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Jun 27, 2014

ASIC's problems start at the top

A Senate committee has savaged the Australian Securities and Investments Commission and demanded a judicial inquiry into the Commonwealth Bank -- but it's unlikely to happen.

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Don’t hold your breath waiting for a judicial inquiry or royal commission into the financial planning industry and the big banks that profit from dodgy planners any time soon.

The case for some form of independent inquiry with coercive powers to examine what went on in the Commonwealth Bank’s financial planning arm, and the Australian Securities and Investments Commission’s response to it as the casualties of planners working for CBA mounted, was laid out by the majority report of the Senate inquiry into ASIC’s performance yesterday — a report from which only Liberal Senator David Bushby dissented, creating a split with his Nationals colleague, Senator John Williams, who instigated the inquiry.

The committee argues that it was misled by both CBA and ASIC (ASIC, in turn, had been misled by CBA); that the current process established by ASIC does not have an expert to represent the interests of CBA victims; that there are likely to be many currently unidentified people who have not been compensated properly by CBA; and that there are allegations CBA has reconstructed the files of those ripped off by planners in a way that would minimise compensation.

As far as the committee is concerned, it simply doesn’t have faith in ASIC to get the current compensation process right. “ASIC has shown that it is reluctant to actively pursue misconduct … rather, it appears to accept the information and assurances the CBA provides without question,” the committee said, damningly. It believes an independent process with coercive powers that can uncover so-far unrevealed rip-offs and force CBA to surrender information is needed.

The government isn’t interested; Finance Minister Mathias Cormann has already dismissed the idea. Nothing could demonstrate the government’s priorities better: having a partisan witch-hunt on the insulation scheme — and going after trade unions on the basis of a few officials ripping members off to the tune of hundreds of thousands of dollars — is OK; an inquiry into how one of Australia’s largest businesses has inflicted tens of millions and possibly hundreds of millions of dollars in damages on vulnerable investors, however, is beyond the pale. Particularly when it’s a business the government is bending over backwards to help by gutting regulations put in place to protect consumers from self-interested planners and the banks that pay them.

The committee makes 60 other recommendations covering a variety of areas: strengthening corporate law and associated penalties, improving the environment for corporate whistleblowers, calling for an independent investigation into the claims raised by James Wheeldon, moving ASIC to a self-funded model — but most of the recommendations focus on how ASIC does its job and the way it uses its powers.

There’s considerable focus on enforceable undertakings — on ASIC using them more aggressively, on being more transparent about them, on having independent monitoring of compliance with them. Enforceable undertakings are a popular tool with regulators: it saves them having to prosecute a company that has broken the law or breached an industry regulation, and they’re more flexible than prosecutions in engendering cultural change within companies. But the problem lies in the “enforceable” bit, because they’re not quite as enforceable as the name suggests.

“Having a partisan witch-hunt on the insulation scheme is OK; an inquiry into how one of Australia’s largest businesses has inflicted possibly hundreds of millions of dollars in damages on vulnerable investors, however, is beyond the pale.”

If a company that has given an undertaking breaches that undertaking, the regulator can’t move to prosecute the company for the breach — it needs to obtain a court order to compel the undertaker to comply with the undertaking first. Only then can a regulator prosecute a breach if it continues. And as the behaviour of ASIC has shown — believe it or not, ASIC used to be used as a model for other regulators in the use of enforceable undertakings — enforcement is unlikely to be effective if the regulator isn’t aware that an undertaking is being breached. Worse, the committee notes that ASIC seems obsessed with the burden that an undertaking would place on a company that had breached the law.

Moreover, ASIC is the classic example of a regulator too reliant on enforceable undertakings, preferring to use them rather than take on well-resourced companies in court — especially when the Commonwealth Director of Public Prosecutions seems to take forever to actually commence prosecutions. As to whether ASIC has a cultural aversion to taking on “the top end of town” (a claim that ASIC bizarrely challenged by claiming it was also accused of being unwilling to take on small business), the committee concluded:

“There appears to be either a disinclination to initiate court proceedings, or a penchant within ASIC for negotiating settlements and enforceable undertakings. The end result is that there is little evidence to suggest that large entities fear the threat of litigation brought by ASIC.”

The problems around ASIC’s enforceable undertakings are, coincidentally for a tool so lauded for its ability to achieve cultural change, cultural ones. It’s a rare regulator that doesn’t have sufficient powers to do its job properly, provided its staff are well motivated and led aggressively. Unfortunately, the likes of Allan Fels and Graeme Samuel, who were willing to endure the contumely of the business community (in Samuel’s case, often his erstwhile business friends) in leading the ACCC, are more the exceptions than the rule among Australian regulators. Under chairmen Tony D’Aloisio and Greg Medcraft, ASIC has endured persistent criticism of its regulatory failings — it’s barely two years since ASIC, along with APRA, was criticised by another parliamentary inquiry for its inadequate response to the Trio Capital collapse. Regulators are influenced strongly by their leaders, who determine the culture and the priorities of the organisation they lead, and that applies as much to poor performers like ASIC as to more successful bodies.

As for the government, it remains determined to press ahead with exacerbating the systemic problems of the big bank-controlled financial planning sector by gutting consumer protections, even after one of its own backbenchers has determined that the sector has such profound problems an independent judicial inquiry is needed to start sorting out the mess. Just how much more evidence does the government need that its gutting of FOFA is downright dangerous?

A final thing: this inquiry wouldn’t have happened without the fantastic journalism of Adele Ferguson and her Fairfax colleagues. Whatever good flows from it, they deserve a share of the credit.

Bernard Keane — Politics Editor

Bernard Keane

Politics Editor

Bernard Keane is Crikey’s political editor. Before that he was Crikey’s Canberra press gallery correspondent, covering politics, national security and economics.

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