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Matters considered at oversight hearing
inquired into several areas of ASIC's activities. These included the
regulatory response to the collapse of Trio Capital;
of the Future of Financial Advice (FOFA) reforms;
activities affecting Australia's superannuation industry;
of Australia's domestic licensed markets;
- oversight of
funds frozen as a result of the global financial crisis; and
- resources and
regulatory response to the collapse of Trio Capital
tabled its report into the collapse of Trio Capital in May this year. However,
the committee continues to closely monitor ASIC's ongoing response to the
corporate collapse. While the government has yet to present its response to the
committee's recommendations, the committee obtained from ASIC a broad update on
the Commission's relevant activities.
that it is continuing the forward work plan outlined in its submission to the
Trio Capital inquiry.
The Commission has released a report on the custodian industry, a consultation
paper on the regulation of research houses, and anticipates the release of
regulatory guidance to improve disclosure by hedge funds.
that the Commission has undertaken also include amendments to capital
requirements to increase the financial resources required of responsible
entities to operate managed investment schemes.
ASIC has also undertaken surveillance of 12 responsible entities, which found
that risk management arrangements appear to be stronger for APRA-regulated
entities compared with entities that operate outside the APRA framework.
between regulatory bodies
As part of
its inquiry into the collapse of Trio Capital, the committee found that
communications between ASIC and the Australian Prudential Regulation Authority
(APRA) regarding key material relevant to Trio Capital were lacking. ASIC
maintained its previously stated position that the Commission has 'a good
working relationship with APRA'.
However, ASIC confirmed that it is considering measures to improve information
sharing with the prudential regulator.
The committee was not provided details of the measures under consideration.
was further informed that ASIC is updating its Memorandum of Understanding with
the Australian Taxation Office. Matters under review include general liaison
and information sharing protocols.
investigations into individuals connected with Trio Capital, including the ARP
Growth Fund and the Astarra Strategic Fund, are continuing. ASIC advised that
'we continue to devote very considerable resources to the investigation of the
Trio matters on an ongoing basis'. However, ASIC further stated that 'it is too
early to say at this stage' whether investigations will result in successful
reiterated its previously stated view that the losses suffered by investors in
the ARP Growth Fund ultimately resulted from investment decisions rather than
acknowledges the devastating financial, emotional, and social consequences of
the collapse of Trio Capital for investors. The committee queries ASIC's view
on the legitimacy of the schemes in which the ARP Growth Fund invested. The
committee requests that ASIC continue to appraise the committee of the
liquidator's success in recovering funds for ARP Growth Fund members. The
committee would also appreciate advice regarding whether the liquidator
encountered any difficulties in fulfilling its responsibilities.
the government's response to its recommendations, the committee acknowledges
the work the Commission has undertaken to respond to the Trio collapse. In
particular, the committee is interested in actions ASIC is taking to strengthen
the regulatory framework for research houses and custodians and will seek
ASIC's further advice regarding these developments at future oversight
of the Future of Financial Advice (FOFA) reforms
to introduce the Future of Financial Advice (FOFA) reforms received Royal
Assent on 27 June 2012, and commenced on 1 July 2012.
However, prior to 1 July 2013 Australian Financial Services Licensees (AFSLs)
may choose whether to adopt the FOFA requirements.
the draft legislation, the committee recommended that ASIC issue guidance
material on aspects of the reforms.
ASIC confirmed that it is issuing guidance in relation to the opt-in
requirements, ASIC's additional licensing powers, the best interests duty, the
scaled advice test, and conflicted remuneration. ASIC had
previously advised that finalised guidance material would be published in
September this year.
The committee received an update on the status of the guidance material. ASIC
advised that the Commission:
- will shortly
release a consultation paper detailing the opt-in requirements;
- has issued
finalised guidance on ASIC's additional licensing powers;
- has released
a consultation paper regarding the best interests duty, with submissions due by
20 September 2012;
- has released
a consultation paper on scaled advice, with submissions due by 20 September
that it will release a consultation paper on conflicted remuneration within the
ASIC may exempt a person or a class of persons from the opt-in
requirements where satisfied that they are bound by a code of conduct that
'obviates the need' for the opt-in provisions.
Separate to the FOFA reforms, ASIC has existing powers to approve codes
ASIC has publicly stated that its current expectations for codes of
conduct will form the basis of consultations on codes of conduct for the
purposes of the opt-in FOFA requirements.
In evidence to the committee, ASIC confirmed this approach. At present,
ASIC expects that, at a minimum, approved codes of conduct will:
specific industry issues and consumer problems not covered by legislation;
upon legislation to deliver additional benefits to consumers; and/or
- clarify what
needs to be done from the perspective of a particular industry or practice or
product to comply with legislation.
publicly announced that the Commission will initially adopt a 'facilitative'
approach to monitoring and enforcing compliance with the FOFA requirements.
Commission explained that this approach is 'fairly common' for major reforms.
It was also clear that ASIC is intending to act proactively to promote compliance
with the legislative reforms:
Kell: It is our
aim to assist them to comply, to get across the line, so that they can get in
shape for the new laws, rather than taking a very strict and inflexible
approach from day one.
policy development...is in addition to quite interactive discussions we are
having with industry, sometimes on a daily basis, about various issues that
they are seeing. The connections between ASIC and industry around how to
implement FOFA are well and truly already made.
thanks ASIC for its continued advice about the implementation of the FOFA
reforms. Noting that AFSLs may choose to adopt the reforms prior to 1 July
2013, it is necessary for guidance material to be issued within the coming months
and with some urgency. The committee will seek ASIC's advice regarding the
extent to which AFSLs have adopted the reforms and any difficulties licence
holders have encountered in implementing the new financial advice requirements.
The committee anticipates that early adoption will provide ASIC the opportunity
to consider whether additional guidance is required, and to ensure that this
guidance is in place prior to 1 July 2013.
previously advised that the continuing growth of the superannuation industry
will strongly influence Australia's financial markets in the coming 12 months,
and, indeed, the coming decade. Accordingly, ASIC has further advised that the
superannuation industry is an area of 'high focus' for the Commission.
to the collapse of Trio Capital, ASIC amended the MoneySmart website to advise
that compensation is not available to self-managed superannuation fund (SMSF)
investors in the event of theft or fraud.
The committee had made this recommendation in its report.
Further to this, the committee was informed that ASIC has now established an
SMSF task force to examine currently available advice and options to more
effectively engage with investors and consumers. It was noted that the task
force was established relatively recently. Therefore, the Commission undertook
to provide the committee updates regarding the work of the task force.
of the SMSF auditor reforms
explored with ASIC activities the Commission is undertaking to establish a
register of SMSF auditors. The government intends that from 1 July 2013
registration will be a mandatory precondition for operating as an SMSF auditor.
ASIC advised that it expects registration to be available from 31 January 2013.
It is anticipated that at minimum 6000 practitioners will register.
agrees with ASIC's assessment that the continued growth of Australia's
superannuation industry will affect the financial services landscape in the
coming years. The collapse of Trio Capital highlights the need for strong
regulation and practitioner standards to protect the superannuation industry
from fraud and mismanagement.
is particularly interested in the work of the SMSF task force. The committee
looks forwards to ASIC's continued advice regarding the task force's work, and
will closely monitor developments in this area. The committee considers that a
task force to guide SMSF regulation is particularly necessary, and should be
comprised of representatives from other regulators concerned with SMSF
activity. The committee will seek ASIC's advice regarding the task force's
collaboration with the Australian Taxation Office and the Australian Prudential
draws ASIC's attention to its previous discussions regarding misuse of the ASIC
logo and Australian Financial Services Licences.
The committee is similarly concerned with any confusion regarding the
significance of SMSF auditor registration. It would be inappropriate for SMSF
auditors to claim, on the basis of their registration, that their services, or
their audit findings, were 'ASIC endorsed'. The committee considers that it
would be appropriate for ASIC to proactively attempt to dispel any such
confusion or misuse of the auditor registration system, through providing the
industry and investors guidance on the significance of auditor registration.
Such guidance could usefully be included on the MoneySmart website.
ASIC's supervision of
Australia's domestic licensed markets
transfer of responsibility for the supervision of real-time trading on
Australia's domestic licensed markets to ASIC in August 2010, the committee has
routinely inquired into market integrity matters. Matters under inquiry include
ASIC's response to internalised/non-transparent trading known as 'dark pools'.
On the basis of
information previously provided, the committee understands that dark pools
traditionally operated to reduce the risk that large transactions could cause
price volatility on the lit market. Accordingly, dark pools were originally
intended to promote market stability.
However, the nature and purpose of the dark pools market is shifting.
Technological advances have broadened market access to dark pools and increased
the use of dark pools for smaller amount transactions. As ASIC has previously
advised, these developments suggest that dark pools are no longer primarily a
vehicle to minimise the risk of unintended market volatility.
ASIC confirmed its previous advice that the value of dark pool
trading has grown significantly in recent years, with the market accounting for
five per cent of trading value as of March 2012. This value has increased since
June 2011, in which dark pool transactions accounted for three per cent of
explained that dark pools operate without the safeguards applying to licensed
These venues are not licensed. If they were licensed they
would have obligations to maintain a fair, orderly and transparent market. They
would have things monitoring volume of sales. They would have some monitoring
for integrity, insider trading and so on.
considering whether additional safeguards are needed to ensure parity between
the lit market and the unlicensed market:
The big issue is that there should be a level playing field.
If it looks like the market, feels like market, it probably is a market.
ASIC told the
committee that it has established a task force to investigate the extent to
which the unlit and unlicensed market is undermining the integrity of the lit
It is anticipated that the task force will issue a consultation paper for
comment in February 2013. ASIC advised that matters under consideration
include whether to impose a minimum size for dark pool transactions.
The task force's work will build on measures ASIC has already undertaken, which
include additional draft market integrity rules. ASIC advised that the
Commission is exploring rules requiring 'kill-switches 'for automated trading
systems, which would enable trading algorithms to be immediately disabled:
[I]n August we proposed rules and guidance on automated
trading that cover high-frequency trading. Our proposals really build on
confidence that we are trying to achieve in equity markets. We have proposed,
for market participants, among other things, a kill-switch which will be
required in relation to algorithms in high-frequency trading; algorithmic
testing, a process of certifying and reviewing annually; and we have also
provided guidance on stress testing of order flows. So, essentially, we have
tried to put more controls around making sure that systemic risk is protected
with respect to high-frequency trading.
The committee has previously stated that it is concerned to ensure that
the transfer of responsibility for supervision of real-time trading on
Australia's domestic licensed markets from the Australian Securities Exchange
to ASIC results in measurable improvements in market integrity.
It is evident that trading in the unlit market may affect the stability of the
lit market. Indeed, the global financial crisis demonstrated the
interdependency between the lit market and unregulated markets. In the
committee's view, market integrity requires transparency and accountability in
both the lit and unlit markets. The committee notes advice provided by
Dr Carole Comerton-Forde, Professor of Finance, Australian National
University, that it is 'very important' for dark pools to be regulated in their
The committee draws this viewpoint to ASIC's attention. The committee will
monitor developments in this area with interest.
The growth of dark pools raises the matter of ASIC's capacity to respond
to innovation. The committee would be interested in ASIC's perspective on the
Commission's current regulatory capacity to predict, and pre-emptively respond
to, market developments.
has continued to monitor the effect of the global financial crisis (GFC) on Australia's
economy and financial markets. This includes developments regarding the
significant number of illiquid managed investment schemes frozen in accordance
with requirements under the Corporations Act 2001.
Commission advised that as of July 2012, $10.96 billion in funds remain frozen.
Of this, $6.36 billion are frozen and inactive with the remaining funds,
with an accumulated value of $4.6 billion, in the process of winding up or
At the height of the GFC the value of frozen funds totalled $25.36 billion.
Accordingly, as of July 2012, 43.2 per cent remain frozen. ASIC advised that it
is estimated that it will be two to five years before all funds frozen as a
result of the GFC are realised.
was informed of the policy intent underlying the requirement in the
Corporations Act for illiquid funds to be frozen. While acknowledging that
suspending investors' rights to redeem their investments could cause financial
difficulties, Mr Price explained that the requirement to freeze illiquid funds
was intended to protect investors:
provisions around frozen funds were put there after the collapse of Estate
Mortgage and various other funds many, many years ago. Possibly equally as
damaging to investors is a situation where assets are sold in a very volatile
market at fire sale prices. So what the legislature wanted to do was put in
place a mechanism whereby there could be some sort of freeze until normality
came back to the markets and you could realise those assets at a more reasonable
that its administration of the frozen funds provisions in the Corporations Act
seeks to appropriately balance long-term market correction and investors'
immediate financial needs. It is this balance that prompted ASIC to introduce
conditional relief, in the form of hardship payments, from the frozen fund
As of July 2012, 6345 applications for hardship payments have been approved,
with payments totalling in excess of $155 million.
This figure has increased since January 2011, in which 4300 applications had
been approved and $144 million returned to investors through hardship payments.
statutory responsibilities include advising the Minister about options to amend
the Corporations Act to improve the Act's operation.
In November 2011, ASIC disclosed that the Commission has advised Treasury of
options to amend the criteria prescribed by the Corporations Act to determine
whether a scheme is liquid.
The committee heard that the proposed options seek to support investors through
providing an objective basis on which to determine liquidity:
the key issues in terms of the definition of the assets of illiquid or not at
the moment is that, to some extent, it depends on the judgement of the relevant
responsible entity, the relevant people who operate the fund. The nature of our
suggested amendments is more about putting a more objective framework around
judging where assets are liquid or not.
It is evident
that the definition of liquidity, and responsible entities' understanding of
the definition, is integral to the operation of the frozen fund scheme. The
committee was informed that investors' and responsible entities' understanding
of liquidity is an area of concern:
problem with many of these funds is that they were sold as liquid investments,
or nearly liquid, whereas the underlying assets were not liquid. That is the
committee has previously noted, Australia's economy has received international
recognition for its resilience during the GFC.
However, the GFC's ongoing significance for investors is evident in the
substantial proportion of funds that remain frozen following the period of
global economic and financial instability. The committee notes that as of July
2012 only 57 per cent, that is, a little over half, of the funds originally
frozen have been realised.
impact both investors and the economy. For investors, the inability to access
investments may affect financial security. For the economy, every year funds
remain frozen represents a year of lost opportunities. Frozen funds cannot
contribute to national, or individual, economic growth. The committee will
continue to monitor developments in this area, and seek ASIC's advice regarding
whether steps can appropriately be taken to support, and accelerate, the
process of returning to pre-GFC frozen funds status.
particularly notes ASIC's advice regarding investor and responsible entities'
understanding of the operation of the frozen funds scheme. It is of concern to
the committee that there is uncertainty regarding the liquidity requirements.
The committee has previously noted the importance for investors to be informed
of the potential for funds to be frozen as a result of illiquidity.
The committee seeks ASIC's advice regarding whether improvements can be made to
product disclosure statements to clarify the liquidity requirements.
Furthermore, the committee seeks ASIC's advice regarding activities the
Commission can undertake to improve financial literacy among responsible
entities. The committee will also continue to seek ASIC's advice on whether
amendments are required to the Corporations Act to improve the operation of the
frozen funds scheme.
ASIC's resources and
routinely questions ASIC regarding its enforcement strategies and allocation of
resources. The committee was advised that the Commission expects gatekeepers in
Australia's financial services system 'to act honestly, to be competent, to be
diligent, and to manage conflicts of interest properly'. ASIC's enforcement
action is focused on these four areas.
was provided a detailed analysis of the Commission's allocation of its
resources to undertake surveillance activities. In summary, the Commission
considers that Australia's financial services system 'is based on
self-execution and relies on people doing the right thing'.
Accordingly, the Commission 'takes a risk based approach' to 'try and get the
best bang for our [ASIC's] buck'.
ASIC candidly stated the Commission's view regarding the extent of ASIC's
not a prudential regulator, not a conduct and surveillance regulator. The
system we have is based on gatekeepers doing the right thing and it is
self-executing. It is quite important in understanding what we are currently
resourced to do. We are not resourced to be looking in everybody, and that is a
very important message.
of outcomes of this approach to enforcement is provided in ASIC's Report 299 ASIC
enforcement outcomes: January to June 2012. For the period of 1 January
2012 to 30 June 2012, ASIC undertook a total of 303 enforcement actions,
which comprised 209 criminal proceedings, one civil action, 59 administrative
remedies, 24 enforceable undertakings or negotiated outcomes, and one warning
The majority of actions related to small business compliance and deterrence
matters, with 196 actions taken against directors for summary offences such as
the failure to keep proper books and records. In addition, ASIC commenced
proceedings against nine directors for what it reported as 'more serious
breaches of the law'.
The committee was informed that the report demonstrates ASIC's proactive,
deterrence-based enforcement strategy:
So it is
about enforcement but is also about proactive regulation, saying "here are
the key areas you should focus on and here are some examples of where we have
taken action". So it is meant to be preventative, going forward.
It was also
evident that ASIC considers investor and gatekeeper education to be a necessary
part of a proactive, deterrence-based enforcement methodology.
appreciates ASIC's candour regarding its interpretation of its statutory duty
to enforce the standards required under the Corporations Act and related
legislation. The committee is also appreciative of ASIC's frank disclosure of
the resources available to undertake surveillance activities.
required under the ASIC Act to undertake whatever action it can take, and is
necessary to take, to enforce the laws of the Commonwealth that confer
functions and powers on it. While the 2012–13 federal budget allocated specific
purpose funding to ASIC for the Stronger Super reforms and the FOFA reforms,
the committee reiterates its previously stated view that the Commission must be
properly resourced to take all necessary and appropriate action to promote
fair, efficient and safe financial markets.
enforcement and surveillance is only one part of an appropriate regulatory
model. Proactive education is a necessary aspect of a well-balanced, effective
regulatory framework. The committee is therefore pleased with the measures ASIC
has taken, and will continue to take, to issue guidance material to gatekeepers.
The committee also concurs with ASIC's view on the importance of investor and
consumer education. The committee would appreciate receiving from ASIC an
overview of the Commission's financial literacy and investor education
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