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Issues raised with ASIC
The committee's hearing with Australian Securities and Investments
commission (ASIC) officials on 18 June 2008 included discussion on a number
issues relating to ASIC's regulatory responsibilities. The main issues that were
discussed are considered in this report. They include:
the regulation of financial markets, particularly issues relating
to short selling and margin loans;
ASIC's strategic review;
ASIC's response to recent property investment scheme collapses;
the regulation of financial planners and the introduction of
professional indemnity insurance for negligent advice;
banking and credit regulation and the implementation of the
government's green paper proposals
Volatility in the Australian share market has brought attention to the
regulation of short selling and margin lending. There have been concerns that
undisclosed covered short selling - where shares are borrowed, sold,
re-purchased at a lower price, and returned for a profit - is affecting market
transparency and encouraging illegal market manipulation. Margin loans have
also been implicated in instances of targeted short selling, where short
sellers aware of an impending margin call have used this inside knowledge to
further drive down share prices. In addition, margin lending has been under
scrutiny following the collapse of margin lenders Opes Prime and Lift Capital,
in circumstances where investors had apparently been unaware of the unsecured
nature these products.
ASIC told the committee that it had worked with the ASX to hasten action
against alleged misconduct referred by the ASX. The breakdown of enforcement
and surveillance activity between January and May was described as follows:
Between January and May this year the ASX has referred some 40
matters to us on possible insider trading and market manipulation. We are
investigating 11 of those for possible civil criminal administrative
proceedings. Fourteen are under surveillance and 11 have been referred to our
licensing unit. Only four have been closed for insufficient evidence. In
addition, we have one insider trading matter before the courts at present, six
matters with the Commonwealth Director of Public Prosecutions, two on insider
trading, and two market manipulation matters are also with the CDPP.
ASIC indicated that it had issued a warning concerning the use of false
and misleading rumours on share trading and indicated that it had recommended
to government that disclosure rules applying to short selling be improved,
which has been accepted.
On margin lending, ASIC has published a reminder about the continuous
disclosure obligations concerning the margin loans of directors. They described
its effect and the circumstances in which disclosure is triggered by the
materiality of the directors' exposure:
When it became clear that a number of margin loans over those
types of shareholdings were being sold down we made an announcement to the
exchange that said that companies that know that this is the position should be
disclosing to the market that that is happening. We took the view, and take the
view, that disclosure is probably a better course than outright prohibition,
simply because people then find ways to get around prohibition. When we said
that some of that should be disclosed there were a number of disclosures about
the existence of margin loans, or in some cases the fact that they were not
disclosed. The disclosure would be under the continuous disclosure rules of the
Where there is a significant shareholding—I think the usual view
we took was a five per cent shareholding as the level—the entry into those
loans where there are directors involved should be disclosed.
ASIC told the committee that it is investigating the failure of Opes
The broader issue of how well informed consumers are about the nature of such
products was also addressed. While emphasising the legitimate function served
by the practice, ASIC acknowledged that the disclosure requirements in this
area could be improved:
...what we have seen also are issues of whether or not a margin
loan is explained in such a way that the investor, the borrowers, actually
understand how it works, how the mortgage arrangement works, how calls can be
made, how you have to meet the calls or the shares will be sold, how shares can
be taken out of a portfolio and you would be given a margin call. We think that
the disclosure around that to the investors can be improved and I think the
government has picked that up as part of its green paper as to whether, for example,
margin loans should be subjected to the same product disclosure statements that
other forms of investments are subject to. That is a matter now for government.
The committee is of the view that ASIC should continue to press for improvements
to the disclosure rules applying to short selling and margin lending where
deemed necessary. Further, the committee does not consider that issuing
warnings about misconduct is going to have any discernable effect. ASIC needs
to maintain a greater level of cooperation with ASX to act on instances of
insider trading and market manipulation. It should remain closely engaged with
the ASX on these matters to ensure that referrals and investigations continue
to be a high priority. Such communication and cooperation is essential to
enforcing the rules that give investors in the market.
ASIC strategic review
Following its recent strategic review ASIC has announced that its focus
over the next three to five years will be:
better understanding the stock market to improve market
looking further ahead to assess systemic risks;
better explaining its actions and what ASIC is trying to achieve;
having clearer priorities, particularly retail investors and
insider trading, market manipulation and disclosure.
ASIC stated that it would make the following changes to achieve this:
additional investment in market research and analysis;
appointment of an external advisory panel to provide advice on
restructuring the organisation from four 'silo' directorates to
17 'outwardly focused stakeholder teams';
providing additional resources to the supervision of
brokers/intermediaries and surveillance of exchange traded markets;
improved staff development.
ASIC told the committee that it wanted to be better positioned to
address emerging regulatory issues:
...what we are seeking to have is an organisation that is
positioned closer to the stakeholders and the people it regulates, so that it
better understands its markets. It about taking on initiatives that are more
forward looking than perhaps we may have in the past. We are very good at
coming in and cleaning some up. The question is whether we can also work harder
at trying to see where markets are headed and what issues are likely to arise.
A notable aspect of the intended changes is the appointment of an
external advisory committee to provide expert market advice on specific
regulatory issues. ASIC indicated that:
...we feel that when a subprime crisis occurs, for example, our
ability to get ... information and to see how it could likely fall out is
extremely important because that will determine the regulatory response. For
us, we have to make a judgment about how heavy-handed our response might be or
what we need to do, always mindful of the market impact. ... We felt that as a
commission we would benefit by having an advisory board drawn from our major
stakeholders and chaired by someone independent. We would take the work on a
subprime issue and debate it with them about what they see as the implications
for the market and what are the implications for ASIC as a regulator. It is an
advisory panel. It would not have access to any confidential or other
information in terms of ASIC, and we would, as a commission, form our own view
on whether or not we accepted that advice.
However, ASIC emphasised that the idea would not be pursued if it was
...if the end it does not work or we cannot make use of it,
clearly we are not going to waste their time. These are important men and women
who are going to give their time, so we have to make their time commitment
meaningful. If we cannot do that, I do not think anybody would have a problem
with just letting it go. But we think it will work and will help us
tremendously in our work.
The committee was particularly interested in how the additional
responsibilities stemming from this shift could be undertaken within existing
budgetary constraints. ASIC told the committee that it would be able to achieve
its objectives within the 2008-09 budget by re-organising priorities, improving
efficiency and removing duplication. However, it admitted that this may not be
sustainable beyond 2009-10.
One of the things that was behind the restructure has been that
we felt we needed to improve efficiency and productivity as part of where ASIC
was at, so we did set ourselves the task of achieving that and really driving
that efficiency and productivity as best we could. At the end of the next 12
months we will be in a much better position to be able to say to government
that we have given it our best shot in getting this, but we have found that we
might need additional resources in these areas. We would be coming to
government with a track record of really trying to run the organisation as
efficiently as possible.
There is the additional prospect that some of the ASX's market
supervision responsibilities may be shifted to ASIC in the near future. This
has followed criticism that the ASX is conflicted in its dual role of market
operator, where there is an incentive to maximise trading volumes, and market
regulator. The possibility of the government ending the ASX's monopoly on
market services would also have implications for its regulatory role, given the
obvious conflicts that might arise from the ASX regulating its competitors.
ASIC may also be granted additional responsibilities from the government's
green paper on financial services and credit regulation. The committee heard
...there is clearly a recognition within government and certainly
a recognition within ASIC that, if the matters that are in the green paper come
to ASIC, then there will be a need for increase in the size of our budget and
The committee supports ASICs restructuring plans, particularly with respect
to a greater emphasis on understanding and conducting surveillance of financial
market activities and trends. The committee will monitor its effectiveness with
Property scheme collapses
The regulation of high risk property investment schemes continues to be
the subject of ASIC's attention following the Westpoint, Fincorp and ACR
collapses. Since its last oversight hearing, ASIC has responded by implementing
more stringent measures to protect consumers, focussing on better disclosure
and improved advertising standards for issuers of unlisted and unrated
debentures. These include:
In October 2007 ASIC released a regulatory guide for debenture
issuers, requiring them to disclose against eight benchmarks on an 'if not, why
In December 2007 ASIC released a regulatory guide on debenture
advertising, including restrictions on the use of terms such as 'secure',
'guaranteed' and 'safe' to better reflect the risks associated with such
In April 2008 ASIC reported its findings of a review into the
disclosures made by each of the unlisted, unrated debenture issuers and posted
their disclosure documents on the ASIC website.
In April 2008 ASIC also released the findings of its review into
the profile of investors in unlisted, unrated debentures.
At the committee's oversight hearing ASIC stated that it had attended a
number of meetings with Treasury as part of its efforts to convince the
government to raise the $50,000 threshold applying to promissory notes.
The government's green paper on Financial Services and Credit Reform proposes
abolishing the threshold altogether, thereby removing the distinction between
promissory notes treated as debentures or financial products. All would be
treated as debentures.
The committee also heard that the Westpoint investigation is almost
complete. Officers indicated that $300 million dollars was being claimed on
behalf of investors in civil proceedings, in addition to the preparation of
criminal briefs relating to former directors and unlicensed advisors.
The committee again notes ASIC's previous tardiness on addressing the
problems with this sector and hopes their more forward-looking strategy will
better protect investors in this area.
Professional indemnity insurance
Compulsory professional indemnity (PI) insurance for financial planners
has been introduced, though concerns remain over the adequacy of cover that
will be available in the insurance market. The regime is designed to protect
consumers seeking compensation for losses attributable to negligent financial
advice. ASIC has released its guidance on compensation and PI insurance, which
outlines a two stage approach that takes into account the limited PI insurance
commercially available at present. From 1 July 2008 until 1 July 2010 licensees must hold a minimum standard of cover, with a higher standard coming into force
at the end of that two year implementation period.
ASIC informed the committee that availability of cover had so far been
New applicants for licenses who have been required to take out
PI insurance do not appear to be having difficulty obtaining PI insurance.
The committee was also told that the regime would be subject to further
...sure government has an open mind as to whether it will be in
the end totally effective and whether it needs to be reviewed, but our feeling
is to give it two years to see how we go and then review it at the end of that
The committee is pleased to hear that cover is so far commercially
available, and that ASIC is prepared to review the scheme should it prove to be
Financial Industry Complaints Service
The adequacy of compensation for investors through the Financial
Industry Complaints Service (FICS) also continued to receive attention. In 2007
FICS announced it would lift the compensation limit it can order advisers to
pay investors from $100,000 to $150,000 from July 2008.
ASIC stated that the limit should be $280,000, in line with other
regulators such as the Banking and Financial Services Ombudsman. It also
conceded that there were arguments in favour of the limit being even higher,
particularly given the higher average value of self-managed superannuation
Shadow shopping survey
In previous ASIC oversight reports the committee has called for ASIC to
repeat its successful superannuation switching advice shadow shopping survey,
and to publicly name planners who have repeatedly failed to provide
superannuation switching advice with a reasonable basis.
This has not occurred since the committee's last oversight hearing.
ASIC indicated to the committee that it plans another shadow shopping
exercise in the 2009-2010 financial year. Describing it as an 'expensive and
time consuming process', ASIC provided the following explanation for the
lengthy gap between each exercise:
When [the exercise] is concluded a number of issues come out of
the shadow shopping report which we then interact with industry about,
sometimes taking enforcement action, sometimes enforceable undertakings and
other times we just have discussions with industry. We are a little bit out of
cycle on that in the sense that we did the last shadow shop in 2005 and
reported on it in 2006 and then continued to do work after that.
The committee is of the view that ASIC has still not adequately
explained why it has taken so long to establish plans for another shadow
shopping exercise. However, it is encouraged that the decision has been made to
conduct another one, even if it is later than desirable.
Banking and credit regulation
The government's green paper on financial services and credit regulation
has outlined options for a federal takeover of consumer credit regulations. The
options include a federal takeover of the regulation of all credit products;
regulating mortgages only and leaving other consumer credit products to the
states; or maintaining the status quo.
The transfer of regulatory control in these areas will require the states'
ASIC informed the committee that the green paper presented a series of
options that are yet to be finalised, making it difficult to assess its likely
effect on ASIC. The committee heard that:
It does not present a particular finality to which we could then
respond and say that we have these comments about that particular state of
affairs and we think it would cost X million dollars to do. The understanding
that the commission has is that additional responsibilities that flow out of
this green paper will be appropriately funded, but it all depends on what the
ultimate proposals are. ... There are myriad different models that could be
presented and each one would have resourcing and skills and all sorts of
implications for us.
The regulation of reverse mortgages, which are being considered as part
of the green paper, was again of particular interest to the committee. ASIC
reiterated the risks with this product, especially for the elderly:
...with reverse mortgages there are assumptions about growth in
interest rates and about growth or non-growth in asset prices. When you have
those variables over a long period of time you can get them out of kilter.
Those that would tend to be more elderly that take the reverse mortgages may
see some difficulties down the track.
In their response to a question on notice, ASIC informed the committee
that it had received a relatively low number of complaints about reverse
mortgages. However, they explained that this is probably due to the increase in
equity release products is a recent phenomenon, and that problems with them may
not have yet emerged.
In evidence ASIC told the committee that they had focussed on trying to
pre-empt problems that may occur in an environment of rising interest rates and
falling asset prices.
The committee is encouraged that the government has chosen to consider
this issue as part of its green paper. ASIC should continue to use all avenues
available to it to educate consumers about the risks associated with these
products. The committee is of the view that while ASIC's consumer website FIDO
is an important part of this, coverage in the mainstream press is far more
effective and needs to be pursued vigorously.
Mr Bernie Ripoll MP
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