Chapter 25
ASIC's responsibilities and funding: problems with the current framework
and suggested changes
25.1
This chapter considers two issues fundamental to ASIC's performance as
a regulator: its functions and responsibilities and the resources available for
it
to perform these tasks. Successive governments have given additional
responsibilities to ASIC at various times since it was established. In recent
years there has been a marked increase in the functions ASIC has acquired.[1]
This chapter considers the implications of this and, in light of the issues
raised in previous chapters, the extent to which ASIC's growing list of
functions and responsibilities has affected the agency's performance.
25.2
When considering the responsibilities given to ASIC, it is helpful,
indeed necessary, to examine the resources given to ASIC to perform these
tasks. Accordingly, this chapter also considers the amount of funding ASIC
receives and whether the mechanism in place for funding ASIC should be changed.
Is ASIC overburdened and underfunded?
25.3
There is clearly a correlation between the list of responsibilities ASIC
has, the funding it receives and the outcomes it can achieve. ASIC's submission
contained
the following statement on this relationship:
What we are able to achieve also depends on our level of
funding. Ensuring ASIC has adequate resources affects the strength and
integrity of the financial system and the confidence of investors.
ASIC can only achieve what it is resourced to do. Funding
levels should be set by reference to Government and community expectations of
what ASIC should deliver and, as a result, what level of resilience they want
in the financial system.[2]
25.4
Figure 25.1 outlines ASIC's operating revenue, expenses and staff
numbers since the 2000–01 financial year. Between 2000–01 and 2012–13, ASIC
produced an operating surplus for eleven of the 13 financial years, averaging a
$16.7 million surplus each year.
Figure 25.1: ASIC's operating revenue, expenses and
staff levels,
2000–01 to 2012–13
Source:
Figures for operating revenue and expenses taken from research prepared by the
Parliamentary Library, based on cash flow statements contained in ASIC's annual
reports, various years. Figures for staff levels are taken from ASIC's annual
reports, various years.
Note: Total operating revenue includes
appropriation revenue and other cash received.
25.5
A 2012 report prepared by staff of the International Monetary Fund (IMF)
argued that ASIC 'has rightfully earned its reputation as an effective and
credible enforcer of market regulation, but would benefit from increased
resources and budgetary flexibility'. The IMF staff argued that:
...ASIC is hampered in its ability to fully carry out proactive
supervision because of the lack of budgetary resources. A significant amount of
ASIC's funding is non-core funding earmarked for specific projects, and the
share of non-core funding has been increasing in the last few years. To
supervise a large number of financial services licensees, ASIC uses desk-top,
rather than on-site, reviews for initial risk-based assessments, reflecting in
part its resource constraints. In determining the target and intensity of its
supervisory actions, ASIC relies heavily on its initial risk-based assessments,
self-reporting of breaches of regulatory requirements and third party
notifications. It is important that ASIC be given more resources and
flexibility over its operational budget.[3]
25.6
Many individuals and organisations agreed that ASIC is currently
underfunded. A view also frequently expressed was that ASIC's expanded
regulatory remit had negatively affected ASIC's performance. This was either as
a logical consequence of ASIC having a longer and more diverse list of
responsibilities,
or because the additional funding provided to supplement specific new responsibilities
has been insufficient. The following extracts from the evidence taken by the
committee illustrate some of the concerns:
In recent years, two trends regarding ASIC have emerged.
Firstly, ASIC has been given increasing responsibility for important areas of
corporate and financial regulation, including stock market regulation,
financial services licensing, consumer protection in financial services,
business names registration and credit regulation. These matters add to ASIC's
already full regulatory brief covering general corporate regulation and
administrative matters (document lodgments, searches and maintenance of
registers). During this time while ASIC's funding has increased, much of the
funding has been tied to particular projects (such as key investigations into
HIH and other high profile matters), and the numbers of staff working at ASIC
has only increased from 1221 in 2000 to 1738 in 2012 (according to ASIC's
Annual Reports). The increases in funding and staffing are wholly inadequate to
account for exponential increase in ASIC's responsibilities.[4]
* * *
...the increase in ASIC's mandate over the last decade has not
been matched by financial appropriations and has stretched its personnel.[5]
* * *
...the constant accrual of functions and services by ASIC has
played some part in reducing the ability of ASIC to devote resources to its
legislative, surveillance and investigative responsibilities.[6]
* * *
Our sense is that the problem ASIC has is complexity of
legislation, huge areas of responsibility and resources that are too limited.
It is not a lack of powers, it is a lack of resources, really, and the
practical ability to make things happen.[7]
* * *
In our view, any deficiencies in ASIC's performance and
effectiveness are more likely to be caused by a lack of adequate funding and resources
to allow ASIC to fulfil its role as a corporate regulator. Being well-funded
and resourced is essential for a regulator to be able to effectively use its
powers and discharge its duties. Relevantly, being adequately resourced allows
a regulator to be more pro-active and therefore maximise the chances of ASIC
being able to properly enforce existing legislation. Company Directors has long
called for and supported moves to provide appropriate funding to ASIC and other
regulators to meet the increasing demands that they face, and we continue to
believe that this is the best way to increase ASIC's performance as a
regulator.
This lack of funding is likely, at least in part, to be due
to the fact that ASIC's role as a regulator has been increased significantly
over time and its resources have been stretched as a result. In addition to
increasing the existing funding and resources of ASIC, going forward ASIC's
roles should only be added to or extended where there is also a commensurate
increase in ASIC's funding and resources.[8]
* * *
The finance world is increasingly complicated with emerging
risks and challenges. It is essential that ASIC is adequately funded and
resourced to carry out its duties. We would not support any proposals to cut
ASIC's funding.[9]
25.7
Members of the public that had dealt with ASIC also called for ASIC
to receive more funding:
ASIC needs more funding to go after criminals and credit
providers. ASIC should have enough funding that it can anticipate rorts and
take steps to protect people...There is a perception in the community that ASIC
is reluctant to take a stand possibly because of lack of funding.[10]
25.8
Others were less sure. Levitt Robinson Solicitors argued that 'ASIC's
failures cannot be blamed on budgetary constraints, given ASIC's apparent
profligacy in the deployment of public money spent on, or in outsourcing legal
services'.[11]
CPA Australia noted that ASIC is possibly overworked, but it considered
other problems with ASIC's approach were more significant:
I think there has been a lot of commentary by ASIC to say
that they are very stretched with their resources and there is more to do.
There may be an element of truth in that argument. I think the bigger issue is
that their sense of priority needs to be revisited.[12]
25.9
The Institute of Chartered Accountants Australia (ICAA) noted that all
organisations face financial pressure and need to ensure they use the resources
they have as efficiently as possible. The ICAA argued that ASIC is currently
undertaking work which 'generally has very little effect but consumes quite a
lot of resources'.[13]
On this issue, the Community and Public Sector Union (CPSU) acknowledged that
every organisation needs to focus on and review whether it is undertaking
activities in the most efficient way. However, the CPSU argued:
...if you are not actually reinvesting in the work that is
needed to be done, and having that investment being made then you are likely to
see the services slip. And I think we sometimes confuse at the moment
conversations about productivity and effectiveness with cuts.[14]
25.10
It is evident that funding issues are not just relevant to ASIC; rather
they are something that all regulators encounter. The former chairman of the
Trade Practices Commission, the predecessor to the ACCC, argued that there 'is
a fundamental flaw in the way in which our regulators are funded':
Having acted as chairman of the Trade Practices Commission
(TPC)...I can say with complete confidence that the level and nature of funding
provided to the TPC at the time to conduct its various activities was well
below what was needed to properly and adequately undertake its tasks. This was
certainly the case in the context of community and media (and some
politicians') expectations of the role of the regulator. The apparent
unwillingness of the TPC to undertake certain investigations or to pursue
certain court actions was often misunderstood, because the critics did not
appreciate the problems that the regulator faced due to its inadequate and
restricted use of its funding.[15]
25.11
Professor Baxt added that regulators also have 'inadequate' resources to
bring cases that challenge well-resourced defendants that 'usually enjoy deep
pockets and are not burdened by significant restrictions in the way in which
they operate in defending the relevant matter'.[16]
25.12
Whether ASIC has sufficient resources to adequately supervise the
entities
it regulates can also be considered by reviewing the number of staff ASIC
allocates to each group of the regulated population. As noted in Chapter 4, ASIC
publishes figures on the number of staff members allocated to each of its
stakeholder teams, the number of regulated entities they oversee and the number
of years it would theoretically take to conduct surveillance on every regulated
entity. These figures highlight the challenges ASIC faces in fulfilling its
regulatory responsibilities with its current resources. For example, ASIC has
29 staff members that oversee 3,394 AFS licensees authorised to provide
personal advice as well as 1,395 AFS licensees authorised
to provide general advice. Approximately 65 staff members oversee: 173
authorised deposit-taking institutions; 141 insurers; 641 licensed
non-cash payment facility providers; 13 trustee companies; and 5,688 non-ADI
credit licensees with 28,201 credit representatives. These figures were
outlined in full in Chapter 4 (refer to Table 4.1).
25.13
However, striking figures on supervision coverage and an imbalance
between the regulator's financial resources and those of the large firms it
regulates are not unique to ASIC. For example, in recent fiscal year budget
requests to the United States Congress, the Securities and Exchange Commission (SEC)
has given the following bleak assessments of its resources and capacities:
...during the past decade, trading volume in the equity markets
has more than doubled, as have assets under management by investment advisers,
with these trends likely to continue for the foreseeable future. A number of
financial firms spend many times more each year on their technology budgets
alone than the SEC spends annually on all its operations. Similarly, SEC
enforcement teams bring cases against firms that spend more on lawyers' fees
than the agency's annual operating budget.[17]
* * *
Currently, the average transaction volume cleared and settled
by the seven active registered clearing agencies is approximately $6.6 trillion
a day. Yet the SEC only has approximately sixteen examiners devoted to them,
with limited on-site presence in only three of the seven.[18]
* * *
Seven years ago, the SEC's funding was sufficient to provide
nineteen examiners for each trillion dollars in investment adviser assets under
management. Today, that figure stands at ten examiners per trillion dollars.[19]
How do ASIC's responsibilities compare with foreign regulators?
25.14
The breadth of responsibilities entrusted to ASIC compared to regulators
in other jurisdictions was noted by witnesses and used to argue that a review
of ASIC's responsibilities was warranted:
At the moment ASIC has an incredibly broad remit in
comparison to most securities regulators globally. If there was that reduction
in supervisory capacity or its responsibilities perhaps it would allow it to
focus more specifically on some of the issues which concern so many of the
people who made submissions to the inquiry and the members of this committee.[20]
25.15
Even a cursory comparison of Australia's framework of regulators and those
of other key jurisdictions indicates that the breadth of ASIC's
responsibilities is significantly greater than those of its foreign
counterparts. In the UK, for example, ASIC's securities and markets regulation
functions are undertaken by the Financial Conduct Authority (FCA). The FCA also
has responsibility for market supervision and governance (through the UK
Listing Authority, a division of the FCA). The FCA also is tasked with
financial products and services regulation and credit and financial services
licensing. However, the FCA does not have responsibility for matters relating
to the corporations law generally, such enforcing directors' duties or
regulating auditors and insolvency practitioners. Company registration is
performed by Companies House, an executive agency of the Department for
Business, Innovation and Skills.
25.16
In the US, ASIC's securities and markets regulatory counterpart is the SEC,
with some functions also performed by the Federal Commodity Futures Trading
Commission (CFTC) and state authorities. However, the Consumer Financial
Protection Bureau (CFPB) is tasked with financial products and services
regulation, and credit and financial services licensing is undertaken by state
authorities.
The regulation of auditors is carried out by the Public Company Accounting
Oversight Board (PCAOB), although this is overseen by the SEC. Reflecting the chapter
11 bankruptcy and reorganisation system in place in the US, corporate
insolvency is dealt with by specialist bankruptcy courts with an office in the
Department of Justice
(the US Trustee Program) responsible for overseeing the administration of
bankruptcy cases.
25.17
In Canada, provincial and territorial regulators are responsible for securities
and markets regulation and market supervision. The Financial Consumer Agency of
Canada (FCAC) supervises financial institutions' compliance with consumer
protection obligations and promotes increased financial literacy. Financial
advice is regulated by provincial and territorial agencies. The federal
registration of companies is administered by Corporations Canada with
provincial agencies registering other companies. The Canadian Public
Accountability Board deals with auditors.
Should ASIC lose some of its functions?
25.18
Following on from the previous discussion, this section examines the
evidence received by the committee that questioned the wisdom of one agency
being given numerous important regulatory and law enforcement functions as well
as other administrative responsibilities. During the course of the inquiry, various
possible changes that could be considered were suggested or noted by
stakeholders.
These options, which are discussed in the following paragraphs, include:
-
transferring ASIC's corporate and business name registry
functions to another government agency, or privatising these functions;
-
splitting ASIC into smaller regulators along the lines of its
broad business areas; and
-
transferring responsibility for consumer protection to the ACCC
or creating a new consumer protection agency.
Corporate registration and other
administrative functions
25.19
Since ASIC was established it has been responsible for the
administration of corporate registration. However, in 2012 ASIC also gained
responsibility for the registration of business names after this function was transferred
from the states and territories to the Commonwealth. ASIC also maintains a
register of SMSF auditors. Stakeholders questioned whether it was necessary for
these functions to be performed by a regulator such as ASIC.
25.20
The devolution of ASIC's registry function to another body was noted by
the Governance Institute of Australia as a possible change that could allow
ASIC
to devote resources to its other legislative, surveillance and investigative
responsibilities. To facilitate this, an equivalent of the UK's Companies House
could be established in Australia.[21]
25.21
The committee is not aware of an example of an advanced economy where
the company registration function is undertaken by the securities and markets
regulator.
In a newspaper article published in 2010, former ASIC chairman Alan Cameron was
reported as identifying Pakistan as the only other country where these roles
are combined.[22]
When asked about ASIC's registry responsibilities, the current ASIC chairman
described them as a 'technology business' and 'not really a regulatory
business'. Mr Medcraft also considered there were a number of opportunities
to leverage economies of scale and to create a better user experience by
transforming ASIC's registry function. As an example, he referred to merging
ASIC's corporate register with other government registries:
The Siebel system we have has, currently, six million names
on it. Verizon use the Siebel system in the States for telephones. They have 70
million customers on it. So I think there are huge benefits in actually
separating out that registry business and merging it with other government
registries to leverage the economies of scale from the Siebel management
system. Basically, it has enormous capacity.
What that also means from a consumer perspective is that you
end up with a one-stop shop for financial services and even other registry
things you go to. If you want to update, you want to go to one place et cetera.
And you have to think about the massive opportunity for extracting revenue from
the metadata that actually comes from that.[23]
25.22
Mr Medcraft explained that although ASIC has its newest registers[24]
operating on the more advanced system, ASIC does not have the resources to invest
in the corporate register. Mr Medcraft opined that there 'is cash there for
somebody':[25]
...at the moment we have only two registers on the Siebel
management system. We have the business names and we have the self-managed
super funds. We have not got the capital to invest to bring the corporate
register onto that. If I were in the private sector, I would finance it as a
banker because that $70 million, by moving those registers onto Siebel, would
allow things like person search so every Australian could log on and check
everything a person has to do with ASIC—whether they are deregistered or
whatever. It also allows for online company registration. That $70 million, if
you were in private enterprise, you would invest because the cash flow you
would get out of it would pay back. It is 10-year payback in simple, straight
cash. It removes all the duplication across the registers.
There are economies of scale. Potentially, an investment in
that could eventually yield $350 million of benefits to small businesses
outside of that. So I think the registry is one that probably would be better
moved out, aggregated with other registries to provide a one-stop shop for
Australians.[26]
25.23
A small business owner similarly observed that ASIC's corporate and
business names registers do not appear to have a regulatory role 'beyond
maintaining up-to-date information and not registering conflicting names'. After
expressing criticism about the fees levied on small businesses to fulfil their
obligations to provide information, the fees imposed to access information, and
ASIC's performance at managing
the register, the small business owner concluded that a commercial enterprise
could undertake ASIC's registry functions for less than 'one tenth of the fee
ASIC charges'.[27]
Other submissions also noted the cost of accessing information on ASIC's
register, such as $18 to obtain each current and historical extract of a
company.[28]
25.24
The Governance Institute of Australia observed that ASIC's registry and
other administrative functions, including its call centre, do not utilise
senior or experienced ASIC staff; in fact it indicated that 'call centre staff
appear to be trained only to the extent of referring callers to the ASIC
website in situations where there is uncertainty about the interpretation of
specific provisions'. The Institute argued that:
...there may be service efficiencies to be gained by ASIC
outsourcing its administrative function in a bid to broaden its educative
function. That is, it might be cost-effective for ASIC to use a commercial
operator to run its administrative function rather than maintaining these
responsibilities inhouse.[29]
25.25
The CPSU was asked about the possibility of certain functions being
separated from ASIC and privatised. The CPSU argued that, as the registries
raise
'a reasonably significant source of income and would appear to be a monopoly
service', it would be in the public interest for an Australian government body
to be tasked with the function, rather than the function being privatised.[30]
25.26
Academics also commented on how privatising ASIC's registry function
could affect the provision of information for research purposes. Mr Jason
Harris,
in consultation with other academics, recommended that if ASIC's registry was
privatised, that this only occur with a requirement that information continue
to be provided for research and accountability purposes.[31]
25.27
In May 2014, as part of the 2014–15 Budget, the government announced
that a scoping study would be undertaken into future ownership options for
ASIC's registry function.[32]
Split along clusters or tasks
25.28
Stakeholder organisations and academics also identified other possible changes
to Australia's framework of regulatory institutions. One of the options for
consideration identified by the Governance Institute of Australia was dividing
ASIC into smaller agencies with specific tasks:
[A] number of smaller regulators could be established to
manage the wide range of regulatory functions currently allocated to ASIC,
leaving ASIC focused solely on its original regulatory functions or more
limited regulatory functions than it is currently tasked to manage.[33]
25.29
CPA Australia suggested that thought could be given to restructuring
ASIC and setting clear priorities:
I think it is worth a conversation and some questions perhaps
around splitting ASIC into some segments that can focus on particular things.
When you have a regulator on Monday chasing a corporate, on Tuesday charging a
small business and on Wednesday giving marriage cost advice, that says that perhaps
we need to pause for a moment, set the agenda for the year, tell the public
what they can expect and let's see how accountable you are, because that is
what you keep telling others they have to be.[34]
25.30
Associate Professor David Brown noted the committee's 2010 report that
recommended that ASIC's insolvency functions be transferred to the Insolvency
& Trustee Service Australia (ITSA), since renamed the Australian Financial
Security Authority. Professor O'Brien added that:
...a lot of the rules for that body would come from the best
practice of ITSA, which had shown itself to be a more effective regulator in
that area, because 'insolvency' was in its title as opposed to it being one of
the many functions of ASIC...[35]
Consumer protection
responsibilities
25.31
Some witnesses suggested that the division of consumer protection
responsibilities between ASIC, which has responsibility for consumer protection
in financial products and services, and the ACCC, which has responsibility for
consumer protection in the remaining sectors of the economy, should be
reviewed.[36] Other submissions outlined different proposals. For example, many individuals
dissatisfied with their treatment by ASIC and external dispute resolution
schemes called for the creation of an agency dedicated to consumer protection
in financial services.[37]
A former ASIC employee argued that ASIC has too much work and that this detracts
from ASIC's ability to protect retail investors:
These are the working Australians—the millions of people who
are putting the money into the superannuation system and are least empowered to
protect themselves. They are the ones who need the most protection. I think
they are the ones who have been let down the most by ASIC, and I think the only
way that you can really get them protected is with an agency that is dedicated
to nothing but protecting retail investors.[38]
25.32
In reaching its recommendation that responsibility for consumer
protection in financial services should be transferred from the ACCC to the
agency that ultimately became ASIC, the Wallis Inquiry considered alternative
approaches. In particular, the Wallis Inquiry noted concerns put to it that
without a dedicated consumer protection agency for financial services 'consumer
protection would otherwise become subservient to other objectives'. However,
the report concluded that:
...this risk is more likely to arise where consumer protection
is combined with the functionally different task of prudential regulation. The
tasks of consumer protection, market integrity and corporations regulation are
more complementary than conflicting.[39]
25.33
The approach taken following the Wallis Inquiry was queried at the time[40]
and more recently. In 2008, the Productivity Commission found that the
financial services carve out from the general consumer law occasionally leads
to uncertainty about whether the ACCC or ASIC had jurisdiction. The
Productivity Commission recommended that the economy-wide jurisdiction of the
ACCC for consumer protection be restored but with ASIC continuing to be the
primary regulator for financial services.[41]
Around the time of the Productivity Commission inquiry,
a former ACCC chairman and a former editor of the Australian Financial
Review wrote in various newspaper opinion articles that '[t]he natural home
of financial consumer protection is the ACCC, not the carve-out to ASIC created
by Wallis';[42]
ASIC had a 'noted lack of consumer zeal to date'; and the government should
consider making the ACCC the sole consumer regulator, including for financial
services as '[c]arving out these powers for ASIC has not worked'.[43]
Concerns about the current framework remain; for example, in late 2013 a Monash
University forum on the government's upcoming review of competition policy suggested
that the review should consider whether the ACCC's and ASIC's consumer law
functions 'should be jointly administered by a single separate body'.[44]
25.34
It is noteworthy, however, that recent reforms undertaken in other
countries have not resulted in responsibility for financial services consumer
protection being taken from the securities regulator and given to the general
consumer protection agency. For example, in the United Kingdom the opposite has
occurred.[45]
Proposal for a user-pays funding model
25.35
In addition to suggestions that some of ASIC's responsibilities be
transferred to other bodies, the committee explored how ASIC is funded and
whether the current funding model encourages better regulatory outcomes.
25.36
Although ASIC collects fees, charges and fines on behalf of the
Commonwealth, this substantial revenue ($717 million in 2012–13) is returned by
ASIC to consolidated revenue.[46]
With the exception of some cost-recovery arrangements,[47]
the majority of ASIC's funding has no relationship with the revenue collected
by ASIC.[48]
Nevertheless, the fact that ASIC collects significantly more revenue than its
operating expenses was noted in submissions.[49]
Further, although the growth in revenue from Corporations Act fees appears
steady, Treasury's submission, received in October 2013, noted that ASIC's funding
was projected to decline.[50] In May 2014, the government announced that it would achieve savings of $120.1
million over five years by reducing funding given to ASIC, with ASIC's funding
reduced in the first year by $26 million. The impact of the savings
announced by the government and the termination of various measures are outlined
in Table 25.1.
Table 25.1: Projected funding for
ASIC, 2013–14 to 2017–18 ($ million)
|
($ million)
|
2013–14
|
2014–15
|
2015–16
|
2016–17
|
2017–18
|
|
Changes announced in 2014–15 Budget
|
3.0
|
–26.0
|
–32.5
|
–32.1
|
–32.4
|
|
Total annual department expenses*
|
366.28
|
321.25
|
306.04
|
303.40
|
306.29
|
* This
funding relates to ASIC's annual departmental expenses under for its main
functions (in the Budget papers, this is Programme 1.1 under Outcome 1). That
is, ASIC's expenses for the administration of unclaimed money from banking and
deposit taking institutions and life insurance institutions are not included.
Source: Australian Government,
2014–15 Budget: Budget Related Paper No. 1.16, Treasury Portfolio Budget
Statements, May 2014, p. 159.
25.37
The committee reviewed the funding arrangements in place for foreign
regulators. As with ASIC, the US SEC collects fees and has funding linked to
government appropriations. However, the arrangement is different in that there
is more of a direct link between revenue raised and funding.[51]
Another US agency,
the CFPB, primarily receives its funding from the Federal Reserve. Subject to
statutory rules and limits, the CFPB determines the amount of funding necessary
to fund its operations. The funding is not subject to review by Congress.[52]
While these arrangements attract some controversy,[53]
it does provide the CFPB with a relatively stable source of funding.
25.38
An alternative model of funding a regulator already utilised in
Australia and prevalent internationally is based on cost-recovery levies. In
Australia, industry levies are used to fund APRA and, as noted earlier, a small
proportion of ASIC's functions. ASIC's chairman noted that, internationally,
levies are the predominant means by which regulators are funded.[54]
Examples of foreign regulators that receive funding from industry levies
include the UK FCA[55]
and the New Zealand Financial Markets Authority. ASIC also identified that
regulators in Canada, France, Hong Kong and Malaysia are funded through various
forms of levy arrangements.[56]
Other foreign professional bodies such as the US Public Company Accounting
Oversight Board, which oversees audit standards and quality, are similarly
funded through levies imposed on main accountancy firms based on their market
size.[57]
25.39
While not necessarily advocating that ASIC should be funded by industry‑based
levies, Industry Super Australia outlined some of the benefits and
disadvantages it considered such arrangements would have:
It would ensure that the cost of the regulatory framework is
borne by those who give rise to the greatest regulatory burden, so that the
funding is not just borne out of general revenue. That is obviously a clear
advantage. ASIC raises a reasonable amount of revenue in its activities,
particularly in markets. In terms of the disadvantages I suppose it changes the
nature of the relationship that ASIC has with industry. If there are parts of
industry that are providing a greater level of funding, it might alter the
perception of the independence of the regulator from those parts of the
industry.[58]
25.40
ASIC was questioned about its funding patterns and alternative funding
models such as a levy‑based arrangement. Mr Medcraft outlined how, in his
view, ASIC's expanding responsibilities had created a 'problem' with ASIC's
funding model. He explained that when ASIC was established as a corporate
regulator, the fees collected and costs incurred were 'reasonably correlated';
that is, in the early 1990s it cost ASIC around $127 million a year (in nominal
terms) to regulate corporations but it collected around $189 million in
revenue on behalf of the Commonwealth. However, over time this connection has
become weaker. ASIC's costs for regulating corporations have fallen in real
terms to about $142 million, largely as a result of technological advancements.
The revenue from company regulation and business names registration is now
around $680 million, 80 per cent of which comes from small businesses.
25.41
Reflecting the expansion in ASIC's responsibilities since it was
established, ASIC now allocates the majority of its financial resources to its
non-registry functions. ASIC's overall costs are currently around $350 million.
The approximately $260 million in costs that do not relate to corporate
regulation are attributable to three areas of responsibility ASIC has gained
over time: financial services; consumer credit; and markets. Mr Medcraft
explained that of these three growth areas, ASIC has only received additional
revenue associated with the markets function (about $30 million), and even then
only ASIC's frontline costs are recovered.[59]
Therefore, despite the significant financial services and markets functions
ASIC now performs, it could be considered that the revenue streams from
Corporations Act fees effectively results in the burden of funding ASIC
disproportionally falls on small business.
25.42
To further bolster its argument that the current framework may not be
fairly allocating the burden associated with funding ASIC's regulatory
functions, ASIC's chairman advised that:
-
auditors cost ASIC about $6 million a year to regulate but only
pay $425,000 in fees (also, regardless of any difference in the allocation of
resources necessary to regulate large audit firms compared to small firms, both
large and small firms pay $146);[60]
and
-
AFS licensees cost ASIC $108 million a year to regulate but only
pay $3.7 million in fees.[61]
25.43
The following diagrams summarise ASIC's evidence about how the revenue it
collects on behalf of the government and the cost of performing particular
regulatory activities have changed over ASIC's history.
Figure 25.2:
Revenue and costs—companies, business names and searches
1991–2013 (nominal terms)
Figure 25.3: Revenue and costs—all other
sectors 1991–2013 (nominal terms)
Note: Figures are estimates
only, and are not adjusted for inflation. Costs include depreciation. In Figure
25.2, revenue is from companies, business names and searches; costs are from
regulating companies, including administering business names and searches. In Figure
25.3, 'Other sectors' includes insolvency practitioners, AFS licensees, credit
providers, exchange market operators, market participants and consumers. 'Financial
services' includes financial advisers, insurers, responsible entities,
superannuation fund trustees, deposit takers, investment banks, consumers and
custodians.
Source: ASIC, Submission
45.7, pp. 2–3.
25.44
Mr Medcraft stated that he is 'a very big believer in user-pays'.
After reflecting on his evidence about how ASIC's costs and its
responsibilities have changed over time, Mr Medcraft observed that 'those that
generate the need for regulation should pay for that regulation', and that
user-pays systems are 'far more transparent'.[62]
In addition to arguments based on fairness and accountability, ASIC's chairman also
argued that a user-pays levy model could lead to better outcomes for the
financial system. According to Mr Medcraft, a well-designed levy system could
encourage better self‑regulation and lead to more efficient regulatory
outcomes:
The fundamental concept here—from my days in banking—is that
frankly if you provide somebody with the free option, they will take as much of
it as they can get. That is why I think we have to put an incentive into the
system to discourage the use of our resources and that drives an efficient
outcome.[63]
25.45
ASIC subsequently expounded on the argument that a sector-based
user-pays system designed to discourage the use of ASIC's resources could lead
to better outcomes:
At present, there are also no economic incentives (price
signals) in the market for the use of ASIC's resources. Stakeholders acting
rationally will seek to efficiently allocate their own resources and may choose
low-cost or no-cost ASIC services over other, more costly, alternatives
available in the market (e.g. private legal advice).
Price signals associated with the use of ASIC's resources
would allow business to identify the cost of regulation required to achieve the
desired regulatory outcome. If industry can deliver the Government's desired
policy outcomes more efficiently and effectively through co-regulation or self‑regulation,
and therefore require less use of ASIC's resources and cost less to regulate,
they would have an incentive to allocate resources to undertake part or all of
the regulation themselves. This would ensure that the desired policy outcomes
are delivered in the most economically efficient way. However, these price
signals are not currently in place.[64]
25.46
Mr Medcraft observed that the financial incentive such a framework
creates also 'incentivises industry groups':
...I know from running an industry group that one of the
biggest challenges you have is demonstrating your value as an industry group to
your members. If an industry group can actually say to its members, 'Look, if
you sign onto our industry standards and you do a good job and we enforce the
industry standards, we should end up with a lower cost from ASIC because
actually we are achieving the outcomes that government desires.'[65]
25.47
The committee explored how a levy-based system would operate. Mr Medcraft
outlined a model of levies that would be sector-based and adjusted periodically.
Any adjustment would be based on the costs incurred by ASIC in regulating that
sector to achieve an outcome determined by the government. Mr Medcraft
provided the following reasoning:
If you want to have a system that works you really want to
have it such that it is at a sufficiently granular level that, if the industry
does a good job, it should be adjusted both downwards and upwards. Let's take
the audit sector, for example. The government might say, 'We want to make sure
that at least no more than five per cent of audits are poor quality. If the
sector is not achieving that then it needs more effort from ASIC, therefore
more resources.[66]
25.48
ASIC put forward a proposal where $286.55 million (based on its 2012–13
costs) would be recovered from industry through a combination of:
-
fees for service of $37.84 million, where charges are directly
linked to the cost of ASIC delivering a particular service, such as takeover
approvals; and
-
sector-based levies of $248.71 million, where sector participants
pay an annual fee based on 'volume-related metrics'.[67]
25.49
The equity argument put forward by ASIC found some support. Dr Suzanne
Le Mire remarked that ASIC's point on equity 'is well made' and that a levy
system 'has some appeal'. Dr Le Mire noted that the development of levies for
ASIC could be informed by the WorkCover model:
...where you could increase levies for those who step out of
line. Using a model whereby levies are higher for those who break the rules and
lower for those who are consistently compliant would have some appeal and
perhaps give ASIC some purchase that it does not currently have without
pursuing more serious options.[68]
25.50
Dr George Gilligan was relatively supportive of the concept of
introducing
a levy-based funding system, although he indicated that the mechanism for
determining the levies would require careful consideration:
I think from the perspective of equity that it was a fairly
powerful argument when it stated the proportion of the fees that were generated
by lower-scale firms and the amount of regulatory activity or attention that
those firms actually require or receive from the regulator. So there is the
sense that there should be greater proportionality, one would have thought, in
terms of the user pays model. Philosophically, it would be hard to argue
against that. The mechanics may be a little more problematic but, certainly,
one would have thought that there could be different scales of registration or
licensing fees, for example, for the different actors who participate within
the industry, depending on the size scale and, of course, the profits that they
generate from the privilege of having the licence to operate in the industry.[69]
25.51
Professor Dimity Kingsford Smith also recognised that a user-pays levy
would support a regulatory regime that was self-executing. However, Professor
Kingsford Smith cautioned that it was necessary to ensure the public interest was
reflected in any changes:
If you have the entire regulatory revenue coming from levies,
particularly in a concentrated market such as Australia where a lot of the levy
income might come from a very few players, you have to watch out for undue influence
coming from those who pay.
I also would encourage us to do a little bit more research
into the notion that big players always cost more in regulatory resources. I
have had some experience in the UK as well, and there, with their user pays
system, particularly at the compensation-fund end, the big players are always
complaining that it is the smaller players who are having the compensation
payouts from the fund and that because they are big players they pay the levies
but the moneys go out to the clients of the smaller players, who are a bit
harder to keep in line compliance-wise.
So it is not an open and shut case by any means. But having
some of ASIC's income derived from levies could be something very seriously to
consider.[70]
Committee view
25.52
This report has highlighted specific instances where ASIC could have
performed better and considered ways that ASIC could undertake its tasks more effectively
in the future. Some of the problems identified were linked to ASIC's approach
to enforcement, failures to utilise evidence to establish links and problems
with complaints management and stakeholder communication. The committee
considers these are matters that ASIC can largely address on its own initiative.
However, ASIC's long list of regulatory tasks and the resources available to
ASIC
to perform these tasks clearly act as constraints on its ability to meet
expectations the public and stakeholders may have. Neither of these matters are
in ASIC's control; they are matters determined by the government and the
Parliament. To the extent that
a problem with ASIC relates to its funding, it would be unfair to criticise
ASIC.
25.53
Evidence before the committee strongly indicates that ASIC is unfocused
and over-stretched with an evident weakness in consumer/investor protection. ASIC
has always had a significant role in the Australian corporate world, however,
over many years successive governments have entrusted ASIC with additional important
functions. ASIC is now firmly established as one of Australia's key financial
regulators. However, one outcome of this is that it is increasingly difficult
to identify, articulate and prioritise what ASIC's key regulatory functions and
priorities should be. ASIC would have a clearer mandate if it was relieved of
some of its functions.
25.54
The committee noted earlier that in the 2014–15 Budget, the government
announced that it would fund a scoping study to consider options and provide
recommendations on the optimal ownership arrangements for ASIC's registry
function. The scoping study is intended to inform the government on key
strategic policy and implementation issues for consideration before commencing
a sale, licensing or external management process.
25.55
The committee has independently considered suggestions of re-positioning
the function elsewhere. Although these ideas were developed in parallel (one
through a public inquiry process and the other through confidential budget
processes), they both point towards a common point that the operation of a
sophisticated IT database is
a mere enabling function for ASIC and not core to its regulatory role.
25.56
The committee does not consider that it would be appropriate to make a
final decision on where those IT functions should go before the findings of the
scoping study are known. The purpose of scoping studies on government assets is
generally
to identify the most efficient and effective ways of delivering a service to
the public, without a predisposition for any particular model. The committee
fully endorses the work of the scoping study that is examining future ownership
options for ASIC's registry function as an important first step toward
relieving ASIC of its registry function.
Recommendation 49
25.57
The committee recommends that the scoping study examining future
ownership options for ASIC's registry function take account of the evidence
that has been presented to the committee.
25.58
The amount of funding allocated to ASIC through the annual
appropriations process was considered by the committee. For the health of the financial
system it is clearly necessary that ASIC receives an amount of funding that
enables proactive regulation and meaningful law enforcement. However, governments
have competing priorities and the committee recognises the difficulties associated
with increasing ASIC's funding due to the present fiscal circumstances. In any
case, the issue is not limited to the quantum of funding; it is also apparent
that the current model for funding ASIC is outdated and does not promote efficient
outcomes. ASIC regulates many different sectors of the financial system but its
funding does not account for differences in the cost of regulating each sector.
It does not provide an incentive through a price signal for sectors to take
action to limit the amount of resources ASIC allocates to regulating them.
25.59
The committee considers that ASIC should be funded on a user-pays
principle like many of its international counterparts. To implement this, a
framework of sector‑based levies should be introduced to provide the
majority of ASIC's funding. By making regulated entities more accountable for
the cost of regulating their sector,
a clear incentive would be provided for these entities to minimise the number
of problems that the regulator has to deal with. This feature of a
well-designed levy system could, over time, promote more efficient regulatory
outcomes through better self-regulation, resulting in more resources being
available, within existing financial constraints, for the regulator to investigate
misconduct reports and deliberate non‑compliance. The levies would be
reviewed periodically to ensure they are set at appropriate levels and to
provide greater transparency of how ASIC manages its resources. ASIC would need
to justify why it requires the amount of funding
it proposes and industry would have the opportunity to respond to ASIC's
assessment. However, as ASIC would no longer be funded through the Budget
process, the levies should ensure that ASIC's core funding is more stable on a
year-by-year basis and that ASIC has sufficient resources to undertake
proactive regulatory activities.
25.60
A further advantage of a levy model for funding ASIC is that it could
provide a revenue-neutral means for the government to reduce the fees charged for
lodging and inspecting information and documents. The committee considers that
the fees currently charged to the public for accessing information held by a
government body are too high. These fees effectively act as a barrier to
accessing information and potentially counteract efforts to inform the
marketplace and promote the confident and informed participation of investors
and consumers in the financial system. The public interest would be better
served if the size of these fees were significantly reduced. Increased
efficiencies resulting from the committee's recommendation regarding
the transfer of ASIC's registry responsibilities to another agency could also
allow the fees to be reduced further.
Recommendation 50
25.61
The committee recommends that the current arrangements for funding ASIC
be replaced by a 'user-pays' model. Under the new framework, different levies
should be imposed on the various regulated populations ASIC oversees, with the
size of each levy related to the amount of ASIC's resources allocated to
regulating each population. The levies should be reviewed on a periodic basis
through a public consultation process.
25.62
The government should commence a consultation process on the design of
the new funding model as soon as possible.
Recommendation 51
25.63
Following the removal of ASIC's registry responsibilities and the
introduction of a user-pays model for funding ASIC outlined in Recommendations 49
and 50, the committee recommends that the government reduce the fees prescribed
for chargeable matters under the Corporations (Fees) Act 2001 with a
view to bringing the fees charged in Australia in line with the fees charged in
other jurisdictions.
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