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Calculating compliance: how ASIC ‘enforced’ financial advice laws

ASIC has failed to respond to serious allegations about its enforcement of the law on financial planning. Crikey examines the damning evidence against the corporate watchdog.

Nearly two weeks on from serious allegations being made by former Australian Securities and Investments Commission employee James Wheeldon about the corporate regulator’s response to demands from the retail superannuation sector for relief from financial advice requirements, we are yet to have a detailed response.

The issues raised by Wheeldon in his evidence to the Senate Economics Committee, which is investigating the Australian Securities and Investments Commission’s performance, are complex but go to the heart of the argument that ASIC is captured by industry and in some ways merely a cipher for the influential companies it purports to regulate. We’re going to deal with just two specific issues he has raised, and do it over two articles in order to explain how extraordinary ASIC’s behaviour was.

Wheeldon joined ASIC in 2004. Despite being dismissed as a “junior lawyer” by ASIC last week, he was no fresh-faced graduate: he has degrees from Sydney University, the University of Chicago and Harvard Law School and spent several years on Wall Street before returning to Australia. He left nine months later, disgusted at the process by which ASIC had given the financial planning industry relief from the requirements of the Corporations Act in relation to financial calculators — online tools that large wealth management firms offer to enable potential customers to estimate their returns from different scenarios.

The ostensible regulatory issue about calculators was whether they amounted to personal financial advice under the Corporations Act  — in which case, they would be subject to requirements under the act, and in particular, s.945A, a section since removed in the Future of Financial Advice reforms, which required a reasonable basis for advice and that advice be appropriate.

The Investment & Financial Services Association — these days the Financial Services Council — was and is the lobby group for the retail super sector, controlled by the big banks and AMP. Ahead of the Howard government’s 2005 reforms establishing greater choice on superannuation funds — a triumph for the retail super sector — IFSA was becoming agitated about the calculator issue, because while some retail funds were open about the impact of fees on financial outcomes in their calculators, others preferred to keep their fees hidden. And a calculator that failed to identify fees, or failed to make clear to people using it that it did not include the substantial impact of fees, would be misleading and potentially in breach of the act.

In May 2004, ASIC issued a “guidance“ to the industry saying, in effect, calculators weren’t personal advice if they met certain broad conditions. But that wasn’t enough for IFSA, and it continued to lobby ASIC for relief from the requirements of the act. When Wheeldon arrived, he was assigned to work on the issue. In May 2005, ASIC issued a “relief’ for the whole industry with a slightly longer but still broad set of conditions. It’s what happened between those points that raises serious questions about ASIC.

According to Wheeldon, Mark Adams, the head of the area within ASIC in which he worked — regulatory policy branch — was keen to proactively meet IFSA’s concerns about the calculator. IFSA wanted the issue settled quickly before the choice reforms commenced in 2005. Some senior officials expressed concern about the political sensitivity of the issue if IFSA decided to raise the matter at a political level.

Now, for context, it is entirely normal within the public service for industry bodies to meet with officials to discuss regulatory issues. It is also normal for industry bodies, if they find public servants insufficiently helpful, to go the minister concerned to overrule them. Ministers can indeed do that, or they can follow the advice of their department. What was unusual about ASIC’s behaviour around the calculators was its apparent deep concern that IFSA might raise the issue at a political level, as if that was an eventuality that had to be forestalled, and that ASIC itself had the power to mitigate the impacts of the law via relief orders, something most departments, and many regulators, don’t have.

ASIC internally was aware of problems with calculators and fees, but preferred to lower the standards to which the industry would be held rather than enforce them.”

ASIC also had several options to resolve the issue. It could have rejected IFSA’s request. ASIC has its own, very good, calculator, which addresses the impact of fees, that it could have encouraged consumers to use; it could have encouraged IFSA to ensure its members were providing calculators fully complied with the law and addressed fees — like AMP’s did. Moreover, ASIC knew there was a concern about fees and calculators. Crikey understands that another section of the regulator, during internal consultations on the issue, identified a number of industry calculators that did not include the impact of fees and in some cases simply did not mention fees at all, giving users a highly misleading result.

But when ASIC granted relief in 2005, it did not mention the role of fees at all. The closest it came was to a nebulous mention of costs. In its guidance relating to the order, it only suggested “costs match respected industry-wide sources” — not those charged by the provider itself.

Reappearing last week before the Economics Committee, ASIC “responded” to Wheeldon’s evidence, but failed to rebut any of Wheeldon’s factual assertions. It flagged a more detailed response to come, although at the time of writing that hadn’t appeared. Chairman Greg Medcraft told the committee:

… there was no special treatment for any parties involved in this matter. I can’t emphasise strongly enough that every single super fund, irrespective of which industry association they belong to, irrespective of whether they are big or small, can use this legal relief to provide these calculators to members. Furthermore, the conditions we attached to this relief apply to all funds in exactly the same way. These conditions are designed to ensure online calculators are of benefit to consumers. They include a requirement that the assumptions underpinning the calculators are reasonable and that the limitations of the calculators are spelt out … ASIC made a relief decision that was completely proper, in response to unintended consequences arising from changes to the law.”

One problem with this is that the issue of unintended consequences doesn’t appear to have been raised internally within ASIC while relief was being discussed — it appears to have been a retrospective justification for the relief, given to Parliament. But the broader point is that ASIC has erected a straw man: the problem isn’t “special treatment”, it’s ASIC’s complicity in lowering the standards applicable to a consumer tool in order to assist some companies to hide the impact of fees, in an industry that relied — and still relies — on hiding the colossal scale of its fees, which are among the highest in the world, from consumers.

All this was a decade ago; what is its contemporary significance? ASIC insists that it has long been concerned about the financial planning industry; as we saw last week, given repeated evidence from 2007 to 2010 that some planners at Commonwealth Financial Planning were engaged in “inappropriate” conduct, ASIC steadfastly did nothing. This is a similar example: ASIC internally was aware of problems with calculators and fees, but preferred to lower the standards to which the industry would be held rather than enforce them.

There is no evidence that ASIC has changed its reluctance to upset the top end of town since then. One of the genuinely funny parts in its statement to the committee last week is Medcraft’s claim that ASIC is wrongly criticised because “it only takes on the big end of town”. Medcraft must move in peculiar circles if he thinks people seriously believe ASIC has a disproportionate focus on big firms. If it does, its focus in on bending the rules to look after them, not enforce the law.

*Tomorrow: from industry representative to regulator — the conflict of interest in ASIC’s response

2
  • 1
    Bill Hilliger
    Posted Tuesday, 15 April 2014 at 1:25 pm | Permalink

    Oh well, it seems its ok (with the aid of a pen) for the retail superannuation industry to steal from a mostly indifferent public.

  • 2
    CML
    Posted Tuesday, 15 April 2014 at 5:18 pm | Permalink

    So, what else is new? The big end of town fleecing the uniformed small retail funds customer?
    Surely not!

    Did you say this all happened under the Howard government?
    Even more extraordinary, NOT!!

    Definitely time for the revolution!!!

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