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to questions on notice taken at hearing
hearing, 12 September 2012
1 (Hansard, p. 7)
Impact of FOFA Bill
FLETCHER: On that point, I recollect that there was some discussion about the
particular drafting of the bill and whether it actually achieved the result you
have described, namely, that its practical impact does not take effect for two
years from the implementation of the bill. Could I ask you to take on notice to
explain how that mechanism works, particularly with respect to clients who are
existing clients of advisers, as at 1 July 2013?
Kell: I can do that.
opt-in provisions do not apply to an ongoing arrangement with an existing
retail client. An opt-in notice will have to be provided to new clients. That
is, clients who receive personal advice and who also enter in to an arrangement
to pay ongoing fees after the commencement of FOFA. An opt-in notice for those
new clients must be provided within 30 days of the two-year anniversary. The
two-year timeframe from implementation of the bill is therefore relevant in
that it is the earliest date on which the opt-in obligation will crystallise in
relation to new clients. This also means that it will not be necessary for an
industry code that obviates the need for opt-in to be in effect and approved by
ASIC by 1 July 2013.
2 (Hansard, p. 10)
Registration of SMSF auditors
BOYCE: How many of the 6,000 to 8,000 would you expect to go onto the register
without competency requirements as a result of the transitional arrangements?
Medcraft: Without a competency exam?
BOYCE: Without a competency exam, sorry.
Tanzer: I'm not sure that I can give you the answer.
Medcraft: We will take it on notice. We do have those numbers, but we will
take it on notice and give them to you. It's not because of the number years of
experience, the numbers sitting exams—we will come back to with the numbers.
been estimated that of the 6,000 to 8,000 expected to register under the
transitional arrangements approximately 1,350 applicants would be required to
sit a competency exam.
BOYCE: Is it likely that Mr Timothy Frazer, for example, would have gotten
onto the register if this had come into place in, say, 2010 before you became
aware of Trio?
Medcraft: Essentially what you are saying is, effectively, a back test?
Medcraft: I understand what you are saying.
BOYCE: If you were unaware of the Trio Capital situation, would Mr Timothy
Medcraft: Have been eligible to be on the register?
Medcraft: We will come back on that.
proposed registration requirements, under the transitional arrangements, had
been in place in 2010 Mr Frazer would have had to meet prescribed qualification
requirements and fit and proper criteria. He may have been exempted from the
competency examination requirement and the prescribed experience requirement
under the transitional requirements. (ASIC is not aware of whether this is the
case). Mr Frazer is currently subject to an enforceable undertaking (EU) with
ASIC that includes a three year period of suspension as an RCA. Should he apply
for registration with ASIC as an SMSF auditor after 31 January 2013 his EU and
the related Trio matters would be considered significant factors in regards to
assessing whether he meets the fit and proper requirements.
3 (Hansard, pp 10–11;
Further information on registration of SMSF auditors
Tanzer: I am not sure of the number of funds that he was an auditor for or any
BOYCE: He was an auditor.
Tanzer: I understand that.
BOYCE: One assumes that—
Tanzer: I don't know how many funds he was an auditor of or for how long he
had been an auditor of those funds. In any case, I am happy to take it on
Medcraft: We will take it on notice and see. It is actually quite an
BOYCE: It does go to the heart, particularly if people try to use the register
as a type of marketing tool in the way that some people try to use an AFSL
does not have access to this information. As the regulator for SMSFs, the
Australian Taxation Office may have information as to the number of independent
audit reports that an auditor provides for SMSF trustees each year.
that the ATO will continue to monitor the compliance of SMSF auditors and will
refer matters to ASIC for consideration where action to disqualify the auditor
may be appropriate.
4 (Hansard, p. 11)
ASIC consideration of Securency
SMITH: Okay. Could I take you, then, to the issue that I have asked about
before—I asked back in March of this year—with respect to your consideration of
matters pertaining to Securency International and Note Printing Australia. You
issued a press statement on Monday, 12 March, essentially saying that ASIC had
decided not to take any action and not to make any further comment. It was a
three- or four-line press release which I asked you about back in February. I
am interested in how long that matter was under consideration by ASIC—or those
matters, because there were two.
Gibson: We were contacted by the AFP towards the end of 2011, and we looked at
SMITH: I do not expect you to give me the precise date or anything.
SMITH: We can get that on notice later. ....
held discussions with the AFP at various times in 2011. Following a discussion
between ASIC and the AFP on 30 November 2011, in relation to a possible
referral to ASIC, a meeting took place on 21 January 2012 at AFP offices. At
that meeting ASIC staff were given a briefing as to the conduct of the AFP
investigation and prosecutions. On 24 January 2012 ASIC was provided with a CD
which contained the documents identified by the AFP as potentially relevant to
the referral. These documents related to both NPA and Securency.
held discussions with the AFP and analysed these documents for the purposes of
deciding whether or not to commence an investigation. Based on that review ASIC
noted that there were significant obstacles to commencing any action. ASIC then
issued a statement on 12 March 2012 to advise it had decided not to proceed to
a formal investigation.
5 (Hansard, p. 12)
ASIC's monetary contribution to MoneySmart
BOYCE: ... Can you tell us how much ASIC's contribution to be MoneySmart Week
Kell: As to the exact amount, I am happy to take that question on notice.
not provided a financial contribution to MoneySmart Week.
with many other key supporters of MoneySmart Week, ASIC provided in-kind
resources to assist in planning, implementing and promoting MoneySmart Week. In
ASIC's case this comprised:
providing secretarial and operational support.
- ASIC gave
Financial Literacy Australia Limited (the not-for-profit company running
MoneySmart Week) permission to use the MoneySmart name.
- Hosting the
MoneySmart Week website (moneysmartweek.org.au).
Week was held for the first time from Sunday 2 – Saturday 8 September 2012. The
Week will become an annual event, in the first week of each September.
Week is an initiative of members of the Australian Government Financial
Literacy Board. They formed a new not-for profit company (Financial Literacy
Australia Limited) to organise the Week. Attachment 1 has a list
Week supports a key pillar of the National Financial Literacy Strategy:
'working in partnership and promoting good practice'. It was planned and
delivered by volunteers from over 50 organisations across the business,
community and government sectors. Supporting organizations are listed at Attachment
1 :Members and Directors of Financial Literacy Australia Limited*
- Mr Paul Clitheroe AM, Executive Director, ipac securities
Captain Robert Brown, Chairman, Australian Defence Force Financial Services
Hamish Douglass, Chief Executive Officer, Magellan Financial Group
Dunn, Chief Executive Officer, AMP
Elkins, General Manager, Marketing, Colonial First State
Guthrie, Executive Director, Financial Counselling Australia
Elaine Henry OAM, Company Director
Anthony Mackay, Executive Director of the Centre for Strategic Education
Silk, Chief Executive Officer of AustralianSuper
Michael Smith OBE, Chief Executive Officer, ANZ Banking Group
Robert Thomas, Chairman, Gardner Smith (Holdings) Pty Ltd
list represents all members of the Australian Government Financial Literacy
Board except ASIC Commissioners. ASIC Commissioners have avoided formally
joining Financial Literacy Australia Ltd to avoid any conflict of interest
between ASIC’s regulatory activity and Financial Literacy Australia’s fund
2 - Organisations represented on MoneySmart Week Workstreams
ADF Financial Services and
ANZ Banking Group
Association of Super Funds of
Australasian Retail Credit
Australian Bankers' Association
Australian Government Department
of Human Services
Department of Families, Housing, Community Services and Australian Library
and Information Association (through the NSW State Library)
Australian Securities and
Commonwealth Bank Foundation
Financial Basics Foundation
Financial Counselling Australia
First State Super
First State Super
Good Shepherd (Microfinance division)
HESTA Super Fund
Internal Consulting Group
The Benevolent Society
The Smith Family
University of Melbourne
Westpac Davidson Institute
Women's Information and
Referral Exchange Inc (WIRE)
other organizations (e.g. The Australian Tax Office, Salvation Army, The
Institute of Chartered Accountants) were represented in a broader group of
supporters willing to promote MoneySmart Week through their networks.
6 (Hansard, p. 15)
Frequency of hedge fund scrutiny
BOYCE: I had been going to ask a question about the 6.6 years for hedge fund
investment managers and REs. Are you able to provide on notice some more
information about which funds come under scrutiny every 6.6 years? Do the top
10 get done more often? As you have with some of the others, are you able to
break that down any further?
Medcraft: We can.
Tanzer: There is quite a lot of information about how we target our activities
with respect to hedge funds and things that we publish, so we would be happy to
provide some of that.....
conducts both reactive and proactive surveillances of hedge funds. A reactive
surveillance might be initiated on the basis of market intelligence or a
complaint received. Pro-active surveillances are reviews initiated by ASIC and
are focused on a particular theme (eg asset misappropriation) and involve us
examining a sub-set of the wider hedge fund or hedge fund manager population.
That sub-set might be selected on the basis of the amount of investors' money
under management, whether the funds are retail or wholesale funds, or other
relevant criteria, depending on the object of the surveillance. The
overwhelming majority of our surveillance work on hedge funds is pro-active and
the figure of 6.6 years to survey each manager in an identified population of
220 hedge fund managers is based on our proactive surveillance work.
2010 we undertook our first hedge fund systemic risk survey. This involved our
largest nine managers (basically all local managers managing more than US$500m
in hedge fund assets) having to answer a comprehensive set of questions about
potential sources of systemic risk, such as the asset classes their funds are
invested in, where those assets were located, the level of leverage used, and
the identity of their largest counter parties. These nine managers held 52% of
known hedge fund assets under management (excluding assets held by funds of
hedge funds to exclude any double counting). The surveillance was coordinated
with similar exercises undertaken by our counterparts internationally, though
the results were assessed locally and only aggregated summary results shared
with other regulators here and abroad. We are about to undertake our second
systemic risk surveillance using the same US$500m threshold, and we estimate
that approximately double the number of mangers will be completing the survey.
The increased number is a result of our having identified some more hedge fund
managers, the appreciation of the AU$ against the US$, and an increase in the
size of several managers’ assets under management.
are just now wrapping up our 2nd Red Flags hedge fund manager fraud
surveillance. The first was done over the 2009/10 financial year. The Red Flag
surveillances involve assessing managers of both retail and wholesale hedge
funds against a set of indicators for the existence of, or vulnerability of
their hedge fund to, manager fraud. The theme of the 2nd Red Flag
surveillance was asset misappropriation, manipulation of fund returns and
overpayment of management and performance fees. We used various risk based
filters to reduce the number of managers we looked at to 58. ASIC prefers not
to disclose the detail of the risk filters we use, as fraudulent managers may
use this information to escape detection.
expects to continue to conduct both types of surveillance every two years or
so. As a result, the largest fund managers and the fund managers which exhibit
more risk indicators will likely be reviewed more often than the average of 6.6
years, and potentially every two years or so. By contrast, managers of smaller
funds and that exhibit fewer risk indicators will likely be reviewed less often
than the overall average.
7 (Hansard, p. 18)
Action by ASIC against auditors
FLETCHER: Given the conduct in the case of Trio, and that the audits that were
conducted extended earlier than 2008, has ASIC considered the possibility of
action against any of the auditors?
Price: We certainly have considered action in respect of various of the
auditors, but I would like to take on notice any further detail around that
area, if I may.
FLETCHER: Yes, I would like to get an answer to that question on notice. Could
I also get on notice the answer to whether you believe there are any other
parties against whom recovery could potentially be made of the monies that have
is responsible for regulating the conduct of registered company auditors. ASIC
has reviewed the conduct of the auditor of both the Astarra Strategic Fund and
the ARP Growth Fund for the financial year ending 30 June 2008. ASIC has also
reviewed the audit of the Astarra Strategic Fund for the financial year ending
30 June 2009.
a result of the disciplinary issues identified by these reviews, ASIC entered
into an Enforceable Undertaking with Mr Timothy Frazer in lieu of commencing
proceedings in the Companies Auditors and Liquidators Board. This Enforceable
Undertaking provided that Mr Frazer would not act as a registered company
auditor for three years.
Capital Ltd (in liquidation) as the responsible entity of both the Astarra
Strategic Fund and the ARP Growth Fun would be the party who would bring
proceedings for compensation in respect of shortcomings by the auditor of these
funds. ASIC anticipates that the liquidators of Trio Capital Ltd (in
liquidation) would examine the feasibility of such a claim.
has a discretion to commence civil recovery action on behalf of an aggrieved
person or company (eg: s50 of the ASIC Act) if it is in the public interest to
do so. ASIC is not however obliged to do so.
considering whether it is in the public interest to take civil recovery action
on behalf of an aggrieved investor ASIC will take into account a range of
- A viable
cause of action being identified (that is, establishing misconduct by the
defendant that gives rise to the basis for a compensation action);
regulatory effect of the action;
- The existence
of other parties able to commence proceedings seeking compensation for
aggrieved investors (such as an external administrator or the investors
availability of funds to satisfy a judgement against a defendant to the
- The prospects
of the action being successfully litigated by ASIC;
regulatory priorities at the time;
of alternative forms of dispute resolution.
the case of the Trio auditor we consider that legislative provisions including
those imposing proportionate liability would complicate the ability of a party
to obtain significant compensation.
does not propose at this stage to pursue civil action against the Trio auditor.
respect of possible recoveries from other parties, ASIC has looked at a range
of persons and entities. Of these persons and entities considered we have not
identified any significant funds, assets or insurance that would satisfy a
judgement debt even if ASIC identified and successfully pursued a claim against
are aware that a claim bought in the Supreme Court of New South Wales by an
investor in the Astarra Strategic Fund has been settled in favour of the
investor. Notwithstanding this successful proceeding we are of the view that
the funds/ assets available are not sufficient to adequately compensation all
the affected investors in the Astarra Strategic Fund given the size of the
Question 8 (Hansard pp 20–21)
Topic: Investors in frozen funds
Tanzer: ... But you can see at least a positive movement from November 2009
where we had a total of 87 schemes involved with $25.3 billion down to now in
the order of 50 schemes with $6.36 billion that remains frozen.
BOYCE: Do you know how many investors there are in those?
Medcraft: We can take that on notice.
Tanzer: I do not have that figure here, I am sorry.
BOYCE: No, that is okay. If you can do this without vast amounts of work, can
you indicate whether they are individuals or organisations.
Medcraft: We will see if we can get the numbers.
Tanzer: Yes, we will see what we have.
does not presently collect or collate information regarding number and/or types
of investors remaining in these frozen funds.
Question 9 (Hansard p. 21)
Topic: Defining liquidity of
Price: One of the key issues in terms of the definition of whether assets are
liquid 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 around putting a more
objective framework around judging whether assets are liquid or not.
How is that done?
Price: We have made some suggestions to Treasury, but in terms of the priority
of those suggestions or looking for an appropriate legislative vehicle, I would
need to take that on notice. It is probably a question for Treasury in terms of
where they see that.
has been assisting Treasury develop possible amendments to the definition of
Liquid Assets in the Corporations Act 2001. Whether amendments are made to the
definition of Liquid Assets is a matter for the Government.
Further follow up information
The following were not taken as official questions
on notice, but were matters on which ASIC undertook to provide further
A) Hansard p. 14
Topic: Auditor registration
requirements for SMSFs
SMYTH: Is there a registration fee? I believe there is.
Tanzer: I think there is. I cannot tell you exactly what it is, but I will
The fee to register is $100. We are waiting
confirmation from Treasury as to whether this fee will be subject to CPI
B) Hansard, p 23
Topic: Communications with World
Bank about business registration
So, in the interests of raising from silver to gold, have you provided the
World Bank with this information about changes to our business registration?
Tanzer: I think they have their sources. I will go back and find out.
Medcraft: When was that report done?
This year. June.
Tanzer: But I think it is always based on work that they have done, so it runs
up until the end of the previous year, I think. It would not yet—
Medcraft: Take into account the business names and some of the other names. I
am sure we will come back to you on it, but we will probably want a target to
The World Bank's Doing Business project provides
measures of business regulations across 183 economies including Australia. The
annual rankings are based on input from lawyers, accountants, judges, business
people and public officials. The Treasury provides input on behalf of the
Australian Government by way of an annual survey. The most recent survey was
submitted by Treasury to the World Bank in July 2012. The survey response made
reference to Australia's new online Business Names Register. The World Bank has
indicated that Doing Business 2013 will be released around October this year.
to questions on notice from Mr Fletcher MP
that an expert report involves the provision by an expert of financial product
advice. This is a financial service, so that the expert must hold a financial
services license, and it is a condition of the license that the expert must
attach a financial services guide to each report. This guide must set out,
among other things, what a retail investor should do if they have complaint
about the report. In essence, the investor must first refer the complaint to
the expert and then if the investor is not satisfied with the expert's
response, they may refer the complaint to an approved complaints resolution
service, usually the financial Ombudsman Service.
a fair summary of the present position?
experts providing financial product advice are typically required to hold an
Australian Financial Services Licence (AFSL). However, some experts, such as
geologists providing technical reports, are not required to hold an AFSL. AFSL
holders need to have both internal and external dispute resolution procedures.
If using dispute resolution processes, an investor should first complain to the
expert directly. If they are not satisfied with the response they can contact
the Financial Ombudsman Service (FOS) or other approved External Dispute
Resolution Services. In addition, ASIC also closely monitors many expert
reports and has issued substantial policy guidance on the standards expected of
experts. ASIC assesses all complaints it receives regarding experts reports.
a retail investor follows the directions in the financial services guide, and
makes a complaint about the report in the first instance to the expert. How
long might it take the expert to deal with the complaint?
internal dispute resolution requirements, an expert / AFSL holder has up to 45
days to respond to a complaint (Regulatory Guide 165: Licensing: Internal
and external dispute resolution - para 100).
the case that many of these corporate actions have run their ordinary course
within about a month, meaning that in most cases, by the time the expert has
dealt with the complaint, the corporate action is over?
commercial considerations mean that a transaction will likely be complete
before any complaint is finalized through internal or external dispute
resolution, ASIC strongly encourages investors to lodge their concerns with it.
reviews many transactions involving listed entities and we therefore recommend
shareholders contact ASIC at first instance if concerns arise before the
transaction is concluded. ASIC can use its position as a regulator to try to
have any substantiated concerns addressed (for instance, by supplementary
investor is not satisfied with the outcome of the complaint and has time to
refer the matter to the Financial Ombudsman Service, what expertise does the
Financial Ombudsman Service have in relation to expert reports?
a matter is referred to FOS rather than ASIC and they do not have internal
expertise in a particular area, they are able to use the services of external
experts to help resolve disputes. It should also be noted that FOS has
discretion to refuse to consider the dispute where there is a more appropriate
forum for a dispute to be heard (FOS Terms of Reference 1 January 2010 (as
amended 1 January 2012) - para 5.2(a)).
officer of the Financial Ombudsman Service make an order correcting error in
not have the power to make amendments to an independent expert's report but it
can order that compensation is paid.
Ombudsman does not have time to correct the report, can he at least make an
order compensating the complainant for financial loss?
maximum FOS can compensate applicants for direct financial loss and damage is
$280,000 (FOS Terms of Reference 1 January 2010 (as amended 1 January
2012) - schedule 1). However, an investor would need to show direct financial
loss as a result of the actions of the expert in the course of them providing
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