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Issues raised with ASIC
The committee discussed a number of issues with ASIC at its oversight
hearing on 25 November 2009.
- ASIC's processes for handling complaints about corporate
- new credit regulation responsibilities for ASIC;
- developments in professional indemnity (PI) insurance;
- frozen mortgage funds;
- the committee's recent recommendation for a professional
standards board to oversee standards for financial advisers;
- ASIC's failed One.Tel prosecutions; and
- insolvency matters.
ASIC's responsibility for regulating corporate behaviour includes taking
surveillance, investigative and enforcement action following reports to ASIC of
alleged misconduct. The committee's 2009 inquiry into financial products and
services raised a number of concerns about ASIC's investigative processes.
Claims put to the committee during that inquiry include that ASIC's threshold
for investigative action is too high, that surveillance is ineffective and that
the organisation resolves issues too slowly.
The committee was particularly interested in ASIC's process for handling
complaints received about misconduct and suspected legislative breaches under
ASIC's regulatory control.
Complaints are received by a variety of mechanisms, including by
telephone, by email and by letter. ASIC's call centre at Traralgon handles a
total of around 700,000 calls per year.
According to Mr D'Aloisio, Chairman of ASIC, the centre staff receive
specialised training and support to enable them to respond appropriately to
There is a lot of training. For particular types of
complaints they will have issues that they need to handle and they will be
trained in how to handle them so that if something comes up on an issue we know
there will likely be a lot of complaints about a lot of initial work will be
done. They are given briefing notes. They are able to call in from where they
are sitting to have a query answered and then go back online to answer the
caller. There is a lot of training and development in handling the calls.
ASIC informed the committee that misconduct and breach reports, or
complaints, are addressed by 95 full-time equivalent staff. In 2008-09, ASIC
received 15,300 such complaints—up 17 per cent from the previous year. ASIC
attributed this increase in complaints to major collapses and the recent market
ASIC indicated that it has changed its complaint handling processes in
recent times to ensure greater involvement by staff at senior levels:
...we made changes...as part of the restructure to introduce much
more direct accountability for the complaints at the very senior levels of the
organisation...if a complaint is referred to one of the stakeholder or deterrence
teams, it is part of the KPIs of the senior leader of that team to get
involved, assess and form a view as to whether or not there could be a smoking
gun or an issue that is of broader significance than it might at first seem.
That has added a layer of responsibility at the senior level
so that these matters are not pushed down in the order. That system is working
well. Our leaders are taking the responsibility for dealing with the more major
ASIC told the committee that its service standard is to acknowledge each
complaint within one day of receipt and, further, that it has a target of
turning around 70 per cent of complaints within 28 days. ASIC indicated that it
met this target during the last annual reporting period.
The committee was interested in whether ASIC tracks complaint statistics
or searches for patterns in the complaints received. ASIC told the committee
that it relies largely on its analysts to discern patterns:
It is not software that would do it. It is really based on
the people doing it and the people in charge of the area looking for those
patterns in complaints when they analyse it on keywords.
The committee also questioned ASIC about how complaints are subsequently
followed up in the field, including the numbers and qualifications of field
officers, and the processes by which those officers conduct their work. ASIC
undertook to provide the committee with information on notice but indicated
that, in order to protect ongoing operations and investigations, it might not
be appropriate to comment publicly on some processes.
The additional information provided to the committee about complaint
handling processes is presented in Appendix 2 (see responses to Questions on
Notice 10 and 11).
The committee remains keen to learn more about ASIC's capacity to
receive and resolve complaints, in order to reassure itself that complaints
raised by members of the public are being recorded accurately and are being
addressed in a timely and appropriate fashion. To this end, the committee will
seek to make arrangements to visit ASIC's call centre in Traralgon during the
first half of 2010.
The committee would welcome enhanced public reporting by ASIC, wherever
possible, of the steps it has taken to deal with complaints and the resolutions
reached. Anecdotal reporting to the committee suggests that a common cause for
concern by complainants is that they are not sufficiently advised of the
progress or outcome of their complaint. The committee encourages ASIC to do
better in this regard, although it does acknowledge ASIC's need to protect the
integrity of its investigations and its investigative processes.
The committee would also appreciate receiving ongoing briefings from
ASIC regarding any trends or patterns in complaints received, as this may help
to flag regulatory inadequacies or concerns in advance of future corporate
collapses. The committee will continue to raise this matter with ASIC at future
ASIC gained a number of additional responsibilities with the 2009
passage through parliament of the national consumer credit reforms, which
establish a single, federal regulatory framework for consumer credit. ASIC's
responsibilities under the new arrangements include licensing consumer credit
providers and being the national regulator of the new code. Licensees will be
required to adhere to responsible lending conduct requirements, prohibiting
lending that is unsuitable to the consumer's needs and that the consumer does
not have the capacity to repay. The commencement of these reforms will be 1
ASIC described the preparations that have been taking place to ensure ASIC
and consumer credit lenders are ready for the new arrangements:
In terms of the credit reform legislation at the moment, our
preparatory work on that through the various consultations on what we are doing
is really very much about getting registration, getting licensing on foot and
waiting for the terms of the legislation to be finalised and then consulting
with the market on regulatory guides on these sorts of issues. We have issued a
regulatory consultation document, for example, on responsible lending as an
initial indicator of what we would be looking at. I think a lot of this work is
going to be in the first half of the next financial year.
The committee was informed that ASIC is 'going to be ready for the
changeover' on 1 July 2010:
A lot of the work that we have been doing with our task force
that has been established and dedicated to this area has really been to be
ready with the licensing and registration requirements. We are also dealing ...
very much with the states to ensure that there is a smooth transition from each
agency of a state to ASIC. We have put in place a phased recruitment program
for some 200 new people.
We have concluded...a number of draft regulatory guides that
we are publishing progressively, and we will be publishing those from Christmas
on, including registration and licensing kits. We are also managing to ensure
that we are going to be ready with deterrence actions and complaints handling
actions that are going to be needed from 1 July with the people who we are
The committee welcomes the new protections that the national consumer
credit regulatory framework will bring to consumers and is encouraged by ASIC's
statement that it will be ready to manage the framework from 1 July 2010.
However, the committee notes that this is a substantial task to add to ASIC's
existing workload and will be seeking information and reassurance from ASIC at
future oversight hearings about how it is balancing its new responsibilities
with its existing responsibilities and ensuring appropriate resource
There have been continuing problems with financial services licensees
accessing the required level of compulsory professional indemnity (PI)
insurance cover. Because of a lack of availability of automatic run-off cover
in the market—that is, cover for claims made after the policy has ended, for
acts and omissions during the period of cover—ASIC has now removed the
requirement to obtain this particular cover.
Although ASIC recognised the industry's concerns about the availability
of PI generally, and acknowledged that they are 'nervous' about the situation, they
commented that 'on balance we think it is still working', as well as noting
that cover is still available to the threshold set by ASIC:
Our information on the research we have done at the moment is
that it is still possible for PI to be obtained by AFS licence holders in basic
cover on the limits we have set. We are not seeing a difficulty. We did see a
difficulty in relation to not being able to get run-off insurance and we have
come in with modifications and we are consulting on modifying that and removing
it because there is no point insisting on a requirement that the market will
not meet, because the market will not meet it.
Increases in premiums are not considered justification for making PI
...there is, no doubt, lifting of premiums to do both with
the market and with the issues of increased liability. But we are not at the
point where we are going to say to government that we really have to move away
from the PI insurance system or make it voluntary. The difficulty with making
it voluntary is that clearly if it is voluntary you will get some who will use
it and some who will not.
ASIC did not agree with the suggestion that the increase in the
Financial Ombudsman Service compensation limit had caused the tightening of PI
There is no doubt that if you increase the liability, the
amount that can be recovered, that must have some impact on premiums, but is it
the reason that policies are hard to get? That is not our experience. Our experience
is that you can still get PI insurance and that the advisors are still able to
get PI insurance. The scheme and the increase from $250,000 or $280,000 I think
have not cut in as yet. It will cut in a little bit later and we will monitor
it. But at this stage our position would be that that is not the issue you
could blame for why the market for PI insurance is tightening.
The committee was told that the increased compensation limit was
Last year, when we did the consultation on lifting the limit
to $280,000, we felt that the $100,000 or $150,000 was just too low, given the
nature of the claims that were coming through. We also felt that it seemed
unfair, for example, if you had invested $200,000 instead of $100,000 in Westpoint
you would be precluded from recovering because you were above the limit. It
seemed to us that having a limit of a potential claim of $500,000, of which you
could recover $250,000 or $280,000, was a better approach than leaving the
limits that were there at that time; and also balancing up the additional cost
for the licence holder on that. Clearly there would be a cost associated
because you have got to pay out higher limits than you otherwise would.
...it does add a cost to the lender because—depending on
whether they are insured or not—they are going to pay out a higher amount and
if they are going to insure it that may well reflect in their premiums. But I
just would not be convinced ... it is the reason why PI insurance may or may not
be available to that whole market. There are other considerations that are at
The committee continues to hear anecdotes from financial services
licence holders that PI insurance cover is becoming difficult, or prohibitively
expensive, to obtain. The committee requests that ASIC monitor this situation
actively, including by checking the availability of insurance cover in the
marketplace from time to time, and report back to the committee at future
Frozen mortgage funds
The freeze on redemptions from cash management trusts and mortgage funds
continues. As noted in the committee's previous oversight report, ASIC has
provided regulatory relief to enable withdrawals from frozen funds on hardship
The committee heard that a number of payments had been made under the
hardship measures. ASIC stated that 2786 applications had been made, with 2293
of these granted:
...the amount applied for was $99 million. The amount paid
out was $58 million and each applicant received somewhere in the order of
$6,000 to $264,000.
...it is an average of $25,000 per applicant. Interestingly, on
those figures, of the 100 per cent of the applications, 82 per cent did receive
hardship relief, so you are getting a high rate of those who apply for hardship
being met by the trustees as genuine hardship and the amount is paid out.
ASIC informed the committee that frozen funds still amount to around
$17 billion to $20 billion.
Some redemptions have been possible for fund members in situations where
the funds have managed to accumulate and pay out monies on a pro-rata basis.
ASIC stated that around $2 billion had been withdrawn by investors through such
redemptions, and noted:
...if the market gets confident and retail investors come
back to the mortgage trust sector they will provide the necessary additional
inflow of funds to enable others to redeem and so on.
However, the freeze has restricted funds' ability to attract new
investment and to return monies to members wishing to exit. There was an
acknowledgement that the situation would continue for some time:
When you move into the unlisted areas of mortgage trust,
property trust, management investment schemes and so on, the experience of the
last couple of years is such that retail investors are going to be quite wary,
with or without financial advice, to go back into those areas. It is something
that we have to monitor. I think it is important for the markets long term that
we have these alternative forms of investment, but it is going to take time for
them to come back.
The committee asks that ASIC continue to monitor this situation closely
and provide relevant updates at future oversight hearings.
Professional standards board
The committee's recently tabled report on its 2009 inquiry into
financial products and services included a recommendation proposing the
establishment of an independent, industry-based professional standards board to
oversee nomenclature, competency and conduct standards for financial advisers.
The committee proposed that ASIC immediately commence consulting with industry
on the scope of this body and how the regulator would work in conjunction with
At the subsequent oversight hearing, ASIC suggested to the committee
that the recommendation was a sound idea conceptually but would require further
We need to look at the feasibility of it, who is going to
fund it, the costs, who goes on it, what is the relationship between that board
and ASIC’s role. There is a lot of value in the proposal, conceptually it is a
very good proposal, but we have to do a lot of work and we have to look at the
money side and budgeting, and that is going to take us a bit of time.
The key is to come up with a structure and a set of training requirements
that are going to be flexible enough to deal with the range of intermediaries
that we are talking about. You have your financial planners, mortgage
brokers—there are a lot of people to the markets that are subject to training
As discussed in detail in its report Inquiry into financial products
and services in Australia,
the committee is unanimously and strongly of the view that a professional
standards board overseeing conduct standards for financial advisers should be
established. This reform would increase professionalism within the industry by
ensuring that those wishing to call themselves 'financial advisers' or
'financial planners' would be required to obtain board membership and adhere to
its standards. An industry-based, independent professional standards board,
working in conjunction with ASIC, would establish, monitor and enforce
competency and conduct standards amongst members and have the power to sanction
or remove those who do not comply.
The committee acknowledges that ASIC would need to work closely with a
professional standards board to avoid duplication and overlap of their
respective oversight functions.
The committee looks forward to receiving advice from ASIC at a future
oversight hearing about how this proposal could be taken forward.
Criticism of ASIC-initiated court actions
Just prior to the committee's hearing with ASIC, the regulator had been
heavily criticised over its handling of the prosecution of One.Tel directors
Jodee Rich and Mark Silbermann. ASIC had sought to fine the two and have them
banned from running companies, on the basis that they had misled the One.Tel board
about the company's true financial position. However, the NSW Supreme Court
found against ASIC, stating that ASIC had failed to prove any aspect of its
ASIC told the committee that it is reviewing the 3000 page judgment and
had not yet made a decision on whether to appeal. ASIC could not provide the
committee with a definitive answer to the question of the cost of running the
Despite the disappointing result, ASIC suggested that bringing these
sorts of cases served an important educational and deterrence role:
...this sort of case brought into focus the duties of directors
and officers leading up to a potential insolvency of a company, so it had
important public interest aspects.
Subsequent to the committee's November oversight hearing, ASIC has come
in for further criticism of its handling of cases against Mr Andrew Lindberg,
former managing director of AWB. Supreme Court Judge Justice Robson described
ASIC's attempt to bring a second round of proceedings against Mr Lindberg as
'an abuse of process'.
In late December 2009, ASIC's proceedings against Fortescue Metals Group
Ltd and Andrew Forrest were also dismissed. ASIC has not yet made a decision
about whether to appeal. 
The committee acknowledges that it is part of ASIC's role to recommend
the prosecution of difficult cases and test cases, and that it is not realistic
to assume that all such cases will be successful. The committee further
acknowledges that the case against the One.Tel directors has been on foot for
some years and that, since those prosecutions were first initiated, ASIC has
undergone both significant internal restructuring and changes in leadership.
The committee accepts that, faced with a similar situation now, ASIC might take
an alternative approach.
However, the criticism of ASIC's recent approach with regard to the AWB
prosecutions suggests to the committee that there is still room for ASIC to
improve its processes. The committee requested that ASIC provide additional
breakdowns on notice with regard to the success rate of its prosecutions during
2008-09 (see Appendix 2, Questions on Notice 2, 3 and 4) and will continue to discuss
this matter with ASIC at future oversight hearings.
The committee notes ASIC's announcement on 17 December 2009 that it will
appeal against both the One.Tel and the AWB findings.
ASIC is responsible for enforcing the provisions of the Corporations
Act, including those pertaining to insolvency matters. Under section 206F of
the Corporations Act, ASIC may disqualify someone from managing a company if
they have been involved in two or more failed companies. ASIC told the
...in 2008-09, we banned 44 such directors that had appeared
in two or more companies under section 206 of the Corporations Act. We are very
alive to that issue, stopping the companies from coming back indirectly through
bannings, as we did in the Somerville case, and through our surveillance
processes undertaken by our insolvency team.
The committee also heard that ASIC had introduced a 'new electronic tool
to sweep its registers to detect director candidates for disqualification under
s206F of the Corporations Act'.
That goes to the issue of where you have been a director of
two or more insolvent companies. We are trying to make sure we are getting that
information. There is a flag that comes up and says ‘Have a look at this
person, they have appeared in more than two, so have a look and see’. And that
might then lead to a banning.
The committee was also interested in ASIC's handling of complaints about
the conduct of insolvency practitioners. ASIC stated that it was investigating
the extent of problems in this area:
At the moment we are doing an exercise on assessing the
significance of complaints that we receive in this area; whether there is a
trend or not, or whether they are still quite isolated. They seem to us at the
moment to be quite isolated. They do not seem to have a pattern. The commission
met yesterday and we looked at a range of new initiatives that we endorsed.
This initiative around looking more closely at complaints relating to
insolvency practitioners about remuneration, independence and so on is
something that we are putting resources into. We will be doing a lot more work
on that in the short term.
It is an ongoing concern of the committee that ASIC is, or is seen to
be, reactive rather than proactive in enforcing the provisions of the
Corporations Act. It is often of little comfort to investors when ASIC takes
action after a company collapse; it would be preferable to build regulatory and
enforcement systems that aid in preventing collapse in the first place.
Therefore, the committee welcomes ASIC's efforts to proactively identify
directors who have been involved in multiple company failures for additional
The committee notes that an inquiry related to insolvency matters is
being undertaken by the Senate Economics References Committee. On 25 November
2009 the Senate referred to that committee an inquiry into liquidators and
administrators. The Senate Economics Committee will investigate the role of
liquidators and administrators, their fees and their practices, and the
involvement and activities of ASIC, prior to and following the collapse of a
business. The Joint Committee awaits the findings of that inquiry with interest.
Mr Bernie Ripoll MP
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