The Australian Securities and Investments Commission's (ASIC's) submission in response to the Financial Services Royal Commission's Interim Report addresses three issues: ASIC's role and approach to regulation; how conduct risk should be addressed and a range of more specific questions/law reform issues.  An overview of some of the issues raised in ASIC's submission is below.

Regulatory architecture should not be changed

• 'ASIC supports the “twin peaks” model': Like the Australian Prudential Regulation Authority's submission in response to the Interim Report, (see: Governance News 05/11/2018), ASIC also argues against revising the existing 'twin peaks' regulatory structure.  
• ASIC's remit is not too wide: ASIC argues against the need to create a third regulatory agency or allocating part of its responsibilities to another agency (eg the ACCC) stating that 'the transfer of parts of ASIC’s regulatory remit to another agency or regulatory body would be a major legislative and practical change. It would also be unwarranted. There are significant benefits in having integrated consumer protection and market integrity functions and one regulator administering both positive conduct rules and licensing, as well as general consumer protection, within those areas' ASIC writes'.  Commenting specifically on the idea of transferring consumer protection matters in connection with financial services/products to the ACCC, ASIC argues that to do so would be inefficient 'if positive conduct rules and licensing regimes were detached from ASIC and given say to the ACCC (which does not administer a licensing regime or other positive conduct rules like ASIC’s), it would need to develop (or acquire from ASIC) new expertise' ASIC writes.

ASIC's role and approach to regulation

• Conduct Risk: ASIC writes that it agrees that there is room for improvement in its response.  More specifically, it states that it is in agreement with the Commission that there has been 'a focus on management of financial risk at the cost of conduct risk and prioritising fair outcomes for customers'. ASIC adds that changes to its enforcement approach to emphasise 'court action' will 'sharpen financial institutions' focus on conduct risk because it will increase the costs, including the reputational costs of engaging in misconduct'. 
• Conduct falling below community standards/expectations: ASIC states that it considers it has been 'broadly effective' in identifying the areas of systemic and widespread problems of this kind (through use of various enforcement 'tools' other than court action) 'even having regard to failures or deficiencies in breach reporting noted in the Interim Report'.
• Currently reviewing its approach: ASIC writes that it agrees with the Commission that a proper starting point is to ask 'why not litigate?' in response to misconduct.  ASIC adds that it is conducting a review and analysis of its enforcement priorities, processes and decision making procedures including the use of court action which is expected to be completed by the end of 2018 and that various interim measures whereby the Chair of ASIC’s Enforcement Committee reviews all decisions to proceed other than by way of litigation, have been introduced pending the outcome of that review.  ASIC adds that proposed changes to legislation (Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018) will also assist ASIC in holding financial institutions to account.
• Use of a range of enforcement tools remains appropriate: Though conceding the limitations of its current approach and the need to alter it (by prioritising litigation), the submission makes clear that the use of a range of enforcement tools remains appropriate in ASIC's view.  The submission explains the theoretical basis underpinning ASIC's enforcement approach noting that 'The enforcement pyramid model of sanctions of escalating severity has been found to be a sound foundation for enabling a regulator to address corporate misconduct – particularly by larger financial institutions'.  Quoting Professor Braithwaite, ASIC adds that it is not workable, possible or desirable for any agency to apply the most severe sanctions/punishments in every instance, as it would be 'unaffordable, unworkable and counterproductive' to do so.  ASIC comments that this is the more so in ASIC's case given the 'exceptionally large number of corporations and corporate actors it oversees'.

[Note: The UNSW submission in response to the Interim Report appears to be supportive of ASIC's use of a range of enforcement tools, on similar grounds. The submission is covered in a separate post in the 12/11/2018 issue of Governance News.]

• Resourcing: The submission makes the point that 'A step change in regulatory priority and practice towards criminal and civil court action on a wide range of fronts will likely necessitate a permanent increase in resources provided to ASIC.  A central question is: what level of funding and resources best enables a re-balancing of priorities, alteration of practices and implementation of decisions weighted more heavily towards litigation-based enforcement or a "deterrence strategy", taking into account the real resource impacts and real resourcing risks of that those approaches?'

[Note: Funding is also identified in the UNSW submission in response to the Interim Report as a key issue.  'If funding is a proxy for political will, then guaranteeing funding in the forward estimates sufficient for ASIC to be credible in its enforcement work over the coming decade, will be the best signal that the politics of regulation have changed and that systematic non-compliance in the financial sector is no longer acceptable' the submission states.  The submission is covered in a separate post in the 12/11/2018 issue of Governance News.]

Expansion of ASIC's powers? 

In addition to product intervention and design and distribution obligations, as well as increased penalties ASIC states that it considers further powers or extensions of existing proposals would assist it in executing its mandate.   These include the following:

• extending the application of the Banking Executive Accountability Regime reforms 'across financial services and credit businesses'
• granting ASIC a rule making power (similar to APRA's) to enable it to make standards in relation to prudential matters under s11AF of the Banking Act 1959 (Cth).
• extending design and distribution obligations to: credit products regulated under the National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) (such as payday loans, and credit cards) and to promoters of self-managed superannuation funds;
• extending design and distribution obligations and product intervention powers to products regulated only under the ASIC Act (eg funeral expenses policies, some extended warranties, short-term credit exempted from the national credit laws and buy now pay later arrangements); 
• expressly permitting ASIC, when applying the product intervention power, to require training of staff focused on poor practices in relation to the particular product involved; 
• removing the exemption from general licensee obligations to have adequate resources to provide financial services and carry out supervision and have adequate risk management systems for bodies regulated by APRA.

Banking Executive Accountability Regime (BEAR)

• BEAR is too limited in scope: ASIC writes that it 'strongly supports' greater executive accountability for poor conduct throughout retail financial services and credit businesses (as does the community) and that this is 'not met by BEAR's present scope'.  ASIC adds that the as presently drafted, BEAR would not address some instances of misconduct identified by the Commission (as the conduct in question would not meet the 'systemic and prudential' test necessary to trigger BEAR).
• Follow the UK example? ASIC writes that it supports expanding the BEAR in line with the UK Senior Manager and Certification Regime and in line with the Economics Legislation Committee report on BEAR (2017) so that it is administered by ASIC in relation to conduct as well as APRA in relation to prudential issues.  More particularly, ASIC suggests the BEAR could be extended to cover conduct by: imposing an obligation on managers within financial services or credit licensees to take reasonable steps within the scope of their management roles to ensure compliance with financial services and credit laws; requiring larger financial services and credit licensees to map key responsibilities; and giving ASIC enforcement powers (power to disqualify managers for serious breaches of their reasonable steps obligation and to seek civil penalties if a financial services or credit licensee breaches BEAR obligations).

Conflicted Remuneration

• ASIC states that 'conflicted remuneration in financial services should be prohibited or removed as a general policy', though in some cases, transitional arrangements will need to be considered in the implementation of such a change.  ASIC adds that 'if there are evidence-based arguments that the removal of conflicted remuneration would generate costs associated with competition or consumer access that clearly outweigh the benefits of reduced consumer harms, then these particular cases could warrant limited exceptions to this rule. This should require ongoing public monitoring and gathering of data on the impacts of conflicts to test whether any exemption should be retained'.
• Mortgage brokers:  Commenting specifically on the issue of payments to brokers ASIC writes that the risks of poor outcomes from the payment of mortgage broker commissions could be mitigated by a combination of broker-specific responsible lending obligations (which would be in addition to existing responsible lending obligations for lenders), restrictions on, or a complete prohibition of conflicted remuneration, and a best interests duty.  ASIC adds that lenders have started to voluntarily remove some types of conflicted remuneration (eg volume based commissions) in this context but that ASIC considers that it is 'too early to determine whether these changes to remuneration go far enough, and whether a complete prohibition on conflicted remuneration is necessary'.
• Disclosure is not effective in addressing the risk: ASIC writes that it does not consider that disclosure is an effective means of addressing the harms arising from conflicts of interest in remuneration.

Regulatory Complexity

• Complexity is not excuse for misconduct: 'Complexity is not and never will be an excuse for misconduct, and this is particularly so for large, sophisticated and well-resourced financial institutions' ASIC writes. However, ASIC goes on to say that it does 'weaken the basic infrastructure for the regulation of financial institutions and complicates their compliance and ASIC’s supervision and enforcement. It also adds costs to business and may deter new entrants to the market'.
• Prohibition of certain conduct/products may be warranted: 'ASIC agrees the present regulatory regime is complex and in parts overly detailed' ASIC writes.  The submission goes on to detail a number of sources and examples of complexity in the current regime that have resulted in poor outcomes.  Among the issues identified is the success of industry in 'securing exceptions, carve outs or other qualifications or compromises' to reform efforts eg exceptions to the Future of Financial Advice reforms and or 'the exemptions enjoyed by the insurance industry from various parts of the consumer protection regime in financial services'.  ASIC goes on to suggest that the simplest way to remove complexity may be to 'prohibit certain types of conflict or conduct'.
• Sale of funeral related financial products: ASIC writes that the current regulatory framework in respect of funeral expenses products is not adequate and that amendments are required.  These are that:  a funeral expenses policy should be a financial product covered by the financial services licensing and conduct regime of the Corporations Act. That is, the exclusion effected by regulation 7.1.07D of the Corporation Regulations 2001 (Cth) should be removed; and subject to this, a funeral expenses policy should also be covered by the proposed new design and distribution obligations and product intervention power.

Oversight and review of ASIC's performance

ASIC writes that it would 'encourage formalised review of its performance against its mandate. Given the challenges in measuring or assessing the effectiveness of regulatory outcomes and the time needed for strategic regulatory decisions to bear fruit, reviews on say a three-year cycle may allow deeper analysis'

[Source: The Australian Securities and Investments Commission submission in response to the Financial Services Royal Commission's Interim Report]