ASIC draws its line in the sand

Would anyone have seriously challenged the Australian Securities and Investments Commission (ASIC) if it had stretched conventional interpretations of the Financial Services Reform Act and the Corporations Act and adopted a more interventionist approach on the issues that led to the collapse of Westpoint and Storm Financial?

This becomes an important question in the context of ASIC’s submission to the Parliamentary Joint Committee on Corporations and Financial Services in which it has actually canvassed legislative and regulatory changes that would facilitate a more interventionist approach.

Within that submission, the regulator is arguing that the benefits of increased market intervention might significantly outweigh the deficits.

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ASIC has argued that while Financial Services Reform (FSR) has worked well in terms of delivering benefits to the economy and retail investors, recent events such as the collapse of Westpoint and Storm have given rise to the possibility of the Parliamentary Joint Committee and, through it, the Government reassessing the policy settings of the existing legislative regime and, “in particular, the balance between market efficiency and investor confidence”.

Also wrapped up in the ASIC submission is its broad rejection of commissions-based remuneration and overt support for an hourly fees-based approach.

While the regulator might well take a view that planners ought not to use remuneration models that give rise to conflicts of interest, it should know that it is not appropriate to then seek to prescribe a specific model, such as an hourly rate.

In fact, there is altogether far too much in the regulator’s submission indicative of a mindset that suggests “all care and no responsibility”.

The regulator’s proposals on a reassessment would seem fair enough, except for the fact that almost from the outset of its submission, it sought to absolve itself of responsibility for the succession of failures that occurred both before and during the global financial crisis.

Nowhere in its submission does ASIC acknowledge that it was always within the discretion of the regulator and a broad interpretation of the relevant legislation to be more proactive.

According to ASIC, the primary causes of collapses and corporate failures such as Westpoint, Storm and Opes Prime were “the market downturn and flawed business models, that is, business models that could only prosper if asset prices continually rose and debt markets remained open and liquid”.

Crucially, the ASIC submission then adds: “ASIC has, within the regulatory framework, discharged its responsibilities effectively and efficiently.”

Of course, ASIC’s analysis of how well it discharged its responsibilities is coloured by its arguably conservative interpretation of that regulatory framework and the degree to which its capacity to do otherwise was constrained by both resources and expertise.

It is notable that around the same time that ASIC was filing its submission with the Joint Parliamentary Committee, the regulator’s chairman, Tony D’Aloisio, was seeking to make clear that the public often-times overestimates the capacity of ASIC to deal with issues such as Westpoint or Storm.

Perhaps if D’Aloisio had looked at ASIC’s handling of the jurisdiction originally handed to it by FSR, he might have concluded that while the regulator chose to be highly prescriptive with respect to its interpretation of functional elements such as Statements of Advice, it chose to be far less robust in its interpretation of its powers with respect to the policing of conduct.

It is the policing of conduct that would change most if the recommendations contained in the ASIC submission were accepted. It broadly recommends increasing ASIC’s reach and its ability to deal with issues before they occur.

The manner in which ASIC intends to achieve this is made clear in the following suggestions/recommendations to the parliamentary committee:

  • the suggestion it could move to remove a licence where it believes a breach “may” occur;
  • the implementation of finance resource requirements as part of obtaining an Australian Financial Services Licence (AFSL);
  • the ability to ban individuals involved in a breach of obligations by another person;
  • clarifying the duty owed by financial planners to act in the best interests of clients; and
  • the prevention of remuneration structures that might create conflicts of interests.

While there will be many in the financial planning industry who will be concerned by the content of the ASIC submission, there are also those such as the Financial Planning Association chief executive, Jo-Anne Bloch, who have welcomed the fact that the regulator has finally declared what it stands for.

“Finally they have put a stick in the ground and made clear what it is they stand for and what they want,” she said.

“It has been incredibly frustrating trying to deal with uncertainty and the FPA is certainly pleased that the regulator has put its strategic intentions on the table.”

While Bloch and the FPA agreed with some elements of the ASIC submission, they strongly disagreed with others, not the least of which is an hourly remuneration model, which the FPA argued could dramatically undermine the commercial viability of many planning practices.

As well, Bloch pointed to an absence in the ASIC submission of any specific reference to the definition of a financial planner or the value of a professional organisation capable of supporting the broader regulatory framework.

It was hardly surprising that the industry superannuation funds and consumer organisation Choice emerged as supportive of large swathes of the ASIC submission, particularly those elements going to commissions-based remuneration and the elimination of percentage-based fees.

The industry funds in particular would have been delighted to see the regulator picking up their mantra of requiring advisers to act in the best interests of clients.

Much of what was contained in the ASIC submission was flagged by D’Aloisio at the Investment and Financial Services Association (IFSA) conference earlier this month, and if the comments of the Joint Parliamentary Committee chairman Bernie Ripoll to the same conference are any guide, planners would be well advised to read the 184-page ASIC submission very carefully.




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