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Corporate watchdog fails to pass a conflict of interest test of its own

How ASIC handles conflicts of interest when it relies on swapping staff with industry is key to perceptions of the regulator. And the story is not a good one.

Recently we examined the circumstances in which the Australian Securities and Investments Commission in 2005 gave the retail superannuation industry “relief” from the requirements of the Corporations Act in relation to online calculators, despite ASIC being aware of many retail providers failing to give consumers information about the impact of fees on potential investments. The issue came to light via the evidence of former ASIC lawyer James Wheeldon to the Senate Economics References Committee’s inquiry into ASIC.

However, as concerning as the nature of the decision ASIC made — in essence, to lower the legal standards so that some retail funds could obscure the impact of fees from consumers — was the conflict of interest involved in it.

One of the ASIC staff working on the issue was Grant Jones. Jones was an MLC employee on secondment to ASIC, and MLC was one of the retail funds affected by the calculator issue. These events took place in 2004 and 2005, but as recently as late last year, MLC was struggling with the calculator issue when Fairfax’s Michael West wouldn’t be fobbed off in his demand for answers about the disclosure of fees on its calculator, which was later pulled offline.

MLC was also a member of the then-Investment and Financial Services Association, which was regularly lobbying ASIC for relief. And according to Wheeldon, in fact, Jones himself had worked on IFSA’s correspondence to ASIC on the calculator issue before shifting to ASIC. Then, at ASIC, he was tasked to work on the regulator’s response to IFSA — helping to draft a response to a letter he had helped draft.

The reason we know this is that Jones was forthcoming about it: he declared his conflict of interest to his superiors. As Wheeldon told the ASIC committee, Jones was entirely open about his position. But ASIC management allowed Jones to continue to work on the issue. In last week’s “response” to Wheeldon’s evidence about the calculators issue before the Senate Economics Committee, ASIC, argued that all was above board:

Yes, ASIC did have a person involved in the relief team that was on secondment from a financial services firm. But that person was not a decision-maker and was only involved in assisting policy work that concerned the industry as a whole, rather than considering matters involving individual firms. ASIC has robust procedures for managing conflicts and these procedures were applied in the case of this secondee.”

The problem with ASIC’s response is it isn’t consistent with the Australian Public Service Values on conflict of interest it is supposed to uphold. It doesn’t matter if an officer with a conflict is a “decision-maker” or not – and in any event, in the policy development process, what is the difference between the non-decision-maker who writes a document (which is what Jones was doing) and the decision-maker who signs off on it? Moreover, the Australian Public Service regards perceived conflicts of interest as every bit as serious as actual conflicts. Crikey understands that ASIC’s conflict of interest guidelines (and they were only guidelines) as they applied in 2004 were consistent with the broader APS policy — indeed, were more hardline in their approach. They recommended officers with real or apparent conflicts be excluded from the any related policy or regulatory process.

How exactly ASIC handles conflicts of interest 10 years on, given the importance it places on secondment, isn’t clear …”

Strictly speaking, the APS Values weren’t applicable in this instance, because Jones was a secondee. The issue of industry secondments is a sensitive one for ASIC; an effective specialist regulator must balance the need for people with industry experience with the risk of industry capture or the appearance or reality of conflict of interest. ASIC told the Economics committee inquiry last week ”71.3% of staff have industry experience, with 28.4% in financial services”. Recently, ASIC told another parliamentary committee, which has oversight of the regulator, about a swap program it has with law firms, investment banks and industry bodies — ASIC’s enabling act specifically provides that it can engage people who aren’t public servants. Such people, however, are still subject to strict conflict-of-interest requirements, and must advise of them in writing. And chairman Greg Medcraft, echoing the ASIC guidelines from 2004, made a point of telling that committee:

We are very careful. If we do a secondment, clearly we have to be sure that they are not into an area where they are regulating their own firm, for example. We can provide you with details on that as well.”

Plainly that didn’t apply in Grant Jones’ situation in 2004, despite Jones’ own efforts to draw attention to his conflict of interest. Jones — who acted entirely appropriately in revealing his conflict of interest — should not have been placed in the position of helping to write the regulator’s response to a letter he had helped draft from an industry body. Speaking as a former APS officer of some experience, I can’t think of any public servant who would seriously think that was appropriate, whether they were a secondee or an APS officer, whether a decision-maker or junior official.

Have things really changed now? How exactly ASIC handles conflicts of interest 10 years on, given the importance it places on secondment, isn’t clear; there is no publicly available ASIC policy on the issue, and ASIC’s promised “detailed response” to Wheeldon hasn’t appeared. On the one hand, Medcraft says secondees are not allowed to regulate their own firms (in fact, they shouldn’t be regulating their own industry, given that would involve regulating competitors), while on the other, in apparent defiance of APS Values, he identifies decision-making as the threshold for conflict of interest.

ASIC is widely perceived as being far too strongly influenced by, and responsive to, the more powerful players in the industry it regulates. But it publicly boasts of its employment of industry people and how that is a good thing. It may indeed be so, but stakeholders and the public are entitled to wonder if there’s a connection between the two. The lack of clarity around how ASIC manages conflicts of interest does nothing to resolve that concern.

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    Yclept
    Posted Thursday, 17 April 2014 at 6:38 pm | Permalink

    Unbelievable that ASIC could allow such a situation to happen. I wish I could get a secondment to the ATO to write replies to myself regarding tax relief…

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