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Matters considered at oversight hearing
The committee inquired into several matters relating to ASIC's
activities. These included:
- ASIC's strategic framework;
- supervision of the stock market;
- ASIC's coercive powers;
- Australian financial services licences; and
- freezing of investors' funds.
ASIC's strategic framework
The committee was informed that ASIC has adopted a strategic framework
to guide the Commission's activities. The strategic framework establishes three
priorities; confident and informed investors and financial markets, fair and
efficient financial markets, and efficient registration and licensing.
Mr Greg Medcraft, Chairman, ASIC, advised that the first
priority covers three 'foci', namely, education, gatekeepers and consumer
behaviour. This priority will drive ASIC's use of new media to promote
financial literacy, and the dissemination of standards and guidance material
for gatekeepers and consumers. Under the second priority ASIC will 'continue to
focus...efforts in market supervision and competition, and also on corporate
governance guidance.' The committee was further informed that under the third
priority, ASIC will give particular attention to 'small business...where there
is perhaps an expectation gap.'
It was apparent that an emphasis on self-regulation and 'empowerment'
underlies ASIC's approach to corporate, markets and financial services
regulation. Mr Medcraft advised that ASIC considers that '[i]t is very
important that consumers and investors are empowered.' Mr Medcraft further
I think it needs to be underlined that our system still
relies very much on the cornerstone of investor responsibility for their own
investment decisions, and that remains core – an understanding of risk, reward
and diversification remains paramount.
With regards to gatekeepers, it was noted that ASIC considers that
'[s]elf-regulation has an important role to play, with the support of ASIC
Mr Medcraft elaborated on the concept of self-regulation:
[I]t is important that we hold gatekeepers, in the widest
definition of the term, to account because they are a cornerstone of the
system. That includes directors, accountants, experts, advisers, product
manufacturers and distributors, market operators and participants.
Self-regulation is actually very important in complementing regulation.
It was explained that there are four factors guiding the development of
the strategic framework, namely, 'legislative responsibilities, systemic or
regulatory risk, stakeholder expectations and government policy.'
It was noted that the Commission's focus on managing systemic or
regulatory risk prompted the formation within ASIC of an 'emerging risks'
Mr Medcraft explained that the committee:
'is designed to...really look at thematic risks that may be
emerging in particular industries or systemic risks and actually connect the
dots across the stakeholder teams in ASIC so that, if we are doing surveillance
in one sector, basically we can discuss the lessons that may be impacting. Part
of it is looking at what is happening in evolving markets and making sure that
we are connecting dots across ASIC.
Mr Medcraft further explained that the formation of the committee is in
response to ASIC's view that '[i]f you really want to be a good proactive
regulator, it is all about having a resilient system that is forward looking and
seeing what is on the horizon.'
The committee notes with approval ASIC's strategic framework, which
appears to cover ASIC's legislative objectives as contained in the ASIC Act.
The committee agrees with ASIC's understanding of its role and responsibilities
as the corporate, markets and financial services regulator, and particularly
approves ASIC's commitment to identifying areas of potential risk. On the basis
of the information provided to the committee, it is apparent that ASIC recognises
the importance of the Commission's educative role in promoting prudent and
fully-informed self-regulation by market participants. The committee considers
that the financial literacy tools, standards and guidance material that ASIC
provides are a necessary part of promoting confident and informed market
participation and are a key tool to assist gatekeepers and investors to self-manage
The committee notes with approval the formation of ASIC's emerging risks
committee. The committee sees merit in the continual analysis of the system to
identify areas of potential risk. Such analysis is a core element of
maintaining and improving Australia's financial system that, the committee
notes, is part of ASIC's legislative objectives. The committee will seek advice
from ASIC's emerging risks committee at subsequent oversight hearings.
Supervision of the stock market
The committee has continued to track the transfer of responsibility for
supervision of real-time trading on Australia's domestic licensed markets from
the Australian Securities Exchange to ASIC. ASIC has previously advised, and
the committee has noted, that since the transfer of responsibility, the time
from problem identification to formal investigation has decreased.
The committee notes that this trend continues, 'with approximately 40% of all
referrals progressing to investigation in under 30 days from identification of
The committee further notes ASIC's advice that from January to June 2011:
[t]here were 23,494 trading alerts, with 121 matters
requiring further consideration. Some 34 matters were referred for further
investigation. These matters involved potential insider trading (17), market
manipulation (6), possible breaches of the market integrity rules (10) and of
continuous disclosure obligations (2).
As has been noted, ASIC advised that 'fair and efficient markets' is one
of the three priorities under ASIC's strategic framework. ASIC's report ASIC
supervision of markets and participants: January to June 2011, provides
further details of the activities undertaken to achieve this priority:
A core outcome for ASIC is investor confidence that our
markets are fair and efficient. This requires our market infrastructure to be
robust; trading, clearing and settlement of transactions to be orderly and
efficient; and market misconduct to be minimised. We do this through engagement
with stakeholders, surveillance of markets and market participants, education,
guidance and our deterrence activities.
ASIC is committed to reducing the incidence of market
- ensuring that market participants have better controls in
accordance with required standards;
- supervising markets and market participants to detect market
misconduct quickly; and
- conducting timely investigations of market and market participant
misconduct, resulting in significant penalties where appropriate.
The committee's attention was drawn to a number of emerging issues that
may affect the performance of Australia's domestic licensed markets, including
'dark pools', high frequency trading and 'white label/indirect brokers'. Areas
of potential risk were identified by ASIC and Dr Carole Comerton-Forde,
Professor of Finance, Australian National University.
The committee was informed that, consistent with its policy of seeking
to identify emerging issues, ASIC has reviewed indirect brokering, also known
as 'white labellers'. Mr Shane Tregillis, Commissioner, ASIC, provided an
overview of indirect brokering in the Australian market, noting that ASIC has 'identified
a number of weaknesses, in terms of controls and other issues'.
However, while commenting that 'there are clearly areas for improvement
required in this sector, and it is an issue that we think requires continued
focus', ASIC noted that regulation of indirect brokers is a policy matter for
The committee was informed that ASIC is advising Treasury of the need for
policy development in this area.
The committee was also informed that in the overseas market,
internalised/non-transparent trading, known as 'dark pools' have caused
'concerns about both price discovery and liquidity'.
Dr Comerton-Forde explained that their increased availability as a result of
advances in technology and, therefore, increased use, 'creates more risks, both
because there is no longer a strong motivation for why that sort of trading is
allowed and because there is no longer a lever for ensuring that sufficient
transparency and liquidity are going to the main market.'
Dr Comerton-Forde explained that 'the current Australian regulatory
environment does not provide for a dark-pool class of markets. They are
operating currently under the rules of the ASX.' Dr Comerton-Forde advised that
it is 'very important...that they [dark pools] are regulated in their own
However, Dr Comerton-Forde questioned whether ASIC has the capacity to regulate
ASIC regulates the brokers who are operating these venues,
but they are not regulating the venue per se. So the brokers have an obligation
to the market and to their clients...but they are not regulated as a trading
venue. And they probably should be.
The committee was also provided with an analysis of the risks posed by
high frequency trading, which Dr Comerton-Forde predicted will increase with
the introduction of competition in the Australian market. While reporting that
high frequency trading can add value to the market, Dr Comerton-Forde advised
that the trading can increase technology costs and 'create a more complex
environment for traders'.
Dr Comerton-Forde recommended consideration be given to ensuring that the
increased costs 'are borne by those that create the costs rather than by the
market as a whole',
and further stated 'I think one sensible approach is to charge a fee when the
ratio of orders being placed to cancelled orders becomes excessive'.
Dr Comerton-Forde also noted that risks may be posed by market
competition and new forms of trading services. While advising that 'competition
in equity markets is very good and very important for the development of the
markets', Dr Comerton-Forde stated that competition entails 'risks and issues
that need to be managed'. These include 'issues in terms of the fragmentation
of the market and being able to access liquidity'.
Drawing on experiences of overseas markets, Dr Comerton-Forde further advised:
[t]he new entrants have come into the market with superior
and much faster technology and have innovated significantly in the way they
offer trading services to the market. Generally this has been good, but there
have been some risks along the way. There has been a massive change in the
types of orders that are available to investors in the market: hidden orders,
pegged orders, flash orders. They have generally been good, but there have been
some instances, such as with the flash orders in the US, which have been
problematic. It is important that the regulator is on top of those sorts of
things and can step in and make changes quickly if needed.
Regarding ASIC's oversight of the Australian market, Dr Comerton-Forde stated
that the challenges facing the market should influence ASIC's resources and approach
to market regulation:
Again, the regulators need additional tools, technology and
understanding of the market in order to monitor the market effectively. In
general, the trends with high-frequency trading, dark pools and competition
increase the need for better understanding of the markets and better access to
data. It is important as we go forward that ASIC are able to obtain that
information and that data to ensure they keep abreast of the market and abreast
of developments in the market, and that they are able to be proactive and
change quickly in response to the market dynamics.
The committee is particularly interested in areas of potential risk that
may threaten the performance of Australia's domestic licensed markets and,
therefore, the financial system. In this regard, the committee notes Dr
Comerton-Forde's advice that the 'two most important qualities that...we need
to keep in mind, as we look at how markets are evolving, are the liquidity and
the price discovery process'.
The committee draws ASIC's attention to the areas of potential risk to market
liquidity and the price discovery process that Dr Comerton-Forde identified.
The committee has previously noted that ASIC is consulting on whether additional
market integrity rules are required to address broader market developments,
including non-transparent trading.
The committee will seek ASIC's advice regarding whether prudent regulation of
non-transparent trading and the other matters identified requires additional
transfer of responsibilities to ASIC.
The committee also notes ASIC's view of the risks posed by white
labellers/indirect brokering. The committee approves ASIC's role in proactively
screening the market for potential risks and, consistent with its
responsibilities under the ASIC Act, alerting the Government to this risk. At
subsequent oversight hearings, the committee will seek an update on the
progress of measures to respond to the risks posed by indirect brokering.
The committee will continue to seek ASIC's estimation of emerging risks,
and the development of regulations to address the risks. To assist with
monitoring risks to the market, the committee considers it appropriate for ASIC
to continue to publish six monthly reports regarding the Commission's
supervision of markets and participants.
ASIC's coercive powers
ASIC has been granted facilitative, regulatory and enforcement powers consistent
with its responsibility to enforce and give effect to relevant Commonwealth law.
These include the power to enter premises and seize documents pursuant to a
warrant, and to compel persons to provide ASIC all reasonable assistance in
connection with an investigation and to appear before ASIC to answer questions
A person may commit an offence if he or she refuses to comply with ASIC's
directions or otherwise hinders ASIC in exercising its powers.
The Rule of Law Institute of Australia commented that such coercive powers
are 'intense and broad ranging' and 'diminish fundamental human rights'.
The Institute suggested that such powers require transparent and accountable
Given the gravity of the powers which we give our regulators,
including ASIC, we say we need to question first of all whether they are really
needed. We need to question whether they have due process around them, whether
there are checks and balances, whether there is transparency both in process and
in outcome and, finally, [whether] there is accountability on the regulator
about how they use those powers.
It was noted that the accountable use of coercive powers is consistent
with the Administrative Review Council's 20 best-practice principles regarding the
use of coercive power by Commonwealth agencies. 
The principles are based on administrative law values of fairness, lawfulness,
rationality, transparency and efficiency, and seek to balance agencies’
objectives and individual rights.
The Institute reported that compared with other Commonwealth regulators,
'ASIC does not exactly come up as the model disclosure regulator'.
The Institute argued that, where appropriate, ASIC should attempt to obtain
information from third parties on a voluntary rather than a compulsory basis,
and also recommended that:
- ASIC publish in its annual reports 'detailed statistics on its
use of coercive powers, along with a discursive statement that notes their use
and key trends'
- ASIC's website contain 'a policy statement on how it uses its
coercive powers', and
- ASIC's use of its coercive powers be reviewed against the
Administrative Review Council's best-practice principles.
ASIC advised that the Commission has recently reviewed its procedures
and policies regarding coercive powers. The committee was informed that
'[o]verall, the review concluded that ASIC's policies and procedures are
appropriate, and subject to a number of internal controls'.
Ms Belinda Gibson, Deputy Chairman, ASIC, elaborated, stating '[b]y and large,
as a result of the discussions with our stakeholders...we did not identify
Regarding ASIC's adherence to the Administrative Review Council's 20 best-practice
principles, the committee was advised that ASIC complies with all bar the two
principles concerning transparency and accountability.
However, the committee was informed that the review has prompted ASIC to
undertake several measures to improve the Commission's use of its coercive
powers. The measures appear to address the Administrative Review Council's
best-practice principles and the Institute's recommendations, and include
additional training for relevant ASIC staff, amendments to ASIC's internal
policies to include additional guidance regarding appropriate use of the
powers, and publication of guidance material and statistics.
As Ms Gibson further explained:
[w]e have committed to provide information in our annual
reports about the exercise of our coercive powers. That will be in this
upcoming annual report...We are close to completing a notice about transparency–that
is, setting out what our powers are, the scope for those powers and so on. At
the moment they appear at the bottom of our notices but we will put that on our
With regards to seeking information on a voluntary, rather than a
coercive, basis, ASIC stated that 'in terms of surveillance we generally take a
voluntary approach where possible'.
However, it was noted that a voluntary approach could not be taken where ASIC
is 'investigating a criminal prosecution or a civil prosecution', or in
circumstances where 'companies cannot do it voluntarily because they need a
direction of law to provide...information'.
The committee considers that it is best practice for regulators to
exercise powers necessary to fulfil their regulatory responsibilities in a
transparent and accountable manner. The committee also considers that
regulators should exercise powers cautiously, giving due regard to individual
rights and ensuring that the most appropriate power is utilised.
The transparent and accountable use of coercive powers is consistent not
only with the Administrative Review Council's best-practice principles but also
with the requirement, under section 1 of the ASIC Act, for ASIC to ensure that
information is available as soon as practicable for access by the public. The
committee encourages ASIC to disclose appropriate information regarding its use
of coercive powers without compromising its activities as a regulator. The
committee considers that it is appropriate for ASIC to make available, for
example through its annual reports, data regarding the incidence of ASIC's use
of its coercive powers, the kinds of powers used and the outcomes of the use of
those uses of power.
The committee notes ASIC's advice that the Commission is currently
implementing measures to significantly improve the transparency of its use of
coercive powers. The committee approves these measures, and will routinely revisit
this matter in future oversight hearings following the release of ASIC's annual
Australian financial services licences
The committee was informed that the Corporations Act contains a
presumption in favour of granting applicants an Australian financial services
licence (AFSL). Mr Price stated:
[t]he law basically says that ASIC must grant a licence
unless there are certain areas where we have reasonable grounds to think they
will not comply with the law or we have evidence that the a person is not fit
However, on the basis of evidence provided to the committee, it was not
clear that the presumption in favour of granting a licence undermines market
integrity. Mr Medcraft informed the committee that stakeholder due
diligence should be taken into account when considering risk:
Our system is a very free system and it is up to investors to
undertake their own due diligence very carefully as to who they deal with. That
is the nature of our system. Highlighting this is quite interesting because it
is important that people who are investors understand that if you are a
director or an AFSL holder the only judgement we can make is if, for example,
you have committed fraud or a monetary crime.
The committee was further informed of misperceptions amongst investors
and consumers of the significance of an AFSL, which may result from licensees
claiming their product or advice is 'ASIC approved'.
The committee is concerned with any confusion regarding the significance
of Australian financial services licences. Consistent with the Commission's
legislative responsibility to promote informed participation in the financial
market, the committee considers that it would be appropriate for ASIC to
publish information to address any such confusion.
The committee also notes ASIC's advice regarding the preconditions for
obtaining an Australian financial services licence. The committee will
subsequently raise this matter with ASIC to determine if the preconditions are
appropriate and adequate to promote the confident and informed participation of
investors and consumers in the financial system.
2.39 The committee recommends that ASIC amend its website to include an
explanation of the meaning and significance of holding an Australian financial
services licence. The information could also be usefully included on the
Freezing of investors' funds
The committee has continued to track the outcomes of the global
financial crisis 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
Mr Medcraft advised that as of November 2008, the value of funds frozen
totalled $22.5 billion. As of June 2011, the value of frozen funds totalled
$18.2 billion. The committee was further advised that, while the funds are
frozen, 'some of them are...actually providing limited access to the money,
such as quarterly withdrawal of money that has come in over time'.
The committee was informed that the significant increase in illiquid
funds, along with a resulting increase in the number of frozen funds, has
affected market behaviour. Mr Medcraft stated '[t]he sector...is actually
really trying to restructure because they basically want to win back the trust
and confidence of investors.'
The committee was also informed that the lessons of the global financial crisis
regarding freezing of investors' funds are informing market regulation. In
March 2011, ASIC advised that the Commission is 'consulting on benchmarks for
the future of the mortgage trust sector' to determine measures that can be
taken to promote 'a more robust sector for the future'.
At the hearing on 24 June, ASIC confirmed that the Commission is 'in the
process of issuing a new regulatory guide to really focus on PDS [product
disclosure statements] disclosure in terms of when you invest in a mortgage
The committee considers that, consistent with the legislative
requirement to promote the confident and informed participation of investors
and consumers in the financial system, ASIC's functions must include
disseminating information regarding the possibility of funds being frozen and what
options are open to investors should this occur.
The committee notes that in May 2010 ASIC released an information sheet for
investors in frozen funds, which particularly included information for
investors in funds frozen as a result of the global financial crisis.
While this is a significant step in ensuring investors are appropriately
informed, the committee considers that such information should be given to potential
investors as an aid to making fully informed investment decisions. The
committee therefore approves the measures ASIC is taking to improve disclosure
regarding frozen funds.
The committee considers that the significant volume of funds frozen as a
result of the global financial crisis provides a substantial opportunity to
assess whether the rules regarding frozen funds in the Corporations Act are operating
effectively. The committee will continue to raise this matter with ASIC, to
determine if improvements can be made to the operation of the Corporations Act.
Mr Bernie Ripoll MP
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