Community expectations and financial literacy
Many submitters who expressed disappointment with ASIC's performance
assumed that ASIC had the authority and the resources to act on their behalf.
In this chapter, the committee examines the expectations that investors and
other consumers of financial services hold when it comes to what ASIC can and
cannot do. It seeks
to establish whether there are gaps between community expectations of what ASIC
can or should do and ASIC's actual statutory functions and powers.
The committee also takes the opportunity to consider financial literacy
in Australia and the way in which ASIC disseminates information.
A number of major institutions and academics expressed their concerns
about the extent to which investors believe that ASIC is able to protect their
For example, the Financial Planning Association of Australia was concerned
about the 'misalignment between consumer perception of the role ASIC should
play in assisting them when things go wrong versus what ASIC can actually
The Association of Financial Advisers shared this view, maintaining that only a
limited proportion of consumers appreciated ASIC's role.
Along similar lines, the Corporations Committee of the Law Council of
Australia's Business Law Section wrote:
It is possible that some financial consumers misunderstand
the difference between a prudential regulator such as APRA and a conduct
regulator such as ASIC. In other words, people may think that ASIC can give
comfort to financial consumers in the same way APRA may be taken to protect the
interests of depositors or policy holders.
The Corporations Committee recognised that ASIC has 'neither the mandate
nor the resources to perform such a role', and suggested that 'perhaps more
needs to be done to ensure that an "expectation gap" does not exist
in this regard'.
the Australian Institute of Company Directors stated:
...ASIC is often placed in a difficult position due to the
unrealistic expectations of the government, media and general public. There seems
to be a general misunderstanding as to what ASIC can reasonably achieve as a regulator.
With regard to unrealistic expectations, the Governance Institute
referred to 'a strong public perception that the regulator should be proactive
in stopping...corporate misconduct from occurring in the first place'. Mr Jason
Harris from the University of Technology, Sydney (UTS) Faculty of Law,
Criticisms based on a failure to prevent corporate scandals
or collapses represent a misunderstanding of the focus of corporate regulation
in Australia. Australia's corporate regulatory framework is based largely on
the disclosure paradigm. Rather than vetting documents (such as prospectus
documents and annual reports) ASIC is merely the body that receives copies of
those documents. It is up to investors to read the information and make a
complaint if they discover a problem. I'm sure ASIC does act proactively where
it has reason to do so, but with over 2 million companies to deal with ASIC
cannot read and assess every document.
This expectation gap is evident in complaints lodged with the
Commonwealth Ombudsman. Of the complaints he receives about ASIC, 'a frequent
point of dispute appears to be the reporter's perception of ASIC's role as
regulator and the expectation of a specific outcome from making a report,
compared with ASIC's stated broader public benefit purpose'. The Ombudsman
quoted from ASIC's published guidance on how it deals with complaints of
misconduct, where ASIC advises that:
All reports of misconduct that we receive provide us with
valuable information, but not every matter brought to our attention requires us
to take action. Under the laws we administer, we have the discretion to decide
whether to take further action on reports of misconduct that we receive.
Generally we do not act for individuals and we will seek to take action only on
those reports of misconduct where our action will result in a greater impact in
the market and benefit the general public more broadly.
As shown in previous chapters, a significant number of submitters held
the expectation that ASIC should have investigated their complaint. The
Ombudsman was of the view that 'early management of expectations about what
ASIC can or will do and the provision of better explanations of decisions to
complainants should lead to
a decrease in the number of complainants seeking an internal review of
decisions by ASIC, as well as the number of complaints to the Ombudsman about
Licensed financial services providers, credit providers and registered
ASIC's licensing regime was one particular area where many people held a
false notion about the extent of ASIC's power. Professor Dimity Kingsford Smith
Assessments of ASIC's performance are sometimes subject to
misconceptions: perhaps the most common is that ASIC closely supervises the
Australian Financial Services License (AFSL) holders it regulates.
She noted that ASIC does a certain amount of surveillance of AFS licence
holders when it is alerted to problems but observed further:
There is an expectation that licensing means that ASIC has
some control over licensees' businesses. Likewise Australian investors expect
that ASIC supervises licensees regularly. When losses occur there is anger and
bewilderment that except in the limited area of market operators, participants
and securities dealers ASIC does not have the power or the resources for
In Professor Kingsford Smith's view, such expectations demonstrate that
Australians mistakenly assume that ASIC has a regulatory toolkit with the types
of tools that APRA has at its disposal.
Similarly, Ms Anne Lampe, a journalist and former employee of ASIC's media
unit, referred to clients who often believe that, because advisers are licensed,
they have passed some kind of integrity and competence screening process and that
ASIC has provided a stamp of approval.
They couldn't be more wrong. The licensing process is simply
a tick all boxes procedure and regulation of financial advisors and fund
managers who invest the money appears to be ineffective.
Indeed, ASIC argued that the relatively low threshold for obtaining an
AFS licence and the relatively high threshold for removing a licence was not
well understood by retail investors. It stated:
Licensing, therefore, may give retail investors a sense of
security which is inconsistent with the settings of the regime. There is a
perception amongst some consumers that an AFS licence means that the licensee
has been approved by ASIC or that it signifies the high quality of the
financial services provided by the licensee. For example, in submissions to the
Inquiry, some former Storm clients have stated that 'Storm was approved by ASIC'.
The matter of ASIC's licensing powers, including the effectiveness of
ASIC's screening processes for licence applicants and its ability to cancel
licences, is examined in chapter 24.
The committee took first hand evidence from people who thought that ASIC
was in a position to provide sound advice and guidance about the integrity or
competence of a financial service provider or the viability of a business. Many
drew on their experiences of the Storm Financial collapse. For example, Mr
Spencer Murray was of the belief that ASIC was appointed by the Australian government
to prevent Australian citizens from fraud by financial institutions.
Another submitter claimed that ASIC was the regulator who gave Storm
Financial approval to run its business.
Mr Sean Mcardle stated that in 2006–07 and prior to becoming a signatory
to the Storm Financial scheme, he sought ASIC's advice about any 'concerns it
may have about this financial planning company'. He stated that he specifically
sought 'to find out if there was anything that, as a retail investor, he should
be aware of regarding Storm Financial'. This information included 'the strategy
they were selling, or its director Emmanuel Cassimatis by way of complaints or
anything else that as the regulator they knew and could warn me about in regards
to investing with them'. Mr Mcardle informed the committee that he phoned ASIC
twice and both times was advised that 'ASIC were unable to say anything about
any company, its directors or the product, stating that if they did, they may
Mr Ron Jelich was also under the impression that ASIC had given its stamp
of approval to the Storm Financial model:
Chief among the reasons for finally deciding to join Storm
were (a) ASIC's 'green light' report into the operations of Storm and ASIC's
endorsement of Storm's investment model; and (b) the fact that Storm's
investment home loans, margin loans and the creation of exclusive Storm-badged
funds were overseen by the Commonwealth Bank of Australia, the country's
biggest and most highly respected bank.
Mr Peter Rigby, who invested in Trio Capital on the basis that it was a
'Fund of Hedge Funds' and hence under the impression that it one of the safest
and most diverse ways of investing, clearly thought ASIC should have prevented
investor losses. He stated:
...these funds were regulated by the government watchdog ASIC,
so it was reasonable to consider that the funds were being run and administered
properly. If this is not the role of ASIC, what is it?
There were also misunderstandings regarding managed investment
schemes approved in principle as 'tax effective' schemes by the ATO and
The Australian Institute of Company Directors observed that, unlike some
overseas jurisdictions, in particular the US, there was a pervading cultural
bias in Australia against failure. It explained:
This bias has led to an expectation that the government can
prevent corporate failures through greater regulation and that, where companies
do fail, it is necessarily due to the fault of the company and/ or its
directors and executives. This will inevitably impact negatively on ASIC's
ability to properly prioritise its enforcement actions, as it is being constantly
called on to investigate any and all corporate failures, notwithstanding the actual
risks that they present or whether a breach of law is involved.
ASIC informed the committee that its regulatory role 'does not involve
preventing all consumer losses or ensuring full compensation for consumers in
all instances where losses arise'. It stated:
Our underpinning statutory objectives, regulatory tools, and
resources are not intended to prevent many of the losses that investors and
consumers will experience. This is true of every financial market regulator.
This is a very important issue that goes to the heart of what
financial market regulation is intended to achieve, and thus to expectations
about ASIC's performance. Unlike prudential regulators, market conduct
regulators such as ASIC do not have the same focus on preventing institutional
collapse and the losses this may bring. In addition, our market-based system
for investment and for capital raising, which has served Australia's
development well, inevitably involves investors assuming an amount of risk in
order to make a return.
Professor Justin O'Brien and Dr George Gilligan cited an interview
related to ASIC's 2012 enforcement report during which Mr Medcraft, emphasised
that 'you get what you pay for'. Mr Medcraft went on to stress that:
ASIC had only 26 staff to cover 25 investment banks; the 135
insurers are reviewed only once every seven years; although the big four audit
firms are reviewed once every 1.5 years the remaining 72 audit firms are
reviewed less than once a decade; and that although the top 20 financial
planners are reviewed once every 1.7 years, for the next 30 largest it is only
once every 3.8 years. This is the actuarial reality of contemporary Australian
Mr Medcraft told the Parliamentary Joint Committee on Corporations and
Financial Services (PJCCFS) that Australia has a system that is 'based on self‑execution
and relies on people to do the right and it was about time people 'were
realistic about what we do and what we cannot do'.
In his view, it was important for ASIC to be 'transparent, to show Australians
what we do in terms of engagement, surveillance, guidance and enforcement'.
As another example of ASIC's limited capacity, Mr Kell told the committee that
ASIC simply cannot visit all financial advisers. A complete set of figures on
the number of years it would theoretically take ASIC to cover the entire regulated
population through 'high intensity' surveillances (those lasting more than two
days), based on the number of surveillances conducted during 2012–2013, were
outlined in Chapter 4.
This evidence clearly shows the limitations placed on ASIC's capacity
to monitor and survey the people its licenses and regulates. But this message
does not appear to be reflected in public expectations of ASIC's role. For
example, a submitter advised that before subscribing to a trading information
service he 'verified that the company is registered with ASIC in order to make
sure if something goes wrong I have an official authority to protect my
rights as a consumer/customer'. After further investigation, he alleged that
the company was engaging in fraudulent phoenix activity. The submitter
expressed concern that before a company registration occurs, ASIC does not
check what products the company offers and whether these products are regulated
by ASIC or not.
The perception that ASIC is able to provide a guarantee about the
soundness and integrity of a financial service provider, a company or a product
is further complicated by the level of literacy and numeracy skills in
Australia. Australia's National Financial Literacy Strategy defines financial
...a combination of financial knowledge, skills, attitudes and
behaviours necessary to make sound financial decisions, based on personal circumstances,
to improve personal financial wellbeing.
According to the Financial Literacy Board, financially literate
consumers are 'more likely to make informed financial decisions and less likely
to choose unsuitable products, thus potentially reducing the degree of
regulatory intervention required'.
Many organisations in the industry, however, cited the growing complexity of
financial products over the past decade. For example, an OECD policy brief
noted that the growing sophistication of financial markets means that:
...consumers are not just choosing between interest rates on
two different bank loans or savings plans, but are rather being offered a
variety of complex financial instruments for borrowing and saving, with a large
range of options. At the same time, the responsibility and risk for financial
decisions that will have a major impact on an individual's future life, notably
pensions, are being shifted increasingly to workers and away from government
and employers. As life expectancy is increasing, the pension question is
particularly important as individuals will be enjoying longer periods of
The Consumer Action Law Centre referred to the current disclosure-based
regulatory approach in Australia, which, in its view, 'fails to address many of
the consumer problems in credit and financial services'. It suggested that more
disclosure is often a bad thing and noted also that:
credit and financial products are extremely complex and
non-experts will frequently misunderstand even the most important elements;
people do not necessarily choose between products 'rationally',
they make quick decisions using mental shortcuts when dealing with unfamiliar
topics or when limited by time; and
people typically have trouble calculating costs and risks, especially
when the cost or risk is temporally remote.
Professor Dimity Kingsford Smith also drew the committee's attention to
research showing there were 'serious reasons to doubt the regulatory efficacy
of disclosure when as much reliance is placed on it'. She maintained:
In essence the literacy and numeracy skills of the majority
of Australians are not adequate for reading and analysing disclosure material
for common retail financial products including superannuation. There are also
indelible behavioural biases in financial decision making which can lead to
unwise decisions. Often disclosure documents seem more apt to protect the
issuer or adviser than to inform the investor.
She underscored the important link between consumer behaviour and
The low level of financial literacy in Australia leads to an
investor propensity to assess advice on 'the advisor's confidence,
approachability, friendliness or professional manner' without looking too
critically at the technical aspects or content of the statement of advice. This
is one of the behavioural biases that can lead to unwise investment decision-making
...Senior citizens are seen as more vulnerable consumers, and account for up to
30% of investment fraud victims.
Many of the personal accounts before the committee, especially those
drawn from the two case studies, demonstrate the harm that can result from investors
or consumers placing too much trust in their adviser and in not asking
questions or seeking second opinions. A former ASIC enforcement adviser, Mr Niall
Coburn, suggested that ASIC needs to review how it responds to individuals and their
expectations. In his view ASIC 'needs to get out into the community a lot more
than it does and explain', before people invest, that they 'do not put 100 per
cent in a managed investment scheme': they do not put all their 'eggs in one
basket'. The Consumer Credit Legal Centre strongly recommended that:
...ASIC consider adopting a 'campaign approach' to enforcement
like that used by the ACCC. In this approach, the regulator takes a
multi-pronged approach to the issue by issuing media releases about concerns,
guides about best practice conduct, investigations, negotiations with affected
businesses and enforcement. We are aware that ASIC conducts all of these
activities but suggest they could do more to coordinate them in a strategic and
publicly overt manner to maximise the combined effect.
The Governance Institute of Australia observed that there was a wealth
of useful information on the ASIC and MoneySmart websites, yet the messages were
'usually only understood by those who operate in corporate circles'. It noted
that 'the expansion in the number of incorporated entities over the past 20–30
years, with which retail investors and consumers are involved through
superannuation, securities trading, and employment, for example, means that
ASIC is now just as relevant to them as the ATO is'.
It noted further that many in the broader community do not know what ASIC does
because it does not widely advertise its functions. It therefore recommended
...should consider engaging in a broader and more prominent
marketing and advertising campaign to promote the regulatory framework which it
oversees, the intellectual property which it creates to guide those who are
regulated, retail investors, and consumers, and the other various services it
provides in administering the regulatory framework.
ASIC's role as an educator for the private and corporate
sector is pivotal to its ongoing functions and the effective regulation of the
The Law Council suggested more should be done to correct the public
belief that ASIC, by licencing financial services providers, is like APRA and
to protect the interests of individuals.
In Chapter 5, the committee recommended that ASIC consider adopting a
multi-pronged campaign to educate retail customers about the care they need to
take when entering into a financial transaction and where they can find
assistance and affordable and independent advice when they find themselves in
difficulties because of that transaction. The committee's findings in this
chapter further underline
the importance of ASIC's role in financial education, especially when
considering the unrealistic expectations that many consumers have of ASIC's
main functions. ASIC may licence persons, but it cannot endorse their business
model nor their trustworthiness.
The committee has also recommended that ASIC review the information
provided on the search results and extracts from its registers. To help avoid
any misunderstanding about ASIC's role in approving the operations of various
on these documents ASIC should more clearly explain its role and what the
The committee recommends that ASIC include on all registry search
results and extracts a prominent statement explaining ASIC's role and advising
that ASIC does not approve particular business models.
The committee recommends that in bringing together the multi-pronged
campaign to educate retail customers outlined in Recommendation 1, ASIC have
regard to the fact that:
many retail investors and consumers have unrealistic expectations
of ASIC's role in protecting their interests; and
financial literacy is more than financial knowledge but also
incorporates the skills, attitudes and behaviours necessary to make sound
Before concluding this chapter on expectations and financial literacy, the
committee considers the role of the Consumer Advisory Panel (CAP).
Consumer Advisory Panel
Established in 1999, CAP's role is to advise ASIC on current consumer
protection issues and give feedback on ASIC policies and activities. It also
advises ASIC on key consumer research and education projects. The Consumer
Credit Legal Centre informed the committee that it has an open and constructive
working relationship with ASIC through its participation on the CAP.
The Consumer Action Law Centre was also pleased with ASIC's
collaboration with consumer advocates, particularly through the CAP. It noted
that the recent introduction of a CAP 'matters register' would enable progress
of matters referred to ASIC from CAP members to be tracked at each meeting.
Nonetheless, it suggested that consideration could be given to whether:
ASIC could do more to prioritise the needs of vulnerable and
disadvantaged consumers; and
ASIC's consumer protection outcomes may be improved by enhancing
the responsibilities of the CAP to more closely resemble the UK's Financial
Services Consumer Panel.
Established under the Financial Services and Markets Act 2000 (UK),
the Financial Services Consumer Panel (FSCP) is an independent statutory body set
up to represent the interests of all groups of financial services consumers in
the development of policy for the regulation of financial services. Its
membership must be such 'as to give a fair degree of representation to those
who are using, or are or may be contemplating using, services other than in
connection with business carried on by them'. According to the FSCP, it works 'to
advise and challenge' the Financial Conduct Authority (FCA) from 'the earliest
stages of its policy development' to ensure it takes into account the consumer
interest. It also takes a keen interest in broader issues for consumers in
financial services where it believes it can help achieve beneficial
change/outcomes for consumers'. Its duties include:
meeting regularly with the FCA and being available for
consultation on specific high-level issues;
actively bringing to the attention of the FCA issues which are
likely to be of significance to consumers;
commissioning such research as it considers necessary in order to
to fulfil its duties under these terms of reference;
requesting access to information from the FCA which it reasonably
to carry out its work; and
requesting regular access to the FCA chairman, board, chief executive
and senior executives of the FCA.
In its submission, the Consumer Action Law Centre noted that the FSCP
describes its role as:
...bringing a 'consumer perspective to aid effective
regulation', supporting or challenging the FCA where required and acting 'as an
independent counter balance' to parallel boards which represent the interests
The committee is of the view that ASIC could do more to prioritise the
needs of consumer interests and should consider whether it could improve the
work of the CAP by introducing some of the features of the Financial Services
Recognising the importance of giving priority to the needs of consumers when
ASIC develops regulatory guidance and provides advice to government, the committee
recommends that ASIC should consider whether its Consumer Advisory Panel could
be enhanced by the introduction of some of the features of the United Kingdom's
Financial Services Consumer Panel.
In this chapter, the committee considered public expectations and
financial literacy with an emphasis on educating people so that they are in a
to protect their interests. The committee also recognised the importance of
ASIC giving priority to consumer protection and suggested a more involved CAP
could help achieve this objective.
In the next chapter, the committee continues its examination of ASIC's engagement
and relationship with retail investors and consumers by considering how ASIC
converses with those who are making a complaint or seeking ASIC's assistance.
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