Grant Chapman (SA, Liberal Party) Share this | Link to this | Hansard source

I present a report of the Parliamentary Joint Committee on Corporations and Financial Services on the statutory oversight of the Australian Securities and Investments Commission, together with the Hansard record of proceedings.

Ordered that the report be printed.

I move:

That the Senate take note of the report.

Statutory oversight of the Australian Securities and Investments Commission is a key role for the Parliamentary Joint Committee on Corporations and Financial Services. ASIC officers appear before the committee about every six months and I would like to thank them for their ongoing cooperation, especially on this occasion, as they were required to appear before our committee only about two weeks after appearing before the estimates committee discussing some of the same issues.

This report includes discussion on a number of issues relating to ASIC’s regulatory responsibilities which were raised with ASIC officials on 13 June 2006. Matters examined by the committee include: the Westpoint collapse; ASIC’s shadow shopper survey on superannuation advice; ASIC’s educational role; ASIC’s new memorandum of understanding with the Commonwealth DPP; the Vizard matter; and proposed changes to the business judgment rule.

An issue of great interest to the committee has been ASIC’s handling of the Westpoint matter. This corporate disaster has cost thousands of investors up to $400 million and many of those people have lost their entire life savings. When setting up their high-risk mezzanine investment scheme, Westpoint directors deliberately sought to put their activities beyond ASIC’s jurisdiction by exploiting an exemption in the current legislative provisions. This was achieved by issuing promissory notes of over $50,000. It meant that Westpoint companies were not subject to ASIC’s usual disclosure requirements and could not be brought into line for distributing what ASIC believed to be misleading information. The committee was particularly interested in ASIC’s response to Westpoint’s deliberate attempts to place themselves outside their regulatory reach. ASIC conceded that they had received warnings about Westpoint in 2001 and 2002. They told the committee that in 2003 an attempt was made to persuade Westpoint that they were not in fact legally justified in ignoring ASIC’s disclosure requirements, which was rejected by Westpoint. ASIC then sought to test the law in the West Australian Supreme Court, which also rejected ASIC’s claim that Westpoint’s products were in fact debentures and subject to ASIC’s disclosure requirements. Although the court ruling provided ASIC with the opportunity to wind the scheme up, there was no evidence of insolvency at the time and investors were still getting paid.

Of course, we now know that Westpoint was a house of cards that collapsed very quickly. In hindsight, ASIC might have opted to seek removal of the relevant legislative exemption rather than embark on a lengthy legal process. Unfortunately, Westpoint’s inherent fragility was not fully understood at the time. Now the damage has been done it is important that those responsible are fully investigated and, where appropriate, brought to justice. Although ASIC has not been prepared to comment on the specifics of the case, it has confirmed that the investigation will encompass the role of Westpoint directors, financial services licensees, advisers recommending the mezzanine schemes with high commissions, KPMG’s role in auditing Westpoint’s accounts and other third parties. The committee urge ASIC to pursue this matter as vigorously as possible and encourages people who invested money with Westpoint to assist ASIC with its investigation. We are also very concerned about other similar schemes that are still operating. The Westpoint saga highlights the need for ASIC to be especially vigilant in monitoring the information provided to investors by these high-risk mezzanine schemes.

The other matter of principal concern this year has been the results of ASIC’s shadow shopper exercise on superannuation advice. This exercise surveyed the advice provided by 259 individual advisers, who were representatives of 102 licensees, and captured 306 examples of financial advice provided to real consumers. According to ASIC, the survey revealed that, given the client’s individual needs, 16 per cent of advice was unreasonable; one-third of advice suggesting a switch in funds lacked credible reasons; unreasonable advice was between three and six times more likely where a conflict of interest, such as high commissions, was present; and advisers failed to give a requisite statement of advice on 46 per cent of cases, although one-fifth of these were instances of verbal advice to stay in an existing fund. If this is the case, it is of major concern. ASIC identified the major problems as being advisers not examining existing funds before recommending new ones; statements of advice not adequately disclosing the reasons for recommended action; and advisers not disclosing the consequences of switching super funds.

Significantly, most clients who had received poor advice were not aware that this was so. One of the problems identified by the committee was the restriction on advisers to provide advice only on financial products included in their licensees’ approved product lists. Where advice is given in the context of a commission based fee structure, those funds that do not pay commissions to advisers often do not appear on approved product lists. This puts advisers in a catch-22 situation with regard to the requirement to assess the existing fund of a client if advising a switch to a different fund. This catch-22 may be a factor in the survey’s apparently unsatisfactory results.

The committee is of the view that any shift to fee-for-service arrangements will naturally extend the scope of approved product lists. This will in turn improve the prospects of consumers getting advice that is best tailored to their needs. The committee welcomes industry moves towards this fee structure and believes it will improve the quality of superannuation advice. However, many consumers cannot afford or are unwilling to pay fee for service, so the commission based fee structure will continue to operate and the situation needs to be managed properly. ASIC told the committee that financial product issuers would continue to be able to pay commissions to enable their product to reach the marketplace. They stated that commission based fees represent a potential conflict of interest that is best managed through disclosure.

Given this reality, exercises such as ASIC’s shadow shopper survey are very important in ensuring that investors get the best advice. Although ASIC told the committee that this survey did not identify the worst culprits—instead, it was used primarily for data capture—it should serve as a wake-up call for the industry. It shows a level of performance that suggests that many customers are receiving advice that will unknowingly cost them a significant proportion of their retirement savings. This is unacceptable. ASIC should repeat the exercise and identify repeat offenders. The committee has recommended that ASIC undertake a similar survey next year. If results have not significantly improved, repeat offenders—those who have been found repeatedly and seriously to have breached the requirement to provide reasonable advice—should be publicly named.

Westpoint and the shadow shopper survey highlight the importance of investors being equipped to protect themselves by being financially literate. This was a theme that ran throughout our discussions with ASIC. The committee was told that ASIC had broadened its education campaign audience beyond publications such as the Australian Financial Review to include talkback radio and newspapers such as the Daily Telegraph. The committee believes that investors not realising when they have received bad advice, or being prepared to put all of their money into a single mezzanine finance scheme, suggests that many investors’ financial literacy is not what it should be when they are making vital financial decisions.

ASIC told the committee that they needed to be careful about overselling their message and putting people off. The committee understands this concern but believes that ASIC need to be more effective in teaching ordinary investors how to spot the pitfalls when making decisions about investing their savings. As important as regulation is for protecting investors, a very effective way of preventing investor losses is by educating the community on how to protect themselves. ASIC do have a very important role in that regard.

On 1 March this year ASIC signed a new memorandum of understanding with the Commonwealth DPP. This replaced the earlier memorandum agreed in 1992. We are aware of criticisms of the effectiveness of the collaboration between these two agencies. These have largely reflected concerns that ASIC should not have to seek DPP approval for criminal prosecutions and that the DPP did not respond to ASIC briefs in a timely fashion.

We recognise the appropriateness of ensuring that ASIC is not both policeman and prosecutor. ASIC also told the committee that the DPP’s responsiveness was improving year by year, which is an encouraging trend. The effectiveness of this very important relationship needs to be monitored. If the new MOU is not working then a new one should be agreed to. The committee have recommended that ASIC and the DPP regularly update them on the effectiveness of the new MOU.

The committee also discussed the Vizard matter with ASIC. The main topic of discussion this time was ASIC’s consideration of the possible perjury implications of the agreed statement of facts put before the court in their civil proceedings against Mr Vizard last year. We were informed that ASIC has assisted the Victoria Police in passing on to them the agreed statement.

We have also questioned ASIC on the proposal by the Parliamentary Secretary to the Treasurer to extend a defence contained in the Corporations Act known as the business judgement rule. This is based on the well-established legal principle that courts are reluctant to pass judgement on the merits of business decisions taken in good faith. The proposed extension of the business judgement rule would significantly broaden the defence by providing a general protection for directors, excusing them from liability under the Corporations Act, subject to certain conditions.

Ross Lightfoot (WA, Liberal Party) Share this | Link to this | Hansard source

Senator Chapman, your time has expired.

Grant Chapman (SA, Liberal Party) Share this | Link to this | Hansard source

Mr Acting Deputy President, I seek leave to incorporate the remainder of my speech.

Leave granted.

The speech read as follows—

As many would be aware, regarding the Vizard matter, there have been suggestions that this statement possibly contradicted earlier evidence he provided to a Magistrate’s Court committal hearing in 2003. We were informed that ASIC had assisted the Victorian Police in passing on to them this agreed statement.

The committee notes in its report that ASIC’s consideration of the perjury question when negotiating their agreed statement of facts remains somewhat unclear.

I also note that despite reports to the contrary, Mr Vizard’s former accountant, Mr Greg Lay, has continued to refuse to assist ASIC with their investigations on this matter.

Proposed business judgment rule

The committee also questioned ASIC on a proposal by the Parliamentary Secretary to the Treasurer, the Hon. Chris Pearce MP to extend a defence contained in the Corporations Act known as the ‘business judgment rule’.

The business judgment rule is based on the well established legal principle that the courts are reluctant to pass judgment on the merits of business decisions taken in good faith.

Currently the business judgment rule only operates in relation to the duty of care and diligence and not to any other provisions of the Corporations Act or under any other law. That is, the business judgment rule does not currently apply, for example, to the duty of good faith, the duty not to misuse position or company information, and the duty to prevent insolvent trading.

The proposed extension of the business judgment rule would significantly broaden the defence by providing a general protection for directors, excusing them from liability under the Corporations Act, subject to certain conditions.

ASIC officials raised concerns about the practical operation of the proposed extension. They said that the proposed change could make it harder for ASIC to enforce the law and that ‘if there is a suggestion that the rule itself is somehow different [from the existing business judgment rule], our position is that we do not support that.’

It was also acknowledged that ASIC has not been asked for advice on this proposal.

Given the broad nature of the proposed extension to the business judgment rule and the enforcement concerns raised by ASIC, the committee formed the view that these concerns should be provided directly to the government so that it fully understands the enforcement issues when it considers the merits of the proposal.

Accordingly the committee has recommended that ASIC provide advice to the Australian Government on its concerns regarding the enforcement effects of the proposal to broaden the ‘business judgment rule’ as well as any other proposals that would have significant enforcement implications.

I note that earlier this week the Parliamentary Secretary to the Treasurer announced that the proposed extension to the business judgment rule is one of several topics that ‘merit a more focused approach, because of the scope and complexity of the policy issues they raise’. Accordingly the proposed extension will be progressed in conjunction with other reviews by Treasury, at which stage ASIC’s enforcement concerns should be given due consideration.

I conclude by thanking the committee secretariat for its good work and I commend this report to the Senate.

Penny Wong (SA, Australian Labor Party, Shadow Minister for Corporate Governance and Responsibility) Share this | Link to this | Hansard source

I also rise to take note briefly of the report of the Parliamentary Joint Committee on Corporations and Financial Services on the statutory oversight of the Australian Securities and Investments Commission. I want to make some short comments in relation to the business judgement rule issue that Senator Chapman referred to. Can I say at the outset that we on the opposition side also add our thanks to the officers of ASIC for their assistance and appearance before the committee and for the provision of information as requested by committee members.

One of the issues that was raised in this hearing and also in the estimates hearings which preceded it was the government’s floating of a proposed extension to the business judgement rule. It was of some concern to a number of committee members that it appeared that the government had not in fact asked ASIC, the regulator, for advice as to what the effect of extending the business judgement rule might be. The evidence of ASIC before this committee and also before the estimates committee, which is referred to in the report, was that ASIC retains substantial concerns as to the risks or difficulties that might be associated with enforcement should there be an extension to the business judgement rule.

What has been proposed by the parliamentary secretary—or floated by him—is an extension to the rule so that it would apply to a great range of duties in the Corporations Law, including the duty not to trade whilst insolvent. I do want to make the point that Labor is willing to have a discussion with ASIC, hopefully CAMAC—that is, if the government is actually going to ask CAMAC, which is supposed to be an advisory body, for its advice in relation to this proposed change to the Corporations Law—and also the business community about the merits of such a change.

However, we do note, as does the committee, the potential risks as to law enforcement difficulties which may arise from the proposed change. Some of these concerns have been raised not only by ASIC but also by the legal community. Clayton Utz is one law firm that has indicated some issues with this. It has stated that such a change would introduce a new defence to insolvent trading that could be significantly easier to establish than the defences currently available to directors, which could in turn lower the overall standard of company directors. The concern is being backed by the Corporations Committee of the Business Law Section of the Law Council, which has stated that such an extension of the business judgement rule to issues such as insolvent trading and the keeping of books and records is a significant policy change with potentially far-reaching consequences for the management of companies.

I am pleased that the committee members of the Joint Committee on Corporations and Financial Services have seen fit in this report to all agree to a recommendation that seeks that ASIC provide advice to the Australian government on any concerns regarding the enforcement effects of such a proposal. We welcome a discussion about these and other changes to the Corporations Law which have been floated by the government. However, I want to make this point: we ought to take a genuine cost-benefit analysis approach to consideration of these changes. I also point out that a reduction in the standards of behaviour, particularly as they would extend to insolvent trading, may have consequences for those, including other corporations and businesses, with whom a company transacts. So there is an argument, one would have thought, that it may in fact introduce a greater level of uncertainty for a great many businesses rather than simply alleviating the duties that apply to some.

I welcome the committee’s agreement to asking ASIC to explore and give advice to the Australian government on these enforcement related issues. I hope that the government will actually take that into account. I also place on record my hope that the government will actually refer this issue also to CAMAC, as a body that obviously has significant expertise in the area of Corporations Law, for advice so that this proposal can be properly considered.

Nick Sherry (Tasmania, Australian Labor Party, Shadow Minister for Banking and Financial Services) Share this | Link to this | Hansard source

I too want to make a contribution on the tabling of the report by the Parliamentary Joint Committee on Corporations and Financial Services on the statutory oversight of the Australian Securities and Investments Commission, commonly known as ASIC. The Joint Committee on Corporations and Financial Services is charged with the oversight of ASIC, the consumer protection regulatory authority in terms of financial services in this country. Firstly, I want to thank ASIC. As the chair has indicated, ASIC are subjected to extensive questioning, not just at hearings of the Joint Committee on Corporations and Financial Services but at the estimates process. ASIC appeared not only at the hearing of 13 June but also at estimates hearings in May and February this year. They were subjected to questioning on the same, if not similar, issues across the board at those three hearings. On behalf of the Labor opposition in the financial services area, I would like to thank ASIC and generally congratulate them on their responsiveness at those hearings.

I would have to say that generally, in most respects of financial services regulation, Labor has been pleased with the approach of ASIC. There are a couple of exceptions, and I have some concerns which I will go to shortly. The report that has been tabled deals with some very important and current issues. The report certainly dealt with the Westpoint matter, which I want to go to in greater detail shortly; the recent shadow shopping exercise; what is known as the Vizard matter; and a number of other issues.

Firstly, I go to the Westpoint financial scandal. There are probably up to 4,000 investors in this country who have lost a substantial sum of money. The sum of money is likely to be in the range of $300 million to $400 million. Most of the investors in Westpoint are elderly Australians, many of whom are retired. Much of the investment in Westpoint took place through what is known as self-managed superannuation fund structures. Between 30 and 40 per cent of the investments in Westpoint were through self-managed superannuation fund structures.

Of particular concern to the Labor opposition is what I have described as the perfect storm of regulatory failure with respect to the Westpoint financial disaster. I call it a perfect storm because it is apparent that there were a number of failures across a number of regulatory agencies and at other points that led to this financial disaster. I am sure that many people have noted the media coverage of current proceedings involving Westpoint. I do not want to go to those in this forum. However, it is apparent that it will take some time, if not years, to unravel what occurred in respect of Westpoint. Even when that is finished, I think it is apparent that most of the investors in Westpoint will end up with very little recompense. The Westpoint investors—as I said, many of them elderly—face a very difficult set of circumstances. Not only will they have to wait for some years for the court outcome but, when that wait is over, I am sure that the level of recompense will be very small compared to the moneys that have been lost.

I come to the issues that are being canvassed not just through the committee’s oversight but also at Senate estimates. As I said, Westpoint is a good bad example of a range of failures that have occurred in our financial services regulatory area. Let me deal with ASIC first. My concern with ASIC’s approach is that ASIC have always argued that they did not have the legal power to regulate in this area—the issue of the promissory notes and the $50,000 exemption. Labor accepts that this was the case and still is the case today. Labor accepts that ASIC did not have the regulatory authority. However, that would not have prevented ASIC, once they were alerted to the Westpoint issues and problems, from going to the financial planners who were recommending Westpoint and at least making inquiries and alerting them to the fact that they had concerns about the Westpoint investment. In my view, if ASIC had done that, the planners would have been much more cautious about recommending Westpoint and there would have been a considerably lower number of people who would have placed funds in Westpoint. Unfortunately, some of the planners involved could not overcome the temptation of the commissions that were on offer for recommendations to go into Westpoint—and commissions are a much broader issue and problem in terms of shadow shopping and superannuation, which is also dealt with by this report.

In particular, ASIC were warned by the Western Australian government, specifically the Western Australian Minister for Consumer and Employment Protection, in writing in August 2002, January 2003, May 2003, June 2003 and March 2004. So they were warned in writing on no less than four occasions about issues relating to Westpoint. I do not believe ASIC were sufficiently proactive in following through on those complaints, so that is a criticism I make of ASIC. However, the government was also warned. No less a person than the Treasurer, Mr Costello, was written to by the Western Australian minister, and it took some six months before the Treasurer deigned to reply. On a very important issue of financial protection, it took six months for the Treasurer to bother to reply to the Western Australian minister.

I know the Treasurer is a busy man and has got lots of things on his plate—but to take six months to respond to a report about, at that stage, possible financial malpractice? I think the Treasurer needs to get a bit of focus in his office and give greater attention to matters that are referred to him by ministers—in this case, the Western Australian minister. It is interesting: the then parliamentary secretary, Minister Ian Campbell, who is now minister for environment and parrots, wrote back on behalf of the Treasurer and said, ‘If required, the government will consider any recommendations ASIC make to improve consumer protection in this area,’ and:

... the Commonwealth Government will consider legislative change should ASIC identify any regulatory gap.

ASIC had already identified the problem of the $50,000 promissory note exemption—the gap in regulation. I still cannot understand why, to this day—and we posed the question to Senator Coonan yesterday in question time—the government will not act to close this loophole. The ASIC chair, Mr Lucy, has called on the government to close the loophole. He is on the public record—add two zeros; $5 million, not $50,000—and yet the Treasurer has not acted to close this loophole in our financial services system to minimise and prevent the sorts of abuses and losses that have occurred to thousands of Australians, mainly elderly, as exemplified by the horrible Westpoint financial scandal.

Andrew Murray (WA, Australian Democrats) Share this | Link to this | Hansard source

I also rise to take note of this report as a longstanding member of the committee and I stress that the four speakers who have spoken to this report are all extremely active and informed members of the committee. That being so, I do not want to repeat the points already well made by the previous speakers to the report. I think they should be noted by the government, the wider corporate community and the regulator.

I want to repeat that ASIC should get credit for being so available and accountable. Its officers do not hesitate to appear before the corporations and financial services committee and estimates committee, with its full range of executives as required. In my experience, ASIC has been very accessible and open and, I might say, very mature in reaction to sometimes sharp and warranted criticism and so on. However, I confirm the views Senator Sherry just expressed—that is, that ASIC cannot stand on its own.

There are times when the government needs to react with some speed and with some sense of both the import and the need for pre-emptive action. I refer particularly to the events in my own state known as the Westpoint scandal. Scandals like that, where a large number of investors—some very unsophisticated, some somewhat sophisticated—have lost their money, have in Western Australia resulted in state ministers losing elections and being turfed out of office and, indeed, in governments being shaken. I refer to the Court government, which was badly affected by what was known then as the finance broking scandal. It is a reminder to politicians that the electorate will take vengeance if it feels that the political world is not sensitive enough to real issues.

The chair of the committee remarked that Westpoint had proved to be a pack of cards and had collapsed. The difficulty with the Westpoint situation is that it is more than one pack of cards and you have to keep going back and unpacking the next pack of cards, and they will collapse and it goes on and on. With respect to that, the government needs to decide what it can do to assist the regulator to act and close down these matters earlier. In that regard, the one thing that is clear to me is that the issue of the imprecise and difficult regulatory hole left by this promissory note issue—as outlined earlier by Senator Sherry and as covered in the oversight report—does need legislative action. I would urge the government not to wait any longer, but to actually address that issue.

A second issue I wish to refer to briefly is the proposed revision to Corporations Law and issues of disclosure as announced by the government. Part of that is a desire to have another look at the business judgement rule. I am not at all averse to reviewing, refining and improving Corporations Law, and the government is entitled to do it—in fact it would be derelict in its duty if it did not. However, I want to caution that adjustments to the business judgement rule should be done with great care. I think we have to be very wary of changes, and that the business judgement rule is not loosened and weakened to the benefit of corporate executives and directors who might be a little loose on the ethical side.

A third issue I wish to briefly deal with is the issue of insider trading and what is known as the Vizard matter. In that area, I think insider trading is so hard to pin down that ASIC need to pursue this with greater vigour and with more determination than they have. In particular, I think a hands-off attitude to the areas of perjury or alleged perjury and a relatively hands-off attitude to the potential of Mr Lay being obliged to be a witness need to be readdressed. I would suggest that ASIC show more interest in that area than they are at present.

The last area I wish to touch on—and as I said my colleagues on the committee have covered many areas quite fully and I do not need to repeat them—is the issue of insolvency laws. The corporations committee has produced an excellent report on the way in which insolvency laws need to be revised, and in my view many of the problems that ASIC is dealing with could be beneficially affected if the consequent legislative changes proposed by that report were introduced into law. So that is an area where I think ASIC should be urging the government to get on with it and to assist in beneficial reform.

Question agreed to.