Overview

In a wide-ranging speech entitled 'Getting on with it' Australian Securities and Investments Commission (ASIC) Acting Chair Karen Chester spoke about ASIC's regulatory stance, the effectiveness of ASIC's actions in responding to the pandemic and executing it's core function, and ASIC's role in supporting Australia's economic recovery.

A core theme of the speech is that ASIC is committed to taking a lighter-touch, outcomes based approach to regulation - only intervening where business has failed to 'step in, and step up'.

'When we see significant detriment, or poor market outcomes – be it actual or likely significant harm to consumers or investors, or an absence of healthy competition creating fertile ground for potential misconduct. Only then do we need to step in'.

'Regulation as better' – a lighter touch regulatory stance that allows business to 'get on with it'

Mr Chester said that the disruption triggered by COVID-19 is an opportunity for the regulator (and for business) to reassess its approach in light of 'the new normal'.

'At ASIC we recognise that this is a time of a potential "new better" for regulators and for business – where boards step in early and step up decisively to manage both financial and non-financial risk. And with that "step in and step up" by business, ASIC can step back. To only intervene when the data (early warning signs) of harm and misconduct require us to do so. We need to support the economy, promote market integrity and efficient and competitive markets. We need to protect consumers – be they individual consumers, be they vulnerable, be they retail investors, be they wholesale investors, be they small business'.

Ms Chester said that ASIC will focus on its core function: to 'monitor and promote market integrity and consumer protection in relation to the Australian financial system' using the regulatory tools at its disposal, while also supporting the COVID-19 recovery. In saying this, Ms Chester made clear that she considers that ASIC now has the necessary regulatory tools required to carry out this function and to move beyond 'regulation as usual' to 'regulation as better'.

'So ASIC’s new age is here. And we are getting on with it. We are better placed to address harm arising from evolving products and practices without compromising the potential for competitive disruption and innovation. Which means we can limit or avoid the future need for more intervention and more regulation. But we will also maintain our enforcement focus…The easiest way to stay off our radar is by living up to Parliament’s and community expectations and following the DDO roadmap. Our new age is about awareness of market realities and placing a competitive market, and consumer outcomes, at the centre of everything we do. Because at the end of the day it’s our job. And we are simply getting on with it'.

Looking forward: ASIC's product intervention power and the design and distribution obligations

Ms Chester described ASIC's product intervention power (PIP) and the forthcoming design and distribution obligations (DDOs) (which commence on 5 October 2021) as 'two bookends' that 'exemplify outcomes based regulation'. She said that in combination, they will enable ASIC to recalibrate its approach to 'firmly' focus on consumer and market outcomes.

• PIP: Ms Chester observed that ASIC is already using PIP where it considers it to be necessary observing that 'because PIP is proactive and flexible, ASIC only needs to take enforcement action if there is non-compliance coupled with significant consumer detriment'.
• DDO: Ms Chester said that if business complies with the DDO it should 'provide scope for less enforcement action from ASIC' and may 'also provide an opportunity for deregulatory initiatives over time'. Ms Chester observed, 'it’s really up to business to pave the way for such deregulation to ultimately be contemplated by government'. Ms Chester added that ASIC expects to release its final regulatory DDO guidance 'in coming weeks'.

Ms Chester observed that the combination of these powers will enable ASIC to take a lighter touch approach to regulation, provided that firms 'step up'.

'When we see significant detriment, or poor market outcomes – be it actual or likely significant harm to consumers or investors, or an absence of healthy competition creating fertile ground for potential misconduct. Only then do we need to step in. For today, this should only be when Boards and business have not stepped in and up, to deter misconduct and deliver good consumer outcomes. Design and distribution obligations are the (self-designed) roadmap for them to do so. Product intervention our tool to act when and if they don’t. So we have the tools. The software script is written. Now we just need to let the program run, while we watch and act if the program fails to deliver the desired outcomes'.

ASIC's 'why not litigate' approach

Ms Chester explained that this regulatory stance is not inconsistent with ASIC's 'why not litigate' approach which already requires the regulator make a judgement call about whether litigating is in the public interest before commencing litigation. That is, before proceeding, two tests need to be satisfied: 'have breaches of the law more likely than not occurred – do we have the evidence? And secondly, is pursing the matter in the public interest, is there regulatory value?'. Ms Chester's view is that 'embedded' in the second of these tests, is consideration by the regulator of the 'the real economic impacts of our regulatory decisions and actions. And how that may impact consumer and investor vulnerabilities and harms both in the here and now, and beyond'. Ms Chester said that ASIC's decision not to proceed to seek special leave to appeal the Westpac responsible lending case is one example of this approach.

Commenting briefly on ASIC's recent losses and the commentary in the press, Ms Chester said that though proud of its successful actions, it is not to be expected/it is perhaps not desirable that ASIC's actions will always be successful. For example, it could signal that ASIC is pursuing only easy wins. Likewise, Ms Chester observed that insights/lessons learned from losses may help inform ASIC's approach and those of policy makers, and 'importantly a win is not always the single prerequisite for market deterrence'.

A data-driven, proportionate approach: How ASIC is already deploying the full range of available regulatory tools available

Ms Chester said that ASIC's approach is data driven - ASIC uses data from reports of misconduct, recurrent data, market intel to competition analytics to identify issues, to inform the appropriate regulatory response and to ensure the response is proportionate. ASIC then uses the right tool or combination of tools to address the issue. The importance that data plays in ASIC decision making is reflected in ASIC's recent investment in its 'data foundations' and in ASIC's recalibrated data strategy.

Ms Chester said that ASIC has implemented new systems to enable better use to be made of existing data and is now working on 'scaling up' its analytics and data collection capability. This will enable the regulator to better 'detect early warning signs of harm and unhealthy competition in markets'. Ms Chester said that ASIC already has some pilot projects underway.

Ms Chester then outlined a number of examples of the way in which ASIC has deployed the range of regulatory tools available to address specific issues. These included:

• ASIC's recent work in consumer credit insurance which entailed use of multiple 'tools': surveillance, transparency (ASIC's report), (ongoing) investigative work, remediation to consumers, guidance to industry on product design and sales practices, and intervention (banning unsolicited outbound telephone sales).
• ASIC's recent review of the Buy Now Pay Later sector which Ms Chester described as an example of a 'powerful yet simple use of regulatory transparency'. Ms Chester observed, 'Our report highlights the ability of recent regulatory reforms and new tools to deal with any consumer harm. By embracing their design and distribution obligations and own self-regulatory code, the industry can go a long way to addressing consumer harm. To step in and step up'.
• ASIC's 'true to label' project – where ASIC used a combination of surveillances, transparency (media releases), investigation, intervention (sending letters of concern to regulated entities) and enforcement action to identify investment fund products with 'inappropriate or confusing product labels'. Ms Chester said that 13 responsible entities were asked to take corrective action and that to date, 'most' have done so. ASIC has commenced proceedings against one group and may take further enforcement action.

Ms Chester flagged lack of sufficient data on investment management and small amount credit contracts as areas of concern for the regulator, stating that ASIC has particular concerns about managed funds. Ms Chester said that ASIC is currently working with Treasury to ensure ASIC has the data it needs/and is able to publicly share it.

ASIC's response to COVID-19

Ms Chester said that ASIC's new regulatory powers, coupled with ASIC's 'new and better use of data' have already enabled ASIC to make positive changes and ensured ASIC was in a position to step 'in an up' to help business and consumers through the disruption caused by the COVID-19 pandemic. Ms Chester then outlined how ASIC had deployed new 'safety valve' powers – eg powers to provide relief and/or to issue waivers – as 'regulatory shock absorbers' during the pandemic, to rapidly and efficiently provide relief to business. For example, ASIC provided relief facilitate virtual shareholder meetings and extended the period for lodging financial reports as well as providing temporary relief to facilitate capital raisings.

ASIC also recalibrated its regulatory priorities and moved immediately, in line with the government's actions, to defer commencement of certain Hayne reforms - ASIC deferred commencement of the mortgage broker best interests duty and the design and distribution obligations.

ASIC also acted to 'disrupt emerging misconduct' and escalating harms for example through reviewing superannuation trustee websites/other communications about the early release of superannuation scheme and secure 'corrective action' where needed and through lending a 'very public voice for consumer awareness about those who prey on the vulnerable'.

Reminder to banks/insurers to ensure consumer 'safeguards' are in place

Ms Chester said that though ASIC 'commends' the way in which insurers and banks have responded to the various challenges throughout 2020 (including the 'escalated natural disasters' and the pandemic), it remains important for firms to ensure that 'safeguards are in place to make it easy for consumers to navigate themselves to better outcomes'. For example Ms Chester said that: a) complaints processes should be straightforward; b) application and switching processes should be streamlined as much as possible; and c) products/services should not contain 'surprise'/hidden fees.

Ms Chester said that ASIC will also continue to support government legislative reform. 'We will intervene in a targeted way where needed, and (in response to industry demand) we will issue guidance to help business meet the challenges of the COVID economy and legislative reform'.

ASIC's competition mandate

Touching briefly on ASIC's competition mandate, Ms Chester said that ASIC is currently undertaking an assessment/review of competition in the Australian funds management industry to 'identify where competition is effective, where it is not, and if not why not' and is supporting Treasury as it 'clears the way for business to operate efficiently and competitively'.

Consumer remediation

• ASIC is currently monitoring 'over 100 remediations' which Ms Chester said could see a return of at least that could see a return of at least $4.6 billion to consumers.
• Ms Chester said that ASIC will initiate consultation on proposed regulatory guidance for remediation shortly. The guidance will outline ASIC's understanding of 'what the law requires of licensees'.
• ASIC will also release, in response to industry demand a 'field guide' called: Making it Right: how to run a consumer-centred remediation. This guide will draw on ASIC's experience 'with remediations and behavioural science to help licensees with the "day-to-day" design and execution of consumer-centred remediations. Licensees have been asking us for just those sort of practical tips'.

Enforcement update – ASIC remains focused on enforcement (where necessary)

Hayne 'legacy pipeline'

• Ms Chester said that of the 13 Hayne referrals to ASIC, five are the subject of civil litigation, two remain under investigation and one matter has been resolved through court action. Five referrals have been concluded with no further action.
• Currently ASIC has 16 Hayne Commission case study matters underway. Six are currently before the courts; three are being considered by the Commonwealth Department of Public Prosecutions (CDPP) and seven are under investigation. A further five case study matters have been finalised: three resulted collective civil penalties of over $20 million and two others resulted in criminal convictions and fines.

COVID-19 related misconduct
Ms Chester said that ASIC is also focused on addressing: predatory lending practices; mis‑selling of products; poor claims handling; scams; unlicensed conduct; and misleading and deceptive advertising. Ms Chester said that ASIC has 13 investigations underway that fall into this category and has commenced court proceedings in connection with a number of them.

Other investigations
By the end of December 2020, ASIC plans to file approximately15 civil cases, refer 'around 20 briefs' to the CDPP relating to approximately 25 individuals or companies, and refer 'around 10' individuals or entities for administrative action.

Six other focus areas
ASIC is also focussed on addressing: misconduct in superannuation and insurance; illegal phoenix activity; auditor misconduct; 'new and emerging types of misconduct' using new technologies; significant market misconduct (eg such as insider trading, market manipulation); and continuous disclosure matters.

Increased accountability is welcome

Ms Chester said that ASIC accepts the need for increased accountability.

• ASIC fully supports the independent review currently being undertaken by Treasury being undertaken by Treasury and is committed to making the necessary changes to ensure there is no repeat of the issues that led to it.
• Ms Chester also welcomed oversight of ASIC's regulatory work by the parliamentary joint committee, and in future by the proposed new Financial Regulator Assessment Authority.

[Source: Keynote address by ASIC Acting Chair Karen Chester at the AFR Banking & Wealth Summit 18/11/2020]