Tim Wilson (Goldstein, Liberal Party) Share this | Link to this | Hansard source

On behalf of the Standing Committee on Economics, I present the committee's report entitled Review of the Australian Securities and Investments Commission annual report 2018 together with the minutes of proceedings.

Report made a parliamentary paper in accordance with standing order 39(e).

by leave—On 16 October 2019, the committee scrutinised the Australian Securities and Investments Commission on its performance and regulatory responsibilities. This was the committee's first hearing with ASIC since the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released its final report.

The royal commission found that Australia's financial sector suffered from a lack of moral leadership and a corporate culture motivated by greed. Evidence provided to the royal commission exposed shocking and widespread examples of misconduct and highlighted systemic failures throughout the banking and financial services sector. Revelations of further misconduct have continued to come to light following the conclusion of the Hayne royal commission.

The community expects the big banks and other financial institutions to be held to account and to fear their regulator. However, the royal commission found that ASIC had a deeply entrenched culture of negotiating outcomes rather than insisting upon public denunciation of and punishment for wrongdoing. Commissioner Hayne emphasised that compliance with the law is not a matter of choice and that negotiation and persuasion without enforcement all too readily lead to the perception that compliance is voluntary.

The government has been working to implement the royal commission's recommendations and strengthen financial regulators to ensure a fair, strong and efficient financial system for all Australians. In April 2019 the government introduced a design and distribution obligations regime for financial firms as well as product intervention powers. This will assist consumers to obtain appropriate financial products by requiring issuers and distributors to have a consumer-centric approach by designing, marketing and distributing financial products. It will also allow ASIC to regulate or, if necessary, ban potentially harmful financial and credit products where there is a risk of significant consumer detriment.

In this report the committee scrutinised ASIC's progress in implementing these reforms recommended by the royal commission. It considers ASIC's program of change, including its new enforcement strategy, which focused on increased and accelerated court based outcomes and the use of new and tougher penalties. ASIC's more intensive supervisory approach aims to improve the culture and behaviour of financial firms. The committee also scrutinised the advice that ASIC is providing to the public for accuracy.

It is essential we restore trust, eliminate conflicts of interest and raise standards of professionalism in Australia's financial services industry. This will require not only the efforts of government and regulators but also the efforts and actions of leaders and individuals within the sector.

The committee also scrutinised the activities of ASIC outside the focus on the Hayne royal commission, in particular focusing on a number of issues, such as advice that ASIC is providing in the public square around the costs and structures of self-managed super funds. As chair, I raised a specific question about their fact sheet, which made the case that the cost of administering a self-managed super fund is $13,900 a year. In that inquiry I outlined that I disagree with that assessment, and I have requested the Australian Taxation Office to provide the evidence base that ASIC claims is the justification for producing such a number in the interests of the public. The Australian Taxation Office has agreed to do so, and I look forward to them reporting publicly about the factual, accurate cost of running a self-managed super fund into the future. I would suggest to the Australian Securities and Investments Commission that they look at and review their documentation in light of that new data and consider whether it properly informs the Australian people, enabling them to fulfil their proper, accurate function to inform the Australian community.

On behalf of the committee, I thank the chair of ASIC, Mr James Shipton, and other ASIC representatives for appearing at the hearing. I also thank the committee secretariat, who always do a very diligent job, particularly given a challenging chair such as myself. I commend the report to the House.

Andrew Leigh (Fenner, Australian Labor Party, Shadow Assistant Minister for Treasury) Share this | Link to this | Hansard source

by leave—The royal commission's final report observed, of ASIC, its 'deeply entrenched culture of negotiating outcomes rather than insisting upon public denunciation of, and punishment for, wrongdoing'. Commissioner Hayne raised a number of concerns about the policies and culture of ASIC, and these were issues that the committee's deliberations went directly to. We spoke to ASIC about their optimal litigation success rate. They advise that in the five years to 2018-19 their enforcement litigation success rate has been above 90 per cent. That does suggest that, while they're having a good record in court, they may not be sufficiently aggressive in taking cases to court. The conversation over the optimal litigation success rate will be an ongoing one between our committee and ASIC.

ASIC has also been doing some important work around disclosure. The old approach to financial advice used to be that, if you educated and disclosed, that would take care of matters. This somehow assumes that people have all the time in the world to acquire appropriate financial education and read long-form documents. In the real world people are time poor. They don't necessarily have the time to invest in getting their heads around the details of financial instruments and don't have the time to work their way through long-form disclosure. ASIC's new work has confirmed that long-form disclosure is often not an effective consumer protection. That work is informed by behavioural economics research over the last few decades. When a product has more than two or three features, it becomes extremely hard for even a well-informed consumer to choose between the different products. As ASIC's report explained, sludge is where there are 'unnecessary frictions in the market' that make it very difficult for a consumer. It is easy for them to get into a product but difficult to get out of a product. But, also, it is very difficult for a consumer to lodge a complaint. Sludge gets in the way, ultimately, if the accountable person within that firm, let alone the directors, knows that complaints are being lodged. The committee will continue to monitor ASIC's work in this area, but I do commend ASIC on their work on looking at the limitations of disclosure and the importance of simple disclosure.

The committee also quizzed ASIC about their work on the rate of return of self-managed superannuation funds. ASIC's work finds that funds with balances under $50,000 delivered, in the most recent available year, a return of minus 15 per cent; for funds from $50,000 to $100,000, a return of minus five per cent; and, for funds from $100,000 to $200,000, a return of minus half a per cent. It's pretty extraordinary that these funds are, on average, losing their members' money and that even self-managed superannuation funds with balances under $500,000 have lower returns, after expenses and tax, compared to industry and retail super funds. ASIC's work to ensure that people aren't adversely steered into self-managed superannuation funds is important, and the committee will continue a conversation with them over that issue.

I also raised with ASIC the issue of tracker mortgages. ASIC wrote what I thought was a good note in 2016, encouraging lenders to offer tracker mortgages. They seem to have backed off from that view and say that they're now agnostic regarding tracker-rate mortgages. In my view that's a mistake, and I'm yet to see evidence that overturns ASIC's well-thought-out statement in 2016.

ASIC also talked to us about their views on a beneficial ownership register. Australia's share register is unusually opaque, making it very difficult to find out who really owns Australian shares. It's too easy for shell companies to hide the true owners of firms, and this can lead to difficulties in combatting financial crime if regulators are unable to find out who the true owners of firms are. ASIC spoke about the benefits of beneficial ownership registers. I would like it if the government moved more speedily on this. It was a commitment made by the former minister, Kelly O'Dwyer, which the government has subsequently abandoned. A beneficial ownership register would be of great benefit to anyone who wants to understand who truly owns Australian firms.

Finally, I commend ASIC on their important work on the commissions paid by fund managers to advisers and stockbrokers selling listed investment companies and listed investment trusts. As I understand, ASIC advice to Treasury in August of last year said:

It is hard, on the historical data available, to justify maintaining the stamping fee exemption from conflicted remuneration for these products.

That advice also went on to say:

Higher stamping (selling) fees for LICs and LITs are correlated with worse investment returns and bigger discounts to NTA [net tangible assets].

I commend the work that the shadow minister for financial services has been doing on this—he'll be speaking on that matter later today or tomorrow—and the work of journalist Christopher Joye, from The Australian Financial Review, who has been a strong critic of the decision by the coalition to open a loophole which allowed these highly risky investments to be sold at a disadvantage to consumers.