is to coordinate and make sure that all of the issues raised by the royal commission are picked up by the relevant agencies and where necessary there is coordination between different parts of that. The primary one that has been referred to us at this stage is the one that you have referred to.

Senator BUSHBY: What resources have been devoted to looking at the broader issue you have just described of coordinating and also that particular reference, and to deal with any further references that might come through?

Mr Tanzer : It follows our normal processes. We obviously are going through the formal royal commission report carefully to see whether there are any other issues there that we might seek to look at more proactively. But with respect to the referrals that have been made, we have resourced in the ordinary way within the organisation so we have referred it through to a team of people to start working on.

Senator BUSHBY: In respect of the specific referral, are you able to update the committee or advise the committee of what action is being taken?

Mr Tanzer : Not really, because it is still in investigation phase. But I should say that CBUS itself has written to us and offered its full cooperation with any investigation.

Senator BUSHBY: But there will be an investigation?

Mr Tanzer : We are investigating that right now.

Senator BUSHBY: Is there a time line that you can indicate?

Mr Tanzer : I cannot give it to you at the moment because it is reasonably recent.

Mr Medcraft : I will note I think that commission has also recommended looking at penalties of ASIC as well.

Senator BUSHBY: Which the government has already agreed to do. On a separate matter, the government's changes to the insolvency law reform bill are intended to strengthen creditor protections in the event of corporate insolvencies. Could you explain to the committee how that would work.

Mr Price : First of all, I should note that we welcome the proposed changes through the insolvency law reform bill and we note that there are some additional rules that are to be made to provide the framework in a bit more detail. But some of the changes that that bill will make, if passed, include things like changes around registration of insolvency practitioners. So a decision to register insolvency practitioners, if the bill is passed, will be made by committee, following an interview process. That is different to the process at the moment which is often made on the papers; there will actually be an interview process.

In terms of disciplinary actions, there will be a disciplinary committee—comprised of representatives of ASIC, the minister's nominee and the relevant industry body, ARITA—to bring some professional expertise to deciding what disciplinary action might be taken against practitioners who are alleged to have done something wrong.

In terms of reporting, there are improved reporting measures that will lead to the benefit of creditors. In terms of remuneration, there will be a greater level of oversight in terms of remuneration. So in some circumstances it is proposed that ASIC would have the ability to appoint a cost assessor, for example, to see the reasonableness of particular costs. Creditors will also have a greater power to have oversight of remuneration matters as well, which I think is quite important. There are some various other improvements—for example, around ensuring appropriate insurance is in place for the insolvency practitioner and so on.

Senator BUSHBY: You would recall this committee did an inquiry into this area.

Mr Price : Yes.

Senator BUSHBY: And I think during that inquiry we even had evidence from Stuart Ariff, who subsequently was jailed for his actions, so clearly the law was in place at the time to ultimately deal with somebody who undertook the types of practices that he did. But I guess the question is whether these changes will actually improve the process up-front, make things quicker, and better protect the interests of creditors and others alike.

Mr Price : That is my opinion. And importantly the changes also tend to harmonise the law between personal insolvency and corporate insolvency. Personal insolvency matters—bankruptcy and the like—are regulated by a separate regulator. By bringing those laws closer together, there is an opportunity to reduce the costs that insolvency practitioners otherwise bear in meeting their different obligations between personal insolvency and corporate insolvency.

Senator BUSHBY: I have a few questions on financial services; some of which may touch on a little bit of the stuff that Senator Williams was asking about earlier. I apologise for that, but they are slightly different so I still want to ask them. What enforcement action has ASIC recently undertaken in the financial advice industry?

Mr Kell : We might have to take some of that on notice but as—

Mr Tanzer : Perhaps I can give you a couple of figures from the last seven months. These are statistics from 1 July 2015 to 31 January 2016. ASIC has a total book of 168 enforcement outcomes across the whole of ASIC that have been achieved over that time. Out of those 168 outcomes, 101 relate to financial services and products. Of which, 28 are credits—set aside credit. I do not have the specific number that goes to financial advice per se, but a large number of that total are bannings. And, out of that, seven Australian financial services licensees had their licences cancelled; a further six individuals or companies had conditions imposed on their licences, and many of those were in the financial advice space. Specifically, 13 individuals were permanently banned from providing financial advice, and a further 16 individuals were banned for shorter periods of time over that period of time. In addition, over $150 million in compensation and remediation was recovered for investors and financial consumers. Seven individuals were sentenced to jail. I am not sure how many of those related specifically to financial advice, but we can come back to you on that.

Senator BUSHBY: If you could, that would be appreciated. The broader information you have provided is, I am sure, of interest to the committee as well. But, looking at specifically at the financial advice industry, were there any themes or major issues? I noted there have been a number of financial services licences cancelled and a number of individuals banned from providing advice. Is there anything coming through in terms of major problems? What are the major issues that ASIC is witnessing in that industry?

Mr Kell : One of the areas that we have had a focus on—and I think we have discussed it with this committee—has been ensuring that any issues arising in the largest financial advice firms are appropriately dealt with and worked through. That has been undertaken as part of what we have called our 'wealth management project'. That has been looking at how those firms have dealt with poor quality advice in the past, including looking at remediation of customers and ensuring that that has been carried out correctly. That project, which has been running for a little over a year, has seen 12 advisers banned who were providing poor quality advice within those large firms. As we heard this morning, there are several further investigations underway. There are also some other themes coming out as a result of that project. One has been looking at the unfortunate practice that had arisen in the past whereby customers were charged fees for services or advice that was not actually provided, so we are looking at ensuring that that is remedied and that appropriate remediation is provided to those customers.

Senator BUSHBY: How are you as an organisation becoming aware of those circumstances?

Mr Kell : It is an interesting issue. One of the outcomes of the FoFA reforms is that firms now have to provide a clearer indication to customers on an annual basis of what services they are getting for the fees and charges that are being levied. Partly as a result of implementing the systems to support that, it has become apparent in some firms people were not getting anything.

We have also, as a result of some early indications from some firms, tested that with others; gone out and said, 'Right, we want you to look at it and make sure that this not occurring more broadly', and some matters have come up there.

We have continued to focus on life insurance advice, for the reasons we set out earlier. That has proven to be an area of ongoing problems, so we want to ensure that as part of the reforms that are undertaken there we do our bit in targeting poor quality advisers—banning them, if necessary—and dealing with firms operating in that area.

So there are a few themes that play themselves out in that space that will, I think, make a difference. Finally, another one that it is obviously growing—it is now pretty much mainstream in the industry—is advice around SMSFs and how people invest through SMSFs and problematic practices there. That has been an active area.

Senator BUSHBY: You are identifying issues clearly there?

Mr Kell : We are—

Senator BUSHBY: The inherent fact that there is more advice is not necessarily a bad thing. But you are identifying problems in that advice?

Mr Kell : We are, which is not surprising. There has been such substantial growth in that area. There are now billions of dollars in assets in SMSFs. It is not surprising that there will be some—

Senator BUSHBY: actually one-third of the—

Mr Kell : targeting some of those. We have had some successful court outcomes there. One of the positive features of our work in the SMSF space, I have to say, is that some of the SMSF industry associations have been active in alerting us to problems that their members see. So we have had a high level of cooperation from the industry. They do not want to see a loss of credibility due to fringe players.

Senator BUSHBY: Recent media coverage suggests that one issue that certainly is out there is record keeping noncompliance by financial institutions—for example, Commonwealth Bank's Open Advice Review program. What powers are available to ASIC in the event of observing noncompliance in that area?

Mr Kell : It is an important area. I might leave it to my colleague Louise Macaulay to discuss, but I would note that we are consulting with the industry and all stakeholders on this matter right at the moment, because we want to see standards improved in relation to record keeping in particular licensees, not just leaving it to the advisers.

Ms Macaulay : The penalties that are available in relation to record keeping issues are administrative actions around licensees' licences, so imposing conditions on licences. There are no civil penalty or infringement notice provisions that relate to record keeping obligations.

Senator BUSHBY: Deputy Chairman Kell indicated that it was a very important area. What is ASIC doing to ensure that those who are subject to these requirements are actually compliant?

Ms Macaulay : At the moment we are consulting on strengthening the requirements on licensees to have the records kept and to have access to them. This is an issue that we have observed over several years, particularly currently in relation to the review and remediation programs that we see on foot. We have been sending messages to licensees around the importance of record keeping. It is vitally important for a licensee to be able to properly monitor the advice that its advisers are giving, and it can only do that through proper record keeping. Record keeping is also very important when a client raises an issue or makes a complaint to allow that complaint to be properly assessed by the licensee, and subsequently by the ombudsman scheme if that is necessary, or by other external entities like the court or ASIC, when we are reviewing the actions of advisers.

Senator BUSHBY: Presumably in many cases it would be in the interests of those providing the advice to maintain those records as well.

Ms Macaulay : It certainly would. We have made our views on this very clear to licensees. We are consulting on strengthening those obligations currently. We have consulted on this in the past and we have received push-back from industry. We will, when this consultation period ends at the end of this month, have a look at those submissions, but we will look at them very much from the lens of the kind of issues that I have described to you today.

Mr Kell : The very nature of these products and this advice is that it is long term. That is why it is vitally important that those records are kept. Frankly, if we do not see improvements in this area, we may well be coming back to this committee in the future arguing for stronger penalties or tougher rules around this, because we are seeing a little too much and we have seen a little too much of the sort of behaviour I was describing earlier. In the past, licensees have said: 'Oh, well, it's the adviser. If they've got it, they've got it. If not, that's life'. We think a stronger approach is needed. Finally, changes and improvements in technology and data collection ought to be allowing better practices in this area as well. There is a positive in terms of the sort of technology that is now available to financial advice firms to ensure—

Senator BUSHBY: Maybe there should be an ASIC cloud and they have to automatically upload everything into ASIC and you can call on it when you need to.

Mr Kell : Some people might say that would be a big grey cloud, but that is not a bad thing.

Mr Medcraft : Senator, it is a very interesting thing you are saying, because for the future, with the development of what they call regtech and the ability to actually monitor big data within companies, that is something that some start-ups already looking at. Rather than actually having compliance people looking at the stuff, the ability, in a digital environment, to actually scan using algorithms is actually something that is on the horizon. If you do take that one step further, for those that are really advanced, there is no reason why you could not have almost real-time reporting. So there are some very promising developments happening in this area.

Senator BUSHBY: I hear you on that. Just for the benefit of Hansard and those reading, I was not actually suggesting that you should have an ASIC cloud.

Mr Medcraft : The companies themselves are saying, 'At the end of the day you've got good culture, you don't need all of that.' Things are being developed.

Senator KETTER: Mr Kell, given the vital importance of good record keeping to successful prosecutions down the track and given that you have just indicated that there is a bit of pushback from industry in relation to the improvements you may be suggesting, is it time that we look at more significant sanctions for poor record keeping?

Mr Kell : I suggest that we give you some feedback at an upcoming session about the response to our current consultation so that you get a sense of whether we are going to be able to put in place stronger requirements. The second suggestion I would make is that we ensure that the penalties in this area are captured as part of that broader look at ASIC's penalty regime. I think that would be quite important.

Senator BUSHBY: I have one final question on a separate matter. As part of the government's deregulation agenda—I think ASIC has been active in that as well—what work has ASIC undertaken to reduce red tape for the businesses you deal with?

Mr Medcraft : I am very pleased to have that question, because cumulatively we have done around 450 million so far.

Senator BUSHBY: That is $450 million in savings for business in terms of cost of compliance.

Mr Medcraft : That is correct. It is actually 470 million now. We are very proud of that.

Senator BUSHBY: I see that the minister at the table is now Senator Sinodinos who chaired the coalition's deregulation committee—

Senator Sinodinos: Of which you were a member.

Senator BUSHBY: We worked closely on this and so I have keen interest.

Mr Medcraft : We are one of the highest performing departments.

Senator Sinodinos: These are savings to business.

Mr Medcraft : These are savings to business, and it is something we have embraced. I appreciate the question. It is something we have been pretty enthusiastic about, but I will pass to John Price, who has been leading our initiative.

Mr Price : Since September 2013, when the cutting red tape initiatives were introduced, ASIC has undertaken work that has led to compliance cost reductions of more than $470 million for businesses. I am informed that that makes ASIC the second largest contributor of any Commonwealth agency in cutting red tape. Our work to do this has been really multipronged. We have also issued a couple of public reports which highlight the things we are doing to cut red tape. We have also asked people in business for their own ideas around where cost savings might come from in cutting red tape.

Senator BUSHBY: That is where you will get the best suggestions.

Mr Price : Yes, but the areas where we undertake to cut red tape include the following. First of all, ASIC has the power in many instances to grant waivers, if you like, from particular parts of the law where granting those waivers would not cause undue consumer detriment and result in savings to business. We literally receive thousands of those waiver requests each year, and we end up granting a fairly high percentage of the applications we receive.

To give you an example of one of these waivers, the laws which deal with financial products and financial services generally provide that the disclosure given to people needs to be in a paper format. Some time ago we decided that businesses would be able to provide that disclosure electronically, unless a consumer specifically asked for the disclosure to be provided in paper format. That decision alone will save tens of millions of dollars on an ongoing basis every year. That is an example of the sorts of ways—

Senator BUSHBY: And common sense too.

Mr Price : We also undertake quite a bit of international work—this is quite important. Sometimes there are opportunities for us to speak to other jurisdictions and say: 'We would like you to recognise our laws so Australian companies don't need to comply with the laws in your jurisdiction; rather they can just comply with the laws in Australia.' Again, there are some significant cost savings that result from those international discussions.

We also provide substantial guidance in communication to both business and consumers to try and cut the costs of red tape. We also have an ongoing focus on our systems and how to develop those systems to try to cut the costs for business, particularly small business. A recent example of government reforms that have resulted in cost reductions are reforms around the registration of business names. Where previously if you operated across Australia you needed to reproduce the business name in every state and territory, now you can register your business name with ASIC once and at a reduced cost. There are some examples.

Senator MADIGAN: I have some questions relating to phoenix activity. How does ASIC define phoenix activity?

Mr Price : Phoenix activity, or activity of transferring a business from one particular entity to another particular entity for a variety of reasons, can either be legal or, in some circumstances, illegal. There is no legal definition of what constitutes illegal phoenix activity, but the hallmarks of phoenix activity, which are strong interest to us, include business transactions that involve transferring assets or businesses to a new entity where that is designed to defeat the interests of creditors in the initial company. That is the specific activity that we are really concerned about. There is no legal definition—not in our legislation anyway.

Senator MADIGAN: Does ASIC keep records or statistics on how prevalent phoenix activity is?

Mr Price : No, we do not. There have been a number of reports in the market place in recent times—reports by academics and reports by large accounting firms. Part of the difficulty, as I say, is that there is no specific definition as to what it is and so it is very difficult to track the transfer of assets from one entity to another entity.

Senator MADIGAN: ASIC would then have no idea of the cost of this activity to sole traders or to small- to medium-sized businesses?

Mr Price : That is not strictly true. We rely on external research which is available in the area. For example, one of the large accounting firms has done estimated costing on the amount of money illegal phoenix activity might be costing the Australian economy. I do not have those figures to hand, but I am happy to take that on notice. We do have access to that.

Senator MADIGAN: Does ASIC keep records on the prosecution of those involved in this type of activity?

Mr Price : Where it is apparent to us that there have been breaches of our laws relating to illegal phoenix activity, we do publicise those. For example, one of the stronger enforcement focuses we have is on people who might be facilitating this type of activity. Some years ago we took enforcement action against a lawyer, Mr Timothy Somerville, who we say was promoting illegal phoenix activity. We also take action from time to time against insolvency practitioners who we say have promoted illegal phoenix activity. Those enforcement results tend to be typically reported in our enforcement reports, which are public documents that we issue on a six-monthly basis.

Mr Tanzer : We also offer shorter prosecutions and we take banning action. Where a director has been involved in two or more companies that fail to pay more than 50 cents in the dollar, there is a provision in the law that allows ASIC to take action to ban that person. In respect of phoenix company activity, that is something we regularly do. We ban of the order of 50 to 60 persons each year, following on from reports of liquidators and the like. We also engage in coordination with the Australian Taxation Office, which also has a particular focus on this. Indeed, we have a cross-agency task force on phoenixing.

Senator MADIGAN: Are you able to inform the committee of how many prosecutions have occurred over the past couple of years? Is there an increase, or is this sort of activity and the number of people involved in this increasing?

Mr Price : We will try to get that information for you on notice, if we can. I do not have it to hand at the moment.

Senator MADIGAN: Is there a publicly available list of people who have been involved in this sort of activity?

Mr Price : As I said, part of the difficulty with phoenix activity is that it may be perfectly legal. There may be perfectly legitimate reasons to restructure a business, or it may be illegal.

Senator MADIGAN: More to the point, people have been involved in what you describe as illegal activity. Is there a publicly available list of those persons?

Mr Price : Yes. I would like to take that on notice.

Mr Tanzer : There is a list of those people that we banned, which is a publicly available list. It is a register that is available.

Senator MADIGAN: If you could point us to where that is, that would be good. And, on average, how long have these individuals who have been found to be involved in this sort of activity been disqualified from being directors of any other companies?

Mr Price : Again, I would need to take that on notice. I do not have that in front of me.

Senator MADIGAN: What efforts are made to ensure that individuals who have been involved in this sort of activity and disqualified from holding directorships do not participate in the management of companies in an unofficial capacity—that is, what some people refer to as shadow directors?

Mr Price : We have a number of activities underway to deter illegal phoenix activity. There is obviously enforcement action, which we have discussed. There is the director disqualification program that my colleague Commissioner Tanzer has mentioned. We also run what is called the Liquidator Assistance Program. In some instances where insolvency practitioners are appointed to particular companies there are no assets left in those companies for the liquidator or the insolvency practitioner to investigate whether or not there was phoenix activity. In those cases either we can assist liquidators in obtaining documents from their directors or, alternatively, there is a fund called the Assetless Administration Fund where we can actually fund the work of the insolvency practitioner in investigating whether or not there has been a problem. One important thing to mention is that the topic of phoenix activity is actually not just of interest to ASIC; there are a number of government agencies that have a strong interest in this, not least of which is the Australian Taxation Office. We work together on various interagency forums to coordinate the activity of the various regulatory agencies looking at this particular issue. And of course there is also the important point around stakeholder engagement, and pointing out to directors and also advisers of companies what their obligations are in terms of phoenix activity. So, as you can see, it is quite a broad, multipronged approach to this particular issue.

Senator MADIGAN: Other than the ATO, are there any other agencies involved?

Mr Price : In terms of the interagency work? Well, there is the ATO. The Department of Employment will sometimes have an interest, as will the Fair Work Ombudsman.

Senator MADIGAN: Can you provide the committee with details of ASIC's current initiatives to address this kind of activity and how successful these initiatives have been to date?

Mr Price : Yes: the initiatives I have talked through before surrounding enforcement action, the director disqualification program, the Liquidator Assistance Program, the administration of the Assetless Administration Fund, stakeholder engagement and participation in the interagency phoenix forum. There is also surveillance that we do of insolvency practitioners to look for whether there are any particular risk indicators—that they might be facilitating the activity. That is the broad sweep of the work we do. In terms of the effectiveness of that work, I think judging regulatory effectiveness is always a difficult issue and an area where you might have some debate, but the programs I have mentioned do provide valuable assistance in containing illegal phoenix activity, which not only is illegal but potentially results in the underpayment of taxation, so it is an important issue for the public more generally.

Senator MADIGAN: Finally, are there any further initiatives that ASIC is looking at to address this?

Mr Price : Not at this particular time, but we always welcome suggestions around how we might improve the work we do or be more efficient. So, I welcome any comments from either the committee or any relevant stakeholders who have an interest in this matter.

Senator WANG: I am interested in your intelligence gathering from surveillance on potential and actual wrongdoings. When you talk about potential wrongdoings, are you talking about preventing actual wrongdoings, or just picking up hints and clues somewhere to prevent the wrongdoing being escalated into a serious offence?

Mr Medcraft : Basically good law enforcement is about both reactive surveillance—when something goes wrong you go and do something—and proactive surveillance. Proactive surveillance is almost like cops on the beat, when you go out to see whether there is a problem. That is what we do in terms of proactive surveillance. It sort of warns people that we are out there.

Senator WANG: And you have many ways to gather intelligence—from auditing—

Mr Medcraft : Yes. Misconduct breach reporting is where a lot of intelligence comes to us—increasingly in our markets area, and our systems in terms of data. That is obviously very important intelligence in terms of monitoring what comes to us from whistleblowers, for example. That is good intelligence. And there is what we get from other agencies, what we get from fellow regulators. We have a whole range of sources of intelligence.

Senator WANG: How much do you rely on referrals or reports from other government agencies?

Mr Day : We get referrals from a range of other agencies, be it local government or state and federal government. That information is assessed equally and sometimes with a greater priority than what we get from the general public, or from industry figures, whether it be a liquidator, an administrator, an auditor and so on. Again, we consider that amongst the usual range of factors that we look at to determine whether or not we want to action a matter further. Then we do go back to those agencies and give them ongoing feedback about the value of that information—is it in line with the types of things we are interested in?—so that they can better understand the things we are interested in and also the things we are not, and why. We also need to understand what they are interested in, because, again, vice versa, we refer a lot of information to other agencies.

Senator WANG: How much do you rely on your coercive information-gathering power? And has it been useful so far?

Mr Tanzer : It is a significant factor in every investigation that we undertake. We undertake of the order of 200 investigations a year. Routinely those investigations will involve the use of coercive powers, the most substantive of which is the power to require a person to appear at an examination to answer questions. It is a very important part of the enforcement arsenal. But, equally, the power to obtain documents and the power to seek reports from particularly licensees are also very useful enforcement tools that we quite regularly use.

Senator WANG: So, the use of coercive information-gathering power you would say, in regular terms, provides satisfactory results for ASIC?

Mr Tanzer : Well, it is a balance, obviously. I think the chair earlier mentioned the usefulness often of voluntary cooperation, and that certainly has been brought out in various cases in the past. But the coercive powers are very important to us, and we use them very regularly.

Senator WANG: In 2014-15 the Financial Ombudsman Service reported 62 definite systemic issues and 14 cases of serious misconduct to ASIC, and the Credit and Investments Ombudsman reported 31 definite systemic issues and 11 definite cases of serious misconduct. Could you explain whether the 14 cases of serious misconduct reported by FOS have been found to be definite? And if not, why?

Mr Kell : We would have to take that on notice and come back to you.

Proceedings suspended from 11 : 00 to 11 : 15

CHAIR: I welcome you back to our session, and we will continue with the ASIC.

Senator WANG: I refer to the 93 cases of definitive systemic issues. Could you categorise the nature of behaviours in those cases?

Mr Day : We would have to take that on notice. Peter Kell said earlier in relation to those that we do not have any details to hand at the moment, so we can take that on notice and give you a complete answer.

Senator WANG: I am very interested in your evidence management system. When was that completed?

Mr Tanzer : The evidence management system?

Senator WANG: Yes.

Mr Mullaly : Our evidence management system is called Ringtail, which is a common product. It is used around the world to manage evidence for litigation, other investigations and legal proceedings.

Senator WANG: When was the system set up?

Mr Mullaly : We moved from, in a sense, a proprietary system to Ringtail probably five or more years ago. I would have to check to get the exact date.

Senator WANG: Over the five years have you seen any really definitive benefits of the system?

Mr Mullaly : We could not do our job without it. For the volume of information that we get, and the ability to manage that for the purposes of litigation, we need to have a world-class litigation management system. Ringtail is one of those systems that provides that for us.

Mr Medcraft : Basically, it is a digital evidence system and it is really relied on heavily in court cases these days. The search functionality on it is becoming more and more sophisticated. We probably do lead the world in this area of digital evidence.

Mr Mullaly : We do have a special team within ASIC that manages our evidence, and they are always looking for ways to improve that system and what opportunities there are for growth of that system so that we are continuing to meet best practice.

Mr Medcraft : Our objective is to see how we can even try to integrate into one our evidence and a lot of our data at ASIC. That is a big project for us—a digital transformation; how we source, share and use data. It is a big thing we are focused on.

Senator WANG: Would you see any value, probably in the future, of integrating the system with the data systems within AFP and ACCC, for instance?

Mr Medcraft : Actually, the evidence management system, Ringtail, is actually used by the Director of Public Prosecutions. It is how we share evidence with them. Essentially, it is really important that we can have a common system. But the big challenge then is to have not just a silo that is that evidence system; also to ensure we can connect the dots with the other data that exist at ASIC. I think I tabled a schedule here last time, which actually explained our strategy on how we intend to develop our data systems to integrate them. One of the things we are doing is moving to a Microsoft-based platform to enable us to have common systems, to share data and link systems.

Mr Mullaly : Just to be clear though, we are not in a position to be able to have a single database where their evidence sits with our evidence on a whole range of matters because of the legal requirements of confidentiality et cetera. Having a common system though, so that you can share data when confidentiality allows, is something that we certainly are aware of.

Mr Medcraft : Because they use Ringtail and we use Ringtail.

Mr Mullaly : I am not sure whether—

Mr Medcraft : They can access data on Ringtail.

Mr Mullaly : Certainly the CDPP does use it.

Senator WANG: In your annual report you suggested that the system has delivered about $10 million in quantifiable benefits. What method did you use to come up with that number?

What method did you use to come up with that number?

Mr Tanzer : I will have to take that on notice. For all of our significant IT projects, we do have a standard process which requires an assessment of benefits initially and then a follow-up on those, so there is a methodology that is followed. I will get some more detail for you on that.

Senator WANG: Thank you.

Senator XENOPHON: I want to go to the issue of the Financial Ombudsman Service and raise the findings of the Supreme Court of Victoria in the matter of Goldie Marketing v Financial Ombudsman Service. Who would be familiar with that? You have got the short straw, Mr Kell!

Mr Kell : Yes.

Senator XENOPHON: I get a number of FOS related complaints directed towards my office. What role does ASIC have in monitoring the function of the Financial Ombudsman Service?

Mr Kell : The starting point is that for financial services licensees, in particular those dealing with retail clients, one of their licence requirements is that they belong to an ASIC approved dispute resolution scheme to enable complaints or disputes to be heard. There are two schemes—there were originally a lot more—that are approved by ASIC: FOS and the Credit and Investments Ombudsman. We approve those schemes and then assess their ongoing operation against standards that we set out in a regulatory guide—

Senator XENOPHON: Could you set this out for me? I have a lot of questions so that may be better. I am happy for you elaborate. I want to get to some issues about ASIC funding cuts, which you may want to comment on.

Mr Kell : I am very happy to do that, but can I just add one thing. The key part of that is on the requirement that they undertake regular independent reviews as well. But I am very happy to set it out.

Senator XENOPHON: Sure. I do want to run through a few other things very quickly in relation to this. Are statistics collected or obtained by ASIC as to the way in which matters are resolved in terms of whether it is in favour of the applicant or in favour of, say, the financial institution, and the types of matters that are resolved? In other words, does a financial institution, for instance, win all the small-value disputes or does the applicant tend to win the big-value disputes? Can you provide on notice details of how those matters fall in terms of both the absolute numbers and the qualitative nature of those?

Mr Medcraft : We have that data.

Mr Day : Do you mean in front of FOS or by FOS?

Senator XENOPHON: By FOS, yes.

Mr Day : We can give you the information that they provide us. They may be a better place to give you that information directly.

Senator XENOPHON: I am just trying to understand if ASIC takes an interest in that.

Mr Kell : Yes, we do and it is actually one of the conditions of their approval, which is that they provide that information.

Senator XENOPHON: I want to go back to Goldie's case, which was determined on 19 June of last year. Paraphrasing, as I understand it, the court found that FOS had a broad discretion to abstain from determining disputes and indicated that successful attempts to challenge excise of that discretion have been few and far between. Is that a fair summary of the case?

Mr Kell : Yes.

Senator XENOPHON: And the court found that FOS were only bound by the terms of reference and that these formed the entire contract between the disputed parties and the FOS, and that their operational guidelines merely assisted in understanding the terms of reference. Is that a fair summary?

Mr Kell : In brief, yes.

Senator XENOPHON: You can elaborate on notice if you want. I am just conscious of time.

CHAIR: You are not under pressure here.

Senator XENOPHON: I am always under pressure.

CHAIR: You are not under any pressure from me.

Senator XENOPHON: Self-imposed. I am trying to be considerate to others who may want to ask questions. My understanding is that the court would not disturb a FOS decision unless there is evidence of bad faith, bias or the decision was so unreasonable that no reasonable decision maker could have arrived at that decision—that is, the unreasonableness test. Is that your understanding?

Mr Kell : Again, in short, yes.

Senator XENOPHON: I am not taking issue with the court's decision. The now clarified situation that emerges from the findings does concern me. FOS, like, say, the AAT, is supposed to act as a buffer in terms of likely expensive litigation. I suggest that if it is a financial institution, they will clearly have an advantage over the applicant or the complainant because of the financial resources disparity between the two.

I wonder whether ASIC has considered whether there ought to be a more administrative law dispute resolution flavour in FOS: that is, issues of procedural fairness, having all the cards laid face-up on the table, and with strong rights in relation to this and rules as to proper and improper considerations—in other words, the sort of rigour that we see with the Administrative Appeals Tribunal, rather than the more narrow confines that FOS seems to be within, which seem to be based on contractual terms of reference. Again, I am not criticising FOS, I am just saying that I wonder, as a result of Goldie's case, whether ASIC is looking at perhaps encouraging or being part of a reform of FOS—again, I am not criticising the good people of FOS—to get rid of the constraints as set out by the Victorian Supreme Court in the Goldie case.

Mr Kell : I do not think we would be of the view that Goldie's case itself generates that need, but it is the broader issue of how FOS goes about hearing disputes and what sorts of processes it has—the evidentiary processes it has. That has been an issue pretty much from day one around these schemes, because there is a tension between their role as faster, quicker, cheaper alternative dispute resolution venues and having more complicated but arguably more court-like processes, and that tension remains. Our focus is very much on: are we seeing the quality of decision making overall at a level that is high and satisfactory and that enables the scheme to deal with the vast majority of retail complaints that come before it in an efficient way? To enable it to do that and to remain cost-effective and quick, there are inevitably aspects of the way that the courts work—or even that the AAT works—that, if you introduced them in FOS, would undermine that other objective. So that is the tension.

Senator XENOPHON: Unless you look at the European system, particularly the French inquisitorial system, where the bench, rather than having an adversarial role, has a more active role in trying to—

Mr Medcraft : You are guilty until proven innocent.

Senator XENOPHON: Well, that was not what I was thinking of. I was thinking more of the case that the format is different—it is less adversarial and more inquisitorial.

Mr Medcraft : Sure. But in the French system you are guilty until proven innocent.

Senator XENOPHON: At the risk of incurring the wrath of the Law Council of Australia, I am just seeing whether there is—

Mr Kell : Our understanding is—and some of these issues are probably better raised with FOS directly—that the case managers within FOS do undertake some of that process that you have just described. I think it can become more complex when you move from what might be regarded as conventional disputes about retail financial services to more complex commercial matters, and there inevitably has to be somewhere where the line is drawn and where you say, 'Right, this matter raises issues that are more appropriately dealt with by a court.' But there is an element of what you are talking about already in their process.

Senator XENOPHON: Can I ask you to take this on notice, and in particular to the chairman; given Goldie's case, given the concerns that are expressed from time to time in terms of FOS—again, I am not criticising FOS, but the constraints in the terms of reference are almost a contractual constraint upon them—is ASIC considering whether there can be ways to improve the FOS to deal with some of those concerns that have been expressed and some of the constraints that appear to have arisen out of the Victorian Supreme Court's decision in Goldie's case?

Mr Kell : Let us take that on notice.

Senator XENOPHON: My second line of questioning relates to a media release issued by Choice headed 'Funding cuts crippling financial regulator'. I am not sure whether you have seen that release.

Mr Medcraft : It was issued today. I just saw it briefly before.

Senator XENOPHON: It is critical of funding cuts in terms of the percentage differences for high-intensity surveillances, of minus 74 per cent; instances of potentially misleading or deceptive promotional material withdrawn or amended, minus 135 per cent—it is going from 54 in 2014-15 compared to 127 in 2013-14. I am not sure whether the arithmetic works or there is another way of assessing that. I do not know whether you can have minus 135 per cent; I think it is more like minus 75 per cent. Anyway, there are a whole range of other issues in terms of people or companies banned from financial services, minus 19 per cent; people or companies banned from credit services, minus 18 per cent; and people disqualified or removed from directing companies, minus 55 per cent. The Choice release is not critical of ASIC per se but is saying that there just are not the resources to deal with that.

Can you outline for me, Mr Medcraft, a few issues. What comments do you have with respect to that? Also, I am concerned about the financial literacy program and whether there have been cuts to that and also about the FoFA project trying to establish where the bad apples are in the financial advice space. Finally, I guess the overarching issue in respect of that is that there has been some talk in previous years about an industry funding model—I know it is something that Senator John Williams has been advocating for, championing, for some time—in order to try to have appropriate resources to deal with these issues.

Mr Medcraft : On the Choice article: just in fairness, there were some areas in there that were positive about where we have actually got more administrative sanctions and more people in prison. There were some positives there.

But overall we have cut our staff by 20 per cent in the last four years, so we have cut one in five. At the end of the day, as I have always said here, basically our objective is to do the best with what we have, with the resources we have, and that is certainly what we have done. We have highlighted previously in front of Senate estimates how we have applied cuts. What clearly gets cut is proactive surveillance because that is discretionary, so proactive surveillance has reduced because essentially we have less staff to do it, and obviously less surveillance often feeds into less enforcement. That is what happens.

But in terms of prioritising—and Peter can speak a little bit more about this—we have really focused. We have limited resources. We have increased the resources to the financial advice surveillance stakeholder team. Actually, the government has allowed us to lower the threshold on the ES Account to enable us to have more funding for that financial advice area, so that financial advice project is one where we actually have lifted the level of resources devoted to it. And, as you say—

Senator XENOPHON: But not financial literacy and not in terms of FOFA?

Mr Medcraft : We will come to that. In terms of the user-pays funding model, the FSI has recommended it, and I think a committee of the Senate recommended it. The government is looking at it, as you are aware, so that is a matter for government, but it is in process.

Senator XENOPHON: I might put that on notice to the Assistant Cabinet Secretary. In terms of the industry funding model, could you take on notice, Senator Ryan, where that is at.

Senator Ryan: I will take that on notice for the minister.

Senator XENOPHON: It has been around for some time. I think that Senator Williams, from the coalition, was championing that.

Senator Ryan: I will take it on notice.

Mr Medcraft : We have said that it is great, and I think even Senator Bushby, from many years ago, has always been a big fan of having a price signal for the use of our resources. Let us see what happens there.

On the issue of financial literacy, we do face next year, I think, a $10 million cut, from memory.

Mr Kell : No, no.

Mr Medcraft : Sorry, over to you. Overall we face $10 million next year. Do you want to just comment on literacy and perhaps financial advice, Peter?

Mr Kell : Yes. Briefly, our funding in the financial literacy area is going down from around $9.8 million to about $7 million. As the current NPP reaches an end, it probably will not surprise you to hear that that is an area where we are having further discussions with Treasury and whatnot because we believe that is an important program, so we will see how that evolves. But it is an area where, for the MoneySmart website in particular, to maintain the number of people coming to it, you have to invest in it. It is getting more than 550,000 unique visitors a month, ordinary Australians from around the country. On our research, nine out of 10 take action after they have gone to the website, so it is something that we are continuing to support.

Senator XENOPHON: How do you know? That is terrific, but how do you measure that level of success? I am sure it is successful, but how do you measure that nine out of 10 take action?

Mr Kell : We do surveys of what people do after they have come to the site. Often it is very simple things like amalgamating their superannuation or doing a budget for the first time, and we can track where they go on the site and what apps they download, such as TrackMySPEND. If you have not downloaded it, I encourage you to do so.

Senator XENOPHON: No, it is too depressing!

Senator Leyonhjelm interjecting

Mr Kell : So it is an area where—

Senator XENOPHON: Senator Leyonhjelm probably thinks the government needs to do that!

Mr Kell : we want to continue to support—

CHAIR: That was a bit cheap, you blokes!

Senator Ryan: If only you would let us, Senator Xenophon!

Mr Kell : On financial advice, as the chairman indicated, the government supported the expansion of the use of our Enforcement Special Account to support investigations in the financial advice area, so that is supporting our Wealth Management Project at the moment. That is looking at advice provided by the largest firms, so that has certainly assisted—

Mr Medcraft : And it is very much appreciated.

Senator XENOPHON: In terms of the Future of Financial Advice and those bad apples in the financial service sector, have there been budget cuts in respect of that? I think Mr Price is nodding, I am not sure whether to me or to someone else.

Mr Price : Yes. There was some NPP funding in relation to the Future of Financial Advice that largely turned around licensing, in particular because I think a large number of accountants were due to be licensed quite shortly, and that NPP funding is falling away. That is the money that will not be continued under the NPP funding arrangements. That is my understanding—Peter or Warren?

Mr Tanzer : That is right. The 'bad apples' project that you refer to is part of the Wealth Management Project, which is funded through the Enforcement Special Account.

Senator XENOPHON: So what has happened? That has been cut?

Mr Tanzer : No.

Senator XENOPHON: It is still going?

Mr Tanzer : It is funded through the Enforcement Special Account.

Senator XENOPHON: So there will not be any diminution of those projects? There will not be any reduction of those—

Mr Tanzer : The Wealth Management Project, which includes the bad-apples project, the money-for-nothing project and the focus on the major advice firms, is funded through the Enforcement Special Account, so that is not cut. The NPP funding, which related to the implementation of FoFA, expires, which is what he referred to. The licensing parts expire.

Senator XENOPHON: That is almost the enforcement part, in a sense?

Mr Tanzer : No, the implementation part expires; the enforcement part we are doing at the moment. These bad-apples things are being done through the Enforcement Special Account.

Senator XENOPHON: But is the implementation tied up with enforcement in the sense that, in order to be as effective as possible in enforcement, you need the implementation as well?

Mr Tanzer : Sure.

Senator XENOPHON: So it might mean that some bad apples will be likely to be in circulation.

Mr Medcraft : The benefit we have is that the government has allowed us to recognise it and to treat it as a group—rather than an individual problem—and for ESA purposes, so it has allowed us to bring together a group of cases, which is good.

Senator XENOPHON: Thank you.

Senator LEYONHJELM: I think probably my questions are for Mr Kell. This is a follow-up. You are earning your money today, Mr Kell. It is a follow-up to the questions that I asked last estimates in relation to financial planners and their qualifications. I have no concerns about the general objectives of what you are attempting to achieve—improving the quality of advice and removing thieves, ratbags and sources of bad advice from the system—so I am not really questioning any of that. What I am a little concerned about is one detail of the direction you are heading in, which is the emphasis on a degree for financial planners.

You kindly gave me a response on notice in which you cited the Financial Planning Association, which indicated that it has a degree level. My understanding is that that organisation uses that as a point of differentiation. The Commonwealth Bank has said it wants its financial advisers to have a degree. My understanding is that it also uses that as a point of differentiation. You also indicated that AMP, NAB and Westpac are primarily relying on the CFP qualification but are moving in the direction of requiring a degree in addition to that.

I do not argue with their right to do that. What I am asking is from a public point of view, a consumer seeking financial advice: whether in fact those aspects, those organisations which require their advisers to have a degree, are necessarily a matter of public policy requiring regulation or they are market factors which you would hope—or they would hope, at least—would persuade customers to come to them. I have some follow-up questions for that, but do you have any general observations on that front?

Mr Kell : There are a couple of points. One is that ultimately the framework for professional qualifications that is actively under consideration at the moment is being developed by the government, obviously with a lot of input from ASIC and other stakeholders—

Senator LEYONHJELM: That is fair enough.

Mr Kell : That is just to clarify the responsibilities. ASIC does support the proposed package of reforms.

In terms of whether it should be a market requirement or a mandatory requirement, which is your question, I suppose one of the observations that ASIC and others have made about the financial-planning sector to date is that the market has not delivered on higher professional standards very effectively over time, and part of the reason for that is that, for consumers, this is a complex market. It is difficult to assess or tell the difference between someone who is promising you a nice high return over here and may not have many qualifications and someone who is more properly qualified. I think that is one of the reasons why there is that mandatory requirement: the market itself has not delivered on higher professional standards. And some of the initiatives you are talking about I think would be regarded as responses to the inevitable, in that, as the government has said it is going to be mandatory, these firms have decided to go in that direction anyway.

Senator LEYONHJELM: I would question that. Yes, they are responding. Are they responding to the market, to customers saying, 'I want to have greater faith in the financial planner who I'm dealing with; I will have greater faith in that person if they have a degree,' or are they simply responding to a regulatory poke, a regulatory nudge, saying, 'Yes, it's going to come; you might as well get on with it and do it'? To take your point that the market has not dealt with it, what do you base that on? I could not find any correlation between poor advice and the absence of a degree, and the presence of a degree does not fill me with any confidence. I have three degrees, and I guarantee that I could not give very good advice. I cannot even advise myself very well!

Mr Kell : There are a few things there. One is that I do not think anyone is suggesting, and certainly ASIC is not suggesting, that a degree alone is the magic answer to better standards and better outcomes in this space. Within the professional qualifications package, there are requirements to hold a degree, pass an examination and undertake continuing professional development. Then, of course, you have improvements to standards that accompany the professionalism piece, such as the removal of conflicts of interest and the establishment of a register. So there is a package of reforms that we believe will lift standards in this area that are being introduced, and within the professionalism piece the degree is one of those. On that issue of a degree, the FPA would argue that its qualifications and its more qualified members are less likely to be the subject of ASIC regulatory action. Furthermore, our surveys show, as I said earlier, that clients have difficulty in assessing the quality of advice and therefore having those objective markers certainly helps.

Senator LEYONHJELM: I understand your logic. Perhaps I am a cynical person, but I am very wary of advocates of qualifications saying they need to be mandatory. It is special pleading and it is credentialism. We see it in lots of areas. Licensed electricians are forever saying you should not be able to change a light globe by yourself—you should have an electrician. In my old profession as a veterinarian, the Australian Veterinary Association is forever railing against farriers and horse dentists and pregnancy testers and artificial insemination technicians and saying this work is properly the realm of qualified veterinarians. Of course doctors are as prickly as hell about nurses doing their work. To be vulgar about it, this is tomcats marking out their territory in many cases.

Mr Kell : I understand the point you are making. Having previously been deputy chair of the competition regulator, I understand how professions and industries go about trying to restrict entry at times in ways that ultimately do not benefit the consumer. It is a very important question that you raise. There are two things to keep in mind here—one is that we are not talking about applying this standard to all advice. This is about what we call tier one personal advice—the highest level of advice. Advice on simpler products does not require these sorts of qualifications; advice that is more general in nature will not require these sorts of qualifications. This is what we call tier one personal advice, which is typically the sort of advice where more of your money or more of your wealth or more of your financial risk is going to be at stake and it will often be longer term. The point you have raised is a valid point, but there is some reassurance that this is not being applied inappropriately to advice that can be provided by people without that qualification.

Senator Ryan: I take your point, Senator Leyonhjelm, and indeed I sympathise with some of your comments. Maybe we need licensing for electricians to do more than change light bulbs. I would not trust myself to rewire the house. To address some of your concerns, sometimes we could facilitate a market where there is a licensing regime where people have confidence that standards can be met. Having had some personal experience of this in recent years, for some of these elements of financial advice one can be highly educated and still find it quite challenging to ascertain the difference between quality and non-quality. But, to be fair, we are dealing with a lot of people, particularly those who are graduating from work to retirement, who have not had a great deal of training in financial literacy. I can speak about this with people I know, where they are dealing with numbers that they never thought they would deal with. They went and got a bank mortgage and you had to pay this much a month, you were not even allowed to pay it down earlier, it was 25 years, there were no offset accounts. I think there is a reasonable pro-market activity here in allowing people to make a choice by having a regime that does give them confidence that the electrician coming to their house is not going to set fire to it.

Senator LEYONHJELM: I take your point, Minister, and I am not suggesting that you do not have a process and ways to ensure the retirees that you are referring to receive good advice from good people. The bit that I am questioning is the degree bit.

Senator Ryan: I appreciate that.

Senator LEYONHJELM: Just to reinforce that point, Harry Triguboff, one of Australia's richest men, does not have a degree. Australia's greatest Treasurer, Paul Keating, never had a degree. Richard Branson does not. Steve Wozniak, Apple co-founder—

Senator Ryan: I appreciate that there are imperfect ways of doing this, but the aspiration I think you would probably share.

Senator LEYONHJELM: Yes, I do.

Senator Ryan: In addressing a concern, like mine, that you want the market to work, sometimes a base degree of regulation that gives people confidence in the market can assist that.

Senator LEYONHJELM: My next point, and I will probably have to expunge this from Hansard because my party members will cut my tongue out, is that the system you have already—the examination, their qualifications, the conflicts of interest register—has standard professional requirements. As I understand it, financial planners' main obligation is to know social security law, taxation law and investment advice. So if you simply had verification of their expertise in those areas—or whatever other areas you think they need expertise in—whether or not they have a degree becomes immaterial, doesn't it? You could argue that having a degree would perhaps be an indicator that they would be better able to meet that standard but, whether or not they have degree, if they met that standard that would be sufficient, wouldn't it?

Mr Kell : First, to clarify, some of the things that you have spoken about as being in the industry at present are yet to be implemented and are part of the package, such as the national exam. But I suppose what we are talking about here, and what the Assistant Cabinet Secretary has referred to, is that there is no one perfect measure to say, 'Right, these people have the appropriate qualifications to advise you on your lifetime savings and wealth.' Having a degree, passing the exam and doing the continuing professional development—these are characteristics of professions. This is a sector that wants to be a profession. ASIC's view is that at the moment, while there are professionals in the sector, it is not yet a profession. It needs to go that next step, especially when we are talking about people's life savings. So that needs to be part of the picture—that degree.

Senator LEYONHJELM: I hear that, except that, if the veterinarians were successful in forcing farriers to give up shoeing horses and only did it themselves, owners of horses would pay a fair bit more to have their horses shod. The same goes for all the other things. What I am concerned about is consumers. If you work on the assumption first of all that not everybody who is capable of giving good financial planning advice has a degree, so the capability to give good advice is not dependent on a degree but you nonetheless require everybody who gives financial advice professionally to have degree, you are reducing the pool. Therefore supply will be reduced. Therefore the cost to consumers will go up. Therefore, consumers who need that advice will either not take it or will pay more for it. That is the concern I have. Ultimately, we are worrying about the quality of the advice and raising the bar in order to improve the quality of the advice without regard for whether that advice will actually be affordable or taken.

Mr Kell : I suspect this is a matter we could debate for some time, but—

Senator LEYONHJELM: That was my last question, if that is any help.

Mr Kell : let me assure you that the issue of accessibility and affordability is also one that we are strongly concerned about, and that is why we have actively engaged with the financial advice sector on how they can provide in a cost-efficient manner so-called scaled advice—or narrower advice—how they might take advantage of new technologies to increase access to advice.

The second point I would make—I suspect I am about to offend farriers by saying this and reveal that I do not know as much as I should about that sector—goes back to this issue about saying, 'This is a requirement for tier 1 advice.' If you had to have a degree to, for example, provide someone with information about their house and contents insurance policy over the phone or to help them open a bank account or those more straightforward financial transactions then perhaps we would be pricing those sorts of services at a level that was unacceptable. But those sorts of things are not captured within this framework. This is for personal advice at a higher level, typically around more complex products. I think there is an argument that that ought to require a higher level.

Senator LEYONHJELM: We could debate this for a long time.

Mr Kell : We could, indeed.

Senator LEYONHJELM: I have no further questions.

CHAIR: I just want to talk about the legislation that the government brought in last year to extend consumer protections against unfair contracts. I am just after an update. That was to do with unfair contracts for small business. I am sure you are aware of it. It was a big issue on our plate last year. It passed. How are you going about making people aware of those new laws?

Mr Tanzer : We have recently—I think it was at the end of last month or earlier this month—released some guidance around the application of these unfair contracts provisions for small business contracts. The legislation that was passed last year will come into effect later this year. I think it will be about November this year. There is a transition period of about 12 months. The ACCC and ASIC share regulatory responsibility for the implementation of this legislation. The ACCC and ASIC both produced some guidance targeted at businesses that deal with small businesses to draw their attention to these unfair contract provisions.

In our case, we have been highlighting terms of financial contracts that might fall foul of the unfair contract terms legislation. You cannot be definitive about that because that is a matter for a court, obviously, in particular circumstances. But the aim is to give guidance to particularly financial services firms on their small business contracts and to let them know that there are some types of terms that they currently may have—for example, in long-term lease contracts or in mortgage-type contracts—which might fall foul of the unfair contract terms provisions. Particularly we have highlighted matters where, even if you have the power to, for example, adjust the interest rate in the event of a default or something of that nature, the unfair contract terms provisions might step in if the small business that is the subject of that change does not have an opportunity then to cancel the contract at that point. That is an example of the sort of guidance we have given.

CHAIR: Thanks for that. Can you update the committee on the outcomes of your capability review. I am particularly interested in what the review had to say about the leadership of the commissioners.

Mr Medcraft : The capability review was a major undertaking and it involved a lot of engagement from the commissioners and from the staff of ASIC. The report is now being considered by government, so I am not in a position to discuss the final report. But on the topic of leadership I can provide you with information from the ASIC staff survey that was undertaken by ORIMA Research. It shows that over the last five years there has been a large and sustained improvement in the opinion of ASIC staff with regard to commission leadership. I will table an annexure on that which I will circulate for you all.

CHAIR: Very good, thanks.

Mr Medcraft : Just to give some highlights, for example, on the commission's focus on results and outcomes, in 2010 61 per cent of staff either strongly agreed or agreed. That is now 78 per cent. On whether ASIC is well managed, five years ago only 39 per cent of them felt ASIC was well managed. The last staff survey showed 69 per cent felt we were well managed. That is pleasing. Overall, on how well they were satisfied with the commission, that was 42 per cent in 2010. It has risen to 67 per cent. If we compare to the rest of the Public Service and other agencies, on the question, 'In my agency, is the senior leadership considered of high quality?' in the 2015 survey 70 per cent of staff indicated they did so consider it. That compares well to other regulatory agencies, where it is 61 per cent. For the overall APS, it is 51 per cent. On the question, 'In my agency, are the senior leaders sufficiently visible?' 66 per cent agreed, versus 49 per cent overall for the APS. If you put that in context, in that period we have had a 20 per cent cut in our resources, so in the context we are quite pleased with the results from these surveys. In 2010, I think the response rate was 65 per cent and it is now 85 or 87 per cent, so the response rate has gone up. We had good responses in our staff surveys, both over the period and when we compare to the rest of the Public Service. We have a well-motivated staff, and I think our recent corporate plan that we lodged has been extremely well received by the Department of Finance as having a clear focus and a clear strategy and as one that they see as a benchmark.

Senator KETTER: Mr Medcraft, firstly on the issue of crowdsourced equity funding, I understand that $1.2 million was allocated in the budget for ASIC to implement and monitor a new regulatory framework to facilitate equity crowdfunding. Can you tell us how that allocation has been used in 2015-16?

Mr Price : We are currently doing the preparatory work in relation to the expenditure of that funding. As you are probably aware, the legislation was to be subject to a review by a Senate committee, so we are planning quite carefully and we want to see whether there are any changes to that legislation before we start expending too much money.

Senator KETTER: There is an average of $1.7 million allocated to you for the following three years. Has this money been set aside specifically for regulatory oversight of the new crowdsourced equity funding framework?

Mr Price : My understanding is that that money you are referring to was NPP funding, and it is to be spent in relation to the implementation of crowdsourced equity funding rather than other matters.

Senator KETTER: Is that the amount of money that you sought for this matter?

Mr Price : That is a good question and I would have to take that on notice. I do not know, off the top of my head.

Senator KETTER: Good, if you could.

Mr Tanzer : I think the answer is that it is the amount that we agreed.

Senator KETTER: Agreed, which is a different amount.

Mr Tanzer : As is always the case with new policy proposal type funding.

Senator KETTER: I am going to turn to a follow-up question to Senator McLucas's interest in Queensland Nickel. Given the concern that was expressed about the FEG, the guarantee for employee entitlements, I want to get your reaction to a proposition that companies should be required to make an annual declaration as to their capacity to meet employee entitlements.

Mr Price : That is really a policy matter for government. Companies need to be solvent when they carry on their operations. That would be an additional disclosure obligation on top of that, but it really is a policy matter for government.

Senator KETTER: Companies are required to make certain commitments and disclosures as part of their financial statements.

Mr Price : Yes.

Senator KETTER: Would this be a matter for accounting standards to be looked at as well?

Mr Price : It all depends. You could have a separate stand-alone provision in the Corporations Act, if a government wanted to have such an obligation. I think the difficulty with accounting standards is that they are set by a separate independent standard-setting body, and largely Australian accounting standards are heavily influenced by international accounting standards—referred to as IFRS, the International Financial Reporting Standards—which then tend to be adopted in Australia. The idea of having that harmonisation is that it lowers the cost of business generally.

Senator KETTER: I am going to move to insolvency law reform. It has been expressed to me that there is some disappointment from ARITA in relation to the fact that there were some provisions that were in early drafts of the bill to provide for more responsibility for directors, and their view is that little action is ever taken against directors to hold them accountable. Mr Price, you have made some comments about this. I am interested in whether you are able to comment on that, and in particular their suggestion that registered liquidators should be allowed to issue penalty and suspension notices to directors who fail to comply with their legal obligations.

Mr Price : That sort of proposal is a policy matter for government. I can give you some background in terms of the broader work that we have done in actions against directors. We have regulatory actions relating to directors in a number of cases relating to very significant matters. You may recall, for example, we took action against directors who were involved in the operation of a significant fund called APCH. That was a very high-profile case. It involved very novel legal issues around the responsibility of directors in running a managed investment scheme. Similarly, we have taken action against directors of companies like James Hardie. I can talk about a number of high-profile cases.

But we also look at directors who may be in breach of their obligations for matters that may more directly impact on small business. My colleague Commissioner Tanzer mentioned at an earlier stage that we have a director disqualification program, and so where someone has been a director of a failed company, where that company has returned a very low return for creditors on a number of instances, we are able to remove that person from being a director for a period of time. More generally, I think some of these issues around directors of companies that have failed on a number of occasions have also been discussed at a recent inquiry into insolvencies in the construction industry. I think it is an important point to remember that, where someone has been a director of a failed company, it is not unusual for that person to be bankrupted. Where they are bankrupted, they are automatically disqualified from being a director for a period of time. That is quite a significant thing that I think sometimes people overlook.

Senator KETTER: I am going to move on to one of my pet interests, which is the ongoing inquiry in relation to banks allegedly inducing employers to adopt their default superannuation funds. Could I ask Mr Tanzer to give us an update on that.

Mr Tanzer : We have been conducting a review of inducements offered to employers to change default super funds over the last year or so. That review has taken the form of getting the details of some research that was published by a group called UMR Research that asserted that there are a large number of these sorts of inducements being paid. Also, we undertook inquiries across both the retail and the industry fund sector of major entities, or the larger entities, involved in the sector to gather information and better understand their processes for engaging employers, and to assist us in identifying any possible breaches of the legislation. We made that quite public through that process, with the aim of trying to flush out any complaints or whistleblowers that might want to come forward. There were a few allegations that came forward to us through that. I will not tell you exactly how many, but it was a small number of those sorts of complaints which we also looked into directly. We are about to make a broader public announcement of the outcomes of that, but to give you the key points of that, notwithstanding that review, we have not found any actionable cases that we felt were worthy of our regulatory action.

That is not to say that there were no cases where some sort of inducement might have been offered that the ordinary person, or the page 3 test, might suggest was an inducement, such as a ticket to a sporting occasion or something of that nature, but the legislation does not prohibit that type of inducement. The relevant piece of legislation, which is section 68A of the Superannuation Industry (Supervision) Act, prohibits inducements that are offered on condition that an employer solicits an employer to switch funds. We found no sufficient evidence that would warrant regulatory action on our part. What we did find, though, was that we think that there is some confusion in the marketplace, particularly amongst employers, about the sorts of things that they should be considering when they are considering this sort of issue, because it is not the sort of thing that would regularly arise. The announcement that I am talking about is being coordinated with the preparation and publication on our MoneySmart website of some material which is specifically targeted to say to employers, 'If you are offered these types of inducements, they may well be illegal, and this the sort of thing that you should stay away from. On the positive side, these are the types of factors that you should take into account in considering a choice of default fund for your employers: issues around the type of insurance that might be offered, issues around the overall cost, the sort of return profile of the fund and so on.'

CHAIR: Just clarifying: you had a look at retail and industry funds?

Mr Tanzer : We looked at a number—I will not say specifically how many—of trustees from both the retail fund sector and the industry fund sector. We felt it was important to do that because, as Senator Ketter mentioned, while the genesis—the research that we looked at—focused on retail funds, we felt that this was an issue that could span across the sector.

CHAIR: Was that what you found?

Mr Tanzer : As we found across the sector, while there were various types of inducements that a normal person might think of as, 'That sounds like an inducement to me,' it is not the sort of inducement that would infringe the section. In fact, some of the inducements included in the original UMR research were not even the sort of inducement that anyone would think was illegitimate, because the inducement was actually offered to employees. It was an inducement or a benefit that was being offered to members of the fund, whereas the point of the section is to prohibit inducements that are being offered to the employer to warrant that change as opposed to a benefit that might flow to members.

Senator BUSHBY: You say you looked at all sectors of the industry. Were these inducements present in all sectors of the industry?

Mr Tanzer : We found across our review that there were various types of inducements being offered. Obviously, certain types of inducements, such as access to a range of banking products, for example, are going to be more prevalent in the retail sector than in the industry sector, but these sorts of inducements—hospitality and so on—are not unknown across the industry.

Senator KETTER: Given the importance of selection of fund to employees' long-term financial interest—their retirement—is it time for a look at the legislation to pick up what you would consider to be inducements?

Mr Tanzer : I think fundamentally that is a policy issue for government. What I would say about that is—as I have mentioned before in this place—that one of the issues with section 68A is that it is not a criminal provision; it is a civil provision. For a person who suffers damage as a result of an illegal inducement, it provides a right to take action to recover that damage. Ancillary to that, under its licensing powers ASIC has some rights to take action—for example, against a trustee if we found a case like this, on the grounds that they were not discharging their obligations efficiently, honestly and fairly, which is a general licensing obligation. But that is an ancillary type of remedy, rather than getting at the heart of the issue.

Through our review, we found that there are difficulties in the implementation of specific enforcement action arising out of the section as it was designed, partly because it is a civil provision and does not carry a criminal penalty and partly because it is quite clear that the inducement has to be offered to the employer on condition that employees switch, and that is a difficult evidentiary burden to make.

Senator KETTER: But the effect of a default status for a fund is going to be that people automatically go into a particular fund offered by the employer at the point of engagement.

Mr Tanzer : The default fund system, of course, does not always give that choice to the employer. Some of that is also based in awards. But where the employer does have the choice about the default fund, which is in a large number of cases, the employer plays a very important role. It is an important responsibility, which is exactly why we are publishing this material. It is a little unusual for us, and that is partly why I make such an emphasis on this. Our MoneySmart material is usually directed to investors, consumers and the like; this is material specifically directed to employers.

CHAIR: I really am intrigued, because I did not know that this existed. You say in the retail sector there are inducements—banking products and things like that. What would be an example of that?

Mr Tanzer : I should be very careful about the language that I am using. We did not find evidence, across our review, of inducements within the meaning of section 68A being offered. We did find examples of the type of thing that the UMR research suggested were inducements, such as offers of hospitality. Some of it might be cross-selling of banking or insurance or other types of products.

CHAIR: Are you talking across retail and industry funds?

Mr Tanzer : Yes.

CHAIR: So this is omnipresent across the whole sector. It was not just industry; it was not just retail; it was the whole lot.

Mr Tanzer : No, it is that the types of inducements—if they are, for example, tickets to sporting events—

CHAIR: Really?

Mr Tanzer : Yes.

CHAIR: Wow, I am in the wrong fund!

Mr Tanzer : Or a range of types of corporate hospitality, obviously. That is quite commonly offered. What is different, of course, is that it is not offered on condition that the employer switch. That does not mean—

CHAIR: So there is no difference between retail and industry, no rotten boroughs; it is just an issue across—

Mr Tanzer : We did not see a discernible difference. I was making the point that in vertically-integrated entities, obviously, there is a capacity to cross-sell banking services, which may not exist in other sectors, although there are some in the industry sector that also have banking affiliates or—

CHAIR: Can you give me an example.

Mr Tanzer : I will take it on notice and see if I can give you a specific example. The sorts of things that had been raised with me were more about free access to other services within the firm.

Senator KETTER: My final line of inquiry is in relation to a building society by the name of Wide Bay Australia. On 3 February 2015, you issued a statement indicating that they had failed to properly assess the suitability of customers for loans referred to them by another company, Financial Technology Securities, in which they had a 25 per cent stake. Three weeks after you issued that statement, APRA changed the status of the building society to a bank. They became Auswide bank from 1 April. Were there any communications between ASIC and APRA about Wide Bay after you assessed its home loan lending concerns?

Mr Saadat : Yes, we were in constant discussions with APRA about that matter. More broadly, we are in regular contact with APRA about a range of issues that affect entities regulated by both ASIC and APRA. APRA were aware of our concerns and were kept up to date as that matter progressed to the public announcement that we made.

Senator KETTER: Did they inform you that they were going to issue what I call a banking licence? I think there is a different sort of terminology. Did they advise you that there was going to be a change to the status of Auswide?

Mr Saadat : I will have to check on the exact details of the contact, but the decision that APRA made was really a decision to change the status of the organisation from a building society to a bank, not to grant the building society a new licence, as such. APRA has rules around when an entity can use the term bank in its name. I suspect that what happened in this case was that Wide Bay met the requirements for using the name bank in its name and, as a result, APRA agreed to allow Wide Bay to do that.

Senator KETTER: Did you relay any concerns to APRA about that change in status?

Mr Saadat : I am not aware that we did specifically. I suppose the issues that we identified around Wide Bay's responsible lending and processes for making inquiries do not go to the question of whether that organisation can use the word 'bank' it its title.

Senator KETTER: Do you have ongoing work with APRA on issues related to links between financial institutions, such as in this particular case?

Mr Saadat : We have a range of formal and informal communication exchanges with APRA. We work quite closely with them on a range of matters. On responsible lending specifically, we have been in close contact, especially in the past 12 to 18 months, including the work we did on the interest-only home loans review. That work was done in close cooperation with APRA, including having APRA staff do joint surveillances with ASIC staff on some of those issues.

Senator KETTER: Do you continue to monitor Auswide's home lending practices, or does APRA take on that responsibility?

Mr Saadat : In relation to the obligations that arise under the consumer credit legislation, that is ASIC's responsibility. We continue to monitor Auswide and the sector more broadly, because responsible lending is one of our key priorities. Auswide did agree to make some changes, and we are obviously concerned to ensure that those changes have occurred. We will continue to monitor that in the usual way.

Senator LEYONHJELM: I hesitate to ask these questions at estimates, because they are kind of trivial, but I will do it anyway. I have two small companies, both proprietary limited companies, and I only received by email my notifications to update details and pay the annual fee. I realise that it saves ASIC money, but they get lost in the email swamp, and often the first thing I know about it is a stern email from ASIC saying, 'If you don't pay this, you'll be subject to higher fees or penalties' or something like that. I would imagine I am not the only busy company director who has an email swamp. I am just wondering whether you have thought about that and whether there is the option of opting in to notices by post, which are harder to ignore, even if the fees are higher.

Mr Tanzer : I will check on the specific question about whether you can opt in to notices by post. It is certainly the case that we have, over many years, been trying to move more and more online. In fact, I understand your experience in the email swamp. But, in the implementation of the business names registration system, which we took on in 2012, I would have to say moving the vast bulk of that online has been a very great success.

When you talk it about it saving money for ASIC, that generates $40 million that actually goes back into the pockets of small business people through a reduced fee. That is made possible by virtue of the fact that it is very much an electronic system.

We also very much tried to simplify the system. We had a three-year rather than a one-year renewal period, which is not currently available with respect to companies. With companies, there is a slight difference in that each year, part of the reason for asking you to pay your fee is also to get you to turn your mind to, as you said, whether there are any material changes to your company and whether you are still solvent, for example. That is an important feature, whereas that is not such an issue for a licence to use a particular business name. We do constantly look to try and improve our processes.

The late fee is very unpopular but it is also very effective. We get many complaints about late fees; we do not get nearly as many people suffering that same problem more than once. In that sense—I do not want to be rude about that—it has been quite an effective compliance technique.

Senator LEYONHJELM: I know you are telling me to read my emails; I don't need to be told!

Mr Tanzer : No, I quite understand the point that you are raising.

Senator LEYONHJELM: I am not complaining about your form; it is just that I do not even see the damn thing.

Mr Medcraft : Senator, I have a question more to Greg: I have a company and a lot of people have this problem. I was wondering whether a solution could be to allow people to put in place a variable direct debit arrangement, because, for most people, you are not going to close your company down. Practically speaking, I have everything—like the electricity et cetera—on variable direct debit. Greg, have we looked at variable direct debit?

Mr Tanzer : We have certainly done it with credit; I do not think we have done it with direct debit, but I am happy to look at that.

Mr Medcraft : Can we have a look at that, because it would probably make sense for everybody to have variable direct debit.

Senator LEYONHJELM: I think your forms are much better now than they used to be. I have had my companies now for two decades. Your forms are much better; the whole process is easier, so I am not complaining about that. All I am complaining about is that the only way that I am ever going to know that it is due for renewal is an email, which history shows goes astray and I do not see it. There is a lot of other—

Mr Medcraft : If we had, for example, a variable direct debit in place, would you take advantage of it?

Senator LEYONHJELM: Yes, I would.

Senator Ryan: So would I.

Mr Medcraft : There you go—innovation from Senate estimates.

Senator Ryan: We are innovators here. We are delirious!

Mr Price : We are agile.

Mr Medcraft : We are agile, flexible and digital.

Senator BUSHBY: I have never been accused of being agile!

Mr Medcraft : We might have a look at that and come back to you with an update because, to be honest, I think we should look at that.

Senator LEYONHJELM: The other thing—this is simply for my education—is: there are repeated allegations, including from some other senators—I think Senator Madigan raised it this morning—about companies folding, then resuming under a slightly different name, with a different ABN and with the same assets, and leaving creditors with nowhere to go. This is my ignorance showing: I am aware that there were changes in relation to disqualifying directors under certain circumstances, but I am not familiar with the details. This is being talked about currently in this place. Could you give me a quick summary.

Mr Tanzer : ASIC does have a power under the legislation to disqualify a director who has been involved in two or more failures of a company that failed to pay 50c in the dollar. That is, if you like, a shorthand way of saying, 'If you're unlucky once, you're unlucky once; if you're unlucky more than once, somebody should look at you a bit more carefully.' The legislation does make clear that that is a discretionary remedy. The banning can be for a period of years or it could be permanent, depending on the circumstances. Obviously, if in your case your two companies both failed at the same time and they are related, that would be a factor which would suggest that that is not two; that is only one. But we do have an active program to deal with that. It is fair to say that there are a large number of people who fall into that category who would not be subject to ASIC banning action, because we prioritise that like we do with everything else. But, as I say, the number of activities that we do under that program is normally in the 50 to 60 to 100 range each year.

On top of that, this has been a particular issue in the construction industry in recent times, and also, to a degree, in one or two other industries—the taxi industry and, to a lesser degree, the hospitality industry. We have been looking at ways where we can target indicators of potential phoenix activity that is coming up. We conducted a pilot—I think it was last year—where we, combined with some information that we got from a private sector credit provider, looked for signs of credit stress and other indicators from our database that suggested that maybe somebody might be about to embark on that sort of behaviour. We went out, visited them, explained to them their responsibilities and basically said, 'We're watching,' but also, 'The appropriate course is to liquidate or close your doors, not to reopen.' The early results of that were quite promising. We felt that it significantly reduced what we would have thought was the normal incidence of going further in those sorts of industries. Again, all of this comes to the amount of resource that you could apply to the particular problem. But it is an example of where we were testing something to see whether we could take it further, and that is what we are considering.

Mr Price : The only other thing I would mention is that, if my memory is right, there was some discussion in the Senate inquiry into insolvency in the construction industry as to whether—rather than having ASIC have to decide to take action in individual circumstances where, for example, a director may have been a director of four, five or six failed companies that have returned less than 50c in the dollar—there was an automatic disqualification without the action by ASIC. That is clearly a matter for government.

CHAIR: Mr Medcraft, Mr Kell and commissioners, thank you very much. You can tell how popular this segment is by the 3¼ hours that we have detained you here.

Mr Medcraft : Very happy!

CHAIR: There are people around the building and, I am sure, out there listening to this, and they are quite riveted. Thank you very much. I mean that. The work you do is very important. We have heard some compelling testimony over the last hours, as we did yesterday with the tax commissioner. Your job is equally important. You all have a role to play in the fabric of Australian society, so we thank you for that. See you in May.

Proceedings suspended from 12:32 to 13:30