Deborah O'Neill (Robertson, Australian Labor Party) Share this | Hansard source

() (): On behalf of the Parliamentary Joint Committee on Corporations and Financial Services, I present the committee's report, Statutory oversight of the Australian Securities and Investments Commission.

In accordance with standing order 39(f) the report was made a parliamentary paper.

by leave—I note that my colleague on the committee is at the table. The Parliamentary Joint Committee on Corporations and Financial Services is responsible for the oversight of the Australian Securities and Investments Commission. As the House would be aware, section 243 of the ASIC Act directs the committee to inquire into and report on ASIC's activities, and matters relating to those activities, to which the parliament's attention should be directed. In fulfilling this statutory function, the committee currently holds four oversight hearings per year and routinely directs matters of interest to the parliament's attention.

Today, I am pleased to speak to the committee's latest report, which draws on evidence from the oversight hearing held in December last year. For the record, I want to note that we also heard on that morning from the ASX. As with all ASIC oversight hearings, last December's hearing covered a broad range of topics. Without doubt, ASIC has challenging and diverse responsibilities as Australia's corporate regulator. The committee recognises in its report the breadth and the complexity of the issues that ASIC must deal with on both a day-to-day basis and as part of its medium to long-term strategy. I would like to draw the parliament's attention today to the following issues that are of key concern for ASIC and the committee:

•   the regulation of dark pools and high frequency trading;

•   the standard of auditing in Australia;

•   compensation for the victims of Storm Financial;

•   the pursuit of the perpetrators of the Trio Capital fraud;

•   the issuing of guidance to stakeholders on the Future of Financial Advice reforms; and

•   the High Court's findings in the cases that ASIC conducted against Fortescue and James Hardie.

High frequency trading and dark pools

High frequency trading uses technological tools and computer algorithms to trade securities on a very rapid basis. The buyer places a large block of orders, many of which are then immediately withdrawn. The intent of this trading is to make a profit on small movements in the share price. The ASX has estimated that high frequency trading accounts for around 25 per cent of the value of activity on Australian markets.

A dark pool is where clients' orders are matched on a computer away from the public market. The trades in the dark pool tend to be smaller and more frequent. This form of trading has the advantage for buyers of very low brokerage fees and the ability to trade away from the scrutiny of the public market, also known as the 'lit market'. The value of activity on unlit or dark markets has been 'as high as about 40 per cent but probably averages in the range of 25 to 30 per cent'. In the United States, the value of dark pool activity can be above 50 per cent.

On 20 November 2012, the government announced new market integrity rules to address risks emerging from developments in market structure, including growth in automated trading and the changing nature of dark liquidity. The new rules provide for:

•   direct control over trading algorithms, including 'kill switches' to immediately stop an algorithm if required;

•   new extreme trading rules in cases of large price movements whereby there will be an immediate obligation on the market operators (Chi-X and the ASX) to enforce an extreme trading range for trade in securities;

•   a requirement that dark pools offer meaningful price improvement over the lit market, with exemptions for block trades; and

•   additional data reporting requirements to assist ASIC in performing market surveillance.

The government has announced that these obligations will come into force over a six- to 18-month period: the extreme trading range rules are already in place; the meaningful price improvement rule will come into effect in June 2013; new market operator data reporting requirements will be introduced in November 2013; and kill switches in June 2014.

Both darks pools and high frequency trading are currently the subject of two separate ASIC taskforces. These taskforces are due to report next month. Notwithstanding indications that the trends in high frequency trading and dark pools are neither as pronounced nor as harmful as in the United States, the committee still strongly supports ASIC's investigations and looks forward to its findings with considerable interest.

Auditing standards

The second significant matter raised during last December's public hearing concerned a decline in auditing standards in Australia. ASIC's chairman, Mr Greg Medcraft, drew the committee's attention to the ASIC audit inspection report for the period 1 January 2011 to 30 June 2012. The report found that there had been an increase in instances where auditors did not perform all of the procedures necessary to obtain reasonable assurance that the audited financial report was not materially misstated.

This finding is very concerning to the committee. In our report into the collapse of Trio Capital last year, we noted our great concern with the lack of 'professional scepticism' displayed by Trio's auditors, WHK. The committee also notes that, only a month before the collapse of the rural Victorian lender Banksia Securities in October last year, the auditors engaged there had signed off on the company accounts. We are looking forward to getting a little more detail at our next hearing to help us get an exact picture of what is happening regarding auditing. While we have already identified the reported decline in auditing standards as a concern, the detail will emerge at our next hearing.

Auditors play a crucial role as gatekeepers of the Australian financial system. When they fail to exercise the requisite professional scepticism in their work, investors and superannuants can suffer significant consequences. It is up to professional associations, standard-setting bodies and the large auditing firms—and the smaller ones too—to reaffirm a commitment to the highest professional standards. The committee intends to call the Auditing and Assurance Standards Board and the Financial Reporting Council to attend the next oversight hearing so we can get a little more detail about what is happening in that space.

Storm Financial

The committee has continued to follow the Storm Financial matter. The committee commends ASIC for its work to reach a settlement with the Commonwealth Bank on compensation costs for the victims of Storm Financial. It notes that ASIC hopes that a similar settlement is reached with Macquarie Bank and the Bank of Queensland and that the outcome is both timely and fair for investors. The committee will seek information from ASIC on the cost of the Storm case once the court proceedings are finalised.

Trio Capital

I move now to Trio Capital. The committee asked ASIC in December for an update on how its investigations into Mr Jack Flader and his associates were progressing. ASIC explained that it had received a number of international requests, was in the process of reviewing those materials and had spoken to 'a number of persons both onshore and offshore'. It had also referred information to the Australian Federal Police and the Australian Crime Commission back in June of last year.

ASIC told the committee that the Australian Federal Police had not yet commenced an investigation. It is still assessing a referral to decide whether to investigate. ASIC noted that it has provided 'all the information that we think is appropriate and that they [the AFP] have requested'.

ASIC told the committee that it has committed significant public funds to the Trio investigation and to claims on behalf of others to recover compensation. It has formed the view, however, that those claims are not 'financially viable' given that there is no-one with resources likely to be found liable.

Nonetheless, the committee urges ASIC, the AFP and the Australian Crime Commission to continue their lines of inquiry into the perpetrators of the Trio Capital fraud. At the next oversight hearing, in March 2013, the committee will seek an update from ASIC on the December 2012 examination of Mr Tony Maher (formerly Mr Paul Gresham). The committee's interest in what is happening in this space, with the Trio fraud, continues to be very much at the forefront of our considerations. I wanted to give that assurance to any people who were affected and are particularly interested in this report today.

FOFA

As parliament will be aware, this committee in 2009 conducted an inquiry into financial products and services and the role of financial advisers. The report tabled was an interesting one and a number of its recommendations were adopted in the government's Future of Financial Advice legislation, which this committee examined and which passed this parliament in June last year.

The committee welcomes the progress that ASIC has made in releasing and finalising guidance material on the key aspects of the FOFA reforms. It awaits final guidance material on the key issues of conflicted remuneration and the codes approval exempting advisers from the duty to inform clients that they need to 'opt in' to continue receiving advice. The committee will monitor with interest the progress of ASIC's FOFA workshops in February and March 2013. The committee is keenly aware of the sector's interest in this phase of the consultation process and looks forward to discussing with ASIC the outcomes of this consultation process when we hear from them at our next oversight hearing.

Fortescue and James Hardie

Finally, I will provide a brief comment on the two recent High Court cases involving ASIC on the matter of directors' continuous disclosure obligations.

In October last year, the High Court upheld the appeals of Fortescue Metals and Mr Forrest against the 2011 decision of the full Federal Court. The High Court found that Fortescue's statements about its 'framework agreements' with Chinese companies were not misleading or deceptive to investors. Accordingly, the High Court further found that Fortescue and Mr Forrest had not failed to meet their obligations under the Corporations Act.

ASIC's chairman told the committee that the High Court's finding were based on the facts of the case itself rather than a changed interpretation of the existing law.

In contrast, the High Court found in favour of ASIC in the James Hardie case in May last year. ASIC noted that that finding was particularly important 'because it was a decision in law'. The decision clarified that company directors are expected to check, and are responsible for the accuracy of, significant statements made to the stock exchange. That is of course what ordinary Australians expect always to be the case. ASIC's chairman told the committee that, while the general level of corporate governance in Australia is very good, the James Hardie decision is a timely reminder to all of our corporate citizens to exercise the very highest standards in the interests of all of us in this nation.

The committee's next oversight hearing is on 15 March 2013.

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