In a speech entitled 'Trust deficit in corporate Australia' given at the Australian Council of Superannuation Investors (ACSI) annual conference, Australian Securities and Investments Commission (ASIC) Chair James Shipton said that:

• The trust deficit in the financial sector is of the sector's own making and industry must commit to changing its approach to compliance to rectify it.

• Conflicts of interest in the sector are 'verging on a systemic issue' and urged industry to act to address it.

• ASIC's preferred approach in relation to conflicted payments in advice is to remove them all together and 'strongly suggest[ed]' that firms take this into account when considering how to deal with conflicts of interest arising from remuneration structures.

• ASIC intends to apply a new supervisory focus on Australia's largest financial institutions and superannuation funds.  This will involve more 'intensive and dedicated supervision, together with increased cooperation with our fellow regulators especially APRA'.  More specifically Mr Shipton said that ASIC plans to accelerate and expand the 'Wealth Management Project' (the series of investigations into advice in large financial institutions which he said had been the subject of many of the issues before the Financial Services Royal Commission). 

A high level overview of the key points of Mr Shipton's address is below.

The 'trust deficit' and the need for industry to raise standards of professionalism

• Mr Shipton said that ' Australia’s corporations, and the finance sector in particular, are suffering from a trust deficit.  And this current predicament is of the sector’s own making. And because it is largely of its own making, the sector must be held to account and must take responsibility for its repair. 

• Need to 'embrace professionalism': Mr Shipton said there is a need for the people in finance to 'refocus on building a highly professional and ethical mindset…What I want to emphasise is that the industry, and the people within it, need to do more to support the proper functioning of the financial system and its regulation'.

[Note: Mr Shipton has spoken previously on the need to raise standards of professionalism to address the 'trust deficit'.  Professionalism was the theme of his inaugural keynote address to the ASIC Annual Forum which also focussed on the 'trust deficit' in the financial sector, the risks this poses to the financial system and the need for higher levels of professionalism in the industry to address the issue. See: Governance News 23/03/2018.]

Conflicts of interest are 'verging on a systemic issue'

• Despite the proliferation of conflicts of interest, industry has not acted to address the issue: Mr Shipton said that there is a 'proliferation of conflicts of interest in parts of the financial sector' as has been highlighted by both recent ASIC actions and by the Royal Commission, and added that though these conflicts of interest are a 'perennial challenge for business' a 'number of institutions have not taken the management of conflicts of interest to heart with many financial firms 'turn[ing] a blind eye' to the risks, failing to have management systems in place to resolve conflicts and resisting attempts by ASIC to address conflicts or in some cases to recompense those harmed by them.

• Need for cultural change: Mr Shipton said that lack of action to address the issue was justified 'too often' on the basis that 'everyone else is doing it' and observed: 'A business culture that is blind to conflicts of interest is a business culture that does not have the best interests of its customer in mind. Moreover, it is one that is not observing the spirit as well as the letter of the law'. 

• Urged industry to take steps to address the issue (particularly conflicted payments): Mr Shipton urged the sector to take steps to address the conflicts issue.  Commenting specifically on the subject of conflicted payments in financial advice, Mr Shipton said: 'the best way to deal with some conflicts..[is] to remove them altogether.  This is an option that ASIC favours in relation to conflicted payments in advice. There can be no ambiguity in this area.  So, I would strongly suggest that all financial firms keep this in mind when considering how to deal with conflicts of interest arising from remuneration structures'.

The Regulatory System is 'not designed a police state'

• Mr Shipton said that regulatory structure of the financial system is 'not designed as a police state' but rather is designed on the basis that the '"first line" of compliance is the firms themselves'.  He emphasised the necessity of firms taking responsibility for ensuring their own compliance and cooperating with regulators on this basis, 'if firms continue to fail to step up to their responsibilities, the integrity of our regulatory structure, and our financial system, is undermined' he said.

• ASIC's active role in holding industry to account: Commenting on the active role ASIC has taken to holding firms and people to account, Mr Shipton outlined the enforcement outcomes (bannings, criminal convictions and civil penalties) ASIC had secured since 2011.  He stated: 'I am personally committed to using every inch of our powers and tools to get the outcomes that the community deserves'.   

Adoption of new supervisory approaches with a focus on large financial institutions and superannuation funds

• 'Accelerate and expand' the Wealth Management Program: Much of what we saw in the financial advice round of the Royal Commission hearings was based on the work of our Wealth Management Project.  We intend to accelerate and expand this intense program. We are also looking at ways to build on our substantial enforcement outcomes.  This could include making greater use of external expertise in our investigations and enforcement actions.

• Focus on large financial institutions and superannuation funds: Mr Shipton said that over the coming years ASIC will improve on existing work by adopting new supervisory approaches.  More particularly Mr Shipton said that ASIC 'is looking to apply a new supervisory focus on Australia’s largest financial institutions and superannuation funds. This will involve more intensive, and dedicated, supervision, together with increased co-operation with our fellow regulators, especially APRA'.

ASIC Resourcing

• Discussing additional resourcing with government: Commenting briefly on ASIC resourcing, Mr Shipton said 'As always, the extent that we can develop these initiatives will depend on our capability and level of resourcing. It is accordingly highly relevant that this is the first year that our funding will be sourced from industry'.  He added that ASIC is in the process of discussing with government 'what additional support' is needed.

[Sources: Keynote address by ASIC Chair, James Shipton, Australian Council of Superannuation Investors Annual Conference, Sydney 17/05/2018; ABC 17/05/2018]