The report finds gaps and inconsistencies in the penalties available to the Australian Securities and Investments Commission that must be addressed. ASIC should be able to force wrongdoers to repay or “disgorge” the money they’ve made, as overseas regulators can.
Tougher penalties will not solve the problem, however, if the regulator lacks the will to enforce them. And that comes down to leadership. At a time of widespread concern about the performance of ASIC, there are simply too many mixed messages coming from chairman Greg Medcraft.
In a revealing, extended interview last Thursday with ABC’s The Business host Ticky Fullerton, Medcraft expressed a preference for timely outcomes — like accepting “enforceable undertakings” from wrongdoers, which amount to a promise not to reoffend — over expensive litigation that could take a decade. Yet Medcraft also said of enforcement action against insider trading, for example:
“If you’re doing it, if you might be getting away with it, we’ll eventually catch up with you; it’s just a matter of time.”
Which is it to be: timeliness or patience?
Medcraft talked about the need for appropriate penalties, comparing, for example, the fines for insider trading in Australia with those in the United States, where the maximum jail sentence is twice as long at 20 years, and fines are not capped at an arbitrary dollar figure but set at “triple damages” (i.e. the fine will be three times the gain from the wrongdoing, which also applies to cartel behaviour in Australia). Yet at the same time Medcraft talked about the need for softer penalties — something akin to an infringement notices for people who “unintentionally break the law”.
Sorry? Since when is that an excuse?
Medcraft spoke of the need to talk softly yet carry a big stick, insisting ASIC was not scared of taking on the big end of town:
“Frankly, under my chairmanship we’ve got a fairly large war chest where we’re very comfortable to go after anybody.”
The war chest Medcraft was referring to is ASIC’s special enforcement account, money the government sets aside for the express purpose of taking on big cases. ASIC is allowed to let the account accumulate from year to year, and the balance is now around $50 million. Yet Medcraft also told Fullerton that:
“… when I became chairman that [balance] was running down, we’ve now built that up … That is there to send a signal to anybody — anybody — we’re willing to take on any big case.”
But the fund is not there to pile up and send a signal, it’s there to spend. Let’s see it used.
“A soft result on Leighton could be the last straw for Medcraft.”
ASIC is right now the subject of a Senate inquiry into its failure over years to act in a timely way to protect investors. As Sydney Morning Herald columnist Michael West wrote recently:
“In mid-2008 the Australian Securities and Investments Commission was warned Storm Financial group was going to blow up. We know this because we warned them ourselves.”
Last year a Walkey Award-winning investigation by The Age’s Adele Ferguson and Chris Vedelago exposed how ASIC took 16 months to crack down on rogue advisers within the Commonwealth Bank’s financial planning arm, despite tip-offs from within the bank itself.
Medcraft joined ASIC in 2009 after a long business career including 30 years in investment banking here and abroad. He was appointed chairman in 2011 taking over from Tony d’Aloisio, the ex-Mallesons and ASX chief who was seen to be too close to the big end of town. Medcraft told the Senate inquiry in February when he was approached to join ASIC, the “last thing I expected was to be a regulator. I was running an industry group.”
At first, there were hopes Medcraft would take a tougher line than d’Aloisio. More than halfway through his five-year term, those hopes have all but evaporated. Most recently, many commentators were surprised by ASIC’s decision to take no further action over allegations of insider trading at David Jones.
Despite a big build-up, the Senate committee did not really lay a glove on Medcraft when he appeared in Sydney. Nationals Senator John “Wacka” Williams grilled him about his overseas travel — slightly unfair, given his role as rotating chair of the International Organization of Securities Commissions — and otherwise wound up asking how the committee might help ASIC, for example by recommending new powers to suspend a financial adviser with a single phone call. The committee’s report in May might be tougher.
A key test will be ASIC’s current investigation into insider trading at Leighton Holdings, in the days before the unveiling of a billion-dollar partial takeover by majority owner Hochtief was unveiled. Australia is regarded as one of the leakiest markets in the world. You don’t need ASIC’s new sophisticated market surveillance software to know that insider trading is rife, routinely evidenced by sudden, sharp share price movements ahead of major corporate announcements.
A soft result on Leighton could be the last straw for Medcraft.