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Issues raised with ASIC
The committee discussed a number of issues with ASIC at its oversight
hearings on 23 June and 24 November 2010. These included:
Expansion of ASIC's responsibilities;
- ASIC's response to the collapse of Storm Financial;
- Issues arising from the Global Financial Crisis (GFC):
Potential for a unique client identifier system
- Freezing of investor funds
- Regulatory reform;
- Complaints handling; and
Expansion of ASIC's responsibilities
ASIC's regulatory responsibilities have increased over time. Recently, ASIC
has assumed responsibility for the following functions:
- Market supervision;
Regulation of consumer credit; and
National Business Names Register.
On 1 August 2010 ASIC took over responsibility from the ASX for
supervision of real-time trading on Australia's domestic licensed markets. The
ASX has retained the 'issuers function, the listings function and the
continuous disclosure function'.
To enable real-time trading supervision, ASIC has an integrated market
surveillance system (SMARTS) in place, which mirrors the system used by the
ASX. A number of ASX surveillance staff moved across to ASIC on 1 August:
...23 or about that number came from the ASX. We already had
a number at ASIC who had been at ASX in the past and we have others with market
As noted in an earlier committee report, it was considered that the new
arrangement would 'counter perceptions of conflict of interest faced by the
ASX' in its dual role of market operator and watchdog. It was noted that the
perception could be exacerbated when competition for domestic trading markets
services is opened up. Had the change not been made, ASX would have had oversight
of its competitors.
Ms Belinda Gibson, Deputy Chair, ASIC, informed the committee that the
transition from the ASX to ASIC went according to plan. She reflected
positively on the process to-date:
The integration process has gone well over the last four
months and we are now at the position where we are monitoring the market
real-time. We are assessing an average of about 300 alerts a day where there is
some questionable activity or questionable conduct that requires greater
Ms Gibson noted that, with respect to monitoring of broker conduct, 'the
time from identification of a problem through to formal investigation has
decreased' since ASIC took on this supervisory function. As she observed:
That is a benefit of the change in supervision program. It is
telescoping the analysis ASX did and the analysis we did into the one exercise.
While it is expected that further efficiencies will be achieved, Mr Tony D'Aloisio,
Chairman, ASIC, commented that it would take another six to twelve months
before the benefits of the new arrangements can be fully assessed.
The committee has noted that ASIC is consulting on reforms to market
structure and surveillance; this was foreshadowed in one of the oversight
The consultation paper was released in November 2010. The media release for the
consultation paper lists the following proposals for reform:
new controls to curb extreme price movements and to
require transparent cancellation arrangements – [ASIC's] response to the
enhanced controls for direct electronic access and
algorithmic trading – in response to the increasingly pervasive role of
formal obligations on market participants – to deliver
best execution to clients
minimum disclosure about order and trade information –
to promote efficient price formation on markets and reduce incentives for
trading to shift to ‘dark pools’
consolidation of market data across all execution venues – to ensure whole of market transparency
market operator cooperation on trading halts and related
better regulatory data on orders and trades – to
ensure ASIC's market supervision keeps pace with market developments.
The committee understands that discussions with stakeholders are continuing,
but that there may be resistance to aspects of ASIC's proposals in some areas
such as the regulation of dark pools.
Dark pool regulation is an important emerging policy issue, which is causing
concern for regulators internationally,
and which the committee understands is also currently being examined by the
International Organization of Securities Commissions (IOSCO), of which ASIC is
The committee has also noted the first market supervision report issued
by ASIC since taking on market supervision responsibilities. The report states
that the pattern of trade surveillance alerts is consistent with that received
by the ASX prior to the handover of responsibilities.
The report does not indicate whether there have been changes in the number of
cases that are subject to initial investigation (91) or referral to a
Deterrence team (17), but states that the turnaround time has improved.
Regulation of consumer credit
In 2008 the Council of Australian Governments agreed that the regulation
of consumer credit would be transferred from the states to the Commonwealth. Dr Peter Boxall AO,
Commissioner, ASIC, explained that:
The states and territories have been operating under the
Uniform Credit Code, and this has been enforced with varying degrees of rigour
in terms of licensing and surveillance...[T]his is moving across to the
Commonwealth, and ASIC will be responsible for the licensing and monitoring of
In October 2009 the National Consumer Credit Protection Bill 2009 was
passed. It established a new single, federal regulatory framework for the
regulation of consumer credit and finance broking. This function requires ASIC
to licence credit providers and monitor compliance with the National
Consumer Credit Protection Act 2009.
ASIC explained that in order to make the changes known and understood by
stakeholders it conducted 'Australia-wide roadshows' in regional areas as well
as capital cities. Along with this ASIC has released several regulatory guides
to assist industry in compliance with the new requirements.
Mr D'Aloisio provided the committee with an update of registration and
licence applications and further reported that:
the team in the next 12 months will be looking at the margins
to see if there are areas where people should have applied that did not and whether
they need to take any action. We can get a fuller answer on this, but I tend to
think it is very much at the margins, by and large, when you look at the number
of registrations, we are not expecting that all those registrations are going
to convert to licences. The take-up rate of the licences is probably going to
be much less, which will give us a clearer picture of the number of real
providers in the market going forward.
National Business Names Register
From April 2011, ASIC will be responsible for the National Business
Names Register, in effect taking over responsibility from the states and
territories. The register will be an online service, hosted by the Australian
Business Register, for registration of Australian Business Numbers and business
ASIC informed the committee that the register is a 'significant project'
that will increase ASIC's registered and related transactions.
The overall resource implications are being assessed:
We are working on a
workforce plan to identify the resource requirements that are going to be
needed for the delivery of the business name service in the first three years
post commencement with ASIC.
ASIC advised that implementation of the register is on track for
Consumer protection – additional
From 1 July 2010—as part of the new Australian Consumer Law—ASIC took on
responsibility for administering laws to deal with unfair terms in consumer
contracts for financial products and financial services.
ASIC was also given additional enforcement powers to deal with conduct that
contravenes the consumer protection provisions of the ASIC Act.
At this stage, ASIC's adoption of the additional functions discussed
above appears to have occurred relatively smoothly. The committee commends ASIC
on its planning and management of these new arrangements.
The committee recognises that there are synergies between some of ASIC's
functions, which give some room for re-directing internal expertise across
functions on a needs basis. In the case of market supervision, expertise has
also been transferred from the ASX to ASIC. At the same time, the committee
notes that an expanding portfolio of responsibilities carries with it risk—in
particular, the potential dilution of resources and expertise.
The committee will continue to track the progress of these new functions and
their impact on the overall performance and resourcing of ASIC. It will talk to
ASIC in 2011 about the equity market structure regulatory framework.
ASIC's response to Storm Financial
Since its 2009 report Inquiry into financial products and services in
Australia, in which the committee considered the collapse of Storm
Financial Ltd, the committee has followed ASIC's investigation into the
collapse with considerable interest. Consequently, the committee asked ASIC to
provide an update on this matter at the public hearing.
With an announcement pending on the Friday following the hearing and
ASIC Board discussions still in progress prior to the announcement, ASIC was
unable to provide the committee with a detailed update. However Mr D'Aloisio
did assure the committee that Friday's announcement would be a 'definitive
statement' on whether a commercial resolution has been achieved or whether
there would be further investigation or litigation.
The committee notes that ASIC duly announced on 26 November that it
would bring civil penalty proceedings against directors of Storm Financial Ltd
and would commence legal proceedings against various parties, including Commonwealth
Bank of Australia Limited, Bank of Queensland Limited and Macquarie Bank
Limited 'seeking compensation for investors arising out of the collapse of
Storm', unless a settlement could be reached in a final three-week period.
No resolution was reached, so on 22 December 2010 ASIC announced that legal
action had commenced.
Issues arising from the Global Financial Crisis
Unique client identifier system
At the April 2010 hearings, the committee sought ASIC's view regarding
the feasibility of a unique client identification system for the Australian
market. ASIC advised that the issue is 'very, very significant', and
undertook to provide further information at the June 2010 hearings.
ASIC outlined the client, or broker, identification systems in Canada,
the United Kingdom and the United States. Ms Gibson advised:
There is no country in the world that has a unique client
identifier system at the moment, in the sense that every time client A trades
they have to tell their broker, whichever broker or intermediary it is: ‘My
number is 572’, and that tracks through the market.
Ms Gibson reported that the US Securities and Exchange Commission has
estimated that implementing such a system in the United States would cost US$4
billion upfront, with annual ongoing costs in excess of US$2.1 billion. Under
the US proposal, the main costs would fall to brokers and clients.
ASIC informed the committee that preliminary discussions about implementing
the system in the Australian market have occurred,
however additional consultation and analysis is required:
The greater opportunity for us to talk to the market on this
issue will be as we move into the consultations around competition for trading
services. That would be the time to probably talk about this issue more. We
need to be careful here. Our markets are operating well, have been operating
well and, if we are going to introduce a change such as this it needs quite a
lot of thought and a lot of discussion.
Freezing of investors' funds
In late 2008, in light of the GFC, a significant number of investors'
funds were frozen. Under the Corporations Act 2001, managed investment
schemes are required to freeze redemptions if the scheme ceases to be liquid.
Therefore, the capacity for investors, who ordinarily have an ongoing or
periodic right to redeem their investments, is suspended.
At its November 2010 hearing, the committee sought an update on this
issue. Mr D'Aloisio explained that mechanisms were put in place to ease the
burden on the unit holders:
We allowed what we called hardship relief—that is, in certain
circumstances, unit holders could withdraw their money ahead of other unit
holders, otherwise, under an illiquid scheme you can only take it out in equal amounts...The
funds themselves are trying to work through a way of, over time, rolling out
these investments so that the unit holders get their money back dollar for
dollar, but we think that is going to take two to five years to work its way
Mr Greg Medcraft, Commissioner, ASIC, observed:
Commercially, I think, it is in the industry’s best interests
to try to get money back to those people who want their money as soon as
possible, because otherwise investors basically are not investing in those
mortgage funds. So there is quite a commercial driver there as well to try to
win back confidence from investors.
ASIC provided the committee with a table containing statistics on the
number of schemes that were frozen and hardship relief, including the number of
Summary – All frozen
Estimated total number of
schemes that were frozen
– restructured, in the process of being wound down or wound up and/or
Remain frozen but offers
Remain frozen and offers no
withdrawal (primarily comprised of frozen property schemes)
Number of schemes applied
for hardship relief
Hardship Relief – total
number of applications received as at Dec 2010
Hardship Relief – total
number of application paid as at Dec 2010
Hardship Relief– total
amount paid under hardship relief as at Dec 2010 ($ million)
Total amount paid under hardship relief as a % to total assets
under management (AUM)
Mr D'Aloisio summarised the reforms, which followed from the GFC, noting
that on a domestic level the government has:
- Reformed the margin lending provision;
- Introduced the national credit regime; and
- Is in the process of reforming the financial advice area.
Mr D'Aloisio noted that because of Australia's relatively robust
systems, international reforms have had less of an impact on Australia.
Nonetheless, reform has occurred in the following areas:
'Changes to short-selling and improved disclosure'; and
- Changes to the credit rating agencies.
Along with this, there are currently proposals concerning improved
disclosure, hedge funds and improved regulation of securitisation.
Mr D'Aloisio observed that the areas of reform adequately capture or
respond to the issues arising from the GFC:
From an ASIC perspective, I think those two streams are
addressing the sorts of issues that we have seen emerge. From our point of
view, we have not at this stage made other suggestions to government outside
those two streams on what is needed or what additional reform is needed.
complaints-handling responsibilities and processes were considered at the
committee's oversight hearing on 25 November 2009. The committee noted that it
would seek further information about ASIC's capacity to receive and resolve
that it receives approximately 13,000 to 15,000 complaints per year. Following
the commencement of ASIC's role in monitoring compliance with the National
Consumer Credit Protection Act, from
July – November 2010 ASIC received 999 credit complaints from both consumers
and industry. The committee noted the general trend, reported in ASIC's 2009-10
Annual Report, for the number of complaints to increase per year. ASIC agreed
that a future annual report will comment on the trends in complaints received.
sought information about whether ASIC has in place measures to continuously
improve its complaints handling processes. Dr Boxall informed the committee
that additional resources have been allocated to the complaints area in
response to ASIC's new consumer credit responsibilities.
ASIC is continuing to monitor the resources required to respond to consumer
The committee was also informed that ASIC has opened a new, small call centre
ASIC also advised
that new procedures to track and report complaints have been introduced,
including revised call centre scripts in the market participant area. The
committee was advised that the ASIC's analysis of the kinds of complaints
received informs other areas of practice, including retail investor education
and feedback provided at stakeholder meetings.
Dr D'Aloisio explained:
the learning, development and experience are occurring both
in the handling and in the output about how that information is used to try and
improve the market and the market players.
It is essential that complaints continue to be appropriately addressed
and accurately recorded. The committee notes with approval ASIC's commitment to
continuously improve its complaints-handling process, and to use the
information gained through the process to improve other areas of responsibility
and service delivery. The committee notes the general trend for the number of
complaints to increase per year. The committee would welcome explanation of the
underlying cause of the trend.
ASIC provides resources to help improve financial literacy. The
committee was informed that ASIC's financial literacy program, which is
developed in consultation with the Australian Government Financial Literacy
Board (FLB), contains four streams:
We have a number of targeted education initiatives which use
the existing educational pathways. We have a number of tools, access to useful
and independent tools that investors could use. We look at other ways to
enhance the financial understanding, and finally we work with other groups like
consumer groups to better educate.
ASIC's financial literacy program are funded from within ASIC's
The direct cost of the financial literacy programs in 2009-10 was
$4 897 915. This does not include associated support costs, such as
IT, finance, corporate affairs and human resources.
ASIC is 'the secretariat and facilitator' of the FLB.
The committee raised with ASIC the question of what populations need attention
when targeting financial literacy activities. The committee notes that ASIC has
undertaken to raise this for discussion at the next meeting of the FLB on 31
The committee was also informed that ASIC plans to expand the financial
ASIC coordinates its financial literacy work with a range of other
bodies, particularly 'FaHCSIA, Centrelink, NICRI, Departments of Education, the
Australian Defence Force, the ATO, ACCC and community and industry associations'.
The committee was particularly interested in financial literacy amongst
retirees, who may be investing large sums. ASIC has indicated that it is 'currently
planning a guide to retirement, on which we are working closely with FaHCSIA
and NICRI and may co-brand the publication'.
Mr D'Aloisio explained that the services are reviewed, including through
focus groups and feedback sessions, to determine their effectiveness in
promoting financial literacy.
For example, monitoring of the FIDO website indicates that the service is an
'extremely well-used tool', with the website receiving approximately 1.5
million hits in 2008-09.
This grew by 50 percent to nearly 2.2 million hits in 2009-10. Beginning in
March 2010, ASIC began to measure how many of the hits on FIDO pages were from
new visitors. In March-June 2010, around three-quarters of visitors to the site
Mr Bernie Ripoll MP
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