Announcement of additional funding

Minister for revenue and financial services Kelly O'Dwyer has announced $70.1 million in additional funding for the Australian Securities and Investments Commission (ASIC) 'to boost the resources and capability of ASIC to improve consumer outcomes'.

Ms O'Dwyer said that the package includes the following measures.

• Embed 'dedicated' ASIC staff within the big four banks and AMP: $8 million to implement a new supervisory approach in respect of Australia's five largest financial institutions (the big four banks and AMP) by 'embedding dedicated staff within these institutions to monitor governance and compliance actions'.
• Additional funds for supervision, enforcement and audit of the superannuation sector: '$9.4 million to boost supervision of the superannuation sector by strengthening audit and enforcement action to improve transparency and outcomes for superannuation members'.
• Additional funding to pursue actions against 'well funded' litigants: $26.2 million to 'accelerate and increase the intensity of ASIC's enforcement activities and enhance its capacity to pursue actions for serious misconduct against well-funded litigants, through the Enforcement Special Account'.
• Funding for a 'targeted and thematic review into corporate governance': '$6.8 million to establish a dedicated taskforce which will conduct a proactive, targeted and thematic review into corporate governance to identify and pursue failings in large listed companies, including deploying staff to conduct new on-site surveillance and investigations'.
• Implementation of whistleblower protection laws: '$6.6 million to implement the Government's reforms to whistleblower protection laws, so that ASIC can better receive, assess, triage and address whistleblower disclosures about misconduct'.
• Fintech development: '$6 million to promote Australia as a world leader in the development and adoption of regulatory technology solutions for the financial services industry'.

Ms O'Dwyer said that the remaining funds would be directed towards improving consumer access to the Financial Advisers Register; enhancing ASIC's enforcement work on the unfair contract term protections for small businesses; and ensuring compliance by licensees and financial advisers with the Future of Financial Advice laws.  She added that the additional funding follows a decision by ASIC's new Chairman, James Shipton, to re-focus ASIC's strategic direction on proactive enforcement and increase onsite supervisory approaches and builds on the government's existing commitment to ensuring 'ASIC is fit for purpose and can pursue and prosecute those who do the wrong thing ASIC.'

[Note: Mr Shipton has flagged his intention to adopt an 'enhanced supervisory' approach in a number of recent speeches.  See: Governance News 30/07/2018; 04/06/2018; 18/05/2018 as well as in the ASIC submission in response to the Productivity Commission's draft report into the efficiency and competitiveness of the  superannuation sector.]

ASIC Chair James Shipton commented that the announcement is 'great news for ASIC, but above all, it is great news for the community and the financial services sector because [it will put ASIC] on an strategic and agile footing'. Mr Shipton went on to highlight that the funding would enable the following.

• Quicker response times: The additional funding will enable ASIC to accelerate enforcement initiatives and capabilities in line with community expectations that the regulator move quickly to resolve issues.  'Deterrence capability is front of mind' Mr Shipton said.
• Superannuation sector will be an area of focus: 'As the Minister and the Treasurer mentioned, we will be going onsite' Mr Shipton reiterated.  He added that ASIC 'are also going to be doing supervisory approaches, supervisory engagement models in the important area of superannuation…It is absolutely vital that this area be a regulatory focus for us, and this is something that we will be working very closely, in close coordination with our colleagues at APRA, to execute on'.
• Taskforce: We also will have a conflicts of interest taskforce and we're going to be looking at conflicts of interest in the financial advice industry. We're going to be looking at conflicts of interest in corporate leadership and in the corporate governance community, and we're also going to be looking across-the-board at corporate governance, particularly where remuneration structures disrupt and mean that the outcome is not as positive for the consumer and the community.
• Promotion of regtech: Mr Shipton said that ASIC would invest 'energies and our resources in promoting regulatory technology solutions. Not just because they are good supervisory tools for a regulatory agency like ours, but also because these regulatory tools should be adopted by the financial sector, because the enormity of the task of avoiding misconduct and having fair, efficient and strong systems is not just a human response alone. It needs to have a technological solution, and we stand ready with this additional support and this additional funding to work with industry to develop these regulatory technology solutions so that we can have positive outcomes for the financial sector, but above all, for the community'.

ASIC to focus on identifying 'the harms' to minimize the 'probability of harm occurring': The AFR quotes Mr Shipton as commenting that the shift in ASIC's regulatory and enforcement strategy 'draws heavily' on the work of Malcolm Sparrow and more particularly is informed by the concept called 'the character of harms' which advocates focusing on the potential harms to financial consumers in society as a means of identifying opportunities for 'surgically efficient and effective interventions'.  Mr Shipton explained that this focus is important because 'a regulatory agency needs to identify the harms that we want to prevent. It's not so much about risks. Risks will always be there. There will always be the risks of the probability of the harm occurring'.

Industry response

• ABA says banks are 'committed to ensuring' the measures are implementing 'quickly and efficiently': In a statement, Australian Banking Association CEO Anna Bligh said 'Restoring trust and confidence in Australia's banks through an open and transparent industry is the joint goal of Government, regulators and the sector' and added that 'Banks will work proactively and in good faith with ASIC on the measures announced today to improve monitoring of regulation and increase the transparency of the financial services industry.  While the industry awaits further details of how the new initiatives will operate, it is committed to ensuring it is quickly and efficiently implemented'.

• More detail needed says Governance Institute: The Governance Institute has issued a statement in support of the additional funding for the regulator to combat misconduct (in principle) but has also questioned the lack of detail that has so far been provided as to how the proposal to embed ASIC staff inside banks will work in practice, what safeguards against 'regulatory capture' will be in place, and how embedding staff will be effective in raising governance standards.  Governance Institute CEO Steven Burrell said: 'We'd like to understand more about how this will work. What relationship will the embedded regulator have with the Board and Management? What are the rules of engagement? What powers will ASIC have within the daily business operations? The banks cannot become reliant on ASIC's "Bank Police", they need long term strategies to fix governance and culture issues'.

• Professor Pamela Hanrahan from UNSW Business School commented that: 'ASIC's announcement that it will embed its enforcement staff into the major banks and AMP is a positive development, but needs to be carefully managed…Formalising ASIC's inspection program in this way represents an important shift in regulatory approach, taking ASIC towards a more real-time oversight of the major players in consumer financial services'.  Professor Hanrahan has previously argued 'in view of the highly concentrated nature of the sector, there may even be a case for embedded regulatory engagement with the major vertically integrated financial businesses, along the lines of the Australian Taxation Office's key taxpayer engagement program'.

[Sources: Minister for Revenue and Financial Services Kelly O'Dwyer media release 07/08/2018; [registration required] Joint Press Conference with Treasurer Scott Morrison: Turnbull expands ASIC's armoury 07/08/2018; [registration required] The Australian 08/08/2018; The AFR 07/08/2018; 07/08/2018; 07/08/2018; 08/08/2018; The ABC 07/08/2018; UNSW media release 09/08/2018; ABA media release 07/08/2018; Governance Institute of Australia media release 09/08/2018]