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

() (): On behalf of the Parliamentary Joint Committee on Corporations and Financial Services I present the committee's report entitled 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—It is always a pleasure to be able to report on the work of the Joint Parliamentary Committee on Corporations and Financial Services and, indeed, to be in the parliament and hear the reports of fellow chairs of committees indicating the work that goes on in this place. We live such busy lives in this place that we often move around and do not hear about the great work that is going on. I am sure people sitting in the gallery today will find that they have heard much more by sitting in the chamber than they might through other sources.

Regarding this report, I am very pleased to report that we are fulfilling our responsibilities for the oversight of the Australian Securities and Investment 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 fulfilment of 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 report, which draws on evidence from the oversight hearing held in September this year. I would like to draw this House's attention to three matters arising out of the oversight hearing: firstly, the collapse of Trio Capital and our continuing inquiries into that matter; secondly, the Australian superannuation industry and reports regarding that sector; and, thirdly, ASIC resources.

Regarding the collapse of Trio Capital, the committee's response and our continuing determination is to ensure that people who were caught up in that collapse understand that we do not believe that our inquiry into the collapse of Trio Capital ended with the tabling of the committee's report in May this year. Indeed, the committee continues to monitor ASIC activities in response to the corporate collapse. At the September hearing ASIC noted that it is undertaking a report on the custodian industry, consultation on the regulation of research houses and the development of regulatory guidance to improve disclosure by hedge funds—all vital work arising out of the context of that collapse.

The committee considers that such steps are fundamentally important. The Trio collapse highlighted weaknesses in key checks and balances in Australia's financial and superannuation system and expectation gaps between the perceived and actual role of gatekeepers such as custodians and research houses. The committee will certainly continue to monitor developments in this area with interest and will continue to report to the House on ASIC's activities. People who are particularly interested in this area will, I am sure, be reassured by that ongoing activity by ASIC in this area.

Regarding Australia's superannuation industry, ASIC reiterated its advice that the continuing growth of the superannuation industry will strongly influence Australian financial markets in the coming 12 months and indeed the coming decades. The committee was informed that the superannuation industry is an area of high-level focus for the commission. I am pleased to report that ASIC has established a self-managed superannuation fund task force to examine the advice currently available to investors and consumers and to consider options to improve investor awareness and financial literacy. The committee is particularly interested in the work of the self-managed superannuation fund task force. It is the committee's view that the task force should comprise representatives from other regulators of Australia's superannuation and SMSF sectors, such as the Australian Taxation Office and the Australian Prudential Regulation Authority. The committee will actively seek from ASIC updates on the work of this important task force and will appraise this House of ASIC's activities.

The committee also received considerable information from ASIC regarding their resources. In August this year, when tabling the committee's third oversight report for 2012, I drew the House's attention to the resources that are available to ASIC. Further detailed information about ASIC's resources and expenditure was provided at our September oversight hearing. Indeed, we received a detailed analysis of the commission's allocation of its resources, which it then uses to undertake surveillance activities.

In summary, ASIC considers that Australia's financial system is based on self-execution and relies on gatekeepers doing the right thing. ASIC chairman Mr Greg Medcraft advised that the commission is not resourced to look into everybody's accounts and situations. Accordingly, it takes a considered risk based approach to surveillance.

The committee appreciates ASIC's candour regarding its interpretation of its statutory duty to enforce the Corporations Act and related legislation. The committee reiterates its previously stated view that the commission must be appropriately resourced to take all necessary and reasonable action to promote fair, efficient and safe financial markets.

However, enforcement and surveillance are only one part of an appropriate regulatory model. The committee considers that proactive education is a necessary aspect of a well-balanced, effective regulatory framework, and the committee is interested in measures that the commission has previously taken, is currently taking and could take in further extension over the coming months to improve financial literacy and investor education.

The importance of the Australian Securities and Investments Commission to the proper functioning of Australia's financial markets cannot be overestimated. Parliament established the commission to ensure the fair and efficient regulation of Australia's markets. The parliament also tasked the Parliamentary Joint Committee on Corporations and Financial Services to monitor ASIC's activities and ensure that the commission is fulfilling its statutory responsibilities to maintain, facilitate and improve the performance of Australia's financial system.

The breadth of the regulator's responsibility is substantial, covering gatekeepers in Australia's financial system, Australia's superannuation system and Australia's national business names register, as well as trading on Australia's domestic licensed markets. These are a few, but by no means all, of the areas within the regulator's purview.

At the next ASIC oversight hearing, the committee will be seeking ASIC's advice regarding the following matters: the regulator's continuing response to the collapse of Trio Capital; the work of the self-managed superannuation fund task force; ASIC's continued supervision of real-time trading on Australia's domestic licensed markets, and in particular Australia's unlit markets; and the commission's enforcement and litigation strategies, particularly in the light of the High Court of Australia's decision in the Fortescue Metals case—to name some substantive things we will be engaging in, not to exclude any further matters that might be of interest to the committee. The committee will hold its fourth ASIC oversight hearing for 2012 on Friday, 23 November 2012. The report for this hearing will be tabled in the 2013 autumn sittings.

Paul Fletcher (Bradfield, Liberal Party) Share this | Link to this | Hansard source

by leave—I am pleased to rise to comment on the most recent report of the Parliamentary Joint Committee on Corporations and Financial Services in the discharge of its statutory oversight of the Australian Securities and Investments Commission. I want to highlight two aspects of the matters that were discussed by the committee with ASIC at the most recent hearing. Once concerns the collapse of Trio and the other concerns the implementation of the so-called FoFA, Future of Financial Advice, reforms.

Let me speak firstly in relation to Trio. At the hearing, ASIC reiterated its view that the loss suffered by investors in ARP Growth Fund ultimately resulted from investment decisions rather than fraud. In response to a question from me, where I asked, 'So it is your view that it was a genuine, albeit risky, investment rather than a vehicle promoted by fraudsters?' Mr Price, of ASIC, responded, 'We have seen some of the agreements relating to the collateralised leveraged credit default swaps and we consider them to be genuine,' and Mr Medcraft responded, 'We have looked at some of the reference entities on the swap as well, and they were genuine.' Let me repeat my view that this is a convenient conclusion for a regulator to reach, but it appears to me to be a conclusion which the facts do not presently allow to be reached. I do not say it could never be reached in the future but, based upon what is known right now, I am unpersuaded by ASIC's view—and I will indicate some reasons for that.

Firstly, it is clear that a number of dubious individuals are heavily involved in the overall factual matrix concerning Trio. Secondly, Mr Paul Gresham, later known as Mr Tony Maher, was involved in the management of the ARP Growth Fund—indeed, he was the key figure. This is a man from whom ASIC have now obtained an enforceable undertaking. So, on the one hand, ASIC think there is something dubious about his conduct, yet on the other hand they appear to be satisfied that there was no fraud in the way the money was invested. Another factor is information that I am aware of, which I know ASIC is also aware of, about the path traced by the funds invested by the ARP Growth Fund. I will not say or disclose more about that as I do not want to prejudice potential further investigations.

ASIC also informed the committee that it does not think there is a sufficient basis to charge the man who is widely thought to be the mastermind of the Trio fraud, Jack Flader—although ASIC conceded that it had not discussed the matter with the Director of Public Prosecutions before reaching this view. ASIC also told the committee that it does not intend to take any civil action against the auditors of the Trio fund, nor against any other parties. It made this statement in answering a question that I had put on notice. It had this to say:

ASIC does not propose at this stage to pursue civil action against the Trio auditor.

In respect of possible recoveries from other parties, ASIC has looked at a range of persons and entities. Of these persons and entities considered we have not identified any significant funds, assets or insurance that would satisfy a judgement debt even if ASIC identified and successfully pursued a claim against these persons.

We are aware that a claim bought in the Supreme Court of New South Wales by an investor in the Astarra Strategic Fund has been settled in favour of the investor. Notwithstanding this successful proceeding we are of the view that the funds/assets available are not sufficient to adequately compensate all the affected investors in the Astarra Strategic Fund given the size of the total losses.

This is, again, a disappointing answer. In particular it is hard to reconcile this answer with the fact that, although there is now a limitation on auditors' liability of 10 times their professional fees, that limitation has only been in place since 2008, whereas the Trio fraud goes back several years earlier. I repeat my view that I am underwhelmed by the vigour with which ASIC and other regulators are pursuing this fraud.

Indeed, I am surprised at the leisurely approach which is being taken, when $176 million has been defrauded from Australian superannuation investors.

In particular, I do not understand why, in the case of other major instances of Australian investors losing millions of dollars, such as Westpoint and Storm, ASIC has, quite correctly, had a clear focus on seeking to recover moneys lost by investors, but that does not appear to be a priority for ASIC in the case of Trio. I refer to the answer to the question on notice that I have just cited.

Once again, I call on the Minister for Financial Services and Superannuation to show some urgency on this issue. Remember that this is the minister who earlier accused the self-managed superannuation fund investors involved in Trio of 'swimming outside the flags'. For example, I wonder why the minister has not directed ASIC to form, jointly with other regulators, a task force of officials directed towards aggressively litigating against any party involved with a view to recovering any moneys which may be involved for recovery.

Let me turn to another matter I want to briefly speak about, which is the implementation of the Future of Financial Advice reforms, the FoFA reforms.    The committee's report refers to the assurances of ASIC officials that ASIC is adopting a 'facilitative approach' to the implementation of the FoFA reforms. I am receiving very strong expressions of concern from industry in at least one specific area which is not consistent with those soothing words. I refer to the ASIC's consultation paper 189 entitled 'FOFA: Conflicted Remuneration'. I quote from one letter I have recently received:

We are concerned that we will be dragged into a very rigid remuneration structure that is unworkable for a boutique investment management firm which traditionally operates on a performance based approach (in the way of most professional service firms).

[Our firm] manages investment portfolios for non-retail clients on a discretionary basis. We charge an asset based fee for management.

I have attached the pages of Paper 189 that worry us. Despite the reference to retail clients we understand that where conflict of interest is concerned ASIC will make no distinction between wholesale and retail. Effectively where one of the KPIs—

that is, key performance indicators—

for portfolio managers is raising of new money we will be caught in the net and the bonus structure will be limited to 5-7% of base salary and that bonus will be widely defined as in para 68. This is a totally unworkable business model.

That letter highlights one of the problems we are seeing, which is that the approach to the implementation of FoFA is going to catch businesses and organisations which operate well beyond the set of factual circumstances which originally led to the Ripoll inquiry, namely, the investments failures of ventures like Storm and Westpoint, which of course were targeted at unsophisticated retail investors.

By contrast, the firm referred to in the letter that I have quoted from is a boutique investment adviser serving sophisticated non-retail clients. I would urge ASIC to give careful consideration to the way it has drafted consultation paper 189 and to take account of these concerns.