When it comes to regulators mastering the art of "jawboning", it's usually the Reserve Bank of Australia that takes the honours. But in an extraordinary development this week the Australian Securities and Investments Commission fired the first salvo in its campaign to secure a greater slice of the shrinking federal Budget. The regulator's chairman, Greg Medcraft, effectively handed the parliament an ultimatum: give us more resources, or watch your constituents lose their savings to fraud and misconduct. While the message was delivered under the guise of "greater transparency" it was, in reality, a gutsy exercise in jawboning the parliament.

As a seasoned investment banker, Medcraft has made a calculated but high-stakes punt — and he's betting that the government will buckle.

It was more than an hour into ASIC's appearance before the Parliamentary Joint Committee on Corporations and Financial Services on Wednesday night when Medcraft dropped his bombshell. By then most of the media had opened their notebooks and begun filing a raft of stories on the perils of dark pools and algos. But the message at the hour-and-20-minute mark was stark: ASIC doesn't have the funding to police its rapidly expanding regulatory perimeters.

Medcraft took the extraordinary step of telling the parliament — in a highly public forum — that the bulk of the Australian financial markets are ultimately operating on an honour system. The phrase he used was "self-executing". He explained that ASIC doesn't have the resources to conduct active surveillance over the vast majority of financial market participants. Most AFSL holders will never hear from ASIC in their working lives. And for those that flout the law, as we saw with the $176 million Trio/Astarra fraud, the regulator will only be able to take action after the fact.

ASIC, essentially, is not funded to be an effective financial sector policeman.

"It's really important that people know that we aren't on every street corner. We'd like to be but we're not," Medcraft told the committee members.

"I guess the warning we have for Australians is that, frankly, what we have is a system that is [based on] self-execution. It relies on people to do the right thing. It's so important — I can't emphasise that more — that it's up to the gatekeepers to do the right thing."

To bolster Medcraft's campaign, ASIC has taken the unprecedented step of releasing a public document detailing exactly how its supervision arm is funded. The document, by little coincidence, was released on the morning of ASIC's PJC appearance. Dubbed the "Surveillance Snapshot", it shows at a glance what the odds are of receiving an on-site or off-site supervisory visit across all of the industry sectors that ASIC regulates.

As an example, the snapshot shows that most financial advisers will never hear from ASIC. Out of the 3,343 licensees registered with ASIC only the 50 largest will face active supervision. The remaining 3,293 will only experience "reactive surveillance". As the Storm Financial case demonstrated, this reactive surveillance work constitutes enforcement work after the damage has been done.

In the superannuation and managed funds space — Jack Flader's former territory — ASIC oversees 589 licensed entities. The top 25, which account for 70 percent of funds under management, will receive a visit every year. But 540 funds will never receive a phone call from the regulator, let alone a site visit.

The document is extraordinary — and ASIC concedes that it is the first time a regulator anywhere in the world has adopted this level of "transparency". In one sense it makes a stark point to the taxpaying public and the government; it is an extremely powerful read. But the flip side is that it can also be used as a "how to" guide for fraudsters. To draw a policing analogy, it is akin to the police force releasing a chart every year outlining the streets that they won't be patrolling for the next 12 months.

Herein lies the fulcrum of Medcraft's gamble. If the document — and his associated parliamentary jawboning — is successful, he will get more cops on the beat. This will mean he can update the Surveillance Snapshot each year showing more streets being patrolled and a higher risk of getting caught for misconduct.

But if the government doesn't react, what then? ASIC has effectively handed its regulated population a mud-map for circumventing the supervisors. It's quite clear from this document that a small financial planner, for instance, runs a near-zero risk of ever receiving a knock on the door.

Fill your boots, Flader, would be the ultimate message to ne'er-do-wells.

Money on the fridge

As Medcraft pointed out during his parliamentary appearance, ASIC is forced to target its limited supervisory resources where they will have the greatest impact. Essentially ASIC takes a risk-based approach and sends in the supervisors where there is the greatest risk of consumer loss. On the other hand, this means smaller operators are "self-executing" — or being asked by Medcraft and his team at ASIC to leave their money on the fridge and turn the lights out when they leave.

The great tragedy, from a financial citizen's point of view, is that ASIC has no shortage of revenue. It rakes up more than $650 million per year in income from its range of fees, including licensing and company registration-related charges. But all of this ends up in consolidated revenue (aka the federal government coffers). The government then makes a decision at Budget time each year to return a portion — usually around half — to cover ASIC's operating expenses. ASIC, it must be noted, is a $300-million-per-year cash cow for governments of any persuasion.

In this context, Medcraft's gamble represents a high-stakes punt. We live in a world where regulators are always under-funded in comparison to the markets they oversee. Inevitably, this means regulators have to work on their bark. Even if they lack the resources to back it up with a bite.

But Medcraft's strategy this week marks a new approach. It is positioned in the best PR-speak, of course, as part of ASIC's drive for transparency. The regulator described its Surveillance Snapshot as a sign of ASIC's "commitment to improving transparency and increasing the public's understanding of how ASIC operates."

But in reality ASIC has handed the parliament and the Australian public a grenade in a velvet glove. It is telling the Budget-setters and the voting public in no uncertain terms: this is what you're funding us to do. And this is where the risks lie. So when the next Trio blows up, don't say we didn't warn you.

It is ASIC's final desperate call for a level of funding that is aligned with the exponential growth of the nation's savings pool, including the $3 trillion that will be held in retirement savings by 2020.

Risks and returns

The ball, now, is very much in the voting public's court. ASIC is asking the nation of financial citizens to demand that the government provide them with a safer investing environment. The mandated superannuation pool has made every working Australian a stakeholder in this debate.

If the public fails to send the government a message, consumers will have to become much better educated to be able to protect themselves from shady operators in the financial services sector.

"I think it's really important to explain to Australians that ASIC is not a prudential regulator or a conduct and surveillance regulator. The system we have is one that's based on gatekeepers doing the right thing and being self-executing. So I think this is quite important in terms of understanding what we're currently resourced to do. We're not resourced to be looking at everybody," Medcraft said. "It's important that Australians are proactive in terms of getting educated and understanding what they should be doing."

Medcraft's warning comes as the budgets for all federal agencies are under growing threat; as the government pushes to squeeze its "efficiency dividend" and to bolster its efforts to secure a Budget surplus. While ASIC has been one of the more fortunate agencies (in terms of its funding increases in the wake of the financial crisis) this has been overshadowed by the expansion of its regulatory oversight role. New aspects of ASIC's work include taking over market supervision from the ASX, running the new National Business Names Register and overseeing the federal consumer credit regime.

Medcraft said that under the current funding model ASIC has little choice but to take a risk-based approach to supervision and to target its resources at the largest players or the areas of greatest risk to consumers.

He said the financial adviser space was a good case in point.

"There are 3,300 financial services adviser licensees for personal advice and you can see that the top 20 of them we get around to seeing every 1.7 years on average. The next 30, which is ten percent of advisers, we get around to every 3.8 to four years. But for the next 3,200 licensees we basically only see them on a reactive basis," Medcraft noted.

An unprecedented step

Medcraft acknowledged that this was the first time that a regulator anywhere in the world had taken the unprecedented step of revealing such detailed information about its supervisory capacities. He indicated that this was necessary, however, to give the government and the public a clear view of the kind of protections that ASIC can provide under its current level of funding.

Medcraft's message was that the government would essentially "get what it paid for" with ASIC. As such, it was up to the government to determine the appropriate level of resources to allocate to the regulator. With those funds, it was then ASIC's duty to get the best regulatory outcomes from that investment, he said.

The ASIC chairman added that ASIC would continue to publish the Surveillance Snapshot each year to give the public an ongoing view of ASIC's regulatory capacity. Or lack thereof, as the case may be.

"The idea behind this is really to say that you can have an ASIC at A$350 million and this is what you get. It actually shows the committee and the Australian public what you get for what you pay for," he said.

Given the risks of alerting financial market participants to the areas where surveillance is not taking place, however, Medcraft left the parliamentary committee in little doubt that there is a deeper agenda underway.

"This is the first time we have actually released to the public our coverage of surveillance in Australia, which I think should be of interest to all the members of the (PJC) committee," he warned. "It's probably the first time in the world that a regulator has released such detailed coverage of what we do in the regulated population. I think it's very important the people know what we do and what we don't do."

In essence, ASIC's campaign to secure more funding relies on publicising just how poorly resourced it is to do the supervisory work that parliament has mandated.

Will the parliament bite? Will Medcraft's punt pay dividends? Or has ASIC just dropped a cheat sheet outlining where market participants will be able to operate without the threat of regulatory scrutiny in the years ahead?

One could argue it's an approach to regulation that only investment banker would dare to take.