SYDNEY: 12 July 2013 - ASIC, now the subject of a Senate inquiry, is just over 20 years old. Before discussing how it could do more, it is important to understand what it can’t do and why. ASIC has no powers to compensate investors and very limited powers to force licensees to do so.  The fact that it has ‘negotiated’ substantial settlements in relation to Westpoint, Storm Financial, Macquarie Bank wealth management and now CBA is a testament to its resourcefulness and determination to see investors compensated, however imperfectly. ASIC is not a prudential regulator: unlike APRA, it cannot influence the business model and the personnel of a regulated body from inside. ASIC is a disclosure and after-the-loss enforcement regulator. However, we now know that disclosure is not very useful in retail investment. We also know that ASIC’s enforcement powers despite seeming awesome on paper are often quite blunt in practice. So here are some suggestions for the Senate inquiry on how ASIC could do more.

Embed regulatory values in the constitutions of financial licensees and the responsibilities of their boards. All holders of Australian financial services licenses (AFSLs) have an obligation to act ‘efficiently, honestly and fairly’ to investors, but their boards have a conflicting obligation to maximise profit for shareholders. If a requirement to act ‘efficiently, honestly and fairly’ to investors was the primary corporate purpose of AFSLs and shareholder profit next, then regulatory values would be shared not on a collision course. In the same vein, the CEO and board of AFSLs including the ultimate holding company, should be required to sign off annually that there are systems in place for the AFSL to effectively comply with the financial services laws. Boards already do this annually on company financial statements, and it would bring similar attention to AFSL compliance. Constitutional changes would help ASIC by requiring AFSLs to make business judgments prioritising regulatory values of efficiency, honesty and fairness. Annual sign-offs would require the individuals on boards to have ‘skin in the game’: only this will change the profit seeking bonus driven culture that is the cause of much regulatory breach and retail investor loss.

Fix up the enforcement powers that ASIC already has and improve law-making. ASIC’s investigation powers are awesome, but its powers to enforce in practice are not. Civil penalty proceedings were to fill the enforcement gap between criminal prosecution and the inspections, warnings etc regulators use. Being civil, evidence and proof should have been easier for ASIC. Instead, courts have treated them more as criminal proceedings, limiting their enforcement usefulness. Consequently, ASIC has turned to another tactic, enforceable undertakings: these are rightly criticised for being too lenient in their terms, requiring no admission of liability and consequently no blame. If civil penalties had worked out as intended, or something better could be provided, ASIC would not need to use undertakings when something more severe is appropriate. The ‘best interests’ duty to improve financial advice comes in on 1 July. It too will likely be a damp squib. It was negotiated by a committee heavy in members of the industry it is meant to regulate, rather than by a law reform commission or other independent body. It is virtually impossible to say what it means. It likely requires only that advice giving follows a process and avoids negligence, a standard no higher than pre-reform. ASIC will probably enforce it reluctantly, since the sanction is a civil penalty, and losing means that ASIC pays costs. It will be no surprise if ASIC uses enforceable undertakings in ‘best interests’ cases. ASIC could do more if independent, expert law-making gave it better (not more) enforcement powers.

Use the criminal law more. Many AFSL breaches are ‘regulatory’ or technical contraventions: with scarce resources prosecutors understandably prioritise fraud and dishonesty even though technical breaches cause most investor loss. It is well known that financial types fear goal or criminal penalties more than all else. Nothing would feed-back to AFSL risk management and compliance practices faster, than prosecutions for ‘regulatory’ offenses. However, the difficulties and cost of complex financial prosecutions means they should be used when other enforcement avenues have failed. For this reason ASIC has, and lawmakers should improve, its range of enforcement options. Then when prosecution is used it will be proportional and appropriate and should not just be for fraud and dishonesty. 

Clarify ASIC’s regulatory objects and resource it adequately. There is an expectation gap between ASIC’s objects and powers and the community’s expectations. Australians think ASIC can get them compensation for investor losses, but ASIC has no powers for this: it is a conduct regulator, not a dispute resolver. Australians think that because ASIC licenses AFSLs that it must supervise licensees, but it has few powers and fewer resources for this. ASIC’s powers are mostly to impose after-the-loss sanctions for bad conduct, crudely, a litigation model of regulation. Yet for the last 4 years only one commissioner has been a lawyer and many seasoned enforcement staff have had to go, lawyers and non-lawyers. ASIC could do more if it had resources to hire and to retain individuals with skills that match its objects, powers and regulatory model. The 2011-12 ASIC annual report shows that ASIC earned the Commonwealth $664 million, up 7% on the previous year: its appropriation from the government was $339 million, down from $348 the previous year. ASIC’s costs in 2011-12 were lower than the prior two years. ASIC could do more if its regulatory objects were clearer and after 20 years, they need up-dating. ASIC could do more if it had resources and personnel, to match its mission.  

Encourage ASIC to co-regulate with professional bodies. There are many other possibilities but here the final suggestion for the Senate is that ASIC is given powers, and encouraged to co-regulate with professional bodies in the financial services sector. There is already a power for ASIC to approve the codes of bodies which promulgate, train for and discipline offenders of, professional or industry self-regulatory rules. No code has ever been approved under this power. As with embedding regulatory values in AFSL constitutions, professional standards codes help individuals working in the sector to internalise values too: there are already some professional bodies which have led the way and would work with ASIC. Co-regulation is a way of dispersing regulatory values beyond the regulator, and ASIC could do more if it had the powers, resources and structured co-operation of other organisations which share its objects and values.