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Chapter 2 - Issues raised with ASIC
The committee's hearing with Australian Securities and Investments
Commission (ASIC) officials on 12 June 2007 included discussion on a number of
issues relating to ASIC's regulatory responsibilities. The main issues that were
discussed are considered in this report. These include:
- property investment scheme collapses;
- bank conduct and dispute resolution procedures;
- professional indemnity insurance for planners;
- ASIC's review of the EFT Code;
- superannuation advice and ASIC's shadow shopping survey; and
- ANAO report on ASIC's investigation procedures.
The committee notes that a number of these issues were discussed with
ASIC officers at the Senate Economics Committee's budget estimates hearing on 30 May 2007. As the two hearings occurred within a two week timeframe, many committee
members had taken the opportunity to follow up on some of these matters at the
committee's ASIC oversight hearing shortly after. Consequently, this report has
drawn on evidence taken during budget estimates where it has provided the basis
for discussions at the hearing relevant to this report.
Property investment scheme collapses
Following the Westpoint collapse in late 2005, the committee has repeatedly
expressed its concern that other similar schemes may encounter solvency
Unfortunately, since the committee's last ASIC oversight hearing two further
property investment schemes have collapsed, owing in excess of $500 million
In March 2007 the Fincorp group of companies collapsed
owing 8000 investors $212 million. Fincorp raised monies through first
ranking (secured) notes and unsecured notes. Of the money owed to investors
$178 million is owed to secured note holders, who are expected to receive
returns of 30 cents in the dollar. Unsecured note holders are not expected to
receive any return. According to ASIC, Fincorp encountered trouble with its
business model between August and November 2006, when it became apparent that
without raising further money the companies would run out of cash. When
property valuations did not support additional borrowing the group decided to
go into voluntary administration. ASIC has indicated that it had previously
placed a number of stop orders on Fincorp prospectuses for inadequate disclosure.
Australian Capital Reserve (ACR) collapsed shortly after in May 2007. It
had raised $327.7 million in unsecured 'Deposit Notes'. ASIC indicated that the
business model was similar to that of Fincorp and that it had also issued a
number of stop orders on ACR for inadequate or inaccurate disclosure.
The committee notes that as this report was being finalised another high
risk property investment scheme, New Zealand based Bridgecorp Holdings,
collapsed in circumstances not unlike the other three cases. The collapse has
left 18,000 investors facing losses of up to $450 million. The group raised
money from investors in both Australia and New Zealand offering 'term
investments' with returns reported to be between 9 and 11 per cent. It loaned
the money raised from investors to property developers at a much higher rate.
Within days of the collapse nine companies in the Australian arms of the group,
including Bridgecorp Finance which reportedly has $27 million of debentures and
unsecured notes issued to Australian investors, were placed in receivership.
The remittance of $3.7 million from the Australian arms of the group to the New
Zealand entity, in possible breach of the Corporations Act, has been referred
to ASIC for investigation.
New preventative measures
At the Senate estimates hearing on 30 May 2007, ASIC indicated that the $8 billion unlisted and unrated debenture market, representing 1.5 per
cent of the total debt securities market, will be given additional attention.
The Westpoint, Fincorp and ACR schemes are part of this sector. A three point
plan was outlined by new ASIC Chairman, Mr Tony D'Aloisio:
the business models of existing schemes.
with/guide proposed new schemes to add protection to business models and
investor education programs.
ASIC also advised that it is using an external property expert and
valuer to advise on changes the regulator can make to the way in which it
reviews prospectuses for these sorts of companies.
From the perspective of improving investor education, ASIC told the
Senate Economics Committee that the attraction of such schemes reflected
imperfect knowledge amongst investors:
There is probably not as great an understanding about how
franked dividends work for yields on shares, compared with 9.5 per cent. If you
have a five per cent yield on shares, you might say, ‘That is only five per
cent.’ When you put your franking credits into that, it makes a difference.
Then you have your capital gain and how you factor that in. They are the things
that need to be reduced to very simple rules, and I think they will go a long
way to dealing with these sorts of issues. You would expect in a market with
perfect knowledge that the $8 billion debenture mark that we are talking
about—if it were high risk, unlisted and unrated—would no longer be preferred
by the market and they would move to other forms of investment. It is the
imperfect knowledge at the moment that must be in part driving that sector.
ASIC indicated that ascertaining the reasons why these unsecured products
have attracted investors is a priority:
...we are looking very closely at what was the investor profile,
but more importantly we are also looking at what motivated the decision, what
were the decision points; the extent and role advertising played; advice, where
they sought the advice, where they did not; how they characterised an unlisted,
unrated debenture, unsecured note compared to a term deposit; was there
ASIC also elaborated on its plan to establish whether the business
models used in this sector are inherently flawed. It warned, however, of the
precarious nature of the task:
...the business model itself has to be stress-tested, but what
we do not want to do is to fall into making a mistake of overreacting and then
there are a lot of probably very valid and proper investments and raising of
capital out there that we then have an implication for and cause a run-on. We
have to be quite careful about how we go forward on analysing this business
model and trying to pinpoint if it has a flaw.
Identifying the motivations for people entering into risky investment
propositions and establishing whether or not the business model behind them are
flawed are both welcome initiatives. The former will assist in tailoring educational
programs to warn potential investors of the financial risks, while the latter
is an essential step in determining how to avoid similar schemes also
collapsing, or at least mitigating any inevitable losses.
However, the committee is of the view that the current strategy should
have been triggered by the Westpoint collapse in 2005, rather than waiting
until further predicted collapses occurred.
Adequacy of past action
As well as questioning the various aspects of ASIC's forward plan to
address problems in the sector, the committee also pressed ASIC on its
inability to prevent the recent property scheme losses, despite widespread
speculation of schemes similar to Westpoint also collapsing. Although it was
too early to speculate on ACR, ASIC responded that the regulator had been regularly
intervening to improve Fincorp's disclosure material for some time. ASIC's
written statement on Fincorp indicated that it had issued stop orders for
inadequate disclosure on three of their four prospectuses, following which the
deficits were rectified. This included ASIC taking action against Fincorp in
the NSW Supreme Court for inadequacies relating to its second prospectus.
Following the third prospectus, ASIC sought legally binding undertakings from
Fincorp to correct misleading advertising. In addition:
For the 4th prospectus, ASIC required an independent expert’s
report on the recoverability or impairment of loans from Fincorp to the group
of companies. In other words, could Fincorp fully recover its loans (as I said
earlier these loans were its main asset and subject to the floating charge for
secured noteholders). This report was provided in May 2006 and confirmed ‘no
impairment’ which, in effect, meant that the loans were (in the independent
expert’s opinion) recoverable by Fincorp in full. Indeed, the Fincorp audited
accounts filed on 9 October 2006 for the year ending 30 June 2006 were not qualified in relation to ‘no impairment’.
The extent of ASIC's intervention raised the question as to why Fincorp's
collapse could not be prevented despite the many warning signs. In response ASIC
emphasised that poor disclosure does not necessarily infer insolvency:
[Fincorp] had absolutely a pattern of poor disclosure. We were
on them regarding their documents and their advertising, but to suggest that
immediately translates to solvency, which is of course the shut-down power, it
does not connect.
ASIC also stressed that any decision to shut down a scheme on the basis
of solvency necessitated making the delicate judgment that investors are going
to be better off by doing so:
The difficulty is to let them run on, because you have rollovers
and redemptions as people go; people could have got out and then do not because
you have got an issue about ‘Do you let them run on or do you stop them?’ It is
a difficult judgment to make. At the end of the day it is really for the
directors of these companies to make those decisions. Indeed, in ACR it was the
directors in the end who made the decision that they could not actually
continue on with the company and put in voluntary administrators. In Fincorp
they did the same. I think it would be difficult for ASIC to have to make that
call because you are then being set up that you know how these investments work
and that you have actually expertise, then you can predict the sale price of
units in a development in two or three years time. It is really the people
running these things, the directors who have to make those sorts of judgements.
The committee acknowledges that ASIC faces a dilemma when attempting to
regulate schemes that it may consider to be flawed and at risk of collapse. It
is not a prudential regulator and, unless the entity is clearly insolvent,
ASIC's role is limited to ensuring proper disclosure. If disclosure problems
are rectified and auditors report no solvency problems, ASIC is left in a
position where more regulatory action is unable to be taken in relation to
Strengthening ASIC's powers
ASIC described its powers over these property investment schemes as
We do not run these people’s businesses for them. We have powers
on disclosure and then right at the end of the line we make ... a judgement
about whether they are solvent or not. There is a lot in the middle.
In response to questions over the adequacy of legislative framework
within which ASIC operates, Chairman Tony D'Alosio indicated that:
I have looked at the issue of whether we need additional powers.
I would like us to go with this three-point plan for the next 12 months before
forming any view about whether additional powers are needed.
He later added:
At the end of that period we would form a judgement as to
whether in fact some change is needed. At this point we do not see any change
The committee has previously recommended that ASIC press the government
to amend the disclosure requirements in the Corporations Act to increase the
$50,000 threshold applying to promissory notes.
At the Senate Economics Committee's May 2007 estimates hearing ASIC indicated
that discussions over the issue with Treasury had taken place since August
2006, culminating in ASIC writing to the Treasurer on 24 May 2007 requesting that the promissory note threshold be lifted.
The committee welcomes ASIC's efforts but again believes a more forceful
approach should have been adopted earlier.
Bank conduct and dispute resolution procedures
The committee's attention has been drawn to a number of cases involving
non-provision of bank statements and alleged bank malpractice. These relate
mainly to instances where business loans are held rather than consumer loans.
The committee is concerned that a number of these disputes have been running
for considerable periods of time and banks have not been able to resolve them through
their internal dispute resolution processes.
One case raised by the committee relates to the apparent non-provision
of bank statements to a client with a loan with Rabobank. ASIC told the
committee that this dispute had been resolved and ASIC would not be
investigating the matter as it was unlikely that any breach within its
jurisdiction had occurred:
...Rabobank was signed up to the 1993 Code of Banking Practice
but not a more recent version. The 1993 code required bank statements to be
provided every six months but because this was a loan account and not a bank
deposit account, the view is that a loan account is not covered by that
provision. The Corporations Act 2001 deals with deposit accounts that are
financial products but does not deal with the reverse. In other words, an
account where you owe the bank money and not vice versa is not a financial
product and therefore the statutory provision does not apply—the statutory
provision being section 1017D(2), that requires a statement every 12 months.
The situation in relation to Rabobank having breached anything was unclear.
Two other cases of interest to the committee that were raised briefly with
ASIC relate to alleged misconduct by banks in their dealings with business loan
customers. The first case relates to alleged misconduct by the National
Australia Bank (NAB) in its dealings with a customer with limited English
skills, Mrs Fouzia Safetli. ASIC confirmed that it is currently investigating
an assertion by Mrs Safetli that the nature, effect and risks of the guarantee provided
for her son's business had not been properly explained by the bank. The second and
long-running case involves allegations by Commonwealth Bank customer, Ms Lana McLean,
that the bank has failed to provide bank statements showing a continuous record
of all transactions and personal records dating back to 1996.
The committee understands that ASIC has jurisdiction to investigate
misleading or deceptive conduct or unconscionable conduct under the
Corporations Act. ASIC told the committee that while it was looking into the Safetli
matter, it did not propose to take any further action in regard to the McLean
dispute unless new evidence was brought to its attention.
Given the number of complaints about banking practices the committee has
received, it is concerned that the banks' own internal dispute resolution (IDR)
procedures do not appear to be working. ASIC told the committee that it had no
indication that there was a systemic failure in this area:
When consumers are not getting what they want from internal
dispute resolution, there is the external process and there is complaining to
us, and our data is not showing over-the-odds levels of complaints about
internal dispute resolution procedures, particularly with the majors. It is a
key part of our surveillance, it is a key part of having a licence from us, but
it is not flashing a red light, particularly because the next step from
internal dispute resolution is generally to external.
It also suggested that banks had a commercial interest in resolving
disputes with customers:
...in financial services where you have a very large brand to
protect there is a pretty strong correlation between having that brand and
wanting to resolve complaints. That is a pretty broad generalisation, but I
think the data bears that out.
On several occasions, including the 12 June oversight hearing, ASIC was
asked to provide an update on the efficacy and timeliness of banks' internal
dispute resolution processes including when they were last examined. ASIC,
having agreed to take the matter on notice, responded that over the last three
years it has examined the operation of IDR processes in areas of three of the
four major banks that fall within the financial services licensing regime, or
where matters have come to its attention in the context of exercising the
consumer protection powers set out in the ASIC Act:
In one case, that examination was as a result of a review in the
bank's financial advice subsidiaries. We have found no significant issues with
the IDR procedures in relation to financial advice in our most recent review. In
another case, the bank self-reported an issue and identified some shortcomings
in its complaint procedures which could have had implications for activity it
undertook under its Australian Financial Services License. Remediation
procedures in relation to those shortcomings have now been completed. The other
matter is ongoing and largely involves a third party's offer of a bank product.
From an external dispute resolution perspective, the committee queried
whether the Banking and Financial Services Ombudsman's jurisdictional limit of
$280,000 limit is too low. ASIC replied that, unlike the FICS limit, 'there is
very, very little noise about that limit being too low'.
On the problem of enforcing adherence to banking codes of conduct, ASIC
confirmed that banks are not legally required to sign the most recent banking
code of conduct. It also informed the committee that the Uniform Consumer
Credit Code, a uniform state-based system, does not apply to business loans.
Given these regulatory dead ends for business loan customers seeking
external resolution to their banking disputes, the role of ASIC in enforcing
the unconscionability provisions of the Corporations Act seems to be an
important one. However, ASIC indicated that it had decided to focus on system
problems rather than individual cases: 'If ASIC got involved in every civil
dispute that it was invited to get into, it simply would run out of resources'.
In the light of ASIC's evidence and subsequent complaints to the
committee alleging malpractice involving by the major banks, the committee has
requested that ASIC further investigate and report to it on a number of these complaints.
The committee has asked ASIC to give particular regard to the non-provision of
bank statements and the internal dispute resolution processes banks follow. Any
further action by the committee in this area, including an inquiry into
possible systemic malpractice in the banking sector, will largely depend on the
response it receives from ASIC.
Professional indemnity insurance for planners
A regulation to require financial services licensees to have appropriate
compensation arrangements for clients' losses is expected to be made by 1 July 2007. This will specify that section 912B of the Corporations Act is satisfied if
licensees take out professional indemnity (PI) insurance. The regulation will
be accompanied by ASIC guidance, which will be released for consultation when
the regulation is made.
ASIC informed the committee that it had commissioned a report examining
the state of the PI industry to complement the consultation process, which is
expected to commence by the end of September 2007. When questioned as to
whether the PI regime would be in place by the intended starting date of 1 January 2008, the ASIC Chairman said: 'We will do our best'.
ASIC had told the Senate Economics Committee that in the longer term it hoped
that a standard industry wide PI policy could be used:
...if you could achieve some sort of industry based standard
policy that the brokers were prepared to write and issue with insurers issuing,
from ASIC’s point of view that would be quite desirable because it makes the
ability to administer adequate arrangements much easier. We think that is a longer
term plan but, nevertheless, we want to work with the industry to see if we can
get to that point.
The committee remains to be convinced that insurers will offer PI
insurance to all existing financial planning firms. In response to speculation
that a leading insurance company is refusing to provide PI insurance, ASIC
Certainly PI insurance as a general rule is available; there is
a market for it both here and overseas. We would need to look at where this
example was a decision made for commercial reasons—if indeed it was made—because
they wanted to focus on other business, as distinct from it being a reaction to
a concern on a number of claims that may be coming forward.
Although overdue, the committee welcomes the introduction of this
regime. It will closely monitor its implementation, particularly with regard to
the availability of PI insurance for smaller financial planning firms.
ASIC review of EFT Code
In February 2007 ASIC invited submissions on the Electronic Funds
Transfer Code of Conduct (EFT Code).
Media reports suggested that some banks may seek to change the code to shift
liability for internet banking scams on to consumers.
ASIC indicated that both it and the Australian Bankers Association did not
support changing the code in this way.
Superannuation advice and shadow shopping survey
Following the AMP Financial Planning superannuation switching scandal,
ASIC has uncovered further instances of unacceptable superannuation switching
advice. In May 2007 the NSW Supreme Court found that First Capital Financial
Planning had engaged in misleading and deceptive conduct when advising 170
teachers to switch from their public sector funds into retail superannuation
funds. It found that the company had not properly compared costs between the
funds and had misleadingly compared past performance. First Capital agreed to
write to the affected teachers offering a full review of their advice, as well
as reimbursing teachers who choose to return to their old fund and for the cost
of making the switch.
In response to a query at a May 2007 Senate Economics Committee
estimates hearing about why those who remained in the retail fund would not be
compensated, ASIC explained that:
... to estimate what position a person would be in staying in
the new product and to try and reimburse them or compensate them for doing that
would involve an acutely hypothetical actuarial calculation about where they
might be at some unknown end point. So what I am saying is that we just did not
run the case against First Capital going into that territory. We decided to
keep it fairly simple and say, ‘You can go back to your existing product, the
one that you were misled out of, if you like, and the court order will say that
you have to be compensated as if you never left that.’ But to go down the other
route would simply be too hard.
In the committee's August 2006 ASIC oversight report, it recommended
that ASIC conduct another superannuation switching shadow shopping survey in
2007, publicly naming advisers and licensees found to have repeatedly and
seriously breached the requirement to provide reasonable advice.
The committee is disappointed that ASIC has not yet made a decision on
whether another shadow shopping exercise of this kind is to be undertaken.
The previous survey highlighted widespread instances of unreasonable advice on
superannuation switching and led to a major undertaking by AMP Financial
Planning to conduct an overhaul of its procedures and offer 35,000 clients a
full review of advice. Given the effectiveness of the exercise in uncovering
inappropriate behaviour by financial planners the committee is surprised at
ASIC's apparent reticence to repeat it. Such surveys not only identify
shortcomings in the industry but act as a considerable deterrent to providing
The committee notes complaints from some sections of the industry that
they have been unfairly targeted by ASIC's shadow shopping exercise. However, clients
of financial planners are entitled to receive advice that meets the
requirements of the law. Therefore if ASIC is serious about superannuation
advice meeting the legislative standard then it will continue to monitor the
financial planning industry through this very effective exercise. The committee
reinforces its recommendation from the August 2006 report and believes that
ASIC should undertake a follow-up shadow-shopping survey.
The committee recommends that ASIC conduct a shadow shopping survey on
superannuation switching advice before the end of 2007.
ANAO report on ASIC's investigation procedures
In January 2007 the ANAO released a report on the effectiveness of
ASIC's processes for receiving statutory reports of suspected breaches of the
Corporations Act. It found that while the number of complaints referred to ASIC
had been increasing the number investigations had fallen dramatically. Specifically,
over the period 1997-98 to 2004-05 the number of reports received alleging
offences increased by almost 90 per cent, while the number of reports that ASIC
investigated or subjected to surveillance decreased by more than 90 per cent.
The ANAO made five recommendations, including that ASIC:
- disclose in its annual reports to Parliament any changes between
years in the underlying processes or assumptions for calculating the statistics
on actions taken on statutory reports, and the effects of these changes;
- identify opportunities for increasing the number of statutory
reports that are investigated;
- promptly refer to the Commonwealth Director of Public
Prosecutions any proposed prosecutions of minor regulatory matters which it has
not been explicitly authorised to undertake;
- develop and implement procedures for the timely follow-up of
external administrators where a supplementary report has been requested but not
- amend the guidance material provided to analysts so that it
correctly reflects ASIC's powers under the Corporations Act to disqualify
persons from acting as directors of companies.
All five recommendations were accepted by ASIC.
The committee had previously considered the reporting and consequences
of suspected breaches of the Corporations Act as part of its inquiry into the
operation of insolvency and voluntary administration laws. In its 2004 report
of that inquiry, the committee raised a number of concerns about ASIC's
investigation of suspected breaches, including that ASIC was not giving
sufficient priority to the assessment and investigation of reported breaches
and that it may not have had sufficient resources for the task.
At the oversight hearing on 12 June, ASIC addressed these concerns. It informed
the committee that additional government funding had allowed ASIC to increase
its rate of investigation:
Data in the 2006-07 year already shows that we are now doing a
two per cent rate on reports as opposed to the one per cent which was mentioned
in the ANAO report. It is pleasing to see that the effects of the assetless
administration fund that the government introduced for us are really starting
to come through. So far this year under that regime we have banned a total of
72 company officers coming directly out of the assetless administration system,
which is more than twice the 30-odd bannings that happened in the previous
ASIC also defended its previous performance in this area. Deputy
Chairman Mr Jeremy Cooper explained that the low rate highlighted by the ANAO
report was offset by increased surveillance to prevent insolvency losses:
...part of the explanation for a seemingly low response rate on
liquidators’ reports was that in fact ASIC had moved into a more proactive
mindset and not waiting around for liquidators’ reports to come in but actually
visiting companies where they were giving off some signs that they might be
having problems with solvency. In the 2005-06 year we did 536 surveillance
visits to companies that were suspected of having these sorts of difficulties.
This intervention resulted in some 95 of these companies having external
administrators appointed. We would say looking at over 500 companies and
appointing administrators in nearly 100 of those cases is effectively
preventing the sort of later catastrophes that might occur if you had not done
that and waited for the companies to go into liquidation and then again waited
even further for liquidators’ reports to come in. In fact we have moved our
activities from the graveyard to while these companies are still alive but
exhibiting difficulties. We think that is much more profitable for protecting
creditors. What this is really about is protecting creditors who deal with
these companies and the investors who invest in them, and we think the early
intervention is better rather than picking over the ruins and seeking to punish
The committee reiterates that reporting obligations are one of the most
important mechanisms in the law for identifying possible breaches of the
Corporations Act that must be performed to the highest standard possible. The
committee accepts that ASIC's priorities in this area appear to be heading in
the right direction, demonstrated by its acceptance of ANAO recommendations.
The committee encourages ASIC to act on these recommendations in a timely
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