20 April 2016 was a big day for ASIC.  The “Fit for the Future” Capability Review report was released, together with the Government’s response and ASIC’s response.  

These were the latest steps in a process that has been underway since 2014 when the Financial System Inquiry (FSI) report was released, examining APRA and ASIC’s effectiveness and the activities they oversee. The Commonwealth Government also announced a reform package – providing ASIC with additional powers, funding and a new “user pays” funding model, applying from 2017-18.

The changes ahead

The Capability Report found that ASIC’s effectiveness and efficiency varied widely across a range of areas. In some (such as real time market supervision), ASIC was at the forefront of best practice. In others (surveillance, education and policy guidance) it was on par with other peer regulators. In some it was behind – especially in the ability to respond to technological changes and the application of “big data” analytics. And in other areas – the report identified worrying material differences from best practice – data infrastructure, leadership and the governance model and stakeholder management. ASIC did not accept all of these views.

The report made 34 recommendations and 5 recommendations to the Government. ASIC is advanced in implementing the majority of the recommendations that relate to it. The Government committed to implementing all recommendations that relate to it.

Some of these warrant comment.

Immediate additional funding

The additional funding will go some way towards assisting ASIC to address the gaps identified – $61M to enhance data analytics and surveillance capabilities; $57M to enable increased surveillance and enforcement in the areas of financial advice, responsible lending, life insurance and breach reporting. The Capability Review makes clear that the external stakeholders who were interviewed in the various roundtable consultations undertaken as part of the evidence gathering process strongly expressed the view that ASIC was not adequately funded. Whilst good news, this is really returning ASIC’s funding to a level it had prior to the May 2014 budget cuts.

Industry Funding Model

The industry funding model for the financial services sector was recommended by the FSI – on the premise that those who create the need for regulation (i.e. the large financial institutions) should bear the burden. No details have been released – and a further round of consultation will follow to refine and settle the funding model. Treasury’s August 2015 consultation paper (see page 16) indicated that fees and levies will be imposed on corporations, Australian Credit Licensees, AFS Licensees, liquidators, auditors and market infrastructure providers. AFS licenses will be providing nearly 50% of the funding.

This “user pays” approach aligns with the announcement ASIC made in July 2015 that where ASIC succeeds in enforcement actions, it will seek to recover the costs of the investigation from the wrongdoers (discussed in our earlier article).

To date, industry response to a user funding model has received cautious support – with a long list of conditions. These include the model operating on a true cost-recovery basis, structuring the model in a way to incentivise ASIC to undertake its activities with optimal efficiency, applying the model fairly across the industry and ensuring the levy mechanism is subject to appropriate accountability. Balancing competing industry objectives and diverse opinions will require political mastery should the funding model proceed further.

Funding to accelerate FSI law reform proposals

The FSI report made various law reform proposals – and an additional $9.2M has been committed to accelerate the implementation of these proposals:

  • A product intervention power to allow ASIC ‘modify, or if necessary ban harmful financial products where there is a risk of significant consumer detriment’;
  • New product distribution obligations;
  • A review of ASIC’s enforcement toolbox – including the maximum value of penalties that can be imposed to ensure deterrence;
  • Strengthening consumer protections in the ePayments Code.

However, as we have previously reported, the lack of detail and extensive consultation promised about these reform proposals makes the Government’s plan to give ASIC new enforcement tools highly ambitious. With commentators tipping a likely Federal election date of 2 July 2016, whether or not ASIC’s proposed powers will survive an election remains to be seen.

Other aspects of note

The Capability Review identified the fact that ASIC’s staff are generally employed within the framework of the Public Service Act (PSA) as detracting from its ability to recruit flexibly (whether by speed of recruitment, salaries and conditions offered). This limitation meant that ASIC was not in the ball park when it wished to recruit superior talent, which may be required for certain positions. The Government will remove ASIC from the PSA. The review also suggested that greater use be made of secondments from stakeholders such as professional advisory firms and banks, and particularly in the area of data analytics and behavioural economics, to assist in developing ASICs own skills in these areas. We have pointed to the increasing importance of behavioural economics in this article. Whilst some may raise concerns about conflicts of interest, the Capability Review was comfortable that these can be managed.

As for ASIC’s litigation enforcement operations, an unfavourable distinction was drawn between the way the ACCC and APRA operate on the one hand, and how ASIC operates. There was a recommendation that ASIC take a more strategic and focussed approach to the matters it prosecutes, to focus a pleading only on the real issues, and to consider the strategic appointment of senior counsel – focussing on overall cost effectiveness as opposed to focussing on their hourly charges. ASIC has taken this on board.