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Issues raised with ASIC
The committee's hearing with the Australian Securities and Investment
Commission (ASIC) officials on 28 November 2008 raised a number of issues
relating to ASIC's regulatory responsibilities. These included a number of issues
stemming directly from the global financial crisis that escalated in the second
half of 2008:
- ASIC's decision to ban short selling to reduce market volatility;
- hardship exemptions for frozen mortgage fund redemptions; and
- new licensing and reporting arrangements for credit rating
The committee also discussed with ASIC a number of issues that were of
interest at previous oversight hearings. These included:
- the regulation of insider trading, false rumours and market
- ASIC's strategic review;
- workload and budgetary issues;
- superannuation projections and shadow shopping;
- financial literacy; and
- professional indemnity insurance for financial planners.
On 19 September 2008 ASIC announced a package of measures to
regulate short selling. This included a ban on naked short sales and the
requirement to disclose covered short sales to the Australian Securities Exchange
(ASX) via brokers.
Two days later ASIC announced that all short selling would be temporarily
banned, to be reviewed in 30 days.
Following the market confusion that ensued, ASIC made a number of announcements
clarifying the operation of the prohibition, particularly with respect to
existing hedging positions.
On 21 October the ban on covered short selling was extended for a further 30
days (until 19 November) and until 27 January 2009 for financial stocks.
This ban on short selling financial securities was subsequently further
extended to 6 March 2009.
The ban on naked short selling remains in place following the passage through parliament
of the Corporations Amendment (Short Selling) Bill in December 2008.
In anticipation of the lifting of the covered short selling ban on 19
November, on 28 October ASIC announced the disclosure requirements that would
apply to covered short sales. Sellers are required to inform brokers whether a
sale is a short sale, and brokers in turn are required to inform the ASX. The
regulator then provides a daily report at 9.00am each day of short sales
executed for the 24 hours up to 7.00pm the previous day.
The passage of the Corporations Amendment (Short Selling) Bill legislated
to set up a disclosure regime for covered short selling that broadly reflects
ASIC's previous announcement. Details of the disclosure of short selling data
will be dealt with by regulation following consultation with the industry.
The committee was interested in why such strong measures had been taken
to curtail short selling activities since the previous ASIC oversight hearing. While
noting that 'liquidity and price discovery are important contributions that
short selling can make', ASIC indicated that circumstances had changed since
its meeting with the committee in June:
In the period leading up to our last meeting we had taken the
view that the way that short selling was operating in the market was not
showing disorderly aspects that concerned us, hence we left the short selling
to play out, although we and the ASX did say to government that there should be
better disclosure of so-called covered short selling.
ASIC told the committee that global financial market turmoil and
regulatory moves in other jurisdictions led to ASIC implementing what it
described as a 'circuit breaker':
The issues that were concerning us were the lack of confidence
in the market, with buyers staying out and short sellers using strategies to
push down prices, and also allegations of false market rumours. We felt that we
needed a circuit-breaker to come into line with what was happening
ASIC also explained the reason why financial stocks continued to be
subject to the short selling ban:
...short selling coupled with rumours can actually depress prices
further. In the case of financials, that is an extremely worrying issue. If the
stock price of a financial gets to a particular level it runs a risk of being
rerated for credit purposes, so it might drop from AA to something else. That,
of course, is your worst nightmare because that then precipitates a further
decline, and, of course if you are the short seller, you keep shorting the
In response to a question on notice about the effect the ban had had on
market liquidity, ASIC stated that trading had decreased following the ban but
that it was difficult to attribute a causal relationship between the ban and
ASX's monthly activity report released for the November period
revealed a decrease (9%) in trades during the period of the short selling ban
when compared to the period from 1 July to the commencement of the ban on 22
September. Given the volatility in market activity internationally, we are
unable to assess whether that decrease is directly related to the short selling
An examination of price levels, volatility and liquidity does
not provide a clear view about the effect of the ban in Australia. However,
none of these indicators suggest that ASIC should not have placed the bans.
ASIC's action to ban covered short selling of all quoted stock was necessary
when considering the aims it set out to achieve, that is, to act as a circuit
breaker to assist in maintaining confidence in Australia's financial markets;
as a response to bans imposed overseas; and to deal with high levels of
With the passage of the Corporations Amendment (Short Selling) Bill
through the parliament in December 2008, there has also been considerable
debate about the disclosure regime for covered short sales. As referred to
above in paragraph 2.4, under ASIC's applicable class order clients are
required to advise brokers whether a sell order is a short sale, with brokers
required to advise the ASX daily of gross short sales executed on the previous
day. Whether this system will be retained under the regulations to the Corporations
Amendment (Short Selling) Act 2008 has yet to be determined by the
ASIC informed the committee that it would be consulting with industry
about the disclosure regime until the end of January 2009, when the ban on
covered short sales of financial stocks is likely to be lifted:
...there are issues around whether reporting should be net or
gross and whether daily reporting is needed, but we will talk to industry and
the ASX over the next couple of months and particularly to the industry
associations. We will also continue to talk to our fellow regulators, the RBA,
APRA and Treasury in particular, and we hope through that to improve the
disclosure regime for the market.
Acknowledging that there would be different views on how the disclosure
regime might operate, particularly from traders who do not want their short
positions disclosed, ASIC indicated that its preference is for the market to
have all the information ASIC has received:
...is the market better by not having it disclosed or having it
disclosed? We are saying that it is better to disclose it and let the traders
sort it out rather than holding the information and then the market is not
aware of how much of the trading that has gone on is covered by borrowed stock.
... ... ...
At the moment the disequilibrium is that covered short selling
goes on in the market but the rest of the market does not know the extent of
the short selling of a particular stock or what percentage of its capital is
being shorted. We think that the best place to put that information is in the
market, not for it to be held by ASIC and then for ASIC to decide when it will
choose to release that data.
Officials emphasised that the steps they have taken were not perfect and
would continue to be refined but were a 'significant move in the right
ASIC also told the committee of its involvement with international
regulators in better co-ordinating regulatory responses:
...it has become more fundamental for ASIC through its good
international credentials and its role on IOSCO, which comprises 95 per cent of
the world’s capital markets regulators, to be part of the reform agenda. At
present our work on IOSCO will essentially be to advise government here and
have input where we can on the reform agenda, which will necessarily unfold as
we look back on what precipitated the crisis and what has occurred. We are involved
in some specifics around that such as the short selling task force. We think it
is important that short selling be treated as a global issue. Because different
jurisdictions have different systems, different disclosure regimes and
different prohibitions, in the heat of mid‑September and in October the
leading capital markets were taking different positions, which made it much
more difficult for Australia to position its short selling regime.
Officials emphasised the importance of understanding the broader
international regulatory environment:
For Australia it is quite important that we are there, because
we have a small market, and what you do not want is not to know what the
settings are so that government can assess whether it will take those settings
into account when it formulates policy.
In response to a question on notice, ASIC indicated that 'the common
international principles that will be developed as a result of the IOSCO
Technical committee task force will inform [the content of the disclosure
The committee is of the view that short selling serves an important
function in assisting with liquidity and price discovery in the market. The
rationale for banning short selling seems to be underpinned at least in part by
the regulators' inability to prevent unlawful profiting from short selling
during volatile periods via spreading false market rumours (for instance, on
impending margin calls) or insider trading. The committee will monitor the
effectiveness of the new disclosure regime closely to ensure that improved
transparency assists in identifying and prosecuting such practices and removes
the need for such drastic action in the future.
With respect to using the regime to inform the market, the committee's
preference is for more transparency about short selling in the market rather
than less, in line with the view expressed by ASIC at the committee's hearing.
Market participants should be able to identify the extent of shorted stock without
undue delay, and traders can manage their short positions accordingly.
The committee also welcomes ASIC's involvement with other regulators at the
international level. It is important that Australia understands the global
regulatory environment when formulating its own capital market regulation and
that Australia contributes to a more consistent global approach to issues such
as short selling. For a small yet interconnected market such as Australia's, such
consistency is important when establishing our own regulatory settings.
Freeze on redemptions from mortgage funds and cash management trusts
On 12 October 2008 the government moved to provide an unlimited
guarantee for all bank deposits in Australian accounts. This was introduced to support
confidence in Australian banks in an environment where stressed banks in other
jurisdictions had been given similar protection. However, the guarantee does
not cover cash management trusts and mortgage funds, prompting investors to
shift their money to government‑backed bank deposit accounts. In order to
maintain stability, many of the affected (non-guaranteed) funds responded by
putting a freeze on redemptions. On 24 October the government applied a fee for
deposits above $1 million to reduce the distorting effects of investors
accessing the guarantee, and on 31 October ASIC announced that it would provide
regulatory relief to enable withdrawals from frozen funds on hardship grounds.
The operators of the frozen schemes apply the hardship provisions where
a request is made by a member of their scheme. Trustees may provide hardship
payments only where the hardship criteria are met, and they are required to
comply with their statutory duty to act in the best interests of the members of
the scheme as a whole.
ASIC reported that the freeze on mortgage trust redemptions had been
widespread: 'something in the order of 52 or so mortgage trusts have frozen
redemptions, which affects about $30 billion of the $32 billion of that
ASIC officials indicated that it was too early to collect accurate information
on the extent of applications for allowing partial redemption on hardship
grounds. However, in evidence ASIC suggested that, as of 28 November, around
100 to 110 applications had been made across three or four funds.
ASIC declined to comment on the policy merits of the government's bank
deposit guarantee. Officials told the committee that their role in this area
relates to the following:
We see our role as being, now that it is in place, first in the
broad area of misleading and deceptive conduct and making sure that the
products that have the guarantee and those that do not are clearly
differentiated, for example, so that there is no misleading conduct in the
market in the way that the guarantee may be administered. Secondly, we are
looking...at the mortgage trust area to see where we can assist with hardship
relief if areas of those markets have their assets frozen for a period. So our
work is very much centred on looking at how the market is handling the
guarantee and responding.
The committee understands that ASIC's responsibility is for
administering the hardship provisions applying to frozen funds, rather than for
the bank deposit guarantee that led to this occurring. The committee will seek
further information about the application of this relief at its next oversight
hearing, when events relating to the guarantee have unfolded.
Credit rating agencies
Investor reliance on credit rating agencies' (CRAs') positive
assessments of complex securitised debt products that subsequently failed was a
contributor to the financial crisis spreading as widely as it did. The complexities
of the products and CRAs' conflicts of interest in rating them have been
suggested as reasons for their inaccurate ratings.
In August ASIC announced that it was working with Treasury on a review
of how CRAs operate.
This review included investor reliance on CRAs' assessments, the diligence
taken in making assessments, and possible conflicts of interest. On 13 November
Minister Sherry announced that the regulation of CRAs is to be reformed. This
includes removing the exemption from holding an Australian Financial Services
Licence and requiring CRAs to issue an annual compliance report, which includes
reporting on rating processes and managing conflicts of interest.
ASIC told the committee that it would be responsible for administering
the new arrangements:
...credit rating agencies is a priority of the government that
will occupy us. We agree with that priority and will be moving to remove the
current exemptions of mid-CRAs not to hold AFSL licences. We will be also
moving on requiring credit rating agencies to produce to ASIC annual compliance
reports outlining in detail how the credit rating agencies have complied with
the IOSCO code of conduct, which is a fundamental underpinning to the licensing
The assessments of CRAs contributed to the ill-founded market confidence
in securitised debt products that triggered the current financial and economic
crisis. The committee therefore commends any action taken to address
deficiencies in the way CRAs perform their functions. It will seek further
information from ASIC at future oversight hearings to determine the
effectiveness of these proposed measures.
ASIC's responsibility for investigating and prosecuting instances of
insider trading, false rumours and market manipulation continues to be of
interest to the committee. In its August 2008 oversight report, the committee
called on ASIC to improve the way it cooperates with the ASX to act against
these practices, to ensure investors have confidence in the market.
Strategies for cracking down on insider trading and market manipulation are
currently being considered as part of a review being conducted by the
Corporations and Markets Advisory Committee (CAMAC). One of the matters
referred to CAMAC by the Minister for Corporate Law and Superannuation, Senator
Nick Sherry, is the spreading of false and misleading information to benefit
from artificial movements in price.
CAMAC has been asked to look at the way overseas jurisdictions regulate this
practice and propose regulatory change if necessary.
This follows ASIC's Project Mint investigation into the effect of false
rumours and collusion on market integrity, launched in March 2008. Although not
complete, ASIC told the committee that the project had established that the
burden of proof required and the elusive nature of rumours made prosecutions
difficult. ASIC officials suggested that the most useful leads come from direct
complaints and that some brokers could do better in preventing the circulation
ASIC stated that dealing with insider trading and market manipulation
had been given high priority by the regulator:
We have worked hard in cooperation with ASX to deal with the
referrals that we get ... in addition to added resources within ASIC to that
sector, principally headed by Commissioner Belinda Gibson. The benefits of that
work are coming through with the prosecutions and the referrals to the DPP ...
and I think you will see more of the benefits of that going forward.
ASIC reported that:
Since January this year the ASX has referred to us some 90
instances of insider trading, market manipulation and market conduct. All of
them have been actioned. Currently we have 12 of those matters before the
court—two insider trading matters, five market manipulation matters, two on
continuous disclosure, one on directors’ duties, one on misleading statements
and one on short selling—and another 11 matters before the Commonwealth
Director of Public Prosecutions. Our work on rumourtrage, in the sense of
coming down as hard as we can on false rumours in the market has continued, and
our so-called Project Mint has extended its inquiries to deal with those
investigations and those issues.
The committee heard that ASIC had systems in place to identify unusual
trading activities that may indicate rumourtrage and market manipulation:
The ASX has a technological system that oversees the market and
alerts us to odd activities or things that are outside the projected normal
bands, and that will lead us to look into what might be manipulative, which is
more often a course of trades over a time frame that look to be odd and out of
the ordinary course. We also look for spikes in trading, which tends more to
suggest inside trading or an inside deal. What we then have to do on the
rumourtrage is tie back where we hear of a rumour or believe that there is a
rumour in circulation and look at what happened to the course of trading, so
that it is a matter of linking fact of rumour to course of trading and, if at
all possible and ultimately if prosecution is to proceed, linking the party
doing the trading to the rumour.
In response to a question on notice ASIC advised that referrals for
insider trading and market manipulation in the calendar year 2008 were more
than double that of the 2005/2006 financial year.
There have been suggestions that some of the ASX's market supervision
responsibilities may be shifted to ASIC. These are a result of 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 conflicts
associated with regulating its competitors.
ASIC informed the committee that it had advised the government on market
competition licensing and that the matter is now with the government for their
It is critical that investors have confidence in the regulators' ability
to identify and prosecute insider trading, false rumours and market
manipulation. The committee recognises that the complex and elusive nature of these
activities makes it a difficult task for ASIC. Project Mint and the recently
announced CAMAC review are welcome initiatives designed to better tackle the
problem, and the committee encourages ASIC to continue to work closely with the
ASX in identifying these practices.
ASIC strategic review
At the committee's previous oversight hearing ASIC outlined a number of
changes within the organisation following its strategic review. This included
additional investment in market research and analysis, the planned appointment
of an external advisory panel, a major staffing restructure and improved staff
development. In August, ASIC announced its senior executive appointments within
the new stakeholder and deterrence teams.
In response to a question on notice, ASIC indicated that since the restructure
there had been only a slight increase in staff turnover from the corresponding
period last year, but that ASIC had 'not experienced any significant increase
in exits from the organisation'.
The strategic review followed a survey of the regulator's stakeholders
in April 2008, which highlighted mixed opinions about ASIC's performance. There
was a view that ASIC is process-driven and concentrates on prosecuting easy
targets. Only 21 per cent of respondents agreed with the proposition that
ASIC was good at identifying emerging problems, while the survey results also
indicated a lack of confidence in ASIC's ability to identify and prosecute instances
of dishonesty and misconduct, and insider trading and market abuse.
ASIC told the committee that the stakeholder survey was an important
basis for the strategic review:
Feedback is important if you are going to make changes. We did a
strategic review of the organisation and made changes that we felt were needed
but we felt that we needed a base, and the best base is to talk to your
customers or to your stakeholders.
The response has been to better develop skills within the organisation
and improve technological efficiencies:
Firstly, it is essentially about training to develop skills and
the development of people so that they are much more in tune with the market
and understand what is happening so they can give a quick response. Secondly,
in terms of systems and processes, ASIC registers 1.3 million companies a year
and licenses 11,000 people, and we are using technology to allow people to deal
with us more efficiently.
The committee sought information about the progress of the changes in
ASIC following the review.
ASIC told the committee that its recruitment had been assisted by instability
in the financial markets:
We were very pleased with the external recruitment process and
now that we are filling other positions below the senior positions pleased with
the applications we are getting. The number of applications are significant. We
accept the fact that that is also to do with the current state of the financial
markets, but we are going to take it as an opportunity to add skills and talent
within ASIC as we fill vacant positions going forward.
The committee also heard of the need to bring a cultural change to the
organisation through a 're-education program':
We have had to turn our staff from processors to thinking about
the market first. We are doing a lot of leadership training of staff at the
most senior level and trailing that through the organisation so they can look
at something and say: 'Does this matter? Why does it matter? What can we do to
make a difference?' That is going to take time, but certainly less than the two
years. There is a mindset to change.
However, ASIC emphasised that the benefits would take some time to
That training and development and improvement in technology will
take place over the next two, three, four or five years. If we did a survey
tomorrow I do not suggest that you would see much of a change in the score, but
in two years time, when we intend to do another survey, I would expect to see
the sorts of things that I have just spoken about pushing up satisfaction quite
ASIC also told the committee that its external advisory panel had not
yet been appointed. Officials indicated that the current regulatory issues
facing ASIC have confirmed the panel's potential benefits.
From a strategic perspective, ASIC suggested that the success of its new
approach is still to be proven:
The way we responded to the mortgage trust issue, the way we
dealt with the hardship issue and with short selling, I think it is fair to
say...are steps that ASIC has not taken in the past. So we are seeing the
benefits of what we are talking about, but we are the first to concede that
with a new structure, a new approach, we are still to prove that it will all
The committee supports the changes arising from ASIC's strategic review
and commends the regulator's honesty in publishing the disappointing findings
from its stakeholder survey. The timing of the financial crisis has assisted
with recruitment and ASIC should work hard to retain the expertise as a
consequence. The committee can also see the potential benefits of ASIC
receiving guidance from its external advisory panel and encourages ASIC to
appoint this panel as soon as possible.
Issues stemming from the global financial crisis and the shifting of
credit regulation from the states to the Commonwealth have increased demands on
ASIC considerably. The committee was interested to ascertain whether ASIC's
budget was adequate to effectively handle the increased workload. The committee
was told that ASIC's work on short selling, mortgage trust redemptions,
additional credit regulation from the states, credit rating agencies and the
Financial Literacy Foundation were significant responsibilities that they were
dealing with. ASIC officials outlined the budgetary implications for the agency
The current position with our budgets is that we said to
government that for the 2008-09 year we felt confident that we could work
within the existing budget settings. Recently, through the Prime Minister’s
allocation for this financial year, we were allocated an additional $10 million
for the crisis work.
For this financial year we have enough resources to do what we
want to do, and our NPP proposal for the next three to four years is currently
with government. In addition to that, again through the Prime Minister’s
allocation, or the Treasurer’s allocation, an additional $20 million has been
set aside for next year, even before we go through that NPP process. As a
commission, we feel that we have the resources at this point to be able to do
what we are doing.
In response to a question taken on notice, ASIC advised the committee
that the government had provided ASIC with $66 million to regulate consumer
In July ASIC released a consultation paper on the best way for
superannuation funds to facilitate calculations for members seeking to estimate
their necessary contribution levels.
It is difficult for members to decide on contribution levels without some
guidance as to how much will be required to meet retirement income needs.
However, there are presently difficulties for superannuation funds wishing to
provide members with projections because they are deemed to constitute personal
advice under section 766B of the Corporations Act. Offering personal financial
advice requires an Australian Financial Services Licence.
The committee heard that superannuation projections were an important
element of getting people to engage with the task of managing their retirement
income. However, ASIC cautioned that work would need to be done to ensure that
the projections offered do not constitute ironclad representations about
...whatever you call it, you are almost representing to people
what they are going to have in retirement. As we have seen, this year equity
markets have fallen by round about 50 per cent. So in making these kinds of
predictions to the entire superannuation population of 10 million-odd people,
some very deep issues are going to have to be worked through. We think it is a
very worthwhile project and that people should have this snapshot, this
picture, but one has to be very careful that it is not an ironclad
representation. After all, these are accumulation funds.
...ultimately there will be pretty ironclad assumptions, and
inflation rates, earnings rates and those kinds of things are all going to have
to be very carefully looked through, probably through the Australian Government
As well as making sure the assumptions used by superannuation account
holders are appropriate, ASIC indicated that liability issues where projections
have been wildly inaccurate would also need to be addressed.
ASIC's shadow shopping exercise was again raised by the committee. In
its last ASIC oversight report the committee criticised the regulator for not
yet repeating its successful superannuation shadow shopping survey. In
response, ASIC told the committee that it would maintain its planned timetable:
At the moment we think there are a lot of issues in the market
that we need to deal with and we are not sure that in the current crisis
situation that accelerating the shadow shopping is the way to go, but certainly
it is for us to do.
Superannuation projections are crucial in assisting people in assessing
the level of contributions they need to make towards their retirement income.
The fact that the law does not facilitate superannuation funds offering projections
to individual fund members hampers the likelihood of them making informed
decisions about their superannuation contributions. This has clear implications
for Australia's aged pension liabilities in the future. The committee
recognises the risks associated with superannuation funds using calculators as
a potentially misleading advertising device, but a solution to this problem is
overdue. The committee therefore suggests that, despite its other pressing
responsibilities, ASIC pursues further work in this area as a matter of
ASIC is also responsible for improving financial literacy amongst
Australians to better equip investors to make appropriate investment decisions,
mitigating the extent of the harm caused by investment scheme collapses,
low-ball share offers and other disreputable investment products. In the
context of banking and credit regulation, in particular the risks associated
with reverse mortgages, the committee previously suggested that ASIC make
greater efforts to gain mainstream press coverage about risky credit products.
ASIC responded to this suggestion in evidence at the hearing:
Within the retail investor consumer area ASIC now has dedicated
teams on financial literacy and a dedicated team on investor education. We
think that through those teams we will do more to educate investors, and
clearly things like seniors’ magazines and the press will be part of the focus
on getting across the message on what really are some fairly fundamental and
simple principles about asset allocation, diversity of portfolio, understanding
price reward premiums on products and the risk profile.
The committee notes that the collapse of Storm Financial Limited
occurred after its hearing with ASIC in November. ASIC's investigation into
this matter will be dealt with at the committee's next oversight hearing.
The committee acknowledges the ongoing work being done by ASIC and
government to improve standards of financial literary amongst Australians,
including through the publication of ASIC's 'fido' website outlining financial
tips and safety checks for consumers.
However, the committee reiterates its position that mainstream press coverage
is the most effective way of educating Australians about important investment
principles. In particular, ASIC should be more visible in promoting these
messages when stories about investment scheme collapses are broadcast in the
Professional indemnity insurance
The committee's previous ASIC oversight report addressed the new
compulsory professional indemnity arrangements for financial planners.
The committee was again interested to know whether the regime was operating
effectively, particularly with respect to the availability of adequate
insurance cover. ASIC told the committee that it was assessing whether the new
scheme is working:
The stresses on that are the availability of professional
indemnity insurance, its cost and its adequacy in the event of issues
occurring. When we implemented the regime we told the market that we would look
at it over a two-year period and give government feedback whether the
professional indemnity approach to protecting those who get advice from financial
planners is adequate or not. We are about 12 to 15 months into that, I think,
so we are going to look pretty carefully over the next six months at what
issues are unfolding...
The committee will welcome further information from ASIC on the adequacy
of professional indemnity insurance cover at its next oversight hearing.
Bernie Ripoll MP
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